australia - ministerstvo zahraničních věcí České ... · could become an even more important...
TRANSCRIPT
Q3 2013www.businessmonitor.com
AUSTRALIAMINING REPORTINCLUDES 5-YEAR FORECASTS TO 2017
ISSN 1755-7763Published by:Business Monitor International
Australia Mining Report Q3 2013INCLUDES 5-YEAR FORECASTS TO 2017
Part of BMI’s Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: May 2013
Business Monitor InternationalSenator House85 Queen Victoria StreetLondonEC4V 4ABUnited KingdomTel: +44 (0) 20 7248 0468Fax: +44 (0) 20 7248 0467Email: [email protected]: http://www.businessmonitor.com
© 2013 Business Monitor InternationalAll rights reserved.
All information contained in this publication iscopyrighted in the name of Business MonitorInternational, and as such no part of thispublication may be reproduced, repackaged,redistributed, resold in whole or in any part, or usedin any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consentof the publisher.
DISCLAIMERAll information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time ofpublishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business MonitorInternational accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of thepublication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind asto the accuracy or completeness of any information hereto contained.
CONTENTS
BMI Industry View ............................................................................................................... 7Australia Still A Regional Standout ............................................................................................................... 7
SWOT .................................................................................................................................... 9Australia - Q3 2013 ................................................................................................................................... 9
Market Overview ............................................................................................................... 11Maintaining Prominence Despite Cooling Boom ............................................................................................ 11
Table: Australia - Select Key Mining Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table: Australia - Mining Industry Value & Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Industry Forecast .............................................................................................................. 15Bauxite: Environmental Concerns Could Derail Production ............................................................................ 15
Table: Australia - Largest Bauxite Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Table: Australia - Bauxite Production Forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Coal: Dimmer Prospects On Mounting Challenges ........................................................................................ 18Table: Australia: Largest Thermal Coal Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Table: Australia - Largest Metallurgical Coal Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Table: Australia - Coal Production Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Copper: Enthusiasm Wanes On Market Uncertainty ....................................................................................... 24Table: Australia - Largest Copper Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Table: Australia - Copper Production Forecasts ('000 ounces, unless stated otherwise) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Gold: Global Share To Decline .................................................................................................................. 28Table: Australia - Largest Gold Mining Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Table: Australia - Gold Production Forecast (mn ounces, unless stated otherwise) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Iron Ore: Miners To Press On Despite Price Weakness .................................................................................. 31Table: Australia - Largest Iron Ore Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Table: Australia - Iron Ore Production Forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Lead: Paroo Station To Lift Growth ............................................................................................................ 35Table: Australia - Key Lead Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Table: Australia - Lead Production Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Nickel: Healthy Growth In Place ................................................................................................................ 37Table: Australia - Nickel Production Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Tin: Brighter Outlook In Store ................................................................................................................... 40Table: Australia - Tin Production Forecast ('000 tonnes, unless stated otherwise) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Zinc: Growth To Collapse As Century Mine Ends .......................................................................................... 43Table: Australia - Zinc Production Forecasts (mn tonnes, unless stated otherwise) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Industry Risk Reward Ratings .......................................................................................... 46 Asia Risk/Reward Ratings ....................................................................................................................... 46
Table: Asia Mining Risk/Reward Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Regulatory Development .................................................................................................. 52Regulatory Environment Favorable For Investment ....................................................................................... 52
Australia Mining Report Q3 2013
© Business Monitor International Page 4
Table: Australia - Mineral Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Table: Australia - Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Competitive Landscape .................................................................................................... 57Major Miners To Remain Prominent ........................................................................................................... 57
Table: Financial Data For Key Mining Firms Listed In Australia, FY2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Company Profile ................................................................................................................ 59BHP Billiton - Q3 2013 ............................................................................................................................. 59
Table: BHP Billiton - Key Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Rio Tinto ................................................................................................................................................ 64
Company Overview ................................................................................................................................ 66
Company Strategy .................................................................................................................................. 67Table: Rio Tinto - Key Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
MMG Limited - Q3 2013 ........................................................................................................................... 69Table: MMG Limited - Key Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Xstrata - Q3 2013 .................................................................................................................................... 74Table: Xstrata - Key Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Global Industry Overview .................................................................................................. 80Major Challenges Ahead ......................................................................................................................... 80
Table: Select Countries - Recent And Planned Tax Increases And Other Government Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Despite Challenges, Bright Spots Remain ................................................................................................... 83
Asia Overview ......................................................................................................................................... 89Table: South East Asia - Select Mining Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Commodities Forecast ..................................................................................................... 95Monthly Metals Update ............................................................................................................................. 95
Iron Ore: More Hurdles Ahead ................................................................................................................ 96
Steel: Resilient For Now .......................................................................................................................... 98
Aluminium: Weak Outlook, With Substantial Downside Risks ......................................................................... 99
Copper: The Trend Is Clear ................................................................................................................... 100
Lead: Taking Lead From Autos Sector ..................................................................................................... 101
Nickel: Struggling To Find Support ......................................................................................................... 101
Tin: Outperforming A Weak Field ........................................................................................................... 102
Zinc: Tougher Ride In H213 ................................................................................................................... 103Table: Select Commodities - Performance And BMI Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Table: BMI Commodities Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Methodology .................................................................................................................... 105Table: Mining Business Environment Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Table: Weighting Of Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Australia Mining Report Q3 2013
© Business Monitor International Page 5
BMI Industry View
Australia Still A Regional Standout
BMI View: Despite the cooling of the mining boom, Australia will remain a leading player in many
segments of the global mining industry. We expect the value of the mining sector to reach US$107bn by
2017, growing at an annual average rate of 4.3% over our forecast period. This will see the mining sector's
share of GDP increasing from 5.6% in 2012 to 7.6% in 2017.
Australia will remain a leading player in many segments of the global mining industry given its rich
deposits of minerals including iron ore, nickel, bauxite, copper, gold, silver, uranium, diamonds, zinc and
coal. We expect the value of the mining sector to reach US$107bn by 2017, growing at an annual average
rate of 4.3% over our forecast period. This will see the mining sector's share of GDP increasing from 5.6%
in 2012 to 7.6% in 2017.
Mining Boom Cools
Australia - Mining Industry Value
Mining Industry Value, US$bn (LHS)% change y-o-y (RHS)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
e
2013
f
2014
f
2015
f
2016
f
2017
f
0
20
40
60
80
100
120
-10
0
10
20
30
40
50
e/f = BMI estimate/forecast. Source: BMI, Australia National Statistics
Australia Mining Report Q3 2013
© Business Monitor International Page 7
Bauxite To Drive Output Growth
We forecast bauxite production to show the greatest increase in output reaching 127mnt (million tonnes) by
2017, marking an average annual growth of 11.2% from 2012 levels. Rio Tinto's US$1.5bn expansion
plans for the South of Embley mine in Cape York will provide a considerable boost to production from
2016 onwards.
Regulatory Environment
Australia's mining sector is one of the most business-friendly in the world, with domestic companies and
overseas miners operating in the country. We expect Australia to remain a highly attractive destination for
foreign investment, despite the recently proposed 30% tax on mining companies' profits in coal and iron ore
production. We do not expect that the proposed tax will have a significant impact on investment in the
country's mining sector as these concerns are likely to be outweighed by the country's rich mineral wealth.
Australia's proximity to the major iron ore and coal importers of China and India gives it competitive
advantage over other mining countries.
Key Players
Given its vast potential and high quality of infrastructure, Australia is home to some of the biggest players
in the global mining industry. Multinationals operating in the Australian mining industry include Australian
companies BHP Billiton and Newcrest Mining and large overseas miners such as Rio Tinto, Norilsk
Nickel and Xstrata. On the whole, we expect Australia's mining sector to remain dominated by large
miners, with the exception of coal, which could become slightly more fragmented with the development of
the Alpha and Galilee coal mines by Hancock Coal and Waratah Coal in 2013. These projects are the
largest planned developments in the coal sector and, thus, the two companies will become significant coal
miners.
Australia Mining Report Q3 2013
© Business Monitor International Page 8
SWOT
Australia - Q3 2013
SWOT Analysis
Strengths ■ Australia ranks at the top of our Q313 mining Risk/Reward Ratings. It has an overall
score of 67.8 (out of a possible 100 with 100 being the highest). The regional average
is 51.3.
• Ideally located in the Asia Pacific region, where major metals consumers are located.
Its coal exports also find a ready market, given the proximity to heavy coal importers
in the region.
• Developed democracy and its mining legislation is the best in the world.
• Home to high-grade deposits of minerals, especially iron ore.
Weaknesses ■ Labour costs are very high relative to other mining economies in the region.
■ Continued strengthening of the Australian dollar has put a strain on the profits of
international miners investing in the country.
■ Effective tax rate for mining players has become higher with the imposition of the
super profits tax on coal and iron ore miners.
Opportunities ■ Potential to challenge the dominance of Indonesia in the Asian tin export market.
■ With major gold, copper and nickel ore exporter Indonesia looking to ban raw material
exports by 2014, Australia can increase production in said minerals.
■ Could become an even more important thermal coal producer if Indonesia retreats
from the export market, while economies in Asia adopt aggressive electrification
programmes.
Threats ■ Our below-consensus view on the Chinese economy will significantly crimp demand
for commodities and affect Australia's mining industry.
Australia Mining Report Q3 2013
© Business Monitor International Page 9
SWOT Analysis - Continued
■ Emergence of frontier mining economies, such as Vietnam, the Philippines and
Indonesia may threaten Australia's dominance in the mining industry.
Australia Mining Report Q3 2013
© Business Monitor International Page 10
Market Overview
Maintaining Prominence Despite Cooling Boom
BMI View: Despite our below consensus views on industrial metal prices, a rapid increase in output will
continue to sustain growth in Australia's mining sector. Indeed, major miners in the country will press on
with the development of brownfield projects and maintain their prominence in the industry over the coming
years.
We expect Australia to retain its dominance in the global mining sector, as investors remain attracted to the
rare combination of a very positive business environment and substantial mineral reserves. In 2011
Australia was the largest bauxite and iron ore miner, and a substantial producer of most base metals, as well
as uranium and coal.
Slowing But Healthy Growth
Australia - Mining Industry Value And Growth
Mining Industry Value, US$bn (LHS)% change y-o-y (RHS)
2007
2008
2009
2010
2011
2012
f
2013
f
2014
f
2015
f
2016
f
2017
f
0
20
40
60
80
100
120
-20
-10
0
10
20
30
40
50
f = BMI forecast. Source: BMI, Australia National Statistics
Australia Mining Report Q3 2013
© Business Monitor International Page 11
While we acknowledge that our below-consensus view on the Chinese economy will adversely affect
Australia's mining industry, we expect the country to remain a global mining leader, especially in the
production of coal and iron ore.
World Leader
Australia - Share And Rank Of Global Mining Output, 2011
Source: BMI, WBMS
Apart from the rich deposits of high grade mineral ores, the proximity of Australia to China will continue to
power growth in the mining sector as it substantially reduces the transportation costs compared to its peers
in other regions. In terms of coal production, we forecast output to reach 468mnt (mn tonnes) by 2017,
growing at an annual average rate of 2.4% from 2012. We expect iron ore production to display a higher
rate of growth, increasing at an annual average rate of 5.8% over our forecast period. We have incorporated
into our forecasts a hint of scepticism as to whether many of the projects announced will come to full
fruition.
Table: Australia - Select Key Mining Projects
Company Mine Expected output Year
Kagara Mount Garnet Lead: 30ktpa 2012
Australia Mining Report Q3 2013
© Business Monitor International Page 12
Australia - Select Key Mining Projects - Continued
Hancock Coal Alpha Coal: 30mntpa 2013
Waratah Coal Galilee Coal: 40mntpa 2013
Xstrata George Fisher Lead: rise from 150 to 250ktpa 2013
Energy & MineralsAustralia Mulga Rock Uranium: 1.0ktpa 2013
Xstrata George Fisher Zinc: rise from 300 to 400ktpa 2013
BHP Billiton Western Australia Operations Iron ore: rise from 164 to 220mntpa 2014
GlencoreInternational Mount Margaret Nickel: increase from 30-45ktpa 2014
Minmetals Dugald River Zinc: 200ktpa 2014
Rio Tinto Pilbara Iron ore: expansion to 360mntpa 2015
Rio Tinto Weipa Bauxite: rise from 18 to 50mntpa 2016
Source: BMI, Company announcements
Mining Outlook Turns Dimmer
In line with our view in previous reports, the proposed 30% tax on company profits has not significantly
affected investments in the Australian mining sector, with a swathe of new coal and iron ore projects being
announced since the tax was first proposed. While this measure alone is unlikely to significantly deter
investment into Australia, the imposition of such tax hikes comes at a time when many of the domestic
miners are already struggling to cope with current market conditions. Indeed, a slowdown in China,
softening commodity prices, rising cash costs, a soaring Australian dollar, coupled with further tax increases
sets the stage for a perfect storm for major miners in Australia.
Table: Australia - Mining Industry Value & Production
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Mining IndustryValue, US$bn 66.6 76.6 83.9 86.6 90.3 94.5 98.9 103 107
- % of GDP 6.8 6.2 5.6 5.6 5.8 6.6 7.4 7.7 7.6
Production
Bauxite, mnt 65.2 68.4 70.0 75.8 79.0 82.3 85.5 102 127
Coal, mnt 403 420 395 415 429 447 456 458 468
Copper, kt 854 870 958 911 921 935 954 975 999
Gold, moz 7.17 8.36 8.29 7.91 8.27 8.40 8.52 8.59 8.63
Australia Mining Report Q3 2013
© Business Monitor International Page 13
Australia - Mining Industry Value & Production - Continued
Iron ore, mnt 394 433 480 486 518 561 606 632 644
Lead, kt 566 712 621 623 673 704 724 735 748
Nickel, kt 166 170 215 242 247 253 278 287 293
Zinc, mnt 1.29 1.48 1.52 1.49 1.56 1.61 1.70 1.77 1.41
e/f = BMI estimate/forecast. Source: BMI, Australia National Statistics, WBMS
Australia Mining Report Q3 2013
© Business Monitor International Page 14
Industry Forecast
Bauxite: Environmental Concerns Could Derail Production
BMI View: Rio Tinto's planned expansion of the South of Embley mine in Cape York will significantly
boost bauxite production in Australia from 2016 onwards. While we forecast growth to increase at an
annual average rate of 11.2%, rising concerns over the environmental impact of mining operations will
remain a real threat to future project development.
We forecast bauxite production in Australia to reach 127mnt by 2017, growing at an annual average rate of
11.2% from 2012 levels. The country remains the largest bauxite producer in the world, with output of
75.7mnt, or 30% of the world's total in 2012. We believe the bulk of production growth will be driven by
Rio Tinto's expansion plan at its South of Embley mine in Cape York.
Rio To Gain Share
Australia - Bauxite Production By Mine, 2011
Source: BMI, Reuters
Rio Tinto Alcan, the aluminium subsidiary of Rio Tinto, is set to overtake Alcoa World Alumina &
Chemicals (AWAC; 60% owned by Alcoa and 40%-owned by Alumina Limited) to become the largest
Australia Mining Report Q3 2013
© Business Monitor International Page 15
bauxite miner in Australia. Production levels at AWAC's Huntly and Willowdale mines are likely to stay
unchanged as the company focuses on the development of the Juruti bauxite mine in Brazil. On the other
hand, Rio Tinto will remain a prominent player in the bauxite sector with the expansion of its South of
Embley mine near Weipa. The US$1.4bn project, which was recently given the go-ahead by the Federal
Environment Minister Tony Burke, involves a staged increase in production to eventually 50mntpa (mn
tonnes per annum). As of May 2013, Rio is targeting construction start, pending board approval, this year
with first bauxite aimed for 2016.
Table: Australia - Largest Bauxite Projects
Company Mine Expected output Year
CHALCO Aurukun 7.4mntpa 2012
Rio Tinto Weipa Rise from 18 to 50mntpa 2016
Yankuang Corporation Darling Range Exploration project na
na = not available. Source: BMI, Company announcements
The bulk of bauxite produced in Australia is exported to China, with approximately 90% of exports entering
the country in 2012. Underpinned by our downbeat view on the Chinese economy, we believe China's
consumption of bauxite imports will fall over the coming years. We forecast official headline real GDP
growth of 7.5% in 2013, compared with consensus estimate of 8.1%. In our view, China's structural
balances are far from being corrected and we expect the current economic bounce to fade towards the latter
part of 2013.
