simon price, azure capital: reviewing investors demands for iron ore in 2014
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AZURE CAPITAL
Iron Ore – Investor Demands and Financial Markets SIMON PRICE | 26 NOVEMBER 2013
STRICTLY CONFIDENTIAL | 2
TABLE OF CONTENTS
THE YEAR IN REVIEW
PRIMARY HURDLE IS COSTS
CAPITAL INTENSITY IS THE KEY
EQUITY MARKETS
FINANCING ACTIVITIES
STRICTLY CONFIDENTIAL | 3
80
90
100
110
120
130
140
150
160
170
180
Sep-12 Dec-12 Mar-13 Jun-13 Sep-13
USD AUD
Iron ore spot price is up 36.3% in USD terms and 52.5% in AUD terms since we met at this conference last September…
WHAT A DIFFERENCE A YEAR MAKES
Notes: 1. China import Iron Ore Fines 62% Fe Spot (CFR Tianjin port) $/dry metric tonne. Source: Bloomberg as at 25-Nov-13.
62% Fe fines1
Iron ore spot price (USD, AUD)
STRICTLY CONFIDENTIAL | 4
0
50
100
150
200
250
Nov-12 Feb-13 May-13 Aug-13 Nov-13
FMG MGX GRR BCI MIN ARI
… bringing equity prices for local iron ore producers with it
WHAT A DIFFERENCE A YEAR MAKES
Source: Bloomberg as at 25-Nov-13.
Index
Relative Equity Prices for ASX-Listed Iron Ore Producers from Nov-11 (Rebased to 100)
STRICTLY CONFIDENTIAL | 5
THE FOCUS HAS SHIFTED
Source: News and Company Announcements.
Now One Year Ago Going Forward
FMG Atlas BHP Mitsubishi Jupiter Mines
– Selling assets, deferring expansions, refinancing debt
– Shares traded at a 3.5yr low of $2.97/share
– Cancel $3bn Ridley Magnetite Project
– Deferred Port
Hedland iron ore expansion projects
– Indefinitely delay Jack Hills iron ore project
– Indefinitely delay Mt Isa Magnetite project
FMG Atlas BC Iron BHP Gindalbie WA producers
– Record FY13 revenue US$8.1bn – S&P upgrade to BB – Near target 155Mt p.a. capacity – Sep Qtr Record production (10Mt
p.a. rate) – Record FY13 revenue $695m – Record production at Nullagine – Record iron ore shipments – 30c dividend
– 5Mt increase in FY14 forecast
production to 212Mt – Sep Qtr record production of 54Mt
– Sep Qtr: Hematite shipped 43% up
– Iron ore exports in FY13 up 13% – Value of sales dropped 7.3%
Expected US$10bn ($10.35bn) new investment in iron ore by BHP and Rio
BHP RIO FMG
– Plans to expand Jimblebar to 55Mt p.a.
– Plans to approve an expansion of its operations from 290-360Mt p.a.
– Plans to repay US$1b debt due in 2015 in December
The improvement in market conditions is being reflected by the change in iron ore business development pipelines.
STRICTLY CONFIDENTIAL | 6
In response to market and iron ore price pressure the major theme of the part year is stemming the tide of rising operating costs.
COST REDUCTION EFFORTS ARE STARTING TO SHOW
Source: Company announcements, reports and presentations. Analyst reports.
BHP has already achieved $US2.7bn ($2.79bn) in cost cutting
• Targeting nominal CIF China equivalent basis cash cost of c.US$39/t by CY2015 from c.US$43/t in CY2013
Rio has made total cost reductions of $978m post-tax from H1 2012 to H1 2013 ($655m of cash costs)
• Targeting all in cash cost of US$35/t in 2020 from US$47.7 in FY13
49
58
101
128
53
44
67 68
114
48
37
59 54
119
44 36
61
36
88
43
0
20
40
60
80
100
120
140
FMG AGO MGX GRR BCI
FY12 FY13 FY14e Long run
GRR costs are for magnetite which attracts a $20-30/t price premium
Cash Costs (A$/t)
STRICTLY CONFIDENTIAL | 7
In the long term the cost curve will go from this…
2013 GLOBAL IRON ORE COST CURVE
Source: Bloomberg.
Rio
Tin
to
BH
P B
illit
on
Val
e
Fort
escu
e
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
0 250 500 750 1,000 1,250 1,500
Cas
h c
ost
(U
S$/t
)
Cumulative Production (Mt)
2013 Global Iron Ore Cost Curve (62% Fe CFR China)
STRICTLY CONFIDENTIAL | 8
To this … as new production is increasingly cost efficient
2020 GLOBAL IRON ORE COST CURVE
Source: Bloomberg.
