living with minerals 4 - shaping uk minerals policy - part 3

A UK view of mineral geopolitics - strategic material risks

Michael D Lynch-Bell Partner, Global Mining & Metals, Ernst & Young LLP

Living with Minerals 4: Shaping UK Minerals PolicyLondon, 7 November 2011

Living with Minerals 4, London7 November 2011

Mineral geopolitics: the global context

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Growth in copper production and consumption, 1960-2010

Refined production Refined usage

‘000

t

► Rapid economic development in 4 out of the 5 most populated countries is driving global demand for minerals and metals

CAGR 2.8%

Source: ICSG

Living with Minerals 4, London7 November 2011

Mineral geopolitics: the global context

► But supply is persistently constrained, sustaining long-term prices► While industry costs are ever-increasing► Leading to a global focus on security of supply:

► Mining industry moving into frontier geographies► Resource-rich nations demanding greater control over, and

economic rent from, their natural resources (resource nationalism)► Resource-dependent nations and industries competing for

security of supply

All of these factors increase geopolitical risk

Living with Minerals 4, London7 November 2011

The top 10 business risks in mining and metals

Up from 2010 Down from 2010

Same as 2010– New entry¬

Living with Minerals 4, London7 November 2011

► Resource supplying nations have rising deficits which is putting pressure on mining companies to contribute more to treasury

► Mining sector is seen as potential cash-cow ► Slowed capital expenditure used as a trigger for “use it or lose it”► Preference for exploitation of own minerals► Significant number of countries considering tax reform to increase

royalty rates► Increase in mandated beneficiation

Globally, resource producing nations taking control and greater value from resources

Living with Minerals 4, London7 November 2011

Tax contagion – spreading Resource Nationalism

Living with Minerals 4, London7 November 2011

Fraud and corruption – regulated change impacting capital flows

M&A target destination by risk level (2009 v 2010)

Source: Ernst & Young analysis

► Regulatory changes will make companies increasingly responsible for fraud and corruption activities.

► UK Bribery Act — Offence to fail to prevent bribery unless there are “adequate procedures” (1 July 2011)

► US Foreign Corrupt Practices Act — A focus on “proper books and records and internal controls”

► Dodd-Frank Act — Whistleblower bounty 10% to 30% of financial sanction

► Impacts for risk weightings of capital allocation

Living with Minerals 4, London7 November 2011

Stimulating regulatory responses among consuming nations

► Nations with potential for Rare Earths deposits are increasingly focused on investing in sustainable and competitive development of domestic resources

► Nations without Rare Earths deposits are focused on securing supply:► EU – information gathering, recycling, open trade policy► Japan – information gathering, cross-border funding, stockpiling► South Korea – financing, partnerships with resource-rich nations,

stockpiling

Living with Minerals 4, London7 November 2011

Mineral geopolitics: the UK contextA long and proud history of mining...►Important indigenous resources of wide range of minerals, including energy and industrial

minerals►In 19th Century, UK was leading world supplier of iron, tin, copper and lead►But production declined as costs escalated and competition from low cost overseas producers

Value of UK mineral production: £29.9b in 2009

► The last lead and zinc mine closed in 1978 in Wales while the last tin mine closed in Cornwall in 1998

► Currently there are plans to open two new gold mines in Scotland and Ireland and a tungsten mine in Devon

► New developments relating to exploitation of shale gas east of Blackpool

Source: BGS United Kingdom Minerals Yearbook 2010

Crude petroleum,

19,075

Natural Gas, 7,570

Construction & industrial minerals,

2,303

Coal, 973Miscellaneous minerals, 48

Gold, 4

Living with Minerals 4, London7 November 2011

With a vital role in the financing of the global resources industries...► The London Stock Exchange is host to 26% of the listed mining market value on key

international resources exchanges*

London Main New York Australian Toronto Johannesburg Hong Kong TSX Venture London AIM0

50000

100000

150000

200000

250000

300000

350000

400000

0

200

400

600

800

1,000

1,200

1,400

Value and number of mining & metals companies by primary exchange of listing

Market value Number of companies

Ma

rke

t v

alu

e U

S$

b

Nu

mb

er

of

co

mp

an

ies

Source: Ernst & Young, Thomson Datastream. Value of primary listing converted to US$, as at 30 September 2011. *Value on major international exchanges. Does not include domestic-only exchanges.

Living with Minerals 4, London7 November 2011

With a vital role in the financing of the global resources industries...► The London Stock Exchange hosts the second largest share of listed oil & gas market value

on key resources exchanges

Source: Ernst & Young, Thomson Datastream. Value of primary listing converted to US$, as at 30 September 2011. Upstream E&P companies only, excludes oilfield services.

