the nickel market outlook: from over-supply to h t ? shortage?

The nickel market outlook: from over-supply to h t ?shortage?

April 2014April 2014

Jim Lennon

C l M i R hConsultant to Macquarie Research

[email protected]

In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer.

Nickel: from worst to best…

The January 12th absolute ban on exports of nickel ore from Indonesia changes everything in the nickel marketeverything in the nickel market.

From being the worst performing metal in recent years, nickel has the potential to be the best performing metal in 2014-16.

The export ban removes up to 450kt of ferronickel/nickel pig iron production from the market, equal to 25% of 2013 global nickel use – in the short run (next two years at least), there are limited substitutes for this nickel.

Impact on the market is delayed by large stocks of nickel ore in China and elsewhere of around 250-300kt nickel and of course large refined stocks on LME and in China.

However, these stocks will rapidly deplete in 2014/5 and, more importantly, those o e e , ese s oc s ap d y dep e e 0 /5 a d, o e po a y, osecontrolling those stocks will hold on to them more tightly if they think prices will rise.

Once stocks are depleted, it is a mystery where supply will come from! This is a repeat of the situation leading up to 2006/7.the situation leading up to 2006/7.

Nickel: the Indonesian supply flood has been stopped Huge requirements for new capacity driven by explosion in Chinese demand since 2000.

Chinese demand remains strong and demand outlook is bright.

Ni k l h t t 2006/07 b t th Nickel shortage up to 2006/07 but then:1. Growth in 200-series stainless steel (1-2% Ni) as a substitute for 300-series (8-9% Ni).

2. Processing of low-grade laterite nickel ores into nickel pig iron in China.g g p g

3. $40bn+ spent by the nickel industry to expand production.

Nickel market moved into large structural over-supply.

…however:

Soaring capex and major technical challenges have made non-Chinese investments economically unviable.

Chinese NPI (nickel pig iron) was a low-capex/high opex solution to meeting demand growth; however, China has limited mine reserves of nickel so it is highly reliant on raw material imports, especially from Indonesia.

Indonesia has banned exports of unprocessed mineral products from 2014. There is no substitute for Indonesian ore.

LME nickel price rallies 25% from January 2014 lowLME nickel price rallies 25% from January 2014 low

18000

19000

: $/t

250000

275000

300000

nnes

15000

16000

17000

E ca

sh p

rice

175000

200000

225000

E st

ocks

: ton

13000

14000

15000

LME

100000

125000

150000

175000

LME

13000

Jul-1

2

Aug

-12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr

-14

100000

LME price LME stocks

Source: LME, Macquarie Research, April 2014

Nickel stocks are higher than for any other base c e s oc s a e g e a o a y o e basemetal…but control of these stocks is the key

Estimated total stocks for base metals: end-Feb 2014(weeks of annual consumption)

27.4 28.530 30

Current nickel stocks

China other

20

25

20

25Raw MaterialsOtherExchange

600700800900

1000 China other

China SRB (e)

ReportedProducer

13.0

8.3 8.26.2

5

10

15

5

10

15

200300400500600

'000

t Ni Non-LME Ex-

ChinaLME

Non-China inraw materials

0

5

Al Ni Zn Cu Sn Pb0

5

0100

End-Feb 2014

China in rawmaterials

Source: LME, INSG, ICSG, ILZSG, IAI, COmex, SHFEMacquarie Research, April 2014

Chinese nickel ore stocks starting to fall, but who C ese c e o e s oc s s a g o a , bu oowns it and when will it be used?

End 2013 estimated ore stocks close to

Estimated Chinese nickel ore stocks35000

End-2013 estimated ore stocks close to 35mt, of which 25mt of high-grade Indonesian nickel ore.

20000

25000

30000

ght

Ni content of stocks probably close to 300kt, around 7-7.5 months.

However, many nickel pig iron producers

5000

10000

15000

'000

t gro

ss w

ei

However, many nickel pig iron producers only have 1-3 months holdings with traders and large producers controlling the bulk of stocks.

0Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

Port Plant

Cuts to nickel pig iron production likely to start soon.

Source: Umetal, Macquarie Research, April 2014

Ore prices critical in costs – starting to soar and sellers of ore socks likely to delay sales

Quotes for nickel ore exports move sharply higherp p y g

606570

45505560

$/t f

ob

25303540$

20

Feb-

10

May

-10

Aug

-10

Nov

-10

Feb-

11

May

-11

Aug

-11

Nov

-11

Feb-

12

May

-12

Aug

-12

Nov

-12

Feb-

13

May

-13

Aug

-13

Nov

-13

Feb-

14

Philippine 1 8%Ni ore Indonesia 1 8%Ni ore

Source: SMM, Macquarie Research, April 2014

Philippine 1.8%Ni ore Indonesia 1.8%Ni ore

LME longs soar and rising cancelled warrants make o gs soa a d s g ca ce ed a a s a estocks harder to obtain

LME cancelled warants as percent of total LME stocks

50%

Huge rise in LME open interest points to large spec longs2000000 19000

30%

35%

40%

45%

1500000

1750000

inte

rest

: ton

nes

17000

$/to

nne

10%

15%

20%

25%

1000000

1250000

LME

futu

re o

pen

15000Pr

ice:

$

0%

5%Ja

n-13

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr

-14

750000

Jan-

13

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr

-14

13000

Open interest LME price

Source: LME, Macquarie Research, April 2014

Projected market balance if the ban is enforcedProjected market balance if the ban is enforced

