ubs mining primer

Global Equity Research

Global

Mining & Metals

Sector CommentMining & Steel Primer

January 2005www.ubs.com/investmentresearch

Global Mining and Steel Teams+44-20-7568 4165

UBS Investment Research

From hard rock to heavy metal� Mining and steel again attracting more investor interest

In this revised second version, we expand our Mining Primer to include detailedstudy of the steel industry. The mining and steel sectors are again attracting moreinvestor interest. We have updated our discussion of key recurring themes, suchas cyclical growth, structural supply and demand trends, consolidation, coststructures, the effect of exchange rates, falling exploration success and valuationtrends. We also highlight that China has become a more ambiguous market driverin terms of supply and demand.

� Investors' needsSuccessful investment in these sectors is based on an understanding of keyexploration, development and production processes, commodity markets, and theinteraction between material prices and equities. This report offers a backgroundbriefing on these issues.

� Detailed data on companiesWe review all the major mining and steel stocks, as well as a number of otherimportant companies. A detailed jargon-busting glossary and other usefulinformation, such as the location and ownership of major operations, conversionfactors, and a list of other information sources, should help to clarify investor issues.

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 235UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in makingtheir investment decision.

Mining & Steel Primer 17 January 2005

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How to use this report The intention of this report is to provide newcomers to the mining and metals sector with a comprehensive guide to the industry, its processes, its markets and its participants in a single source. The report is divided into five sections.

■ The first two sections deal with the mining industry�s major drivers, as well as the key indicators that mining investors use to read the sector.

■ In the third section we discuss commodity market trends and identify the main producers, end uses, cost structures and price trends in a standardised fact sheet for each major material.

■ The fourth section explains the process of exploration, mining and metal production.

■ Finally, Sections 5 and 6 provide a standard fact sheet for all major mining and steel companies researched by UBS, and identify the major companies that are unlisted or not currently under our research coverage.

■ We include a comprehensive appendix with a glossary of commonly-used terms, a list of important places and projects in the world of mining and metals, data on the distribution of mineral reserves by region, a short discussion on metals trading, chemical symbols, conversion factors and a list of other useful sources of information.

Investors getting started in the industry should read the Introduction and Sections 1 and 2. Despite representing only just over 3% by capitalisation of the Dow Jones World Index, history suggests that mining and steel stocks, owing to their cyclical nature, can provide returns of 50-100% as markets anticipate recovery. However, such returns are far from being risk-free, and the reader is advised to follow the various stages of production described in Section 4 to understand these risks and to better interpret company announcements.

Controllable factors for companies are production volume and costs. However, the earnings equation is most profoundly affected by the factors that a company does not control, such as prices and exchange rates. There are a multitude of views as to the likely course of commodity prices, including our own (published bi-monthly in Commodity Connections). However, the discussion of price mechanisms and market trends in Section 3 should provide a guide for interpreting the disparate views in the equity market.

Those with strong commodity views may wish to go straight to Section 3 to identify the major producers of their preferred commodity and then move to Sections 5 and 6 to review other attributes of that particular company.

Finally, the industry is well known for confusing the uninitiated with a myriad of terms and exceptions to the rule. We have attempted to clear the fog by providing a glossary of commonly used terms, abbreviations and industry sites. If all else fails, there is a list of UBS mining and steel analysts only too willing to join the dots and answer that question that continually defies logic.

Getting started? Read the Introduction and Sections 1, 2 and 4

Section 3 should help explain commodity price behaviour

If you have strong commodity views, go straight to Section 2 and then onto Sections 5 and 6

The appendix should help to clear the fog of industry jargon


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Contents page

How to use this report 2 Introduction 5 Section 1: Sector drivers and valuation 9

� Consolidation..................................................................................................................12 � Industry structure, costs and pricing power....................................................................15 � Declining reserves..........................................................................................................19 � Cyclicality........................................................................................................................22 � Long-term demand trends and intensity of use ..............................................................23 � Speculative demand a continuing driver ........................................................................26 � Stocking and de-stocking impact cycles.........................................................................27 � The �China effect� and other emerging economies.................................................................29 � Exchange rate effects.....................................................................................................32 � Impact of infrastructure development .............................................................................34 � Valuation trends and methodology.................................................................................35

Section 2: Major indicators 37 � Industrial production (IP) ................................................................................................39 � US ISM Manufacturing Index .........................................................................................40 � Metals prices (MGMI) .....................................................................................................41 � 10-year bond prices........................................................................................................42 � Fed funds rate ................................................................................................................43 � Exchange rates...............................................................................................................44 � Gold price .......................................................................................................................45 � COTR (Commitment of Traders Report) ........................................................................46 � Freight rates ...................................................................................................................47 � Auto, business and metal exchange inventories ............................................................48 � Chinese import/export statistics .....................................................................................49 � Other important indicators ..............................................................................................50

Section 3: Metals and commodities markets 51 � Prices..............................................................................................................................52 � TC/RCs...........................................................................................................................52 � Metal exchanges ............................................................................................................54 � Aluminium.......................................................................................................................57

� Copper............................................................................................................................60

� Nickel..............................................................................................................................62

� Zinc.................................................................................................................................64

� Lead................................................................................................................................66

� Tin...................................................................................................................................68

� Platinum group metals (PGMs) ......................................................................................70

Matt Fernley [email protected]

+44-20-7568 8327

Global Mining and Steel Teams -

44-20-7568 4165


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� Gold ................................................................................................................................74

� Iron ore ...........................................................................................................................77

� Coal ................................................................................................................................80 � Coking coal.....................................................................................................................80 � Steaming coal.................................................................................................................80 � Steel ...............................................................................................................................83

� Stainless steel ................................................................................................................86

� TiO2 (Titanium feedstock) ..............................................................................................88

� Other materials ...............................................................................................................90

� Regional reserves, production and demand...................................................................98 Section 4: Hard rock to heavy metal 103

� How did it get there and how do you get it out? ...........................................................104

� Steel � a major subset of the metals industry ..............................................................125 � Uses of steel.................................................................................................................130 � Stainless steel ..............................................................................................................131

Section 5: Major mining companies 134 � The �Big Three� .............................................................................................................135 � Other companies (alphabetical order) ..........................................................................137 � Companies not covered by UBS ..................................................................................175

Section 6: Major steel companies 179 Appendix 201

� Definitions of common terms........................................................................................202 � Where�s where in mining? ............................................................................................217 � Common abbreviations.................................................................................................220 � Metals trading � an introduction ...................................................................................221 � More sophisticated strategies.......................................................................................225 � Accounting and valuation definitions ............................................................................227 � Key chemical symbols ..................................................................................................229 � Useful conversion factors .............................................................................................230 � Earnings splits for key mining companies (2004E) ......................................................231 � UBS global mining sector stock coverage....................................................................232 � UBS global steel sector stock coverage.......................................................................233 � UBS global mining and steel analysts ..........................................................................233 � Other useful information sources .................................................................................234

Thanks to Rio Tinto plc for supplying some of the photographs on the front cover.


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Introduction The importance of mining to the world should not be underestimated. Materials extracted from the ground are sources not only for the metals used in buildings, cars, aeroplanes and household products, but can also be used for energy, and in the building and chemicals industry.

Table 1: Uses of mined materials

End use Contribution from mining

Automobiles Aluminium and steel used to manufacture frame and body

Copper and zinc used for parts

PGMs used for catalytic converters

Buildings/structures Iron and steel used as a key support material

Cement manufactured from limestone and sandstone extracted from the ground

Glass manufactured from silica and trace materials extracted from the ground

Computers/internet Copper leads used for data transfer

Nickel used for stainless steel parts

Semi-conductor metals used for microchips

Infrastructure/utilities Copper and aluminium wires for electricity supply, telephone, television lines

Metal pipes used for transfer of water, gas, etc

Aggregates and tarmac extracted from the ground

Paper Limestone and china clay used as pigments/fillers

Energy Coal and uranium used to produce energy

Chemicals Metals and minerals used in the manufacture of specialty chemicals

Source: UBS

From an investment perspective, mining and metals companies represent just over 2% of the Dow Jones World Index. In a basic materials context, mining is the second largest sector, with 29% of the sector market capitalisation.

Chart 1: Mining as a percentage of the Dow Jones World Index Chart 2: Mining as a percentage of the DJ Basic Materials Index

DJ World97%

Steel1%

Mining2%

Paper9%

Cement/aggs15%

Steel11%

Mining29%

Chemicals36%

Basic Materials & Building Mats = 6% of DJ World

Source: Thomson Financial Datastream Source: Thomson Financial Datastream

In the past, the mining sector has represented a higher percentage of the market capitalisation of the index, representing over 4% in 1980s. The sector underwent a prolonged period of underperformance in the late-1980s and 1990s, and it is

Mined materials have a myriad of uses

Mining and metals companies represent just over 2% of DJ World

The mining sector used to have a larger weighting, but has lost ground over the past 10 years


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only since late-2001 that it has started to regain some of this lost ground. We believe that the mining sector is of interest because, in our view, there is still further potential for outperformance over the long term.

Chart 3: DS Mining & Metals Index relative to DS World, 1980-2004

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There are several distinct segments to the mining and metals industry, dependent on the different products produced by companies. The chart below shows an indication of the different values of the separate markets that make up the mining industry.

Chart 4: Different market values of major segments in the mining industry, 2004E

05

1015202530354045

Aluminium Alumina Copper Lead Nickel Zinc Iron ore Coking Steaming Gold Platinum Titanium

Smelting Refining Mining Mining Mining Mining Mining* Coal* Coal* Mining Mining Minerals

Aluminium Base metals Bulk materials Precious metals IndustrialsUS$bn

Market value = long-term price forecast x production. *Seaborne trade only. Source: AME, Brook Hunt, WBMS, UBS estimates

Another aspect of the mining and metals industry is that regions where minerals are produced are not necessarily those regions in which they are used. The chart overleaf shows the most important producing regions in the world in terms of market value.


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Chart 5: Market value of commodities produced by major producing regions, 2004E

05

10152025303540

Europe N America Latam S Africa Australia China Asia ex-China Other Aluminium Smelting Alumina Refining Copper Mining Zinc Mining Nickel Mining Lead MiningIron ore Mining* Coking Coal* Steaming Coal* Gold Mining Platinum Mining Titanium Minerals

US$bn

Market value = long-term price forecast x 2002 production. *Seaborne trade only. Europe includes CIS and Europe.

Source: AME, Brook Hunt, WBMS, UBS estimates

The aim of this publication is to help explain to the investor what the different factors are that determine how mining companies work, and the major drivers that affect the performance of their shares.


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Section 1: Sector drivers and valuation


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One of the major complications of the mining and metals sector is the number of drivers that can effect company performance and hence profitability and stock performance. With so many different products available and very few single product (�pure�) producers, it is necessary to generalise some of the input drivers.

In this section we study the key drivers of both earnings and valuation. Generally speaking, with a few noticeable exceptions, these can be split between supply-based drivers and demand-based drivers.

Supply-based drivers ■ Consolidation: the mining sector has seen some of the highest levels of

consolidation within basic materials since the mid-1990s. This has been a driver of valuation over the past few years and it looks set to continue. Consolidation is also ongoing in the steel industry, which is regionally if not globally consolidated.

■ Industry structure, costs and pricing power: continued consolidation has seen the industry structure in many commodities improve and has led to pricing power in some sectors. We examine the key sectors and ask whether this is set to continue.

■ Declining reserves: while consolidation has been a positive for the industry, it has led to a halving of the number of exploration teams. In addition low metal prices have meant that exploration is less attractive and as a result reserves have declined. How much of a problem is this and how long is it likely to be an issue for?

Demand-based drivers ■ Cyclicality: the mining and steel sectors, in common with all basic materials

sectors, are well correlated to the global industrial production cycle, both in terms of earnings and hence in terms of stock performance, although stocks tend to pre-empt it.

■ Long-term demand trends and intensity of use: over the past twenty years as the US economy has dominated, metals prices have been decreasing in real terms. Now with the advent of China�s growth cycle, this could change because of higher intensity of use trends.

■ Speculative demand: as commodities prices have increased in the current (2003-04) cycle, speculative activity has increased. With the expectation that materials usage is rising, there has been growing speculative interest in both commodities and stocks.

■ Stocking and de-stocking impacts: many investors underestimate the impact of stocking and de-stocking cycles on industry demand outcomes. Often demand trends at the beginning or end of a cycle can be intensified by these effects.


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Supply and demand-based drivers ■ The China effect and other emerging economies: China�s significant

growth over the past few years has caught many in the industry by surprise, and increasingly China is a differentiator of which segments are attractive. However, this is a two edged sword; China�s demand is positive but in some areas it is an oversupplier. Could other emerging economies like India, Russia and Latin America have the same impact?

■ The impact of exchange rates: metals prices and metals stock performance are strongly correlated to exchange rates and particularly to the US dollar. This is primarily because over 70% of materials production comes from outside US dollar denominated regions. As the dollar strengthens/weakens it alters the production economics of suppliers and consumers.

■ Infrastructure � transport and energy: over recent years infrastructure development has been neglected, not only by the major western countries, but also by emerging regions like China and India. The US, Chinese, Brazilian and Indian governments have all identified significant infrastructure bottlenecks and are moving to address them. Some of these will stimulate materials consumption, others will help facilitate materials industry development.

Valuation methodology DCF and earnings-based multiples are some of the major valuation measures used in the sector. However, when should each of these multiples be used? They may be more useful at different points in the cycle.


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Consolidation The mining sector has seen some of the most consolidation among the basic materials sectors in recent years. Not only have companies consolidated, but they have also focused their operations, disposing of non-core assets. For example, Anglo American has shed its industrial and financial services operations, and Rio Tinto and BHP Billiton have also shed non-core activities.

The mining industry has consolidated throughout its history but has actively consolidated since the mid-1990s. The first move was the merger of the UK�s RTZ and Australia�s CRA to form the largest mining company in the world, later to be known as Rio Tinto. Anglo American restructured throughout the 1990s, and the formation of BHP Billiton by the merger of BHP and Billiton in 2001 capped off five years of active consolidation. The table overleaf shows some of the major deals that have taken place in the mining industry since 1999.

Chart 6: M&A in Basic Materials sectors and as a percentage of market capitalisation

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Paper Chemicals Mining Steel Cement0%

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60%

80%

100%

M&A Market Cap

US$bn % of Market capitalisation

Source: UBS estimates

This consolidation has led to the formation of market leaders. The �Big Three� � Anglo American, BHP Billiton and Rio Tinto � moved ahead of the rest in terms of market capitalisation, production capacity and reserves. In 2004 BHP, with its oil division, has outperformed the other majors, and producers like Alcoa and CVRD have caught up. There is now a clear three division structure separating the �Majors�, the �Up and Comings� and the others.

Chart 7: Largest 30 companies (by market capitalisation) in the mining sector, 2004E

BHP Billiton

Rio Tinto

Anglo American

CVRD

Alcoa

Newmont

Alcan

Barrick Gold

XstrataNorilsk Nickel

Phelps Dodge

Placer Dome

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Source: Company data, UBS estimates

Mining has seen a significant amount of restructuring and consolidation

RTZ and CRA and Anglo American led the way

The �Big Three� are market leaders


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Table 2: Major deals in the mining sector, 1999-2004

Bidder Target Commodity Size (US$bn) Anglo consortium De Beers Diamonds 16.0BHP Billiton Diversified 12.0 Alcan Pechiney Aluminium 4.6 Alcoa Reynolds Aluminium 4.5 Alcan Algroup Aluminium 3.0 Alcoa Cordant Aluminium 3.0 Norsk Hydro VAW assets Aluminium 2.8 Newmont Franco Nevada Gold 2.8 Xstrata Glencore coal Coal 2.6 Barrick Homestake Gold 2.3 Newmont Normandy Gold 2.3 Newmont Normandy Gold 2.2 Xstrata MIM Holdings Base Metals 2.1 Rio Tinto North Iron Ore 2.0 Anglo American Disputada et al Diversifieds 2.0 Kinross Echo Bay/TVX Gold Gold 2.0 Anglo American Tarmac Industrial 1.9 Public IPO CVRD 31% Diversifieds 1.9 Phelps Dodge Cyprus Amax Copper 1.8 Grupo Mexico Asarco Copper 1.7 CVRD Caemi/Ferteco Iron ore 1.5 Billiton Alcoa's Worsley Alumina 1.5 Franco Nevada Euro Nevada Gold 1.2 Billiton Rio Algom Copper et al 1.2 Driefontein Gold Fields (SA) Gold 1.1 Placer Dome AurionGold Gold 1.0 De Beers Winspear, Venetia Diamonds 0.9 Anglo American Shell Coal Coal 0.9 Rio Tinto Comalco Aluminium 0.8 Alcoa Chalco interest/IPO Alumina 0.6 AngloGold Geita, Acacia Gold 0.6 Anglo, Billiton etc, Exxon Columbian assets Coal 0.6 Rio Tinto Peabody Coal Coal 0.6 CVRD Samitri Iron Ore 0.5 Barrick Sutton Resources Gold 0.5 Xstrata Asturiana Zinc 0.5 BHP/Mitsubishi QCT Coal 0.5 BHP Diamet Diamonds 0.4 Rio Tinto Ashton Diamonds 0.4 Delta Goldfields Gold 0.3 Rio Tinto Lemington Coal 0.3 Norilsk Nickel Stillwater Mining Platinum 0.3 Goldfields WMC Gold Gold 0.2 Total 89.8



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Figure 1: Major mergers, acquisitions and divestments among the �Big Three�, 1990-2004

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Anglo American

Minorco takes non-African assets; Anglo takes African

assets

Sells interests in JCI & Johnnic in restructuring deal

Combines Pt assets in Amplats

Anglo & Minorco recombine and list in London

Unbundles SAB holding

Buys Shell�s Aus. coal holdings

Restructures eliminating De Beers crossholding

Buys Disputada copper deposit

Buys 20% of Kumba

JV with Billiton & Glencore in Columbian coal

Buys 23% of Anaconda Nickel

Buys mins in Amcoal and Amic

Acquires 50% of Gencore�sColumbian coal assets

BHP Billiton

BHP Gold merges with Newmont Aus. to form

Newcrest

Buys La Granjadeposit, Rio Algom and

56% in Worsley

Gencor buys Shell�s mining interests to form

Ingwe

Acquires minorities of QNI and Ingwe

Gencor restructured;Billiton takes base

metal and coal assets

Buys remaining 56% of Alusaf; Buys Coal

Mines of Aus.

BHP and Billiton merge to form

BHP BILLITON

De-merger of BHP Steel

Spins outOneSteel

Sells BHP Hawaii

Acquires Magma, merges assets to form

BHP Copper

Acquires Tintayacopper mine, Peru

Sells holding in Newcrest

Acquires further 50% in NZ Steel

Acquires Supracote; renames it BHP

Coated Steel

Increases to 52% holding in CQCA

Sells stakes in Alumbrera and Highland Valley Copper

BHP Billiton

BHP Gold merges with Newmont Aus. to form

Newcrest

Buys La Granjadeposit, Rio Algom and

56% in Worsley

Gencor buys Shell�s mining interests to form

Ingwe

Acquires minorities of QNI and Ingwe

Gencor restructured;Billiton takes base

metal and coal assets

Buys remaining 56% of Alusaf; Buys Coal

Mines of Aus.

BHP and Billiton merge to form

BHP BILLITON

De-merger of BHP Steel

Spins outOneSteel

Sells BHP Hawaii

Acquires Magma, merges assets to form

BHP Copper

Acquires Tintayacopper mine, Peru

Sells holding in Newcrest

Acquires further 50% in NZ Steel

Acquires Supracote; renames it BHP

Coated Steel

Increases to 52% holding in CQCA

Sells stakes in Alumbrera and Highland Valley Copper Acquires further 47% of Kumba

RTZ CRA

Sells 52% stake in Rio Algom

Acquisition of 37% of Coal & Allied

Sells RTZ Pillar Increased holding in Coal & Allied to 71%

Buys minority holding in Freeport; takes 40%

interest in Grasberg

Sale of remaining 10% interest in Pasmino

RTZ and CRA merge to formRTZ-CRA (latterly Rio Tinto)

Acquisition of Caballo Rojo and Fort Union coal mines

Buys Jacobs Ranch coal mine

Buys additional 2% of Comalco;

Buys outstanding Comalco shares

Buys Peabody Aus. coal assets, Ashton Mining

Acquires Nerco & Cordero coal ops in US

Buys additional 3% of Comalco

80% of Kestrel coal mine

Acquisition of North

Sells North Forest Prods

Disposes of a variety of non-core assets

RTZ CRA


















RTZ CRA


















Disposes of a variety of non-core assets

Source: Company data, UBS estimates. *Excluding acquisitions outside the mining sector.


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The second division of companies represent some of the market leaders in their own fields, for instance Angloplats the largest platinum player, Norilsk Nickel the largest producer of nickel and palladium, and Barrick and Newmont, some of the largest gold producers. Xstrata is growing rapidly by acquisition, acquiring MIM in 2003 and currently (2004) bidding for WMC Resources. Following its acquisition of Pechiney, Alcan has returned to the pinnacle of the world�s aluminium industry.

The Big Three prefer a diversified portfolio. The attraction of having a diversified portfolio is that while one commodity is not doing well, others may be performing strongly and can keep profits up. An example would be that in 2001-02, Anglo American�s base metal division was not performing as planned, good performance from its coal, PGM and paper holdings kept its profit up. In 2003-04, paper was not doing so well, but base metals were strong. If a company is only exposed to one commodity, then its earnings are likely to be that much more volatile.

The extensive consolidation of the past five years has given the producers something else, which has changed the structure of the industry for the better, namely pricing power.

Industry structure, costs and pricing power The significant consolidation that the Mining industry has undergone has resulted in a very different industry structure to that which was in place 10 years ago. As a result, producers in many segments now have more pricing power.

Chart 8: Market share of top ten producers in 1995 and 2003

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AluminaAluminium Minedcopper

Minednickel

Refinednickel

Minedzinc

Refinedzinc

Cokingcoal

(exports)

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(exports)

Gold Steel

1995 2003

Source: AME, Brook Hunt, Company data, CRU, IISI, UBS estimates

In the early-1990s, the industry was fragmented, but by 2003 the top ten producers represented over 50% of production in most segments of the industry. Only zinc, thermal coal, gold and steel stand out as relatively unconsolidated, and steel is well consolidated on a regional basis in the major producing regions.

The increased level of consolidation has resulted in improved profitability for many sectors, although the impact of other factors, such as cyclicality and oversupply is also important. Chart 9 illustrates these trends.

Asset and geographical diversification has been important in keeping profits less volatile

Pricing power key in many segments

Increased consolidation has helped profitability


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Chart 9: EBIT margin versus market shares for key segments in 1995 and 2003

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Higher returns have been made possible by the consolidation of the industry, which has meant that the larger producers have been able to show discipline. These producers have been able to better control supply of concentrate and metal to the industry, helping to control prices.

To do this a miner might �low grade� a deposit (ie, mine areas that are of a lower grade than elsewhere, resulting in less concentrate being produced). Metal producers may decide to take downtime at smelters and refineries, or stockpile metal out of the market to avoid flooding the market and causing prices to fall.

In the run up to the 2003-04 cycle, we saw this behaviour in the copper industry, where both BHP Billiton and Codelco built up stockpiles of material, and in the steel industry. The steel industry has not been well known for its supply discipline in past cycles, having been responsible for overproducing and contributing to some deep troughs in the past, but early in this cycle we saw the Japanese steel producers rationalising capacity and matching supply with demand. Before the merger of Usinor, Arbed and Aceralia in 2001 to form Arcelor, and Kawasaki Steel and NKK in 2002 to form JFE Holdings, these industries were considerably less consolidated.

Pricing power is made possible by two tactics: supply discipline in a downturn and supply management. This is the rationalisation of supply whereby companies will close less profitable operations in order to focus on more profitable ones. Often the effect of this can be twofold: in the long term, it is improving the profitability of the company, but in the short term, capacity rationalisation announcements are often greeted with good share price performance for that company and often for its peers.

Examples of this have come in a variety of industries. For instance, Alcoa has shut many of its less profitable aluminium smelters in the US Pacific northwest (PNW) because of the high cost of power and labour, which made them unprofitable. When JFE Holdings announced that it would further rationalise its steel capacity in 2003, it and its peer Nippon Steel, outperformed on the TSE for several days.

Discipline by larger producers has helped prices

Copper and steel are two segments showing nascent supply discipline

Longer-term supply management is also important

Rationalisation announcements can often result in strong stock performance


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In the longer term, these tactics are more profitable as well, moving companies down the cost curve. The chart below examines the improving profitability of the copper sector, as the consolidation of the industry increases.

Chart 10: Market share of top 10 copper producers versus average EBIT margin, 1990-2003

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Source: AME, Brook Hunt, CRU MICA, UBS estimates

Of course, cost structures also have a major impact on prices and supply. The impact of exchange rates is widely felt on industry operating costs and we will cover that in a separate section, however, there are also other major components of costs, of which transport and infrastructure are important factors, and the greater consolidation of the industry, with the possibility of establishing economies of scale, have been important.

Table 3: Comparison of cost structures for different commodities, 2004

Percentage of cash cost Copper Mining

Lead Mining

Zinc Mining Nickel Gold Iron ore*

Thermal Coal*

Hard Coking Coal*

Mining 50% 28% 44% 32% 73% Mining 24% 17% 21%

Processing 44% 16% 26% 61% 58% Processing 38% 43% 43%

Other (incl. transport) 40% 66% 64% -12% 1% Transport 32% 35% 29%

By-product credits -36% -10% -34% 19% -32% Other (incl. Royalties) 6% 5% 7%

Copper SX-EW Zinc

SX-EW

Mining 39% 14%

Leaching & SX-EW 61% 86%

Copper refining Zinc

smelting Alumina refining

Aluminium smelting

Steel

Raw materials & maintenance 25% 22% 36% 56% 56%

Labour 32% 27% 12% 8% 22%

Energy 27% 41% 31% 26% 16%

Other 16% 10% 19% 10% 6%

Source: AME, Brook Hunt, UBS estimates. *Bulk materials are quoted FOB, ie ocean transport costs are extra.

Cost structures vary for different commodities and also for different regions. For instance, for bulk commodities such as iron ore and coal, transport is much more important as a cost than it is for lower volume commodities such as copper and high value commodities such as gold and platinum.


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Unfortunately Table 3 only shows FOB costs for bulk materials (ie the cost that the producer endures), but the consumer incurs additional costs, of which freight is a major constituent (demurrage charges and insurance are other constituents). Chart 11 and Chart 12 show average prices for iron ore and thermal coal as well as freight costs. It is particularly notable for iron ore that from mid-2003, iron ore consumers in Asia (that were importing from Brazil) were paying more for the freight constituent of their iron ore cost than for one tonne of iron ore!

Chart 11: Iron ore FOB costs and freight costs, 2000-04 Chart 12: Thermal coal FOB costs and freight costs, 2000-04

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Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Iron ore FOB Brazil-Japan Capesize freight

US$/tonne

0102030405060708090

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Jan-

02

Jul-0

2

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03

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4

SA Thermal coal FOB (spot) SA-Europe Capesize freight

US$/tonne

Source: Clarksons, UBS estimates Source: Clarksons, GlobalCoal, McCloskey, UBS estimates

Mining is obviously also a major cost. In Table 3 the term �Mining� covers a multitude of costs; the physical cost of digging the material out of the pit or mine, the cost of haulage, as well as the labour costs associated with this. The processing component also consists of a number of different areas. In copper and zinc mining, this includes milling and flotation, in nickel, this includes refining and smelting, in iron ore it includes palletising and in coal it includes washing and screening the material.

One important recurring component that we see as being a major under-appreciated cost in coming years is labour. Over recent years when low materials prices have been the norm, labour cost growth has not been an important issue for miners, but now as metals prices rise, labour disputes are again becoming common. In the past year (2004) we have seen a number of major labour disputes at mining operations that have seen up to 10% per annum wage increases agreed. As materials prices continue to remain strong, we expect wage costs to continue their increase.

Energy is another major cost associated with the mining and metals industry. While mining per se is not necessarily particularly energy intensive, many smelting industries are. The most well known energy-guzzlers are the aluminium and zinc smelting industries. Table 3 slightly misrepresents the issue for the aluminium industry since most aluminium smelters are built in regions where there is cheap, abundant electricity, so the energy cost seems to be a lower percentage of overall cash costs than expected. However, the aluminium industry is the most power intensive of all smelting industries; in China in 2002 the aluminium industry consumed 4% of national power (zinc was less than 0.4%).

Freight is a major constituent of bulk material costs

Mining and processing cover a number of different costs

Labour costs are likely to be a major issue over the next few years

Smelting industries are particularly energy intensive


UBS 19

With the difficult metal price environment of the 1990s and the corporate focus on returns and profitability in the late-1990s, cost control has been a major ongoing theme for the industry. As we have already stated, we believe that labour costs are likely to increase over the next few years, and in addition, the under-investment in infrastructure development by many countries over the past 10-15 years looks set to lead to higher power and transport costs as well. In our view, cost appreciation is likely to be a recurring theme for the industry in the next few years and as a result of this, industry consolidation, with the associated development of cost synergies, is likely to remain attractive.

One often-used method to compare mining projects, and often companies, is looking at a cost curve. This is a chart that graphically depicts the magnitude of the production at a particular company or project along the x-axis, with the company/project�s cost of production on the y-axis. The costs may often be split into categories: C1 refers to cash costs, ie labour, energy, mining, processing; C2 costs include the above and depreciation; C3 costs include C2 plus indirect costs and interest. C3 is the total cost of production, but C1 is the most commonly compared. Chart 13 shows a typical industry cost curve.

Chart 13: Copper mine cost curve*, 2003

Hin

dust

an C

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Cumulativ e Production (kt)

US $

/t

Source: Brook Hunt. *Freeport costs negative because of by-product credits.

Declining reserves Consolidation has not been the only cause of the drop in the success of mining exploration; 20 plus years of low metal prices, environmental legislation in some countries, and high risks for mining companies in others have all affected the efficiency of exploration efforts over the past ten years.

Cost pressures to be an ongoing theme

Cost curves used to compare profitability

Exploration efficiency has suffered in the past 10 years


UBS 20

Chart 14: Discovery rates for exploration* and annual exploration expenditure, 1980-2004

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Too little too late?

No. of discov eries US$m

Source: BHP Billiton, Metals Economics Group, UBS estimates. *Includes non-ferrous metals and precious metals exploration.

The point to take away from Chart 14 is that not only did exploration expenditure more than halve between 1997 and 2002, but that the number of major deposit discoveries has substantially dropped off since the late-1980s and early-1990s. While part of the success of the 1980s was the opening up of Latin America, other important reasons for the fall in success rates were:

■ Declining metals prices in real terms over a 30-year period, which meant that companies were no longer desperate to expand organically.

■ The advent of environmental legislation raising the prospect of legacy liabilities in traditional mining areas, such as the United States, which would lead to costs beyond the life of the mine.

■ Land ownership issues, particularly with aboriginal races in countries like Australia and Canada.

■ High geopolitical risks in areas such as Eastern Europe, Africa and Russia.

■ With the downturn in the mining industry over the past 20-30 years, the number of graduates joining the industry has fallen. As a result the �brain drain� is a key issue, with a lack of skilled labour affecting not only the exploration, but also the production side of the business.

This failure to discover new world-class operations has, unfortunately for metals consumers, come at a time when China�s consumption growth of materials has coincided with a recovering world industrial production profile. This has contributed to a significant increase in materials prices in the short term (2003-04), but is also likely to continue to keep materials prices high.

Due to the fact that it can take anywhere between four and ten years to build a new mining operation (after discovery), it is unlikely that the industry will be able to bring into operation replacements for the world�s current major operations, such as Grasberg, Escondida, Broken Hill, until 2015 at the earliest.

The number of major discoveries dropped off rapidly in the 1990s

Coupled with China�s growth as a consumer, this is a major driver

Industry unlikely to bring on any new world-scale operations before 2015


UBS 21

In addition, because of the nature and occurrence of many of these deposits, miners are having to cope with declining grades. Over the past five years, copper grades, for example, have been declining at some 1.5% per annum. The reason for this is that open pit copper mines are designed to maximise the NPV, and 85% of copper is open pit mined. This is illustrated in Figure 2.

Figure 2: Stripping ratio gets higher as life extends

Orebody

Initial pit � no stripping Initial pit � no stripping

Intermediate pit � stripping ratio now 1.5 to 1 Intermediate pit � very little stripping

Final pit � life of mine stripping ratio 3 to 1 Final pit � life of mine stripping ratio 1.5 to 1


Our view is that this is just one more driver that is likely to lead to metals prices staying at a higher level for longer. A pre-cursor for this type of behaviour can be found in the freight market.

Chart 15 shows the percentage of the bulk freight fleet laid up in ports for the period 1970 to 2003, compared to freight rates. The percentage layup is similar to the number of deposits discovered (ie the slack in supply in the system); freight rates could be seen as a proxy for metals prices. As the fleet layup percentage fell away in the early-1980s, freight rates re-rated and stayed at a significantly higher average level for the next 10-15 years until the significant emergence of the �China effect� in mid-2003, which led to a further re-rating. We believe that this is a possible model for the behaviour of metals prices over the next 10-15 years.

Chart 15: Bulk fleet layup versus freight rates, 1970-2003

0%

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6%

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12%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

0

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10000

15000

20000

25000% bulk fleet in layup LHS Panamax 1y r TC US$/day RHS

Source: Clarksons

Declining grades also an issue

Freight market an interesting pre-cursor of the metals market


UBS 22

Cyclicality The mining sector, in line with all the basic materials sectors, is a cyclical sector. This means that it rises and falls in line with the peaks and troughs of the global industrial production cycle.

Because of their different uses, materials have different cyclical behaviours. For instance, gold is generally an early-cycle material. Cycles for different materials may be of different lengths; for example, steel cycles have been shortening in recent years. Cycles are driven by different variables, mainly demand, which is amplified by supply issues to varying degrees. Restocking drives the amplitude of a cycle.

Chart 16: Gold price and MGMI cycles, 1989-2004

250

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140160

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280Gold US$/oz LHS MGMI US$ RHS

1986-87: Gold price moves before MGMI

1993-94 and 2003-04: Gold price pre-empts

MGMI again

Source: Thomson Financial Datastream, UBS

Early cycle materials include nickel, aluminium and copper. Steel is more of a mid-cycle material and bulk materials, like coal and iron ore, are generally considered to be later cycle, with zinc seen as the most late-cycle base metal.

Chart 17: Steel pricing cycles, 1985-2004 (German HRC price, �/tonne)

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03

Cycle 1:1987-1992

Cycle 5:2002-present

Cycle 4:1999-2001Cycle 3:

1996-98

Cycle 2:1992-96

EUR/tonne

Source: MEPS

Valuation and share price performance are related to the cyclicality of sectors, since investors have clear ideas about when is the best time to start buying certain sectors. For instance, the perceived wisdom is that the best time to buy

Materials may peak at different times in the cycle and their cycles may last for different amounts of time

Valuation trends are related to the cyclicality of sectors


UBS 23

the steel sector is as pricing nears trough levels, and the best time to sell is when pricing nears its peak.

Chart 18: Steel pricing cycles and share price performance, 1985-2004

200

250

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350EU HRC price EUR/tonne LHS EU Steel abs. perf. RHS

Source: MEPS, Thomson Financial Datastream

Long-term demand trends and intensity of use One of the reasons for the past 20- 30-year downcycle in the mining industry has been the decline of metals prices in real terms. This is directly related to the declining intensity of use of materials.

We define intensity of use as the materials consumed per unit of GDP. The reason for the decline in intensity of use has been:

(1) The dominance of the US economy in the late-1980s and 1990s.

(2) The move by the US and developed European economies into a post-industrial society where services dominates manufacturing and industry as a contributor to GDP.

Chart 19: US steel consumption versus GDP, 1900-2003

0.00.10.20.30.40.50.60.70.80.91.0

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000GDP per capita US$

Finish

ed st

eel c

onsu

mptio

n/cap

ita t

1900-1940 1941-2002

Drop in intensity of use as Serv ices starts to dominate

Initial rapid increase in intensity of use

Source: US Census Bureau, USGS, UBS estimates

Declining real metals prices have caused 20 years of underperformance


UBS 24

This can be illustrated using Chart 19 that shows US steel demand trends from 1900 to 2003. In the early stages of development, materials consumption per capita increases extremely rapidly for a relatively small increase in GDP per capita, whereas later in a country�s development this slows, and, in the US�s case, as it moves to a services-dominated economy in the 1970s/80s, intensity of use starts to fall off. In Chart 20 this is illustrated more clearly.

Chart 20: Steel consumption per capita for the US and Japan versus the World, 1910-2003

0.000

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0.040

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1910

1920

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2000

0.0000.1000.2000.3000.4000.5000.6000.7000.8000.900

World (LHS) US (RHS) Japan (RHS)

Rapid growth

Rapid growth

USconsumption slows

Source: IISI, Japan Iron & Steel Institute, US Census Bureau, USGS, World Bank, UBS estimates

We will discuss China and its significant consumption growth in a later section of this chapter, but we have forecast China�s materials consumption growth over the long term using the growth trends we have seen in the other Asian �Tiger� economies and also development trends from the US and Japanese experience. Using these estimates, we have been able to calculate forecast world demand, and hence intensity of use, trends for the next 10-15 years.

The relationship between changing intensity of use and materials prices in real terms is close. Chart 21 shows this relationship between change in intensity of use of four major materials; aluminium, cement, copper and steel, and real metal prices.