New York London Main Toronto Hong Kong Australian London AIM TSX Venture -

200,000

400,000

600,000

800,000

1,000,000

1,200,000

0

50

100

150

200

250

300

Value and number of oil & gas companies by primary exchange of listing

Market value Number of companies

Ma

rke

t v

alu

e U

S$

b

Nu

mb

er

of

co

mp

an

ies

Living with Minerals 4, London7 November 2011

And growing economic importance to UK

► UK-listed mining companies have become increasingly important to the UK economy, accounting for 17% of the FTSE 100 by value at 31 December 2010.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -

50,000

100,000

150,000

200,000

250,000

300,000

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Value and weighting mining companies in the FTSE 100, 2000-2010

Mining market value Weighting %

Ma

rke

t v

alu

e £

m

We

igh

tin

g in

FT

SE

10

0

Source: Ernst & Young, Thomson Datastream. As at 31 December each year.

Living with Minerals 4, London7 November 2011

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

50,000

100,000

150,000

200,000

250,000

300,000

350,000

0%

5%

10%

15%

20%

25%

Oil & Gas market value Weighting

Ma

rke

t v

alu

e £

m

We

igh

tin

g in

FT

SE

10

0

► UK-listed oil and gas companies have consistently accounted for between 16 and 22% of the FTSE 100 by value over the past five years

Source: Ernst & Young, Thomson Datastream. As at 31 December each year. Upstream E&P companies only, excludes oilfield services.

And growing economic importance to UK

Living with Minerals 4, London7 November 2011

London is the primary exchange of choice for large inbound IPOs

●ENRC

●UC Rusal

●Vedanta Resources

●African Barrick Gold●Gem Diamonds

●Ternium

●EvrazNewYork London

Hong Kong

●Fresnillo

●Hochschild Mining

●Talvivaara●Vimetco

●Xstrata ●Glencore

●New World Resources ●Kazakhmys●Ferrexpo

Living with Minerals 4, London7 November 2011

But today, the UK is dependent on imports of many of its key minerals...

► UK is major consumer of minerals, essential raw materials for its key industries► Construction► Manufacturing► Electricity generation► Transportation► Agriculture

Living with Minerals 4, London7 November 2011

But today, the UK is dependent on imports of many of its key minerals

► But the UK imports most of its mineral supply► Self-sufficient only in construction minerals► Increasing reliance on imported natural gas and oil► Coal imports now supply half of UK demand► Reliant on imports of metallic minerals, ferrous and non-ferrous

ores and alloys

The UK’s substantial and increasing dependence on foreign mineral supply exposes its economy to supply risks

Living with Minerals 4, London7 November 2011

Including the strategic minerals needed to supply its key growth industries► Strategic minerals play an essential role in UK’s potential to become a world leader in low carbon

technologies. Selected materials and applications:

► Magnesium Compounds – casting alloys► PGMs – Catalysts, electronics, fuel cells, glass and green industrial applications► Cobalt – Rechargeable batteries, specialised alloys► Niobium – Specialised steels► Antimony – Flame retardant► Tungsten – Specialised steels► REE – Automotive, electronics, renewables technology► Fluorspar – Chemicals and steel► Tantalum – Telecommunications, IT► Germanium – Telecommunications, solar energy applications► Gallium – Semi-conductors, renewables technology► Beryllium – Electronics► Indium - Electronics

Living with Minerals 4, London7 November 2011

Centres of production are not aligned with centres of demand

Brazil•Niobium

China•Antimony•Fluorspar•Germanium•Graphite•Indium•Magnesium•Rare earths•Tungsten

DRC•Cobalt•Tantalum

South Africa•PGM

USA•Beryllium•Tantalum

► Centres of strategic mineral production are generally not aligned with the UK’s traditional strategic partners

► Overdependence on supply from China and higher risk geographies such as DRC, South Africa

Living with Minerals 4, London7 November 2011

The EU’s response to the growing strategic minerals risk

► Over the past decade, the European Union (EU) has increasingly realised that strategic raw materials are vital for the future growth of the region’s economy

► In June 2010, the European Commission (EC) identified 14 raw minerals materials as critical to European industry

► Insufficient investment has been made in securing sustainable supplies either domestically or offshore, exposing the EU to increasing geopolitical risks to supply

► A Raw Materials Strategy has been established to explore options for improving resource efficiency and security across the region, including:

► Reducing intensity of use ► Substitution► Stockpiling► Recycling ► Potential development of European sources of strategic materials