2008 13 540kt

12293

136

186

150

200

250

alan

ce

8

10

12

eek'

s us

e

2008-13: 540kt surplus2003-07: 141kt

deficit 2014-18f: 462kt

4810 4

32

93

36

0

50

100

ply/

dem

and

ba

2

4

6

s st

ocks

in w

e

deficit

-26

-111

-40 -33-12

-145-117

-88 -100-150

-100

-50

'000

t sup

p

-2

0

2

LME/

prdu

cers

145-200

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

f

2015

f

2016

f

2017

f

2018

f

-4

L

B l (LHS) St k i k f (RHS)

Source: INGS, Macquarie Research, April 2014

Balance (LHS) Stocks in weeks of use (RHS)

2013 prices well into cost curve – worst since early-1980s

Nickel industry costs and LME price40 000

30,000

35,000

40,000

nne

Ni)

15,000

20,000

25,000

nd p

rices

($/to

n

5,000

10,000

Cos

ts a

0

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

9th Decile Upper quartile Median Lower quartile LME Price

Source: Wood Mackenzie, LME, Macquarie Research, April 2014

The Indonesian banFrom January 12 2014 exports of unprocessed nickel products (Ni content From January 12, 2014, exports of unprocessed nickel products (Ni content

<4%) banned in line with 2009 Indonesian Mining Act.

Macquarie had expected a partial ban with companies building plants being Macquarie had expected a partial ban with companies building plants being granted export licence extensions – this was rejected by Indonesian Parliament.

No sign of a change, although Parliamentary elections in April 2014 and Presidential election in July 2014 may change personnel and policy – we, however, see this as unlikely, especially as plans to build processing plants come to fruition.

Incredible growth in Indonesian nickel ore c ed b e g o do es a c e o eoutput…mainly destined to China

Indonesian apparent nickel ore production ('000t Ni)

800 40% Ore to China

617500

600

700

Ni

30%

rodu

ctio

n Ore to Europe

Ore to Australia

Ore to Japan

51 62 71134

338 403

617

200

300

400

'000

t N

10%

20%

% o

f wor

ld p

r Ore to Japan

Aneka Tambang

PT Vale

0 0 0 0 0 1 6 51 62 71

0

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0%

%

% of world finishednickel production

Source: INSG, Indonesian trade statistics, Macquarie Research, April 2014

2 2 2 2 2 2 2 2 2 2 2 2 2 2

More than half of Chinese nickel production from o e a a o C ese c e p oduc o oIndonesian nickel ore!

Split of Chinese nickel production

714700800

700800

177256

409

254315

445541

300400500600700

000t

Ni

300400500600700

0 516 35 43

67

102 134187 216 254

0100200300'0

0100200300

2005 2006 2007 2008 2009 2010 2011 2012 2013

Conventional - Jinchuan Conventional - Other

NPI from Philippines ore NPI from Indonesian ore

Source: INSG, CNIA, SMM, Macquarie Research, April 2014

The changing face of nickel – stagnation in sulphide The changing face of nickel stagnation in sulphide production as laterites take off – mine production basis

World laterite nickel mine production by country

1400

1600IndonesiaPhilippinesTurkeyChina

World sulphide nickel mine production by country

800

900

800

1000

1200

t Ni

MyanmarUkraineAlbaniaPapua New GuineaMadagascarVenezuela500

600

700

800

NI

CanadaAustraliaRussiaUSAZambia

400

600

800

'000

t VenezuelaSerbiaRussiaDominican Rep.GuatemalaMacedonia200

300

400

500

'000

t N ZimbabweFinlandBrazilBotswanaS.Africa

0

200

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

AustraliaCubaColombiaBrazilN.Caledonia

0

100

200

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

China, P.R.

Source: INSG, Macquarie Research, April 2014

2 2 2 2 2 2 2 2 2 2 2 2 2 2 Greece2 2 2 2 2 2 2 2 2 2 2 2 2 2

Indonesian nickel exports: incredible growthIndonesian nickel exports: incredible growth

Indonesian exports of nickel ore

60

70

Indonesian ore exports (m wmt gross weight)% change

China (+HK) Australia Greece Japan Ukraine Others Total YoY2005 0.07 0.95 0.10 2.03 0.49 0.06 3.70 13.6%2006 0.66 0.71 0.15 2.07 0.73 0.08 4.39 18.6%2007 5 43 0 37 0 39 1 85 0 59 0 39 9 03 105 4%

40

50

60

es w

et b

asis

2007 5.43 0.37 0.39 1.85 0.59 0.39 9.03 105.4%2008 6.59 0.51 0.35 1.83 1.01 0.31 10.59 17.3%2009 7.88 0.00 0.39 1.46 0.58 0.12 10.44 -1.5%2010 14.35 0.84 0.24 1.45 0.63 0.21 17.73 69.9%2011 36.23 0.96 0.57 1.86 0.71 0.51 40.84 130.4%2012 43.54 1.45 0.64 1.55 1.20 0.06 48.45 18.6%2013 59.17 1.57 0.46 1.98 1.48 0.14 64.80 33.8%

20

30

mill

ion

tonn

e2013 % share 91.3% 2.4% 0.7% 3.1% 2.3% 0.2% 100.0%

0

10

2005 2006 2007 2008 2009 2010 2011 2012 2013

China (+HK) Australia Greece Japan Ukraine Others

Source: Indonesian trade statistics, Macquarie Research, April 2014

Indonesian nickel ore exports: massive growth but do es a c e o e e po s ass e g o bulow value add