Chart 21: Intensity of use versus metal prices, 1930-2025E

-6%

-4%

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2%

4%

6%

8%

1930

1935

1940

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E

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2015

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2020

E

30

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Chg in intensity of use LHS Real metal prices index ed to 1930 RHS

1950-65: golden era of materials demand, prices rise in real terms

1975-2000: dominance of w estern economies shifting to serv ices, prices fall consistently in real terms

2001-15E: China's urbanisation and industrialisation. Prices to rise in real terms?

2015-30E: India, Brazil, Indonesia to follow ? Not included in our numbers...

Source: AME, Brook Hunt, CEMBUREAU, IISI, United Nations, US Census Bureau, USGS, World Bank, UBS estimates

Over the past 20 years intensity of use has dropped in line with the US economy�s dominance

We can forecast demand trends using recent economic history

Clear relationship between change in intensity of use and real prices


UBS 25

For a single commodity, there is an even closer relationship, as illustrated in Chart 22.

Chart 22: Copper intensity of use versus real prices, 1950-2010E

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er pr

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98 U

S$/t

Copper int. of use LHS Copper price (5YMA) 98 US$/t RHS

Source: AME, Brook Hunt, United Nations, US Census Bureau, USGS, UBS estimates

The major takeaway from this analysis is that even though intensity of use has been declining over the past 30 years, it looks likely that, with the advent of China as a major consumer of materials, over the next 10-15 years the long term trend for intensity of use will reverse. If this is the case then we would expect to see a reversal of the long term trend of declining materials prices in real terms, as illustrated in Chart 21. This would have a significant impact on long term material price forecasts and hence on valuation, particularly in the context of DCF valuation methodology.

When analysing the impact of these types of trends it is also important to note that the different applications of materials are likely to differentiate their relative levels of consumption. This is particularly relevant to stock analysis and comparison. For instance, aluminium may be used in the manufacture of autos, in aerospace, in electrical machinery and equipment. However, these sectors are all likely to be affected by a downturn in industrial production. Aluminium may also be used in the building, power and packaging industries, which are less likely to be affected and therefore are deemed more defensive in a downturn. Companies with more exposure to these defensive sectors, such as Alcan, are therefore likely to be less affected by an IP slowdown than companies with higher exposure to Aerospace and Defense, such as Alcoa.

As a rule, consumer applications as a whole tend to be more defensive than industrial applications during a downturn. The splits by end use for many common materials are shown in Table 4. Table 4 shows global average percentages of end use, however, there are clear regional variations according to the level of the development of the particular economies, and this comes back to the issue of higher growth of intensity of use in developing economies. It is illustrated by comparing US and Indian end uses of aluminium in Chart 23 and Chart 24.

Could see a reversal of long-term declining materials price trend

Different applications of materials relevant to valuations

Consumer applications generally more defensive


UBS 26

Table 4: Summary of average end uses for common materials

Industrial applications Consumer applications

Material Building/ construct�n Transport Electrical

Machinery & equip�t Alloys* Chemicals Others Packaging Jewellery Investment Other

Aluminium 18% 31% 9% 9% 16% 17%

Copper 6% 61% 20% 13%

Gold 12% 78% 8% 2%

Lead 75% 3% 10% 12%

Nickel 92% 8%

Palladium 60% 14% 5% 2% 5% 14%

Platinum 36% 6% 4% 13% 40% 1%

Steel 45% 25% 10% 20%

Tin 34% 26% 24% 16%

Zinc 57% 23% 10% 10%

Source: AME, Brook Hunt, Company data, UBS estimates. *Including plating.

Chart 23: US end uses of aluminium, 2002 Chart 24: Indian end uses of aluminium, 2002

Construction15%

Electrical8%

Packaging24%

Consumer goods

7%

Transport36%

Machinery7%

Other3%

Construction7%

Pow er & Electrical

36%

Packaging12%

Consumer products

12%

Transport22%

Other11%

Source: Brook Hunt, UBS estimates Source: AME, UBS estimates

Speculative demand a continuing driver Speculators are generally of quite some importance to metals price moves during a cycle. Because most metals are exchange traded and have exchange traded futures, speculative trading is a major factor of metals price cycles. There is a full discussion of metals price management in the Appendix and an introduction to the major metals exchanges at the beginning of the third section.

Copper, nickel and gold are generally seen as the markets where the speculators hold the most sway. In copper and gold they have the highest percentage of the market, and the global nickel market is so small anyway that even small positions add to volatility.

Analysts tend to monitor speculative positions on COMEX and NYMEX where releases are produced weekly for traded metals and oil. It is possible to calculate LME net speculative positions from data released by the exchange, but the information released by the US exchanges is easier to interpret and is generally used as an indicator. The Commitment of Traders Report (COTR) is widely followed for gold, platinum, palladium and copper.

Speculative trading a major factor of metals price cycles

COTR is a widely followed indicator of speculative positions


UBS 27

Often speculative moves can have a major impact on the market, particularly at points where the net short or long position hits record levels, stimulating an overcorrection. Some of these points of inflection are shown for copper in Chart 25. An example of this occurred in the weeks of 12-19 October 2004 when gross long positions fell by 352Kt and the net long position fell by 207Kt to 247Kt and the copper price fell by 9%. This stimulated a significant sell off in copper equities.

Chart 25: COTR for copper and copper price, 2000-04

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Net Speculative Open Interest (LHS) Copper Price, 3M LME (RHS)

Source: COMEX

Another area where the speculators are important is as a leading indicator for cyclical recovery. Often towards the end of a cycle, speculators will bet on a recovery cycle, adding to net long positions in both equities and commodities. In the current 2003-04 cycle, we believe that speculators were responsible for the first leg of performance in commodities and equities, before fundamental demand returned to support and raise commodity prices further.

Chart 26: Mining equity performance in four reflationary cycles Chart 27: MG base metal prices in four reflationary cycles

100120140160180200220240260

Q0 Q1 Q2 Q3 Q4 Q5 Q6 Q7

index

Q0=

100

1993-1995 2003-2004 1986-1987 1979-81

First leg: speculators

Second leg:Fundamental

demandRetracement

ev ent

100120140160180200220240260

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First leg: speculators

Second leg: Fundamental

demandRetracement

ev ent

Source: Thomson Financial Datastream, UBS estimates Source: Thomson Financial Datastream, UBS estimates

Stocking and de-stocking impact cycles Many investors underestimate the impact of re- and de-stocking on demand cycles, but it is an extremely important contributor, magnifying both the positive effects of an upcycle and the negative effects of a downcycle.

Speculative moves can have a major impact on metals and stock pricing

Speculators can be a leading indicator for cyclical recovery

Stocking and de-stocking impacts are often under-estimated by the market


UBS 28

The period 2000-02 saw a strong de-stocking event in US and OECD business inventories. The advent of Just-in-Time inventories and the availability of raw materials saw the need for large inventories to fall away and materials demand growth in the developed world stagnated as a result. However, the onset of China�s large growth event and the simultaneous recovery in the US, Europe and Asia over the past two years has seen a strong re-stocking event as metals users realised that suddenly availability of raw materials was not so certain.

Chart 28: US business and auto inventories, 1993-November 2004

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US auto inventories US$bn (RHS)

De-stockingRe-stocking


The re-stocking of business inventories has been strongly correlated with the de-stocking of LME metal inventories and illustrates the important impact that inventory restocking can have on a cycle.

Chart 29: LME base metals inventories versus US business inventories, 1993-2004

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LME stocks y/y % (RHS)


However, the impacts of business inventory changes are not always so positive, and often they can exacerbate the effects of a downturn as well as an upturn. Chart 30 illustrates the amplified effects on copper demand in a normal cycle.

Business inventory re-stocking closely correlated with exchange inventory de-stocking


UBS 29

Chart 30: The impact of re- and de-stocking on demand for copper, 1992-2006E

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Source: AME, Brook Hunt, UBS estimates

The �China effect� and other emerging economies China�s demand story has dominated materials markets over the past five years. CAGRs for many materials have been in high double figures and while the rest of the world�s materials demand lagged, China has always been there in the past five years to buoy global demand growth.

Chart 31: China�s percentage of world growth for basic materials, 2003

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Source: AME, BP, Brook Hunt, CMAI, GFMS, Hawkins Wright, RISI, UBS estimates

However, it is not just China�s demand that has been relevant. It is also supply. Particularly in areas involving processing, China is also a major supplier. It has been a net exporter of zinc and aluminium, and even though it is now likely a net importer of zinc, it has started exporting significant amounts of steel in 2004. As a result of this significant processing expansion, it has become an extremely large importer of raw materials such as iron ore and copper concentrate.

China�s demand a key aspect of world materials markets

China�s impact as a producer is often underestimated


UBS 30

Chart 32: China�s growth as a supplier of metals, 1990-2005E Chart 33: China�s growth as a consumer of metals, 1990-2005E

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2005E China's % of w orld demand

Source: AME, Brook Hunt, CRU, GFMS, IISI, UBS estimates Source: AME, Brook Hunt, CRU, GFMS, IISI, UBS estimates

In our view, this area is likely to grow as an issue in coming years as China�s processing expansion continues to demand higher imports of raw materials. The only constraints on this are likely to be infrastructure (particularly with iron ore as port infrastructure is still creaky) and prices; if prices rise too far it will be difficult for producers to afford raw materials.

Chart 34: China�s materials output growth (indexed to 1995), 1995-2006E

100150200250300350400450500550

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004E 2005E 2006E

Raw materials Processed materials Metals refining

Difference between processed and raw

material capacity i t t

Raw materials: alumina, copper, nickel, zinc, iron ore, gold,pulp, cement, crude oilProcessed materials: aluminium, steel, ethy lene, PE, PS, PP, PVC, containerboard, P&W paperMetals refining: copper, nickel, zinc

Source: AME, BP, Brook Hunt, CEMBUREAU, CMAI, CRU, GFMS, Hawkins Wright, IISI, RISI, UBS estimates

While China�s demand was extremely important in 2000-03 because of low demand growth elsewhere, it has become less so in 2004 with recovering industrial production in the rest of the world and a slowing China. Consequently some of the relationships between Chinese net import (export) levels and prices have broken down, although some are still strong.

Chart 35 and Chart 36 show the relationship between aluminium net imports to China and prices, and between iron ore imports and freight prices. While the relationship between aluminium prices and imports has broken down as demand recovers in the US and elsewhere, iron ore imports are still an important contributor to freight rates.

China�s processing expansion a key issue

China�s slowing in 2004 offset by recovery elsewhere, but will that always be the case?


UBS 31

Chart 35: Chinese aluminium net imports and prices, 1997-2004 Chart 36: Chinese iron ore imports and Baltic Freight Index

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1800

1900Aluminium price

3MMA Net imports

US$/t Kt

Good relationship betw een prices and imports

Relationship breaks dow n

406080

100120140160180200220240

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Baltic Freight index

Iron ore imports Mt

Source: Chinese Customs Statistics, Thomson Financial Datastream Source: Chinese Customs Statistics, Thomson Financial Datastream

Will a slowing China hurt the mining and steel industries? We believe that for the answer to this question, the investor must look to Chart 34. We expect that materials where China can overproduce are more at risk from those areas where China does not have adequate reserves, such as copper concentrate, iron ore and hard coking coal. In processed materials such as aluminium and lower value added steel products, we expect further pain in the medium term.

Over the long term, we expect China�s materials consumption to continue to grow at double-digit rates. The reason for this is what we see as the primary driver of materials consumption at a certain stage in development, urbanisation.

If we examine urbanisation trends in other developing economies, such as Japan and the US in the 1950s we see that both economies went through an urbanisation growth spurt in the 1950s. This is very similar to the spurt we see China going through now. If we look at the urban population ratio (the percentage of the population living in urban areas) we see that United Nations forecasts suggest that in the next 15-20 years China could expand at a rate comparable to that which the US and Japan underwent in the 1950s.

Chart 37: Urban population ratios for key countries, 1900-2020E Chart 38: Urban population for developing countries, 1950-2005E

0%10%20%30%40%50%60%70%80%90%

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

E

2020

E

JapanChinaUSIndia

Rapid periods of urbanisation

are key

0%10%20%30%40%50%60%70%80%90%

1950

1960

1970

1980

1990

2000

India China Brazil Russia

Urban population ratio

Source: United Nations, World Bank, UBS estimates Source: United Nations, World Bank, UBS estimates

Processed materials markets more at risk from a slowing China

China�s cyclical slowing to have negligible effect on its long-term growth trends

China�s growth spurt similar to those of the US and Japan in the 1950s


UBS 32

The urbanisation ratio also helps to answer the question of which countries could show growth similar to China�s. Will it be Russia, Brazil maybe, or India? Chart 38 shows that both Brazil and Russia are heavily urbanised compared to China and India. In Brazil�s case there is more upside, because a fair amount of this urban population lives in shanty towns, but Russia definitely doesn�t have the urbanisation driver in our view. However, we believe that India has significant upside to follow China�s lead.

Chart 39: US steel consumption versus urban pop�n, 1900-2003 Chart 40: Chinese aluminium consumption vs urban pop�n

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

Stee

l con

sump

tion/u

rban

capit

a t

30%

40%

50%

60%

70%

80%

90%

Urba

n pop

ulatio

n rati

o %

steel consumption/capita

urban population ratio

Post industrial US

0.000

0.0020.004

0.006

0.008

0.0100.012

0.014

1950 1960 1970 1980 1990 2000 2010 2020

Al co

nsum

ption

/urba

n cap

ita t

10%

20%

30%

40%

50%

60%

70%

Urba

n pop

ulatio

n rati

o %

aluminium consumption/capita urban population ratio

??

Source: United Nations, USGS, US Census Bureau, World Bank, UBS estimates Source: AME, United Nations, World Bank, UBS estimates

Bottom line: We expect China�s materials growth story to continue to be a major driver for materials, but not necessarily as a positive. We believe that population growth and urbanisation are key drivers of demand and we feel that India is likely to be the �next China�, although it is currently some 5-10 years behind China. We do not feel that Russia is likely to follow in China�s footsteps.

For further reading we recommend:

Strategic opportunities in Basic Materials: India and Russia to boost China�s materials momentum? Matt Fernley & Peter Hickson, 20 September 2004

Q-Series � China and Basic Materials: Will a slowing China hurt basic materials? Peter Hickson & Matt Fernley, 2 March 2004

Exchange rate effects Currencies have a significant impact on mining companies� profitability. Metals are generally traded in US dollars, but many mines are located in non-US dollar denominated regions and of course the fluctuations of those local currencies against the dollar can raise or lower those companies� margins. Chart 41 shows the breakdown of materials production by currency.

Brazil and Russia have less growth potential than India

70% of materials produced outside US-dollar-denominated regions


UBS 33

Chart 41: Materials production split by producer currency

95% 88% 85% 80% 77% 69% 68% 68% 61%

0%10%20%30%40%50%60%70%80%90%

100%Iro

n ore

*

Mine

dnic

kel

Mine

dco

pper

Ther

mal

coal*

Cokin

gco

al*

Mine

dzin

c

Crud

este

el

Alum

inium

Mine

dlea

d

US$ Non-US$

Source: AME, UBS estimates

As the US dollar strengthened in the mid-1990s, costs for producers outside the US fell significantly and profits soared. However, as the US dollar has weakened in 2003-04 costs have started to rise, pressurising margins and forcing producers to raise prices. Chart 42 illustrates the effect of exchange rates on costs.

Chart 42: Mining cash costs and exchange rates, 1996-2004E

30

50

70

90

110

130

1996 1997 1998 1999 2000 2001 2002 2003 2004E

BRL/US$ A$/US$Copper Cash costs US¢/lb Iron ore Cash costs US$/tAluminium smelter Cash costs

Strengthening dollar depressing costs

Weakening dollarraising costs


If we are now in the middle of a decade when the US dollar will remain structurally weak, then it is likely that materials prices will remain significantly higher than in the previous decade as higher relative costs at producers keep prices high.

While most commodities prices are related to the US dollar, they tend to lag US dollar moves. Gold, in its role as an asset class, has seen the closest relationship to the US dollar in the past three years.

US dollar trends have major impacts on costs

Weak US dollar will keep materials prices high


UBS 34

Chart 43: Gold price versus US dollar/euro rate, 1998-2004 Chart 44: Base metal prices vs US dollar/euro rate, 1998-2004

200

250

300

350

400

450

500

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

0.8

0.9

1.0

1.1

1.2

1.3

1.4Gold US$/oz LHS US$/euro RHS

100

120

140

160

180

200

220

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

0.8

0.9

1.0

1.1

1.2

1.3

1.4MGMI US$ LHS US$/euro RHS


Impact of infrastructure development As we have already discussed, urbanisation and infrastructure are likely to be major drivers for the Chinese economy over the next 10-15 years. However, we believe that infrastructure development is likely to be a driver of global materials supply and demand trends, not only in China.

For the past 5-10 years infrastructure development (power, public transport, roads) has been neglected in a number of developed and developing regions. It is only in recent years that US non-residential construction has started to pick up and that other governments have identified infrastructure investment as a major growth area.

The power outages in the US east coast region in 2003, coupled with continuing power shortages in the Pacific North West (PNW) region have caused the US government to invest further in power supply as well. This has also been an area of importance in Europe.

Although China�s power shortages have garnered recent media attention, a similarly power-short situation exists in India and many other rapidly developing countries. India�s Golden Quadrilateral and NSEW Corridor projects should see the building of some 13,000 kilometres of roads in coming years and China has also identified key East-West projects. China is also planning to embark on the construction of oil and gas pipelines from Russia to its eastern region and is in the middle of significant port expansions and developments.

This focus on infrastructure provides problems and opportunities for materials producers. In the near term, the bottlenecks in transport and power mean that costs for producers are higher, but in the longer term, development of infrastructure relies on materials. This greater emphasis over coming years should further stimulate consumption of industrial materials.

Infrastructure a driver of demand trends

Infrastructure development neglected in recent years

China and India are both power-short


UBS 35

Valuation trends and methodology The three most common valuation multiples used in the mining sector are EV/EBITDA, P/NPV and PE. In the steel sector EV/IC tends to be substituted for P/NPV.

As a result of the good cash flows seen for many mining companies, multiples such as EV/OpFCF and P/CF may also be used and, when comparing with other basic materials sectors, P/BV also may be used (although this tends to be less applicable for gold companies). The appendix contains definitions of UBS�s core EV multiple calculations.

As Chart 45 shows, the market does not necessarily reward the sector for higher returns.

Chart 45: EV/EBITDA and ROIC for the global mining sector, 1995-2004E

4.05.06.07.08.09.0

10.011.012.013.0

02/95 02/96 02/97 02/98 02/99 02/00 02/01 02/02 02/03 02/04101214161820222426

EV/EBITDA x LHS ROIC % RHS

Source: Company data, UBS estimates

A common way to look at individual company valuations in the Mining sector is using DCF. However, this is best used for inflection points. A P/NPV of less than one suggests that a company is undervalued, but while NPV�s are useful for establishing target prices (in combination with other metrics like sum of the parts or earnings-based multiples) they often tend to underestimate share price momentum.

We also believe that it is useful to compare current valuations with long term averages as shown in Chart 47.

DCF is commonly used in the Mining sector


UBS 36

Chart 46: Rio Tinto P/NPV, 1998-2004 Chart 47: EV/IC versus 5-year EV/IC range for key steel stocks

0.70.80.91.01.11.21.31.41.51.6

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

Blue

Scop

e

JFE

Nipp

on S

t.

BaoS

teel

POSC

O

CSN

Seve

rstal

Acer

inox

Arce

lor

Nuco

r

5 y ear peak

Current

5 y ear trough

Source: UBS estimates Source: UBS estimates

Many North American investors prefer to look at PE ratios. While this is a reasonable comparison for stocks within one particular country, global comparisons of PE ratios are made less valid because of the different tax regimes and accounting treatments in countries that are applied to the P&L to generate EPS. In addition, for many cyclical stocks, PE ratios can swing wildly because of low or even negative earnings in particular years, especially for single commodity stocks.

Chart 48: PE (1 year forward) for the mining sector versus key stocks, 1995-2004E

-10

0

10

20

30

40

50

60

02/95 02/96 02/97 02/98 02/99 02/00 02/01 02/02 02/03 02/04

Mining sector Alcoa Rio Tinto

Alcoa has very low earnings; comparison

not meaningful

Alcoa has negative earnings; comparison

not meaningful


PE is good for comparing single region stocks but not globally


UBS 37

Section 2: Major indicators


UBS 38

Profits and profit growth are the single most important drivers of share prices. Profits are the difference between price and cost, multiplied by volume. As such, anything that impacts one of these variables will have an impact on share prices. In this sense, we look to macro and industry variables to frame our view on valuation.

Timing is essential in the sector, particularly in the context that equities are forward looking and pre-emptive. As a result, any leading indicator of cyclical inflection points are extremely useful to investors.

In this section, we look at some of the leading indicators that have historically been useful for predicting equity performance of the mining sector. We have devoted a page to each of the major lead indicators, listed below, and we also examine several other indicators that we think are important for specific commodities.

Major lead indicators:

■ Industrial production

■ US Institute of Supply Management (ISM) Manufacturing index

■ Metals prices � MGMI

■ Ten-year bond yields

■ US Fed funds rate

■ US$ exchange rates

■ Gold price

■ Commitment of Traders Report (COTR)

■ Baltic freight rate

■ US auto and business inventories and exchange inventories

■ Chinese trade statistics

■ Other useful indicators


UBS 39

Industrial production (IP) Chart 49: OECD IP versus DJ World Mining and Metals absolute performance, 1992-2004

75

95

115

135

155

175

195

Nov-92 Nov-94 Nov-96 Nov-98 Nov-00 Nov-02 Nov-04-6%

-4%

-2%

0%

2%

4%

6%

8%

10%DJ World Mining & Metals abs (lhs) OECD IP y/y % (rhs)


Explanation

Demand for metals, and hence their prices, are driven by industrial production. As IP grows, so does the use of metals, driving operating rates and prices up. This aids profitability, and hence results in investors moving into the mining sector.

In recent years, we believe that investors have started to anticipate an improving trend in IP earlier and earlier, and have resorted to using a number of lead indicators of IP, such as the US ISM index, to try to anticipate an upturn in IP and hence buy into the sector before prices start to lift.

Key periods

The IP decline in January 1996 heralded a period of underperformance by mining and metals producers that lasted nearly five years. The improving IP cycle in 2001-02 heralded a strong outperformance for mining and metals stocks.

When not to use it?

When the tech boom busted in late 2000/early 2001, metals stocks experienced a recovery as investors rotated into value stocks after shunning them for the past several years. Hence the equity indices outperformed despite falling IP.

Future � still useful?

This is one of the most important lead indicators for mining and metals stock performance, but more often than not, the US ISM or a metals price index will be used as an IP proxy, as data is generally not released until three months after the date represented.

Other related indicators

Regional IP, particularly US and European. A plot of year/year change in metal prices versus year/year change in IP shows a good correlation. Freight rates are also another useful indicator.


UBS 40

US ISM Manufacturing Index Chart 50: ISM Manufacturing index versus DJ World Mining & Metals Index, 1992-2004

40

45

50

55

60

65

Nov-92 Nov-94 Nov-96 Nov-98 Nov-00 Nov-02 Nov-0470

90

110

130

150

170

190

ISM manufacturing index (lhs)

DJ World Mining & Metals abs (rhs)


Explanation

The US ISM (Institute of Supply Management, formerly NAPM, National Association of Purchasing Managers) monitors economic activity in the manufacturing sector, a key user of raw basic materials. The ISM also issues data making up current production and new orders indices, allowing some indication of future movements. ISM reports are usually released in the first week of each month. One important point to note: the ISM leads the MGMI.

Key periods

The ISM�s drop in mid-1997 preceded a significant drop in equities, but the tip up in 1999 led a rise in equities in absolute terms. There has been a very close correlation between absolute equity performance and the ISM since late 2001, and the downturn in May 2002 was a precursor to a sharp drop in the equity index. A rising ISM in early-2003 preceded a period of outperformance.

When not to use it?

During the volatile 1995-96 period, the correlation broke down. Also, during the downturn in late- 2002, equities fell more than would have been predicted from the falling ISM. The relationship also broke down in late-2004 as investors valued the sector�s secular trends over the downturn in US manufacturing growth.


This is one of the most widely followed indicators, not just for the mining sector but also for the basic materials sector as a whole, and we expect this to continue. Many investors suggest that Chinese indicators should be more important in coming years and, while we believe this to be true, we expect the ISM to remain a useful tool for many years to come.


ISM Non-Manufacturing index, Manufacturing new orders and employment indices. The Chicago PMI, European PMI, New York Empire State, US durable goods orders and Philadelphia Fed indices are used to anticipate the relative strength of the ISM.


UBS 41

Metals prices (MGMI) Chart 51: MGMI versus DJ World Mining & Metals index, 1992-2004

70

90

110

130

150

170

190

Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-0480

100

120

140

160

180

200DJ World Mining & Metals abs (lhs)

MGMI (rhs)


Explanation

The Metallgesellschaft Metals Index (MGMI) covers six base metals traded on the LME. The weighting of each metal � aluminium (42.6%), copper (25.4%), zinc (16.0%), lead (13.6%), nickel (1.9%) and tin (0.5%) � was calculated by comparing each metal�s consumption in the western world with the total consumption of all six metals in the base year, 1985. It is priced in US dollars.

The price of metals is directly linked to the profitability of mining companies � if prices go up, then cash flow and hence profits generally increase (excepting the effect of exchange rates); if prices go down the opposite occurs. Hence this is a widely monitored index and usually moves in line with mining equities.

Key periods

The fall in metal prices in early 1996 and again in mid-1997 heralded large-scale declines in stock prices, and the turning point in 1999 and the small upturn in prices in early 2002 led to strong performance for metals equities. The run up in early-2003 also led the strong stock outperformance of 2003-04.

When not to use it?

In early 1993, the equity indices appear to have second-guessed an improvement in metal prices, moving up before they actually increased. In early 1996, a significant dip in metal prices did not presage a fall in mining equities. We reiterate that the mining sector is a complicated sector and suggest that no single driver of equity prices exists.


Definitely. In the last 10 years it has not predicted every rise and fall in stock prices, but when used in conjunction with other leading indicators, it has provided a good indication of the direction and timing of changes in prices.


Gold price, metal inventories, other price indices such as Reuters CRB Index.


UBS 42

10-year bond prices Chart 52: US 10-year bond rate versus DJ World Mining & Metals Index, 1992-2002

3.54.04.55.05.56.06.57.07.58.0

Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03708090100110120130140150160

10 year US bond yields (lhs)

DJ World Mining & Metals index (rhs)


Explanation

Ten-year bond prices have been well correlated with metals and stock price performance. The bond price tends to be a good lead indicator of materials prices and hence stock performance. Bond yields are well correlated with inflation expectations.

Key periods

In 1994-95 and 1999-2000, bond prices were a good lead indicator. Inflection points generally show a change in direction of metals prices.

When not to use it?

It is generally a good indicator of the direction of movement, if not the magnitude. In addition, the relationship broke down towards the end of 2004 when lower bond yields discounted higher inflation, but stocks continued to rise, driven by the secular revaluation argument.


Yes, in conjunction with other indicators.


US Fed funds rate and interest rate spreads.


UBS 43

Fed funds rate Chart 53: US Fed funds target rate and DS Mining & Metals performance, 1985-2004

-4%

-2%

0%

2%

4%

6%

8%

10%

01/85 01/87 01/89 01/91 01/93 01/95 01/97 01/99 01/01 01/03

80

180

280

380

480

580

680

780

Fed Rate Bias DS Mining & Metals

tightening bias

neutral bias

easing bias

Fed rates

Source: Thomson Financial Datastream, UBS estimates

Explanation

As growth is stimulated, and the Fed shifts to a tightening bias, metals consumption rises and the sector starts to outperform as a result.

Key periods

In early 1994, the sector outperformed, and again in early 1999, when the Fed�s bias shifted. The shift in bias in January 1998 heralded a deep trough in the equity market.

When not to use it?

Good for inflection points, but not so effective outside of these times.


Yes, as above and in conjunction with other indicators.


US 10-year bond yields and interest rate spreads.


UBS 44

Exchange rates Chart 54: US dollar/euro rate versus DJ World Mining & Metals rel perf, 1993-2004

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-030.75

0.85

0.95

1.05

1.15

1.25

1.35

1.45

DJ World Mining & Metals rel (lhs)

US$/euro (rhs)


Explanation

During periods of a strengthening or strong US dollar, mining performance tends to suffer. In times of a weakening US dollar, performance is generally better. There are several reasons for this:

■ Weak commodity currencies such as the euro, Australian dollar, rand and Real mean that producers based in countries outside the US have lower relative costs and higher margins, ie, local currency denominated costs and dollar revenues. This is more likely to stimulate overproduction and can result in lower metal prices. As the dollar weakens, operations outside the US become less profitable and can be forced to close in some cases.

■ A weaker dollar boosts demand in non-US dollar denominated currencies, since materials prices in those regions are relatively weaker. As a result, there is support for price rises and stock performance can improve.

Key periods

The strengthening US dollar in the 1997-2001 period was concurrent with terrible performance in the mining and metals sector, but since the dollar started to weaken in mid-2002, sector performance has turned up.

When not to use it?

In the 1998 period, the relationship broke down.


Yes, particularly for gold equities. In the past two years the correlation between US dollar/euro and the US dollar gold price has been very high.


Australian/US dollar, rand/US dollar, Real/US dollar.


UBS 45

Gold price Chart 55: Gold price versus DJ World Mining & Metals index, 1993-2004

75

95

115

135

155

175

195


300

350

400

450

500DJ World Mining & Metals abs (lhs) Gold price US$/oz (rhs)


Explanation

Gold is one of the most early-cycle materials. Normally the gold price is the first metal price to improve in a recovery, often due to the actions of speculators. As metal prices improve, earnings increase and buyers are more likely to buy into a company, boosting its stock price. The opposite is also true � the chart above shows that gold is a good lead indicator of a declining market as well.

Key periods

The price is well correlated with stock performance, particularly in the late-1995 downturn and also during the downturn of 2000. It moved before share price appreciation in 1993 and in mid-2001.

When not to use it?

During the tech boom the gold price decoupled from equity performance.


As companies decouple their hedging positions, gold seems more attractive as an investable asset; it is unclear whether this will affect its correlation with equity performance.


MGMI, other metals prices, COTR for copper and gold.


UBS 46

COTR (Commitment of Traders Report) Chart 56: COMEX copper speculative interest versus LME 3-month copper, 1990-2004

(400)

(200)

0

200

400

600

800

Jan-00Apr-00Jul-00Oct-00Feb-01May-01Aug-01Nov-01Mar-02Jun-02Sep-02Dec-02Apr-03Jul-03Oct-03Jan-04Apr-04Aug-04Nov-04

Thou

sand

s of S

hort

Tons

1300

1600

1900

2200

2500

2800

3100

US$/t

Net Speculative Open Interest (LHS) Copper Price, 3M LME (RHS)

Source: COMEX, Thomson Financial Datastream

Explanation

COMEX provides the Commitment of Traders Report (COTR) for copper, gold, palladium and platinum. Basically it records the net speculative positions held by traders on that exchange in those commodities. When traders hold long positions, it generally means they are positive on the outlook for metal prices, and vice versa with short positions.

Key periods

In late 2001, traders reversed a significant net short and prices increased on the back of that and also in June 1997, as long interest began to bleed off, copper prices fell significantly.

In mid-October 2004 when speculators halved net long positions when they reached over 400,000 short tons, the copper price fell 9% and equity prices fell more.

When not to use it?

Not so useful in the 1994/95 period. One other problem is that in times of tight supply, trading positions can promote substantial price volatility.


It is useful, except as mentioned above when supply is tight and prices are very volatile.


UBS 47

Freight rates Chart 57: Baltic dry freight rate versus DJ World Mining & Metals Index, 1992-2004

60

80

100

120

140

160

180

200


1500

2500

3500

4500

5500DJ World Mining & Metals abs (lhs) Baltic Freight Index (rhs)


Explanation

High freight rates are an indication that large quantities of material are being moved around. This can be due to cargoes such as grain, but may also be due to demand for bulk materials such as alumina, coal and iron ore. Freight rates are seen as a broad index of trade volumes and by inference industrial activity.

Key periods

The upturn in freight rates in late 2002 tipped investors off that the China demand story was going into overdrive. China�s booming demand for iron ore and alumina in particular was seen as a driver for the high freight rates. The fact that global IP was falling but freight rates were rising helped to alert analysts to the fact that China was a new player. The measure was also a useful indicator of an inflection point in early 1997 and late 2001.

When not to use it?

Since it is not possible to tell just from the freight rate what cargo is being carried, it is important to make sure that it is metals cargo that is causing the step up or down.


Yes, but be aware that cargoes other than metals are carried (for example, grain). Also, changes to freight shipping regulations could cause performance to vary.


There are many different freight routes used and they can be indicators of the strength of trade flow to and from different regions.


UBS 48

Auto, business and metal exchange inventories Chart 58: US auto and business inventories, 1993-2004 Chart 59: Change in LME stocks vs business invs, 1993-2004

800

900

1000

1100

1200

1300


90

110

130

150

170

190US business inventories US$bn (LHS)

US auto inventories US$bn (RHS)

-5%

-3%

-1%

1%

3%

5%

7%

9%


-75%

-25%

25%

75%

125%

US business inventories y/y % (LHS)

LME stocks y/y % (RHS)


Explanation

Changes in US auto and business inventories have shown a good correlation with metal prices in the past. Generally, a rising inventory of autos means that demand for metals is increasing, which has a knock-on effect on prices. Increases in finished goods inventories generally suggest a restocking cycle and there is a good inverse correlation between increasing business inventories and decreasing exchange stocks, as shown in Chart 59.

Key periods

The dip in business inventories in the 2001-2002 period suggests that suppliers were using a �just in time� inventory strategy during the downturn. As metals demand started to lift and metals inventories were low, we saw a strong restocking cycle in manufactured goods.

When not to use it?

Not overly useful except at points of inflection, unless it is used as a monitor of health of demand.


Yes


N/A


UBS 49

Chinese import/export statistics Chart 60: Chinese aluminium net imports vs LME price, 1997-2004 Chart 61: Chinese iron ore imports vs Baltic Freight Index, 1997-2004

-100-80-60-40-20

020406080

100

Jan-

97Ju

l-97

Jan-

98Ju

l-98

Jan-

99Ju

l-99

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

1100

1200

1300

1400

1500

1600

1700

1800

1900

Aluminium price

3MMA Net imports

US$/t Kt

406080

100120140160180200220240

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

0

1,000

2,000

3,000

4,000

5,000

6,000

Baltic Freight index

Iron ore imports Mt

Source: Chinese Customs Statistics, Thomson Financial Datastream Source: Chinese Customs Statistics, Thomson Financial Datastream

Explanation

In recent years, the rise of Chinese industry and the incredible production and consumption growth story in China has had a profound effect on metals and materials prices. The chart above looks at aluminium � the correlation between Chinese net imports/exports and price behaviour has been quite strong since late 1999, with the exception of mid-2004 onwards as western world drivers (ie consumption growth) started to dominate again. In the same way, there is a strong relationship between Chinese iron ore imports and the Baltic Freight Index in the past 2-3 years.

Key periods

From January 2001 onwards, when overproduction in China led to it becoming a net exporter of aluminium in 2002, aluminium prices started to suffer. As imports ticked up in late 2002, so did prices.

When not to use it?

With the recovery of demand in the western world, other factors, as well as China�s imports, have become relevant to metals prices. Many of these are listed on preceding pages (OECD IP, business inventory restocking, exchange rates, low materials inventory levels)


China will continue to be of great importance to materials prices in the future.


This relationship is relevant for materials such as alumina, aluminium, iron ore, coal, nickel, crude oil, copper, zinc and pulp.

NB: There is further discussion of China in the previous section.


UBS 50

Other important indicators In addition to the indicators on the previous pages, we also pay attention to the following relationships:

Table 5: Other relevant indicators for the Metals and Mining sector

Economic indices Other industry sectors Commodity and price indices Auto registrations Chemicals CRB index Japanese construction Paper Economist metals index US consumer confidence Steel HRC steel US consumer spending Cement/aggregates JOC index US CPI TMT Oil price - Brent US durable goods orders Industrials Oil price - West Texas US housing starts US inventory to sales ratio US manufacturing capacity utilisation US unemployment

Source: UBS


UBS 51

Section 3: Metals and commodities markets


UBS 52

Commodities markets and how they work Some miners are fully integrated and process the material they mine internally, selling it on to industrial consumers. Other producers sell onto an established terminal market, for instance an exchange, while some commodities are priced and sold by individual producers.

Prices There are two types of pricing prevailing in the metals industry; spot and contract pricing. Spot pricing in most metal industries is based on exchange-traded pricing. Many other commodities including bulk materials such as iron ore, coal and alumina, are sold under longer-term contracts, normally negotiated annually. These benchmark prices are often concluded between suppliers and consumers and then are referenced throughout the industry. With the rise of electronic exchanges, some of these bulk materials, such as steaming coal, are increasingly being priced in a spot market.

TC/RCs There is also a series of intermediate pricing within metals industries. The sale of concentrate to custom smelters is determined by treatment and refining charges, often expressed as a flat charge with rise and fall provisions for changing metals prices and penalties, and bonuses for trace metals. Some treatment charges also include a direct component of price sharing.