Living with Minerals 4, London7 November 2011

The UK’s response to the growing strategic minerals risk

House of Commons Science & Technology Committee report, May 2011:

► Strategically important metals for the UK include rare earths, PGMs and other specialist metals

► But there is some level of disagreement about the extent of the UK’s vulnerability to supply and the degree of direct impact

► Important sectors of UK economy rely on wide range of metals at stable prices

► A stable supply will be important in the transition to a low carbon economy

Living with Minerals 4, London7 November 2011

► Establish departmental responsibility for:

► Identifying which metals are of strategic importance to UK► Information gathering on existing resources and future demand► Knowledge sharing across government and dissemination to business

► Understand and assess potential impact of supply and price volatility on SMEs► Identify more effective scrap recycling methods to capture strategic metals lost in the current

process ► Minimise exports of valuable waste materials► Explore potential for economically viable domestic extraction of mineral resources

► Work with UK Geological Survey to identify domestic natural reserves of strategic minerals► Classify mines as nationally significant infrastructure to speed up planning process

Key recommendations focused on information gathering

Living with Minerals 4, London7 November 2011

Potential Approach for UK

► UK Government to enter into bilateral agreements to secure supplies

► The correct investment framework / incentives to foster sustainable supplies from less problematic, lower risk nations

► Greater resource efficiency and increased recycling.

► Research into greater substitution with viable alternatives

► Create national strategic stockpiles for emergency use

Living with Minerals 4, London7 November 2011

The Global response

► European Union – Published a report “Critical Materials for EU” which highlighted critical strategic metals that EU must consider in terms of supply security. EU has adopted a Geo-political approach and is investing in R&D to find alternatives

► USA – Developed a strategy focussing on core technologies: batteries, photovoltaic films, permanent magnets and phosphors. Intends to develop domestic resources where possible for production of strategic metals. Technology advances to recycle metals to reduce dependence

► Japan – Seeking to secure alternative supplies supported by State financing. Government has earmarked $1bn to secure supplies, including funding research and projects such as robotic deep sea mining. Creation of national stockpile.

Living with Minerals 4, London7 November 2011

In conclusion...

► Declining production of domestic resources of non industrial minerals has increased UK exposure to imports and therefore supply chain and geopolitical risks

► Strategic minerals have been identified as critical to UK industry and vulnerable to supply interruptions

► The UK’s growth industries and low carbon potential require a stable supply of these strategic raw materials

► The potential for future supply disruptions exposes SMEs to price and supply volatility

► UK Government must act now to secure supplies of strategic metals necessary for a technological and environmentally responsible future

► This includes greater emphasis on recycling, substitution and reduced intensity of use

► May include incentives to resource sector to stimulate exploration in prospective geographic localities

Living with Minerals 4, London7 November 2011

In conclusion

Now is the time for government and industry to act:

►Information gathering and sharing

►Incentivised investment framework

►Cross-border and cross-sector partnering

Living with Minerals 4, London7 November 2011

Our views and opinionswww.ey.com/miningandmetals

Living with Minerals 4, London7 November 2011

Our mining experience

► We audit 8 of the 23 FTSE All-share listed mining companies in London

► Aquarius Platinum► Ferrexpo► Fresnillo► Gem Diamonds► Hochschild Mining► International Ferrous

Metals► Kazakhmys► Xstrata

► We have advised on major transactions in the mining sector

► Xstrata’s $5.9bn rights issue and associated acquisition of Prodeco coal mine

► Proposed merger of Vale and Xstrata► Proposed Xstrata and Anglo American ‘nil

premium merger of equals’► Proposed West Africa iron ore joint venture► Falconbridge takeover by Xstrata► Inco takeover by Vale► Phelps Dodge takeover by Freeport

McMoran► Kazakhmys’ investment in ENRC► Rio Tinto’s defence of BHP Billiton’s $150bn

hostile takeover approach► CITIC’s $185m investment in Oxus Gold plc

► We have the lion’s share of inbound London listings in the mining sector

► Ruukki Group► International Ferrous

Metals► Ferrexpo► Fresnillo► Gem Diamonds► Hochschild Mining► Kazakhmys► Xstrata► Ferrous Resources

(aborted during 2010)

► We work with 25 of the top 30 mining companies globally. Our mining team are market leaders for inbound London main market listings in the sector.

Thank youMichael D Lynch-BellPartner, Global Mining & Metals, Ernst & Young LLP+44 (0)20 7951 3064mlynchbell@uk.ey.com

UN Expert Group on Resource Classificationhttp://live.unece.org/energy/se/reserves.html