Value of Indonesian nickel ore exports

1.691.8

Reported Indonesian nickel ore exports - mostly but not just China

64.870

Average fob value of Indonesian nickel ore exports per tonne fob

24%70 25%

1.431.49

1.2

1.4

1.6

40.8

48.4

40

50

60

t bas

is

18% 18%

24%

19%

14%

16%

19%

17%

40

50

60

mt 15%

20%

% L

ME

pric

e

1.161.25

1.450.61

0.52 0.53

0 4

0.6

0.8

1.0

$USb

n

36.2

43.5

59.2

17.720

30

40

mill

ion

tone

s w

et

49

67

49

2730

3531

26

14%

20

30

40

$US/

wm

5%

10%

Ni r

ecpo

vere

d as

%

0.03

0.28 0.230.15

0.35

0.220.28

0.0

0.2

0.4

China Australia Japan Ukraine Greece Others

0.75.4 6.6 7.9

14.34.4

9.0 10.6 10.4

0

10

2006 2007 2008 2009 2010 2011 2012 2013China Australia Japan Ukraine Greece Other

27 26

0

10

2006 2007 2008 2009 2010 2011 2012 20130%

5%

Ore/tonne fob Ni in ore as % of LME price

Source: Indonesian trade statistics, Macquarie Research, April 2014

Some room for doubt on actual nickel exports?Some room for doubt on actual nickel exports?Indonesia-China nickel ore trade from both sides

70

Chinese nickel ore trade with Indonesia8

43.1

58.6

41.150

60

nes

5

6

7

es

14 3

36.1

25.7

33.9

20

30

40

mill

ion

tonn

3

4

5

mill

ion

tonn

e

6.6 7.6

14.3

7.4 7.212.2

0

10

2008 2009 2010 2011 2012 20130

1

2

Source: GTIS, Macquarie Research, April 2014

2008 2009 2010 2011 2012 2013

Indonesian exports to ChinaChinese imports from Indonesia

2008 2009 2010 2011 2012 2013

Chinese imports Indonesian exports

Since January 2011: total Indonesian exports to China: 138mt; Chinese imports from Indonesia: 101mt = 27% difference implies Chinese reported imports mostly on dry basis?

Average CFR value of Chinese imports is too high e age C a ue o C ese po s s oo grelative to actual reported values

Average fob and cfr values in Indonesia China nickel oreAverage fob and cfr values in Indonesia-China nickel ore trade

115120

140

66

105

88

7380

100

120

as re

port

ed

35

20 2432 29 25

44

20

40

60

$/to

nne

a

02008 2009 2010 2011 2012 2013

Indonesian exports Chinese imports from Indonesia


p p

Philippines mostly not recovered as nickel ore (iron pp es os y o eco e ed as c e o e ( oore)

I d i d Phili i h i l b l i R bl i k l d ti i I d iIndonesia and Philippines share in global mine production

30%

35%

ctio

n

Recoverable nickel ore production in Indonesia, New Caledonia and the Philippines

1000

1200

15%

20%

25%

min

e pr

oduc

544

755

600

800

ntai

ned

nick

el5%

10%

15%

% o

f wor

ld

9863 86

128 98 147183

184195 183

263473

200

400

'000

t con

0%2007 2008 2009 2010 2011 2012 2013

Indonesia Philippines New Caledonia

125 103 93 130 128 132 1600

2007 2008 2009 2010 2011 2012 2013New Caledonia Philippines Indonesia

Source: INSG, Dimenc, Trade data and Macquarie Research estimates, April 2014

What can replace Indonesian ore?What can replace Indonesian ore?Close to 450kt of Indonesian nickel ore used in 2013 in China, Japan and Europe.

Stockpiles of 250-300kt ore can be used to replace lost imports but traders hold bulk of the ore stocks the ore stocks.

Most of Indonesian ores are saprolite ores (1.7-2.0% Ni, 15-20% Fe) used mainly in electric furnaces to make high-grade (8-12% ni) nickel pig iron (NPI).

M t f Phili i li it (0 8 1 3% Ni 45 50% F ) d i l i bl t Most ore from Philippines are limonite ores (0.8-1.3% Ni, 45-50% Fe) used mainly in blast furnaces to make low-grade (1-4% Ni) NPI or pig iron with no nickel recovery. Potential for maybe 30-60kt extra high grade/low grade Pilipino ore.

New Caledonia may supply more ore to Japan and Australia but most expansion New Caledonia may supply more ore to Japan and Australia but most expansion committed to SMSP/Posco ferronickel plant in Korea, which is being expanded from 30ktpa to 54ktpa.

Guatemala mine expansion by Solway Group (Skye Resources Fenix project) could Guatemala mine expansion by Solway Group (Skye Resources Fenix project) could supply 15-20ktpa for Ukraine ferronickel plant to replace Indonesian feed.

No other significant potential nickel ore suppliers to replace Indonesian ore.

Stainless steel scrap and substitution within stainless grades to lower nickel likely Stainless steel scrap and substitution within stainless grades to lower nickel likely.

Supply is still coming from new projects ex-Supp y s s co g o e p ojec s eChina…but (thankfully) at well below capacity!

