Shared Mining Infrastructure: Too Good to be True? Trends, Challenges and Opportunities for Private Financing of Mining-Associated Transport Infrastructure in SSA Pierre Pozzo di Borgo, Principal Investment Officer, International Finance Corporation Cape Town, February 2 nd , 2012
Table of Contents 1. Market trends: mining operators are re-focusing on OECD markets while demand and supply are becoming increasingly concentrated 2. What does this mean for shared mining transport infrastructure in Sub-Saharan Africa? IFC’s experience: practical takeaways learned from the past year in Sub-Saharan 3. Africa 4. Concluding remarks 2
1. Market Trends: Re-focusing on OECD markets & Concentration of Supply & Demand The mineral “ super-cycle ” has tapered off with Majors taking the lead on investment scale-backs … resulting in a sharp scale - back of Majors’ CAPEX plans… Commodity prices remain high, but have stabilized at a lower level 25 100 180 95 160 Iron Ore & Coal (USD/metric ton ) 20 90 140 85 120 In US$ Billions 15 80 100 75 80 10 70 60 65 40 5 60 20 55 0 0 50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2012 2013 2014 2015 Coal, Australian thermal Iron Ore Rio Tinto BHP Vale Evolution since 2012 (2012=100) … and a refocussing on OECD countries • The Majors plan further CAPEX scale-backs (>-35% between 2012 and 2014). • The Majors have a renewed focus on (a) low-risk investment environments and (b) existing, brownfield projects, deemed less risky and less capital-intensive than greenfield endeavors (e.g. Rio Tinto’s asset base: Pilbara region in Australia). • High volumes of un-contracted production (Rio: >15% of 2014 iron ore) are likely to increase price volatility (downward). This rapid reversal, driven primarily by decreases in commodity prices, will likely delay large mining projects in SSA (i.e. greenfield and greenfield/brownfield projects). 3
1. Market Trends: Re-focusing on OECD markets & Concentration of Supply & Demand Majors are now fully focused on cost-cutting and increasing productivity from existing mines Cost- cutting is at the forefront of miners’ minds As is profit maximization from Brownfield mining investments West Australian Iron Ore - Ebitda per ton in US$ Cost savings in 2013, in billions of USD Price slow-down 120 0 Focus on 100 productivity -1 80 -2 BHP 60 -3 Rio Tinto 40 Rio Tinto BHP -4 20 FMG 0 -5 June Jan 2010 June Jan 2011 June Jan 2012 June Jan 2013 Exploration Operating Divesting 2009 2010 2011 2012 Source: Rio Tinto Whereas a year ago, companies were looking at expanding their mining asset base through developing greenfield projects, the focus is now on: • Reductions in operating costs; • Reducing exploration and production costs; • Divesting of non core assets; • Reducing CAPEX; and, • Deferring greenfield developments. Source: Rio Tinto 4
1. Market Trends: Re-focusing on OECD markets & Concentration of Supply & Demand The market has become hyper-dependent on very few key suppliers and one large consumer …and are the best positioned players on the cost curve Three Majors represent 50% of market capitalization… Industry cost curve, US$/wmt CFR Market capitalization at December 2013, top 15 companies (US$ billions) 0 20 40 60 80 100 120 140 160 180 BHP Rio Tinto Vale Glencore Xstrata Shenhua Freeport Anglo American Potash Corp The top 5 = 67% of total Norilsk Gr. Mexico market capitalization of the Southern Copper top 15 players Barrick Goldcorp Fortescue Teck Cominco Source: Rio Tinto China is fuelling demand growth more than ever, which begs the question of the likely effect of a Chinese economy’s prolonged slowdown Rio Tinto’s iron ore shipments by market, June 2012 -June 2013 China’s share of total demand for different commodities 66 70 60 From a minor player to 45 50 the key market driver 40 30 21 20 13 13 5 10 4 1 0 0 1990 2000 2012 Source: Rio Tinto Iron Ore Aluminium Coal Source: Rio Tinto 5
Table of Contents 1. Market trends: mining operators are re-focusing on OECD markets while demand and supply are becoming increasingly concentrated 2. What does this mean for shared mining transport infrastructure in Sub-Saharan Africa? IFC’s experience: practical takeaways learned from the past year in Sub-Saharan 3. Africa 4. Concluding remarks 6