Australia Mining Report Q3 2013
© Business Monitor International Page 16
Exports To Weaken As China Slows
Australia - Bauxite Exports To China
Source: BMI, China General Customs Administration
Risks To Outlook
Owing to the poisonous nature of bauxite by-products, political intervention and risks are significantly
higher in this mining sector. We remain cautiously optimistic on the growth of bauxite production, given the
possibility that a mining ban on the exploration of bauxite minerals might be imposed on certain parts of
Australia. In 2012 a south west anti-mining group, the Bauxite and Alumina Action Group of Australia,
called on local MP Terry Redman to support changes to the Mining Act aimed at protecting the Warren-
Blackwood electorate from strip mining for bauxite. Indeed, rising concerns over the environmental impact
of mining activities might prompt the Australian government to adopt an increasingly interventionist stance
towards the bauxite sector, posing significant threat to future project developments.
Australia Mining Report Q3 2013
© Business Monitor International Page 17
Table: Australia - Bauxite Production Forecast
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Bauxite, mnt 65.2 68.4 70.0 75.8 79.0 82.3 85.5 102 127
- % change y-o-y 0.9 4.9 2.3 8.3 4.3 4.1 3.9 19.5 24.1
f = BMI forecast. Source: BMI, WBMS
Coal: Dimmer Prospects On Mounting Challenges
BMI View: A steady flow of large projects will continue to fuel growth in Australia's coal mining industry
over the coming years. However, the country's pre-eminent position in the global coal market is under
increasing threat as falling prices, rising cash costs, higher taxes and a soaring Australian dollar take their
toll on miners. We forecast Australia's coal output (both coking and thermal coal) to reach 468mnt (mn
tonnes) by 2017, marking an annual average growth of 2.4% from 2012 levels.
We believe Australia's coal mining production will continue to increase over the coming years, as a steady
stream of large projects and expansion plans come online. However, we remain wary of the future
development of these projects and highlight that a further deterioration in prices might herald a wave of
capital expenditure plans being cancelled or delayed. Coal miners in Australia have been facing an
increasingly difficult operating environment, as a combination of falling prices, rising cash cost, higher
taxes and a soaring Australian dollar coalesce to present a modest growth picture at best. A recent study by
the Australian Coal Association revealed that Australia, with cash cost at US$176/tonne, is currently the
most costly coal producer in the world. This is in stark contrast to an estimated US$106/tonne for its peers
operating in other regions.
While not our core scenario, Australia may lose its pre-eminent position in the global coal market as a
multitude of challenges reduce cost competitiveness and inhibit growth in the coal industry. Overall, we
forecast Australia's coal output (both coking and thermal coal) to reach 468mnt by 2017, marking an annual
average growth of 2.9% from 2011. We have incorporated into our forecasts a hint of scepticism as to
whether many of the projects announced will reach full fruition.
Australia Mining Report Q3 2013
© Business Monitor International Page 18
Australia Remains Top Exporter
Share Of Global Coal Exports, 2011 (%)
Source: BMI, WBMS
Thermal Coal Production Still Going Strong
Our outlook for thermal coal is based on our regional view of a surge in coal demand from Asia, which
currently accounts for over 65% of global coal consumption. We expect the majority of this demand to be
supported by Australia, the largest coal exporter in the world. Despite our relatively optimistic view on
Australia's coal industry, the country will see a slowdown in production growth over the medium term.
Slumping coal prices and rising production costs have led to the closure and delay of several mining
projects globally.
In late 2012 global mining giant Rio Tinto flagged the closure of its Queensland Blair Athol Mine before
the end of the year at the expense of 170 jobs, while Whitehaven Coal closed its Sunnyside pit near
Gunnedah in New South Wales. The Blair Athol mine has been operational for nearly three decades and
was initially slated for a closure in 2016. The profit margins that these companies believed would be
available from expending output are unlikely to be achieved, suggesting that further downscaling of
expansion plans may be ahead.
Australia Mining Report Q3 2013
© Business Monitor International Page 19
High Quality Coal To Drive Production
Share Of Global Coal Output, 2011 (%)
Source: BMI, WBMS
Banking On Demand From Asia
Australia is the fourth largest coal producer in the world, accounting for 6% of global mined output. It
focuses on the production of two types of coal, namely high-quality black coal (84%) and lower-quality
brown coal (14%). In our view, coal will remain the dominant form of fuel for electricity generation, given
its price and ready availability.
We believe that aggressive industrialisation programmes in China, the world's largest consumer of coal, will
continue to spur coal production in Australia. Despite the Chinese government's plans to increase natural
gas consumption, we believe China will remain heavily reliant on coal for the generation of electricity. We
forecast coal to account for more than 75% of China's total electricity generation by 2020. This is in stark
contrast to Western markets such as the US and Europe, where a combination of slow economic growth,
greater environmental regulations and cheap natural gas prices will see coal consumption remain fairly
stagnant.
Australia Mining Report Q3 2013
© Business Monitor International Page 20
Furthermore, we expect the long-term demand for Australian coal to remain robust. We believe Asia's top
coal importers, Japan, China, South Korea and India, will remain dependent on coal-based power generation
over the next decade, with India's coal consumption expected to grow the fastest due to the country's
inability to maximise the potential of its domestic coal resources.
Coal To Hold Its Ground
Chinese Electricity Generation By Source, 2010 And 2020 (%)
2020 = forecast. Source: BMI, EIA, World Bank
Tax Hike Angers Miners
In line with one of the key themes we have been highlighting in the global mining industry, the Australian
government has been adopting an increasingly interventionist stance towards the mining sector with the
introduction of a carbon taxation scheme and a 30% super-profit tax on coal mining companies. While this
measure alone is unlikely to significantly deter investment into Australia, the imposition of such tax hikes
comes at a time when many of the domestic miners are already struggling to cope with current market
conditions. A slowdown in China, plunging commodity prices, rising cash costs, a soaring Australian dollar,
coupled with further tax increases sets the stage for a perfect storm for major miners in Australia.
The tax hike announced by the Queensland government in September prompted a chorus of criticism from
some of the country's largest miners, notably BHP Billiton, Xstrata and Rio Tinto. Under the new tax
Australia Mining Report Q3 2013
© Business Monitor International Page 21
regime, royalties will jump from 10% to 12.5% on coal sold for US$100-150/tonne, while coal sold for
more than US$150/tonne will attract a 5% royalty payment. This move will affect the profitability of
existing operations and darkens mining prospects in Queensland, especially given that the state already had
one of the world's highest comparable coal royalty regimes.
Table: Australia: Largest Thermal Coal Projects
Company Mine Expected output Year
Wesfarmers/Rio Tinto Benggala expansion (Stage 1) 2.1mntpa thermal coal (ROM) 2012
Rio Tinto/MitsubishiHunter Valley (operations
expansion) 6mntpa thermal and semi-soft coking coal 2012
Whitehaven Narrabri (stage 2) 4.5mntpa thermal coal 2012
Xstrata Ravensworth North 8mntpa thermal and semi-soft coal 2012
Peabody Energy Wilpinjong 2-3mntpa thermal coal 2012
BHP Billiton Mount Arthur (RXI) 4mntpa thermal coal (ROM) 2013
Rey Resources Canning Basin 2.5mntpa thermal coal 2013
Idemitsu Kosan Boggabri (opencut) 3.3mntpa thermal coal 2014
Xstrata Ulan West 7mntpa thermal coal 2014
Rio Tinto/Mitsubishi Mount Pleasant 8.5mntpa thermal coal 2014
Macquarie Generation/Delta Cobbora 12mntpa thermal coal 2015
Anglo Coal Australia Drayton South 7mntpa thermal and semi-soft coking coal 2016
GVK/Hancock Coal Alpha Coal 30mntpa thermal 2018
Adani Carmichael Up to 60mntpa thermal coal 2018
Yancoal Australia Moolarben (stage 2)12mntpa openpit; up to 4mntpa
underground na
Waratah Coal China First Up to 40mntpa thermal coal na
na = not available/applicable. Source: BMI, company announcements, BREE
Galilee Basin To Become A Dominant Thermal Coal Producer
Australia's Galilee Basin, in Queensland, is set to become an important coal production region with its vast
deposits of thermal coal. Projects in the region contain the largest thermal coal projects in the country
including Adani's 60mntpa (mn tonnes per annum) Carmichael, Hancock Coal's 30mntpa Alpha Coal, and
Waratah Coal's 40mntpa China First projects. Within our forecast period growth drivers would include
Xstrata's 7mntpa Ulan West, BHP Billiton's 4mntpa Mount Arthur and Macquarie Generation's 12mntpa
captive Cobbora thermal coal projects.
Australia Mining Report Q3 2013
© Business Monitor International Page 22
Coking Coal Output To Hold Strong
While the recent heavy rains in Australia's eastern Queensland state have disrupted production and caused
major coal producers such as Rio Tinto and Xstrata to declare force majeure on exports, we do not expect
coal output to fall drastically. Instead, we expect coking coal production to hold up strongly over the
coming quarters, supported by a plethora of new mine openings and expansion plans including Peabody
Energy's 5-6mntpa Denham and Anglo Coal Australia's 6.5mntpa Moranbah South coking coal projects.
Furthermore, the Australian Planning Assessment Commission (PAC) has recently granted approval for the
construction of Whitehaven's AUD651mn Maules Creek mine in the heart of the Gunnedah Basin. The
project, slated to become one of the largest open-cut coal mines in the world, is scheduled to start operations
in mid-2013 and aims to ramp up production to more than 10mntpa of high quality semi-soft coking coal
from 2016 onwards.
Table: Australia - Largest Metallurgical Coal Projects
Company Mine Expected output Year
Yancoal Australia Austar underground (stage 3) 3.6mnt hard coking (ROM) 2012
Peabody Energy Burton 2-3mntpa hard coking 2012
Wesfarmers Curragh Increase to 8.5mntpa 2012
Rio Tinto/MitsubishiHunter Valley Operations
Expansion 6mntpa thermal and semi-soft coking 2012
Xstrata Ravensworth North 8mntpa thermal and semi-soft coking 2012
BMA Daunia 4.5mntpa coking 2013
Anglo Coal Australia Grosvenor underground 4.3mntpa hard coking 2013
Peabody Energy Eaglefield Expansion 5.2mntpa coking (ROM) 2013
Aston Resources Maules Creek10.5mntpa semi-soft coking and
thermal 2013
Aquila Resources Washpool Coal Project 2.6mntpa hard coking 2013
Whitehaven Coal Maules Creek 10mnt of semi-soft coking 2013
BHP Billiton Mitsubishi Alliance(BMA)
Caval Ridge/ Peak Downexpansion 8mntpa coking 2014
Peabody Energy Denham 5-6mntpa coking 2014
New Hope Coal Lenton 3.5mntpa coking 2014
Peabody Energy Millennium Expansion 3.5mntpa coking (ROM) 2014
Caledon Resources Minyango 4.5mntpa thermal and coking 2014
Anglo Coal Australia/ Exxaro Moranbah South Project 6.5mntpa coking 2014
Australia Mining Report Q3 2013
© Business Monitor International Page 23
Australia - Largest Metallurgical Coal Projects - Continued
Xstrata Oaky Creek (phase 2) 5mntpa coking 2015
Source: BMI, Company Announcements, BREE
Fighting An Uphill Battle
Apart from the growing threats of resource nationalism, rising costs and weakening coal prices, our forecast
for the country's coal sector has been dented by a soaring Australian dollar. It has outperformed other
currencies in recent months and further strengthening might weigh on exports and force miners to look
elsewhere for investment opportunities.
Furthermore, growing concern over the environmental impact of mining activity has prompted the
government to adopt harsher measure against mining companies. In 2012 the state government of Western
Australia terminated all coal mining exploration licences within a 230-square km zone of the Margaret
River. We believe the impact of such an act will be detrimental to the growth of the coal mining industry as
it effectively put an end to all future mining projects in the region.
Table: Australia - Coal Production Forecasts
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Coal, mnt* 403 420 395 415 429 447 456 458 468
- % change y-o-y 3.1 4.2 -6.0 5.0 3.3 4.2 2.0 0.4 2.2
e/f = BMI estimate/forecast; * Includes both coking and thermal coal production. Source: BMI, EIA
Copper: Enthusiasm Wanes On Market Uncertainty
BMI View: Copper production in Australia is set to experience modest growth, as we expect renewed
weakness to take hold of China's economy towards the latter part of 2013. While enthusiasm for copper
investment has waned in the face of cooling demand, rising cash costs and growing market uncertainty, a
string of projects scheduled to come online will continue to support growth. Overall, we forecast copper
output to reach 999kt (thousand tonnes) by 2017, increasing at an annual average rate of 1.9% from 2012
levels.
Australia Mining Report Q3 2013
© Business Monitor International Page 24
In line with our expectations, enthusiasm for copper investment has waned over the past year with major
miners in Australia scaling back expansion plans and announcing further work deferrals in the face of
cooling demand, rising cash costs and growing market uncertainty. BHP Billiton, the world's largest miner,
decided to shelve the US$30bn planned Olympic Dam expansion project in South Australia in August 2012.
Miners are increasingly backing away from large-scale capital expenditure commitments, choosing instead
to embark on incremental phased projects. In view of the recent downturn in the mining industry, we
believe copper production in Australia is set to experience modest growth over the coming years, increasing
at an annual average rate of 1.9% from 2012 levels, to reach 999kt by 2017.
Table: Australia - Largest Copper Projects
Company Mine Production capacity Year
Hillgrove Resources Kanmantoo 20ktpa 2012
OZ Minerals Ankata 25ktpa 2012
Ivanhoe Australia Osborne 21ktpa 2012
Xstrata Ernest Henry 50ktpa 2013
Sandfire Resources DeGrussa 77ktpa 2013
Redbank Copper Redbank 30ktpa 2013
Mungana Gold Mines Mungana 12ktpa 2014
QMC White Range 25ktpa 2014
Ivanhoe Australia Mount Dore 19ktpa 2014
Kagara Einasleigh 15ktpa 2014
Venturex Resources Pilbara VMS Province 20ktpa 2014
Golden Cross Resources Copper Hill 37ktpa 2015
Rio TintoNorthparkes (step change
expansion) 90ktpa 2015
Source: BMI, Company Announcements
Australia is the fifth-largest copper producer in the world, with output of 911kt in 2012, approximately
5.4% of global supply. The country's key copper producers include BHP Billiton, Mount Isa Mines and
OZ Minerals, which together accounted for over 46% of the country's copper output in 2011. While we
expect these miners to continue their dominance in the copper sector, the mining boom in Australia will be
heading for a sharp slowdown in the years ahead. Rising costs and falling prices have led to the delay and
cancellation of several exploration projects initially scheduled to come online in 2012, with dominant
players such as Barrick Gold and Anglo American pledging to practice greater caution over commitment
to large-scale projects.
Australia Mining Report Q3 2013
© Business Monitor International Page 25
Major Miners To Continue Dominance
Australia - Copper Output By Company, 2011
Source: BMI, Reuters
Risks To Outlook
Our view that Australia's copper mining output will display a modest growth to 2017 is exposed to three
downside risks. First, the Australian dollar has outperformed other currencies in recent months and further
strengthening of the currency might weigh on exports and force miners to look elsewhere for investment
opportunities. However, our Country Risk team remains downbeat on the Australian dollar over the medium
term and forecast the currency to weaken to average US$$1.00/AUD by the end of 2013 and subsequently
to depreciate further to US$0.75/AUD by 2017.
Second, our below consensus view on the Chinese economy will see that demand from the largest importer
of Australia's copper will weaken over the coming quarters. As China's structural imbalances are far from
being corrected, we expect renewed weakness to take hold of the country's economy towards the latter part
of 2013. We forecast China's official headline real GDP growth of 7.5% in 2013, compared with consensus
forecast of 8.1%, which puts us in the minority of forecasters who expect economic growth momentum to
continue waning.
Australia Mining Report Q3 2013
© Business Monitor International Page 26
Mining Boom Cools As China Slows
China - Real GDP Growth (%)
2007
2008
2009
2010
2011
2012
2013
f
2014
f
2015
f
2016
f
2017
f
4
6
8
10
12
14
16
f = BMI forecast. Source: BMI, National Bureau of Statistics
Lastly, future mining projects may be hindered by a lack of infrastructure growth in Australia as we believe
major players like BHP Billiton will continue to undertake further cuts and deferrals to capital expenditure
plans for coming years. We do not envisage a return to the stellar infrastructure growth story that Australia
saw over the past few years. The huge ramp up of construction activities during the boom times have
generally saturated the market and lead to overcapacity now that China has slowed and commodity prices
have come off their recent highs.