Chart 62: LME copper prices and TC/RCs, 1980-2003 Chart 63: Copper TC/RCs as a function of price and stockpiles

0

20

40

60

80

100

120

140

1980

1983

1986

1989

1992

1995

1998

2001

LME Copper price US¢/lb Smelting/Refining charge US¢/lb

200400

600800

10001200

14001600

1980

1983

1986

1989

1992

1995

1998

2001

0%5%10%15%20%25%30%35%40%

Global Copper conc. stockpile Kt Cu LHSTC/RC as % of Cu price RHS

Source: Brook Hunt, UBS estimates Source: Brook Hunt, UBS estimates

The treatment charges can move independently from metal prices and reflect the supply/demand balances between mines and smelters. The chart above illustrates the share of revenue between mines and respective smelters for copper and zinc. The copper mines get a relatively higher share because of the higher inherent value of the metal and the cheaper smelting regime compared to the zinc industry. Zinc miners struggle with only approximately 50% of the inherent metal value returning to the mine after the deduction of treatment charges. Their recent share increase is due to a significant fall in treatment charges caused by a build up in Chinese smelting capacity and a fall in Chinese mine output.

What happens to the material once it has been processed?

Spot and contract pricing important in the industry

Intermediate pricing (TC/RCs) arises between mines and smelters

Treatment charges can move independently from metals prices


UBS 53

Bulk contract prices Key bulk contract pricing negotiations occur annually for iron ore, coking and steaming coal. Iron ore and coking coal contract negotiations have historically been held independently between Japanese steel mills and the three major iron ore producers, BHP Billiton, CVRD and Rio Tinto. In recent years, the European steel producer Arcelor has played a greater role as the European negotiations become more important than the Japanese. In coking coal, BHP Billiton, the world�s largest producer, leads the negotiations. In steaming coal, the annual contracts have traditionally been set between Japanese power utilities and Australian producers, although recently both Korean power utilities and Chinese producers have been influential. Bulk material contracts normally start at 1 April, the beginning of the Japanese fiscal year. This can create distortions in pre-price hike periods. Alumina benchmark prices have generally been set by the largest suppliers, but they are also referenced back to the aluminium price. The alumina contract is priced at approximately 13% of the aluminium price.

In recent years, with the impact of China, use of spot purchases is growing in traditional contract markets.

Freight issues

Most metal pricing is covered by two forms of selling conditions; with or without freight and insurance included in the price.

■ FOB (free on board) pricing includes freight costs from the mine/smelter to the port, and port handling charges.

■ CIF (cost, insurance and freight) pricing includes the additional seaborne freight and handling, as well as insurance costs.

Freight prices are particularly significant in bulk materials, where the differential freight costs from key suppliers to key markets can be as high as 80% of the inherent value of the cargo. The chart below illustrates the variation in freight rates to key markets such as Europe and Asia from Brazil for iron ore.

Chart 64: Iron ore (capesize) differential between Australia and Brazil, 1989- 2004

-6

-1

4

9

14

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24

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89

May-9

0

Oct-9

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98

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01

Oct-0

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4

to As ia to EuropeUS$ /t


Bulk contract negotiations for iron ore, coking and steaming coal are annual

Freight prices can be especially significant for bulk pricing


UBS 54

Metal exchanges There are three major exchanges; the London Metal Exchange (LME) is the world�s most important market for base metals, while New York�s Commodity Exchange (COMEX) is a major market for copper, silver and gold, and precious metals. Precious metals are also traded on the Tokyo Commodity Exchange (TOCOM). The LME functions as a clearing market for metals, offering both spot and futures contracts, while COMEX is more of a speculative market, attracting a higher proportion of individual investors than the LME. The Shanghai Metals Exchange is of increasing importance.

London Metal Exchange (LME) The LME is the world�s premier non-ferrous metals market, with an annual turnover value of some US$2,000 billion. It is a 24-hour market through inter-office trading, but also has defined periods of open-outcry trading between ring-dealing members. The open-outcry periods are highly transparent, reflecting the current supply/demand situation. The LME�s official prices, announced daily, are used by the global industry as the basis for contracts for the movement of physical metal.

History Metal traders first met in the Royal Exchange, which was founded in London in 1571. In 1877, the London Metal Market and Exchange Company was opened officially as a result of Britain�s large increase in metal consumption following the industrial revolution. This demand required large imports from abroad. However, investors were exposed to not insignificant risk from this process, not only because transportation was hazardous, but also because prices could vary between when the material was paid for and when it arrived in the country.

Merchants began trading forward contracts to try to protect themselves from this latter risk. Initially they met in coffee houses, but eventually the LME was formed to bring order to this activity by establishing a single market place, recognised trading times and standardised specifications for contracts.

As the exchange developed, more and more advanced products began to be traded by more parts of the industry. This resulted in the birth of hedging.

Trading

Trading takes place electronically around the clock at the LME, but there are also several important open outcry periods, timed as below

■ 11.45: The day�s first open outcry period with five minutes per contract (eight contracts altogether).

■ 12.30: Another open outcry period. This is the focal point of day as it gives rise to settlement and official prices.

■ 15.10: Second floor trading session. Five minutes for each contract, then repeated as above (no official prices are produced in the afternoon).

Four major metal exchanges; LME, COMEX/NYMEX, TOCOM and Shanghai

LME is the premier base metals exchange; its official prices are the basis for metal price contracts

Forward contracts were used by merchants in the nineteenth century to protect from risk

There are three major open outcry trading periods


UBS 55

Contracts and warehousing

The LME futures and options are described opposite. Futures and options based on an index (LMEX) of six primary base metals are also available.

All LME contracts assume delivery of physical metal. To meet this need, large stocks of metal are held in warehouses approved, but not owned, by the LME at selected locations around the world. There are more than 350 approved warehouses in 42 locations in 12 different countries. Metal stored in LME warehouses must be of an LME-approved brand or production of an LME-approved producer, conforming to the specifications covering quality, shape and weight, as defined by the specific contract rules at the LME.

Only a small percentage of LME contracts actually result in delivery, the vast majority being hedged or sold back before falling due. Delivery of these contracts is in the form of warrants, which entitle the bearer to take possession of one lot of metal at a specific LME approved warehouse.

COMEX/NYMEX

The New York Mercantile Exchange (NYMEX) was founded in 1872 as the Butter and Cheese Exchange of New York. As the product base broadened, it became NYMEX 10 years later. In 1994, NYMEX merged with the Commodity Exchange (COMEX). The trading operations continued as two divisions, each offering trading in their respective futures and options contracts, energy, platinum and palladium for the NYMEX division, and gold, silver and copper for COMEX (aluminium has since been added).

Table 7: NYMEX/COMEX commodities and trading hours

Commodity Open Outcry trading Online trading days Hours NYMEX Platinum 08.20-13.05 Monday-Thursday 15.15-08.00 Sunday 19.00-08.00

NYMEX Palladium futures 08.30-13.00 Monday-Thursday 15.15-08.00

Sunday 19.00-08.00

NYMEX Coal futures 10.30-14.00

COMEX Gold 08.20-13.30 Monday-Thursday 15.15-08.00

Sunday 19.00-08.00

COMEX Silver 08.25-13.25 Monday-Thursday 15.15-08.00

Sunday 19.00-08.00

COMEX Copper 08.10-13.00 Monday-Thursday 15.15-08.00

Sunday 19.00-08.00

COMEX Aluminium 07.50-13.10 Monday-Thursday 15.15-08.00

Sunday 19.00-08.00

Source: NYMEX.com

TOCOM

The Tokyo Commodity Exchange (Tokyo Kogyohin Torihikijo), or TOCOM, was created on 1 November 1984 by consolidating the Tokyo Gold Exchange, the Tokyo Rubber Exchange and the Tokyo Textile Commodities Exchange. It took over the gold futures contract, priced in yen, originally launched by the

Table 6: LME contracts

LME contractsCopper grade APrimary high grade aluminiumStandard leadSpecial high grade zincPrimary nickelTinAluminium alloyNorth American Special Aluminium Alloy

Source: LME

A major exchange for energy, precious metals, copper and aluminium

Precious metals and aluminium


UBS 56

Tokyo Gold Exchange in March 1982. The contract traded is for 1kg of 99.99% gold. Systems trading has been used for precious metals since 1991.

Initially the exchange attracted only local business because of the difficulty of foreign dealers becoming members and relatively high charges compared with COMEX, but from 1987 volume exceeded two million contracts annually and the exchange attracted more international participation by offering associate membership for foreign dealers. A further waiving of membership charges in 1994 pushed volume to over 10 million contracts annually, with many small speculators building up long positions.

Commodities traded on TOCOM include gold, silver, platinum, palladium and aluminium.

Table 8: Precious metals trading on TOCOM

Precious metals, aluminium, oil

Morning session 09.00-11.00

Afternoon session 12.30-15.30

Source: TOCOM

The only other major exchange is China�s Shanghai Futures exchange (copper, aluminium, gold, platinum).

The appendix contains some information on metals trading, strategies and hedging.


UBS 57

Aluminium Today�s aluminium industry is troubled by fluctuating demand and the ongoing threat of oversupply from China. The key emerging constraint we see for primary aluminium producers is the availability of raw materials and energy. Many of the major producers in the world (RusAl, Chalco) are alumina-short, and Chinese and North American producers are power-short.

In the mid to late-1990s, industry consolidation led to the formation of a �Big Three� following the merger of Alcan with Algroup, the acquisition of Reynolds by Alcoa and the emergence of Russky Aluminy (RusAl). It had been hoped that pricing power would emerge with Alcoa providing good leadership in the alumina market when alumina threatened to move into oversupply.

The supply part of the equation was aided by the fact that power prices in the US Pacific northwest (PNW) had reached record levels due to shortages, and as a result much of the aluminium industry in this area had to be idled. This region represented some 7% of world aluminium supply, and at the height of the emergency we estimate up to 25% of capacity was temporarily shut down.

However, with the emergence of China as a major aluminium producer in recent years, the supply discipline seems to be cracking. As China has expanded production to become a net exporter of aluminium and power prices in the US have started to draw back, the aluminium market has moved into oversupply. The strong re-stocking cycle of 2004 has provided a momentary reprieve, but the future outlook remains weak.

The story does not seem to be getting better. RusAl has identified over one million tonnes of net capacity additions that it hopes to carry out in the next three to five years, and Alcoa is planning to add further capacity (to try to move itself down the cost curve). BHP Billiton has also identified further expansion at its smelter in Mozambique; there are planned and ongoing capacity expansions in the Middle East, an area with access to cheap power supply; and in our view, the Chinese industry cannot be counted on to exhibit supply discipline either.

The only possible upside is supply tightness in alumina and energy. Unfortunately any alumina tightness is likely to be short term as announced capacity additions are likely to catch up with demand over the next few years. Energy issues, however, could provide long-term controls on aluminium production. We estimate power contributes 30-40% of the cost of aluminium manufacture, depending on the price of power. Aluminium smelters are generally built in areas of cheap power supply, which generally means hydroelectric power (HEP). These power stations may be affected by unusually high or low rainfall, and if the water level in their catchment areas falls below a certain level, power generation becomes more difficult. In addition the shortages of power in China, where the aluminium industry uses 4% of national power supply are also likely to cap further capacity additions in the medium term.

Today�s industry is dominated by worries over weak demand and oversupply

Formation of the big three producers in mid-1990s suggested a period of stability for the industry

Power costs have led to shutdowns, aiding the image of good supply discipline

But oversupply from China threatens that...

... and further capacity addition announcements are not positive

Alumina, and power cost and availability could constrain aluminium production


UBS 58

On the demand side, the story is confused. We estimate that global demand for aluminium rose by 8% in 2004, but this growth will likely fall back to 4% in 2005. The slump in the aerospace industry has not been positive for some producers, notably Alcoa. However, the packaging sector is a relatively defensive industry, and aluminium consumption in passenger and light vehicles is increasing, by 5% per annum in the US and in Europe by 60% by 2008 (AME estimates). Asia, and China especially, represent a beacon of light. China is showing strongly increasing demand, driven by transport, construction and the power sectors.

Table 9: Changes to supply/demand balance � major planned smelter changes

Region Project Company Date DetailsIndia Korba Bharat Aluminium 2005-06 250Ktpa capacity expansion Bahrain Alba Alba 2005-08 600Ktpa capacity expansion Russia Sayansk RusAl 2007-08 300Ktpa capacity expansion Iceland Fjardaal Alcoa 2007-08 new 300Ktpa smelter

Source: AME, Brook Hunt, UBS estimates

Key facts: China aluminium � why the big fuss? ■ China has stormed into the aluminium market in recent years, nearly quadrupling

its production between 1990-2002. The major jumps occurred in 1997 and 2000.

■ The cause of this remarkable rise has been the Chinese government�s wish to modernise its aluminium industry. The government has given loans for producers to develop more modern pre-baked anode technology to replace the ageing, inefficient and environmentally unfriendly Soderberg technology upon which the industry was based.

■ The aim was for the Soderberg capacity to be closed once the larger-scale, more modern technology was opened. However, this has not occurred. As a result, China has swung from being a net importer of some 700,000 tonnes of aluminium in 2000 (an average of 200-300,000 tonnes per annum before that) to being a net exporter of 500,000 tonnes of aluminium by 2004.

■ Many commentators believe that these exports will continue, and probably get worse. However, we believe the power supply situation in China, which we do not expect to improve until 2007 at the earliest, may cap further aluminium expansions. We also believe central government, and the newly-empowered major producers (including Chalco) will force through some rationalisation in the industry causing some less profitable operations to close.

■ At the current time, China represents over 21% of the world�s primary aluminium production, but it is also a significant consumer with 20% of consumption, and growing. We expect this to continue to grow as China�s autos, power and construction industries continue to expand.

Demand not helped by the slump in the aerospace and auto industries

China has quadrupled its production between 1990 and 2002

Industry modernisation is the root cause, with the government trying to close ageing Soderberg technology

But older capacity has not been closed

We believe power supply will be a constraint in the future

China accounts for 16% of world consumption and growing


UBS 59

Aluminium Key factsAluminium supply Chart: Aluminium production by region, 2004E Chart: Major producers of aluminium, 2004ECommon ore minerals:Bauxite (Al2O3)Nepheline (Russia; (Na,K)AlSiO4)

Major mining/production operationsRusAl has the world's two largest smelters:Bratsk (920Ktpa); Krasnoyarsk (860Ktpa)Alcoa has the largest alumina operations:Pinjarra (3.45Mtpa); Wagerup (2.56Mtpa)

Source: AME, UBS estimates Source: AME, Brook Hunt, UBS estimatesChart: Aluminium production costs Chart: Geographic consumption of aluminium, 2004E Chart: End uses of aluminium

Source: Brook Hunt, UBS estimates Source: AME, UBS estimates Source: CRU, UBS estimatesDemand

Chart: World aluminium consumption History of aluminium

Source: AME, UBS estimatesPricing and inventories

Chart: Long term pricing trends Chart: Pricing and inventories Chart: Profitability and returns of key producers

Source: Datastream, UBS estimates Source: Datastream, UBS estimates Source: UBS estimatesKey technical facts

China23%

Other15%

North America

17%

Latin America8%

Asia (excl. China)

9%

Western Europe

14%

Eastern Europe

14%

Transport31%

Building18%

Pack'g17%

Mach. & equipm't

9%

Electrical9%

Cons. durables

6%

Other10%

North America

24%

Eastern Europe

7%

China21%

Other3%

Latin America4%

Asia (excl. China)20%

Western Europe

21%

Others46%

Next 512%

BHP Billiton4%

Norsk Hydro5%

RusAl9%

Alcoa12%

Alcan12%

- Aluminium was discovered in 1808, but was not produced commercially until 1854.- In 1886 the Hall-Héroult process was invented which is the basis for aluminium production today. Aluminium ismanufactured by passing an electric current through dissolved alumina.- In 1889 Freidrich Bayer invented the Bayer Process for large-scale manufacture of alumina from bauxite.- In 1999 consolidation in the industry really began in earnest, with Alcan merging with Algroup and Alcoa acquiringReynolds. With the emergence of Russky Aluminy (RusAl) in 2000 consolidating major Russian smelter interests,Pechiney was consigned to the second division of producers.- It had been hoped that this consolidation would give producers pricing power and help to keep prices steady, but theemergence of China as a major producer in the late 1990s, and its subsequent move from a net importer to a netexporter of aluminium, has led to price weakness.- China remains one of the key factors determining the medium term outlook for aluminium, but production disciplineby the "Big Three" will also be of vital importance in the coming years.

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Mt

Alumina33%

Other raw materials

12%

Power24%

Labour12%

Deprec'n7%

Other costs12%

1,0001,2001,4001,6001,8002,0002,2002,4002,6002,800

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LME aluminium, US$/t

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LME aluminium, US$/t LHS

LME aluminium stocks, Kt RHS 0.05.0

10.015.020.025.030.035.040.0

Alca

n

Alco

a

Nalco

Chalc

o

EBIT margin 2004E ROIC 2004E

- One tonne of alumina normally requires two to three tonnes of bauxite.- Two tonnes of alumina are required to produce one tonne of aluminium.- Aluminium is smelted in graphite-lined steel containers known as "pots".

- Smelting is energy intensive, so most smelters are located in areas with a plentifulsupply of cheap power.- Aluminium smelting can use up to 15MWh per tonne of metal produced.


UBS 60

Copper

The copper industry has recovered from the weak demand of 2001-02, following the surging demand seen during the high tech boom years. The significant re-stocking cycle of 2003-04 has caused copper stocks (at exchanges, producers and consumers) to fall to 15-year lows. The relative scarcity of major new copper discoveries is a recurring theme in the industry.

With the BHP Billiton merger, the top five producers now control nearly 50% of world supply, which gives them the opportunity to influence supply for the first time. With the Escondida Phase IV expansion, BHP Billiton and Rio Tinto will significantly expand their market share, especially into the Chinese market.

Good supply management in 2001-02 saw BHP Billiton, Codelco and Grupo Mexico all announce production cuts, with Codelco building up a material stockpile to keep from flooding the market. China�s growth over recent years has �sponged up� much of that stockpile and led to the current low levels of copper inventories in the market. The lack of new large mines planned for the next few years and the fact that average grades have been falling by approximately 3% per annum over the past few years have helped to keep the market in deficit.

Following the Grasberg pit wall collapse in late-2003 concentrate was difficult to get and smelters were hurting, while miners profited. With recent small-scale supply additions and Grasberg�s re-opening there is better concentrate supply to the market and smelters are exhibiting better earnings growth than miners.

Demand has improved in 2004 and looks set to continue this improvement over the next few years. Wiring, the main use for copper, be it in the construction industry (think about how much wiring is used in a new office building � not only the lights and air conditioning, but also the intranet), is set to continue as a growth area, as are electronic products, machinery and transport. Copper is also used to make pipes because of its unreactive nature � in China it has found growing applications in water pipes.

As with many other materials, China�s copper imports are well correlated with copper prices � when Chinese buyers are in the market, prices are strong, when they leave the market prices weaken.

Table 10: Changes to supply/demand balance � major planned mine changes

Region Project Company Date DetailsChile Escondida BHP Billiton/Rio Tinto 2005-06 200Ktpa expansion Chile Andina Codelco 2006-08 200Ktpa expansion Peru Cerro Verde Phelps Dodge 2007-08 200Ktpa expansion Chile Spence BHP Billiton 2007-08 200Ktpa project

Source: Brook Hunt, UBS estimates

Experiencing a demand recovery after a weak 2001-02

The BHP-Billiton merger gives the top five producers a market share of nearly 50%

Good supply discipline, China�s demand and declining grades have kept the market in deficit

Variations in concentrate supply have benefited miners and smelters in turn

Construction industry and electronic applications are the main uses of copper

China is a key player in the industry


UBS 61

Copper Key factsCopper supply Chart: Copper mine production by region, 2004E Chart: Major copper miners, 2004ECommon ore minerals:Native copper (Cu)bornite (Cu5FeS4; 63% Cu), chalcocite (Cu2S; 80% Cu),covellite (CuS; 67% Cu), chalcopyrite (CuFeS2; 35% Cu),malachite (Cu2[(OH)2/CO3]; 57% Cu)Major mining/production operationsEscondida, jointly owned by BHP Billiton and Rio Tinto,produces 1.05Mt per annum (2002)Grasberg, owned by Freeport and Rio Tinto, produces800Kt per annum (2002E)

Source: AME, UBS estimates Source: AME, UBS estimatesChart: Copper production costs Chart: Geographic consumption of copper, 2004E Chart: End uses of copper

Source: Brook Hunt, UBS estimates Source: AME, UBS estimates Source: AME, UBS estimatesDemand

Chart: World copper consumption History of copper




China4%

Other12%

North America

14%

Latin America46%

Asia (excl. China)

9%

Western Europe

1%

Eastern Europe

14%

Electrical61%

Corrosion res.20%

Structural6%

Aesthetic2%

Heat transfer11%

North America

19%

Eastern Europe

5%

China20%

Other5%

Japan& Korea13%


Western Europe

24%

Others33%

Next 521%

Grupo Mexico5%

Rio Tinto7%

Phelps Dodge9%

BHP Billiton9%

Codelco16%

- The discovery of copper dates back to prehistoric times, there are reports of copper use dating back to 9000 BC inIraq.- Harder copper alloys, such as bronze, superceded copper as a material used to make tools by 3000 BC.- Copper's properties of electrical and heat conduction make it attractive for use in electrical wiring applications as wellas for home heating systems. Its malleability and resistance to corrosion make it useful for use in water pipes.- The high tech boom of the late-1990s stimulated demand, swinging the copper market from surplus in 1996-99 todeficit in 2000.- China's emergence as a major consumer of copper (most of which is imported) is now the major swing factor in thecopper market, as is the issue of how fast supply additions can come into the market.

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LME copper, US$/t

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1,000LME copper stocks, Kt RHS

LME copper, US$/t LHS

0102030405060

Phelp

sDo

dge

Free

port

KGHM

Antof

agas

ta


- Open pits produce around 70% of mined copper and the world's top five copper minesare all open pit.- Often "waste" copper may be further treated by leaching (the SX-EW method).

- Some mines may report revenue net of treatment/refining charges (TC/RCs).- On average copper mine grades have been decreasing at 1.3% per annum since1990.

Labour26%

Deprec'n16%

Other costs14%

Maint. & Consumm.

21%

Energy23%


UBS 62

Nickel Usage of nickel is dominated by the stainless steel market, which consumes some 70% of world nickel demand. As such, the market has been affected in recent times by cuts in stainless steel production in western Europe. The outlook for the metal in the shorter term is affected by Chinese stainless steel capacity additions in 2004 and 2005.

In terms of supply, nickel production is dominated by the Russian producer Norilsk Nickel, which is by far the largest producer from its operations in northern Russia. It produces some 20% of world nickel supply. The Canadian producer, Inco, is the next-largest producer with some 15% of world supply. The top five producers control over 50% of world capacity, which should has given them a fair amount of pricing power. Norilsk Nickel�s gradual release of its stockpile in 2003 and 2004, which was aimed at keeping price capped, is an indication of this.

Looking to the future, lack of supply has been the major problem for the nickel market. The development of pressure-acid-leach laterite projects in western Australia fell well below expectation. Three projects were planned to come into production in 1999, Murrin Murrin, Cawse and Bulong, with a combined initial production capacity of 64,000 tonnes of refined nickel. They produced only 8,500 tonnes in 1999, and, in 2002, produced in the region of 44,000 tonnes. However, Inco�s delayed development projects at Goro in New Caledonia (laterite; intended production capacity: 55,000 tonnes per annum) and Voisey�s Bay (sulphide; intended production capacity: 50,000 tonnes per annum) look set to come into production in the next few years.

The recent high and volatile prices in nickel have led some Indian and Chinese stainless steel producers to experiment with substitution from 300 series to 200 series stainless steel, which uses less nickel. In addition, probably about 25% of stainless steel usage is for decorative purposes which is easily substitutable out of.

With Chinese stainless steel production expected to grow significantly over the short to medium term, the prospects for nickel prices look solid, although expected supply additions and substitution suggest that the market is likely to be better balanced than over the past few years.


Region Project Company Date Details

Australia Ravensthorpe BHP Billiton 2007-08 26Ktpa project Canada Voisey's Bay Inco 2006-08 65Ktpa project New Caledonia Goro Inco 2006-08 54Ktpa project


Stainless steel dominates nickel usage

Norilsk Nickel is the world�s dominant producer

Finally new supply coming into the market

Substitution becoming more of an issue

China is a major factor in nickel demand


UBS 63

Nickel Key factsNickel supply Chart: Nickel mine production by region, 2004E Chart: Major producers of nickel, 2004ECommon ore minerals:Pentlandite ((Fe,Ni)9S8; 35% Ni)Also less common nickel sulphides and arsenides

Major mining/production operationsNorilsk Nickel's operation is one of the world's largestwith an output of over 200Kt per annumInco's Indonesian operations, PT Inco, produce in excessof 60Kt per annum

Source: AME, UBS estimates Source: AME, CRU, UBS estimatesChart: Nickel production costs Chart: Geographic consumption of nickel, 2004E Chart: End uses of nickel

Source: AME, Brook Hunt, UBS estimates Source: AME, UBS estimates Source: AME, UBS estimatesDemand

Chart: World nickel consumption History of nickel




China4%Other

9%

North America

18%

Latin America16%

Asia (excl. China)

8%

Austr'sia24%

Eastern Europe

21%

Stainless steel65%

Alloys & castings

14%

Cast irons1%

Plating7%

Other alloy steel5%

Other8%

North America

11%


China11%

Other3%

Latin America2%

Western Europe

35%

Eastern Europe

4%

Others27%

Next 520%

Eramet5%

WMC Res.6%

Falcon-bridge6%

Inco16%

Norilsk20%

- Nickel was discovered in 1751 by Baron Axel Frederik Cronstedt in a mineral called niccolite.- As recently as 100 years ago nickel was still considered a worthless variety of copper!- Since that time, Nickel has found uses as an anti-corrosive covering in steel and as a component of alloys.- Demand for nickel really started to take off from the 1960s onwards as it became an important component of thegrowing stainless steel business.- Since the early-1990s consumption has nearly doubled.- In the late-1990s Australian producers, predominantly, proposed laterite deposits as the future of nickel production.So far operating issues have limited the productivity of these deposits.- China has grown to be a major consumer of nickel (predominantly for stainless steel) in recent years. However thisgrowth looks to be slowing and the effects of substitution in some end uses of nickel, coupled with higher production,are likely to be seen in less favourable supply/demand balances.

500600700800900

10001100120013001400

1974

1978

1982

1986

1990

1994

1998

2002

Kt

-10123

Sulph

idepr

ods

Norils

k

Later

itepr

ods

Aver

age

Cash costs* Mining SmeltingRefining Credits DepreciationOther costs

US$/lb

*Norilsk only

1,0003,0005,0007,0009,000

11,00013,00015,00017,00019,000

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

E

LME nickel, US$/t

3,0005,0007,0009,000

11,00013,00015,00017,00019,000

Jan-

95Ja

n-96

Jan-

97Ja

n-98

Jan-

99Ja

n-00

Jan-

01Ja

n-02

Jan-

03Ja

n-04

020406080100120140160

LME nickel, US$/t LHS

LME nickel stocks, Kt RHS

01020304050

Inco L

td

Falco

n-br

idge

WMC Re

s.

Norils

kNi

ckel


- There are two major types of economic nickel deposits, sulphides and laterites.Sulphides have historically been the major source of nickel (eg Norilsk, Sudbury), butlaterite deposits are of growing importance (eg Goro).

- Laterite deposits are generally of higher cost to operate than sulphide deposits due tothe different mineralogy and different nickel extraction techniques.


UBS 64

Zinc

Until 2004, the refined zinc market had been struggling with oversupply since 2000 when zinc metal net exports from China peaked at 555Kt. Zinc prices fell steadily between mid-2000 and late 2003, depreciating by over 20% during that period.

However, these trends have started to reverse in the past year, as China�s significant industrial expansion, coupled with a zinc concentrate shortage, have caused China to become a net importer of zinc.

This trend started in 2001 when China switched from being a net exporter of zinc concentrate to being a net importer with a 350Kt swing. The major reasons were a poor safety record in the Chinese mining industry, which led to government-enforced mine closures, as well as a strong uptick in zinc metal production, which led to a shortage of concentrates. However, in mid-2002, China began to import zinc metal as well, and by late 2004, looks set to become a net importer of zinc metal.

One of the major depressants on price in the past six months has been the introduction of unreported stocks onto the LME. We believe that very little of this material is left and that it is unlikely to be a long term issue.

Much of the reason for the slightly improving zinc profile is that refined zinc production has grown at less than 3% over the past few years, following periods of greater than 4% in 1999-2000. This is due to the period of poor pricing (the zinc industry has a history of very volatile and unexpected price movements), which has taken its toll on the industry, forcing several European smelters to close. However, zinc consumption has risen relatively rapidly over the past few years and this is forecast to continue, suggesting a better market balance in the future.

Zinc�s primary first use is in galvanising steel, which accounts for 48% of production. It is used because it is resistant to atmospheric corrosion and provides a physical barrier that prevents air and moisture from corroding steel. Zinc is also used to produce a variety of alloys, including brass and bronze (34%). As galvanised steel, zinc finds its primary use in construction and transport; galvanised steel has also become an important material in industrial development.

In our view, the major issues for zinc in future are whether China�s net exports will continue to shrink and whether production growth will remain low.

Table 12: Changes to supply/demand balance � major planned capacity changes

Region Project Company Date Details Mines India Rampura-Agucha Hindustan Zinc 2005-06 140Ktpa expansion Peru Antamina Noranda 2006-08 310Ktpa expansion China Lanping Sichuan Hongda 2005-08 175Ktpa new mine Refineries China Lanping Sichuan Hongda 2004-08 240Ktpa new smelter


Market struggling with oversupply due to Chinese exports

Zince is one of the most unfancied markets, but China reached an inflection point in 2003

China has moved to be a net importer of zinc

Unreported stocks not a long-term issue

Refined zinc production growth is slow, while consumption is growing much more rapidly

Galvanised steel accounts for 47% of production and is used substantially in construction

China is the major maker or breaker for the zinc industry


UBS 65

Zinc Key factsZinc supply Chart: Zinc mine production by region, 2004E Chart: Major producers of zinc conc., 2004ECommon ore minerals:Sphalerite (ZnS; 41-67% zinc)

Major mining/production operationsTeck Cominco's Red Dog mine in the US produces615Kt per annum of contained zincZinifex's Century mine in Australia produces over300Kt per annum

Source: AME, UBS estimates Source: AME, UBS estimatesChart: Zinc production costs Chart: Geographic consumption of zinc, 2004E Chart: End uses of zinc


Chart: World zinc production and consumption History of zinc




China23%

Other17%

North America

21%Latin America17%

Western Europe

7%

Eastern Europe

8%

Asia (excl. China)

7%

Construc.48%

Transport23%

Cons. durables

10%

Infrastr.9%

Mach. & equipm't

10%

North America

16%


China23% Other

4%

Latin America4%

Western Europe

23%

Eastern Europe

6%

Others57%

Next 515%

Boliden4%

Anglo American

5%

Noranda6%

Zinifex6%

Teck Com-inco7%

- Zinc has been used in the form of alloys for more than 2000 years. The first evidence of zinc smelting technology isin the form of seventh century Chinese coins and mirrors.- The first large-scale production of zinc was undertaken in India in the fourteenth century and China in the 1600s. Theexport trade to Europe from Asia flourished during the seventeenth and eighteenth centuries.- Large scale commercial smelting began in Europe in the early-1800s and in the US in the 1850s.- Development of the froth flotation process in the twentieth century enabled recovery from more complex ores in theUS, making higher grade concentrates. This allowed the US to attain its position as the major global zinc producer.- In 1971, Japan surpassed the US as the world's largest zinc metal producer but in 1993 China overtook Japan.Undisciplined production by Chinese producers in recent years has led to a crash in the zinc price, although theconsumption rise in China may represent an inflection point.

6

7

8

9

10

11

1981

1985

1989

1993

1997

2001

2005

E

Consumption Refined production

Mt

600800

1,0001,2001,4001,6001,800

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

E

LME zinc, US$/t

600800

1,0001,2001,4001,6001,800

Jan-

95Ja

n-96

Jan-

97Ja

n-98

Jan-

99Ja

n-00

Jan-

01Ja

n-02

Jan-

03Ja

n-04

02004006008001,0001,200

LME zinc stocks, Kt RHS

LME zinc, US$/t LHS 05

1015202530

Umico

re

Teck

Comi

nco

Zinife

x


%

- Zinc often occurs in association with lead in ore deposits. 85% of WW zinc is mined inassociation with lead.- Zinc sulphide ore is concentrated by a process called flotation.

- Zinc may be refined using smelting or an electrolytic process (80% of zinc metalrefining is carried out using one of these methods).- China has swung from being a net exporter to net importer of zinc concentrate.

Labour22%

Deprec'n13%

Other costs19%

Maint. & Consumm.

11%

Energy35%


UBS 66

Lead Lead is generally produced as a by-product of zinc mining and generally the zinc/lead output of mined production is rising, putting more pressure on lead mine supply. The lead industry is also being shadowed by environmental and health concerns, making the installation of new facilities in developed markets highly unlikely.

The lead-acid battery market accounts for 78% of lead demand and, despite predictions to the contrary, is still going strong. Despite its demise being predicted for several years, demand for lead continues to grow along with the automotive and industrial battery markets, although 85% of the demand is due to replacement batteries and only 15% is from original equipment.

At present the lead market is close to balance and the absence of new lead mine developments over the next several years means that some investment is needed by lead producers if a market deficit is not to develop. A market deficit had developed by 2004 and is likely to continue, which has stimulated lead prices. However, lead has had an unfavourable price history over the last 20 years following a loss of market share caused by substitution of other metals.

Lead concentrate availability is quite tight following production cuts by Doe Run, closure of 9% of the world�s mine capacity and increased concentrate imports by China. Despite the fact that mined lead production has been flat/declining over the last 20 years, this has been made up by the rise in importance of recycled material. In 2000, 60% of western world production was from secondary materials, up from 50% in the early 1990s.

While we think the outlook for lead remains good, finding a producer with significant exposure to lead to invest in remains difficult. The world�s largest producer, Doe Run, is unlisted and, of the next four largest producers, lead is a tiny percentage of their earnings. Zinifex is the most leveraged larger cap listed stock.

Table 13: Changes to supply/demand balance � major planned mine/refinery changes

Region Project Company Date Details Mine production Australia Magellan Ivernia 2005-08 New 95Ktpa mine


Lead is normally a by-product of zinc mining

Batteries account for 75% of demand

It is a balanced market and closures are more common than than additions

Tight concentrate availability is also a positive

Not many listed producers with significant exposure to lead


UBS 67

Lead Key factsLead supply Chart: Refined lead production by region, 2004E Chart: Major producers of lead conc., 2004ECommon ore minerals:Galena (PbS; 87% Pb) is the major ore mineralMinerals such as cerussite (PbCO3; 77% Pb), anglesite(PbSO4; 68% Pb) and wulfenite (PbMoO4; 56% Pb)occur where galena has been weatheredMajor mining/production operationsDoe Run is the US's largest producer with significantoperations in Missouri, USA

Source: AME, UBS estimates Source: AME, UBS estimatesChart: Lead production costs Chart: Geographic consumption of lead, 2004E Chart: End uses of lead


Chart: World lead production and consumption History of lead


Chart: Long term pricing trends Chart: Pricing and inventories Chart: Sources of lead, 1996-2003E

Source: Datastream, UBS estimates Source: Datastream, UBS estimates Source: AME, UBS estimatesKey technical facts

China26%

Other4%

North America

25%Latin America

5%

Western Europe

19%

Eastern Europe

6%


Batteries78%

Chemicals9%

Semi-manufact.

7%

Other4%

Alloys2%

North America

26%


China18% Other

2%

Latin America3%Western

Europe24%

Eastern Europe

5%

Others57%

Next 513%

Teck Cominco

4%

Zinifex4%

Xstrata5%

Doe Run8%

BHP Billiton9%

- Lead is one of the oldest metals known to man, with a history dating back to 5000 BC. It is known to have been usedby the Egyptians in 4000 BC and by the Chinese to mint coins in 3000 BC. Mines throughout Europe were workedfrom 2300 BC, including the still-operating Rio Tinto mine in Spain.- By 100 BC, lead water pipes and barrel hoops were ubiquitous throughout the Roman Empire. In medieval times,lead was used as a construction material, and by the 1400s was used as ammunition.- Consumption remained low until the mid-1800s when production increased to cater for cable sheathing andcontainers for storing corrosive materials. This extra demand resulted in the discovery of the Missouri Lead Belt in1867 and the Broken Hill orebody in Australia in 1883.- In recent years, lead has been used extensively in batteries, although many commentators believe usage in this areawill fall off.- At present, the market is in balance, but more production capacity needs to be added to prevent prices spiking.

5.05.56.06.57.07.5

1981

1985

1989

1993

1997

2001

2005

E


Mt

400500600700800900

1,000

1993

1995

1997

1999

2001

2003

2005

E

LME lead, US$/t

300400500600700800900

1,0001,100

Jan-

95Ja

n-96

Jan-

97Ja

n-98

Jan-

99Ja

n-00

Jan-

01Ja

n-02

Jan-

03Ja

n-04

050100150200250300350

LME lead stocks, Kt RHS

LME lead, US$/t LHS

- There are still few potential production projects in the pipeline, except in China andcontinued supply tightness is likely to lead to further price breakouts.

- In recent years, the source of lead production has changed from primary to scrapsources to some extent. This is likely to continue if no new production capacity is added.

Deprec'n7%

Cost of conc.44%

Other costs10%

Smelter charges

33%Freight

6% NB excl. credits

20%24%28%32%36%40%44%

1996

1997

1998

1999

2000

2001

2002

2003

2004

E

2005

E

5.86.06.26.46.66.87.0

primary / total refined prod. LHS

total refined prod. RHS


UBS 68

Tin The tin market is in very good condition compared to many commodities markets. World tin production peaked in 2003 and fell 1% in 2004. This would suggest that the market should be in deficit in 2005, implying that pricing will be steady to strong.