000t Ni Year Year Year Year Year Change Change Change ChangeProcess Capacity Start-up 2010 2011 2012 2013 2014F 2011/10 2012/11 2013/12 2014/13F

VNC (Goro) HPAL 57 1Q 11 0 8 6 15 30 7.4 -1.9 9.6 14.7Onça Puma FeNi 50 1Q 11 0 7 6 2 16 7.0 -1.0 -4.1 14.1Ravensthorpe HPAL 39 2H 11 0 6 33 38 38 5 7 27 2 5 2 0 1Ravensthorpe HPAL 39 2H 11 0 6 33 38 38 5.7 27.2 5.2 -0.1Kevista Conc 11 2Q 12 0 0 4 9 10 0.0 3.9 5.1 1.0Enterprise Conc 40 2016 0 0 0 0 0 0.0 0.0 0.0 0.0Eagle Conc 25 2014 0 0 0 0 2 0.0 0.0 0.0 2.0Koniambo FeNi 60 1Q 13 0 0 0 1 23 0.0 0.0 1.4 21.6Talvivarra Bioleach 30 4Q 09 10 16 13 10 15 5 7 3 2 2 8 4 9Talvivarra Bioleach 30 4Q 09 10 16 13 10 15 5.7 -3.2 -2.8 4.9Barro Alto FeNi 40 1Q 11 0 6 22 25 26 6.3 15.3 3.5 0.9Ambatovy HPAL 60 2Q 12 0 0 6 25 43 0.0 5.7 19.5 17.4Taganito HPAL 30 2H 13 0 0 0 1 21 0.0 0.0 1.0 20.4Ramu HPAL 32 2H 12 0 0 5 11 22 0.0 5.3 6.1 10.6Sk e Reso rces FeNi 20 Late 13 0 0 0 0 3 0 0 0 0 0 0 3 0Skye Resources FeNi 20 Late-13 0 0 0 0 3 0.0 0.0 0.0 3.0Taguang FeNi 23 1Q 13 0 0 0 3 14 0.0 0.0 3.1 10.4Total 517 11 43 94 142 262 32.1 51.3 47.6 120.8YoY change 11 32 51 48 121

Source: Company Reports, Macquarie Research, April 2014

Our supply assumptions by main supplier - finishedOur supply assumptions by main supplier finished'000t finished Ni 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F

Vale 209 218 231 255 279 290 295 305 315 327

Norilsk Nickel 286 279 276 275 275 277 280 280 280 280

Jinchuan Nickel 127 128 143 128 150 150 150 150 150 150

BHP Billiton 83 108 115 113 114 112 110 107 107 107

QNI 36 37 34 34 30 30 30 30 30 30

Xstrata 106 107 102 114 127 132 142 147 152 152

Anglo American 49 57 51 55 48 71 77 79 80 80

Sumitomo MM 68 70 75 89 92 94 97 102 102 102

E t 54 56 51 59 63 65 65 65 65 65Eramet 54 56 51 59 63 65 65 65 65 65Chinese NPI 282 361 500 375 175 150 150 150 150 150Indonesian NPI 0 1 2 5 40 100 150 200 250 275Other Chinese 36 52 60 80 90 95 100 100 100 100

Cubaniquel 31 27 22 16 27 28 28 28 28 28

Sherritt 35 34 34 34 36 38 40 40 40 40

Ambatovy 0 6 25 43 55 60 60 60 60 60

Pamco 26 38 39 33 39 39 39 39 39 39

Minara/Glencore 30 36 44 44 44 44 44 44 44 44

Aneka Tambang 20 18 19 20 25 35 45 50 50 50

Larco 19 19 18 18 18 18 18 18 18 18

SNNC 17 22 25 29 40 45 50 50 50 50

Votorantim 21 21 23 26 27 27 27 27 27 27

Cunico 33 29 29 29 29 29 29 29 29 29

Others 69 64 58 76 92 107 110 110 110 110

Disruption allowance 0 0 0 -70 -96 -102 -107 -110 -114 -116


Total World 1633 1788 1977 1879 1818 1934 2029 2099 2162 2197Change t y-o-y 178 155 189 -98 -61 115 95 70 63 35Change % y-o-y 12.2% 9.5% 10.6% -4.9% -3.2% 6.3% 4.9% 3.5% 3.0% 1.6%

Intermediate supply flows – little room to supplement NPI feed sources with sulphides?

Change Change Change Change Change Change Change'000t ni 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2012/11 2013/12 2014/13F 2015/14F 2016/15F 2017/16F 2018/17FL t itLateritesRamu Pal inter. 0.0 0.2 15.1 22.0 28.0 31.0 31.0 31.0 0.2 14.9 6.9 6.0 3.0 0.0 0.0PT Vale matte 69.5 66.2 79.4 79.5 85.0 90.0 90.0 90.0 -3.3 13.2 0.1 5.5 5.0 0.0 0.0First Quantum Ravensthorpe PAL inter. 5.7 28.7 38.1 40.0 40.0 40.0 40.0 40.0 23.0 9.4 1.9 0.0 0.0 0.0 0.0Vale VNC PAL inter. 7.7 3.4 6.9 8.0 7.0 7.0 7.0 7.0 -4.3 3.6 1.1 -1.0 0.0 0.0 0.0SMM Taganito PAL inter. 0.0 0.0 1.0 22.0 30.0 30.0 32.0 35.0 0.0 1.0 21.0 8.0 0.0 2.0 3.0New Caledonia Ni in ore 61.7 67.1 57.4 65.0 80.0 90.0 95.0 100.0 5.4 -9.7 7.6 15.0 10.0 5.0 5.0Philipino Ni ore exports 75.0 125.0 160.0 200.0 225.0 230.0 240.0 250.0 50.0 35.0 40.0 25.0 5.0 10.0 10.0I d i i 385 0 451 0 672 0 75 0 0 0 0 0 0 0 0 0 66 0 221 0 597 0 75 0 0 0 0 0 0 0Indonesian ni ore 385.0 451.0 672.0 75.0 0.0 0.0 0.0 0.0 66.0 221.0 -597.0 -75.0 0.0 0.0 0.0Guatemala ni ore 0.0 2.4 8.0 12.0 15.0 15.0 15.0 15.0 2.4 5.6 4.0 3.0 0.0 0.0 0.0Sub-total laterites 604.6 744.0 1037.9 523.5 510.0 533.0 550.0 568.0 139.4 293.9 -514.4 -13.5 23.0 17.0 18.0