2020 Global Iron Ore Cost Curve (62% Fe CFR China)
Rio
Pilb
ara
Ph
ase
1
Rio
Pilb
ara
Ph
ase
2
BH
P R
PG
5
Rio
Tin
to e
xist
ing
Fort
escu
e T1
55
BH
P e
xist
ing
Val
e
Fort
escu
e ex
isti
ng
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
0 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250
Cas
h C
ost
(U
S$/t
)
Cumulative Production (Mt)
STRICTLY CONFIDENTIAL | 9
Despite operating cost improvement, rising capital costs remain a challenge for new production
CAPITAL INTENSITY
Notes: 1. In 2011-dollar terms. Source: Bloomberg Industries.
96
150
100
195
0
20
40
60
80
100
120
140
160
180
200
2007 2011/2012
Rest of the world Australia
Capital Intensity (US$/tonne of capacity)
Capital Intensity (US$/tonne of capacity)1
STRICTLY CONFIDENTIAL | 10
Capital intensity represents an even greater challenge for magnetite projects
CAPITAL INTENSITY - MAGNETITE
Source: Bloomberg.
266
105
0
50
100
150
200
250
300
Magnetite Hematite
Capital expenditure (US$/tonne of capacity)
Capital Intensity: Australian New Iron Ore Projects
60
46
0
10
20
30
40
50
60
70
80
Magnetite Hematite
Cash Cost (US$/tonne of capacity)
Cash Costs: Australian New Iron Ore Supply
Though prices for Magnetite are typically $20-30/t more than Hematite, this remains inadequate to compensate for the higher costs in most projects
STRICTLY CONFIDENTIAL | 11
IS IT CHEAPER TO BUY OR BUILD?
Despite share prices of Australia’s iron ore producers increasing by 40% over the past year1, a comparison of annual production multiples of Australia’s iron ore producers to the capital intensity of new projects suggests buying is cheaper than building
Notes: 1. Based on an equally weighted index consisting of Fortescue Metals Group, Mount Gibson Iron, Grange Resources, BC Iron, Mineral Resources and Arrium. Source: Bloomberg as at 28-Oct-13, Mineral Council of Australia (MCA), company reports & filings.
0
50
100
150
200
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400
450
FMG
BC
Iro
n
Atl
as
Gra
nge
Gin
dal
bie
Min
as R
io
Mb
alam
Rio
Tin
to -
Pilb
ara
BH
P -
RP
G5
FMG
- T
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Ro
y H
ill
Kam
i
Pep
el35
Car
ajas
Ser
ra…
Avi
ma
Mar
amp
a
Mt
Web
ber
Blo
om
Lak
e
Wilc
her
ry H
ill
Mar
illan
a
Bu
nga
roo
So
uth
Bal
mo
ral S
ou
th
Car
ajas
II
Bu
ckla
nd
Jack
Hill
s
Sin
o Ir
on
Cen
tral
Eyr
e
Kar
ara
May
oko
Ap
uri
mac
Market Value ASX-listed Companies Hematite Projects Capital Intensity Magnetite Projects Capital Intensity
Magnetite average: US$225/t
Implied market value versus capital intensity for global iron ore projects (US$/tonne of annual capacity)
US$/t
Hematite average: US$154/t
ASX-listed average: US$99/t
STRICTLY CONFIDENTIAL | 12
The iron ore price has had a benign 12 months … where is it heading? Short term views are generally positive…
THE IRON ORE PRICE OUTLOOK
Source: Australian Financial Review, Broker Reports.
Broker Long Term Price Forecast (US$/t)
Hartleys Deutsche Bank RBC Capital JP Morgan UBS Goldman Sachs
80-90, FOB 80, fines CIF ~75, CRF China, 62% Fe 115, TSI benchmark 70 (revised this up) 88
Commentary
– “…it seems more and more likely that there will be upgrades to those [iron ore price] estimates in the coming months…” Hartleys
– “With iron ore inventories still at modest levels, we continue to expect iron ore prices to be well supported through Q4 (the fourth quarter) 2013” RBC
– “We have seen a bounce that should be supported into December” Platypus Asset Management
– “While we expect prices to remain supported near term, oversupply in mid CY14 will see prices retreat to marginal support levels thereafter” Goldman Sachs
STRICTLY CONFIDENTIAL | 13
But analysts diverge on the big question: what will be the long term price for seaborne iron ore?