The regions which most influence the tin market are also the most opaque markets: China and Indonesia. Both are large producers and refiners of tin and both have anecdotally seen a fall in concentrate production in recent years. The imposition of an export ban by the Indonesian government has meant that it is increasingly difficult for Chinese smelters to source sufficient tin and therefore we expect that refined tin output may fall in 2003.

Chinese producers have suffered a depletion of their reserves due to �disordered� mining since the mid-1990s. As a result the outlook for Chinese mine production is not very favourable, and while consumption continues to grow, we see China as a significant importer of concentrates, although it will probably remain a net exporter of refined metal.

The only problem with this is that it is very difficult to invest in tin equities, or at least equities with high leverage to the tin market. None of the larger mining stocks have much exposure to tin and, although the largest tin producer, PT Timah, is listed, it has a market capitalisation of only US$100 million, which makes it difficult for most global investors to play.

A good market with falling production and relatively steady pricing

China and Indonesia the most significant players

Reserve depletion an issue in China

Very difficult to get tin exposure via equities


UBS 69

Tin Key factsTin supply Chart: Tin mine production by region, 2004E* Chart: Major producers of tin conc., 2002ECommon ore minerals:Cassiterite (SnO2; 79% tin)

Major mining/production operationsPT Timah's operations in Indonesia are the largest miningoperations

*Refined tin Source: CRU, UBS estimates Source: CRU, UBS estimatesChart: Major producers of refined tin, 2003 Chart: Geographic consumption of tin, 2004E* Chart: End uses of tin in the US

Source: Brook Hunt, UBS estimates Source: CRU, UBS estimates Source: USGS, UBS estimatesDemand

Chart: World tin production and consumption* History of tin

Source: CRU, WBMS, UBS estimates.*refined.Pricing and inventories

Chart: Long term pricing trends Chart: Pricing and inventories Chart: Sources of tin production, 1993-2004E

Source: Datastream, UBS estimates Source: Datastream, UBS estimates Source: CRU, WBMS, UBS estimatesKey technical facts

Other Latam13%

Other6%

China42%

Malaysia1%

Indonesia21%

Peru17% Thailand

0%

Solders30%

Others16%

Chemicals28%

Tinplate26%

North America

23%Asia (excl. China, Jpn)

19%

China25% Other

1%

Japan10%Western

Europe19%

Eastern Europe

3%

Others47%

Next 53%

Murch-ison Utd2%

Parana-panema

3%

PT Koba9%

Minsur15%

PT Timah21%

- Tin is one of the oldest metals to be known and used.- It was extracted during the bronze age (2100 BC) by mining alluvial placer deposits.- Europe (and Britain in particular) dominated tin production by the 19th century when other countries such as Bolivia,China, Indonesia and Malaysia began to be of greater importance.- In recent years, tin's uses have grown from its original use in alloys such as pewter, and food stores, to encompassits use in superconductive magnets, electrically conductive coatings and glass.- Secondary sources are of growing importance to tin supply, especially in the United States.- China's tin production peaked in 2001, and Indonesia has been of growing importance in recent years, while Peru isalso a large producer. Bolivia and Brazil have declined in relative importance.

170

220

270

320

370

1980

1984

1988

1992

1996

2000

2004

E


Kt

3,0004,0005,0006,0007,0008,0009,000

1990

1992

1994

1996

1998

2000

2002

2004

E

LME tin, US$/t

3,0004,0005,0006,0007,0008,0009,000

10,00011,000

Feb-

95Fe

b-96

Feb-

97Fe

b-98

Feb-

99Fe

b-00

Feb-

01Fe

b-02

Feb-

03Fe

b-04

051015202530354045

LME tin stocks, Kt RHS

LME tin, US$/t LHS

- Tin is a relatively scarce mineral in the Earth's crust with an abundance of only 2ppmcompared with 63ppm for Cu, 94ppm for Zn and 12ppm for Pb.- Tin is produced by reducing the ore with coal in a reverberatory furnace.

- Small quantities of tin may be recovered from complex sulphide minerals such asstanite, cylindrite, frankeite, canfieldite and teallite.

Thaisarco7%

Others40%

PT Timah16%

Yunnan Tin11%

Malaysia Smelting

Corp.11%

Minsur15%

050

100150200250300

1993

1995

1997

1999

2001

2003

China Malaysia Indonesia Peru Other


UBS 70

Platinum group metals (PGMs)

The platinum group metals industry is dominated by the major South African platinum producers, whose operations are centred on the Bushveld igneous complex, and the largest palladium producer in the world, Norilsk Nickel, based in Russia. These areas account for 87% of the world�s platinum and palladium production.

Platinum and palladium consumption has risen extremely rapidly since the late 1980s as PGMs have started to be used in autocatalysts and as platinum has taken off in the jewellery industry. The properties of PGMs that make them useful for autocatalysts are discussed overleaf, but in all automobiles since emission restrictions were introduced in the mid-1980s, PGMs have been included to a varying degree. The relative concentration of platinum or palladium used has varied according to the relative prices of the two metals as well as the level of technological advancement; at the beginning of the 1990s, substantially more PGM was needed than is used today.

At present (2004), platinum is used in the highest concentration. After the massive palladium price spikes seen in 2000 following uncertainty over Russian supplies, many autos producers switched over to platinum, which at that time was more attractively priced. However, in recent years, South African producers have oriented their production profiles more towards palladium production, Chinese demand for platinum jewellery has increased and demand for diesel autocatalysts (which use exclusively platinum) has also picked up. All of these, coupled with delayed production capacity additions in South Africa, have led to substantial deficits in the platinum market, and strong platinum prices.

The outlook for the palladium price is not so good following the production shifts described above, which have resulted in the market being oversupplied. Despite active supply management by Norilsk Nickel, we forecast continued torrid times for palladium over the shorter term.

China has again been a major player in these markets. China has almost no known resources of PGMs, yet is a major consumer of platinum for use in jewellery, and a growing PGM consumer for use in the autos sector and other industrial applications. We would expect China to continue to be a major user of PGMs.

However, the high and volatile price of platinum in the past 18 months has discouraged many Chinese jewellery producers and platinum demand for jewellery applications in China has fallen in 2003 and 2004, with many producers favouring �white gold� a mixture of palladium and gold. This trend looks set to continue with gold also winning share off platinum in jewellery. These trends look set to force the platinum market into oversupply in 2005 and 2006.

Platinum production dominated by South Africa and Russia

Consumption takeoff due to growing importance of autocatalysts and popularity of platinum jewellery

Platinum is the most intensively used PGM, following palladium price spikes, which forced consumers away

Oversupply of palladium as a result of falling consumption

China a major consumer but no source of its own

High prices have forced substitution


UBS 71

Key facts: autocatalysts � how do they work?

An autocatalyst is a cylinder of circular or elliptical cross section made from ceramic or metal formed into a fine honeycomb and coated with a solution of chemicals and PGMs. It is mounted inside a stainless steel canister (the whole assembly is called a catalytic converter) and is installed in the exhaust line of the vehicle between the engine and the silencer (muffler).

Autocatalysts convert over 90% of hydrocarbons (HC), carbon monoxide (CO) and nitrogen oxides (NOx) into less harmful carbon dioxide, nitrogen and water vapour. They also work for diesel engines, converting over 90% of hydrocarbons and carbon monoxide and 30-40% of particulate into carbon dioxide and water vapour.

Table 14: Comparison of emissions with and without autocatalysts

g/km Carbon monoxide Hydrocarbons Nitrogen oxides Particulate

1.8L petrol engine

No catalyst 5.99 2% 1.04 -

With catalyst 0.61 0% 0.04 -

1.9L diesel

No catalyst 1.2 0.38 0.54 0.07

With catalyst 0.17 0.05 0.42 0.04

Source: Johnson Matthey

The PGMs are important because they can assume a variety of oxidation states and can therefore ensure that all the carbon monoxide and hydrocarbons are fully burned (oxidised) to make carbon dioxide and water, and that all the nitrogen oxides are fully reduced to make nitrogen gas.

There are various important points to remember about the composition of autocatalysts:

■ Petrol engines use catalysts made of an assortment of palladium, platinum and rhodium in various ratios depending on economic availability;

■ Diesel engines can use only platinum.

The amount of PGMs used (also called loading) varies according to what type/size of vehicle is being built and the level of legislation the vehicle has to comply with.

Table 15: PGM in autocatalyst loading for a range of vehicles

Vehicle size Loading Notes

Small passenger vehicle 2-3g

Large US-style SUV 8-12g Under revised US Tier II 2004 legislation

Heavy trucks 20g If retrofitted with a catalyst

30-50g New vehicle fitted to Tier II legislation standard (by 2007) Source: UBS estimates

An autocatalyst is a cylinder formed into a honeycomb that is coated with chemicals and PGMs

Autocatalysts reduce emissions by 90%

PGMs help to oxidise the carbon monoxide and reduce the nitrogen oxides


UBS 72

Platinum Key factsPlatinum supply Chart: Platinum production by region, 2004E Chart: Major producers of platinum, 2004ECommon ore minerals:Native platinum (chemical symbol: Pt)Sperrylite (platinum arsenide)Normally occurs associated with mantle rocks

Major mining/production operationsAnglo American Platinum is the world's biggest producerwith several major operations on South Africa's Bushveld

Source: Johnson Matthey, UBS estimates Source: Johnson Matthey, UBS estimatesChart: Platinum price premium over palladium Chart: Geographic consumption of platinum, 2004E Chart: End uses of platinum

Source: Datastream, UBS estimates Source: Johnson Matthey, UBS estimates Source: Johnson Matthey, UBS estimatesDemand

Chart: World platinum consumption History of platinum

Source: Johnson Matthey, UBS estimatesPricing and inventories


Source: Datastream, UBS estimates Source: Swiss Customs Service, UBS estimates Source: UBS estimatesKey technical facts

South Africa69%

Russian Sales12%

North America

5%

Other4%

Recycling10%

Autocats49%

Jewellery30%

Inv.0%

Glass3%

Electrical4%

Other9%

Chemical5%

North America

30%

Rest of the World

16%

Japan21%

Europe18%

China15%

Others2%Next 5

8%Northam3%

Norilsk13%

Lonmin15%

Implats21%

Ang'plat38%

- Platinum was used by the Egyptians prior to 700 BC. It was named platina "little silver" by Spanish conquistadors in1590.- In 1824 substantial platinum deposits were discovered in the Ural mountains of Russia.- In 1912, in an attempt to provide a substitute for increasingly rare platinum, white gold is invented.- In 1924, the geologist Hans Merensky discovers the largest platinum deposits ever found in the Bushveld complex ofSouth Africa, the horizon is later called the Merensky reef.- During the war years the US restricts platinum for any use except the war effort.- During the 1990s platinum group metals (PGMs) gain further application as autocatalysts, promoting the greaterburning of exhaust gases.- In the late-1990s China grew in importance as a consumer of platinum with CAGR of 74% for 1995-2001.- In 1997, the US government mints the first platinum coin, known as the American Eagle.

0

2,000

4,000

6,000

8,000

1975

1979

1983

1987

1991

1995

1999

2003

Total Autocatalyst Jewellery

000 oz

300400500600700800900

1988

1990

1992

1994

1996

1998

2000

2002

2004

E

LME platinum, US$/oz

300400500600700800900

1,000

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

0102030405060

LME platinum, US$/oz LHS

Swiss Pt stocks, t RHS

0.020.040.060.080.0

100.0120.0140.0160.0

Anglo

plats

Impa

la

Lonm

in

North

am


- 10 tonnes of ore and eight weeks is needed to produce 1 oz of metal; the procedurefor extraction and refining is extremely complex.- Platinum is often used in concert with other PGMs for industrial applications.

- PGMs are useful for autocatalysts because they can exist in multiple oxidation statesand also they adsorb gases to their surfaces.

-600-400-200

0200400600800

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

US$/oz


UBS 73

Palladium Key factsPalladium supply Chart: Palladium production by region, 2004E Chart: Major producers of palladium, 2004ECommon ore minerals:Native palladium (chemical symbol: Pd)Alloys with copper and nickel, complexesNormally occurs associated with mantle rocks

Major mining/production operationsNorilsk Nickel's operations in the Kola Peninsulaproduce 3Moz/year as a by-product of nickel mining

Source: Johnson Matthey, UBS estimates Source: Johnson Matthey, UBS estimatesChart: Palladium market balance and price Chart: Geographic consumption of palladium, 2004E Chart: End uses of palladium

Source: Johnson Matthey, UBS estimates Source: Johnson Matthey, UBS estimates Source: Johnson Matthey, UBS estimatesDemand

Chart: World palladium consumption History of palladium

Source: Johnson Matthey, UBS estimatesPricing and inventories


Source: Datastream, UBS estimates Source: Swiss Customs Statistics, UBS estimates Source: UBS estimatesKey technical facts

South Africa33%

Russian Sales44%

North America

13%

Other3%

Re-cycling

7%

Autocat57%

Elec-trical13%

Other1%Chems

4%Jewell-ery

11%

Dental14%

North America

21%

Japan25%

Europe28%

Rest of the World

26%

Others4%Next 5

11%Lonmin

7%Stillwater

7%

Implats10%

Angloplat19%

Norilsk42%

- Ancient Egyptians and pre-Columbian Indian civilisations used PGM alloys.- W. H. Wollaston discovered palladium in 1803. It was named after the asteroid Pallas, in turn named for the Greekgoddess of wisdom.- 1935, building of Norilsk Combine began. Production began in 1939 and the operation rapidly grew to representsome 90% of the USSR's PGM production.- Use of palladium really took off in the 1970s when demand for catalytic converters increased as auto emissionstandards were introduced.- With the collapse of the USSR in the early-1990s, PGM sales to the West and Japan became more irregular,causing supply deficits which resulted in prices rocketing in the late-1990s. This initially caused "thrifting" of palladiumin autocatalysts, and then an eventual switch from platinum to palladium as the major metal.- In recent years, oversupply, coupled with switching and thrifting, has caused prices to fall back.

02,0004,0006,0008,000

10,000

1980

1984

1988

1992

1996

2000

2004

E

Total Autocatalyst

000 oz

0100200300400500600700800

1988

1990

1992

1994

1996

1998

2000

2002

2004

E

LME palladium, US$/oz

0200400600800

1,0001,200

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

020406080100120140

Palladium, US$/oz LHS

Swiss Pd stocks, t RHS

0.010.020.030.040.050.0

Anglo

plats

Norils

kNi

ckel


- Palladium is generally found in association with copper, nickel and chromite ores andusually occurs with other PGMs.- Palladium can be mixed with gold to produce white gold.

- PGMs are useful for autocatalysts because they can exist in multiple oxidation statesand also they adsorb gases to their surfaces.

-1,000-500

0500

1,0001,5002,000

1990

1992

1994

1996

1998

2000

2002

2004

E

0100200300400500600700800

average price US$/oz RHS

surplus / deficit 000 oz LHS


UBS 74

Gold

Gold, considered a commodity for the purposes of this document, differs from most other metals for a number of reasons. The first differentiating factor is the different sources of supply to the gold market:

Over the last 10 years, mine production has made up only 67% of total demand. Recycling, important for many metals, made up 19% of supply while accelerated supply from hedging made up 4% of the total. Disposals from central banks, another factor very specific to gold, made up 10% of supply. Although mine production remains the largest single component of supply, it is the least volatile. Rapid growth or contraction in mine supply could see perhaps a 4% or about 100 tonne change in gold supply. Such changes are small compared to the swings from producer hedging, scrap supply or central bank sales. Gold mine supply has been relatively static over the past five years as falling dollar gold prices have cut exploration budgets and resulted in few projects under development.

The second differentiating factor is that almost all the gold ever mined is available to the market (although in many cases, re-refining would be necessary before the gold could be sold in either the OTC market or stand as delivery under a futures contract.). Whilst technically every tonne of copper or nickel that has ever been produced is also available in one form or another, gold�s inertness, together with its high value, have led to the total stock of mined gold � 145,200 tonnes � being carefully hoarded.

No other commodity (with the possible exception of silver) has had such a widespread use as money due to its indestructibility and relative rarity. In fact in many respects the money that we use today is a descendant (some would say a markedly inferior descendant) of gold coinage. While paper currency has circulated for hundreds of years, until 1972 all major currencies were underpinned or �backed� by gold, although the final segregation took place in 2000 when the legal backing of the Swiss franc was abandoned. Central banks retain large gold holdings, most of which are relics of the old monetary role of gold, and have been steady sellers of gold since the mid-1980s.

Extensive hoards of monetary gold led to the fourth unusual feature of the gold market, that of the liquid and long dated repo market for gold. Borrowing and lending of gold is extremely common: initially restricted to private investment holdings, central banks enthusiastically joined this market in the 1980s and 1990s, facilitating the growth in producer hedging. Ample liquidity in the forward market led to a low cost to borrow gold. Low gold �lease rates� (as this interest is known) and higher US dollar interest rates resulted in a high �contango�, where the forward price of gold exceeded the current (spot) gold price by as much as 6% per annum. This encouraged gold miners to lock in attractive forward gold prices, especially once the gold price began to fall sharply in the late 1990s. Falling US interest rates and improving prospects for the gold price have seen gold producers reducing their outstanding forward sold positions over the past two years, a trend that we expect to continue at least while US interest rates are low.

Gold has different sources of supply from most of the other commodities

Recycling, central bank disposals, hedging and mine production are all sources of gold

Gold may be hoarded, unlike other commodities

Gold has been used as money and indeed remains as a store of value

Borrowing, lending and trading of gold are common


UBS 75

The jewellery market, responsible for about 80% of identified gold demand, is extremely important and is the fifth special property of gold. The geographical distribution of gold jewellery demand differs from that of other commodities quite dramatically. Cultural affinity leads India to be the largest market for gold jewellery and, in a wider sense, Asian developing countries are particularly important for gold demand. The emerging market crisis in 1998 hit gold demand particularly hard, and led to a surge in scrap supply as beleaguered economies organised collections of gold jewellery.

On a broader scale, little gold is consumed or produced in countries that use the US dollar. Although gold is most widely traded in US dollars, the price of gold in consumer and producer currencies is more important to determining supply and demand. US dollar gold prices are negatively correlated with the US dollar. The other important point about jewellery demand is that almost all of this demand is discretionary and can be theoretically deferred or downsized in a rising price environment, leading to a greater degree of price elasticity of consumption from gold compared to other metals.

Investor interest in gold represents the sixth and final special characteristic of gold. While the prices of many real assets increase during inflationary times or other periods of financial instability, gold is probably the most attractive of all distress assets due to its high value-density, portability and fungibility. Apart from some very rare coins, investment gold tracks the �real� gold price and coins or bars are easily weighed and assayed to determine the �right� price, unlike diamonds, fine paintings or collectable stamps. While investment in gold has been a small component of the bullion market over the past two decades, three years of consecutive declines in major equity markets together with high property prices and a weakening US dollar have led to an increase in investor interest. While the gold price has been largely determined by conventional demand and supply, there is an increasing chance that investment demand for gold could break gold from its jewellery-demand prison, taking the price materially higher.

Jewellery market responsible for 80% of gold demand; India is the largest market for jewellery

Investor interest another differentiating factor for gold


UBS 76

Gold Key factsGold supply Chart: Gold production by region, 2004E Chart: Major producers of Gold, 2004Common ore minerals:Native metal (chemical symnbol: Au)Found in association with conglomerates, as shear-hosted and in alluvial deposits

Major mining/production operationsGold Fields Ltd's Driefontein operation in South AfricaRio Tinto and Freeport's Grasberg copper mine in IndonesiaNewmont's Nevada Complex in the US

Source: CRU, UBS estimates Source: AME, UBS estimatesChart: Gold production costs for key producers, 2002 Chart: Geographic consumption of gold, 2004E Chart: End uses of gold

Source: AME, UBS estimates Source: GFMS, UBS estimates Source: GFMS, UBS estimatesDemand

Chart: World gold consumption History of gold

Source: GFMS, UBS estimatesPricing and inventories



Africa (excl. SA)

3%

South Africa17%

North America

20%

Latin America

11%

Asia18%Europe

15%

Australas.16%

Jewellery77%

Dental2%

Other3%Retail inv.

10%

Electr'cs8%

Americas11%

Middle East19%

China7%

Other7%

Europe19%

Asia (excl. Ch., In.)

18%

India19%

Newmont9% Ang'Gold

Ash.8%

Barrick6%

Gold Fields

5%Harmony5%

Next 514%

Others53%

- The oldest gold objects are Egyptian, dating back to 5000 BC although gold only began to be used as money in3000 BC.- Gold rush in California in 1848; gold discovered in Australia in 1850 and in South Africa in 1886.- 1887: gold extraction using cyanide is discovered.- 1896: last gold rush of the nineteenth century with gold discovery in the Klondike river, Canada.- 1944: the Bretton Woods agreement sets an international gold exchange standard, creating the IMF and WorldBank.- 1961: modern-day mining began in Nevada's Carlin trend, making it the US's largest gold mining state.- 1973: US dollar is removed from the gold standard and gold prices are allowed to float free. It reaches a US$120 perounce peak.- Gold peaks at US$870 per ounce on 21 January 1980.

2000

2500

3000

3500

4000

4500

1987

1989

1991

1993

1995

1997

1999

2001

2003

E

2005

E

t

250270290310330350370390410430

1988

1990

1992

1994

1996

1998

2000

2002

2004

E

LME gold bullion, US$/oz

200

250

300

350

400

450

01/95

01/96

01/97

01/98

01/99

01/00

01/01

01/02

-15

-10

-5

0

5

10

15

Gold price US$/oz LHS

Total traders posn (futures) Moz RHS

05

101520253035

Barri

ck

Newm

ont

Anglo

gold

Ash.

Newc

rest


- The nature of gold mines have changed from predominantly deep level undergroundSouth African mines in the 1970s to large low grade open pit operations throughout theworld.

- Low grade open pit mining became economic due to higher gold prices and thecommercialisation of heap leach technology where ore is crushed and then piled in aheap for low cast chemical extraction.

050

100150200250300350400

Harm

ony

Anglo

Gold

Ash.

Newm

ont

Newc

rest

Barri

ck

Goldc

orp

US$/oz


UBS 77

Iron ore

The iron ore industry is currently one of the most attractive among the mining segments. There are three major reasons for this:

■ The seaborne iron ore trade is extremely consolidated with CVRD (28%), Rio Tinto (24%) and BHP Billiton (15%) controlling nearly 70%.

■ China�s rapidly expanding steel industry is increasingly dependent on imported iron ore since its domestic supply is of limited quality and is only capable of supporting 80 million tonnes of steel production, out of a total of 270 million tonnes of production in 2004.

■ With the increasing demand from China and other Asian countries, major mining companies have been hard pressed to produce enough iron ore to match demand: iron ore mining is capital and infrastructure intensive, with long lead times for new production.

While the economic slowdown caused iron ore demand to fall in 2001, it bounced back in 2002 with China and the former Soviet Union showing significant increases in demand. Demand continued to grow in 2003 and 2004 as steel production and consumption increased globally.

One of the most interesting changes in the next few years could be a re-weighting of the established key centres of the iron ore market. Traditionally Europe, Japan and China have been the major consumption centres, but areas such as the CIS and the new Asian powerhouses, particularly South Korea and Thailand, are showing higher incremental growth as the European and Japanese markets mature.

In terms of supply, Australia and Brazil have been the largest producers in terms of iron content (China produces a lot of tonnage, but its ore is around 30-35% iron, compared to Brazil and Australia with over 60%). However, in recent years India has been gaining market share, particularly in the Chinese market.

BHP Billiton, CVRD and Rio Tinto have all announced significant iron ore production increases and debottlenecking and all have signed long term supply agreements with steel producers aimed at reassuring them regarding security of their supply.

One of the major cost constraints continues to be freight rates, which can make up as much as 40-80% of total costs. Rising freight rates mean that Brazilian ore being exported to China is not as attractive as Australian and Indian ore, which costs less to ship.

Price contracts for iron ore usually run for one year and are generally negotiated in the first quarter of the calendar year. Historically, the larger producers negotiate prices with Japanese steel mills to arrive at an agreed price for JBM (Japanese Benchmark) iron ore and then the European mills will usually adopt that price. More recently, negotiations have been conducted first in Europe, as Japanese buyers have had less of a strong position to negotiate from. In recent

One of the most attractive segments

Very consolidated

China�s rapid steel expansion soaking up material

Not enough expansion projects to meet demand

Iron ore demand rose in 2003-04 on strong steel demand

Maturing of established European and Japanese markets should see Asia and the FSU assume more importance as consumers

Australia and Brazil the key producers�

�with production increases planned by the big three

Freight rates one of the major constraints on profitability

One-year price contracts are normally negotiated in the first quarter


UBS 78

years iron ore has allegedly been sold into China at a discount to the JBM price as producers fight for market share.

Iron ore prices are often quoted for lump and fines. These are terms for size cut-offs. Lump ore and pellets each make up 20-25% of total production. Lump ore is unbeneficiated ore, generally 6-30mm in diameter, usually with less than 20% fines. It is often the preferred feed for blast furnaces as it allows gases to percolate more easily. Lump generally has a higher iron content than fines. Since only a few sources worldwide produce ore with these properties, it is generally more valuable.

Fines, whose particle size is less than 6mm diameter, may be mined or separated from coarser material by screening. They are the most common form of iron ore, making up over 50% of ore produced. Fines normally need to be agglomerated (made into pellets or sintered) before iron making, which is undertaken at the expense of the producer.


Region Project Company Date Details Australia Mining Area C BHP Billiton 2005-10 25Mtpa expansion Australia West Angelas Rio Tinto 2005-07 10Mtpa expansion Australia HIYandi Rio Tinto 2005-07 14Mtpa expansion

Brazil Northern System expansion CVRD 2005 Investment in rail, ports, mines, will add 10-14Mtpa

Brazil Multiple projects CVRD 2005-10 79Mtpa expansions South Africa Sishen Kumba 2006-09 19Mtpa expansion


Lump iron ores are the preferred feed for blast furnaces

Fines are smaller grained and may need to be pelletised (agglomerated) before iron making


UBS 79

Iron ore Key factsIron ore supply Chart: Iron ore ore production by region, 2004E Chart: Major producers of iron ore, 2004ECommon ore minerals:Haematite (Fe2O3; 70% Fe), magnetite (Fe3O4; 72% Fe),siderite (FeCO3; 48% Fe).

Major mining/production operationsThe Rio Doce valley in Brazil is one of the world's majorore provinces (operated by CVRD)The Hammersley province in Australia (Rio Tinto) isanother.

Source: AME, UBS estimates Source: AME, UBS estimatesChart: FOB cash costs Chart: Geographic consumption of iron ore, 2004E Chart: Global seaborne trade in iron ore, 2004E


Chart: World iron ore consumption History of iron ore


Chart: Long term pricing trends Chart: World steel and iron ore production Chart: Origin of iron ore exports, 1990-2004E

Source: UBS estimates Source: Datastream, UBS estimates Source: AME, UBS estimatesKey technical facts

China21%

Other8%

North America

8%Latin America

22%

Australia18%

Eastern Europe

14%

Asia (excl. China)

9%

Others33%

CVRD28%

Rio Tinto24%

BHP Billiton15%

North America

8%


China37%

Other14%

Latin America6%

Western Europe

14%Eastern Europe

11%

Others52%

Next 58%

Kumba2%

Cleveland Cliffs3%

BHP Billiton8%

Rio Tinto11%

CVRD16%

- The earliest iron implements date from about 3000 BC and iron ornaments date from even earlier. The moreadvanced technique of hardening iron weapons using heat was known to the Greeks in 1000 BC.- Alloys made of wrought iron were produced up until the 14th century after which blast furnaces grew in size and steelmanufacturing really took off.- The process of refining molten iron with blasts of air was designed by Sir Henry Bessemer in 1855, and since thenthe steel making process has been larger in scale.- In recent years, the major production of iron ore has moved away from Europe and North America, towards the largescale, low cost operations of Australia, Brazil and India.- As China becomes a major importer of iron ore to feed its steel production growth, Australia's iron ore resourceshave become more important.900

1,0001,1001,2001,3001,4001,500

1990

1992

1994

1996

1998

2000

2002

2004

E

2006

E

Mt

10

20

30

40

50

60

1988

1990

1992

1994

1996

1998

2000

2002

2004

E

US¢/L

TU

Iron ore lump (JBM)

Iron ore fine (JBM)

550

650

750

850

950

1,050

1,150

1970

1975

1980

1985

1990

1995

2000

5006007008009001,0001,1001,2001,300

Iron ore production, Mt RHS

Steel production, Kt LHS

- The top three producers now account for over 60% of global seaborne trade.- Production costs are falling, but freight rates are important in terms of break-evenlevels on some routes, and exchange rates are of increasing importance.

- Iron ore demand is driven by crude steel production which in turn reflects industrialproduction.

Mining30%

Royalties7%

Transport & ports39%

Process'g24%

0%

20%

40%

60%

80%

100%

1990

2000

2004

E

Oceania

Other

LatinAmericaNorthAmericaEurope


UBS 80

Coal There are two principal types of coal, steaming (thermal) coal and coking (metallurgical) coal. Steaming coal is used in electricity generation while coking coal is used to manufacture coke for use in steel manufacture and other metallurgical applications.

One relevant point is that it is important to differentiate between the export coal business and total production. For instance, China is the world�s largest steaming coal producer, but Australia is the world�s largest exporter. Most commentators look only at the export market for coal.

Market consolidation has continued apace with significant ownership concentration as oil companies and other non-mining companies have left the sector. The top four export coal producers � Rio Tinto, BHP Billiton, Anglo American and Xstrata � now supply 40-45% of the total traded coal market, with the top ten controlling 60%. These companies are now as large if not larger than the companies they are selling to with buyers fragmenting due to deregulation and privatisation. This gives the industry much greater pricing power than ever before.

Coking coal Coking coal is harder than steaming coal and it also has the ability to swell, which is what gives it the coking and other physical characteristics needed for blast furnace operations. Approximately 500-600kg of coking coal is used per tonne of steel produced.

The coking coal market is finely balanced at present. The relative consolidation of the market has meant that there have been fewer capacity increase announcements during the period following price increases than following other such periods. This has been the first time since 1981-82 that the market has lasted more than one year in balance. The largest exporters are Australia (55%), Canada and the US. China is the next largest. Operating constraints have forced many producers, particularly in Australia, underground, which has raised operating costs significantly.

Hard coking coal is supplemented by the direct injection of pulverised coal (PCI) at rates of 100-200kg per tonne of steel. PCI uses cheaper steaming and semi-soft coking coal to cut down total costs.

Coking coal demand grows in line with steel production and China�s change from net exporter to net importer of coking coal, in line with its rapidly increasing steel production in 2004, has further tightened the coking coal market.

Steaming coal Steaming coal is basically any coal other than that used in the metallurgical industry. It has suffered competition from alternate sources of energy in recent years, but is still the world�s primary and cheapest source of power. In the 1980s, the competition came from nuclear power, but in recent years concerns about associated greenhouse gases have constrained new generating development in favour of natural gas.

Steaming coal (for power) and coking coal (for steel manufacture) are the two major types

In the coal market, it is important to differentiate between the total market and the export market

There has been significant consolidation of the coal market, while buyers have been fragmenting

This finely balanced market is dominated by Australia and North America

China a major factor in the coking coal market

�Dirtiness� of coal is an issue; natural gas is cleaner but more expensive


UBS 81

When pure carbon is burnt to give power, it gives off carbon dioxide, a greenhouse gas. However, coal is not pure carbon and often contains impurities such as sulphur which burn to produce acidic gases like sulphur dioxide. Consequently these waste gases have to be cleaned. Unfortunately, many countries do not clean their waste gases and these go into the atmosphere as pollutants. New generating technology has continued to lift the thermal efficiency from 30% to beyond 45%, lowering the carbon dioxide emissions per unit of power generated. Potential systems for sequestering (locking carbon dioxide in solid form) may also allow the coal power industry to regain ground lost to other forms of energy.

In recent years natural gas has gained in popularity as an energy source. The bonus with natural gas (which is predominantly methane) is that it burns to produce water and smaller amounts of carbon dioxide, so is very clean. It has gained share off oil, coal and nuclear in recent years.

However, steaming coal is still extremely important, particularly in countries with low reserves of hydrocarbon-based fuels such as China and much of Asia. In China, 80% of power comes from steaming coal while hydro power accounts for nearly 20%. This is particularly important to the market given China�s pre-eminent position as a producer of steaming coal.

Even though the demand outlook for steaming coal is strong, discoveries of natural gas in the North Sea, North Africa and Russia and clean air legislation have reduced coal consumption in Europe. Pipeline natural gas is normally competitive with coal, particularly for inland locations. Growth is still positive in Europe with Germany accounting for much of it, and electricity deregulation in Asia is creating more buyers for coal. Despite overall consumption of thermal coal stagnating in many countries, demand for export coal continues to increase as domestic production falls off in many countries.

Supply remains relatively tight in the market. Coal is still the cheapest energy source and reduction in mining costs in recent years has meant that margins have expanded. China is the major wildcard in the industry, although it now seems China�s steaming coal net exports peaked in 2001 with domestic consumption lowering exports in 2002 and actually causing some coal to be imported to coastal regions. While China�s power consumption grows above planned levels, we not expect its net exports to continue to grow significantly, which should be positive for the other export coal producers.


Region Project Company Date Details Australia Hail Creek Rio Tinto 2005-07 3Mtpa coking coal expansions Australia Theodore Anglo American 2005-07 2.6Mtpa coking coal project Canada Cheviot Elk Valley 2005-06 2.4Mtpa coking coal expansions Australia Mt Arthur BHP Billiton 2005-08 2.5Mtpa thermal coal expansion Australia Newlands Xstrata 2003-08 2.3Mtpa thermal coal expansions Australia Rolleston Xstrata 2005-08 6Mtpa thermal coal project Columbia Cerrejon Anglo Am, BHPB 2005-08 3Mtpa thermal coal expansion Indonesia Kaltim Prima PT Bumi 2005-08 6.2Mtpa thermal coal expansion


Chart 65: Electricity supply by source

0%

20%

40%

60%

80%

100%

1971 1997 2010Coal Oil GasNuclear Hy dro Other

Source: AME

Coal is still important, particularly in Asia�

�but of less importance in Europe, except in Germany

Globally, supply remains tight; China the major wildcard


UBS 82

Coal Key factsCoking coal Chart: Coking coal exports by region, 2004E Chart: Major producers of export coking coal*, 2004Properties:Hardness and ability to swell (supports structure of blastfurnace). Good coking characteristics (ie strength underhigh temperature conditions).

Major mining/production operationsAustralia: Bowum Basin, 5 major BHP Billiton operationsLargest is Peak Downs mine (7Mt per annum production)

Source: AME, UBS estimates Source: AME, UBS estimatesChart: Hard coking coal export costs Chart: Coking coal imports by region, 2004E Chart: Coking coal consumption and pricing

Source: AME, UBS estimates Source: AME, UBS estimates Source: AME, UBS estimates

Steaming coal Chart: Steaming coal exports by region, 2004E Chart: Major producers of export steaming coal*, 2004EProperties:Coal practically devoid of coking properties; descriptioncovers all coal not specifically designated as coking coal.

Major mining/production operationsHigher quality operations are in US: Powder River Basin;Australia: Hunter Valley; South Africa: Karoo Basin;Columbia: Cerrejon Norte

Source: AME, UBS estimates Source: AME, UBS estimatesChart: Steaming coal production costs Chart: Steaming coal imports by region, 2004E Chart: Steaming coal consumption and pricing

Source: AME, UBS estimates Source: AME, UBS estimates Source: AME, UBS estimates

Key technical facts Chart: Profitability and returns of key producers


United States12%

Canada12%

Australia54%

China4%

Other18%

North America

4%

Other2%

Latin America8%

Western Europe

32%

Asia (incl. China)54%

Next 517%

Others45%

Xstrata5%

Anglo American

5%

Fording6%

BHP Billiton14%

Mitsubishi8%

*Equity share

500600700800900

1000

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

E

40

60

80

100

120

Consumption, Mt LHS

Hard coking coal price, US$/t RHS

0

10

20

30

40

Australia Canada USA Av'geMine labour Other onsite RoyaltyFreight Loading

US$/t

- Coal is a carbonaceous rock that forms when organic material (decomposing plant life) is compressed at great depthin the Earth's crust.- Coal is classified into different types, depending on its carbon, ash and sulphur contents. As the coal is compressed,chemical and physical reactions cause the concentration of these key components.- Anthracite is the highest quality coal; it has the greatest calorific value (gives out most heat when burnt), low moisturecontent, lowest percentage of volatiles and highest carbon content (92-94%). Other grades in order of decreasingquality are: semi anthracite, semi-bituminous, sub-bituminous and lignite.

Americas15%Other

2%

China15%

Indonesia18%South Africa

13%

Eastern Europe

15%

Australia22%

Asia55%

Western Europe

31%Eastern Europe

4%

Other1%

North America

8%Latin America

1%

Next 513%

Others56%

PT Bumi6%

BHP Billiton7%

Xstrata7%

Shendong Coal5%

Anglo American

6%

*equity share

01020304050

Peab

ody

Ener

gy

Yanz

hou

Coal

Coal

&Al

lied

Maca

rthur

Coal


0

10

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30

South

Afric

a

Aus-

tralia

Indo-

nesia US

A

Av'ge

Mine labour Other onsite RoyaltyFreight Loading

US$/t

0100200300400500

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

E

0102030405060

Consumption, Mt LHS

Steaming coal price, US$/t RHS


UBS 83

Steel Steel was the backbone of industrial development in the twentieth century. It was seen as the cornerstone of industrialisation, and national governments developed their steel industries accordingly, as a key component of industrial policy. The legacy of that historical development still impacts the global steel industry today.