SulphidesFirst Quantum Kevista conc 0.0 1.6 8.5 10.0 18.0 20.0 20.0 21.0 1.6 6.9 1.5 8.0 2.0 0.0 1.0Norilsk Tati conc 9.3 12.2 6.4 4.0 8.0 12.0 12.0 12.0 2.9 -5.8 -2.4 4.0 4.0 0.0 0.0Norilsk Lake Johnson conc 1.7 8.8 2.8 0.0 0.0 0.0 0.0 0.0 7.0 -5.9 -2.8 0.0 0.0 0.0 0.0Gl X t t A t li 17 0 11 7 4 1 0 0 0 0 0 0 0 0 0 0 5 3 7 6 4 1 0 0 0 0 0 0 0 0Glencore Xstrata Australia conc 17.0 11.7 4.1 0.0 0.0 0.0 0.0 0.0 -5.3 -7.6 -4.1 0.0 0.0 0.0 0.0Bindura Nickel Trojan conc 0.0 0.0 5.0 10.0 10.0 10.0 10.0 10.0 0.0 5.0 5.0 0.0 0.0 0.0 0.0Norilsk/ARM Nkomati conc 11.6 19.2 23.8 24.0 24.0 24.0 24.0 24.0 7.6 4.6 0.2 0.0 0.0 0.0 0.0BHP Billiton conc 9.9 9.6 11.6 10.0 10.0 10.0 10.0 10.0 -0.3 2.0 -1.6 0.0 0.0 0.0 0.0Panoramic Resources conc 18.4 19.4 21.1 22.0 22.0 22.0 23.0 25.0 1.0 1.7 0.9 0.0 0.0 1.0 2.0Mincor Resources conc 8.79 9.06 9.13 9.5 9.5 9.5 10.0 11.0 0.3 0.1 0.4 0.0 0.0 0.5 1.0First Quantum Enterprise conc. 0.0 0.0 0.0 0.0 5.0 20.0 35.0 40.0 0.0 0.0 0.0 5.0 15.0 15.0 5.0Lundin Eagle conc 0.0 0.0 0.0 2.0 15.0 20.0 20.0 20.0 0.0 0.0 2.0 13.0 5.0 0.0 0.0W t A 26 1 26 3 26 3 26 5 27 0 27 0 28 0 30 0 0 2 0 0 0 2 0 5 0 0 1 0 2 0Western Areas conc 26.1 26.3 26.3 26.5 27.0 27.0 28.0 30.0 0.2 0.0 0.2 0.5 0.0 1.0 2.0Belvedere Resources conc 2.2 2.3 0.9 0.0 0.0 0.0 0.0 0.0 0.1 -1.4 -0.9 0.0 0.0 0.0 0.0Asian Mineral Resources Ban Phuc conc 0.0 0.0 1.0 7.0 7.0 7.0 10.0 12.0 0.0 1.0 6.0 0.0 0.0 3.0 2.0Royal Nickel (Dumont) 0.0 0.0 0.0 0.0 0.0 0.0 5.0 15.0 0.0 0.0 0.0 0.0 0.0 5.0 10.0Talvivaara conc 16.1 12.9 10.1 15.0 20.0 20.0 25.0 30.0 -3.2 -2.8 4.9 5.0 0.0 5.0 5.0Mirabela Nickel conc 15.3 19.3 15.6 16.0 16.0 16.0 16.0 16.0 3.9 -3.6 0.4 0.0 0.0 0.0 0.0BHP Billiton matte 52.7 38.1 33.2 22.0 20.0 20.0 20.0 20.0 -14.6 -4.9 -11.2 -2.0 0.0 0.0 0.0Angloplats matte 0.0 0.0 5.8 0.0 0.0 0.0 0.0 0.0 0.0 5.8 -5.8 0.0 0.0 0.0 0.0S b t t l l hid 189 2 190 4 185 5 178 0 211 5 237 5 268 0 296 0 1 3 5 0 7 5 33 5 26 0 30 5 28 0


Sub-total sulphides 189.2 190.4 185.5 178.0 211.5 237.5 268.0 296.0 1.3 -5.0 -7.5 33.5 26.0 30.5 28.0

Total 793.7 934.4 1223.4 701.5 721.5 770.5 818.0 864.0 140.7 289.0 -521.9 20.0 49.0 47.5 46.0

New capacity has high average capital costsNew capacity has high average capital costs…PAL '000tpa $m Ferronickel '000tpa $m

Start up Capacity Capex $/t cap Acid plant Refinery Start up Capacity Capex $/t capStart-up Capacity Capex $/t cap Acid plant Refinery Start-up Capacity Capex $/t capMurrin Murrin 1999 40 1700 42500 x x Gwangywang 2008 30 720 24000Coral Bay Stage 1 2005 12 220 18333 Onca Puma 2011 52 3200 61538Ravensthorpe original 2007 40 3000 75000 x x Barro Alto 2011 40 1900 47500VNC (Goro) 2010 60 6000 100000 x x Koniambo 2013 60 6300 105000Ramu 2012 32 1800 56250 x Taguang Taung Nickel 2013? 22 850 38636Ramu 2012 32 1800 56250 x Taguang Taung Nickel 2013? 22 850 38636Ambatovy 2012 60 5500 91667 x xTaganito 2013 30 1600 53333

Total above 222 17900 80631 Total above 204 12970 63578Source: Company Reports, Macquarie Research, April 2014

Average PAL capital costs = $80,000/tonne of capacity, while ferronickel plants coming in at close to $65,000/t of capacity.