LONG TERM VIEW UNCHANGED FROM LAST YEAR
Source: Australian Financial Review, Bloomberg, Broker Reports.
Consensus view (Nov 2013 presentation) Current views?
China’s growth may slow but there is enough urbanisation and ongoing construction that new iron ore projects will need to be developed for another ~5 years until supply catches up
Chinese domestic production costs set a floor around $100-120/t CFR
Rising costs will continue to underpin the price...
– new supply has a habit of running late...
– ... but in time significant new supply will dampen the price in the long term
Short term views are generally buoyant …
…but many analysts are concerned about rising supply and over-supply
Consensus long term expectations is ~$80
However it is hard to reconcile that with the capital intensity of new investment. At US$80/t long term it is not worth bringing most greenfield projects into production
My preferred view hasn’t changed from last year
STRICTLY CONFIDENTIAL | 14
After 5 years of high volatility, a bull market has emerged for equities. US markets are above their post GFC highs and Australian markets are getting there. The ASX accumulation index (includes dividends) is above 2008 levels.
EQUITY MARKETS – THE BULL MKT APPEARS?
Source: Bloomberg as at 25-Nov-13.
40
50
60
70
80
90
100
110
120
130
2008 2009 2010 2011 2012 2013 2014
ASX 200 Index
ASX All Ordinaries Index
ASX 200 Accumulation Index
40
50
60
70
80
90
100
110
120
130
2008 2009 2010 2011 2012 2013 2014
Dow Jones Industrial Average Index
S&P 500 Index
Aust Capital Markets: ASX200 & ASX All Ords from
Jan-08 (Rebased to 100)
US Capital Markets: Dow Jones & S&P 500 from Jan-08
(Rebased to 100)
STRICTLY CONFIDENTIAL | 15
Australia remains middle of the road compared to Europe, Japan and China…
RECOVERY IS NOT A GLOBAL THEME … YET
Source: Bloomberg as at 25-Nov-13.
20
40
60
80
100
120
140
2008 2009 2010 2011 2012 2013
HK Hang Seng FTSE 100 Nikkei 225 Euro Stoxx 50 SSE Composite ASX All Ords S&P 500
← ASX All Ords
Major Stock Exchange Indices from Jan-08 (Rebased to 100)
STRICTLY CONFIDENTIAL | 16
After the crash, the initial recovery and a (very protracted) period of consolidation, the final stage – a multi year bull market – is what investors are now hoping for...
LOOKING FOR THE LAST (BULL MARKET) PHASE OF THE
MARKET CYCLE
Source: Bloomberg as at 25-Nov-13.
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
2008 2009 2010 2011 2012 2013 2014
3. Consolidation - market trades sideways for 3 years
from 4800 in Oct 09 to ~5,5000 now
1. Market crashes – post GFC severe at -56% over 17
months
2. Market bounces off the bottom - +53% over
8 months
4. Finally the bull market - rally commences in
2013
ASX 200 Index from Jan-08
STRICTLY CONFIDENTIAL | 17
IPO MARKET STAGES A TURNAROUND
Capital raised by Australian companies has been extremely low for the last few years with the IPO market virtually non-existent… but the year end pipeline gives us hope
Note 2013 is YTD June. Source: Bloomberg as at 22-Sep-2013.
Australian Equity Issuances (A$billions)
A$37B
A$41B
A$25B
A$14B
A$11B A$10B
2008 2009 2010 2011 2012 2013YTD
IPO's Secondary
Significant re-capitalisation /debt reduction
Company Ticker Industry Raised / Target
(A$m)
Selected 2013 IPOs
99 Wuxian NNW Mobile Phones 20.0
Australian Industrial REIT
ANI Real Estate 129.0
OzForex OFX Online Payment 439.4
Freelancer FLN Freelancing 15.0
iSelect ISU Online Comparison 479.3
Selected Planned IPOs
Nine Entertainment
NEC Television 3,000.0
Life Healthcare LHC Health 100.0
BIS Industries - Mining Services 1,500.0
Dick Smith DSH Electronic Retailer 344.5
STRICTLY CONFIDENTIAL | 18
While the IPO market has boomed in sectors such as healthcare, media and financials there is no IPO activity in mining and relatively low secondary issuance.