Table: Australia - Copper Production Forecasts ('000 ounces, unless stated otherwise)
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Copper, koz 854 870 958 911 921 935 954 975 999
- % change y-o-y -3.6 1.9 10.1 -4.9 1.1 1.5 2.0 2.2 2.5
e/f = BMI estimate/forecast. Source: BMI, WBMS
Australia Mining Report Q3 2013
© Business Monitor International Page 27
Gold: Global Share To Decline
BMI View: We forecast a modest increase in Australia's gold production over the coming years, with
output reaching 8.63moz (million ounces) by 2017, marking an annual average growth rate of 1.8% from
2012 levels. Newmont Mining will account for the bulk of output growth over our forecast period due to the
ramp up in production at its Boddington mine.
We believe Australia is set for modest growth in gold production over the coming years as falling ore
grades at some of the country's largest mines partly offset the impact of several large expansions. The recent
decline in gold prices will also throw an increasing number of mining projects into question, dealing a hard
blow to projects sitting at the higher end of the global cost curve. In view of our subdued growth outlook,
we expect Australia's share of global production to decline from 9.5% in 2012 to 9.0% in 2017. Australia
produced 7.9moz of gold in 2012, placing the country as the second-largest gold producer in the world, after
China.
Barrick Takes The Gold
Australia - Gold Production By Company, 2011
Source: BMI, Reuters
Australia Mining Report Q3 2013
© Business Monitor International Page 28
Gold mining in Australia is dominated by Barrick Gold, Newcrest Mining, Newmont, Gold Fields and
AngloGold Ashanti, which together account for 70 % of the country's total output in 2011. We believe the
sector is set to become more fragmented with the entrance of several new companies on the horizon. The
recent fall in gold prices has ignited interest from Chinese gold producers and companies seeking to acquire
mining assets in Australia on the cheap. These include the likes of Zijin Mining Group, China Hanking
Holdings and Shandong Qixing Iron Co., which have offered to acquire Kalgoorlie Mining, Stonewall
Resources and St. Barbara in recent months.
Newmont To Drive Growth
We expect Newmont Mining to account for the bulk of output growth over our forecast period due to the
ramp up in production at its Boddington mine. At full capacity, the Boddington project will be Australia's
largest gold mine with annual production capacity of 1mozpa (million ounces per annum) during the first
five years of production. Newmont expects attributable gold production at the mine to reach 700-750koz in
2013, with costs applicable to sales of approximately US$850-950/oz.
Australia's Share To Decline
Select Countries - % Share Of Global Gold Mined Output
f = BMI forecast. Source: BMI, WBMS
Australia Mining Report Q3 2013
© Business Monitor International Page 29
Still Cause For Optimism
While we forecast modest growth in Australia's gold production, the country will remain an attractive
destination for gold mining investment. Australia tops our mining risk/reward ratings for Asia and although
the government recently enacted taxes on iron ore and coal miners, we do not expect gold mining
companies to encounter similar measures as their carbon emissions are relatively low.
Table: Australia - Largest Gold Mining Projects
Company Mine Expected output Year
Silver Lake Resources Murchison 100kozpa 2012
Boddington Newmont Rise from 500koz to 1moz 2013
AngloGold Ashanti Tropicana 300kozpa 2013
Mungana Gold Mungana 140kozpa 2014
Southern Cross Goldfields Parker Range 700koz reserve na
na = not available. Source: BMI, Company Announcements
Furthermore, we note that the ability of gold miners to modify their production to more favourably reflect
the lower gold price environment is a cause for optimism. We expect that more mining companies will look
to change their mine plan and target higher grades and lower cost zones in a bid to mitigate the effects of
falling gold prices. Overall, we expect Australia's gold production to reach 8.63moz by 2017, marking an
average annual growth rate of 1.8% from 2012 levels.
Table: Australia - Gold Production Forecast (mn ounces, unless stated otherwise)
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Gold, moz 7.17 8.36 8.29 7.91 8.27 8.40 8.52 8.59 8.63
- % changey-o-y 3.7 16.6 -0.8 -4.6 4.5 1.6 1.5 0.8 0.4
e/f = BMI estimate/forecast. Source: BMI, WBMS
Australia Mining Report Q3 2013
© Business Monitor International Page 30
Iron Ore: Miners To Press On Despite Price Weakness
BMI View: Major miners in Australia will continue to press ahead with plans to expand iron ore
production despite growing concerns over the strength of iron ore prices. The rich deposits of high-grade
hematite ores and extensive infrastructure support will considerably lower the operational costs of mining
projects and strengthen the market positions of domestic miners.
While we are forecasting iron ore prices to head broadly lower over the coming years, this is unlikely to
have a considerable impact on output in Australia as the country remains one of the lowest-cost iron ore
producers in the world. In our view, the worst is now over for Australia in terms of cutbacks in investment
spending. While more projects may be delayed or cancelled, we believe the pullback in capital expenditure
will not return to the levels seen over the past year. Overall, we forecast iron ore output to reach 644mnt
(million tonnes) by 2017, growing at an annual average rate of 5.8% from 2012 levels.
In a move that further attests their prominence in the global mining sector, Rio Tinto, BHP Billiton and
Fortescue Metals are planning to add a combined 235mnt of new mine capacity by 2015. The planned
output expansion, equivalent to around half of Australia's total iron ore production in 2012, came amidst
growing doubts over the future growth trajectory of China, hence, iron ore prices.
Australia Mining Report Q3 2013
© Business Monitor International Page 31
Australia Leading The Pack
Select Countries - Iron Ore Production (mnt)
Australia Brazil China IndiaRussia
2007
2008
2009
2010
2011
2012
e
2013
f
2014
f
2015
f
2016
f
2017
f
0
100
200
300
400
500
600
700
e/f = BMI estimate/forecast. Source: BMI, USGS, National Bureau of Statistics, Federation of Indian Mineral
Industry
Australia A Cost Leader In Iron Ore Production
Despite our below consensus view on iron ore prices, we believe many of the big players in Australia will
continue to perform well in the coming years. The rich deposits of high-grade hematite ores (iron content of
62.5% and above), coupled with extensive infrastructure support will considerably lower the operational
costs of mining projects and strengthen the market positions of domestic miners (see 'Tracking The Cost
Leaders In Iron Ore Production', January 17 2013). Hematite ores (also known as 'direct shipping ores')
can be fed directly into iron-making blast furnaces and require relatively little beneficiation. Production
from these deposits tends to place miners at the lower quartile of the cost curve.
Notwithstanding a sharp escalation in operating cost, our forecast for iron ore prices to average US$118/
tonne in 2013 and US$105/tonne in 2014 should see that the operations of Australian miners will remain
profitable. On average, the cost of producing iron ore in Australia is US$30-40/tonne, compared with US
$40-50/tonne in West Africa and US$120/tonne in China.
Australia Mining Report Q3 2013
© Business Monitor International Page 32
Maintaining Dominance With Low Cash Cost
Australia - Select Iron Ore Projects, Cash Cost (US$/tonne)
Source: BMI, Bloomberg
Major Miners Forging Ahead
We expect BHP Billiton and Rio Tinto, which account for 40% and 37% of Australia's iron ore production
respectively, to drive much of the production increases over our forecast period. BHP's West Australian iron
ore business is now equipped with the infrastructure capacity to transport 220mntpa (mn tonnes per annum)
of iron ore and is expected to deliver volume growth of 5% in 2013. At the same time, Rio Tinto is
advancing with its plan to boost iron ore output in the Pilbara region by 15% this year to 290mnt, and a
target of 360mnt by 2015. Of the US$3.1bn investment in the Pilbara expansion project, US$2bn will be
used to extend the life of the Nammuldi iron ore mine while the remaining will be spent on the expansion of
Rio's Cape Lambert port and rail facilities. In conjunction with its expansion plans, the miner, which posted
its first ever full year loss of US$2.6bn in 2012, is targeting US$5bn in cost savings across all businesses by
the end of 2014.
Aside from BHP and Rio Tinto, Fortescue Metals will be a key growth driver with its Chichester Hub,
Solomon Hub and North Star project, which together total 2.0bnt (billion tonnes) in resources making them
some of the largest magnetite deposits in Australia. Exploration programmes are also under way at the
Australia Mining Report Q3 2013
© Business Monitor International Page 33
Western Hub area with current inferred resources of 624mnt at an average grade of 58.7%. The abundance
of mineral reserves, low cash costs and a stable political environment in Australia put domestic miners at a
significant competitive advantage over peers in other regions.
Table: Australia - Largest Iron Ore Projects
Company Mine Expected output Year
CITIC Pacific Mining Sino Iron project 28mntpa 2012
Fortescue Metals Group Chichester HubIncrease from 55mntpa to
95mntpa 2013
Fortescue Metals Group Solomon Hub (stage 1) 60mntpa 2013
BHP Billiton Jindelbar 35mntpa 2014
Hancock Prospecting Roy Hill 55mntpa 2014
Aquila Resources/AMCI West Pilbara 30mntpa 2014
Rio Tinto Total company capacity Increase to 360mntpa Mid-2015
Crosslands Resources Jack Hills project (stage 2) 25-35mntpa 2014/2015
Source: BMI, Company Announcements
Risks To Outlook
Compared with most other countries, the risks in Australia are low. On balance, upside risks significantly
outweigh those to the downside. Our expectation for lower growth over coming years is partly predicated on
increased taxes and greater government involvement in the mining sector. That said, the controversial tax on
resources profits will be a key battleground ahead of the national elections on September 14 2013. While it
remains difficult to determine the outcome of the election, we believe it is highly likely that the Mineral
Resource Rent Tax (MRRT) will be abandoned should the ruling Labour Party fail to secure a third term
against the opposition centre-right Liberal-National Coalition. Opposition leader Tony Abbott has been a
vocal critic of the mining tax and has on several occasions reiterated his pledge to scrap the tax and restore
competitiveness to the mining sector. The main downside risk is for a significant decline in iron ore prices
which would be likely to cause mining companies to revisit planned investment in iron ore, not just in
Australia.
Australia Mining Report Q3 2013
© Business Monitor International Page 34
Table: Australia - Iron Ore Production Forecast
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Iron ore, mnt 394 433 480 486 518 561 606 632 644
- % change y-o-y 15.1 10.0 10.8 1.3 6.5 8.3 8.1 4.2 2.0
e/f = BMI estimate/forecast. Source: BMI, ABARES
Lead: Paroo Station To Lift Growth
BMI View: The recommencement of Ivernia's Paroo Station mine will provide a significant boost to
Australia's lead mine production over the coming quarters. We expect lead output to reach 748kt (thousand
tonnes) by 2017, growing at an average rate of 3.8% per annum. However, the planned closure of MMG's
Century mine by 2016 will be a drag on output growth towards the latter part of our forecast period.
We expect lead mine production in Australia to increase at an annual average rate of 3.8%, to reach 748kt
by 2017. The bulk of this growth will be driven by the recent restart of Ivernia's operations at the Paroo
Station mine, which has been on care and maintenance since April 2011. The recommencement of Ivernia's
Paroo Station mine (previously known as Magellan) in March 2013 will provide a significant boost to
output growth over the coming quarters. The mine, located near Wiluna, Western Australia, is expected to
reach its full production levels by the end of this year. The Paroo Station mine was forced to suspend
operation on April 2011 as a result of the detection of lead bearing mud on one of Ivernia's shipping
containers.
Table: Australia - Key Lead Projects
Company Mine Expected output Year
Kagara Mount Garnet 356t 2012
Ivernia Inc Paroo Station Restart operation: 85ktpa 2013
XstrataGeorge Fisher (Mount
Isa) Increase to 200ktpa 2013
MMG Dugald River 25ktpa 2015
Source: BMI, Company Reports
Australia Mining Report Q3 2013
© Business Monitor International Page 35
Additionally, other major committed projects especially MMG's $1.4bn Dugald River mine will continue to
support production growth over our forecast period. The Dugald River project has successfully secured
funding from the China Development Bank Corporation (CDB) in March and is on track for production
in 2015. The project has a resource estimate of 53mnt at 12.5% zinc, 1.9% lead and 36g/t silver.
Nonetheless, it is telling to note that the planned closure of the MMG's Century lead-zinc mine by 2016 will
be a drag on output growth towards the latter part of our forecast period. The Century mine, the second-
largest zinc mine in the world, is scheduled to be exhausted in three years.
We have also factored into our forecast an expectation that some of the projects announced will not come to
full fruition. As evidenced by the industry-wide culling over the past year, mining companies across the
board are scaling back their ambitions and focusing on the development of brownfield projects. Indeed, the
outlook in the lead mining industry remains relatively weak. According to the International Lead & Zinc
Study Group (ILZSG), a relatively sparse pipeline of 250ktpa (thousand tonnes per annum) of new mine
capacity is at present committed to start up between 2013 and 2015. It was estimated that only US$3.5bn
will be spent on lead mining expansion globally between 2013 and 2016, as opposed to US$161bn for
copper and US$119bn for coal.
Heavily Centred On Asia
Australia - Exports of Mined Lead, 2012
Source: BMI, WBMS
Australia Mining Report Q3 2013
© Business Monitor International Page 36
Australia To Remain A Dominant Player
While rising environmental concerns over the impact of lead mining activities will continue to be a key
impediment to production, we expect Australia to remain a dominant player in the global lead mining arena
over the coming years. The country is the second-largest lead producer in the world, after China, accounting
for 12.2% of global output in 2012. The majority of Australia's lead exports go to China, which constituted
35% of the country's exports last year. This is followed by South Korea and Japan, at 26% and 15%,
respectively.
Table: Australia - Lead Production Forecasts
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Lead, kt 566 712 621 623 673 704 724 735 748
- % changey-o-y -12.9 25.8 -12.8 0.3 8.1 4.5 2.9 1.5 1.8
e/f = BMI estimate/forecast. Source: BMI, WBMS
Nickel: Healthy Growth In Place
BMI View: The scheduled release of several key mining projects in Australia will continue to drive nickel
production higher over the coming years. We expect nickel output to increase from 242kt (thousand tonnes)
in 2012 to 293kt by 2017, increasing at a healthy clip of 3.9% per annum.
We believe nickel production in Australia will continue to experience healthy growth over the coming
years, supported by the scheduled release of several key mining projects. However, we remain cautiously
optimistic towards the development of these projects as significant weakness in nickel prices might prompt
an increasing number of miners to rein in their capital expenditure and shed their non-core assets. Overall,
we forecast nickel production to increase from 242kt in 2012 to 293kt by 2017, growing at an annual rate of
3.9%. Australia exports the majority of its nickel to China, with more than 78% of nickel entering the
country in 2012. This is followed by Canada, at approximately 18% of total exports.
Australia Mining Report Q3 2013
© Business Monitor International Page 37
China Dominates
Australia - Mined Nickel Exports. 2012
Source: BMI, WBMS
Ravensthorpe To Dominate Output Growth
Following the restart of commercial production in 2011, First Quantum Mineral's Ravensthorpe mine is
set to drive nickel output growth in Australia over the coming years. The mine is located in Western
Australia, approximately 550km south east of Perth. First Quantum expects annual production at the mine to
be approximately 39ktpa (thousand tonnes per annum) during the first five years of recommencement and
28ktpa over its 30-year expected mine life. The Ravensthorpe mine produced 9.0kt of nickel in Q113, its
highest quarterly production as a result of improved grades.
Australia - Largest Nickel Projects
Table:
Company Mine Expected output Year
First Quantum Minerals Ravensthorpe Average of 28ktpa over 30-year mine life 2012
Metallica Minerals Lucky Break 0.66ktpa 2012
Proto Resources andInvestments/Metals Finance Barnes Hill 2.2ktpa; feasibility study under way 2013
Australia Mining Report Q3 2013
© Business Monitor International Page 38
- Continued
Metallica Minerals Nornico 6ktpa; prefeasibility study under way 2014
Norilsk Nickel Honeymoon Well 40ktpa; undergoing further drilling programme 2015-2016
Gladstone Pacific Nickel Gladstone (stage 1) 63ktpa; US$4.2bn project 2015
Gladstone Pacific Nickel Gladstone (stage 2) 57ktpa 2018
Heron Resources Kalgoorlie 36.7ktpa; US$2bn project On hold
Wingellina Metals X 40ktpa; EIS underway na
Sherlock BayAustralasian
Resources 9ktpa; prefeasibility study underway na
Nickelore Canegrass 20ktpa; US$865mn project na
na = not available. Source: BMI, Company reports
Apart from First Quantum, a string of new projects and expansion plans will continue to support nickel
production over our forecast period. Russian mining company Norilsk Nickel announced in July 2012 that
it will invest US$1.5bn in the development of Australia's Honeymoon Well Nickel Deposit, which is
considered to contain one of the world's largest undeveloped nickel reserves. Many West Australian nickel
producers, such as Mincor Resources (MCR), have reported rising profitability in recent years after they
adopted more cost-effective measures and successfully produced nickel of improved grades.