By contrast, older NPI plants had capacity costs of <$5,000/t of capacity and newer rotary kiln electric furnace (RKEF) capacity is around $15,000/t of capacity.

400kt+ of RKEF capacity built/under construction in China! 400kt+ of RKEF capacity built/under construction in China!

Ore is a big factor in Chinese NPI costs but the O e s a b g ac o C ese cos s bu eprice is not static!

Published Chinese import ore price (1.8% Ni ore from Indonesia)

140 30%

Chinese RKEF nickel pig iron cost breakdownTheoretical for coastal plant

8%100%

80

100

120

a (e

x-VA

T)

22%

24%

26%

28%

% o

f LM

E

31%25%

21% 25% 28%

15%13% 11% 13% 12%

14% 11% 9% 8% 10%

sh c

osts

20

40

60

80

$/to

nne

cfr C

hin

14%

16%

18%

20%

Ni c

onte

nt a

s %

40%52%

59% 54% 50%

31%

% o

f tot

al c

as

0

20

2009 2010 2011 2012 201310%

12%

Ore price Ni in ore as % LME

0%2009 2010 2011 2012 2013 YTD

Ni ore Electricity Carbon Other


NPI costs on their way up – using spot quotes for cos s o e ay up us g spo quo es oore

20000

22000

24000

t 20000

22000

24000

16000

18000

20000

$/to

nne

ex-V

At

16000

18000

20000

ne e

x-VA

T12000

14000

0 0 0 0 0 0 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 4 4

12000

14000

0 0 0 0 0 0 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 4 4

$/to

nn

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep-

10N

ov-1

0Ja

n-11

Mar

-11

May

-11

Jul-1

1Se

p-11

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep-

12N

ov-1

2Ja

n-13

Mar

-13

May

-13

Jul-1

3Se

p-13

Nov

-13

Jan-

14M

ar-1

4

Price: 8-13% NPI Costs: 10% Ni - Coastal

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep-

10N

ov-1

0Ja

n-11

Mar

-11

May

-1Ju

l-11

Sep-

11N

ov-1

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep-

12N

ov-1

2Ja

n-13

Mar

-13

May

-13

Jul-1

3Se

p-13

Nov

-13

Jan-

14M

ar-1

4

Price: 8-13% NPI Costs: 12% Ni - Conventional

Costs: 10% Ni - Inner Mongolia Costs: 12% Ni - RKEF

Source: SMM, Mysteel, Macquarie Research, April 2014

LME outperforms Chinese domestic pricing – too ou pe o s C ese do es c p c g oomuch finished stock in China?

Chinese and non-Chinese nickel prices

18000-VA

T

Price premiums and discounts in China

500

1000

ex-V

AT

16000

8

$US/

tonn

e N

i ex-

-1000

-500

0

500

ce: $

US/

tonn

e N

i e12000

14000Pric

e: $

-2500

-2000

-1500

1000

Pric

12000

Jan-

13

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr

-14

LME cash price 8-13% Ni electric furnace NPI

Ni in SS scrap (EU/US) inc Fe Jinchuan metal price

-3000Ja

n-13

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr

-14

8-13% Ni - LME price LME minus Jinchuan metal price

Source: LME, SMM, CRU, Macquarie Research, April 2014

Indonesia verses Chinese NPI plants?Indonesia verses Chinese NPI plants? Ore costs substantially lower if plants built at mines (barging costs in Indonesia are high).

Labour costs are higher in Indonesia (2-3x) and skilled workers hard to get.g ( ) g

Power costs might be comparable, if power was available (need to build power plants).

Chinese efficiencies may not be readily transferrable to Indonesia?

Ancillary costs and engineering services substantially higher in Indonesia.

New RKEF plants in China are at/near stainless plants enabling hot metal transfer.

Capital costs would be substantially higher than in China (3x higher?):

1. In China, infrastructure such as ports, rail, power, engineering services, etc are already in place (essentially “free” to a new producer).

2. Chinese experience in building overseas (e.g., Ramu in Indonesia, Sino Iron in Australia) shows low-cost and quick build Chinese model is easily not transferable off-shore.

3. If Chinese investors, law requires foreign equity share to go below 50% after start-up., q g q y g p

Chinese NPI can’t be exported: 17% non-refundable VAT and 25% export tax

The economics of NPI is phenomenal compared to p pconventional processes at current ore prices

The "economics" of new capacity - based on today's parametersThe economics of new capacity based on today s parameters

80000

6500070000

80000

90000

45000

40000

50000

60000

$/to

nne

5000

1500013000 1000017000

12500 11500

2700021375

17875 1512519375

10000

20000

30000

$

0PAL (recent) FeNi (recent) Old NPI New NPI (RKEF) Indonesian NPI?

Capex Opex Incentive price

This is a very rough guide to the economics of new capacity

Source: Company data, Wood Mackenzie, Macquarie Research, April 2014

How much would it cost to build capacity in o uc ou d cos o bu d capac yIndonesia and is it likely?Until the first plant is built capex and timing are speculative but $15bn+ Until the first plant is built, capex and timing are speculative but $15bn+

investment would be needed to replace existing Chinese NPI capacity.

By comparison, reported 2013 Indonesian nickel ore exports of 48mt generated $ $revenue of $1.7bn (and probably profits of less than $0.5bn).