2. What does this mean for shared mining transport infrastructure in Sub-Saharan Africa? The refocusing on OECD countries (production) and Asia (consumption) makes Sub-Saharan Africa less attractive for now Which has an especially adverse impact in an environment Sub-Saharan Africa is less competitive in terms of where “every dollar counts” transport costs Transport costs for one ton of C3-C5 iron ore to China Transport costs for one ton of C3-C5 iron ore to China US$/t in % of H1 2013 Ebitda $30 50% 44% 45% $25 40% 31% 35% $20 30% $15 25% ~$7-10/t 18% 20% 13% $10 15% 10% $5 5% $- 0% Shipping from Shipping from Shipping from Shipping from West Africa to West Africa to Pilbara to China Pilbara to China ~$20-25/t China (Rio Tinto) China (FMG) (Rio Tinto) (FMG) • The differential for transport costs only for a ton of 55% grade iron ore shipped from West Africa or from Pilbara to China is approximately $14-15/t (all things being equal). • In an increasingly competitive environment where every dollar counts, this has a huge impact on profitability – transport costs to China equate to anywhere from 13 to 44% of Ebitda depending on where the ore is produced. Are there still options for non recourse financing of mining infrastructure in sub-Saharan Africa in this context? 7
2. What does this mean for shared mining transport infrastructure in Sub-Saharan Africa? Current trend of favoring brownfield transactions in SSA, whether single or shared-use Number of Number of Bankable Railway Project Financing Profile Traffic Thresholds to Reach Existing Projects Projects Using Purely Operations (above /below rail investment) Bankability (mpta/km of track) in SSA (excl. SA) Private Financing Brownfield 4 > 5 mpta 4 Dedicated Mining Railways (single or 7/11 Brownfield/Greenfield (50/50) 2 > 15 mpta 2 multiple mining (63%) users) Greenfield 5 > 25 mpta of track 1 8 Freight >50%; > 3 mpta 4 Brownfield Freight <50%; > 5 mpta Shared Mining and 6 Freight >50%; > 5 mpta 3 7/14 General Freight Brownfield/Greenfield (50/50) Freight <50%; > 7 mpta (50%) Railways n.a. Freight >50%; > 10 mpta n.a. Greenfield Freight <50%; > 15 mpta Source: IFC • IFC estimates that in today’s market, there are few bankable mining-associated railway projects in Sub-Saharan Africa, of which only 1 is a Greenfield project which will be financed initially using a single anchor client while being designed to accommodate multiple users and usages: About 11 dedicated mining infrastructure projects (including projects with multiple mining clients), of which 7 are bankable on a pure private financing basis. About 14 shared mining / freight infrastructure projects, of which only half are financeable on a purely private basis. Is there still a way to harness these bankable opportunities, and in particular the ones based on shared- Source: IFC use concepts? 8
2. What does this mean for shared mining transport infrastructure in Sub-Saharan Africa? Investors furthermore continue to face a number of risks & challenges likned to SSA overall challending investment climate Investors face both “hard” and “soft” challenges As evidenced by IFC’s Doing Business report “Hardware” “Software” Challenges Challenges Political risk Lack of core infrastructure: Bureaucracy / government Power capacity Resource-rich zones Rail Underdeveloped legal / regulatory The combination of (i) a decrease in the risk appetite of environment Roads the Majors; (ii) the limited number of bankable mining Corruption infrastructure projects in sub-Saharan Africa; and (c) the Ports Lack of skilled labor force risks linked to the investment environment in the continent make both Greenfield investments and shared Social / community issues use investments extremely challenging. 9
Table of Contents 1. Market trends: mining operators are re-focusing on OECD markets while demand and supply are becoming increasingly concentrated 2. What does this mean for shared mining transport infrastructure in Sub-Saharan Africa? IFC’s experience: practical takeaways learned from the past year in Sub-Saharan 3. Africa 4. Concluding remarks 10
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