Rise Of Nickel Pig Iron To Weigh On Prices
We are aware that the rise of China's nickel pig iron (NPI) industry as a new source of supply for Chinese
nickel consumers will continue to put downward pressure on refined nickel prices. Indeed, this remains a
key downside risk to our production forecast as it could potentially throw more mining projects into
question. NPI is mainly produced from laterite nickel ores, which China currently sources from the
Philippines and Indonesia. A key risk to laterite ore projects is their higher production costs relative to
sulphide ore projects. The majority of nickel is produced from sulphide deposits, which are generally easier
and cheaper to mine than laterite ores. In the long run, we expect increased production from laterite nickel
mines in Australia, and the giant Honeymoon Well and Gladstone projects (commercial production by
2015-2016) to be the main drivers of growth.
Australia Mining Report Q3 2013
© Business Monitor International Page 39
Table: Australia - Nickel Production Forecasts
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Nickel, kt 166 170 215 242 247 253 278 287 293
- % change y-o-y -17.0 2.4 26.5 12.6 2.1 2.5 9.8 3.3 2.0
f = BMI forecast. Source: BMI, WBMS
Tin: Brighter Outlook In Store
BMI View: Australia's tin production is heading towards a brighter future, following a drastic fall in output
over the past two years. The scheduled release of several key mining projects, coupled with ongoing
expansion plans at Metals X's Renison mine, will provide a considerable boost to production. We forecast
tin output to grow at an annual average rate of 11.0% from 2012 levels, to reach 12.6kt (thousand tonnes)
by 2017.
We believe Australia's tin production will experience a brighter outlook following a drastic fall in
production over the past two years, during which output declined by more than 17.2% year-on-year (y-o-y)
and 51.2% y-o-y, in 2011 and 2012, respectively. The scheduled release of several key mining projects over
our forecast period will drive output growth towards the positive territory. In addition, the ongoing
expansion plans at Metals X's Renison mine will provide a considerable boost to tin production. Overall,
we forecast tin output to reach 12.6kt by 2017, growing at an annual average rate of 11.0% from 2012
levels. With this growth rate, we expect Australia's share of global tin production to increase from 2.8% in
2012 to 4.5% in 2017.
Australia Mining Report Q3 2013
© Business Monitor International Page 40
Australia's Share To Increase
Select Countries - % Share Of Global Tin Mined Output
f = BMI forecast. Source: BMI, WBMS
Metals X To Lead The Charge
Metals X's Renison Bell mine is Australia's richest source of tin and the largest tin producer in the country.
The Renison mine, a 50-50 partnership between Metals X and Yunnan Tin - Parksong Group (YTG), is
an underground tin mine on the West Coast of Tasmania. We believe Metals X will continue to dominate
the tin mining sector in Australia given the company's plans to expand output at the Renison mine.
The Renison project, slated for completion by 2013, involves the development of new stopping blocks, as
well as rehabilitation of old areas for the extraction of remnant pillars. As of March 2013, the project hosts
more than 590kt of fully developed ore and 2.1mnt of capitally developed ore stocks. Although mined
production decreased by 14.7% in Q113 as compared to the previous quarter, this was mainly due to the
changeover of the principal mining contractor and Metals X expects productivity to return to steady state in
the ensuing quarter.
Australia Mining Report Q3 2013
© Business Monitor International Page 41
More Projects On The Horizon
Apart from Metals X, other companies, such as Monto Minerals and Stellar Resources (SRZ), are also
undertaking new projects and looking to expand production. As of May 2013, Monto Minerals has started
drilling at high priority tin targets at its wholly owned Herberton tin project in Northern Queensland, where
recent rock chip sampling has returned high grade tin values to 5.99%. On the other hand, the Heemskirk
Tin project of SRZ has one of the highest grade tin resources globally and with an estimated resource of
4.4mnt, possesses immense potential to become one of Australia's largest tin producers. Construction on the
Heemskirk project is expected to start in 2014 and operations are expected to begin in 2015.
Malaysia's Reliance To Stay
Australia - Mined Tin Exports By Geography, 2012
Source: BMI, WBMS
While our expectation that tin will be a strong performer among the industrial metals complex and that it
will continue to incentivise production, we remain doubtful as to whether some of the projects announced
will come to full fruition. Indeed, the Australian government has been adopting an increasingly
Australia Mining Report Q3 2013
© Business Monitor International Page 42
interventionist stance in the mining sector, with growing environmental concerns and rising resource
nationalism poised to threaten the growth of future tin mining production.
That said, we believe Australia will remain an important player in the global tin mining industry. It is the
seventh-largest tin producer in the world, accounting for approximately 2% of global output in 2012. The
majority of Australia's mined tin exports go to Malaysia, at more than 78% of total exports in 2012. This
trend is likely to persist as Malaysia depends heavily on imported tin concentrates and crude tin from the
country to meet its demand for feedstocks by domestic smelters and refineries.
Table: Australia - Tin Production Forecast ('000 tonnes, unless stated otherwise)
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Tin, kt 13.3 18.6 15.4 7.5 7.5 8.6 9.7 11.0 12.6
% growthy-o-y 646 39.8 -17.2 -51.2 0.2 14.2 13.0 13.5 14.1
e/f = BMI estimate/forecast. Source: BMI, WBMS
Zinc: Growth To Collapse As Century Mine Ends
BMI View: The scheduled release of several key expansion plans and new mine openings in Australia will
continue to support zinc production over the coming years, until the planned closure of the massive Century
mine in 2016.
While the scheduled release of several key expansion plans and new mine openings in Australia will
continue to support zinc production, we expect the planned closure of Century zinc mine in 2016 will pull
down growth considerably towards the end of our forecast period. For the time being, we believe Australia
will remain a dominant player in the global zinc mining industry. The country is the second-largest zinc
producer in the world, accounting for more than 11% of global output in 2012. Overall, we forecast zinc
output in Australia to reach 1.41mnt by 2017, a 4.7% decrease from 1.49mt in 2012.
Australia Mining Report Q3 2013
© Business Monitor International Page 43
Century To Maintain Dominance Until 2016
Australia - Zinc Output By Mine, 2011
Source: BMI, Reuters
Century Mine's Life Extended To 2016
Minmetals' Century mine, the world's second largest zinc operation, will be dominating the Australian zinc
mining industry for another year due to the inclusion of Stage 10 of the mine. The mine, which produced
514kt of zinc in 2012, was supposed to be depleted by mid-2015, but its life has been extended to 2016.
Over the past few years Minmetals has been conducting extensive brownfield exploration projects to extend
the mine's life. These have been successful, with the mine containing substantial zinc reserves of
approximately 2.5mnt as of 2011.
Australia - Largest Zinc Projects
Table:
Company Mine Expected output Year
Toho Rasp 70-90ktpa 2012
Perilya Potosi (stage 2 and 3) Increase to 45ktpa 2012
XstrataMount Isa mines (Black Star, George Fisher,
Handlebar Hill) Increase from 300 to 400ktpa 2013
Australia Mining Report Q3 2013
© Business Monitor International Page 44
- Continued
Xstrata Lady Loretta 126ktpa 2013
Argent Minerals Kempfield82.8ktpa; AUD100mn project; feasibility
study under way 2013
Xstrata McArthur River (phase 3)Increase to 200ktpa; feasibility study
under way 2014
Minmetals Dugald River 200ktpa; US$850-950mn project 2015
Admiral Bay Kagara846ktpa ; AUD997mn project; Prefeasibility
completed na
na = not available. Source: BMI, Company Announcements, BREE
Xstrata And Minmetals To Dominate Growth
Notwithstanding the closure of the Century mine in 2016, zinc production will be driven by the ongoing
expansion plans and new mine openings from Xstrata and Minmetals over the coming years. Expansion
and extension projects are currently under way for Xstrata's three Mount Isa mines: Black Star, George
Fisher and Handlebar Hill. The company is undertaking US$116mn and US$38mn mine life extension
projects on the 120ktpa Black Star Deeps and 40ktpa Handlebar Hill mines, respectively. On top of these
projects, the US$246mn expansion of the George Fisher mine in Mount Isa will increase its production rate
by almost 30% by 2013. Indeed, the George Fisher mine contains one of the largest zinc reserves in the
world.
Minmetals' Dugald River project will be another major driver of growth in the industry. The Dugald River
deposit is a world-class, undeveloped zinc-lead-silver resource located some 85 km north east of Mount Isa.
With a development capital expenditure budget of A$800mn, the mine has a projected life of 23 years and is
set to begin production by 2015.
Table: Australia - Zinc Production Forecasts (mn tonnes, unless stated otherwise)
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Zinc, mnt 1.29 1.48 1.52 1.49 1.56 1.61 1.70 1.77 1.41
- % change y-o-y -15.1 14.7 2.4 -1.9 4.9 3.5 5.1 4.6 -20.3
f = BMI forecast. Source: BMI, WBMS
Australia Mining Report Q3 2013
© Business Monitor International Page 45
Industry Risk Reward Ratings
Asia Risk/Reward Ratings
Asia has become the dominant global mining player over the last decade, with China, India, Australia and
Indonesia becoming global leaders in mineral production. We expect this trend to continue as major
companies such as Rio Tinto and BHP Billiton focus on the expansion of their core high-margin assets in
Australia, while state-owned companies undertake investment in China and India.
While Australia leads the region in our mining business environment ratings, thanks to abundant mineral
wealth and stable investment climate, the rest of Asia is generally hampered by security issues and
nationalistic concerns over mining investment. This is most notable in India and the Philippines, where
bureaucracy and red tape slow development. A second theme is growing environmental concerns over the
effects of mining activities, which has resulted in more government intervention, a trend we have seen
around the world. In China environmental concerns have partly prompted the government to restructure and
consolidate the massive mining industry, especially the iron ore, coal and rare earths sectors.
Table: Asia Mining Risk/Reward Ratings
Rewards Risks
Industry Country Rewards Industry Country Risks Risk/Reward Ratings
Australia 62.5 61.4 62.1 75.5 86.6 81.0 67.8
Mongolia 65.0 62.1 64.0 50.9 46.9 48.9 59.5
China 62.5 51.8 58.8 37.1 69.4 53.2 57.1
Malaysia 45.0 65.4 52.1 49.6 73.6 61.6 55.0
Indonesia 57.5 52.5 55.8 42.6 45.2 43.9 52.2
Vietnam 55.0 62.5 57.6 31.9 43.5 37.7 51.6
Thailand 45.0 62.6 51.2 42.7 60.3 51.5 51.3
Laos 57.5 60.9 58.7 24.7 28.9 26.8 49.1
Myanmar 60.0 47.5 55.6 31.5 34.2 32.8 48.8
India 47.5 43.1 46.0 51.2 52.1 51.6 47.7
Philippines 45.0 50.8 47.0 39.7 41.8 40.7 45.1
Japan 10.0 63.3 28.6 72.4 77.9 75.2 42.6
South Korea 7.5 70.7 29.6 62.7 57.3 60.0 38.7
NB Scores out of 100, with 100 the best. Source: BMI
Australia Mining Report Q3 2013
© Business Monitor International Page 46
Australia: Still A Regional Standout
Australia remains at the top of our risk/reward ratings (RRRs) as it has the rare combination of substantial
mineral reserves, considerable growth opportunities and a positive investment climate. It is a world leader in
coal, iron ore, lead, zinc and gold production, and we expect its share of global output in these metals to rise
as major miners focus on the expansion of their core assets.
Nonetheless, the government has been adopting an increasingly interventionist stance towards the mining
sector, with the imposition of a 30% super-profit tax on coal and iron ore miners the most notable. Although
this measure alone is unlikely significantly to deter investment, the tax hike comes at a time when many
domestic miners are struggling to cope with current market conditions. A slowdown in China, softening
commodity prices, rising cash costs, a strong Australian dollar and further tax increases set the stage for a
perfect storm for the mining industry. However, despite a string of project delays and cancellations, we
believe the worst is over. While we expect China's slowdown to continue from H213, Australia will remain
one of the most competitive places for mining investment.
China: Growth To Moderate
We expect growth in China's mining sector to moderate, although we still believe it will be the key driver of
global growth in copper, gold, coal and iron ore output. The main theme in China's mining sector is
industry-wide energy efficiency and consolidation measures, as part of the 12th Five-Year Plan
(2011-2015). We expect the consolidation process gradually to gain steam as concerns over maintaining
employment give way to a number of weak fundamentals facing the industry. The consolidation measures
will result in the closure of inefficient smaller mines while expanding the dominance of the largest
operators. We believe China's aggressive exploration efforts will continue to pay off, with reports in 2011
indicating that it plans to spend US$4.5bn between 2011 and 2015 in a bid to plug the structural deficit of
key minerals. However, China's risk ratings could take a hit on the back of greater government intervention
and regulation. As shown by the recent wave of 'greener initiatives' in various minerals segments, there is a
growing emphasis on the negative environmental impact of mining activities.
India: Bureaucracy Hinders Potential
India's ratings continue to be affected by bureaucratic and security concerns. Land and environmental
disputes continue to delay projects, while disagreements between the mining and environment ministries
damage confidence in the business environment. The most notable feature of India's mining sector is the
Australia Mining Report Q3 2013
© Business Monitor International Page 47
complex bureaucracy, which dissuades much foreign investment. Domestic companies proliferate in the
mining sector, a feature we expect to remain in place. Despite the liberalisation of investment restrictions,
the government continues to have a strong preference for domestic companies over Western counterparts.
Unless the government undertakes serious efforts to combat deep-rooted shortcomings in the
implementation of key policies, pervasive lawlessness coupled with scandals will remain a problem.
Indonesia: Losing Sparkle, But Potential For Policy Moderation
Recent changes to Indonesia's mining code have reduced the overall level of attractiveness for investment.
While there is a possibility for further reforms, especially in the run up to the 2014 general election, we
believe the worst is over and do not expect significant policy changes in the near term. Although rhetoric
against foreign miners could step up, we believe a moderation in the government's stance is more likely. We
forecast metal prices to head broadly lower over the course of 2013 and 2014 and believe the government
may reconsider measures in a period of lower prices and profits for domestic miners. The importance of the
mining sector, which constitutes 12% of Indonesia's GDP, reinforces our conviction that policies that would
jeopardise growth in the resource sector will not be implemented.
Australia Remains Unchallenged
Asia - Mining Risk/Reward Ratings
NB Scores out of 100, with 100 the best. Source: BMI
Australia Mining Report Q3 2013
© Business Monitor International Page 48
Malaysia: Gold Sector An Avenue For Growth
Compared to other countries in the region, Malaysia offers the most attractive mining legislative
environment for foreign investors. The government has implemented a range of measures aimed at enticing
investors away from Indonesia. These include the provision of 100% foreign ownership, tax holidays,
centralised licence granting, low levies and no import duties. That said, more than a century of tin mining
has exhausted the country's reserves and made it prohibitively expensive to mine the remaining deposits.
We see Malaysia's gold mining industry as the next driver of growth. Gold production has surged, owing to
a number of significant finds and production ramp-ups in the country's existing mines.
Mongolia: Greater Government Control Unlikely To Hinder Phenomenal Growth
Mongolia remains near the top of our ratings table due to its enormous untapped coal, gold and copper
reserves. However, the glowing business environment has lost some of it lustre over the past few months as
the government seeks to renegotiate mining contracts and extract a greater share from the mining sector.
Although rising tensions between the government and foreign mining firms will restrict investment activity
in the near term, we believe the state will gradually realise that it can only afford to push the foreign
investment community so far. The mining sector is of paramount importance to Mongolia's overall
economy, contributing more than 20% to the country's GDP.
Philippines: Great Long-Term Potential
Despite the poor business environment, we believe the government's recent move to lift the ban on new
mining applications will pave the way for increased capital inflows. The mining application fee has risen,
but we expect investment to be forthcoming as many governments worldwide are also extracting a greater
share from their mining sectors. Moreover, the abundance of untapped mineral reserves in Philippines is
particularly attractive due to the threat of resource depletion in many traditional mining regions.
Australia Mining Report Q3 2013
© Business Monitor International Page 49
Resource Nationalism Holding Asia Back
Regional Mining Risk/Reward Ratings
NB Scores out of 100, with 100 the best. Source: BMI
Japan: Little Potential In Sight
Japan's mineral resources industry is characterised by small-scale operations in the upstream mining
activities and by large, global operations further down the value chain in metal processing and
manufacturing activities. The mining industry is not a significant part of the economy, as the vast majority
of mineral consumption is sourced through imports. This is not to say that Japanese mining companies do
not play an active role in the global mining sphere. Largely due to the country's lack of mineral resources,
the country's metal companies have substantial stakes in major mining assets and companies worldwide.