Unrealistic to expect such a large investments to be made quickly. First plant (Tsingshan) not likely to start before mid-2015(Tsingshan) not likely to start before mid 2015.

Even if willing, it would take many years to realise (5 years+ from now?).

It is tempting to say that raising revenue from 20% of LME price to It is tempting to say that raising revenue from 20% of LME price to 80-90% of price is “good” for the country…but ONLY if it is

profitable to do so!

Big falls in Chinese nickel pig iron production in 2H g a s C ese c e p g o p oduc o2014; nickel market in 1H surplus, 2H deficit

Estimated and projected Chinese NPI production

145160

73 7593 94

7995

112 111132

145130

105

75100120140160

Ni

65 73 75 6979 75

65

406080

'000

t

020

Q11

1

Q21

1

Q31

1

Q41

1

Q11

2

Q21

2

Q31

2

Q41

2

Q11

3

Q21

3

Q31

3

Q41

3

14F

214F

314F

414F

Q Q Q Q Q Q Q Q Q Q Q Q Q1

Q2

Q3

Q4


We assume some Indonesian NPI…but not so soonNickel pig iron production

2502

425500

600

500

600

15

200250 275

282

362 380

215250

300350

400 425

300

400

'000

t Ni

300

400

40 100150

200

2071 87 106

159215

100

200

100

200

0

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

0

China: 0.5-2%Ni BF China 4-8%Ni BF China: 9-10%Ni old EF


China: 9-15%Ni RKEF Indonesia

Nickel use in stainless can change!Austenitic ratio on world steel production

200+300 series combined

76%

78%World stainless production share

24%

24%

24%

23%

24%

6% 24%

9% 0% 7% 8% 26%

24%

25%90%

100%

74%

00+3

00)

2 2 2 2 2 2 2

29 30 27 28 2 2 2

60%

70%

80%

otal

70%

72%

% o

f tot

al (2

0

72%

72%

72%

71%

68%

65%

68%

59%

58% 57

%

58% 57

% 57%

55%

20%

30%

40%

50%

% o

f to

66%

68%

4% 4% 4% 5% 8% 9% 9% 12%

13%

15%

14% 17%

20%

20%

0%

10%

20%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

200 series (1-2% Ni) 300 series (8% Ni) 400 series (no nickel)

Source: INSG, ISSF, Macquarie Research, April 2014

Austenitic ratio depends on price…Nickel price and world stainless austenitic ratio

78% 55000

74%

76%

tic %

35000

45000

e (2

013$

)

70%

72%

Aus

teni

t

15000

25000

Pric

e: $

/tonn

66%

68%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-5000

5000

Austenitic ratio Nickel price

Source: LME, ISSF, Macquarie Research, April 2014

Scrap use peaked when price was high in Sc ap use pea ed e p ce as g2006…potential for growth as ni price rallies?

Secondary nickel share in stainless steel

700

750

48%

50%

600

650

rcha

sed

scra

p

44%

46%

ratio

%

500

550

'000

t ni i

n pu

r

40%

42% Scra

r

400

450

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

36%

38%

2 2 2 2 2 2 2 2 2 2 2 2 2 2

Ni in purchased scrap Scrap ratio %

Source: ISSF, Macquarie Research, April 2014

NPI accounted for major share of nickel used in accou ed o ajo s a e o c e usedChina in 2012 – replacement for scrap use in ROW

Chinese nickel use by type Nickel use ex-China by type

17%

38%Ni in scrapNPI 40%42%

Ni in scrap

NPI

38%

FeNiMetal/utility/oxide

FeNi

Metal/utility/oxide

38%

7% 0%18%

Source: INSG, Macquarie Research, April 2014

Chinese stainless is grabbing market share from C ese s a ess s g abb g a e s a e orest of world – 4.5mtpa swing since 2003!

Chinese net imports of stainless steel

25003000

15%

20%

nd

500100015002000

S pr

oduc

ts

5%

10%

5%

ines

e de

man

-1500-1000

-5000

'000

t SS

-10%

-5%

0%

% o

f non

-Chi

-2000-1500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-15%

%


Chinese net imports China trade as % of non-Chinese demand

Nickel demand in stainless: all about ChinaStainless steel production by area ('000t)

Year Year Year Year Year Year Year Change'000t 2007 2008 2009 2010 2011 2012 2013 2007-13USA 2171 1925 1618 2201 2074 1978 2056 5%USA 2171 1925 1618 2201 2074 1978 2056 -5%Japan 3885 3567 2606 3427 3256 3132 3171 -18%Europe 8093 7819 5972 7485 7552 7450 7172 -11%Korea 1942 1743 1677 2049 2157 2167 2143 10%Taiwan 1515 1297 1468 1514 1203 1106 1081 -29%India 2045 1980 2002 2119 2271 2470 2688 31%China 7108 6787 9396 11907 14066 16111 19461 174%Other 1438 1208 1086 1160 1088 1121 1112 -23%Total 28196 26325 25824 31862 33666 35536 38884 38%Total Ex-China 21088 19538 16429 19955 19600 19424 19423 -8%Total Ex-China 21088 19538 16429 19955 19600 19424 19423 -8%

% change yoyUSA -12.1% -11.3% -16.0% 36.0% -5.8% -4.6% 3.9%Japan -4.9% -8.2% -26.9% 31.5% -5.0% -3.8% 1.2%E 13 5% 3 4% 23 6% 25 3% 0 9% 1 4% 3 7%Europe -13.5% -3.4% -23.6% 25.3% 0.9% -1.4% -3.7%Korea -15.4% -10.2% -3.8% 22.2% 5.3% 0.5% -1.1%India 14.1% -3.2% 1.1% 5.9% 7.1% 8.8% 8.8%China 45.6% -4.5% 38.4% 26.7% 18.1% 14.5% 20.8%Other -0.4% -16.0% -10.1% 6.8% -6.1% 3.0% -0.8%

Source: ISSF, INSG, Macquarie Research, April 2014

Total 0.5% -6.6% -1.9% 23.4% 5.7% 5.6% 9.4%Total Ex-China -9.0% -7.4% -15.9% 21.5% -1.8% -0.9% 0.0%

Our nickel supply/demand balance to 2020: big Ou c e supp y/de a d ba a ce o 0 0 b gquestion – where will supply come from?