NO RECOVERY IN MINING EQUITY ISSUANCE
815 419
173 54
2,731 3,407
1,981
1,277
3,546
3,826
2,154
1,331
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2010 2011 2012 2013 YTD
Secondary Issuances
IPOs
Primary and secondary market issuances for ASX listed mining companies (A$m)
A$m
Source: Bloomberg.
STRICTLY CONFIDENTIAL | 19
5.9
5.4
4.4
5.1 5.0
3.9 4.1
6.1
5.5
4.5
5.3 5.1
4.0 4.2
0
1
2
3
4
5
6
7
2007 2008 2009 2010 2011 2012 2013 YTD
ASX200 Index ASX All Ordinaries Index
ASX Liquidity has fallen since GFC – reflective of lack of investor confidence and reduced international participation due to high A$. This has started to recover but not in small caps.
LIQUIDITY TURNING - BUT REMAINING LOW
Source: Bloomberg as at 25-Nov-13.
267 253
165
261 251
146
119
0
50
100
150
200
250
300
350
2007 2008 2009 2010 2011 2012 2013YTD
ASX Small Cap Resources Index
↓ 55% since 2007 for Small Cap Resources Index
Small recovery in liquidity from 2012 lows, but still below historical levels
Average Daily Value Traded (A$billions) Average Daily Value Traded (A$millions)
STRICTLY CONFIDENTIAL | 20
-600
-400
-200
0
200
400
600
2008 2009 2010 2011 2012 2013 YTD
Equities Bonds MM
After the GFC, funds withdrew dramatically from equities and flowed aggressively into Money Market and Bond Funds. 5 years later, that money is returning to equity funds.
INCREASED FLOW INTO EQUITY FUNDS
Source: JBWere.
Asset Flows (A$billions)
STRICTLY CONFIDENTIAL | 21
Since last year there has been considerable multiple expansion in Australian equities with little earnings growth
MULTIPLE EXPANSION AND EARNINGS GROWTH
Source: Bloomberg as at 22-Nov-13.
ASX 200 12 month forward EPS and P/E
6
8
10
12
14
16
18
200
250
300
350
400
450
500
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
12
mo
nth
fo
rwar
d P
/E
ASX
20
0 1
2 m
on
th f
orw
ard
EP
S 12 month forward EPS 12 month forward P/E
STRICTLY CONFIDENTIAL | 22
Market valuations of some of the largest global mining companies have continued to decline over the past 3 years.
MINING COMPANY VALUATIONS COMPRESSED
Notes: FY13 is YTD. Source: Bloomberg as at 29-Oct-13.
232
162 155
51
87
20
42
29
15
167
105 101
31
69
15
37
17 13
167
97
74
59 59
9 17
8 6
0
50
100
150
200
250
BHP RIO Vale Glencore ChinaShenhua
FMG Barrick Newcrest AngloGold
FY11 FY12 FY13
Market Cap at Financial Year End (A$billions)
STRICTLY CONFIDENTIAL | 23
Mining equities continue to underperform the underlying commodities in AUD terms, the strong dollar no longer hides the difference…
MINING EQUITIES UNDER-PERFORMING COMMODITY PRICES
Notes: 1. All indexes are presented on monthly intervals. Source: Bloomberg as at 29-Oct-13.
HSBC Global Mining Index vs. RBA Commodity Price Index in US$ terms (Rebased to Jan 2007)
40
80
120
160
200
240
2007 2008 2009 2010 2011 2012 2013
HSBC Global Mining Index
RBA Commodity Price Index (in US$ terms)
HSBC Global Mining Index vs. RBA Commodity Price Index in A$ terms (Rebased to Jan 2007)
40
80
120
160
200
240
2007 2008 2009 2010 2011 2012 2013
HSBC Global Mining Index
RBA Commodity Price Index (in A$ terms)
STRICTLY CONFIDENTIAL | 24
62% Fe fines spot price1
Mid cap iron ore peers index2
Similar theme applies to the Australian iron ore sector… (chart excludes majors as they are diversified)
THE SAME TREND CAN BE SEEN IN IRON ORE
Notes: 1. China import iron ore Fines 62% Fe spot (CFR Tianjin port) – denominated in US$/dmt. 2. Mid cap iron ore peers consists of Aquila Resources, Atlas Iron, Gindalbie Metals, Grange Resources and Mount Gibson Iron. Source: Bloomberg as at 25-Nov-13.