Japan has little to no existing reserves of non-ferrous and precious metals (with the exception of gold),
although it does have a number of small operating zinc, lead, and copper mines. Sumitomo Metal's
Hishikari mine is the country's last remaining gold mine operating commercially, while Japan's coal
reserves are nearing depletion, with existing reserves of only 773mn tonnes (mnt).
Australia Mining Report Q3 2013
© Business Monitor International Page 50
South Korea: Investment To Remain Lacklustre
South Korea will continue to see modest growth in uranium, copper, nickel, refined lead and zinc
production, as the government focuses on ramping up production of nuclear energy. The unspectacular
outlook is compounded by limited mineral reserves, which have prompted an increasing number of
companies to shift their mining activities overseas to secure raw materials for the domestic refining and
processing industry.
South East Asia Slowly Realising Potential
We believe South East Asia will be one of the main drivers of growth in the Asian mining sector. Vietnam,
Myanmar, Cambodia and the Philippines have immense potential to become major mining economies given
the size of their respective mineral reserves. Vietnam is home to the world's fourth largest bauxite reserves,
while Myanmar and the Philippines have considerable deposits of copper and gold. With a series of reforms
on the cards, the governments in these countries are increasingly receptive to foreign investment. In
contrast, we expect Laos and Thailand to remain mining laggards owing to high political instability, an
opaque regulatory environment and antiquated infrastructure. The Lao government recently imposed a ban
on all new mining investment until 2015, in a bid to diversify its economy and address environmental
problems.
Australia Mining Report Q3 2013
© Business Monitor International Page 51
Regulatory DevelopmentRegulatory Environment Favorable For Investment
BMI View: Australia's mining sector is one of the most business-friendly in the world, with domestic
companies and overseas miners operating in the country. We expect it to remain a highly attractive
destination for foreign investors as the government continues its pro-business approach. While the
proposed mining tax may increase costs for miners, this is unlikely to outweigh the allure of Australia's rich
deposits of minerals.
Recent Developments
■ Imposition of a 30% super-profit tax on coal and iron ore miners.
■ An initial levy AUD23/tonne of carbon emissions is imposed on polluting companies from mid-2012,increasing by 2.5% per annum before gradually transitioning into a market-based pricing mechanism by2015.
■ In October 2012 mineral-rich Queensland state reversed a decades-long ban on uranium mining.
■ Mining taxes will be a key battleground ahead of the national elections on September 14,2013. Opposition leader Tony Abbott has been a vocal critic of the mining tax and has on severaloccasion, reiterated his pledge to scrap the tax and restore competitiveness to the mining sector.
Well-Developed Regulatory Framework To Support Investment
We believe the positive regulatory climate in Australia will continue to attract foreign investors to undertake
investment in the country. Mining activity in Australia comes under the remit of the Ministry of Resources,
Energy and Tourism (MRET). According to the MRET, it is committed to 'creating a policy framework to
expand Australia's resource base, increase the international competitiveness of our resources sector and
improve the regulatory regime, consistent with the principles of environmental responsibility and
sustainable development'.
In conjunction with the MRET, the Foreign Investment Review Board (FIRB), which advises the treasury,
must be advised when investments or acquisitions exceed AUD10mn (US$8.21mn) and AUD50mn (US
$41.06mn) respectively. Mergers and acquisitions (M&As) are subject to scrutiny by the FIRB, which will,
in general, only object to a takeover if it decides that the deal would result in a 'substantial lessening of
competition'.
While states have their own laws governing mineral activities, they are very similar in content and
administration. In Australian mining legislation, there are three basic stages to mine development: initial
Australia Mining Report Q3 2013
© Business Monitor International Page 52
exploration, further detailed exploration and assessment (possibly under a retention licence), and mining.
The country has well-defined regulatory bodies and a well-established legal system that is investor-friendly.
Foreign investment rules are liberal and encourage inward investment.
Table: Australia - Mineral Taxation
Royalties
WesternAustralia Ores: 7.5%
Concentrates: 5.0%
Metals: 2.5%
Gold: 1.25-2.5% based on price
Export coal: 7.5%
Coal not exported: Specific royalty
Queensland Coal: 7%
Other minerals: Fixed rate option of 2.7% or variable rate option: 1.5-4.5% based on price
New SouthWales Aluminium: A$0.35 per ton of bauxite
Industrial minerals: A$0.4 or A$0.7 per ton
NorthernTerritory 18%, profit-based
Source: BMI, IMF
Under existing legislation, the treasury has the power to scrutinize and approve or reject foreign investment
proposals. It will only reject those that are shown to be contrary to the national interest. In practice, out of
the few significant proposals that have been rejected over recent years, the majority have been uranium
projects where there were fears over the health impact.
After years of opposition, Australia has become more amenable to uranium mining over the past few years.
Most notably, the state government of Western Australia overturned a ban on uranium mining in 2008. This
has led to a flurry of projects, and most of the growth we forecast for the uranium sector is due to projects in
Western Australia.
In October 2012 mineral-rich Queensland state reversed a decades-long ban on uranium mining. The state
government plans to restart the uranium mining industry, which has been dormant since the closure of the
Australia Mining Report Q3 2013
© Business Monitor International Page 53
major Mary Kathleen mine in 1982, in an attempt to unlock deposits of the nuclear fuel estimated at US
$10bn. Victoria is now the only Australian state with a total ban on uranium mining or exploration. That
said, uranium mining remains politically contentious and there is significant opposition to it in both the
political and public spheres.
Australia - Key Legislative Changes
Table:
Date Details
October 2012 Queensland lifted ban on uranium mining
September 2012 Queensland increases coal royalties to 12.5% for prices between AUD100 and AUD150/tonne.
Anything higher will be taxed at 15%
July 2012 Imposed fixed carbon tax of AUD23 for every tonne of carbon dioxide emitted
March 2012 Minerals Resource Rent Tax (MRRT): imposition of a 30% tax on profits of coal and iron ore miners.
February 2012 New South Wales overturned its quarter-century ban on uranium exploration
Source: BMI, MRET
Mining Tax Could Be Watered Down
Recent events have indicated that the tax on mining companies' profits may be watered down as an
independent tax panel has recommended that the tax rate should be lower than the currently proposed 30%
tax on profits above AUD50mn (US$49mn). In 2012, the High Court agreed to hear a landmark challenge
filed by pure iron player Fortescue Metals Group to the controversial super profits mining tax. The
hearing is currently underway.
In addition, we note that the mining taxes will be a key battleground ahead of the national elections on
September 14, 2013. While it remains difficult to determine the outcome of the election, we believe it is
highly likely for the Minerals Resource Rent Tax (MRRT) to be abandoned should the ruling Labor Party
failed to secure a third term against the opposition centre-right Liberal-National Coalition. Indeed,
opposition leader Tony Abbott has been a vocal critic of the mining tax and has on several occasion,
reiterated his pledge to scrap the tax and restore competitiveness to the mining sector. Several mining lobby
groups such as The Minerals Council of Australia have also expressed their support by calling for lighter
regulations and less government intervention.
Australia Mining Report Q3 2013
© Business Monitor International Page 54
Tax Regime
Tax incentives are deployed for companies in target sectors such as research and development,
pharmaceuticals and venture capital - where capital gains tax exemptions apply to foreign investors from
specific countries, including the US, the UK, Japan, Germany, France and Canada. Tax is levied at federal,
state and municipal levels. Importantly, the ALP administration introduced a number of sweeping changes,
including the 30% Minerals Resource Rent Tax on all extractive businesses, following the China-induced
mining boom in the late 2000s, and the Clean Energy Bill, which would levy a tax on each tonne of carbon
emitted beyond the company's allocated amounts.
Key policies that are currently in place:
Corporate Tax: The standard rate is 30%. Non-resident companies are taxed on Australian-source income
only. Losses may be carried forward indefinitely, but may not be carried back. In May 2010, the ALP
government announced plans to reduce this rate to 28% over the next few years in order to increase
Australia's competitiveness.
Individual Tax: Individual tax rises progressively to 45%. Taxable income from wages, dividends, interest,
rent and royalties is aggregated and charged at progressive rates to 45%, with different bands applying to
residents and non-residents.
Indirect Tax: Goods and services tax is levied at a 10% rate. Registration is compulsory for businesses
with annual turnover of more than AUD50, 000. Exports, basic foods, water, education and medical
services are zero-rated.
Capital Gains: Capital gains are generally taxed as income, subject to rollover relief. Non-residents are
subject to capital gains tax only on the disposal of assets that are considered to have a necessary connection
with Australia.
Withholding Tax: Unfranked dividends are taxed at 30%, franked dividends 0%, interest 10% and
royalties 30%.
Carbon Tax: An initial levy AUD23/tonne of carbon emissions will be imposed on polluting companies
from mid-2012, increasing by 2.5% per annum before gradually transitioning into a market-based pricing
Australia Mining Report Q3 2013
© Business Monitor International Page 55
mechanism by 2015. This legislation will have significant impact on carbon- or energy-intensive industries,
including mining and aviation.
Corruption Not A Major Issue
Widespread levels of transparency ensure that corruption is kept to a minimum, with effective monitoring
mechanisms in place. Australia is an active participant in international efforts to end the bribery of foreign
officials. Legislation explicitly disallowing tax deductions for bribes of foreign officials was enacted in
2000.
Table: Australia - Political Overview
System of GovernmentParliamentary democracy, universal suffrage: 150-seat house of representatives (three-year
term) and 76-member senate (six-year term). Executive power rests with prime minister.
Head of State Queen Elizabeth II, represented by Governor General Quentin Bryce, September 5 2008-
Head of Government Prime Minister Julia Gillard, June 24 2010-
Last Election Parliamentary - August 21 2010
Composition of CurrentGovernment Australian Labor Party, Australian Greens
Key Figures
Deputy Prime Minister and Treasurer - Wayne Swan; Minister for Foreign Affairs - KevinRudd; Minister for Defense - Stephen Smith; Minister for Finance and Deregulation - Penny
Wong; Central Bank Governor - Glenn Stevens.
Main Political Parties(Seats won in Aug. 2010elections in brackets)
Australian Labor Party (72): Centre-left, traditionally social-democratic. Founded in 1891. Ledby Julia Gillard.
Liberal Party (65): Centre-right, conservative. Founded in 1944. Led by Tony Abbott.(Includes 21 seats from the Liberal National Party, an affiliated party in Queensland).
National Party (6): Centre-right, conservative. Founded in 1920. Led by WarrenTruss. Country Liberal Party (1): Centre-right. Founded in 1974. Affiliated with both the
National and Liberal parties. Led by Terry Mills
Australian Greens (1): Environmentalist, liberal. Founded in 1992. Led by Bob Brown.
Next Election Parliamentary - 2013
Key Relations/Treaties
Australia is a member of the UN, the British Commonwealth, the Australia, New Zealand, USSecurity Treaty (ANZUS) and the Pacific Islands Forum. It has close relations with the
Association of Southeast Asian Nations and is also a US major non-NATO ally.
BMI Short-Term PoliticalRisk Rating 81
BMI Structural PoliticalRisk Rating 83
Source: BMI
Australia Mining Report Q3 2013
© Business Monitor International Page 56
Competitive Landscape
Major Miners To Remain Prominent
BMI View: Despite the highly-competitive nature of the mining industry, major miners in Australia will
continue to account for the bulk of output growth over the coming years. While mining companies across
the board are scaling back their expansion plans, major miners will maintain their dominance and focus on
the development of their brownfield projects in the years to come.
The mining industry in Australia is a world leader and a strategic sector for the country. The country's vast
landmass is endowed with many significant metals and minerals including iron ore, coal, nickel, uranium
and gold, representing a plethora of opportunities for the domestic and global extractive industries.
Australia's mining sector is highly competitive, with hundreds of companies ranging from global leading
multinationals such as BHP Billiton and Rio Tinto to small and medium-sized outfits, such as Wesfarmers
and Salisbury Resources.
While the recently proposed 30% super tax on coal and iron ore miners may squeeze profit margins, we do
not expect it to significantly deter investment as the attractiveness of Australia's mineral wealth is likely to
outweigh concerns over rising taxes. In addition, Australia's proximity to the major iron ore and coal
importers of China and India gives it a competitive advantage over other destinations.
Capex To Drop Off On Lower Prices
In line with the global trend we have been highlighting, mining giants in Australia have been reducing
capital expenditures (capex) on the back of slower global economic growth and lower industrial metal
prices. BHP Billiton has vowed to practice austerity by putting more than US$68bn of projects on hold,
with the Olympic Dam copper and uranium mine being the most notable. Mining companies are
increasingly focusing on the expansion of brownfield projects instead of developing large new mines from
scratch. Given both our below-consensus forecast for base metal prices and our relatively more optimistic
outlook on precious metal prices, we believe miners are less likely to reduce spending on gold and silver
projects that fall within feasible cost guidelines.
BHP To Outperform Rio Tinto
BHP Billiton is one of the largest players in Australia's mining sector and will be one of the main drivers of
production growth. Rio Tinto will be another key driver of output growth over the coming years,
Australia Mining Report Q3 2013
© Business Monitor International Page 57
particularly in iron ore production. While both companies have a similar dependence on China and iron ore
for the bulk of their revenues and profits, we expect BHP to outperform Rio Tinto over the long term. The
latter appears to be banking on a bounce in Chinese growth and therefore has yet to cull projects
aggressively. In contrast, BHP has announced a string of cutbacks in capital expenditure and looks set to
keep production volumes fairly steady on the expectation of a prolonged slowdown in China, an outlook
more in line with our own.
Mining Giants To Remain Dominant
We expect BHP, Rio Tinto and Xstrata to remain the major players in Australia's mining sector. These
companies have the largest expansion plans, most notably in terms of iron ore, bauxite and nickel
production. One exception to this is the coal sector, where we envisage a greater proportion of output
coming from smaller miners. Indeed, Hancock Coal and Waratah Coal will account for the largest
increases in coal production, with the development of the Alpha and Galilee coal mines in 2013.
Table: Financial Data For Key Mining Firms Listed In Australia, FY2012
Company Market Cap (US$mn) Revenue (US$mn) Net Income (US$mn) Profit Margin (%)PE
Ratio
BHP Billiton Ltd 170,466 72,226 15,417 21.3 18.6
Rio Tinto Ltd 85,284 50,967 -2,990 -5.9 na
Iluka Resources Ltd 4,425 1,108 376 34.0 12.4
New Hope Corp Ltd 3,091 695 172 24.7 23.4
Whitehaven Coal Ltd 2,284 638 64.5 10.1 71.7
MMG Ltd 1,649 2,499 193 7.7 8.6
PanAust Ltd 1,354 713 142 20.0 9.1
OZ Minerals Ltd 1,224 1,021 157 15.4 8.4
Lynas Corp Ltd 1,178 0.0 -90.6 na na
Sandfire Resources NL 953 21 -24.6 -115 12.9
Aquila Resources Ltd 893 203 -0.2 -0.1 3.6
Paladin Energy Ltd 785 366 -173 -47.2 na
Cudeco Ltd 779 0.0 0.8 na na
Independence Group NL 707 213 -294 -138 na
Yancoal Australia Ltd 680 1,395 419 30.0 1.6
na = not available. Source: BMI, Bloomberg
Australia Mining Report Q3 2013
© Business Monitor International Page 58
Company Profile
BHP Billiton - Q3 2013
SWOT Analysis
Strengths ■ As a large diversified miner, we expect BHP to outperform in the event of a sustained
downturn in mining equities.
• Remains one of the lowest-cost iron ore producers in the world.
• Success rate of drilling activity increased from 78% in 2010 to more than 97% in
2012.
• Increasing drive towards automation will enable productivity gains while reducing the
threats of wage inflation and shortage of skilled labour in Australia.
Weaknesses ■ Declining ore grades, increasing cash costs and the growing threat of resource
nationalism will continue to weigh on profit margins.
■ Slower mineral demand growth from China will drag on profit margins. We have a
below consensus outlook on China's economy and expect weakenening resource
intensity in the world's largest consumer of industrial metals.
• Sale of the US$430mn Yeelirrie Project, western Australia's largest undeveloped
uranium deposit, may put the company at a disadvantage given the growing
importance of the uranium sector in Australia.
Opportunities ■ BHP enjoys market dominance in Australia, the country with the best mining business
environment in the Asia Pacific region.
• Absent additional industrial action, production capacity at Escondida is set to reach
1.3mntpa by 2015, as operations progress towards higher grade ore in the main pit.
• Should the current glut of gas in the US market eventually be absorbed and the
expected surge in importance of natural gas as a global fuel source be fulfilled, then
BHP, with its Petrohawk Energy acquisition, is set to benefit immensely.