The global industry had until recently remained relatively fragmented with low returns and high capital demands. The cyclical performance of the steel industry was accentuated by oversupply. Significant government subsidisation and intervention also hampered business rationalisation. In the US, many steel producers have ended up in Chapter 11 bankruptcy because of high labour and pension costs.

Global consolidation Historically, the three major steel-producing regions have been Europe, North America and Japan, In recent years there has been significant consolidation in these regions. In the past four years Arcelor was formed by the merger of Usinor, Arbed and Aceralia in Europe; JFE Holdings in Japan from a merger of Kawasaki Steel and NKK and the most recent largest steel company in the world will be formed in 2005 with the merger of Mittal Steel and ISG. We expect ongoing activity and further global rationalisation with many new entrants as potential agents for change. The Brazilian steel company Gerdau and Russia�s Severstal are just two of the energetic acquirers of global assets.

Chart 67: European market shares, 2003 Chart 68: Japanese market shares, 2003 Chart 69: US market shares, 2003

Arcelor28%

Corus11%

Thyssen Krupp10%

Riva9%

Other35%

Salz-gitter7%

Nippon Steel25%

JFE Holdings

21%

Other33%

Kobe Steel6% Sumi-

tomo11%

Nisshin Steel4%

US Steel20%

Nucor17%

ISG16%

Other39%

AK Steel6%

Weirton Steel2%

Source: Company data, UBS estimates Source: Company data, UBS estimates Source: Company data, UBS estimates

China the growing global force China has grown in importance over the past decade and specifically in the last four years when its production growth averaged over 20% per annum shown in Chart 70. This has exceeded all expectations and has created huge demand for imported iron ore and associated bulk shipping capacity and has taken the world�s production growth to a yearly average to 5%. The world ex-China production growth only averaged 2% per year in the same period.

China is now the largest steel producing region (268 million tonnes in 2004E) with its output now eclipsing the rest of Asia, including Japan, Korea, Taiwan and India. However, its steel product mix in terms of long and flat products is different from the rest of the world. China�s output is 60% long products (ie,

Chart 66: Steel production and EU exp HRC prices, 1984-2006E

500

600

700

800

900

1000

1100

1200

1984 1988 1992 1996 20002004E

200

250

300

350

400

450

500

550

World steel production v olumeHRC spot price (RHS)

Mt US$/t

Source: IISI, MEPS, UBS estimates

Formation of Arcelor, JFE Holdings and Mittal Steel led global consolidation

China�s steel production growth has averaged 20% per annum

China�s product mix differs from the rest of the world


UBS 84

beams for use in the construction industry) and 40% flat products such as sheets and coils. In the rest of the world the mix is reversed, 60% flat and 40% long. China is addressing this imbalance and has in fact brought the long mix down from 70% in 1994.

Chart 70: Steel production by regions

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

EC 15 North America China Pac Rim ex China

Source: IISI, UBS estimates

China�s steel production process mix is more reliant on the blast furnace-basic oxygen furnace steel process with 86% of its production coming from this process compared to 57% for the rest of the world. Only 14% of China�s production comes from electric arc furnaces compared to 38% in the rest of the world.

China�s rapid growth in steel consumption has been the driver behind global surge in steel consumption, which has averaged 5% per annum for the last five years compared to 2% per annum growth in the previous five years. One of the key issues for global steel in coming years will therefore be the balance between Chinese steel production and consumption growth.

Chart 71: Steel production growth, China and ROW, 1998-2004 Chart 72: Steel consumption growth, China and ROW, 1998-2004

-5%

0%

5%

10%

15%

20%

25%

30%

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

China ROW ex China

-5%

0%

5%

10%

15%

20%

25%

30%

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

China ROW ex China

Source: IISI, UBS estimates Source: IISI, UBS estimates


UBS 85

Steel Key factsSteel supply Chart: Steel production by region, 2004E Chart: Major producers of steel, 2004EManufactured usingIron oreSteel scrapCoke

Major production operationsPOSCO's 16Mt Kwangyang operation, KoreaThyssenKrupp's 14Mt Duisburg site, GermanyRiva's 13Mt Taranto operation, Italy

Source: AME, IISI, UBS estimates Source: AME, UBS estimatesChart: Steel production costs Chart: Geographic consumption of steel, 2004E Chart: End uses of steel

Source: UBS estimates Source: AME, IISI, UBS estimates Source: UBS estimatesDemand

Chart: World steel consumption History of steel

Source: AME, IISI, UBS estimatesPricing and inventories

Chart: Longer term pricing trends Chart: Pricing and production Chart: Profitability and returns of key producers

Source: MEPS, UBS estimates Source: IISI, UBS estimates Source: UBS estimatesKey technical facts

China18%

Other15%

North America

12%

Asia (excl. China)

8%

Japan12%

Western Europe

19%

Eastern Europe

16%

Auto-motive25%

Public constr'n

10%Private constr'n

35%

Goods & Pckg20%

Other10%

China22%

Other14%

N. America15%

E. Europe9%

W. Europe

19%

Latin America

5%


Others74%

Mittal Steel4%

Nippon Steel3%

JFE Holdings

3%

Arcelor4%

POSCO3%

Next 59%

- The Bessemer process was the first efficient steelmaking process and was invented in 1856. However, it wasn'teffective for high-phosphorous iron ore.- In 1878 Siemens started to build Electric Arc Furnaces which were initially used to produce high grade alloy steel,but have since been used for more and more production.- In 1913 Harry Brearley, a British scientist, discovered stainless steel, finding that steel with over 12% chromium wasextremely resistant to corrosion.- Hot strip mills were invented in the 1920s, followed by cold-rolling mills in the 1930s.- In the 1960s Basic Oxygen Furnaces began to cut melt times from 9-10 hours to 45 minutes for high-phosphorousiron ores.- In 1989, thin-slab casting increased productivity to less than 1 man hour per ton, speeding mill throughput times to 3-4 hours.- The industry was extremely fragmented as steel was seen as a strategic industry by national governments.

600

700

800

900

1000

1100

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

E

Mt

180280380480580680780

1990

1992

1994

1996

1998

2000

2002

2004

EU Export HRC US HRCJapan export HRC

US$/t

100200300400500600700

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

405060708090100

wld stl prod China stl prod

EU export HRC price LHS

US$/t Mt

0102030405060

POSC

O

JFE

Holdi

ngs

Arce

lor

Nuco

r

CSN

Seve

rstal


- Nickel and chromium are added to make stainless steel, while vanadium, manganeseand molybdenum may be added to create other alloys.- 1.5 tonnes of iron ore and approx. 0.8 tonnes of coking coal go into one tonne of steel.

- Steel is a very regional industry, and while it is unconsolidated on a global scale, it ismore consolidated from a regional perspective. For instance the top 5 producers inNorth America, Europe and Japan control over 60% of capacity.

Energy2%

Iron ore & scrap17%

Other50%

Labour15%

Coking coal16%


UBS 86

Stainless steel Stainless steel has one of the strongest consumption growth trends in basic materials, in the main a reflection of rising global �standards of living�. Compounded consumption growth since 1980 has been 5.5% per annum, driven by stainless steel's unique properties: corrosion resistance, strength, temperature resistance, workability, aesthetic appeal and hygienic standards.

Many types of stainless steels have been developed to meet its many applications. Stainless steels are essentially chromium rich steel alloys; the minimum chromium content is 10.5%. Chromium makes the steel 'stainless' and corrosion resistant. Nickel, molybdenum and nitrogen are also added in the alloy mix; nickel improves the formability and ductility of stainless steel.

Currently, markets are being driven by industrial production and consumer affluence. Europe and China are the world�s major markets with 50% of global demand. Stainless steel slab production is dominated by Europe with nearly 40% of global supply although China is rapidly building up its capacity from 6% of global supply in 2004; Japan/Korea/Taiwan make up 34% of global supply.

Stainless steel pricing is unusual in that it comprises an ex-mill price plus alloy surcharge that reflects the raw material costs. Nickel and chrome comprise a significant and highly variable component of the total cost of stainless steel. The industry also refers to the absolute conversion margin and as a percentage of the net stainless steel transaction price; this is in fact difference of the transaction price minus the raw materials costs. The conversion margin varies for different types of materials and with prevailing raw material prices. In recent years with surging raw material costs conversion margins have fallen below 50%. Similarly the alloy surcharge has risen with surging nickel and ferro-chrome prices.

Oversupply remains a major worry for the industry. Asia has the fastest growing stainless steel industry and Japanese, Korean and Taiwanese exports are likely to pressure markets in Europe and the US. Projected expansions in China are likely to cause it to become a net exporter by 2008 such that by 2008-2009, we believe global capacity increases will well outstrip growth in demand intensifying the competitive pressures. We expect that transaction prices will decline in 2005 and in 2006 under this increased competition and lower raw material prices.

Chart 73: Stainless steel production and prices

82

83

84

85

86

87

88

1999 2001 2003 2005E1500

1700

1900

2100

2300

2500

2700

Global slab productionutilisation rates % (LHS)Global Average Price US$/t

Source: IISI, MEPS, UBS estimates

Oversupply a major concern for the industry


UBS 87

Stainless steel Key factsStainless steel supply Chart: Stainless steel slab production 2004E Chart: Major producers of stainless steel, 2004EManufactured usingScrap steel, steelNickel, molybdenumChromium, ferro-chrome

Major production operationsPosco Pohang, Korea 1.7Mtpa melt capacityAvestaPolarit Tornio, Finland 1.7Mtpa melt capacityThyssenKrupp Terni, Italy 1.5Mtpa melt capacityAcerinox Palmones 0.9Mtpa melt capacityArcelor Genk, Belgium 0.6Mtpa melt capacity Source: Company sources, UBS estimates Source: CRU, UBS estimates Source: CRU, Outokumpu

Chart: Stainless steel production costs 2004E Chart: Consumption of stainless steel, 2004E Chart: End uses of stainless steel

Source: UBS estimates Source: CRU, UBS estimates Source: CRU

Demand

Chart: World stainless steel CRC consumption History of stainless steel

Source: IISI, UBS estimatesPricing and inventories

Chart: Regional pricing trends Chart: Slab and CRC production Mt Chart: Real conversion margins in 2003 �

Source: CRU, UBS estimates Source: CRU, UBS estimates Source: Outokumpu, UBS estimatesKey technical facts

Other8%

Korea/Taiwan18%

W Europe39%

NthAm10%

Latam3%

China6%

Japan16%

Process industry

29%

Transport16%

Catering/household25%

Welded tubes15%

Construction10%

Other5%W Europe

26%Korea/Taiwan

9%

Other14%

Japan12% NthAm

12%

Latam3%China

24%

Others27%

Arcelor15%

Outokumpu15%Acerinox

13%

Thyssen-Krupp15%

POSCO9%

AK Steel6%

- Stainless steel was invented in 1912 by an English metallurgist, Harry Brearley; the first commercial production wasin 1913 in Sheffield. Stainless steel cutlery began to be used in 1914 based on '18/10 stainless steel', namely 18%chromium and 10% nickel. Stainless steel quickly found applications in industry and architecture and in 1930 theChrysler Building top arches were stainless steel clad. In 1935 stainless steel cars promoted the material's uniquecharacteristics.- Broad growth in industrial applications was driven by stainless steel's corrosion resistance, strength, temperatureresistance, workability, aesthetic appeal and hygienic standards. Consumption blossomed in the 1960-70s andcompounded consumption growth of 5.5% per annum has been realised since 1980.- Future consumption is being underpinned by stainless steel's link to growing global affluence. Signifcant productionexpansion, none the least in China, is expected to meet future demand.

3.0

6.0

9.0

12.0

15.0

1990

1992

1994

1996

1998

2000

2002

2004

E

Mt

1,2001,5001,8002,1002,4002,7003,000

1997

1998

1999

2000

2001

2002

2003

2004

E

German CRCUS CRCJapan export CRC

US$/t

8101214161820

1999

2000

2001

2002

2003

2004

E

2005

E

8101214161820

SS slab prod RHSSS CRC prod LHS

Mt Mt

- Austenitic stainless steel is most widely used. It has a chromium content of at least16% and a nickel content of at least 7%; chromium makes the steel stainless.- Ferritic stainless steel contains no nickel, but has 12-17% chromium.

- 80% of stainless steel is sold as cold rolled product but 20% is sold as hot rolledproduct. Western Europe is still the largest region followed by the rest of Asia and China.

Alloy/Nickel40%

Energy22%

Other13%

Labour10%

Scrap15%

600

1,100

1,600

2,100

2,600

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

�/t


UBS 88

TiO2 (Titanium feedstock)

TiO2 or titanium dioxide is used primarily as a pigment. Its properties of high refractive index and good light scattering make it good for this and its chemical and thermal stability, biological inertness and non-toxicity have allowed it to win market share off lead-based pigments. The major first uses are in paints, plastics and paper, with end-uses being construction, autos and infrastructure.

There are two principal areas of the industry, feedstock producers and pigment producers. Feedstock producers are involved with mining the material. The major minerals are ilmenite, rutile and zircon. Feedstock producers sell rutile, zircon and small quantities of ilmenite directly to pigment producers while ilmenite is normally upgraded to higher quality synthetic rutile.

Price contracts are long term (three to five years) and are solely between the supplier and buyer. As a result of the duration of contracts, prices are not very volatile. The major grades are rutile, synthetic rutile and ilmenite.

The industry is almost entirely non-integrated, with the only major integrated producers being Dupont and Kerr McGee. Feedstock producers sell their product on to pigment producers, who then use either a sulphate- or chloride-based method to extract the titanium dioxide from the raw material.

Dupont is the pre-eminent producer of pigment and is also the lowest-cost producer. This is possible because it has excellent technology, based on low-cost ilmenite, and also because the US government allows the company to bury its waste products, whereas most other producers end up paying considerably more for waste disposal.

Feedstock plants have been suffering from overcapacity in recent years, which has caused operating rates to fall. The Richard�s Bay operation (the world�s largest) has been particularly affected by this, running at operating rates as low as 65%. The trend going forward seems to be further capacity additions, perhaps at a faster rate than demand growth out to 2006.

Significantly, China is not such an issue in this industry, as the technological requirements of the process provide a high barrier to entry and producers have not fallen over themselves to give us this advantage. As such China is a still a net importer of titanium dioxide.

Table 18: Changes to supply/demand balance � major planned feedstock changes

Region Project Company Date Details Mozambique Moma Kenmare Res. 2003-04 324Ktpa TiO2 units Mozambique Corridor Sands WMC Res. 2003-05 315Ktpa TiO2 units


Primarily used as a pigment

Long-term price contracts result in low price volatility

Industry is not very integrated

Dupont is the pre-eminent pigment producer in a better-positioned upstream industry

Further capacity additions in feedstock not positive for operating rates

China is a net importer


UBS 89

TiO2 Key factsTiO2 supply Chart: TiO2 production by region, 2004E Chart: Major producers of TiO2 feedstock, 2003Common ore minerals:Rutile (TiO2; 93-6% TiO2); ilmenite (FeTiO3; 44% TiO2);Leucoxene (altered ilmenite) are the most economicallysignificant minerals

Major mining/production operationsRio Tinto's Allard Lake operation in Canada (1.1Mtpa)Iluka's Eneaba and Yoganup operations in Australia

Source: AME, UBS estimates Source: AME, UBS estimatesChart: TiO2 production by feedstock type, 2004E Chart: Geographic consumption of TiO2, 2004E Chart: End uses of TiO2

Source: AME, UBS estimates Source: AME, UBS estimates Source: AME, UBS estimatesDemandChart: World TiO2 consumption History of TiO2


Chart: Long term pricing trends Chart: Market balance Chart: Profitability and returns of key producers

Source: AME, UBS estimates Source: AME, UBS estimates Source: UBS estimatesKey technical facts

China3%

Other21%

Canada15%

South Africa22%

Australia23%

US10%

Asia (excl. China)

6%

Paper20%

Plastic21%

Other9%

Coating50%

North America

34%

Western Europe

31%

Asia22%

Other13%

Others13%

Next 521%

Anglo American

6%BHP Billiton

8%

Ticor11%

Iluka18%

Rio Tinto23%

- Titanium was discovered in 1791 by the chemist William Gregor, but it was not until 1795 that it was re-discovered bythe German chemist Martin Heinrich Klaproth and named.- It did not find a commercial use until the early twentieth century when it was included in iron and steel alloys becauseof its hardness.- Titanium pigment was produced for the first time in 1918.- In recent years, capacity additions have become a major issue in the industry, with operating rates falling as moreand more capacity is added.- Further capacity increases are likely to put operating rates under further pressure.0

1,0002,0003,0004,0005,000

1994

1996

1998

2000

2002

2004

E

Coating Paper Plastic Other

100

300

500

700

900

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

40

60

80

100

120

Rutile LHS Syn. rutile LHSIlmenite RHS

US$/t

2,500

3,000

3,500

4,000

4,500

1994

1996

1998

2000

2002

E

2004

E

65%70%75%80%85%90%

Feedstock Production TiO2 Demand

Feedstock op rate

0

5

10

15

20

25

Iluka

Ticor


- Titanium pigments are chemically and thermally stable, biologically inert and non-toxic,and hence they are more acceptable than lead-based pigments.

- TiO2's high refractive index and light scattering capability make it attractive for use as apigment.

Natural rutile10%

Ilmenite30%

SP slag13% CP slag

28%

Synthetic rutile19%


UBS 90

Other materials1 Metals Antimony (Sb)

Antimony may be used as a hardener for lead in storage batteries and also as a solder and in other alloys, particularly for flame-retardant applications. Its main ore mineral is stibnite.

China is the world�s major producer with 89% of world mine production in 2002, although export controls imposed in the last few years have led to a dearth of antimony, which has resulted in significant price increases.

Bismuth (Bi)

Bismuth is mainly a by-product of lead processing. It is the heaviest of the so-called �heavy� metals and is the only one that is non-toxic. It is used in solders and a variety of alloys, additives, medications and in atomic research. It is also used as a non-toxic substitute for lead.

The world�s largest producers are China (38%) and Mexico (26%), while China has by far the world�s largest reserves.

Cobalt (Co)

The largest use of cobalt is in superalloys, used to make parts of gas turbines and aircraft engines. It is also used to make magnets, corrosion- and wear-resistant alloys, diamond tools and catalysts, and has a variety of chemical applications.

World production of cobalt has been increasing steadily since 1993. Demand is heavily influenced by general economic conditions and demand from those industries that consume large amounts of cobalt. Cobalt is produced mainly as a by-product of copper and nickel production, so production increases or decreases dependent on production of these metals. The largest producers of cobalt include Zambia (21%), Australia (18%), Canada (14%) and Russia (12%), while the Democratic Republic of the Congo has the highest reserve base.

Chromium (Cr)

Chromium has a multitude of uses. It is used in iron, steel and non-ferrous alloys to enhance hardenability and resistance to corrosion and oxidation. Other applications include alloy steel, metal plating, pigments, catalysts and surface treatments.

South Africa is the largest producer of chromite ore (45% of world production) while Kazakhstan has 18% and India 15% of world production. 95% of the world�s chromite resources are based in southern Africa.

Lithium (Li)

Lithium is used in ceramics, glass and primary aluminium production as well as in batteries. The larger producers are Chile (45% of production), China, Australia and Russia.

1 Data and some information sourced from USGS.


UBS 91

Magnesium (Mg)

Magnesium is an extremely abundant element in the earth�s crust (about 2%) and the third most plentiful in seawater. Commercially significant magnesium minerals include: dolomite, magnesite, brucite, carnallite and olivine. Magnesium compounds, and magnesium oxide in particular, are used as refractory materials in furnace linings. Magnesium metal is primarily used in association with aluminium in alloys in beverage cans, automobiles and machinery. It may also be used to remove sulphur from iron and steel.

China is the largest producer of magnesium compounds (magnesite) with 25% of world production, while Turkey (19%), Korea and Russia are also significant producers. Russia and China have the largest reserves. China is by far the largest producer of magnesium metal, with 50% of world production.

Manganese (Mn)

Manganese is an essential component of iron and steel production because of its sulphur-fixing, deoxidising and alloying properties. Steelmaking accounts for 85-90% of manganese use � the manganese of the form of ferroalloys. These manganese steels are used primarily for construction, machinery and transportation. Manganese may also be used in aluminium alloys and, as manganese oxide, in dry cell batteries. Manganese compounds may be used as fertilisers, animal feed and colorants for brick.

The largest producers are Brazil (20% of world production) and South Africa (17%), with South Africa having the largest reserve base.

Molybdenum (Mo)

Molybdenum is used primarily as an alloying agent in steel, cast iron and superalloys to enhance hardenability, strength, toughness and corrosion resistance. It is frequently used in conjunction with chromium, niobium, manganese, nickel and tungsten. It may also be used in chemical applications such as catalysts, lubricants and pigments.

The principal producers of molybdenum are Chile (27%), the US (25%) and China (22%), while China and the US have the largest resource bases.

Rare earth elements (REEs) Table 19: The rare earth elements and their uses

Symbol Sc Y La Ce Pr Nd Pm Sm Eu

Name Scandium Yttrium Lanthanum Cerium Praeseo-dymium

Neodymium Promethium Samarium Europium

Use Stadium lighting

Colour TV screens

Camera lenses Lighter flints Ceramic

colouring

High strength magnets for disk drives

Nuclear batteries Lasers Colour TV

tubes

Symbol Gd Tb Dy Ho Er Tm Yb Lu

Name Gadolinium Terbium Dysprosium Holmium Erbium Thulium Ytterbium Lutetium

Use Computer memory chips

Fluorescent lamps

Colour TV tubes

Eye-safe lasers

Coating sunglasses Lasers Dentures Dentures

Source: Los Alamos National Laboratory, UBS estimates


UBS 92

The rare earths are a relatively abundant group of 17 elements including scandium, yttrium and the lanthanides. They have unique properties making them important for a wide variety of uses, such as glass polishing, petroleum refining catalysts, catalytic converters, metallurgical alloys and phosphors for lighting, TVs monitors and radar. The major economic sources are the minerals bastnaesite, monazite and loparite and some clays.

China is the world�s largest producer with 88% of production, with the US, India and the FSU also producing fair amounts of rare earths. China also has by far the world�s largest reserve base.

Silver (Ag)

Silver has been used for thousands of years for ornaments and utensils, as well as for money. It also has significant industrial applications due to the photosensitivity of silver halides. It may be used in mirrors, electrical and electronic products, photography, and as a catalyst. The advent of digital imaging has posed a serious threat to the use of silver for photographic applications. Silver is traded on Comex and TOCOM.

Silver is often produced as a by-product of copper, gold, lead and zinc mining. The largest producing countries are Mexico (15% of world production), Peru (12%) and Australia (12%). China is also a producer and has the largest reserves.

Tungsten (W)

Tungsten�s largest use is as tungsten carbide in cemented carbides, which are wear-resistant materials used in the metalworking, mining and construction industries. Tungsten metal may be used for wires, electrodes, heavy metal alloys used for armaments, heat sinks and high-density applications, superalloys for turbine blades and wear-resistant alloys. Tungsten composites may be used as a substitute for lead in bullets while chemical compounds are used in catalysts, inorganic pigments and high temperature lubricants.

China has been the dominant producer in recent years (and will continue to be so as it has the largest reserve base), with its cheap exports killing off mining in many other countries. It accounts for about 80% of world production while Russia, Canada and Austria also produce fair amounts.

Uranium (U)

Uranium is primarily used in the nuclear industry although it has other applications making use of its high density such as in counterweights. Its common ore minerals are pitchblende, uraninite and branerite.

Australia and Canada are the largest producers of uranium, but Kazakhstan and the US also produce significant amounts. Uranium may only be sold to countries which are signatories of the nuclear non-proliferation treaty, and which allow international inspection to verify that it is only used for peaceful purposes.

Vanadium (V)

Vanadium is used in small amounts in ferrous alloys to improve toughness and resistance. The principal producers are China (58%) and South Africa (27%), which also dominate the reserve base.


UBS 93

Non-metals Sulphur (S)

Sulphuric acid, one of sulphur�s derivatives, is one of the most important industrial raw materials. It is of major importance to every sector of the world�s industrial and fertiliser businesses to such an extent that sulphuric acid consumption is regarded as one of the best indicators of a country�s industrial development.

Sulphur may be produced as a by-product at petroleum refineries as well as from pyrites and native sulphur mining. The largest producers are the US and Canada, each with 16% of world production, Russia (11%) and China (9.5%).

Industrial minerals Asbestos

Asbestos is the generic name given to six fibrous minerals that are used in commercial products. These are chrysotile, crocidolite, amosite, anthophyllit asbestos, tremolite asbestos and actinolite asbestos, with chrysotile being produced in the largest quantities. The properties that make asbestos useful are its high tensile strength, coupled with high chemical and thermal stability, flexibility, low conductivity and large surface area. Major end uses are roofing products, gaskets and friction products.

The asbestos industry has been affected by health liabilities and public opposition to the use of asbestos and it is no longer widely used. Many basic materials companies such as Dow Chemical, Georgia-Pacific and Gencore have been affected by asbestos litigation and the resulting share price volatility.

Barite

Barite is the mineralogical name for barium sulphate, which is also sometimes known as barytes. Coarse barite grains may be used in �heavy� cement, while fine barite may be used as a filler or extender, as an addition to industrial products or a weighting agent in well drilling.

Historically, oil well drilling has been a driving force in barite demand, but it has been of less importance in recent years. The largest producer of barite is China, with 50% of world production, followed by India with 15%. These two countries also dominate the reserve base.

Borates

Boron compounds are used primarily in the glass and ceramics industries, and to a lesser extent, in soaps and detergents, agriculture and fire retardants.

Turkey is the world�s largest producer (31% of production), with the US (25%) and Russia (21%) also producing significant amounts. These three dominate the reserve base, although it should be noted that China also has extensive reserves.

Calcite/limestone

Limestone (made up of the mineral calcite or calcium carbonate, as well as varying amounts of silica) is one of the most important and accessible natural resources for


UBS 94

the cement, steel and agriculture industries. Despite the low value of its basic products, this is a high value segment when volumes are taken into account.

Gypsum

Gypsum is one of the most widely used minerals in the world due to its use in making plasterboard (wallboard) for homes, offices and commercial buildings. A typical new home contains seven tonnes of gypsum alone. It is also used in concrete for roads, bridges and buildings, and as a soil conditioner. Demand for gypsum depends very much on the well being of the construction industry.

The US is the largest producer with 16% of world production, while Iran with 11% and Canada with 8% are also large producing regions.

Kaolin

Kaolin or China clay is a fine-grained, white material that is used as a dye and a filling agent in paper and refractory markets.

Marble

Marble is a metamorphosed form of calcium carbonate, which has been baked and pressurised at depth in the Earth�s crust to form a fine-grained, hard material suitable for decorative use.

Phosphate

Phosphate minerals are the only significant global resources of phosphorous, an essential element for animal and plant nutrition. Most phosphorous is consumed as a component of nitrogen-phosphorous-potassium (NPK) fertilisers used for arable crops.

The US is the world�s leading producer and consumer of phosphate rock. Other major producers are Morocco (18% of world production) and China (16%)

Potash

Potash, like phosphorous, is used primarily as an agricultural fertiliser. The name potash denotes a variety of mined and manufactured salts containing potassium in water-soluble form. Potash consumption in has been declining in recent years.

Major producers are Canada (32% of world production), Russia (16%) and Belarus (15%).

Salt

Salt (rock salt or sodium chloride) may be used as a flavour enhancer in food, or on roads and walkways to remove ice. It is also used as a feedstock for chlorine and caustic soda manufacture. Chlorine may then be used to make plastics such as PVC, while paper-pulping chemicals may be manufactured from caustic soda.

The US is the world�s largest producer with 20% of production, while China (16%) is also a large producer.


UBS 95

Soda ash

Soda ash is the trade name for sodium carbonate, a chemical refined from the mineral trona or sodium carbonate-bearing brines. It is an essential raw material for glass, chemicals, detergents and other major industrial products.

Zirconium

Zircon (zirconium silicate) is used for refractories, foundry sands and ceramic opacification, while its oxide is also used to produce cubic zirconia, which may be used to simulate diamonds. Zircon itself may also be used as a natural gemstone. Zirconium is used in nuclear fuel cladding, chemical piping in corrosive environments, heat exchangers and speciality alloys. Zircon is a by-product of the mining and processing of heavy mineral sands and is the primary economic source for zirconium.

Australia (44% of world production) and South Africa (29%) are the world�s largest producing regions.

Gemstones These are minerals, stones or organic matter that can be cut, polished or otherwise treated for use in jewellery or other ornaments. Diamond, corundum (ruby, sapphire), beryl (emerald, aquamarine), topaz and opal are classified as precious stones; other gemstones are usually classified as semi-precious.

Gemstones are not common in nature and do not form ore deposits in the normal sense. When present at all, they tend to be scattered sparsely through a large body of rock, to have crystallised as small aggregates or to fill veins and/or small cavities. They occur in most geologic environments, but are most common in pegmatites, stream gravels (as placer deposits) and metamorphic rocks.

Table 20: Common gemstones

Mineral Common gems Description Mineral Common gems Description Beryl Emerald Intense green or bluish green Nephrite/Jadeite Jade White, deep green, creamy brown (beryllium aluminium silicate) Aquamarine Greenish blue or light blue (calcium/sodium

aluminium silicate)

Red beryl Raspberry red Lazurite/pyrite rock Lapis lazuli Deep, azure blue Chrysoberyl (beryllium aluminium oxide) Cat's eye Yellowish or greenish Opal Black opal Flashes and speckles on a black

background Corundum Ruby Intense red (hydrated silica) White opal Opaque, porcelain-like (aluminium oxide) Sapphire Blue Fire opal Reddish or orange Carbon Diamond Colourless to faint yellowish tinge Quartz Amethyst Purple

Feldspar Labradorite Colourful, iridescent or transparent stones in yellow, orange, red or green (silicon dioxide) Citrine Yellow or amber

(alumino silicates) Moonstone Colourless, white-yellow or reddish to bluish grey

Smoky quartz Smokey grey or brown

Garnet Almandine Orange- to purple-red Rose quartz Translucent pink

(silicate mineral group) Grossular Colourless, orange, pink, yellow or brown

Silica Chalcedony Many colours and combinations. Includes sub divisions - bloodstone, onyx, jasper, agate

Pyrope Colourless or pink to red Topaz Topaz Wine yellow, pale blue, green, violet or red

Source: USGS, UBS


UBS 96

Diamonds

Diamonds could equally well be classified as an industrial mineral as they are one of the world�s most versatile engineering materials as well as the most famous gemstone. Diamond is the strongest and hardest known material and has the highest thermal conductivity of any material at room temperature.

If diamonds do not meet gem quality standards, they are used in industrial applications, principally as abrasives, where they cut faster and last longer than competing materials. Synthetic diamonds are of growing importance for industrial applications, accounting for up to 90% of industrial diamond usage in the US, the largest market for industrial diamonds. The industrial diamond market has been healthy and we expect it to stay healthy over the next few years, although there is increasing demand for synthetics over natural diamond material.

South Africa has historically dominated mine production of diamonds, but in recent years Australia, Russia and other African countries have gained importance and market share and there is now significant mine development in Canada. The Russian industry is experiencing structural changes as mining operations move underground; this is likely to lower production and increase costs in the short term.

Industrial and gemstone applications

Synthetic diamonds used increasingly for industrial applications

South Africa has historically dominated the industry, but Russia, Australia and Canada are of growing importance


UBS 97

Diamonds Key factsDiamonds supply Chart: Ind. diamond production by region, 2003 Chart: World's major diamond miners, 2003OccurrenceFormed from carbon compressed at high pressure.Found in metamorphic deposits called kimberlites,also in alluvial deposits.Major mining/production operationsRio Tinto's Argyle operation in Australia accounts for onethird of world volumes, but with relatively low quality stones.De Beers' Orapa Mine in Botswana accounts for nearlyhalf of Botswana's diamond production.

Source: USGS, UBS estimates Source: Company data, UBS estimates.Chart: Avge Carats per piece of retail jewellery, 2003 Chart: Gem diamond production by region, 2003 Chart: Global demand for retail diamond jewellery, 2003

Source: De Beers, UBS estimates Source: USGS, UBS estimates Source: De Beers, UBS estimates

DemandChart: Growth in retail diamond jewellery demand, 2003 History of diamonds

Source: De Beers, UBS estimatesKey facts

- Geological evidence suggests that diamonds were formed some 3.3bn years ago when diamonds were formed inthe Earth's mantle at extreme temperatures and pressures.- Diamonds were first used as early as the Stone Age.- Venice established an early pre-eminence in the diamond trade as stones from India were carried overland toEurope. Vasco de Gama's discovery of the sea lane from India to Europe in 1498 ended this.- First Bruges, then Antwerp, Amsterdam and London established positions as diamond centres.- By 1650, the British East India company had consolidated the export of India's entire production via London.- In 1859, anecdotal reports emerged of the discovery of a diamond on the Vaal River in South Africa. Between 1866and 1869 further diamonds were discovered and the great diamond rush began.- De Beers Consolidated Mines was formed in 1888 and in 1890 signed a contract to market all its production throughthe London Diamond Syndicate.- The Diamond Corporation (later the Central Selling Organisation CSO) was formed in 1930 as a producers' co-operative to maintain the stability of the diamond trade.- The 1950s saw exploration in Botswana, Sierra Leone and Siberia. In 1959, the first marketing agreement betweenthe CSO and the Soviet government was signed.- 1979 saw the discovery of significant diamond deposits in Western Australia, while Canada opened up in the 1990s.

- Anglo American's 45% associate De Beers controls some 45% by value of the world'sdiamond production. It has additional purchasing agreements with Alrosa, Russia'sdiamond mining company and BHP Billiton, for production from the Ekati mine inCanada.- The market for industrial diamonds is much smaller in value; most diamonds areproduced synthetically.- The Diamond Trading Company (formerly the CSO) is the sales and marketing arm ofDe Beers for rough diamonds and markets some two thirds of global supply.

- Synthetic diamonds contribute some 90% of industrial diamond consumption.- The growth rate for diamond production 1970-2001 is 4.5% per annum, for 1991-2001is 1.5% per annum, according to Rio Tinto.- There are various classifications of diamonds according to colour.- Contrary to popular belief, diamonds are not unbreakable, they have "hard" and "soft"directions and blows of sufficient force can break them.- Quality of diamonds is measured by the 4C's; cut, colour, clarity and carat weight.- A carat is the unit of measurement used to determine the weight of a diamond. Onecarat is 0.2g. Diamonds less than 1 carat in weight are called "pointers".