`000t 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020fTotal SS production 35536 38884 41431 43925 46741 49168 51258 53531 55848% Change 5.6% 9.4% 6.6% 6.0% 6.4% 5.2% 4.2% 4.4% 4.3%300-series SS prod. 20037 21602 23234 24596 26117 27328 28815 30441 32262% Change 4.1% 7.8% 7.6% 5.9% 6.2% 4.6% 5.4% 5.6% 6.0%Nickel Consumption 1652 1790 1891 1963 2050 2117 2199 2288 2376Nickel Consumption 1652 1790 1891 1963 2050 2117 2199 2288 2376% Change 3.5% 8.4% 5.6% 3.8% 4.5% 3.3% 3.9% 4.0% 3.8%Use of purchased ni in scrap 650 660 707 758 806 846 888 934 980% change -0.5% 1.6% 7.1% 7.2% 6.3% 5.0% 5.0% 5.2% 4.9%

Nickel Supply 1788 1977 1879 1818 1934 2029 2099 2162 2197% Change 9.5% 10.6% -4.9% -3.2% 6.3% 4.9% 3.5% 3.0% 1.6%(of which NPI) (362) (502) (380) (215) (250) (300) (350) (400) (425)

World Market Balance 136 186 -12 -145 -117 -88 -100 -126 -179World Market Balance 136 186 12 145 117 88 100 126 179

LME/Producer stocks 230 349 337 193 76 -12 -113 -239 -418Weeks' world demand 7.1 9.9 9.1 5.0 1.9 -0.3 -2.6 -5.3 -9.0LME Cash Price (cents/lb) 795 681 726 794 907 998 1089 1179 1270LME C h P i ($/t ) 17527 15002 16001 17500 20000 22000 23999 26000 26151

LME Cash Price ($/tonne) 17527 15002 16001 17500 20000 22000 23999 26000 26151LME Cash Price ($/tonne) - 2013$ 17877 15002 15611 16657 18572 19931 21212 22420 22000

Source: INSG, LME, Macquarie Research, April 2014

Important disclosures:

Recommendation definitions

Macquarie Australia/New Zealand

Volatility index definition*This is calculated from the volatility of historic price

Financial definitions

All "Adjusted" data items have had the following adjustments Macquarie - Australia/New Zealand

Outperform – return > 3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return > 3% below benchmark return

Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

movements.

Very high–highest risk – Stock should be expected to move up or down 60-100% in a year – investors should be aware this stock is highly speculative.

High – stock should be expected to move up or down at l t 40 60% i i t h ld b thi

All Adjusted data items have had the following adjustments made:

Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expenseExcluded: non recurring items, asset revals, property revals, appraisal value uplift preference dividends & minority interests

Macquarie – Asia/Europe

Outperform – expected return >+10%Neutral – expected return from -10% to +10%Underperform – expected <-10%

Macquarie First South - South Africa

Outperform – return > 10% in excess of benchmark return

least 40-60% in a year – investors should be aware this stock could be speculative.

Medium – stock should be expected to move up or down at least 30-40% in a year.

Low–medium – stock should be expected to move up or down at least 25-30% in a year.

appraisal value uplift, preference dividends & minority interests

EPS = adjusted net profit /efpowa*ROA = adjusted ebit / average total assetsROA Banks/Insurance = adjusted net profit /average total assetsROE = adjusted net profit / average shareholders fundsGross cashflow = adjusted net profit + depreciationOutperform – return > 10% in excess of benchmark return

Neutral – return within 10% of benchmark returnUnderperform – return > 10% below benchmark return

Macquarie - Canada

Outperform – return > 5% in excess of benchmark returnNeutral – return within 5% of benchmark returnUnderperform – return > 5% below benchmark return

Low – stock should be expected to move up or down at least 15-25% in a year.

* Applicable to Australian/NZ stocks only

Recommendation – 12 months

Gross cashflow = adjusted net profit + depreciation*equivalent fully paid ordinary weighted average number of shares

All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Underperform – return > 5% below benchmark return

Macquarie - USA

Outperform – return > 5% in excess of benchmark returnNeutral – return within 5% of benchmark returnUnderperform – return > 5% below benchmark return

Recommendation 12 months

Note: Quant recommendations may differ from Fundamental Analyst recommendations

Recommendation proportions – For quarter ending 31 March 2014

AU/NZ Asia RSA USA CA EUR

AU/NZ Asia RSA USA CA EUROutperform 51.32% 60.23% 41.25% 40.21% 58.52% 48.74% (for US coverage by MCUSA, 8.21% of stocks covered are investment banking clients)Neutral 34.54% 24.97% 40.00% 53.19% 35.56% 32.77% (for US coverage by MCUSA, 6.67% of stocks covered are investment banking clients)Underperform 14.14% 14.80% 18.75% 6.60% 5.92% 18.49% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)

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