Australia Mining Report Q3 2013
© Business Monitor International Page 59
SWOT Analysis - Continued
Threats ■ Elevated metal prices bring the risk of greater industrial action, especially with wage
negotiations at copper mines in the US, Mexico, Chile and Indonesia.
• Given our negative view on the Chinese real estate segment, BHP is at risk because
of the outsized role the iron ore segment contributes to the company.
• Development of the Escondida mine in Chile remains vulnerable to disruptions caused
by labor unrest and extreme weather conditions.
Australia Mining Report Q3 2013
© Business Monitor International Page 60
China Slowdown To Bite
BHP Billiton - Revenue By Destination (2012)
Source: BMI, Company Report
Company Overview
BHP Billiton is the largest mining company in the world, with a diversified portfolio including copper,
diamond, iron ore and coal production, and substantial interests in oil, gas, liquefied natural gas and
diamonds. It distinguishes itself from its competitors by the combination of the quality of its assets; deep
inventory of growth projects; customer-focused marketing; diversification across countries, commodities
and markets; and its petroleum business. The company's commitment to be a significant producer across the
energy and metals complex has placed it among the top 10 in the natural gas sector through the US$12.1bn
acquisition of Petrohawk Energy.
Australia Mining Report Q3 2013
© Business Monitor International Page 61
Diversification A Boon
BHP Billiton - Revenue By Product Segment, 2012 (US$bn)
Source: BMI, Company Report
Company Strategy
Under the helm of new CEO, Andrew Mackenzie, BHP is set to raise more cash by divesting non-core
assets and pursuing a mandate of greater efficiencies and capital discipline. As of March 2013, the mining
giant is planning to sell approximately 10 of its assets amid a rise in debt levels, adding substantially to the
US$4.47bn raised from the sale of four assets since August 2012. These assets include the potential
divestment of the Gregory-Crinum coal mine and Cannington silver-lead mine in Queensland, the Zamzama
gas project in Pakistan, the Pinto Valley copper project in the US, as well as a string of projects and
interests in other countries including Brazil and West Africa.
However, the miner remains committed to the longer-term structural drivers of industrialisation and
urbanisation in the developing world, in particular China. Substantially more low cost supply, especially
from the iron ore division, is expected to come online over the coming quarters and this will lead to a
flattening of cost curves, placing BHP in a better financial position amidst the challenging outlook in the
mining industry. BHP's heavy investment in the energy markets has now turned it into one of the largest
Australia Mining Report Q3 2013
© Business Monitor International Page 62
natural gas players in the world, following its acquisition of Petrohawk Energy in 2011. Although there is
currently a glut of natural gas supply in the US, we expect this to be slowly taken in by the market.
Additionally, we note that Australia's Minerals Resource Rent Tax (MRRT) will come under renewed
pressure in the coming months. While it remains difficult to determine the outcome of the election, we
believe it is highly likely that the MRRT will be abolished should the ruling Labor Party failed to secure a
third term against the opposition centre-right Liberal-National Coalition.
Outperformance To Hold
Select Indices, Rebased
Source: BMI, Bloomberg. Note: Jan 2006 = 100.
Company Details
■ BHP Billiton
■ 180 Lonsdale Street
■ Melbourne VIC 3000
■ Australia
■ +61 1300 554 757
■ www.bhpbilliton.com
Australia Mining Report Q3 2013
© Business Monitor International Page 63
Table: BHP Billiton - Key Financial Data
2006 2007 2008 2009 2010 2011 2012
Revenue, US$mn 32,153 47,473 59,473 50,211 52,798 71,739 72,226
- % changey-o-y 20.3 47.6 25.3 -15.6 5.2 35.9 0.7
EBITDA, US$mn 12,118 22,777 27,892 17,311 23,794 37,765 32,616
- % changey-o-y 39.3 88 22.5 -37.9 37.5 58.7 -12.9
Net income,US$mn 10,450 13,416 15,390 5,877 12,722 23,648 15,417
- % changey-o-y 63.4 28.4 14.7 -61.8 116.5 85.9 -34.8
Profit margin,% 32.5 28.3 25.9 11.7 24.1 33 21.3
Debt toEBITDA 0.7 0.5 0.5 0.9 0.7 0.4 0.9
P/E ratio 12.4 13 15.2 26.5 13.9 10.9 11.1
Source: BMI, Bloomberg
Rio Tinto
SWOT Analysis
Strengths ■ Plans to increase the annual output of the Cape Preston Iron Ore Mine in Western
Australia by 50% over the next five years, which could boost the company's revenues
and profits significantly.
■ Reduced its debt from US$18.9bn in 2009 to US$4.3bn in 2012, reducing a significant
weight from share price performance.
■ Restructuring aluminium operations to improve EBITDA margins to 40% from 20% in
the medium term.
Weaknesses ■ Mined copper was down 12% y-o-y in 2012, due to lower grades at the company's
Grasberg mine in Indonesia and the Escondida mine in Chile. Labour disputes at
Grasberg continue to disrupt production at one of the company's main operations.
Australia Mining Report Q3 2013
© Business Monitor International Page 64
SWOT Analysis - Continued
■ Purchase of Alcan has left company saddled with an industry beset by small margins.
■ High exposure to cost inflation in Western Australia, where most iron ore operations
are situated.
■ Heavily dependent on the health of the Chinese steel industry, due to a reliance on
profits from iron ore operations. We are particularly bearish on China's steel sector as
oversupply and weaker demand will keep prices subdued for the foreseeable future.
Opportunities ■ Rio Tinto's presence and holdings in three key growth areas over coming years:
Mozambican coal, Mongolian copper and Guinean iron ore.
■ As the world's second-largest miner, has the expertise and capital to develop the
most lucrative and largest mines in the world.
■ India's steady withdrawal of supply from the seaborne trade of coal to feed its own
power demands could be a growth driver for Rio Tinto's coal business.
Threats ■ Elevated metal prices bring the risk of greater industrial action, especially with
ongoing wage negotiations at copper mines in the US and Mexico.
■ We are below consensus on iron ore prices, expecting an average of US$110/tonne in
2013.
■ Heavily reliant on the Chinese economy, and thus will be detrimentally affected when
our forecast for a renewed slowdown in the country's growth in the latter part of 2013
plays out.
■ The company's flagship Oyu Tolgoi mine in Mongolia is threatened as the government
seeks to extract higher royalties from the project.
Australia Mining Report Q3 2013
© Business Monitor International Page 65
Buoyed By Huge Iron Ore Margins
Rio Tinto - Revenue (LHS) And Net Income (RHS) By Segment, 2012
Source: BMI, Bloomberg
Company Overview
Rio Tinto is a leading international mining group headquartered in the UK, combining Rio Tinto Plc, an
LSE and NYSE-listed company, and Rio Tinto Ltd, which is listed on the Australian Securities Exchange.
Rio Tinto's business is finding, mining and processing mineral resources. The major products it deals with
are aluminium, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax, titanium,
dioxide, salt, talc) and iron ore. Its activities span the world but are strongly represented in Australia and the
US, with significant businesses in South America, Asia, Europe and Southern Africa.
Australia Mining Report Q3 2013
© Business Monitor International Page 66
Dependence On China To Increase
Rio Tinto - Sales Revenue By Destination, 2012
Source: BMI, Bloomberg
Company Strategy
Rio Tinto is well placed to enjoy significant expansion, especially in gold and copper output, as the
gargantuan Oyu Tolgoi mine in Mongolia comes online. This mine is one of the few large-scale copper
projects coming online in the next few years and will give the company substantial profit margins. In
addition, Rio owns the Simandou iron deposit in Guinea and is developing the Benga coking coal deposit in
Mozambique. Both assets have large untapped reserves.
Rio Tinto is dependent on continued growth in China because much of the company's production is for that
country. It also relies heavily on iron ore and hence is reliant also on the health of the Chinese steel sector,
an area towards which our views are particularly below consensus.
Rio has cut back on expansion projects aggressively of late, illustrating that its outlook for metals is coming
in line with our less bullish views. Indeed, the replacement of Tom Albanese by Sam Walsh as CEO has
seen rhetoric become more cautious, focusing on value rather than revenue growth, and we expect fewer
acquisitions and major projects in future.
Australia Mining Report Q3 2013
© Business Monitor International Page 67
Worst Losses Are Over
Select Indices, Rebased
Source: BMI, Bloomberg
Company Details
■ Rio Tinto
■ Head Office - Melbourne120 Collins StreetMelbourne 3000Australia
■ Tel: +61 (0) 3 9283 3707
■ www.riotinto.com
Table: Rio Tinto - Key Financial Data
2007 2008 2009 2010 2011 2012
Revenue, US$mn 29,700 54,264 41,825 55,171 60,537 50,967
% change y-o-y 32.2 82.7 -22.9 31.9 9.7 -15.8
EBITDA, US$mn 10,489 18,964 10,920 22,752 26,657 15,902
% change y-o-y 4 81 -42 108 17 -40
Net income, US$mn 7,312 3,676 4,872 14,238 5,826 -2,990
Australia Mining Report Q3 2013
© Business Monitor International Page 68
Rio Tinto - Key Financial Data - Continued
2007 2008 2009 2010 2011 2012
% change y-o-y -2 -50 33 192 -59 -151
Profit margin, % 24.6 6.8 11.6 25.8 9.6 -5.9
Debt to EBITDA 4.5 2.1 2.1 0.7 0.8 1.7
P/E ratio 18.5 6.2 18.1 9.6 16.1 na
na = not available/applicable. Source: BMI, Bloomberg
MMG Limited - Q3 2013
SWOT Analysis
Strengths ■ Being majority owned by state-owned Minmetals Corporation, MMG might have
access to crucial information regarding the actual state of base metal demand in
China and thus invest accordingly.
■ As a subsidiary of a state-owned company, MMG has an edge over its competitors in
terms of securing stable, cheap and long-term financing.
■ Acquisition of MMG brought a host of key assets in the Australasian region.
■ Acquisition of Anvil Mining expands presence in Katanga province, the Democratic
Republic of the Congo (DRC), which has more than 10% of the world's copper and
many of the world's high-grade deposits.
Weaknesses ■ Century zinc mine in Australia, the world's third largest zinc mine, is set to be
depleted by 2016.
■ Ageing of Century, Sepon (Laos) and Golden Grove (Australia) mines to incur higher
production costs. Our below-consensus view on base metal prices will further strain
profit margins.
Opportunities ■ Dugald River mine, set to begin operations by 2014, is home to one of the world's
largest and highest grade undeveloped lead zinc-silver deposits.
Australia Mining Report Q3 2013
© Business Monitor International Page 69
SWOT Analysis - Continued
■ Initial work on a definitive feasibility study of the Izok Corridor project in Canada has
begun and is estimated to be completed by late 2013.
■ Ongoing brownfield exploration projects around the Sepon, Golden Grove, Rosebery
and Avebury mines currently underway, in addition to greenfield exploration projects
in Australia, the Americas and South-Central Africa.
■ Falling output from traditional copper producers, namely Chile and Peru, should result
in greater attention to the DRC's copper reserves. MMG could benefit from first-
mover advantage.
Threats ■ Our downbeat view on China, hence industrial metal prices, will adversely affect
miners' profit margins.
■ Elevated political risk in DRC.
■ Chinese state-owned companies continue to face fierce political resistance in certain
countries such as the US.
Australia Mining Report Q3 2013
© Business Monitor International Page 70
Zinc & Copper To Maintain Dominance
MMG Limited - Revenue By Commodity (2011)
Source: BMI, Company Report
Company Overview
Minmetals Resources Ltd (MMR) is an upstream-integrated diversified base metals company, specialising
in the processing and production of zinc, copper, lead, gold and silver. Prior to MMR's acquisition of
Minerals and Metals Group (MMG), the company was principally engaged in the trading and
manufacturing of non-ferrous metals, ores and metallic finished products. The acquisition of MMG brought
MMR key assets such as the Century zinc mine, Golden Grove base and precious metals mine, Sepon
copper and gold operation and Rosebery polymetallic mine in addition to a suite of development and
exploration projects across Australia, Asia, Africa and North America. In February 2012, the company
acquired over 90% of Anvil Mining Ltd for US$1.3bn. MMR changed its registered company name to
MMG Limited in September 2012.
Australia Mining Report Q3 2013
© Business Monitor International Page 71
China Slowdown To Drag On Sales
MMG Limited - Revenue By Country (2011)
Source: BMI, Company Report
Company Strategy
MMG's long-term strategy is to grow and develop its upstream, diversified base metals operations through
exploration and discovery, organic growth and acquisition. Due to its ageing mines, the company will be
investing heavily in replenishing its depleting reserves and regaining production capacity losses from its
older mines. The acquisition of TSX-listed Anvil Mining was the first step in MMG's strategy to acquire
more assets. Going forward, MMG will be on a continual drive to identify potential acquisition targets
necessary to achieve its growth aspirations.
Our downbeat view on China, hence industrial metal prices will be a drag on MMG's operations over the
coming years. The ageing of the company's mines will further increases operating costs amidst an
environment of softening demand and weakening prices of commodities. This notwithstanding, we believe
the recent meltdown in gold prices will be another headwind for MMG, although it constitutes only 8% of
its total revenue in 2011. A bright spot, however, is that the current downturn in the mining industry might
Australia Mining Report Q3 2013
© Business Monitor International Page 72
allow MMG to acquire other mining companies on the cheap, thereby strengthening its position and achieve
significant economies of scale over the long run.
More Headwinds Ahead
Select Equities & Indices, Rebased
Source: BMI, Bloomberg. Note: Jan 2006 = 100.
Company Details
■ MMG Limited
■ Level 23
■ 28 Freshwater Place
■ Southbank Victoria 3006
■ Australia
■ +61 3 9288 0888
■ www.mmg.com
Australia Mining Report Q3 2013
© Business Monitor International Page 73
Table: MMG Limited - Key Financial Data
2006 2007 2008 2009 2010 2011 2012
Revenue, US$mn 1,651 940 1,085 1,650 1,920 2,228 2,499
- % changey-o-y 285.4 -43.1 15.4 52 16.4 16.1 12.2
EBITDA, US$mn 207 106 35 364 919 860 837
- % changey-o-y 238 -49 -68 955 152 -6.4 -3.0
Net income,US$mn 111 108 2 216 409 541 193
- % changey-o-y 377 -3.0 -99.0 na 90.0 32.0 -64.0
Profit margin,% 6.7 11.5 0.1 13.1 21.3 24.3 7.7
Debt toEBITDA 1.4 0.8 3.2 3.4 1.3 1.3 2.0
P/E ratio 4.6 9.4 185 4.1 6.1 4.2 11.4
na = not available. Source: BMI, Bloomberg
Xstrata - Q3 2013
SWOT Analysis
Strengths ■ Diversified across geographies and product segments. While we are below-
consensus on industrial metal prices, the thermal coal division should perform well on
aggressive electrification needs from Asia.
■ Part owner of several large mines in Latin America, including the Collahuasi copper
mine in Chile, the Antamina copper-zinc mine in Peru and the Cerrejón coal mine in
Colombia. These joint venture (JV) operations provide stable production outside its
wholly-owned projects.
Weaknesses ■ Copper and coal account for the bulk of profits, leaving it vulnerable to fluctuations in
prices.
Australia Mining Report Q3 2013
© Business Monitor International Page 74
SWOT Analysis - Continued
■ Several of the largest projects are in Argentina, presenting risks to potential growth.
Resource nationalism, including local content requirements, capital controls and
expropriation, are serious risks. Such risks may increase over the coming months as
the macroeconomic outlook worsens.
Opportunities ■ The anticipated merger with Glencore will provide more vertically integrated supply
chains, lowering costs for both companies and generating significant synergies. It will
be able to exploit, not just endure, volatility in commodity prices.
■ Set for additional growth opportunities with the Tampakan gold project in the
Philippines, the Falcondo nickel mine in the Dominican Republic and numerous other
projects in Latin America and globally.
Threats ■ The bulk of growth plans are focused on emerging markets in Latin America, Africa
and Asia. These markets are often characterized by high levels of political risks and
poor business environments.
■ In a bid to ease Chinese worries over the grip on copper supply from the biggest ever
mining tie-up, the merger with Glencore could result in the sales of several greenfield
projects to China. The Chinese could also impose conditions on the combined
group's commercial behavior, or secure a chunk of the group's production.