Russia18%

Others6%

Congo23%

S. Africa10%

Botswana14%

Australia29%

Russia13%

Angola5%

Others24%

Australia18%

Botswana22%

S. Africa5%

Congo4%

Canada9%

Alrosa13%

De Beers32%

Others28%

Rio Tinto24%

BHP Billiton3%

Total world prod'n: 140m carats

Japan12%

Other3%

Asia Pacific11%

Middle East12%

Europe11%

US51%

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Regional reserves, production and demand Table 21: Regional reserves, production and demand (% of world)

Alumina Copper Iron ore and steel LeadBauxite

reservesAluminium Production Consumption Reserves

Metal Production Consumption

(contained Fe)

Steel Production

Steel Consumption Reserves

Metal Production Consumption

Australia 19% 6% 1% 5% 3% 1% 16% 1% 22% 5% 0%Bahrain 2% 1%Belgium 3% 2% 1%BoliviaBotswanaBrazil 8% 5% 2% 1% 2% 7% 3% 2% 3% 1%Canada 9% 3% 1% 3% 2% 2% 2% 3% 1%Chile 32% 18% 0%China 3% 21% 20% 6% 13% 21% 10% 26% 28% 16% 24% 18%ColumbiaCongoCubaDominican RepublicDubai 2%France 3% 3% 2% 3%Germany 2% 7% 4% 7% 5% 6% 6%GreeceGuinea 32%Guyana 3%India 3% 3% 3% 3% 2% 6% 3% 3% 3%Indonesia 1% 7% 1%Iran 1%Italy 3% 4% 3% 3% 4%Kazakhstan 3% 3% 5% 7% 3%Jamaica 9%Japan 9% 7% 11% 7% 5% 3%MalaysiaMauritania 1%Mexico 6% 3% 2% 2% 2% 3% 4%Morocco 1%Mozambique 2%New CaledoniaNorway 4%Peru 6% 3% 0% 5% 2%Philippines 1% 0%Poland 6% 3% 2% 1%Russia 1% 12% 4% 4% 6% 4% 20% 6% 2%South Africa 3% 1% 1% 1% 1% 1% 2%South Korea 3% 3% 6% 5% 5% 3% 6%Spain 2% 2% 2% 3%Suriname 3%Sweden 3% 1% 1%Taiwan 2% 4% 2% 2% 3%Thailand 1%Turkey 2%Ukraine 13% 4%US 0% 8% 21% 7% 8% 14% 3% 9% 12% 12% 20% 21%Venezuela 1% 2% 1% 3%Zambia 4% 3%

N. America 13% 17% 24% 15% 15% 19% 6% 13% 14% 17% 26% 26%Latin America 13% 8% 3% 41% 23% 3% 10% 4% 3% 5% 3% 3%W. Europe 15% 22% 11% 22% 3% 16% 19% 1% 20% 23%E. Europe 1% 15% 6% 16% 14% 6% 38% 15% 6% 7% 7% 5%China 3% 21% 20% 6% 13% 21% 10% 25% 28% 16% 24% 18%Japan 0% 7% 9% 7% 11% 7% 5% 3%Asia (excl. China & J 4% 5% 14% 7% 10% 18% 6% 9% 16% 9% 18%Australasia 19% 8% 1% 5% 3% 1% 16% 1% 1% 22% 4% 1%Mid. East & Africa 32% 11% 1% 6% 3% 2% 3% 1% 4% 1% 2% 2%

Source: AME, Brook Hunt, CRU. GFMS, Johnson Matthey, USGS, UBS estimates


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Nickel Tin Titanium minerals Zinc

ReservesMetal

Production Consumption ReservesMetal

Production Consumption ReservesFeedstock

Production Consumption ReservesMetal

Production ConsumptionAustralia 35% 10% 2% 0% 30% 23% 1% 15% 5% 2%BahrainBelgium 4% 3% 1% 1% 3% 3%Bolivia 7% 3%Botswana 1%Brazil 7% 2% 9% 4% 2% 5% 2% 2% 3% 2%Canada 8% 12% 1% 8% 15% 2% 5% 8% 2%ChileChina 2% 6% 10% 28% 37% 22% 8% 3% 1% 15% 24% 22%Columbia 1%CongoCuba 9% 4%Dominican Republic 1%DubaiFrance 3% 3% 3% 3% 3%Germany 8% 6% 6% 4% 6%Greece 1% 2%GuineaGuyanaIndia 3% 2% 9% 4% 3% 3%Indonesia 5% 13% 22%Iran 8%Italy 6% 2% 3% 3%Kazakhstan 14% 4%JamaicaJapan 13% 15% 9% 7% 6%Malaysia 16% 4%MauritaniaMexico 4% 3% 2%MoroccoMozambique 7%New Caledonia 7% 4%Norway 6% 10% 3%Peru 12% 14% 7% 2%Philippines 2%Poland 2% 1%Russia 11% 20% 2% 5% 3% 2% 1% 2% 2%South Africa 6% 3% 1% 18% 19% 1% 1%South Korea 9% 5% 3% 7% 5%Spain 2% 2% 5% 2%SurinameSweden 3%Taiwan 7% 3% 2% 4%Thailand 3% 6% 1% 1% 1%TurkeyUkraine 2% 3% 1%US 9% 0% 13% 3% 9% 29% 14% 3% 12%Venezuela 1% 1%Zambia

N. America 11% 12% 10% 0% 22% 11% 24% 32% 22% 15% 16%Latin America 14% 13% 2% 28% 26% 5% 2% 7% 5% 4%W. Europe 1% 16% 34% 1% 19% 11% 3% 21% 21% 23%E. Europe 11% 21% 4% 5% 3% 2% 3% 14% 10% 5%China 6% 7% 10% 28% 37% 24% 8% 3% 1% 15% 24% 22%Japan 13% 15% 10% 7% 6%Asia (excl. China & J 6% 1% 19% 33% 31% 19% 14% 7% 5% 11% 19%Australasia 41% 10% 0% 2% 30% 23% 1% 15% 5% 2%Mid. East & Africa 6% 4% 4% 19% 27% 3% 2%



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Gold PGMs Silver Diamond

ReservesMine

Production Consumption Reserves Production Consumption ReservesMine

Production Consumption Reserves ProductionAustralia 13% 11% 11% 10% 13% 3%BahrainBelgium 3%Bolivia 3%Botswana 19% 25%Brazil 2%Canada 3% 5% 0% 6% 7% 22% 13%Chile 1% 4% 7%China 3% 8% 8% 10% 10% 8% 5% 1%ColumbiaCongo 22% 11%CubaDominican RepublicDubaiFrance 3%Germany 5%GreeceGuineaGuyanaIndia 19% 14%Indonesia 5% 6% 2%IranItaly 10% 6%Kazakhstan 4%JamaicaJapan 5% 23% 13%MalaysiaMauritaniaMexico 14% 16% 2%MoroccoMozambiqueNew CaledoniaNorwayPeru 1% 7% 13% 15%PhilippinesPoland 19% 7%Russia 8% 7% 9% 31% 6% 6% 18%South Africa 21% 14% 89% 57% 10% 12%South Korea 2%SpainSurinameSweden 2%Taiwan 1%Thailand 5%TurkeyUkraineUS 15% 11% 7% 1% 9% 24% 9% 7% 20%VenezuelaZambia

N. America 18% 16% 8% 0% 9% 24% 29% 14% 21% 22% 13%Latin America 16% 15% 3% 17% 41% 4%W. Europe 1% 1% 18% 27% 10% 26%E. Europe 8% 12% 2% 0% 31% 19% 10% 3% 6% 18%China 3% 8% 8% 10% 10% 8% 5%Japan 0% 0% 5% 23% 0% 13%Asia (excl. China & J 14% 12% 35% 4% 25%Australasia 13% 11% 0% 11% 10% 1% 13% 3%Mid. East & Africa 27% 23% 22% 0% 57% 2% 2% 51% 64%



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Coal Oil Gas

Reserves Production Consumption Reserves Production Consumption Reserves Production ConsumptionAustralia 8% 7% 2% 0% 1% 1% 1% 1% 1%Bahrain 0% 0%BelgiumBolivia 0% 0%BotswanaBrazil 1% 1% 2% 2% 0% 0% 1%Canada 1% 1% 1% 1% 4% 3% 1% 7% 3%ChileChina 12% 33% 31% 2% 5% 8% 1% 1% 1%Columbia 1% 1% 0% 0% 1% 0% 0% 0% 0%Congo 0% 0%CubaDominican RepublicDubaiFrance 3% 2%Germany 7% 2% 3% 3% 0% 1% 3%GreeceGuineaGuyanaIndia 9% 7% 7% 0% 1% 3% 0% 1% 1%Indonesia 1% 3% 1% 0% 2% 1% 1% 3% 1%Iran 11% 5% 1% 15% 3% 3%Italy 0% 0% 3% 0% 1% 3%Kazakhstan 3% 2% 1% 1% 1% 0% 1% 0% 0%JamaicaJapan 4% 7% 3%Malaysia 0% 1% 1% 1% 2% 1%MauritaniaMexico 1% 5% 2% 0% 1% 2%MoroccoMozambiqueNew CaledoniaNorway 1% 4% 0% 1% 3% 0%Peru 0% 0% 0% 0%PhilippinesPoland 2% 3% 2% 0% 0% 0%Russia 16% 5% 4% 6% 11% 3% 27% 22% 16%South Africa 5% 5% 3%South Korea 2% 1%Spain 2% 1%SurinameSwedenTaiwan 1%Thailand 0% 0% 0% 1% 1%TurkeyUkraine 3% 2% 2% 1% 1% 3%US 25% 22% 22% 3% 9% 25% 3% 21% 24%Venezuela 7% 4% 1% 2% 1% 1%Zambia

N. America 26% 23% 24% 6% 18% 30% 4% 29% 29%Latin America 2% 2% 1% 9% 9% 6% 4% 5% 4%W. Europe 10% 5% 10% 1% 8% 19% 3% 11% 17%E. Europe 26% 13% 11% 8% 14% 7% 32% 28% 25%China 12% 33% 31% 2% 5% 8% 1% 1% 1%Japan 0% 0% 4% 7% 3%Asia (excl. China & J 10% 11% 13% 2% 5% 13% 5% 9% 8%Australasia 8% 7% 2% 0% 1% 1% 1% 1% 1%Mid. East & Africa 6% 5% 4% 72% 40% 9% 49% 15% 11%



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UBS 103

Section 4: Hard rock to heavy metal


UBS 104

How did it get there and how do you get it out?

Geology and mining Geology is the science of the earth. Applied geology is used extensively by the mining industry first to locate ore deposits, then to economically extract the key materials.

Basic geology

The five most abundant elements in the earth�s crust are oxygen, silicon, aluminium, iron and calcium. These elements bind together, in association with other elements (often in trace amounts), in chemical compounds to form solid crystalline substances called minerals. The concentration of minerals in sufficient quantities is termed a mineral deposit. Mineralisation can be termed ore when the minerals are present in sufficient quantity or tonnage, and quality (known as grade), to be recovered profitably. Deposits are usually mined to produce metals, such as copper and gold, or other commodities such as coal.

Metals may be split into groups, depending on their uses or properties. The diagram below shows the different groups of metals and some examples.

Figure 3: The major groups of metals classified by uses and/or properties

Precious Metalseg gold, silver, PGMs

Non-Ferrous Metalsnot used in steelmakingeg copper, lead, zinc,

lead, magnesium, nickel, tin

Base Metalslower value metals

eg copper, lead, zinc,

Light Metalsvalued for lightness and

strengtheg berry lium,

magnesium, aluminium, titanium

Ferrous Metalschemical affinity to iron,

used in steelmakingeg iron, chromium, cobalt, manganese,

molybdenum

Refractory Metalscan withstand high

temperatureseg niobium, tungsten,

ruthenium

Rare Earth Metals

eg scandium, y trium, zirconium and 15

lanthanides

Radioactive Metalsoften used for power

generationeg radium, thorium, uranium, plutonium

Reactive Metalseasily react with

oxygen, less stableeg lithium, strontium,

cesium

Semi- Metalsposess metallic and non-

metallic attributeseg silicon, arsenic,

selenium

Source: UBS

Geology is an extensive subject, but for the mining investor there are some key aspects of �geospeak� that it is useful to know.

The Earth�s structure The Earth is split into four layers, like an onion. The inner two layers are the inner and outer core. They are extremely rich in iron and are very dense.

Geology is the science of the Earth

A concentration of minerals in sufficient quantity to be extracted economically is called a mineral deposit


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Beyond these is the mantle, a thick slab of semi-molten material, which contains many metallic elements at high pressures. Resting on the surface of this layer is the Earth�s crust, a relatively thin (5-20 kilometres) outer layer. Mining is restricted to the top three kilometres of the earth�s crust, with approximately 70% from the near-surface area.

The Earth�s cycle Earth is over four billion years old, and its development during that time is the key to how ore deposits have formed and where they have formed. Plate tectonics is one of the key mechanisms that contributes to the formation of ore deposits. Plate tectonics is the mechanism behind continental drift, whereby the tectonic plates which host the outer surface of the earth�s crust move around over the mantle, away from each other (diverging plate margins) and toward each other (collision or converging plate margins). At diverging margins, new material from deep within the earth is erupted to the surface, whereas at collision margins one plate may be pushed beneath another, or may literally crumple up against another. This results in extremely high temperatures and pressures at depth, which can result in earthquakes, volcanic reactions and lots of circulation by hot melted rock fluids close to these margins. Converging margins may also result in the formation of mountain ranges as the plates are pushed together, or one is pushed beneath another, causing uplift.

Three major rock types There are three different types of rock in the Earth�s crust (the outer layer of the Earth). They are defined by their method of formation and are known as igneous, sedimentary and metamorphic rocks. Sedimentary rocks tend to be the source of energy deposits (coal and oil), while metallic deposits are often, but not exclusively, associated with igneous and metamorphic rocks.

Molten material originating at great depths in the crust, or below, is called magma. As this magma rises through the crust, it may cool and solidify to form igneous rocks. These may be intrusive (ie, the magma crystallised when still covered by other rocks), or extrusive (the magma rose to the surface and was erupted, for example by a volcano).

The intermediate stage in the geological cycle is caused by erosion. Rock formations may be eroded at the surface by mechanical means (ie, by the effect of wind, water or ice), or by chemical means (when some of the minerals in a rock may be dissolved by a water solution). Eroded material is then carried, by wind, water or ice, and may be deposited as loose material (for instance at the end of a glacier, on the shore or bed of a river, or on a beach). As this loose material collects, it is buried and then compacted to form sedimentary rocks.

The final stage of the cycle comes about as previously formed igneous and sedimentary rocks are heated and pressured at depth to form metamorphic rocks. This may occur in convergent tectonic regions where rocks are pushed together at high temperature and pressure, or may be caused by the intrusion of hot igneous material at depth.

Tectonic plates move across the earth�s surface and often govern the location of ore deposits

Molten rock rises from the centre of the Earth to form igneous rocks

Erosion of rocks at the surface and subsequent burial and compaction results in the formation of sedimentary rocks

Metamorphic rocks form at high temperatures and pressures within the crust


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Figure 4: The geological cycle

WeatheringTransportation

Deposition

Sedimentary rocks

Compaction (high temp, pressure)

Metamorphic rocks

Continental plate

Mid-ocean ridge

Oceanic crust

Molten andsemi-molten mantle

PlutonicIgneousrocks

Uplift

Mountain range

Convergent plate margin Divergent plate margin

Igneous rocks

Contact metamorphism

Source: UBS

Development of rock formations and structures

When sediments are laid down, they are normally in relatively horizontal layers; however, these layers may be deformed over time through the effect of pressure to form different shapes, and the layers may adopt different orientations up to and beyond vertical. This deformation is termed folding. The orientation of a particular layer or bed may be described by strike and dip. Strike and dip can be illustrated by imagining a sheet of wood at an angle in a water tank. The line where the sheet and the water surface intersect is the strike, while the angle the wood makes with the surface of the water is the dip.

Igneous rocks occur in three major habits. In their most simple form they occur as a batholith, a large body of magma at great depth. However, small sheet-like offshoots of igneous material can also escape from larger bodies, normally pushed by heat or pressure, and these can cut through older igneous, sedimentary or metamorphic rocks. These intrusions may be known as dikes (when they cut across the orientation of the country rocks), or sills (when they are parallel to that orientation). Mineral zones may form as igneous bodies cool and different minerals cool at different times, settling to different layers in the melt.

Metamorphic rocks are igneous, sedimentary or other metamorphic rocks that have undergone extreme chemical or physical changes, which often obscure the original rock�s identity. If subjected to high temperatures or pressures, new minerals can be formed that are stable under these conditions.

Fractures are common in rock. If the fracture is large enough and the two sides have moved relative to one another, it is called a fault. Where a series of many smaller parallel fractures form a fault, this may be known as a shear zone. Minerals often concentrate in shear zones and faults.

When layers of sediment are deformed it is called folding

Igneous rocks can occur in three major habits

Metamorphism can obscure a rock�s previous identity, forming new minerals

Minerals often concentrate near rock fractures


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Different types of minerals

For the purposes of this subject, minerals may be split into two types; basic rock forming minerals, such as quartz and feldspar, which in this context will mostly be referred to as gangue (waste from the mining process), and the ore minerals that contain the metals which are of interest to the mining industry. This is not to say that the rock forming minerals do not contain economically significant metals, indeed they do, however, they do not contain these metals in enough concentration, or in a structure that it is economically viable to break down, to be of interest.

A table of metals and their common ore minerals is shown below:

Table 22: Key metals and their ore minerals

Metal Symbol Common ore minerals Aluminium Al Bauxite (hydrated aluminium oxide)

Cobalt Co Cobaltite (cobalt suplarsenide, 36% Co)

Chromium Cr Chromite (ferrous chromic oxide, 46% Cr)

Copper Cu Native copper

Chalcopyrite (copper iron sulphide, 35% Cu)

Chalcocite (copper sulphide, 80% Cu)

Bornite (copper iron sulphide, 63% Cu)

Gold Au Native gold

Iron Fe Haematite (iron oxide, 70% Fe)

Magnetite (iron oxide, 72% Fe)

Siderite (iron carbonate, 48% Fe)

Lead Pb Galena (lead sulphide, 87% Pb)

Molybdenum Mo Molybdenite (molybdenum disulphide, 60% Mo)

Nickel Ni Pentlandite (nickel iron sulphide, 22% Ni)

Platinum Pt Native platinum

Sperrylite (platinum arsenide, xx% Pt)

Silver Ag Native silver

Tin Sn Cassiterite (tin oxide, 79% Sn)

Titanium Ti Ilmenite (iton titanium oxide, 32% Ti)

Tungsten W Wolframite (iron magnesium tungstate, 77% WO3)

Scheelite (calcium tungstate, 81% WO3)

Uranium U Pitchblende (uranium oxide, 50-58% U3O8)

Zinc Zn Sphalerite (zinc sulphide, 67% Zn)

Source: Northern Miner, UBS

Formation of ore deposits Most of the mineral deposits being mined today were formed hundreds, sometimes thousands, of million years ago and minerals may have concentrated in mineable proportions via a variety of different processes. Examples of common mineral deposit types and an explanation of their formation can be seen in Table 23.

Gangue does not contain economically significant minerals

Ore deposits can form by a variety of processes


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Mineral exploration

Exploration has changed dramatically in recent years, enabling mining companies to search large areas of land using aeroplanes that could take weeks, rather than employing teams of geologists to go tramping over smaller areas of land, which used to take years.

In many countries, government geological surveys have produced regional geological maps. These maps may have been developed over two hundred years and are cobbled together by mapping geologists who travel over large areas noting down key geological features as revealed by outcrops and landforms. These reports and maps are good sources of reference where they exist, but many areas have never been explored on foot.

In recent years remote sensing has started to be of greater importance. This is the use of photographic or radar images taken by satellites and aircraft. It can be useful for identifying large-scale geological structures like faults or contacts where mineralisation may occur.

Geophysical surveys have become of great importance since World War II. Geophysics is the remote sensing of the physical properties of the earth and it is more concerned with highlighting anomalies where the earth has unusual properties. Physical properties such as the earth�s magnetic, electric or gravitational fields are tested since different types of rock have different magnetic and specific gravitational properties. On a large scale, sensors may be towed by aircraft or ships, while on a smaller scale they can be carried by individual geophysicists. A map can be created from the readings, using contours to delineate different levels, exactly the same as on a relief map.

Geochemistry is also used routinely in most exploration programs. A geochemical survey is used to track anomalous concentrations of chemical elements in ground and surface water. Geochemists use a detailed knowledge of the relative mobility of certain elements and the processes that cause this mobility in order to track metals back to their source. They do this by sampling materials such as water, soil or bedrock, analysing them for certain key elements and then plotting the results on a map.

Exploration has changed dramatically in recent years

Remote sensing by satellite or aircraft is of increasing importance

Geophysical properties such as magnetism, gravimetric and electric fields can also help in exploration

Chemistry of waters also aids exploration geologists


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Table 23: Different types of ore deposit

Type of ore deposit Formation Common metals/minerals present Example Magmatic and intrusive deposits Layered magmatic deposits

Layering of minerals as they cool at different rates in magma chambers

Nickel, platinum group metals Sudbury, Canada (Nickel), Bushveld, RSA (PGMs)

Diamond pipes Kimberlite, a rock from the earth's mantle, is erupted to the surface, carrying rock fragments of diamond-bearing rocks to the surface

Diamonds Kimberlite pipes may be found in several areas including Canada, RSA, Russia

Porphyry deposits

Fracturing and hydrothermal activity caused by igneous intrusions; mineralisation forms in veins or breccia bodies within the intrusion itself and on its margins with country rock over a large area

Copper, tungsten, molybdenum, gold Andean copper porphyries

Skarn deposits Form at the contact between intrusive rocks and carbonate country rocks

Copper, molybdenum, tungsten, tin, gold, iron, zinc

Twin Buttes, Arizona, US

Granite-hosted Deposits form in veins and pegmatites (coarse grained dykes) associated with granite intrusions

Tin, tungsten, molybdenum and uranium; gemstones

Tin deposits of southwestern Britain

Epithermal veins Large vein systems, usually in volcanic rocks Gold, silver Cripple Creek, Colorado (gold)

Sedimentary deposits

Stratabound massive sulphides

Occur as part of a sequence of volcanic or sedimentary rocks and conform to the host rock's bedding

Copper, zinc, lead; gold, silver, cadmium, tin byproducts

Kidd Creek deposit, Canada

Carbonate-hosted Metal ores are precipitated by chemical conditions as fluids travel through fractures and pore spaces in carbonate rocks

Base metals Mississippi Valley, US

Red-bed copper Fine-grained disseminations of base metal sulphides, normally in shales and sandstones; formed by chemical precipitation of circulating fluids

Copper Zambian copper belt

Sedimentary uranium Precipitation of uranium from circulating fluids Uranium Niger, SW US

Placer deposits Chemically stable and physically resistant minerals are transported by water and may be deposited in a sedimentary bed

Gold, diamonds, gemstones Witwatersrand gold, RSA; placer diamonds in Africa

Laterites

Rocks in tropical climates weather to form laterites; some minerals are leached out but several such as aluminium, iron and nickel form insoluble compounds which remain in place

Aluminium, iron, nickel Most of the world's bauxite

Iron formations Iron minerals are precipitated in layers on a sea floor

Iron Hamersley, Australia, Lake Superior region, Canada

Other deposits

Replacement deposits

Bodies of rock out of which ore-forming fluids have migrated leaving behind enough mineralisation to make ore. They are often large, low grade deposits. Often the ore may be further concentrated by circulating fluids at a later date, a process known as supergene enrichment

Gold Carlin, Nevada, US

Lode deposits Formed in veins or shear zones during tectonic deformation

Key source of high grade precious metals; may also contain base metals

Unconformity uranium deposits

Form at or near the contact of overlying sandstone and underlying metamorphic rocks

Uranium Saskatchewan, Canada; northern Australia

Other materials

Coal Decayed plant material, buried and compacted Coal

Evaporite Left over when seawater evaporates in a shallow basin

Potash, salt, gypsum



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Table 24: Common geophysical methods

Method Parameters recorded Application

Magnetics Where rocks have high magnetic susceptibility, there will be a stronger magnetic field and vice versa

Deposits with magnetic minerals such as iron deposits, pyrrhotite-bearing nickel deposits and scarns may be detected directly. Used to aid geological mapping

Resistivity Electric current is forced into the ground through widely spaced electrodes; the amount of current that flows depends on the resistance the rock offers

Economic massive sulphide occurrences exhibit anomalously low resistance. However, other materials also cause low resistivity, so this method should be used in association with other methods

Induced polarisation (IP) Certain bodies can be �charged� by passing an electric current through them. This can then be measured

Effective in detecting disseminated sulphide minerals, either in economic deposits or as pathfinders

Electromagnetics Alternating magnetic field induces a current in nearby conductors which can be measured

Because no contact with the ground is required, this is a useful method in airborne geophysics

Gravity Gravity is not uniform and is stronger over areas where the underlying rocks are more dense and vice versa

Used to indicate areas favourable for further mineral exploration

Seismics

Sound waves travel at different speeds through different rock types, as well as being reflected at boundaries between different rock types. The time they take to travel allows geophysicists to determine the structures of rocks

Widespread method in petroleum exploration

Radiometrics

The presence of radioactivity can be determined using a scintillometer, or gamma ray spectrometer, which can distinguish between the three main radioactive elements in nature - uranium, potassium and thorium

Can be used to assist geological mapping since radioactive elements occur in greater abundance in granites


As the exploration team homes in closer to prospects that look promising, they will use smaller scale exploration processes. Sampling is the process by which small amounts of material are extracted and analysed with the expectation that they will indicate the composition of a larger area. Samples may be taken from the surface, but these do not tend to give a very clear view of the situation at depth. As a result companies will use drilling to take samples from depth. The advantages of this method are that:

(1) Samples removed from underground are less likely to be heavily weathered than those taken from the surface;

(2) Through many of these methods it is possible to keep a record of the whole operation, like a 3D map, in the form of the drill core. This drill core may be split into pieces; different pieces can be catalogued by geologists, tested by geophysicists and geochemists to build up a detailed three dimensional map of the test area. Drill cores may be stored by companies for future testing.

Common drilling methods include diamond drilling, reverse circulation drilling and wireline drilling.

Diamond drilling can also be important for established mines. It can be used to:

� explore for new ore, or outline and map-known orebodies

� investigate rock types and structures

locate ore bodies displaced by faults and other tectonic features

Companies use surface or sub-surface samples to analyse the composition of rocks


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Resources and reserves

When a drilling program has been finished the resources and reserves of a prospect can be calculated using geostatistics. Drill holes are normally spaced at regular intervals. The spacing varies according to geological continuity of the deposit type; they may be widely distributed for regular deposits such as stratiform deposits and coal reefs, but will be much closer together for irregular deposits like shear-hosted gold deposits. There are various statistical methods that can be used to infer, with varying degrees of accuracy, the grades of mineralisation between drill holes. Using sophisticated computer software, it is then possible to make a three-dimensional representation of the deposit.

The difference between reserves and resources is of major importance to mining companies. Broadly speaking, resources are defined as the material of intrinsic economic interest in a deposit, which has reasonable prospects for eventual economic extraction. Depending on the spacing of the drillholes and hence the geological certainty, the resources may be classified as inferred (low certainty), indicated and measured (high certainty). Reserves are only those areas of the deposit that can be extracted economically. They are subject to more engineering and technical review. Reserve estimations come into play when a company starts to consider actually mining a deposit.

Figure 5: Illustration of reserves and resources

IdentifiedDemonstrated

Measured Indicated

Increasing degree of geological assurance

Total resources

Econ

omic

Sub-

econ

omic

Inferred

Reserves

Resources

Zone of economic uncertainty

Source: Evans (1993)2

From prospect to mine The process from discovery of a deposit to the actual opening of a mine is different for every operation, but we have tried to show a stylised representation of the sort of timings associated with the process in Figure 4. It is important to note that it can take several years between discovery of the deposit to actually producing the first product. During this period, projects are cash drains for companies and it is only at the end of the period that they can hope to start to make some money back. This is the reason why the payback period tends to be very important for mining projects. It is also the reason why many larger mining operations are JVs; so that the investing company can share the costs and risks.

2 Evans, A. M. (1993) Ore Geology and Industrial Minerals � An Introduction. 3rd edition. Blackwell: Oxford, 390pp.

Geostatistics allows companies to �fill in the gaps� around drill holes

Differentiation between reserves and resources is important

It can take several years for a discovery to be put into operation as a mine


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Figure 6: Typical timetable for mining project development

Discovery *Drilling programEvaluation / pre-feasibilityFeasibility studyApproval / Go ahead *Funding completedConstruction / Pre-strippingMining

0 1 2 3 4 5 6 7 Time / years


Once a mineable resource has been established, the company will carry out a pre-feasibility study and then a full feasibility study to determine whether a further investment and eventual development is viable. The feasibility study is also used for funding purposes � in order to attract project finance. The cost estimates in a full feasibility study will be in the region of ±15%.

The major question when evaluating a deposit is always the same:

� does it contain enough recoverable and marketable metals, minerals and gems to be dug up, transported to market and sold at a profit, given price and market assumptions?

Diverse risks must be considered by companies in these situations. The most serious risks include:

■ Issues associated with geology (size and grade of the mineable portion of the orebody) and how the deposit can be economically mined.

■ Metallurgy (often underestimated � how much of the metal can be recovered, what is the preferred recovery method; are there any impurities or associated minerals that could affect this?)

■ Economics (metal markets and their forecast behaviour, transportation costs, interest rates)

■ Country risks (political stability, climate, laws)

Other risks may include:

■ The effect of any unforeseen political developments (remember that mine lives are often in excess of twenty years so a long-term view is necessary).

■ Varying currency strengths.

■ Environmental issues, including the cost of eventual reclamation because all activity is based on a finite reserve with a finite life.

■ Availability of workers and local labour laws.

A feasibility study is carried out to determine the project�s viability

All risks must be considered


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These must be offset against any benefits of starting a mine in a particular area; for instance, local or national governments will often give a company tax breaks or incentives to base an operation in a particular area.

The feasibility study

A mine is referred to as a wasting asset because at the end of its useful life, its asset (ie, all the economically extractable minerals within it) will be gone. This is an important distinguishing fact when considering mining projects in the context of other businesses. As a result, in this context, the payback period is of key importance. Basically, it is imperative that the profits generated by the operations should be enough to pay back the initial investment, and generate a competitive return on this capital, within a reasonable period of time. It is the job of mining engineers to estimate the payback period, based on their estimates for the scope of the mine and the speed of implementation of full production.

Cost estimation is one of the key aspects of the feasibility study. The final estimate is only as useful as the information needed to calculate it, which can be a moveable feast. Prices for labour, electricity, supplies and transportation must all be considered and, when possible, a company will try to lock in long-term contracts to isolate itself against volatility in these costs.

Other costs that may have to be factored in may include the construction of infrastructure. For instance, projects in the undeveloped regions of Canada, Africa and Australia would demand high cost investment in building roads, railways, power lines and, in some cases, even villages and towns for the miners to stay in when they are working at the mine. In lower cost, less developed countries, companies may come up against higher tax levels, corruption of local officials, and even high security risks, such as political instability.

One other issue that is important, and that is topical at the moment, is the issue of workforce health. Issues such as a high proportion of the workforce with illness can add extra costs to a project. The example of the South African mining industry is a good one; over 20% of workers are HIV positive and mining companies in South Africa are having to budget money to treat their workers.

Extraction issues may also be important. Geological issues include:

■ Orientation of the deposit: what is the best mining method to use? Awkward orientations make handling the ore underground demanding, and a lack of strength in the rocks can make underground and open pit development difficult.

■ Associated mineralisation: sometimes the mineralisation of a deposit can affect the processing methods used, sometimes new methods have to be invented to extract metals and sometimes impurities make extraction difficult, if not impossible. It is the role of the metallurgists to overcome these problems and in order to accomplish this, they will have to have samples from each geologically distinct area of the orebody.

■ Reserve estimation: infill drilling (both from surface and underground) is often required to upgrade resources to reserves. Companies are required to

Payback period is of key importance when evaluating a project

Cost estimation is an important part of the feasibility study

Infrastructure development is another important area

General health of workforce is also an issue

Geological issues can be a significant risk


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optimise the cost associated with drilling against the deposit certainty required. Often the reserve estimation must be audited by an outside consultant to check the data (see Bre-X);

■ Complexity of mining: the costs of mining deeper can escalate and also there can be problems with ground stability and temperature at greater depths.

Other issues include:

■ Extraction rate: because economies of scale are particularly important in the mining industry, but not all orebodies can support a large mine. Also, the orientation and depth of the deposit can affect the rate of extraction;

■ Effect of dilution: in an open cast mine, the stripping of the overburden constitutes dilution. In all types of mine, the characteristics of the rocks may require a company to extract a significant amount of barren rock, as well as ore, which costs money. Dilution may reach as high as 20%, which makes the operation far less profitable than it would otherwise have been;

■ Metallurgical risks (see above).

Mine development and mining methods

The choice between underground or open pit mining is one of the most important. The deeper the open pit, the greater the waste that has to be removed to yield the ore, and the higher the costs.

Since it is cheaper, open pit is every miner�s first choice for a mine, especially if the deposit is a large scale, near-surface body. The first stage is for a rock mechanics engineer to assess a safe slope angle for the pit (ie, how high the benches can be and how wide) so that the walls don�t fall down. Then, it is necessary to assess how much waste rock needs to be mined and to balance this with the mining rate. The placement and diameter of the first bench of the pit, and placement of support buildings must also be carefully designed so that there is space if further expansion were to take place. Also, since each successive bench is smaller, the depth of the pit is determined by the diameter of the first bench. The amount of waste rock that must be mined for each amount of ore is called the stripping ratio. In most cases this decreases along the life of the mine. An open pit is only profitable if the value of the ore exceeds the cost of mining the waste.

Table 25: Summary of features of surface mining techniques

Surface techniques Typical setting Key features

Open pit or open cast Surface to sub surface deposits but can extend to +500m in depth. Applies to most metals and minerals.

Generally high throughput but can be very small scale. Simple and low cost versus underground. Relatively safe operationally. Enjoys incremental economies of scale. Generally capital intensive and highly mechanised

Strip mining Surface deposits mining thin, horizontal, near surface seams over a large area

Large scale, low cost operations that move over a large area. Overburden is removed, orebody is excavated and overburden is replaced

Dredging (includes use of suction pumps, etc)

River beds (alluvial), seabed, beach sands. Applies to heavy minerals eg, gold, diamonds, tin and titanium mineral sands.

Low to high throughput, low barriers to entry. Very low cost and highly mechanised


Stripping ratio very important to profitability

Open pit or underground is an important question

Open pit is cheaper and simpler although planning is more involved than many people think


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Figure 7: Explanation of stripping ratio in open cast mines

A flat or lenticular shaped orebodylends itself to low stripping ratio. Thefinal pit depth is then more determinedby the geology of the ore body and notthe economics of production. A certainamount of pre-stripping may berequired before production starts andthis is often charged to capital costs.

A vertical or steeply dipping orebodysuffers increasing stripping ratio as thedepth of the pit is extended. The finaldepth of the pit is then determined bythe economics of extraction rather thanthe geology of the orebody. In somecases the mining will be continuedusing underground techniques e.g.Palabora, South Africa

Initial pit - no stripping

Orebody

Intermediate pit - strippingratio now 1.5 to 1

Final pit - life of mine strippingratio 3 to 1

Source: UBS

For orebodies where open pit mining is not viable (or where it has been undertaken to the greatest possible depth), underground mining is used. The method of mining is again determined by the type of orebody, coupled with its orientation, thickness and regularity.

Several different underground mining methods may be used and the table below shows a summary of some of the most common.

Table 26: Common underground mining methods

Stoping methods Suited to Description

Cut-and-fill stoping Irregular ore bodies; wall rocks cannot support loads over large stoping heights

The stope is mined upward from below in horizontal cuts, each slice is blasted to the floor and then brushed into the ore pass. Once a level has been entirely mined, it can be backfilled and the level above is blasted

Blasthole stoping Large, regularly shaped, steeply-dipping orebodies with competent host rock

Low-cost, bulk method. Sublevels are driven through an orebody at regular intervals (20m) and a vertical raise is made to connect sublevels. It is then opened across the width of the stope to produce a slot shape. Blastholes are drilled out in a fan-like pattern and detonated to fill into the slot

Vertical crater retreat Wide, steeply dipping orebodies (development of blasthole stoping)

Room-and-pillar

Shrinkage stoping

Sublevel caving


Underground mining must be used at greater depths


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Mining � digging the holes

Figure 8: The mining flow sheet

Mining

Processing Refining Market

RockDeposit

Increasing Value AddedSource: UBS

Mining can be broken down into three basic processes, with a fourth option:

■ Rock breaking

■ Loading

■ Transport (or hauling) to process site

■ Backfilling (optional in underground mines)

The first three are summarised in the table below.

Table 27: Comparison of mining processes in surface and underground operations

Rock Breaking Loading Transport

Surface Explosive: drill and blast Non-explosive: rip, load direct

Front-end loader, back hoe, shovel, water jet, suction pump

Truck, train, by-hand (very rare), conveyor belt, pipe

Underground

Explosive: drill and blast, gravity (block cave method) Non-explosive: face shearers, road headers

Gravity, by-hand, mechanical loader (diesel, electric or compressed air)

Truck, train, conveyor, by-hand, vertical shaft and any combination of the above.

Source: UBS

Rock breaking generally entails the use of explosives. Some rock types, however, are soft and can be broken by mechanical means. Most of the world�s coal is broken in this way and the use of explosives in coal mines is restricted to specific situations. In some mining situations no breaking is required at all, as in the mining of diamonds off the seabed, which are quite simply sucked up a large underwater �vacuum cleaner�.

Where explosives are used, holes are drilled into the rock, charged with explosives and then blasted. Drilling holes in rock uses considerable amounts of energy, the cost of which makes up a meaningful portion of mining costs. The

Rock breaking generally entails the use of explosives


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miner must therefore optimise the blasting configuration against the level of desired breakage (ie, average size of the broken rock). Explosives are also expensive and again the miner has to maximise the explosive efficiency (and safety) through design, planning and control, without the need for secondary blasting. Secondary blasting occurs when large rocks that result from poor blasting, have to be re-blasted.

In open pit mining operations, rock is blasted in a series of benches and the broken rock is assigned to the process plant or waste rock dump, depending on the contained value. Underground, ore is produced from stopes, whilst access to the stopes is made via tunnelling, usually in barren rock (waste), also referred to as development.

As previously stated, explosives are the main rock-breaking tool available to the miner. The explosion sets up a shock wave that fractures the rock, and produces large amounts of gas, which propagate the fractures and heave the rock away from the face. In designing a blast, the mining engineer has to consider, amongst other things, the required degree of breaking and heaving in conjunction with the rock conditions, the proximity of buildings and other structures, appropriate explosive and initiation.

The availability of a free face in the underground situation becomes more important, especially in stoping, where the free face has to be established. At a development face the free face has to be created by using a �cut�. This requires intensive drilling and use of explosives, therefore the cost per tonne of broken rock from development should always be more than that of stoping. Stoping methods that depend on development techniques, such as drift and fill, will always be more expensive, in terms of cost per tonne broken, than underground bulk methods such as sub-level caving.

Loading is the process of moving the broken rock into a conveyance for transport to the processing plant. This can be a simple process making use of gravity to feed broken rock into rail cars, or by use of mechanical loaders to load trucks.

In many underground situations, broken rock has to be transferred from one system to another before arriving at the processing plant and may require that the rock is re-handled a number of times. Re-handling adds expense for little or no value added and reduces the overall efficiency of the operation.

Transport is the most critical of the three processes. In most cases the mining operation is only as good as the transport system and has to be diligently managed. Rock transport can take many forms, the most common being the use of trucks both in underground and surface operations. Nearly all open-pit mines use a fleet of large trucks specifically designed for the purpose. These trucks have a capacity (payload) of 30-300 tonnes each, depending on the scale of production required. In many cases the fleet is managed by a sophisticated despatch system, which makes use of GPS technology, and because of the capital-intensive nature, effective truck utilisation is critical and carefully managed.