20
40
60
80
100
120
140
Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
Index (rebased to 100)
62% Fe Fines Spot Price v. Mid Cap Iron Ore Peers Index from Jan-12 (Rebased to 100)
STRICTLY CONFIDENTIAL | 25
EQUITY RAISING FY13 AND FY14 TO DATE – IRON ORE
Date Company Amount
Raised (A$m) Type
Premium / Discount
to last close Purpose/Comments
8-Nov-13 Western Desert
19.43 Share Purchase
Plan 12.75% discount
Development/construction of Roper Bar iron ore project
22-Oct-13 Sundance 40 Convertible Notes Issue
Half at 9% premium: Half at 30% premium to
1mth VWAP
Working capital requirements for Mbalam-Nabeba Iron Ore Project
16-Oct-13 Pluton 3 Private
Placement Less than 1%
discount
Bolster balance sheet and progress growth opportunities
13-Sep-13 Legacy 1 Convertible
Notes 10% discount
Had to cancel Entitlement Offer to raise $25m due to market volatility
24-Jan-13 BC Iron 10 Share Purchase
Plan 6% discount to 5
day VWAP Working capital for Nullagine JV
Source: Thomsonone and company announcements.
STRICTLY CONFIDENTIAL | 26
Miners have been seeking where possible to raise cash through asset sales … however, the big transactions have not come through yet (e.g. IOC)
RECENT IRON ORE ASSET SALES
Seller BHP Billiton FMG Western Desert
Resources Cliffs Asia Pacific Iron Ore Holdings Pty Ltd
Harbinger Capital Partners
Target Jimblebar (15% stake) Nullagine JV (25% stake) Western Desert
Resources Cockatoo Island iron ore
assets
Asian Coast Development
(Canada Ltd) and Ferrous Resources do
Brasol Ltda
Bidder Mitsui & Co Ltd; Itochu
Corporation BC Iron Meijin Energy Group Pluton Resources
Australia Acquisition Corp
Amount (A$m) 1,626.4 190.0 342.1 n.a. 341.1
Announced
Date 20-Jun-13 18-Dec-12 18-Sep-12 1-Aug-12 11-Jul-12
Source: Company announcements.
STRICTLY CONFIDENTIAL | 27
Despite the gloom in equity, raising US Dollar high yield debt (ie non-investment grade) is cheaper in absolute terms than pre GFC! Although in spread terms, not quite as cheap...
US DEBT MARKETS – NEVER BETTER
Source: Bloomberg as at 25-Nov-13.
0
5
10
15
20
25
1999 2001 2003 2005 2007 2009 2011 2013
0
5
10
15
20
25
1999 2001 2003 2005 2007 2009 2011 2013
Cheaper in absolute terms than the last ~ 10 years
Median: 8.7%
Median: 5.4%
Spreads not as low, yet still attractive
Credit Suisse High Yield (CS HY) Index (%) High Yield Spread – CS HY Index v. 10-yr US treasuries (%)
STRICTLY CONFIDENTIAL | 28
The onset of tapering has moved the 30 year bond rate (which is the reference rate for most US mortgages) to ~3.5% …
TAPERING EXPECTATIONS PUSHING UP LONG TERM YIELDS
Source: Company announcements.
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13
Yield
US 30 Year Government Bond Index
STRICTLY CONFIDENTIAL | 29
KEY THEMES AND CONCLUSIONS
Source: Australian Financial Review.
Global Equities Resource Equities
Global economic outlook is improving even though sovereign debt issues remain
Key Australian and US markets have (more or less) recovered GFC losses and we are entering a bull market phase
Major Equity markets racing along… now including Australia…. and IPOs are back
Interest rate cuts in Australia have sparked a return to equities
Liquidity low but may have bottomed
Small caps looking very cheap and out of favour
Resources have underperformed significantly and may be next in line for a rally
Clear underperforming sector of the past 12
months having been the outperformer through the bear market.
Reasons include major M&A failures, lack of confidence, rising costs and concern around China growth / commodity prices
Overall equities have lagged commodities – and mining equity markets are weak and unloved right now
This has kept the marking for raising money for early stage explorers very subdued
Access to debt for good quality projects remains good
In iron ore specifically:
- Iron ore prices have been strong, bringing equities with it
- Operating costs are coming down
- The challenge remains capital intensity and access to funds
STRICTLY CONFIDENTIAL | 30
QUESTIONS & ANSWERS
Questions?
AZURE CAPITAL
PO Box Z5340
Perth Western Australia 6831
Level 34 Exchange Plaza
2 The Esplanade Perth
Western Australia 6000
Phone: +61 8 6263 0888
Fax: +61 8 6263 0878
www.azurecapital.com.au
AZURE CAPITAL
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