Australia Mining Report Q3 2013
© Business Monitor International Page 75
Copper Key Revenue Generator
Xstrata - Revenue By Segment (2012)
Source: BMI, Company Report
Company Overview
Xstrata is one of the largest diversified mining companies, with major operations in coal and copper
production and a strong presence in nickel, zinc, lead and ferroalloys output. The company's planned merger
with global commodities trader Glencore, which will streamline their combined supply capacity around the
globe, is currently awaiting regulatory approval from China. Xstrata's operations and projects span across
20 countries, with significant exposure to Australia, Peru, Chile, Canada and increasingly South Africa. The
company is heavily invested in Latin America with major copper projects in Peru, Chile and Argentina.
Australia Mining Report Q3 2013
© Business Monitor International Page 76
Coal & Copper Lead
Xstrata - Capital Expenditure By Segment (2012)
Source: BMI, Bloomberg
Company Strategy
Xstrata, currently the world's fourth-largest copper producer, is well placed for further growth in the coming
years. Its planned merger with Glencore will increase its global supply efficiency and provide Glencore
with access to some of the world's largest copper and coal reserves. Xstrata's organic growth strategy began
in earnest in 2009, and aims to increase copper output by more than 50% by 2014. The US$5.2bn Las
Bambas copper mine in Southern Peru is the sole remaining major greenfield project under construction.
Xstrata is planning to commission a number of new projects in 2013. These include the Fraser Morgan
nickel mine and the Bracemac McLeod zinc operation in Canada, Stage 2 of the Ravensworth North
expansion in Australia as well as completion of the Lion II ferrochrome expansion in South Africa. These
new projects are expected to improve the relative competitive position of Xstrata by lowering the unit cost
of operations while laying the foundation for brownfield investment in the years to come.
Our downbeat view on China will have knock-on implications on industrial metal prices and adversely
impact the profit margins of miners around the world. While the diversified nature of Xstrata's operations is
Australia Mining Report Q3 2013
© Business Monitor International Page 77
a boon, the company is exposed to further headwinds over the coming quarters. Specifically, our price
forecasts for metal prices remain firmly below-consensus, and we expect copper prices to average US
$7,700/tonne in 2013. Consequently, this will affect the profitability of Xstrata's copper division, which
accounts for the bulk of its revenue, at 42% in 2012. Furthermore, we note that the looming merger with
Glencore could see the combined group giving China a guaranteed slice of its copper production in order to
ease the Chinese concerns over its outsized dominance in the copper industry.
Outperformance To Hold
Select Indices & Equities, Rebased
Source: BMI, Bloomberg. Note: Jan 2006 = 100.
Company Details
■ Xstrata
■ Bahnhofstrasse 2
■ PO Box 102
■ Zug 6301
■ Switzerland
■ Tel: +41 726 6070
Australia Mining Report Q3 2013
© Business Monitor International Page 78
■ www.xstrata.com
Table: Xstrata - Key Financial Data
2006 2007 2008 2009 2010 2011 2012
Revenue (US$mn) 17,102 28,542 27,952 22,732 30,499 33,877 31,618
% chg y-o-y 112 66.9 -2.1 -18.7 34.2 11.1 -6.7
EBITDA (US$mn) 5,181 10,904 9,645 6,476 10,393 11,648 8,122
% chg y-o-y 68.2 110 -11.5 -32.9 60.5 12.1 -30.3
Net Income (US$mn) 1,501 5,543 3,595 661 4,688 5,713 1,180
% chg y-o-y -12.0 269 -35.1 -81.6 609 21.9 -79.3
Profit Margin (%) 8.8 19.4 12.9 2.9 15.4 16.9 3.7
Debt to EBITDA 3.0 1.2 1.8 2.1 0.9 0.9 2.1
P/E Ratio 26.8 12.3 2.5 72.4 14.6 7.7 43.0
Source: BMI, Bloomberg
Australia Mining Report Q3 2013
© Business Monitor International Page 79
Global Industry Overview
BMI View: A renewed slowdown in Chinese economic growth and the subsequent negative impact on
mineral prices will be the overarching issue affecting the global mining industry in the coming quarters.
These dynamics will result in further curtailment of mining sector investment, both in terms of physical
capital expenditure and equity investment. Nonetheless, several bright spots will continue to stand out in the
challenging environment. Below, we highlight the key challenges that are set to dominate the headlines over
the coming quarters, before mapping out the opportunities in the mining industry.
Major Challenges Ahead
1. China Slowdown The Overarching Issue
Despite the slew of significant divestitures of mining assets over the past year, we believe the worst is not
over and that further headwinds are in store for miners around the world.
Less Commodity-Intensive Growth
China - Select Economic Indicators, Real Growth (%)
Real GDP Fixed Capital Formation
2007
2008
2009
2010
2011
2012
2013
f
2014
f
2015
f
2016
f
2017
f
0
4
8
12
16
20
24
f = BMI forecast. Source: BMI, National Bureau of Statistics
Australia Mining Report Q3 2013
© Business Monitor International Page 80
While the current growth upturn in China's economy will likely run for several more months, we believe
this will prove fleeting and that a growth relapse is on the cards in H213. We forecast a slowdown in
Chinese real GDP growth to 7.5% in 2013, from 7.7% in 2012 and below consensus estimates of 8.1%.
Amid any renewed sell-off in equity markets, we expect large, diversified miners to hold up best, and
highlight BHP Billiton as an outperformer owing to its size and diversified portfolio. Furthermore, the
company has been most aggressive out of the majors to cut back its expansion plans.
Limited Respite In Sight
Bloomberg World Mining Index (weekly chart)
Source: BMI, Bloomberg
2. Miners Brace For Industry-Wide Culling
We believe the recent trend of mining capital expenditure (capex) plans being delayed or cancelled will
continue over 2013. The euphoria that has dominated the global mining industry in recent years is largely
spent as miners across the board adopt aggressive cutbacks amidst escalating cost pressures and softening
commodity prices. Large miners are reconsidering ambitious capital expenditure projects, while an
Australia Mining Report Q3 2013
© Business Monitor International Page 81
increasing number of smaller miners are struggling to stay afloat as funding from traditional capital markets
evaporates.
Capex To Drop Off On Lower Prices
Mining Capital Expenditure And S&P GSCI Industrial Metals Index
NB Capex figure is from basket of major mining companies rather than industry total. Source: BMI, Bloomberg
The mining industry has witnessed a new generation of CEOs taking over the helm of many companies,
with a shift in focus from 'growth-at-all-costs' to cost-containment and capital efficiency. Many of the major
miners are adopting a much more conservative approach following a series of soured takeovers. Many
assets purchased just a few years ago as bold bets on growing metals demand will prove deadweight in an
era of lower commodity prices.
The curtailment of project spending will darken the mining outlook of certain economies such as Guinea,
Argentina and South Africa, where greater resource nationalism is already threatening investment. Mining
taxes are relatively low in these countries, but we forecast that strong growth in mining output may prompt
the governments to increase their social takes from the sector.
Australia Mining Report Q3 2013
© Business Monitor International Page 82
Table: Select Countries - Recent And Planned Tax Increases And Other Government Plans
Country News
Brazil Mining royalties to increase from 2% to 4%
Indonesia A 20% duty is imposed on raw mineral exports ahead of a complete ban in 2014
Mozambique Government plans to revise mining code to ensure higher revenues from the sector
Peru President Humala plans to raise taxes on mining firms and increase government involvement in the sector
Russia 5% tax on nickel exports recently introduced
Zimbabwe Mining companies will have to be 51%-owned by indigenous Zimbabweans
Source: BMI
3. Greater Industry Consolidation
We expect the global mining industry to become more consolidated as lower prices and elevated costs
continue to weigh on miners' profit margins. Furthermore, given the weak economic outlook, we expect
mining companies in Australia to focus more on brownfield projects rather than greenfield developments.
This reverses a trend over the past decade. In China we expect greater consolidation in mining as the
government slowly reduces support for unprofitable mining operations. In the US and Europe higher costs
and pollution controls, as well as the removal of state support in countries such as Germany, will see coal
mining become more unprofitable and it is likely that many coal miners will go out of business.
Despite Challenges, Bright Spots Remain
Several bright spots will continue to stand out amid the challenging environment. A number of countries
will successfully ride out the doldrums to emerge as clear winners in the mining industry. Africa is on the
cusp of a resource boom as frontier mining proves to be increasingly attractive. Additionally, the global coal
sector will undergo shifting dynamics with the US capturing a greater share in the seaborne market.
1. Frontier Markets Beckon Investors
We expect frontier mining to gain precedence over coming years as depleting reserves and rising cash costs
in traditional mining regions encourage more companies to cast their sights on overseas markets. Although
softening metal prices have prompted a large number of mining companies to reassess their project
pipelines and allocate their capital more judiciously, the drive towards self-sufficiency and the still-elevated
prices of commodities will continue to underpin the long-term growth story of many frontier markets.
Australia Mining Report Q3 2013
© Business Monitor International Page 83
Rapid Growth In Frontier Markets
Select Countries - % Production Growth
Mongolia - Copper Mozambique - CoalRomania - Gold Sierra Leone - Iron OrePhilippines - Gold Colombia - Coal
2012e 2013f 2014f 2015f 2016f 2017f0
20
40
60
80
100
120
e/f = BMI estimate/forecast. Source: BMI, World Bureau of Metal Statistics (WBMS), Energy Information
Administration (EIA)
We expect rapid growth in the mining sectors of Sierra Leone, the Philippines, Mexico, Colombia,
Mozambique, Myanmar and the Democratic Republic of the Congo (DRC). These countries all have
substantial high-grade mineral reserves and have opened up to foreign investment over the past few years.
While substantial risks remain, there has been an improvement in security and a general reduction in
political risk.
Nonetheless, the key to unlocking mineral riches in these countries hinges on the level of infrastructure
support available to mining companies. While major miners have significant financial capability to develop
the required transportation facilities, a large number of small players remain heavily dependent on host
governments in alleviating the infrastructure bottlenecks that so often stall progress in the mining space.
Australia Mining Report Q3 2013
© Business Monitor International Page 84
Trending Lower, But Still Elevated
Select Commodities, 2005-2017 (US$/tonne)
Copper (LHS) Iron Ore (RHS)
2005
2006
2007
2008
2009
2010
2011
2012
2013
f
2014
f
2015
f
2016
f
2017
f
0
2,000
4,000
6,000
8,000
10,000
0
40
80
120
160
200
NB Three-month LME copper, China import iron ore fines 62% Fe, CFR, dry tonne; f = BMI forecast. Source:
BMI, Bloomberg
2. Africa On The Cusp Of A Resource Boom
While Africa is only a fringe producer in the mining of most metals, we believe this is set to change as
several projects come online over the coming years. Capital inflows into Africa have been especially
forthcoming in recent years. Mining companies from Australia, China and India have continued to make
their presence felt in Africa's mining space as a host of factors including resource depletion, rising cash
costs and regulatory hurdles force miners to venture abroad for investment opportunities.
Australia Mining Report Q3 2013
© Business Monitor International Page 85
Africa's Share Of Global Mining To Rise
Africa - % Share Of Global Mined Output And % Change
Source: BMI, WBMS
Apart from the rich deposits of high grade iron ore in West Africa, we expect Southern Africa to attract
considerable interests from foreign investors. The region will be one of the key growth drivers in coal
exports over the next few years, as production in Mozambique, South Africa and to a lesser extent, Zambia
and Botswana increases substantially. Africa has immense potential to climb up the investment rankings in
the mining arena.
3. US Capturing Larger Share In Coal Market
We expect significant changes in global coal dynamics over coming months and years. This could have a
substantial impact on global shipping and infrastructure. We forecast a decline in output from traditional
coal exporters to China and India as Indonesia plans to increase domestic coal consumption; and Australia's
taxes on carbon emissions and coal mining profits deter investment. We expect these imports to be replaced
by increased production in Southern Africa and the US. A plethora of projects have been announced in
Mozambique and South Africa, of which the vast majority will be exported as there is currently little
demand for coal in the region.
Australia Mining Report Q3 2013
© Business Monitor International Page 86
US Game Changer
US Coal Exports And Imports ('000 short tonnes)
Source: BMI, US Department of Energy
We expect the US to become a major coal exporter, as domestic demand declines on the back of
environmental concerns while the glut of cheap natural gas from recently embraced hydraulic fracturing
flood the market. As the outlook for the domestic market deteriorates, we expect coal companies, which are
geared for export, especially to Asia, to outperform and highlight Peabody Energy as well placed to benefit
from this trend.
Australia Mining Report Q3 2013
© Business Monitor International Page 87
Coal Competitiveness Past The Nadir
Price Ratio: Central Appalachian (NYMEX) Coal/Natural Gas (Henry Hub)
Source: BMI, Bloomberg
However, we do not expect US power plants to significantly switch away from coal and towards natural gas
in the coming quarters. The ratio of coal to US natural gas has bottomed and this will reduce the incentive
for additional switching. Indeed, we are modestly positive towards natural gas prices over the medium term
and expect broadly stable coal prices.
Australia Mining Report Q3 2013
© Business Monitor International Page 88
Asia Overview
BMI View: With a series of reforms on the cards, South East Asia will become one of the main growth
areas for mining in the wider region. Amid a period of continual restructuring in China, an increasing
number of miners in traditional mining economies will continue their hunt for mineral resources abroad as
several issues come to the fore. Of these, economic nationalism, resource depletion and inadequate
infrastructure are the most prevalent, and we expect private sector players to gain firmer footing in frontier
markets. Global coal trade flows will continue to centre on Asia. Below we highlight some of the key themes
that will dominate the headlines of Asia's mining sector.
1. South East Asia: A Rising Star In Asia Mining
Underpinned by an abundance of untapped mineral wealth and the increasing attractiveness of frontier
mining, we believe South East Asia will become one of the main growth drivers in Asia's mining
sector. Resource depletion and rising cash costs in traditional mining regions will encourage more
companies to invest in new markets. While countries such as Cambodia, Vietnam and Myanmar are poised
to experience healthy growth, mining investment into Laos and Thailand is likely to remain lacklustre as a
number of challenges continue to stall progress. The vast majority of Cambodia and Myanmar remains
largely unexplored and with a series of positive reforms on the cards, we believe these countries will
continue to attract growing interests from foreign investors. Vietnam's mining sector is also poised for a
brighter future as the 2011 mining law takes a tougher stance on illegal mining activities while providing for
longer exploration licences.
Australia Mining Report Q3 2013
© Business Monitor International Page 89
Table: South East Asia - Select Mining Projects
Country Company CommodityLocation of main
facilities Details
Cambodia Renaissance Minerals GoldOkvau Workings
depositsInferred resources of
729koz of gold
Cambodia Indochine Mining Gold Kratie na
LaosMinerals and Metals Group
Lane Xiang Minerals Copper Savannakhet Province 88ktpa
LaosMinerals and Metals Group
Lane Xiang Minerals Gold Savannakhet Province 8ktpa
LaosViengphoukha Coal Mine Co
Ltd. Coal Luangnamtha Province 66ktpa
Myanmar Union of Myanmar Copper Sabetaung Estimated reserve at 2bnt
Myanmar North China Industries Corp Copper MonywaEstimated reserve at
5.4bnt
Vietnam Vinacomin Bauxite Tan Rai 600ktpa
Vietnam Viet Minerals Bauxite Kon Ha Nung 1.5mntpa
na = not available/applicable; koz = '000 ounces; ktpa = '000 tonnes per annum; bnt = bn tonnes; mntpa = mn tonnes perannum. Source: BMI, Company announcements
2. China: Industry Consolidation To Gather Momentum
We expect China's mining industry to see continual restructuring over coming years as part of the country's
12th Five-Year Plan (2011-2015). In a bid to curb overcapacity and reduce environmental pollution, the
government plans to close smaller and less efficient mines, while medium-sized miners will be merged and
production consolidated into giant vertically integrated state-owned outfits. Although officials will be
reluctant to implement further capacity reductions in the immediate aftermath of the leadership transition,
we expect the consolidation process to gradually gain steam as concerns over maintaining employment give
way to a number of weak fundamentals facing the industry. The floundering domestic steel industry,
diminishing bank lending to the steel sector and our expectation for base metal prices to head broadly lower
in 2013 and 2014 will pave the way for industry consolidation.
Australia Mining Report Q3 2013
© Business Monitor International Page 90
Steelmaker Margins Crushed
China - Price Ratio: Steel Rebar/Iron Ore
NB A rise in the ratio implies steel outperformance. Source: BMI, Bloomberg
3. Hunt For Mineral Resources To Continue Unabated
We believe an increasing number of companies in traditional mining countries will continue their hunt for
mineral resources abroad as threats of economic nationalism, resource depletion and regulatory hurdles
stifle developments in the mining space. As evident in the surge in foreign interests of recent years, the
stellar deposits of coal and iron ore reserves in Africa have proved to be a major draw for many Asian
miners. Australia, China and India are well placed to be at the forefront of the region's mining boom.