The rock must be moved to the processing plant

Transport is extremely important


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Figure 9: A typical underground mining operation showing extraction, loading and transport methods

Mineral bearing ore toprocess plant

Barren waste todump

Ore

Hoist

Stope

Load2

Load1

Haul

Minedout

Wastedevelopment

Face

Orepass

Haulage

Shaft

Head frame orheadgear

Conveyor belt

Storage BinWindinghouse

= rock flow

Source: UBS

Underground, the shaft hoisting system is the critical element. Shafts vary in inclination from shallow to vertical. Some shallow mines use trucks to haul to surface up a system of underground roads or ramps; this is generally viable to a depth of around 400 metres. Where this is not feasible then a hoist is employed.

Hoisting is generally automated and usually takes place on a continuous basis. Again the capital-intensive nature of hoisting systems, tied up in the cost of the equipment and the cost of the �hole in the ground�, requires maximum shaft and hoist utilisation. The hoisting system is usually fed by a horizontal transport system that might take the form of trucks, trains or belt conveyors. Conveyor belt systems are common in surface and underground operations and can be used as either the principal transport system or as part of a secondary system.

Once a stope has been fully mined out, it may be necessary to backfill it with waste materials either so that ore adjacent to the stope can be mined out, or as a further means of support. Backfill may be waste rock from underground, sand brought down from the surface or processed mill tailings; it generally has some cement added to it. Backfilling may take place concurrently with the mining of a stope, or it may be carried out only when mining of a particular stope has totally finished.

Other capital-intensive systems needed for underground mining include ventilation, access declines, underground workshops, stores and drainage systems (all the water entering the mine and used in the mining process must be pumped out).

Shaft hoisting systems are critical to underground mines

Stopes may need to be backfilled to prevent collapse


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Minerals processing (beneficiation) In nature most metals, with the notable exception of gold, occur as one of the components of a compound. For example copper is often found as a compound of copper, iron and sulphur known as chalcopyrite (Cu,FeS). In a typical copper deposit the chalcopyrite is distributed within the host rock and the overall concentration of copper may be as low as 1% (10,000 parts per million). Gold is effectively inert and is normally found in its natural state but usually very fine-grained. In some gold mines the concentration can be less than 2 grams per tonne (2g/t), equating to 0.0002%. With such low concentrations, the rock has to be reduced dramatically in size to liberate the target mineral or at least expose a surface on the target mineral for further processing.

Figure 10: Crushing and grinding � why is it needed?

Rock ex-mine, no targetmineral exposed

Target mineral

Divide by 624Target mineral now mostly liberated

from host rock

Source: UBS

Naturally there are exceptions. Coal is washed and sized according to the customer requirements and rarely undergoes grinding on the mine site. In some operations, such as the mining of beach sands for titanium minerals, the process bypasses crushing and grinding and goes straight to concentration. All mined material requires some processing to yield a marketable product. Processing plants are generally sited on surface at or near the source mine and the typical process flow is as follows:

■ Crushing and grinding

■ Concentration

■ Refining

Some operations, such as diamond mining from the seabed, only require the final steps of concentration and refining, and not the first steps of crushing and grinding.

Minerals processing is the initial separation and concentration of the mineral-bearing material

Some materials such as coal can bypass the minerals processing stage


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Crushing and grinding reduce the size of mined (referred to as run-of-mine) rock to a predetermined size, usually that of fine sand, so that the next step of concentration is effective. Crushing and grinding is expensive so there is a trade off between grinding for total liberation or accepting that some of the target mineral will be lost.

Concentration is the first real value adding stage and significantly raises the concentration of the target mineral. There are two broad categories:

■ Physical (including flotation, gravity, magnetic)

■ Chemical

Of the physical methods, flotation is the most important. In froth flotation the physical properties of the target mineral are manipulated through the addition of reagents, so that the mineral will attach itself to air bubbles in liquid. These bubbles, with the target minerals attached, form a froth at the surface of each flotation cell and are simply skimmed off leaving the waste or gangue material behind. The basics of the process are shown in the diagram below. Figure 11: Basic features of froth flotation

Feed

Reagents

Air bubble

Sulphide grains

Compressed air

The nature of the surface of the sulphide grain isreconditioned by the addition of reagents to make itwater-averse and attracted to air

Froth

Concentrate

Barren waste to re-treatment or tailings

The grain will then attach itself to an air bubble which floats to thetop of the cell and the froth is simply skimmed off as aconcentrate

Agitator

Source: UBS

Crushing and grinding is the first stage to reduce particle size

Concentration starts to add value

Froth flotation is commonly used in copper, lead, nickel and zinc processing


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Flotation is very important in the sulphide-based metals including copper, zinc sulphide nickel and lead. Copper, in particular, is the product of flotation, with around 75% of mined production being derived from the process. Most of the world�s silver is also produced this way, as it is, for the most part, a by-product of lead and zinc mining.

Gravity and chemical methods are the next most common. Gravity concentration simply uses the difference in specific gravity of the target mineral and the host mineral to capture the valuable part. Panning for gold is its simplest form. One other method of concentrating can be nothing more than physical sorting, such as is used in diamond production.

Chemical concentration methods are manifold, but the important methods are:

■ Dissolution

■ Solvent extraction

These processes fall under the general categorisation of hydrometallurgy and some processes may include any combination of the above. Dissolution can take place either under ambient conditions, or under specific conditions of temperature, pressure and acidity. Where temperature and pressure are raised, the process is called autoclaving. In Australia a number of nickel deposits, known as laterites, are processed under high pressure, heat and acidity and this process is called pressure-acid-leach or PAL. In many cases, mines produce a concentrate that is then sold on to specialist refineries and smelters for final refining before going to market. The waste products from concentration are known as tailings and are dumped.

PAL technology is not new. However, the process was brought into sharp focus in the mid 1990s with the development of the �dry� nickel laterites in Australia (dry laterites are those formed under dry weathering conditions consistent with an arid climate). In the PAL process the feed is put into a pressure vessel where the temperature and pressure are raised and the pH is lowered (to raise the acidity). This has the effect of essentially dissolving all the components of the feed. The solution is then de-pressurised, known as flashing, and the nickel and cobalt are recovered selectively, or together as a precipitate or a mixed sulphide, or as metal through electro-winning.

The technology was set to revolutionise the production of nickel and cobalt in the late 1990s and sent the respective markets into a spin with Australia set to become the world�s largest producer of nickel in a few short years. Further, the first proponents of the use of PAL with the dry laterites were forecasting fantastic cost savings. Cash costs as low as US$1.00/lb of nickel produced (derived by netting the actual cash cost against the cobalt credit) were being advertised as all the deposits could be mined by inexpensive surface techniques. Production costs this low were unheard-of in the industry and put the established producers into a panic. However, all has not turned out as hoped. Engineering the process to the scale required has proved problematic and costly, and none of the original projects have been able to sustain production at the design level.

Hydrometallurgy is a method of chemical concentration


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However, steady progress is being made and the technology may yet prove to be the key source of nickel in the future.

SX/EW stands for solvent extraction/electro-winning, and refers to a process that bypasses many of the energy hungry steps of crushing and grinding. Metals are leached to form highly concentrated solutions, which can then be separated using solvent extraction. The target metal is then extracted from solution in an electrolytic cell. For many years very large, low-grade copper deposits were known to exist but were uneconomic using the prevailing technology. As such, they were ignored or mined and dumped as waste to access deeper high-grade sulphide deposit. With the development of SX/EW in the 1980s, many of these low-grade copper deposits have been successfully exploited. It should be noted however, that SX/EW only applies to parts of a sulphide orebody near to its surface, that is, those parts that have been oxidised; therefore the resource base for SX/EW is far more limited.

Mining takes place conventionally and the ore, after minimal treatment, is stacked on impervious membranes known as leach pads. The stacks can be several tens of meters high. Acid, usually sulphuric acid, is then delivered to the top of the stack via drip lines or sprinklers. As the acid percolates through the stack the copper is dissolved and the solution (in the form of copper sulphate and known as a pregnant solution) is collected at the bottom of the stack. The solution is further purified by solvent extraction that involves the selective transfer and re-transfer of the copper solution into and out of an organic liquid. Electrolysis is then utilised to plate high purity copper onto stainless steel cathodes. In many cases the end product is acceptable for delivery to the London Metal Exchange with a purity of 99.99% copper. High quality SX/EW operations can produce copper cheaply, with cash costs around US$0.40 to US$0.50 per pound. A similar method known as heap leach can be used in the extraction of gold. Instead of sulphuric acid, weak cyanide solution is delivered to the stack and the gold is recovered using a combination of hydro and pyro-metallurgical processes.

Refining is the final step before releasing the product to market and adds significant value. There are three important methods:

■ Electro-winning

■ Pyro-metallurgy (smelting)

■ Precipitation

■ Physical sorting

Pyro-metallurgy and electro-winning are the most important. In electro-winning, still a hydro-metallurgical process, electrolysis is used to capture the target metal and very high levels of concentration, up to 99.99%, can be achieved in this way. Pyro-metallurgy uses very high heat to melt, separate and concentrate metals, but this method is energy intensive and costly in both capital and operating cost terms. As a consequence many smelter/refineries make use of a

SX/EW provides an economic way to treat low-grade deposits

Refining is the final step in producing metals

Metals may be extracted using electric currents in electrolysis


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combination of pyro-metallurgy and electro-winning. In the process the concentrate, which generally arrives direct from the mine in the form of a sulphide, undergoes three stages of processing, namely: roasting, smelting and converting, and refining. In the roasting stage the sulphur is driven off (it is generally then used to produce sulphuric acid). During smelting and converting more sulphur is driven off along with iron and other impurities, which are collected as slag. The molten matte is then cast to produce anode plates. In the final refining process the anodes undergo electrolysis to produce high purity cathodes as described above. Many smelters may recast metal to the final customer specifications.

Primary aluminium is produced by electrolytic techniques. The raw material for aluminium production is alumina, which is refined from bauxite. In the Hall-Heroult process, alumina is dissolved in molten cryolite (a complex sodium aluminium fluoride mineral) in a reduction pot and high amperage direct current is applied. In the reaction the oxygen in the alumina is driven off and molten aluminium is then tapped off, with the cryolite being recycled.

However, the process is extremely power hungry and around 40% of the processing cost in aluminium production is power (conversely aluminium recycling requires only 5% of the power required to produce primary aluminium). Consequently, aluminium smelting takes place in regions of traditionally low power prices, usually associated with hydro-power (prices greater than US¢3.5/kwh are generally not economic). Such power resources, however, are subject to the vagaries of climate change and poor management, as has been seen in the Pacific northwest of the US and in Brazil.

The process is also polluting, with large amounts of CO2 and trace fluorine being produced as the carbon anodes are consumed in the process. This has put pressure on aluminium companies to find an alternative process and so far only Alcoa, the world�s largest aluminium company, has made any progress in finding a more environmentally friendly process. The company is currently developing a process that greatly reduces CO2 pollution based on �inert anode� technology. In the Hall-Heroult process the carbon anode takes part in the reaction and hence produces CO2. As the name suggests, the anode does not take part in the Alcoa reaction and hence a substantial reduction in CO2 emission occurs.

The end of the road � what�s left? All that�s left at the end is the waste from the various processes (some of which may be recycled) and the refined product. What happens to the refined product we will deal with in the following chapters, but what happens to the non-recyclable waste has become of much greater interest in recent years.

Harmful substances from mines are normally the waste products of processing, although sometimes the waste material from the mining process itself can be dangerous. Waste rocks may contain sulphides that react with water and oxygen at the surface to produce acids such as sulphuric acid; run-off water from mines is often run through a treatment plant to clean it. Waste rocks themselves may be used as backfill, although there is often much left over and all mines have to be

Aluminium is a good example of metal extraction using electrolytic techniques

Disposal of waste is an important aspect of mining

Waste from processing may be harmful


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designed with provision for a waste rock dump that will not collapse and will be insulated from the local groundwater.

The milling, smelting and refining functions can also generate waste materials. Waste water from milling and other processes may contain organic and inorganic compounds, which also must be disposed of. For example, in gold extraction the weak cyanide-containing solutions must be broken down into their core elements; the waste waters may be held in a pond where sunlight and air help to break the cyanide down, or using a cyanide destruction process.

Tailings, the solid waste from the milling process, also often contain hazardous waste materials. Examples of these are the arsenic commonly found in waste from gold ores and the radioactive products found in uranium waste. Tailings may be disposed of in a tailings dam, or pond, which is designed to keep the by-products where they are and prevent them from reaching the environment, either by the effect of wind or water. When a tailings dam gets full, it must be capped with an impermeable material to prevent leakage, which is then usually seeded to allow plants to grow on the surface and help to prevent erosion of the cap.

Waste gases are also an issue and the mining industry has made giant strides in recent years in scrubbing waste gases, such as sulphur dioxide. However, there is still some way to go in fixing this problem (it is estimated that some 60% of all sulphur emissions in the atmosphere come from smelting and other industrial activity).

Solid waste may be stored in a dam or pond, which may be capped to prevent leakage

Waste gases must be scrubbed


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Steel � a major subset of the metals industry Steel is one of the most important, multi-functional and adaptable materials in use today. Properties that allow this multifunctionality include the fact that it is hot and cold formable, weldable, has good machinability, is hard and resistant to corrosion, wear and heat. Among a myriad of uses, some of the most important are in cars, as a support material in construction, power lines, pipelines and containers.

Steel manufacture Iron was first used to replace bronze in early tools and weapons and has been in use for over 6,000 years. It was slow to catch on initially because of the difficulty of smelting, forging, hardening and tempering the iron. In early times, iron was smelted with charcoal made from wood, but later coal was adapted since it was a more efficient source of heat. In 1646, the first successful iron works, Saugus, was founded in America. Iron became the dominant material for the industrial revolution and enjoyed a dominant position for over 200 years.

During the mid-nineteenth century, the age of steel began with the invention of the Bessemer process in 1856, which allowed large-scale production of steel at reasonable cost. Bessemer�s breakthrough was based on getting carbon out of cheap carbon-rich cast iron, rather than getting carbon into low carbon wrought iron. This he accomplished by blasting oxygen through the iron mix, which oxidised the carbon to form CO2. The process was modified at various times later in the century by introducing small amounts of other metals into the mix. For instance, the introduction of manganese strengthened the mix, allowing the production of construction steels and alloying with chrome and nickel produced stainless steel.

The development of the industry progressed further during the twentieth century with more attention being paid to the forming process. The Hot Strip mill was invented in America, allowing massive blocks of metal to be broken down into ribbons and then coiled. This innovation gave birth to the automobile age, metals packaging and many consumer goods.

With the establishment of a volume steel economy, scrap steel also started to become important. Electric arc steelmaking became one of the most significant recycling processes. As more developments were made, the steelmaking process grew faster and faster � 50 years ago to reach strip form from raw materials took over a week, now it can take as little as eight hours.

Raw materials used for steel manufacture There are three main raw materials for steel; iron ore, coking coal and scrap.

Iron ore: Trade in iron ore has grown with steel production particularly in China. The major exporters are Australia and Brazil that respectively supply Asian and European demand. The dramatic growth in China�s imports has driven bulk freight rates to record levels. Approximately one and half tonnes of iron ore is needed to make one tonne of steel.

Steel is one of the most important metals

Iron usage dates back 6,000 years

Bessemer process made large-scale production possible

Hot strip milling

Electric arc furnaces

Traded iron ore generally contains 60-68% iron in oxide form


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Coking coal: Coking coal is the other key raw material for the production of steel via blast furnace process. Coking coal has specific physical properties that allow the coke produced from the coking coal to sustain the blast furnace charge. Coking coal has been in short supply in 2004 because of operating problems in key production areas of Australia and Canada. 2005 settlement prices of US$120 per tonne have doubled 2004 prices.

Chart 74: Global exporters of iron ore in Mt, 2003 Chart 75: Global importers of iron ore in Mt, 2003

020406080

100120140160180200

Australi

aBraz

ilInd

ia CISAfric

a

Canada

EU (15) US

020406080

100120140160

China

Japan

EU (15)

Korea CIS

Taiwan US

Source: IISI 2004 Yearbook Source: IISI 2004 Yearbook

Scrap: Scrap steel is used mainly in electric arc furnace production of steel, although 15% of the charge to the basic oxygen furnace is also scrap. Scrap is classified as home, prompt or obsolete. Home scrap is generated in the plant, but supply has decreased in recent years owing to the advent of continuous casting. Prompt scrap is from steel product manufacture, and the supply of this is also waning. Obsolete scrap is most people�s idea of scrap � it is post-consumer scrap such as shredded cars, consumer products, etc. Home and prompt scrap are of low quality and are low in residuals, while obsolete scrap is high in residuals and cannot be used in large quantities for production of high quality steels.

Chart 76: Net steel scrap importers (exporters) in Mt, 2003

-15

-10

-5

0

5

10

15

EU (15) US China India Japan Korea Taiwan CIS Turkey Brazil

Net scrap importers (exporters) in 2003

Source: IISI 2004 Yearbook

The IISI estimates that some 420 million tonnes of scrap (44% of total output) were consumed in the steel industry in 2003 with China and Turkey being the largest net importers and the CIS and the US being the largest net exporters.

Coking coal used to make coke, a key blast furnace ingredient

Scrap or recycled material used in both electric arc and blast furnace processes


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Steel production There are then two major methods of steel manufacture. The bulk of steel is made in blast furnaces (65-70%), which are integrated, large-scale operations (that have to be sized at 3-4 million tonnes per annum to be economic), while approximately 30-35% comes from electric arc furnaces (also called EAF or mini-mills), which are normally much smaller operations of 200-300,000 tonnes per annum.

Blast furnace/basic oxygen steel making starts with the sintering of the iron ore and other fluxes. The materials are crushed, homogenised and mixed with limestone and coke. The mixture is sintered and then fed, in alternating layers with coke, into a blast furnace. This is injected with hot air and the coke burns to produce carbon dioxide, reducing the iron oxide to produce pig iron (94-96% iron, 3-4% carbon and 1-2% non-ferrous elements).

Figure 12: The iron cycle in steel production

Iron ore

Lump(60-68% Fe)

Fines(60-68% Fe)

BlastFurnace

SinterPlant

PelletisingPlant

BlastFurnace

Direct Reduced Iron (DRI)(93% Fe)

Hot Bricketed Iron (HBI)(93% Fe)

ScrapEAF

BOC

Longproducts

Slabcasting

HRC

CRC

Coatedsteel

Flatproducts


Electric Arc Furnace technology offers the advantages of lower capital cost and utilises scrap as the primary raw material. The process economics also relies on cheaper power. The smaller production scale, linked with thin casting technology, also offers logistic and flexibility benefits. These competitive advantages have been eroded in recent years with dramatic increases in both scrap and energy costs. The limited ability of EAFs to produce flat products, for example sheets and tin plate, has also constrained this method.

EAFs are smaller scale but have yet to replace blast furnaces


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Steel products can be broadly classified as flat and long products. Flat products are those products such as slabs, which may be converted into hot rolled or cold rolled coils and/or coated. They are used primarily in manufacturing industries, such as white goods and autos. Flat rolled products are usually made by integrated producers. Long products are used for construction-type applications (I-beams, rebars). They are usually of lower quality and are generally produced by EAF plants.

■ In the basic oxygen furnace, pig iron from the blast furnace is purified in an oxygen converter (basic oxygen converter, BOC) and combined with additional products such as limestone and scrap, which burn off most of the unwanted metals and other contaminants, leaving crude steel as the end product. Additions of other metals such as manganese occurs at this stage for specific alloying characteristics.

■ In the EAF, steel is recycled from scrap. Heat is supplied from electricity that arcs between graphite electrodes and a metal bath. This process is suitable for almost all stainless steel and other alloyed steel products, and for most long carbon steel products. However, it is not a competitive production method for high purity flat carbon steel products. Generally the scrap-based process is advantageous with respect to investment cost and the flexibility of operations.

Chart 77: Crude steel production by process, 2003 Chart 78: Flat products as % of total steel production, 1994-2003

0%10%20%30%40%50%60%70%80%90%

100%

China World ex China Total

Oxygen converter Electric Furnace

20%25%30%35%40%45%50%55%60%65%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

China ROW

Source: IISI Source: IISI

The molten steel then undergoes continuous casting, whereby it is converted to semi-finished products. The molten steel is poured and solidified to produce either blooms or billets (which may be transformed into long products), or into slabs (used for flat products).

All semi-finished products are then rolled at high temperatures, a process known as hot rolling. They are drawn and flattened through rollers to give the metal the desired dimensions and metallurgical properties.

Some steel products go through an additional step of rolling at ambient temperatures (a process known as cold rolling).

Flat products better quality, long products used for construction; normally made by EAF plants

Products rolled at high temperatures are known as hot rolled (HR)

When they are cooled and then rolled, they are called cold rolled (CR)


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For cold rolled applications, coils are placed in the annealing furnace and heated to 1,300 degrees Fahrenheit, then gradually cooled to room temperature over a four-day period. This softens and stress relieves the metal to give it uniform properties for future fabrication. Oil may be applied to the surfaces for protection from rust.

A final operation, such as coating with zinc (hot dip or electro-galvanised sheet for the automobile industry) or tin (tin plate for tin and beverage cans) may then be carried out.

Figure 13: Manufacture of steel

Source: Nippon Steel Corporation

Modification of steel properties Properties of steel may be modified by the addition of small amounts of other metals or metal oxides into the structure of the steel. Stainless steel is an example of this process, where the addition of nickel and chromium makes the steel more rust resistant. This should not be confused with the process of galvanising, whereby steel is coated in zinc after processing.

The table overleaf lists a number of trace elements that are present in alloy steels, their properties, and the resultant uses of the new alloys.

Coating (where applicable) is the final process

Properties may be modified by including a variety of trace elements


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Table 28: Trace elements used in alloy steels

Trace element Proportion Effect Uses Manganese 0.3-0.8% Reduces oxide formation and counteracts the influence of iron sulphide All commercial steels

<1.8% Increasing Mn content gives improved ductability for equal tensile strength

1.3-1.6% Substituting for 3% Ni (with 0.3-0.4% C, and 0.3% Mo)

<2% Non-shrinking tool steel

Nickel 0.5% Higher strength than carbon steel

>10% Higher tensile strength, greater hardness, but more brittle

2-5% Ni, 0.1% C Case hardening

2-5% Ni, 0.25-0.4% C Crankshafts, axles and connecting rods

Chromium Increased hardness, resistance to wear Contained in stainless steel, easier to machine than nickel steels

NiCr Combination of Ni and Cr properties

4.5% Ni, 1.25% Cr, 0.35% C Hardened simply by cooling in air

Low Ni-Cr Heat treated to give desired properties Construction

Molybdenum 0.5% Increased strength at boiler temperatures; although mainly used in combination with other elements

High speed steels, magnet alloys, heat and corrosion-resistant steels

Ni-Cr-Mo Less brittleness Ordnance, turbine rotors

Vanadium Oxide scavenger

Cr-V 0.15% V Auto axles, coil springs

Tungsten Raises critical points in steel Hot-working tool steels and magnet-, corrosion- and heat-resistant steels

Silicon 4.3% Si, 0.1% C, 0.1% Mn Electrical purposes, eg transformer coils

Si-Mn 1.5% Si, 0.8% Mn, 0.5% C Springs

Si-Cr 3.5% Si, 8% Mn, 0.4% C Automobile valves

Copper Lowers critical points and provides more resistance to atmosphere

Cobalt Decreases hardenability but sustains hardness during tempering Gas turbines, magnets

Boron 0.003-0.005% Increases hardenability Hard facing alloys, nuclear control rods

B-Mo High tensile steels

Source: www.key-to-steel.com, UBS estimates

Uses of steel Steel has a myriad of uses. Its main end markets are listed below:

Table 29: End uses of steel

General use Specific use Flat or long? Competitors Other points

Manufacturing Autos, white goods Flat Aluminium and its composites are major competitors

Appliances Flat Plastic liners Strong market position

Containers Food cans Flat Aluminium, plastics, paper products Lost out on the lucrative beverage can market but has a foothold in food cans

Oil and gas Pipe systems, ships Flat NA Since 1982 the number of drilling rigs and pipelines has fallen

Construction I-beams, rebars Long Wood and concrete High growth industry; in 1991, 1 million new homes were built in the US, in 2002 it was 1.7 million

Transport systems Rails Long NA



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Stainless steel Stainless steel is a major subset of the steel industry. It is produced by alloying steel with nickel, chromium and other materials.

Production Stainless steel is produced in an arc furnace where scrap steel is melted with the aid of graphite electrodes and high-voltage alternating current that forms powerful arcs between the electrodes and the scrap. The molten steel is purified in a converter, where carbon, silicon and sulphur are removed by blowing a mixture of oxygen and argon through the melt. Various alloying materials are also added in the converter. Most steel is then continuously cast. The product of this is preheated to approximately 1,250°C before it continues to the hot rolling mill.

The hot-rolled strip is annealed in a continuous furnace before cold-rolling, ensuring that the properties of the material are homogeneous. The strip is treated with acids or other liquid chemicals combined with an electrical current in order to remove oxides. It then proceeds to the cold rolling mill. The stainless steel becomes progressively thinner and harder during cold rolling; the process may also be described as cold-hardening.

Four major types of stainless steel ■ Austenitic is the most widely used type of stainless steel. It has a nickel

content of at least 7%. The range of applications of austenitic stainless steel includes housewares, containers, industrial piping and vessels, architectural facades and construction structures.

■ Ferritic stainless steel has properties similar to mild steel but with better corrosion resistance. The most common of these steels contain 12-17% chromium, with 12% chromium steel used mostly in structural applications and 17% chromium steel in housewares, boilers, washing machines and indoor architecture. Ferritic stainless steel does not contain nickel.

■ Austenitic-Ferritic has some nickel content. The structure delivers both strength and ductility; it is used in the petrochemical, paper and shipbuilding industries.

■ Martensitic stainless contains 11-13% chromium offering strength and hardness with moderate corrosion resistance. It is used in turbine blades and knives.

Market development Stainless steel was invented in 1912 with first commercial production in Sheffield in 1913. Stainless steel cutlery production began in 1914 based on 18/10 stainless steel, namely 18% chromium and 10% nickel. Stainless steel quickly found applications in industry and architecture.

Current markets are driven by industrial production and consumer affluence. Europe and China are the world�s major markets with 50% of global demand. Stainless steel slab production is dominated by Europe with nearly 40% of global supply. China is rapidly building its capacity but in 2004 constituted only 6% of supply; Japan/Korea/Taiwan made up 34% of global supply.

Stainless steel production starts in an electric arc furnace

Converting, rolling and annealing complete the process

Austenitic the most common

Ferritic contains no nickel

Duplex stainless steel

Martensitic contains 11-13% chromium

Stainless steel invented in 1912

Stainless steel growth reflects rising global standards of living


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Pricing structure Stainless steel pricing is unusual in that it comprises an ex-mill price plus alloy surcharge that reflects raw material costs. Nickel and chrome comprise a significant and highly variable component of the total cost of stainless steel. The industry also refers to the conversion margin that is measured both in cost per tonne and as a percentage of the net stainless steel transaction price; this is the difference between the transaction price and raw materials costs. The conversion margin varies for different types of materials and with prevailing raw material prices. In recent years surging raw material costs have caused conversion margins to fall below 50%. Similarly the alloy surcharge has risen with higher nickel and ferro-chrome prices.

Chart 79: Stainless steel price and conversion margin Chart 80: Stainless steel base price and alloy surcharge

30%

35%

40%

45%

50%

55%

60%

65%

1997 1998 1999 2000 2001 2002 2003 200410001200140016001800200022002400260028003000Conversion margin LHS

Stainless price US$/t (304) RHS

0

500

1000

1500

2000

2500

3000

3500

Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04

Base price SurchargeUS$/t

Source: CRU Source: CRU, AvestaPolarit

Growing oversupply the long-term concern Asia has the fastest growing stainless steel industry and Japanese, Korean and Taiwanese exports are likely to pressure markets in Europe and the US. Projected expansions in China are likely to see it become a net exporter by 2008 such that by 2008-2009, we believe global capacity increases will well outstrip growth in demand, further intensifying the competitive pressures. We expect that transaction prices will decline in 2005 and in 2006 under this increased competition and lower raw material prices.

Peaking nickel and molybdenum prices have also revived speculation about material substitution for stainless steel. There has been some substitution of austenitic with ferritic material. The low nickel content 200 series stainless steel products� share has increased to near 30% in China and might increase further in the short-term, but we believe it will subsequently decline to its current level. We expect stainless steel raw material prices to moderate in coming years lowering substitution pressures.

Stainless pricing reflects raw material costs

Asia�s capacity expansions overshadowing Europe and the US

Raw materials prices a major issue


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Appendix


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Definitions of common terms Acid mine drainage Acidic run-off water from mine waste dumps and mill tailings ponds containing

sulphide minerals. Also refers to ground water pumped to the surface from mines

Adit A tunnel driven horizontally into a hillside to provide access to a mineral deposit

Aerial magnetometer An instrument used to measure magnetic field strength from an aeroplane

Aeromagnetic survey A geophysical survey using a magnetometer aboard, or towed behind, an aircraft

Agitation In metallurgy, the act or state of being stirred or shaken mechanically, sometimes accomplished by the introduction of compressed air

Alloy A compound of two or more metals

Alluvial placer Gravels that have been transported and deposited by flowing waters, streams, creeks, etc, depositing placer gold and other valuable minerals. Also called an �alluvial deposit�

Alteration Any physical or chemical change in a rock or mineral subsequent to its formation. Milder and more localised than metamorphism

Aluminium A light, malleable metal that is a good conductor of electricity. Commonly found in nature in oxidised form, bauxite

Amalgam A mixture of different elements or substances; such as an alloy of mercury with another metal

Amphibolite A metamorphic rock largely made up of amphibole and plagioclase minerals

ANFO Acronym for ammonium nitrate and fuel oil, a mixture used as a blasting agent in many mines

Anode The positive electrode at which oxidisation occurs. The other electrode that completes the circuit in an electrolysis reaction

Anthracite A hard, black coal containing a high percentage of fixed carbon and a low percentage of volatile matter

Anticline An arch or fold in layers of rock shaped like the crest of a wave

Aquifer A water-bearing bed of porous rock, often sandstone

Asbestos One of the characteristics of this fibrous mineral is its high resistance to heat

Ash The inorganic residue remaining after ignition of coal

Assay A chemical test performed on a sample of ores or minerals to determine the amount of valuable metals contained

Autogenous grinding The process of grinding ore in a rotating cylinder using large pieces of the ore as a grinding medium instead of conventional steel balls or rods

Back The ceiling or roof of an underground opening

Backfill Waste material used to fill the space in an underground mine created by mining an orebody

Backwardation A situation when the cash or spot price of a metal stands at a premium over the price of the metal for delivery at a forward date. Caused by a shortage of metal deliverable to the exchange in days or weeks rather than months

Ball mill A steel cylinder filled with steel balls into which crushed ore is fed. The ball mill is rotated, causing the balls to cascade and grind the ore (it is the most common method of grinding ore)

Banded iron formation (BIF) A bedded deposit of iron minerals


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Bank Top of the shaft in an underground mine

Basalt An extrusive volcanic rock composed primarily of plagioclase, pyroxene and some olivine. It is normally dark in colour

Base metal A subset of non-precious metals (for example, copper, lead, zinc)

Basic rocks Igneous rocks that are relatively low in silica and composed mostly of dark-coloured minerals, for example, basalt

Batholith A large mass of igneous rock extending to great depth with its upper portion dome-like in shape. Similar, smaller masses of igneous rocks are known as bosses or plugs

Bauxite A rock made up of hydrous aluminium oxides; the most common aluminium ore

Bedding The arrangement of sedimentary rocks in layers

Bench Vertical mining component in an open pit, typically 10 million in height and 5 million to 6 million in width.

Beneficiate To concentrate or enrich; often applied to the preparation of iron ore for smelting

Bio-leaching A process for recovering metals from low-grade ores by dissolving them in solution, the dissolution being aided by bacterial action

Bit The cutting end of a drill frequently made of an extremely hard material such as industrial diamonds or tungsten carbide

Blast furnace A reaction vessel in which mixed charges of oxide ores, fluxes and fuels are blown with a continuous blast of hot air and oxygen-enriched air for the chemical reduction of metals to their metallic state

Blasthole A drill hole in a mine that is filled with explosives in order to blast loose a quantity of rock

Blasting Technique to break ore in an underground or open-pit mine

Blister copper A crude form of copper (assaying about 99%) produced in a smelter, which requires further refining before being used for industrial purposes

Block caving A cheaper method of mining in which large blocks of ore are undercut, causing the ore to break or cave under its own weight

Bornite An ore mineral of copper. Its presence often indicates high grades of Cu

Bre-X This mining fraud, which broke in March 1997, had a profound effect on the industry, particular for junior Canadian exploration companies like Bre-X, which suddenly found it very difficult to raise money.

Breccia A rock in which coarse angular fragments are surrounded by a mass of fine-grained minerals

Broken reserves The ore in a mine which has been broken by blasting but which has not yet been transported to surface

Bulk mining Any large-scale, mechanised method of mining involving many thousands of tonnes of ore being brought to surface per day (see block caving)

Bulk sampling Large-scale sampling of mineralised rock, frequently hundreds of tonnes, selected in such a manner as to be representative of the potential orebody being sampled. Used to determine metallurgical characteristics

Bullion Metal formed into bars or ingots, for example, gold, silver or lead

Cadmium A metal used in metal-protecting alloys; often produced as a by-product of zinc refining


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Cage The conveyance used to transport people and equipment between the surface and the levels in an underground mine; the underground equivalent of an elevator

Carbon-in-leach A metallurgical process very similar to the carbon-in-pulp gold extraction method. In the carbon-in-leach process, the leaching and absorbing of gold onto carbon take place in the same tank rather than different tanks as in C-I-P (carbon-in-pulp)

Carbon-in-pulp A process to recover gold from a cyanide leach slurry. Coarse, activated carbon particles are moved counter-current to the slurry, absorbing the gold. Loaded carbon is removed by screening, and the gold is recovered from the carbon by stripping in a caustic cyanide solution followed by electrolysis or by zinc precipitation

Cash cost Includes production costs, royalties, marketing and refining charges, together with all administration expenses at the joint venture level

Cathode A rectangular metal sheet, produced by electrolytic refining, usually 99.9% pure in the case of cathode copper and deliverable to the LME

Chalcocite A sulphide mineral of copper common in the zone of secondary enrichment

Chalcopyrite A sulphide mineral of copper and iron; the most important ore mineral of copper

Chromite The primary ore mineral of chromium

Chute An underground opening, usually constructed of timber and equipped with a gate, through which broken ore is drawn from a stope into mine cars

Cinnabar A vermilion-coloured ore mineral of mercury

Classifier A mineral-processing machine which separates minerals according to size and density

Clay A fine-grained material composed of hydrous aluminium silicates; commercial grades are often used as a paper filler

Cleavage The tendency of a mineral to split along crystallographic planes

Coal A carbonaceous rock mined for use as a fuel

Coking coal Bituminous coal used in the production of steel via basic oxygen furnace (BOF) route, generally low in sulphur and phosphorous. More scarce than thermal coal and thus priced at a premium

Collar The term applied to the timbering or concrete around the mouth of a shaft; also used to describe the top of a mill hole

Column flotation A separation process, carried out in a tall cylindrical column, whereby valuable minerals float due to their greater wetability than gangue minerals

Complex ore An ore containing a number of minerals of economic value. The term often implies that there are metallurgical difficulties in liberating and separating the valuable metals

Concentrate A fine, powdery intermediate product of the milling process formed by separating a valuable metal from waste

Cone crusher A machine which crushes ore between a gyrating cone or crushing head and an inverted, truncated cone known as a bowl

Conglomerate A sedimentary rock consisting of rounded, water-worn pebbles or boulders cemented into a solid mass

Contact A geological term used to describe the line or plane along which two different rock formations meet


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Contact metamorphism Metamorphism of country rocks adjacent to an intrusion, caused by heat from the intrusion

Contango A situation in which the price of a metal for forward or future delivery stands at a premium over the cash or spot price of the metal

Continuous miner A piece of mining equipment which produces a continuous flow of ore from the working face

Converter In copper smelting, a furnace used to separate copper metal from matte

Copper Very malleable and ductile red metal that is a good conductor of electricity

Cordillera The continuous chain of mountain ranges on the western margin of North and South America

Core The long cylindrical piece of rock, about an inch in diameter, brought to surface by diamond drilling

Country rock Loosely used to describe the general mass of rock adjacent to an orebody. Also known as the host rock

Cross-cut A horizontal opening driven from a shaft and (or near) right angles to the strike of a vein or other orebody

Crust The outermost layer of the Earth; includes both continental and oceanic crust

Cut-and-fill A method of stoping in which ore is removed in slices, or lifts, and then the excavation is filled with rock or other waste material (backfill), before the subsequent slice is extracted

Cut-off grade The lowest grade of mineralised material considered economic; used in the calculation of the ore reserves for a given deposit

Cyanidation A method of extracting gold grains from crushed or ground ore by dissolving them in a weak solution of sodium or calcium cyanide: also known as leaching

Decline A sloping underground opening for machine access from level to level or from surface; also called a ramp

Deposit A mineralised body which has been physically delineated by sufficient drilling, trenching, and/or underground work and found to contain a sufficient average grade of metal or metals to warrant further exploration and/or development expenditures. Such a deposit does not qualify as a commercially mineable ore body, or as containing ore reserves, until final legal, technical, and economic factors have been resolved

Development In an underground mine the process of tunnelling etc, to gain access to the orebody

Diamond The hardest known mineral, composed of pure carbon; low-quality diamonds are used to make bits for diamond drilling in rock

Diamond drilling Rotary rock drilling that cuts a core of rock that is recovered in long cylindrical sections, 2cm or more in diameter

Dilution The process by which rock removed along with the ore in the mining process, lowers the grade of the ore

Dip The angle at which a vein, structure or rock bed is inclined from the horizontal, measured at right angles to the strike

Disseminated ore Ore carrying small particles of valuable minerals, spread more or less uniformly through the gangue matter; distinct from massive ore, wherein the valuable minerals occur in almost solid form with very little waste mineral included


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DRI Direct Reduced Iron; refers to iron produced from ore without melting. The term is used broadly to include the product of several processes that produce primary iron similar to pig iron without exceeding the melting temperature

Drift A horizontal underground opening that follows along the length of a vein or rock formation as opposed to a crosscut which crosses the rock formation

Due diligence The degree of care and caution required before making a decision; loosely, a financial and technical investigation to determine whether an investment is sound

Dump A pile of broken rock or ore on surface

Dyke A long and relatively thin body of igneous rock that, while in the molten state, intruded a fissure in older rocks

Electrolysis An electric current is passed through a solution containing dissolved metals, causing the metals to be deposited onto a cathode

Electrolytic refining The process of purifying metal ingots that are suspended as anodes in an electrolytic bath, alternated with refined sheets of the same metal which act as starters or cathodes

EM survey A geophysical survey method which measures the electromagnetic properties of rocks

Environmental impact study (EIS)

A written report, compiled prior to a production decision, that examines the effects proposed mining activities will have on the natural surroundings

Epigenetic Orebodies formed by hydrothermal fluids and gases that were introduced into the host rocks from elsewhere, filling cavities in the host rock

Epithermal Hydrothermal deposits formed at low temperature and pressure

Era A large amount of geological time

Erosion The breaking down and subsequent removal of either rock or surface material by wind, rain, wave action, freezing and thawing and other processes

Evaporite Sedimentary rock formed by precipitation from water of soluble minerals due to evaporation

Exploration Prospecting, sampling, mapping, diamond drilling and other work involved in searching for ore

Explosive Commercial explosives used for breaking rock underground or in surface operations. Generally ammonium nitrate based, but can by nitro-glycerine based

Face The end of a drift, crosscut or stope in which work is taking place

Fault A break in the Earth�s crust caused by tectonic forces which have moved the rock on one side with respect to the other

Feldspar A group of common rock-forming minerals that includes microcline, orthoclase, plagioclase and others

Fines (1) The sand or other small-sized components of a placer deposit

(2) The material passing through a screen during washing or other processing steps of a mining operation

Fines (iron ore) Particles generally of less than 6mm diameter, either as mined or separated from coarser material by screening. Marketable fines meet various specifications regarding iron ore content and impurities and normally require agglomeration before use in steel manufacture

Float A term often used among miners and geologists, for pieces of ore or rock that have fallen from veins; or strata; or have been separated from the parent vein by weathering agencies


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Flotation A process for concentrating materials based on the selective adhesion of certain minerals to air bubbles in a mixture of water and ground-up ore. When the right chemicals are added to a frothy water bath of ore that has been ground to a fine powder, the minerals will float to the surface. The metal-rich flotation concentrate is then skimmed off the surface

Flux A chemical substance that reacts with gangue minerals to form slags, which are liquid at furnace temperature and low enough in density to float on the molten bath of metal or matte

Fold Any bending or wrinkling of rock strata

Footwall The rock on the underside of a vein or ore structure

Foundry/smelter A pyrometallurgical plant where the concentrate is chemically reduced in order to extract the metal or metals it contains

Free milling Used to describe gold and silver ores from which the precious metals can be recovered by concentrating methods without resorting to pressure leaching or other chemical treatment

Front end loader Loader with bucket at the front. Usually diesel powered and articulated, capacity up to 20 cubic metres.

Froth flotation Very common method of concentrating, especially sulphide based ores, by changing the surface characteristics of the target mineral and separating using air bubbles.

Galena Lead sulphide, the most common ore mineral of lead

Gangue Rock surrounding a mineral or precious gem in its natural state

Geochemistry The study of the chemical properties of rocks

Geology The science concerned with the study of the rocks which compose the Earth

Geophysics The study of the physical properties of rocks and minerals which include magnetism, specific gravity, electrical conductivity and radioactivity

Geostatistics Statistical methods used to estimate ore reserves and resources, usually from bore hole data

Geothermal Heat from the Earth�s interior

Gold A very ductile and malleable brilliant yellow precious metal that is resistant to air and water corrosion

Gold loan A form of debt financing whereby a potential gold producer borrows gold from a lending institution, sells the gold on the open market, uses the cash for mine development, then pays back the gold from actual mine production

Gossan The rust-coloured capping or staining of a mineral deposit, generally formed by the oxidation or alteration of iron sulphides

Grab sample A sample from a rock outcrop that is assayed to determine if valuable elements are contained in the rock. A grab sample is not intended to be representative of the deposit, and usually the best-looking material is selected

Grade The relative value or tenor of an ore or of a mineral product

Granite A coarse-grained intrusive igneous rock consisting of quartz, feldspar and mica

Gravity meter, gravimeter An instrument for measuring the gravitational attraction of the earth; gravitational attraction varies with the density of the rocks in the vicinity

Gravity separation Recovery of gold from crushed rock or gravel using gold�s high specific gravity to separate it from lighter material


UBS 208

Grinding Means of reducing ore into very small particles by means of pressure or impact. Different types of grinders are used in the processing plant to obtain the desired dimension

Grizzly A grating, usually constructed of steel rails, placed over the top of a chute or ore pass for the purpose of stopping large pieces of rock or ore that may hang up in the pass. Can be called a mantle

Gypsum A sedimentary rock consisting of hydrated calcium sulphate

Gyratory crusher A machine that crushes ore between an eccentrically mounted crushing cone and a fixed crushing throat. Typically has a higher capacity than a jaw crusher

Haematite An oxide of iron, and one of that metal�s most common ore minerals

Halite Rock salt

Hanging wall The mass of rock overlying a geological structure such as an orebody or fault

Hanging wall The rock on the upper side of a vein or ore deposit

Haul Process of moving rock horizontally, or along shallow inclines (generally less than 1 in 6) out of an underground or open pit mine. Usually by truck but often by train or conveyor

Haulage Underground, a tunnel which constitutes the main horizontal transport conduit, generally runs from the cross cut to the shaft tips

Head grade The average grade of ore fed into a mill

Heap leaching The process whereby valuable metals, usually gold and silver, are leached from a heap, or pad, of crushed ore by leaching solutions percolating down through the heap and collected from a sloping, impermeable liner below the pad

Heavy minerals The accessory detrital minerals of a sedimentary rock with a high specific gravity

Hectare An area of land equivalent to 10,000 square meters or 2.47 acres

High grade Rich ore. As a verb, it refers to selective mining of the best ore in a deposit

Hoist The machine used for raising and lowering the cage or other conveyance in a shaft

Host rock The rock surrounding an ore deposit

Hydrometallurgy The treatment of ore by wet processes, such as leaching, resulting in the solution of a metal and its subsequent recovery

Hydrothermal Relating to hot fluids circulating in the earth�s crust

Igneous rocks Rocks formed by the intrusion of molten matter from far below the earth�s surface

Ilmenite An ore mineral of titanium, an iron-titanium oxide

Induced polarisation (IP) A method of ground geophysical surveying employing an electrical current to determine indications of mineralisation

Industrial minerals Non-metallic, non-fuel minerals used in the chemical and manufacturing industries. Examples are asbestos, gypsum, salt, graphite, mica, gravel, building stone and talc

In-fill drilling Drilling within a group of previously drilled holes to provide a closer spaced pattern to define more accurately the parameters of the orebody

Intrusive A body of igneous rock formed by the consolidation of magma intruded into other rocks, in contrast to lavas, which are extruded upon the surface

Ion exchange An exchange of ions in a crystal with irons in a solution. Used as a method for recovering valuable metals, such as uranium, from solution


UBS 209

Iron A ductile and malleable greyish white metal used in making steel

Jaw crusher A machine in which rock is broken by the action of steel plates

Jig A piece of milling equipment used to concentrate ore on a screen submerged in water, either by the reciprocating motion of the screen or by the pulsation of water through it

Joint Naturally occurring parting in rock, perpendicular to bedding

Kimberlite A variety of mantle rock; the most common host rock for diamonds

Lagging Planks or small timbers placed between steel ribs along the roof of a stope or drift to prevent rocks from falling, rather than to support the main weight of the overlying rocks

Launder A chute or trough for conveying pulp, water or powdered ore in a mill

Leachable Extractable by chemical solvents

Leaching A chemical process by which a soluble metallic compound is extracted from ore by dissolving the metals in a solvent; see cyanidation

Lead A heavy soft malleable ductile but inelastic bluish white metallic element found mostly in combination and used in pipes, cable sheaths, batteries, solder, type metal, and shields against radioactivity

Lens Generally used to describe a body of ore that is thick in the middle and tapers towards the ends

Level A horizontal opening in a mine; levels are usually established at regular intervals, usually 50 metres or more apart

LHD Acronym for load haul dump, an underground, low profile, articulated loader capable of short transporting distances, generally diesel powered but can be electric, often remotely controlled in dangerous unsupported areas.

Lignite A soft, low-rank brownish black coal

Limestone A bedded, sedimentary deposit consisting chiefly of calcium carbonate

Limonite A brown, hydrous iron oxide

Lode A mineral deposit in solid rock

Logging The process of recording geological observations of drill Core either on paper or on computer disk

London fix The twice-daily bidding session held by five dealing companies to set the gold price. There are also daily London fixes to set the prices of other precious metals

London Bullion Market Association (LBMA)

The most active of the gold markets, based in London, sets indicator prices for gold twice a day at 10h30, the a.m. fix, and 15h00, the p.m. fix.

London Metal Exchange (LME) A major bidding market for base metals, which operates daily in London

Long ton 2,240 lbs. avoirdupois (compared with a short ton, which is 2,000 lbs)

Lump (ore) Unbeneficiated marketable iron ore particles of 6-30mm diameter and usually with less than 15-20% accompanying fines

Magma The molten material deep in the Earth from which rocks are formed

Magmatic segregation An ore-forming process whereby valuable minerals are concentrated by settling out of a cooling magma

Magnesium A malleable and ductile silvery white metal that is used in alloys


UBS 210

Magnetic gradient survey A geophysical survey using a pair of magnetometers a fixed distance apart, to measure the difference in the magnetic field with height above the ground

Magnetic separation A process in which a magnetically susceptible mineral is separated from gangue minerals by applying a strong magnetic field; ores of iron are commonly treated in this way

Magnetic susceptibility A measure of the degree to which a rock is attracted to a magnet

Magnetite Black, magnetic iron ore, an iron oxide

Marble A metamorphic rock formed by the recrystallisation of limestone under intense heat and pressure

Marginal deposit An orebody of minimal profitability

Marra Mamba iron ore A mixture of haematite and goethite that is low in the silica and alumina impurities normally associated with the Brockman Formation. It is yellow/brown in colour and friable

Matte A product of a smelter, containing metal and some sulphur, which must be refined further to obtain pure metal

Mesh size The number of openings within a 1 inch square of screen in which materials are sifted. The most common sizes for screens used with concentrates in mining are: #20, #30, #40, #60, #80, and #100 mesh size

Metallurgical coal Coal used in steel manufacture

Metallurgy The study of extracting metals from their ores

Metamorphic rocks Rocks which have undergone a change in texture or composition as the result of heat and/or pressure

Mill A plant in which ore is treated and metals are recovered or prepared for smelting; also a revolving drum used for the grinding of ores in preparation for treatment

Millivolts A measure of the voltage of an electric current, specifically, one-thousandth of a volt

Mineable reserves Ore reserves that are known to be extractable using a given mining plan

Mineral A naturally occurring homogeneous substance having definite physical properties and chemical composition and, if formed under favourable conditions, a definite crystal form

Mineral processing Extraction and concentration of economic minerals contained in ore. It includes various procedures that rely on the mineral's gravimetric, and magnetic characteristics, on its colour, on reagents to make target particles float to the surface (flotation)

Molybdenum An element often found in copper porphyry deposits. It is used extensively in steels particularly grinding steels and as a filament material

Muck Ore or rock that has been broken by blasting

Native metals Metals occurring in nature in pure form, uncombined with other elements

Net smelter return An interest in a mining property held by the vendor on the net revenue generated from the sale of metal produced by the mine

Net smelter royalty Royalty based on metal poured at the smelter based on a fixed percentage, typically 1-5%, and the prevailing metal price

Nickel A silvery white metal that is very resistant and stable at ambient temperatures

Niobium A rare brilliant white metal always found in combination with tantalum

Nugget A small mass of precious metal, found free in nature

Open pit A mine that is entirely on the surface. Also referred to as an open-cut or open-cast mine


UBS 211

Operating cost Cash cost plus depreciation and amortisation

Ore A mixture of ore minerals and gangue from which at least one of the metals can be extracted at a profit

Ore pass Vertical or inclined passage for the downward transfer of ore connecting a level with the hoisting shaft or a lower level

Ore reserves The calculated tonnage and grade of mineralisation which can be extracted profitably; classified as possible, probable and proven according to the level of confidence that can be placed in the data

Orebody A natural concentration of valuable material that can be extracted and sold at a profit

Organic maturation The process whereby peat is converted into coal

Ounce Unit of mass, equal to 31.1034 grams

Outcrop An exposure of rock or mineral deposit that can be seen on surface, that is, not covered by soil or water

Overburden Worthless or low-grade surface material covering a body of useful mineralisation

Oxidation The alteration of a mineral by weathering and the action of surface waters resulting in conversion, partly or wholly, to oxides, carbonates and sulphates

Pan To wash gravel, sand or crushed rock samples in order to isolate gold or other valuable metals by their higher density

Pegmatite A coarse-grained, igneous rock, generally coarse, but irregular in texture, and similar to a granite in composition; usually occurs in dykes or veins and sometimes contains valuable minerals

Pellet Iron ore fines agglomerated by heat treatment with clay into a roughly spherical shape.

Pentlandite Nickel iron sulphide, the most common nickel ore

Phyllite Scaly minerals, micas, chlorites and clays

Piesolitic A term applied to iron ores which contain large nodules (ooliths) about the size of a pea

Pig iron Crude iron produced by a blast furnace

Pillar A block of solid ore or other rock left in place to structurally support the shaft, walls or roof of a mine

Pitchblende An important uranium ore mineral. It is black in colour, possesses a characteristic greasy lustre and is highly radioactive

Placer deposit A deposit of sand and gravel containing valuable metals such as gold, tin or diamonds

Plate tectonics A geological theory which postulates that the Earth's crust is made up of a number of rigid plates which collide, rub up against and spread out from one another

Platinum Group Metals (PGMs) Metals in the platinum group as defined by the periodic table; includes platinum, palladium and rhodium

Plutonic Refers to rocks of igneous origin that have come from great depth

Porphyry Any igneous rock in which relatively large crystals, called phenocrysts, are set in a fine-grained groundmass

Porphyry copper A deposit of disseminated copper minerals in or around a large body of intrusive rock

Potash Potassium compounds mined for fertiliser and for use in the chemical industry


UBS 212

Precious metals High value metals including gold, silver, platinum and palladium

Precipitate A mixture of mineral particles filtered from solutions as a result of a chemical reaction

Primary crushing Process of reducing blasted ore into smaller fragments so that it can be transported to the processing plant. In underground mines, the primary crusher is often located underground, or at the entrance to the processing plant

Primary deposits Valuable minerals deposited during the original period or periods of mineralisation, as opposed to those deposited as a result of alteration or weathering (called secondary deposits)

Pulp Pulverised or ground ore in solution

Pyrite A yellow iron sulphide mineral, normally of little value. It is sometimes referred to as �fool's gold�

Pyrrhotite A bronze-coloured, magnetic iron sulphide mineral

Quarry Open-pit operation where stone, rock and construction materials are extracted

Quartz Common rock-forming mineral consisting of silicon and oxygen. When coloured with impurities it can form a variety of semi-precious gems

Radioactivity The property of spontaneously emitting alpha, beta or gamma rays by the decay of the nuclei of atoms

Raise A vertical or inclined underground working that has been excavated from the bottom upward

Ramp Underground or open pit road access

Rare earth elements Relatively scarce minerals such as niobium, yttrium and the lanthanides

Reclamation The restoration of a site after mining or exploration activity is completed

Recovery The percentage of valuable metal in the ore that is recovered by metallurgical treatment

Refining Purifying the matte or impure metal undertaken to obtain a pure metal or mixture with specific properties

Refractory material A material with a very high melting point used for applications such as furnace linings and kilns. They are also used for resistance to abrasion, excessive pressures, chemical attack and rapid temperature changes

Refractory ore Ore that resists the action of chemical reagents in the normal treatment processes and which may require pressure leaching or other means to effect the full recovery of the valuable minerals

Regional metamorphism Metamorphism caused by both the heat of igneous processes and tectonic pressure over a long period of time

Replacement ore Ore formed by a process during which certain minerals have passed into solution and have been carried away, while valuable minerals from the solution have been deposited in the place of those removed

Reserves That part of a mineral resource that can be mined profitably

Resistivity survey A geophysical technique used to measure the resistance of a rock formation to an electric current

Resources The calculated amount of material in a mineral deposit. It can be classified as measured, indicated or inferred, based on the density of drill hole data used


UBS 213

Resuing A method of stoping in narrow-vein deposits whereby the wallrock on one side of the vein is blasted first and then the ore

Rock A mass containing a combination of minerals

Rock mechanics The study of the mechanical properties of rocks, which includes stress conditions around mine openings and the ability of rocks and underground structures to withstand these stresses

Rockbolting The act of supporting openings in rock with steel bolts anchored in holes drilled especially for this purpose

Rockburst A violent release of energy resulting in the sudden failure of walls or pillars in a mine, caused by the weight or pressure of the surrounding rocks

Rod mill A rotating steel cylinder that uses steel rods as a means of grinding ore

Room-and-pillar mining A method of mining flat-lying ore deposits in which the mined-out area, or rooms, are separated by pillars of approximately the same size

Rotary drill A machine that drills holes by rotating a rigid, tubular string of drill rods to which is attached a bit. Commonly used for drilling large-diameter blastholes in open-pit mines

Royalty An amount of money paid at regular intervals by the lessee or operator of an exploration or mining property to the owner of the ground. Generally based on a certain amount per tonne or a percentage of the total production or profits. Also, the fee paid for the right to use a patented process

Run of mine ore Uncrushed ore in its natural state just as it is when blasted

Run-of-mine A term used loosely to describe ore of average grade

Salting The act of introducing metals or minerals into a deposit or samples, resulting in false assays. Done either by accident or with the intent of defrauding the public

Sample A small portion of rock or a mineral deposit taken so that the metal content can be determined by assaying

Sampling Selecting a fractional but representative part of a mineral deposit for analysis

Scintillation counter An instrument used to detect and measure radioactivity by detecting gamma rays; more sensitive than a Geiger counter

Secondary blasting Use of explosives to break large rocks as the result of primary, production blasting

Secondary enrichment Enrichment of a vein or mineral deposit by minerals that have been taken into solution from one part of the vein or adjacent rocks and re-deposited in another

Sedimentary rocks Secondary rocks formed from material derived from other rocks and laid down under water. Examples are limestone, shale and sandstone

Seismic prospecting A geophysical method of prospecting, utilising knowledge of the speed of reflected sound waves in rock

Self-potential A technique, used in geophysical prospecting, which recognises and measures theminute electric currents generated by sulphide deposits

Semi-autogenous grinding (SAG)

A method of grinding rock into fine powder whereby the grinding media consist of larger chunks of rocks and steel balls

Semi-autogenous mill A mill in which rock is reduced to smaller particles partially by grinding against other pieces of rock


UBS 214

Shaft A vertical or inclined excavation in rock for the purpose of providing access to an orebody. Usually equipped with a hoist at the top, which lowers and raises a conveyance for handling workers and materials

Shale Sedimentary rock formed by the consolidation of mud or silt

Shear zone A zone in which shearing has occurred on a large scale

Shear/shearing The deformation of rocks by lateral movement along innumerable parallel planes, generally resulting from pressure and producing such metamorphic structures as cleavage and schistocity

Shoot A concentration of mineral values; that part of a vein or zone carrying values of ore grade

Shrinkage stoping A stoping method which uses part of the broken ore as a working platform and as support for the walls of the stope

Siderite Iron carbonate, which when pure, contains 48.2% iron; must be roasted to drive off carbon dioxide before it can be used in a blast furnace. Roasted product is called sinter

Silica Silicon dioxide. Quartz is a common example

Siliceous A rock containing an abundance of silica

Sill An intrusive sheet of igneous rock of roughly uniform thickness that has been forced between the bedding planes of existing rock

Silt Muddy deposits of fine sediment usually found on the bottoms of lakes

Silver A very malleable metal found naturally in an uncombined state or with other metals

Sinter Fine particles of iron ore that have been treated by heat to produce blast furnace feed

Skarn The metamorphic rocks surrounding an igneous intrusive where the latter has come in contact with limestone or dolomite rocks

Skip A self-dumping bucket used in a shaft for hoisting ore or rock

Slag The vitreous mass separated from the fused metals in the smelting process

Slate A fine-grained metamorphic rock; the metamorphic equivalent of shale

Sludge Rock cuttings from a diamond drill hole, sometimes used for assaying

Sodium cyanide A chemical used in the milling of gold ores to dissolve gold and silver

Solvent extraction - electrowinning (SX-EW)

A metallurgical technique, so far applied only to copper ores, in which metal is dissolved from the rock by organic solvents and recovered from solution by electrolysis

Spacing In blasting, the distance from blast hole to blast hole, perpendicular to burden

Specific gravity The specific gravity of a substance is its weight, as compared with the weight of an equal bulk of pure water. The specific gravity of a mineral or metal greatly determines its susceptibility to recovery in simple gravity concentrators such as sluice boxes

Spelter The zinc of commerce, more or less impure, cast from molten metal into slabs or ingots

Sphalerite A zinc sulphide mineral; the most common ore mineral of zinc

Spot price Current delivery price of a commodity traded in the spot market, also called the cash price

Station An enlargement of a shaft made for the storage and handling of equipment and for driving drifts at that elevation

Steaming coal Bituminous coal suitable for thermal power stations, also known as thermal coal

Step-out drilling Holes drilled to intersect a mineralisation horizon or structure along strike or down dip


UBS 215

Stockpile Broken ore heaped on surface, pending treatment or shipment

Stope The working area in a mine from which ore is extracted

Stratigraphy Strictly, the description of bedded rock sequences; used loosely, the sequence of bedded rocks in a particular area

Strike The direction, or course or bearing, of a particular sheet of rock measured on a level surface

Stringer A narrow vein or irregular filament of a mineral or minerals traversing a rock mass

Strip To remove the overburden or waste rock overlying an orebody in preparation for mining by open pit methods

Strip mine An open-pit mine, usually a coal mine, operated by removing overburden, excavating the coal seam, then returning the overburden

Stripping ratio The ratio of the amount of waste material which must be removed in an open pit to allow one ton of ore to be mined

Sub-bituminous A black coal, intermediate between lignite and bituminous

Sub-economic Rock that contains a target mineral but in insufficient concentration to be profitable.

Sub-level A level or working horizon in a mine between main working levels

Sulphides Compounds of sulphur (without oxygen) with other elements

Sulphur Element that occurs in a nature state or in compounds such as sulphides

Sulphur dioxide A gas liberated during the smelting of most sulphide ores; either converted into sulphuric acid or released into the atmosphere in the form of a gas

Sump An underground excavation where water accumulates before being pumped to surface

Supergene enrichment A mineral deposition process in which near-surface oxidation produces acidic solutions that leach metals, carry them downward, and re-precipitate them, thus enriching minerals already present

Support Physical means of keeping workings open and safe underground, can be active that is, effective on installation, or passive, that is, reacts with compression

Sustainable development Industrial development that does not detract from the potential of the natural environment to provide benefits to future generations

Sylvite Potassium chloride, the principal ore of potassium mined for fertiliser manufacturing

Syncline A down-arching fold in bedded rocks

Syngenetic A term used to describe when mineralisation in a deposit was formed relative to the host rocks in which it is found. In this case, the mineralisation was formed at the same time as the host rocks. (The opposite is epigenetic.)

Taconite A highly abrasive iron ore

Tailings Material rejected from a mill after the valuable minerals have been recovered

Tailings dam (pond) A low-lying depression used to confine tailings, the prime function of which is to allow enough time for heavy metals to settle out or for cyanide to be destroyed before water is discharged into the local watershed

Telluride A chemical compound consisting of the element tellurium and another element, often gold or silver

Tesla Measurement unit for magnetic fields


UBS 216

Thermal coal See steaming coal

Tip Top of a vertical or sub-vertical ore pass, where broken rock is dumped often near the shaft system

Titanium A brilliant white metal found in most igneous or sedimentary rocks

Ton (short ton) A unit of mass equivalent to 2000 pounds or 907.185kg

Tonne (metric tonne) A unit of mass equivalent to 2204.6 pounds or 1.102 short tons

Treatment and refining charges (TC/RC)

Charges levied by smelter/refineries for the treatment of concentrate from mines. Particularly applicable to copper, lead and zinc. Some mines report revenue net of TC/RCs

Trend The direction, in the horizontal plane, of a linear geological feature, such as an ore zone, measured from true north

Troy ounce Universal unit measure of weight for precious metals equal to 31.105 grams

Tube mill An apparatus consisting of a revolving cylinder about half-filled with steel rods or balls and into which crushed ore is fed for fine grinding

Umpire sample or assay An assay made by a third party to provide a basis for settling disputes between buyers and sellers of ore

Uncut value The actual assay value of a core sample as opposed to a cut value which has been reduced by some arbitrary formula

Uraninite A uranium mineral with a high uranium oxide content. Frequently found in pegmatite dykes

Uranium A radioactive, silvery-white, metallic element

Vein A fissure, fault or crack in a rock filled by minerals that have travelled upwards from some deep source

Volcanic Massive Sulphide (VMS)

Homogenous or largely homogenous sulphide rock mass derived from volcanic action, important source of lead and zinc

Volcanic rocks Igneous rocks formed from magma that has flowed out or has been violently ejected from a volcano

Volcanogenic A term used to describe the volcanic origin of mineralisation

Vug A small cavity in a rock, frequently lined with well-formed crystals. Amethyst commonly forms in these cavities

Wall rocks Rock units on either side of an orebody. The hanging wall and foot wall rocks of an orebody

Winze An internal shaft

Zinc Bluish-white hard metal, occurring in various minerals, such as sphalerite


UBS 220

Common abbreviations

ABARE Australian Bureau of Agricultural and Resource Economics

ANFO ammonium nitrate and fuel oil (explosive)

av. avoirdupois

bbl barrel

BIF banded iron formation

Btu British thermal unit

cif cost, insurance, freight

CRB Commodity Research Bureau

E estimated data

EIS environmental impact study

FAS free alongside ship

FOB free on board

GDP Gross Domestic Product

IP induced polarisation

ISM Institute of Supply Management (formerly NAPM)

J joule (unit of energy)

JBM Japanese benchmark; a contract for coal and iron ore negotiations

JFY Japan fiscal year (April to March)

kcal kilocalories (unit of energy)

kg kilogram

Kt thousand tonnes

lb pound

LBMA London Bullion Market Association

LHD load haul dump

LME London Metal Exchange

LTU Long ton unit of iron equivalent to 1% Fe content

m metre

MBtu million British thermal units

Mcf thousand cubic feet

MMcf million cubic feet

Mt million tonnes

MW megawatts

NAPM see ISM

NSR net smelter royalty

oz ounce

Pa pascal (unit of pressure)

PCI coals for pulverised injection

PGM platinum group metals

REE rare earth elements

SAG semi-autogenous grinding

SOE state-owned enterprise

st short ton

SX/EW solvent extraction/electrowinning

T tesla (unit of magnetic induction)

TC/RC treatment and refining charges

tce tonnes of coal equivalent

toe tonnes of oil equivalent

V volt

VMS volcanogenic massive sulphide


UBS 227

Accounting and valuation definitions Definitions of common accountancy and valuation terms and ratios

Core sales = Revenues from core assetsCore EBITDA = EBITDA from core assetsCore EBIT = EBIT from core assets

Core EV = Market Core net Peripheral Pension Buy out ofcapitalisation debt (cash) assets provisions (-ve) minorities

Net Debt = All interest-bearing finance Cash and(long and short term) marketable securities

CEPS = Cash earnings per share

Exceptional items =

Extraordinary items =

EPS ==

adjusted EPS = EPS excluding exceptional items

BVPS =

Operating free cash = Operating profit + - Changes in net WCflow (OpFCF)

ROIC (EBIT) = (also called ROCE)Intangible Fixed Assets + Tangible Fixed Assets + Net WC

ROE =

Net Debt/Equity =

Net WC = -

NOPLAT = Normal operating profit - Adjusted taxes (effectively EBIT less tax attributable to EBIT)

Shareholders' funds = Share capital + Group's reserves (book value of net assets attributable tothe shareholders or parent company)

Source: UBS

(including other non-cash operating income)

Sum(all non-interest bearing current assets) Sum(all non-interest bearing current liabilities)

Net Debt

-

EBIT

+ - -

-

Earnings

Gains and losses deriving from activities outside a companies' ordinary activities. The definition of this item variesby country. Usually reported post tax but may sometimes included as a component of pre-tax profit.

Depreciation & amortisation

basic no. of equity shares at a date

Ave no. of shares in a period

year/end shareholders' equity

Items which result from ordinary activities but which are disclosed separately due to their size or incidence in orderto give a true and fair view. They are normally included in operating income, either disclosed on the face of theincome statement or within a note.

Total equity (sum of shareholders' funds - minority interests)

Net incomeaverage shareholders' funds


UBS 228

Explanation of multiples and ratings used

UBS stock -rating

UBS price -target

EV -

EV/EBIT -

EV/EBITDA -

EV/Invested Capital -

EV/NOPLAT -

EV/OpFCF -

EV/Sales -

Source: UBS

EV divided by sales (core sales are total sales less non-core activity sales). A crude measure but the leastsusceptible to accounting differences. Do not use to compare companies with different products where marginsnaturally differ. Useful for identifying restructuring potential.

EV divided by EBIT. EBIT multiples are more comparable than those based upon EBITDA where capital intensitydiffers but are affected by accounting policy differences for depreciation and amortisation.

EV divided by EBITDA. In UBS data this multiple is based upon core EV and core EBITDA. Commonly used forintra sector relative comparisons where capital intensity is similar. Useful for cross border valuation whereaccounting practices differ.

EV divided by invested capital. Important in sectors where tangible asset value is key. It does not focus onprofitability or cash generation.

EV divided by NOPLAT. NOPLAT is normal operating profit less adjusted taxed, (effectively it is a post tax EBIT).Allows for differences in tax efficiency and effective tax rates. If the company were all equity financed NOPLATwould equal earnings. The NOPLAT multiple is effectively an unlevered P/E.

EV divided by core operating free cash flow. OpFCF is a normalised and more comparable version of EBIT; this ismore comparable and less susceptible to accounting distortions and therefore a more suitable basis for valuationmultiples.

Derived by the analyst in absolute terms using a 12-month horizon. Targets will normally be derived from a range of valuation techniques and ratios ranging from equity or enterprise value multiples to absolute measures such as discounted cash flow.

The cost of buying the right to the whole of the enterprise's core cash flow. This is the estimated value of theoperations of the enterprise as represented by the value of the various claims on cash flow and profit.

Covers a 12-month horizon and varies between Buy, Neutral and Reduce depending on the difference between thereturn implied by the price target and the local bond yield. If the return implied by the target price is at least 15%above the local bond yield, it is a Buy rating. If it is at least 15% below the local bond yield then it is a Reduce rating.If stocks are within this 15% range of the local bond yield then they are a Neutral rating. The Predictability level ofthe price target, denoted by 1 or 2, is the degree of confidence that the analyst has in their ability to accuratelypredict the range of possibilities in proximity to the price target that the stock will move. 1 denotes higherpredictability and 2 lower.


UBS 229

Key chemical symbols Table 32: Important chemical element symbols

Major elements Rare Earth Elements

Symbol Name Symbol Name Symbol Name

Ag Silver Mg Magnesium La Lanthanum

Al Aluminum Mn Manganese Ce Cerium

Ar Argon Mo Molybdenum Pr Praseodymium

As Arsenic N Nitrogen Nd Neodymian

At Astatine Na Sodium Pm Promethium

Au Gold Ni Nickel Sm Samarium

B Boron O Oxygen Eu Europium

Ba Barium P Phosphorus Gd Gadolinium

Be Beryllium Pb Lead Tb Terbium

Bi Bismuth Pd Palladium Dy Dysprosium

C Carbon Pt Platinum Ho Holmium

Ca Calcium Pu Plutonium Er Erbium

Cd Cadmium Ra Radium Tm Thulium

Cl Chlorine Rh Rhodium Yb Ytterbium

Co Cobalt Rn Radon Lu Lutetium

Cr Chromium S Sulphur Sc Scandium

Cs Caesium Si Silicon Y Yttrium

Cu Copper Sn Tin

F Fluorine Th Thorium

Fe Iron Ti Titanium

H Hydrogen U Uranium

He Helium V Vanadium

Hg Mercury W Tungsten

K Potassium Zn Zinc

Li Lithium Zr Zirconium

Source: UBS


UBS 230

Useful conversion factors

Mass VolumeImperial to Metric Metric to Imperial Imperial to Metric Metric to Imperial1 troy ounce 31.103 g 1 g 0.032 troy oz 1 cu. foot 0.028 m3 1 m3 35.315 cu. ft1 troy pound 0.37224 kg 1 kg 32.151 troy oz 1 cu. yard 0.765 m3 1 m3 1.308 cu. yd1 lb 0.454 kg 1 kg 2.205 lb 1 bbl 0.159 m3 1 m3 6.29 bbls1 short ton 907.185 kg 1 tonne 2,204.59 lb 1 gallon (Imperial) 4.546 lires 1 litre 0.220 gal (Imp.)1 short ton 0.907 tonnes 1 tonne 1.102 short tons 1 gallon (US) 3.785 litres 1 litre 0.264 gal (US)1 long ton 1.016 tonnes 1 tonne 0.984 long tons

Others Others1 troy oz 1.097 av oz 1 av lb 16 oz1 troy lb 0.8229 av lb 1 quintal 100 kg1 troy lb 12 oz

Area Costs/pricesImperial to Metric Metric to Imperial Imperial to Metric Metric to Imperial1 acre 0.405 ha 1 ha 2.471 acres 1US¢/lb 22.05 US$/t 1 US$/tonne 0.0454 US¢/lb1 sq. foot 0.093 m2 1 ha 0.004 sq. miles 1 US¢/oz 32,151 US$/t 1 US$/tonne 0.0031 US¢/oz1 sq. yard 0.893 m2 1 cm2 0.155 sq. ft 1 US$/oz 0.0311 US$/kg 1 US$/kg 32.151 US$/oz1 sq. mile 2.590 km2 1 m2 10.764 sq. ft 1 US$/bbl 0.114 US$/t 1 US$/tonne 8.98 US$/bbl1 sq. mile 258.999 ha 1 km2 0.386 sq. miles

EnergyCrude equivalents Crude oil1 tonne of oil 1.5 tonne of coal 1 tce 0.7 toe 1 MBTU 1.76 x 10-8 Mtce 1 barrel (bbl) 42 US gallons1 tonne of oil 3.0 tonne of lignite 1 Mtoe 0.0419 megajoule 1 megajoule 23.88 Mtoe 1 short ton 6.65 bbls1 tonne of oil 40 x 106 BTU 1 Mttce 0.0293 megajoule 1 megajoule 16.7 Mtce 1 tonne 7.33 bbls1 tonne of oil 397 x 106 therms 1 kWh 3.6 megajoule 1 megajoule 0.2778 kWh

Others

1 LTU of iron ore Grade* x 1.016 tonnes *Average iron ore grade is 63% iron1 Mt of oil produces about 4 x 109 kWh of electricity in a modern power station. Calorific values of coal and lignite are as produced.

Source: CRB, UBS


UBS 234

Other useful information sources Mining industry consultants

AME Mineral Economics: monthly and annual reports on the industry and in depth cost studies. Cover: aluminium, copper, lead and zinc, nickel, gold, titanium minerals, iron ore, coal and steel. http://www.ame.com.au

Brook Hunt: monthly reports and annual cost studies on aluminium, copper, gold, lead, nickel, stainless steel, zinc. http://www.brookhunt.com

CRU Group: monthly and ad hoc reports on aluminium, base metals, steel and ferroalloys, precious metals industries. http://www.cru.co.uk/

Gold Fields Mineral Services (GFMS): good source of data on gold and silver. http://www.gfms.co.uk/

Websites

International Iron & Steel Institute (IISI): http://www.worldsteel.org/

Johnson Matthey (PGMs site): http://www.platinum.matthey.com/

The Bullion Desk (information on precious metals markets): http://www.thebulliondesk.com

United States Geological Survey (USGS): http://minerals.er.usgs.gov/minerals/pubs/commodity/

World Gold Council: http://www.gold.org/

Introduction to mining

Whyte, J. and Danielson, V. (1998) Mining Explained: A Layman�s Guide, The Northern Miner, 150p.

Data sources

World Bureau of Metal Statistics

Further reading on gold and/or precious metals trading

Jameson, R. (1997) Managing Metals Price Risk, UBS, Risk Publications

Bernstein, P. (2001) The Power of Gold: the History of an Obsession, John Wiley & Sons, 432p.

Green, T. (1984) The New World of Gold: the inside story of the mines, markets, politics, investors, Walker & Co., 324p.

Faber, M. (2002) Tomorrow�s Gold, CLSA, 432p.

ubs mining primer

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