Capital inflows from these countries have been especially forthcoming as several issues come to the fore in
their domestic markets. In Australia, the escalation of cash costs, declining ore grades and most importantly,
the imposition of a 30% super profit tax has had a considerable impact on miners' profit margins.
Elsewhere, the growing shortfall of domestic production has encouraged a string of Chinese and Indian
miners to undertake investment opportunities in overseas markets. However, bureaucratic and regulatory
hurdles have continued to sap growth in India's mining industry.
Australia Mining Report Q3 2013
© Business Monitor International Page 91
More Asian Miners To Secure Assets Overseas
Southern Africa - Coal Deposits
Source: BMI
4. Private Sector Players To Gain Firmer Footing In Frontier Markets
We believe private companies will gain a firmer footing from investing in frontier markets as opposed to
traditional mining regions. Although the growing threat of resource nationalism in countries such as
Mongolia will continue to rear its head, we believe the rich endowment of minerals, with the Oyu Tolgoi
project the most notable, will prove to be attractive plays for many miners. In contrast, we expect the
majority of mining activity in China and India to remain largely dominated by state-owned
companies. Private companies are unlikely to find much success in China and India due to the outsized
dominance of state-owned firms such as Chinalco and Coal India Ltd (CIL) which often enjoy significant
economies of scale and efficiencies in mining production.
Australia Mining Report Q3 2013
© Business Monitor International Page 92
An Outsized Role
China - Market Share Of State-Owned Enterprises (%)
Source: China Statistical Yearbook 2011
5. Global Coal Trade Flows To Centre On Asia
Global coal trade flows will continue to move towards Asia as the region remains heavily dependent on
coal-powered electricity generation. Demand for coal will remain resilient and encourage production
growth, but a regional shortfall will require a greater proportion of global coal exports to go to Asia. This
contrasts with western markets such as the US and Europe, where a combination of slow economic growth,
greater environmental regulations and cheap natural gas prices will see coal consumption remain fairly
stagnant. Although continued investment in renewable energy has been made, thermal coal will remain the
principal fuel for electrification programmes across emerging Asia and this will underpin coal consumption
growth. Electricity from coal-powered plants is not susceptible to the vagaries of weather, and can more
easily satisfy base-load demands without interruption.
Australia Mining Report Q3 2013
© Business Monitor International Page 93
A Cut Above The Rest
Coal, As % Of Total Power Generation By Region
f = BMI forecast. Source: BMI, Energy Information Administration (EIA), UN data
6. Infrastructure Shortfall A Major Roadblock
A lack of adequate infrastructure in some Asian countries will be an obstacle to further investment in the
mining sector. While major miners such as Rio Tinto and BHP Billiton are capable of developing their
own transport facilities, infrastructure bottlenecks will mean that investing in many frontier markets will
remain a parlous undertaking for smaller miners. We highlight Australia, Indonesia and the Philippines as
places that will capture some of the largest mining investment in the region. The considerable number of
large-scale infrastructure projects in these countries will provide a firm platform for mining industry
growth. A chronic shortage of infrastructure in countries such as Vietnam, India, Afghanistan and Pakistan
will retard capital inflows and impede mining development.
Australia Mining Report Q3 2013
© Business Monitor International Page 94
Commodities Forecast
Monthly Metals Update
■ We expect a consolidation in metal prices in the short term. Underlying macroeconomic fundamentalswill remain relatively supportive in Q213, which should assist a further bounce from recent lows.
■ Looking beyond Q213, we retain our bearish medium-term view, expecting a steady decline in metalprices over coming years, and our forecasts remain significantly below consensus.
■ We remain particularly bearish towards iron ore and expect significant weakness by the end of the year,as demand from struggling Chinese steel mills falters.
■ We expect metals with tighter supply fundamentals, such as tin, to outperform oversupplied markets suchas lead, zinc and steel. The decade-long trend of copper outperformance is over.
Underperformance To Persist
Select Indices, Rebased
NB January 1 2010 = 100. Source: BMI, Bloomberg
Australia Mining Report Q3 2013
© Business Monitor International Page 95
Iron Ore: More Hurdles Ahead
Iron ore prices have continued to recede from Q113 highs and we expect significant weakness by the end of
2013, as demand from the floundering Chinese steel sector falters. Apart from our downbeat view on
China's growth trajectory, a confluence of factors including significant overcapacity, depressed margins and
softening demand in the Chinese steel sector will see import demand from China disappoint over 2013 as a
whole. Moreover, healthy mine supply growth in countries such as Australia and Brazil will continue to
keep prices in check.
Firmly Below Market Consensus
Select Commodities: BMI 2013 Average Price Forecasts - % Difference From Bloomberg Consensus
NB A negative number indicates BMI forecasts are lower than consensus. Source: BMI, Bloomberg
Australia Mining Report Q3 2013
© Business Monitor International Page 96
We forecast iron ore prices to average US$118/tonne in 2013 and US$105/tonne in 2014. Our forecasts
remain significantly below Bloomberg consensus estimates of US$123/tonne for 2013 and US$120/tonne
for 2014. Lower iron ore prices than the market currently expects will have significant implications for the
global mining industry, for instance putting downward pressure on global mining investment.
Downhill From Here
China Iron Ore Import Price, 62% Grade (US$/dry metric tonne, CFR)
Source: BMI, Bloomberg
Australia Mining Report Q3 2013
© Business Monitor International Page 97
Steel: Resilient For Now
We expect steel prices to prove resilient over Q213, as sentiment towards construction materials in general
improves following further signs of an uptick in industrial metals demand in China. We expect a move
higher by the MEPS Carbon Steel Composite Price towards US$745/tonne, although this rally will lose
steam by the second half of the year, in line with a renewed slowdown in the Chinese economy.
Steel Industry Margins Collapsing
Price Ratio: China Steel Rebar/Iron Ore Import Price
Source: BMI, Bloomberg
During 2013 the global steel market will remain undermined by significant overcapacity, and weak prices
will gradually incentivise rebalancing. This process will be distorted by dynamics in the Chinese steel
market, where government support for state-owned enterprises will prevent production and employment
cuts by loss making steel mills from being as drastic as would otherwise be the case. European, Asian and
potentially North American markets will be pressurised by rising steel exports from China.
Australia Mining Report Q3 2013
© Business Monitor International Page 98
Support To Give Way
MEPS Carbon Steel Composite Price (US$/tonne)
Source: BMI, Bloomberg, MEPS
Aluminium: Weak Outlook, With Substantial Downside Risks
We expect aluminium prices to head back to US$1,800/tonne in 2013, as demand from China, the largest
consumer, comes in below market expectations. Any sustained price weakness will help bring the
oversupplied market back into balance, and we expect this to occur by 2016. Tight availability of
aluminium from London Metal Exchange (LME) warehouses belies the record stockpiles that have built up
over recent years. We see this as a lingering, but significant, downside risk to aluminium prices due to
stockpiling being driven by financing deals, which in turn are supported by negative real interest rates.
Given the uptick in economic growth in the US, we could see real interest rates start to rise, unleashing a
flood of the metal onto the market as demand for aluminium for financing deals dries up.
Australia Mining Report Q3 2013
© Business Monitor International Page 99
On The Ropes
Three-Month LME Aluminium (US$/tonne, weekly chart)
Source: BMI, Bloomberg
Copper: The Trend Is Clear
While a temporary bounce is likely in Q213, high global inventories and slower growth from China will
lead to lower prices in H213. We have lowered our 2013 average price forecast to US$7,300/tonne (from
US$7,700/tonne) and expect an average of US$7,000/tonne in 2014. Our bearish view on copper prices over
the medium term is driven primarily by our forecast for a renewed slowdown in China's economy from
H213, in contrast to general market expectations for a sustained rebound in 2013. We expect Chinese
economic rebalancing to continue, with fixed-asset investment growth falling, leading to slower growth for
copper imports. Moreover, we forecast that healthy mine supply growth over coming years will add to
already elevated global inventories, with the copper market in surplus in the second half of the year.
Australia Mining Report Q3 2013
© Business Monitor International Page 100
Lead: Taking Lead From Autos Sector
While three-month lead is edging closer to support at US$1,900/tonne, we believe further upside is on the
cards over the medium term. Specifically, strong autos production, an important outlet for the lead battery
market, will eventually herald a trend reversal and push prices higher over the rest of 2013. We expect
prices to average US$2,200/tonne in 2013 and forecast lead to outperform the wider metals complex in the
years ahead.
Tin Market Bucking The Trend
Select Metals - Global Stocks-To-Use For Refined Metal (%)
Copper Aluminium Lead TinNickel
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
f
2014
f
2015
f
2016
f
2017
f
0
5
10
15
20
Source: BMI, World Bureau of Metal Statistics (WBMS)
Nickel: Struggling To Find Support
Elevated LME inventory levels and price declines from the start of Q213 leave us slightly bearish, with
further weakness likely. Nickel is in a pronounced downward trend, even though the global economy
continues to show signs of gaining traction. Our below-consensus view on the Chinese economy spells
challenging times for nickel in H213. Nickel consumption is predominantly tied to the Chinese steel sector,
where a number of precarious fundamentals are weighing heavily on the industry. With stainless steel
demand growth lacklustre and the string of new projects to be commissioned in the coming quarters, we
Australia Mining Report Q3 2013
© Business Monitor International Page 101
maintain our nickel price forecast for 2013 at US$16,500/tonne, significantly below consensus estimates of
US$18,000/tonne.
Tin: Outperforming A Weak Field
Tin prices have suffered the same loss of momentum seen in other base metals. However, we remain neutral
on tin in the short term, as improving macroeconomic fundamentals will lend support to prices.
Furthermore, the constrained nature of the supply markets in Indonesia and China will prevent prices from
deteriorating significantly. We forecast tin to average US$22,500/tonne in 2013 and US$23,000/tonne in
2014. While we expect Chinese economic growth to fare worse in H213, we believe tin will hold up
relatively well owing to its use in the consumer electronics sector.
Limited Downside
Three-Month LME Tin (US$/tonne, weekly chart)
Source: BMI, Bloomberg
Australia Mining Report Q3 2013
© Business Monitor International Page 102
Zinc: Tougher Ride In H213
After hitting a key support level, three-month zinc has rebounded slightly, and we believe prices will head
higher due to favourable underlying fundamentals, including declining LME inventory levels. However, our
expectations for renewed weakness to take hold of China's economy in H213 will prevent prices from
making substantive gains over the long run. Zinc's primary use in the galvanisation of steel will weaken
along with our bearish outlook on the Chinese construction sector. We expect prices to average US$2,050/
tonne in 2013, in contrast to the Bloomberg consensus estimate of US$2,123/tonne.
Table: Select Commodities - Performance And BMI Forecasts
Commodity UnitSpot price
Year-to-date, %change
One year, % change
2012,average
Year-to-date,
average2013, BMI
average2014, BMI
average
Aluminium US$/tonne 1,917 -7.5 -7.4 2,052 2,008 1,950 2,100
Copper US$/tonne 7,052 -11.1 -14.1 7,953 7,804 7,300 7,000
Gold US$/oz 1,441 -14.0 -12.2 1,669 1,596 1,575 1,450
Iron ore US$/tonne 135 -6.8 -7.9 128 146 118 105
Lead US$/tonne 2,043 -12.3 -2.3 2,074 2,249 2,200 2,250
Nickel US$/tonne 15,250 -10.6 -13.4 17,591 17,010 16,500 17,000
Palladium US$/oz 674 -4.2 2.8 645 733 na na
Platinum US$/oz 1,430 -7.1 -7.4 1,553 1,601 na na
Silver US$/oz 23.22 -23.0 -23.5 31.15 28.92 na na
Steel (MEPScarbon steel) US$/tonne 720 -0.1 -10.1 755 729 730 720
Tin US$/tonne 20,960 -10.4 -4.4 21,100 23,568 22,500 23,000
Zinc US$/tonne 1,912 -8.1 -4.6 1,965 2,017 2,050 2,100
na = not available/applicable. Source: BMI, Bloomberg
Australia Mining Report Q3 2013
© Business Monitor International Page 103
Table: BMI Commodities Strategy
Entry date Entry level Gain/(loss) Rationale
Agriculture
Bullish coffee (front-month Arabica) December 6 2012 138 0.69%
Sentiment at a bearish extreme, significanttechnical support, slight deterioration in supply
prospects
Bullish sugar (ICE #11world, front-month) March 11 2013 18.82 -7.92%
Sentiment at a bearish extreme, bullishtechnicals, risks to short-term supply prospects
Bullish cocoa (front-month LIFFE) April 16 2013 1,507 2.26%
Poor medium term production prospects, keybreak of technical resistance
Energy
- - - -
Metals
Bearish iron ore (SGXAsiaclear swap)* January 16 2013 150.2 8.77%
Less bullish than consensus on sustainability ofChina's economic recovery
NB Returns do not take into account roll yield, unless stated otherwise; *SGX Asiaclear iron ore, cfr China 62% fines (first-month swap). Source: BMI, Bloomberg
Australia Mining Report Q3 2013
© Business Monitor International Page 104
Methodology
BMI's approach to our Mining Risk/Reward Ratings is threefold. Firstly, we seek accurately to capture the
operational dangers to companies operating in this industry globally. Secondly, we attempt, where possible,
to identify objective indicators that may serve as proxies for indicators previously evaluated on a subjective
basis. Finally, we use BMI's proprietary Country Risk Ratings (CRR) to ensure that only the aspects most
relevant to the industry have been included. Overall, the ratings system, which integrates with those of all
industries covered by BMI, offers an industry-leading insight into the prospects and risks for companies
across the globe.
Ratings System
Conceptually, the ratings system is divided into two distinct areas:
Rewards
An evaluation of the sector's size and growth potential in each state, and also broader industry/state
characteristics that may inhibit its development.
Risks
An evaluation of industry-specific dangers and those emanating from the state's political and economic
profile that call into question the likelihood of anticipated returns being realised over the assessed time
period.
Risk Rated
BMI's Mining Risk/Reward Ratings evaluate the relative attractiveness of states to (primarily new) large-
scale investments in the industry. Thus, we focus not only on the relative attractiveness of the industry, but
also the key features of the state that will impose either additional costs or introduce additional risks to
investment.
Australia Mining Report Q3 2013
© Business Monitor International Page 105
Table: Mining Business Environment Indicators
Indicator Rationale
Limits of potential returns
Market structure
Mining output, US$bn Current sector size is used as a proxy for resource endowment
Sector value growth, % y-o-y Rapid growth is a proxy for attractive opportunities, and is given double weighting
Mining sector, % of GDP Used as a proxy for the extent the economy is already oriented towards the sector
Country structure
Labour market infrastructure Rating from BMI's CRR to denote cost/availability of labour. High costs will affect risk-returns calculations
Physical infrastructure Rating from CRR. Poor power/water/transport infrastructure act as bottlenecks to sectordevelopment
Tax Rating from CRR. Punitive taxation regime limits opportunities
Scope of state Rating from CRR. Low state control markedly increases security risks, thereby increasingcosts in certain states
Risks to realisation of returns
Market risks
Metals prices, 5-year forecastaverage
Expectations of price strength will increase investment opportunities and limit downsiderisks
Metals price forecast, average5-year growth
The resultant score is weighted by the average score of the VIX index over the precedingmonth to incorporate uncertainty arising from global market volatility, a key risk givenhigh cost of new investment projects
Regulatory framework Evaluates risks arising from environmental/land issues and the transparency/ consistencyof industry oversight
Legal framework Rating from CRR. It denotes the strength of legal institutions in each state and thereforethe predictability of the legal environment for investors
Country risk
Long-term external risk Rating from CRR, to denote vulnerability to external shock - which is principal cause ofeconomic crises. While most output is exported, an economic shock would hit domesticvalue-added industry and may affect the predictability of economic/business policy-making
Corruption Rating from CRR, to denote risk of additional illegal costs/possibility of opacity intendering/business operations affecting companies' ability to compete
Bureaucracy Rating from CRR to denote ease of conducting business in the state
Long-term policy continuity Subjective rating from CRR, to denote predictability of government policy acrosselectoral cycle/government change
Source: BMI
Australia Mining Report Q3 2013
© Business Monitor International Page 106
Weighting
Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-components
equal weight. Consequently, the following weighting has been adopted.
Table: Weighting Of Components
Component Weighting
Limits of potential returns 70%
Mining sector 65%
Country structure 35%
Risks to realisation of returns 30%
Market risks 50%
Country risk 50%
Source: BMI
Australia Mining Report Q3 2013
© Business Monitor International Page 107