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Premium member Presentation Transcript Slide1: ‘Rebirth of the London Mining Sector’ Note: No one would like to take any responsibility for the content of this presentation NUMIS SECURITIES LIMITEDPlease don’t sue us: Please don’t sue us This document has been approved under section 21(1) of FSMA 2000 by Numis Securities Limited (“Numis”) for communication only to market counterparties and intermediate customers as those terms are defined by the rules of the Financial Services Authority. Its contents are not directed at, may not be suitable for and should not be relied on by private customers. Numis does not provide investment advisory services to private customers. Numis regards this document as objective research material. It does not constitute a personal recommendation and does not constitute an offer or a solicitation to buy or sell any security. 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Where a price is quoted in research material it will generally, in the absence of contrary words, be the latest practicable price prior to distribution or, in the case of a research circular printed overnight, the closing price at the close of business. The tariff for recommendations is set out in the Numis website, together with the relevant time horizon. A chart showing the recommendation history for each company covered for the past twelve months is set out under the appropriate company name in the archive of research material contained in this website and is available to all customers who normally receive Numis research material. There is also available on this website an analysis of the split of recommendations over the past quarter for all subject companies and for corporate clients. For this information - see www.numiscorp.com/x/regulatory.html © Numis Securities Limited. In the beginning : In the beginning The stone age The bronze age The iron age But what age are we in ? Space age Oil age Plastics age Information age Consumer age Capitalist age Democracy age Freedom age The public investment age ! .: . What in the world has changed ? Credit cards What is happening now !: What is happening now ! Global GDP growth Supply / demand drivers Copper suffered several years of abnormally low prices now two years into above average pricing 37% of copper goes into construction – this is a significant growth area Diggers – the number of digging machines sold continues to rise Diggers do not sell unless there are contracts for digging China – did they think they were the only growth economy ? US Brazil Global Industrial Production growth is way ahead of GDP growth in China and Taiwan Proliferation in energy demand - more energy creates greater demand New regions open for Western investment break-up of the FSU fall of the Berlin Wall end of the cold war Capitalism – a new era of economic growth Creating new generation of consumers Eg Russian microwaves …more reasons !: …more reasons ! Urbanising population: - 80% in the west - 60% urbanisation forecast by UN for the world by 2050 Health issues – affect rich and poor, public and politicians SARS – was a serious interruption to Chinese growth Has probably strengthened China’s resolve to urbanise Bird flu – scattered cases only so far Reminds us of the threat posed by potential epidemics Keeping up with the neighbours in economic terms in military strength Japan Taiwan Hong Kong South Korea Consumerisation : Consumerisation Consumer class population at 1.7bn and growing forecast for 9bn global population by 2050 Rising population entirely in less developed world Consumer spending Share of world Share of private consumption world population USA and Canada 32% 5% W. Europe 29% 6% E. Asia & Pacific 21% 33% Latin America 7% 9% Rest of World under 3% 47% Household consumption has increased 4x to $20 trillion since 1960 60% urbanisation by 2050, 80% in W. Europe – UN estimates China is urbanising 20m people each year on average Developed world population just 1.2bn US consumers use 25% of global energy - and release 25% of global carbon dioxide Chinese consumerisation: Chinese consumerisation Chinese GDP thought to still be running ahead of the official statistics Export growth has taken off as a result of dramatic industrial production growth China has just loosened credit Local consumption growth through the development of personal borrowing Credit cards Consumption to be the main driver of the economy Consumerisation to drive stainless steel demand Swiss consumption of stainless steel = 3.5kg/head China < 0.5kg/head JISCO – direct investment in new Ferro-chrome smelter Chinese people save 60% of earnings To pay for health and education The Iron rice bowl China is becoming more like the US than America Chinese people now have to pay for their own health and pensions and often opt to pay for their own education Infrastructure: Infrastructure China Urbanisation Industrial production facilities Energy generation and distribution BHP Billiton calculate that 85% of copper going into China stays in China US Housing starts Gulf states reconstruction Eastern Europe Massive property investment, speculation Central Asia Replacement of Soviet construction Latin America Replacement of slums Changes in construction materials: Changes in construction materials Construction techniques: Steel over concrete Steel and glass construction above street level Concrete mainly below ground except for large infrastructure projects Substitution takes many years Eg architects need to plan with alternative raw materials Plastic pipes are increasingly expensive as well and raw materials are limited Chairman Mao bankrupt the Chinese economy in the 1950s Lets hope they don’t do that again ! Copper at all-time high levels: Copper at all-time high levels Why do we talk about copper ? Copper is the most liquid traded metal It acts as a barometer of global demand Chinese copper crisis A trader goes missing – supposedly stress related 50,000t of short positions reportedly closed SRB tries to disown trades 130,000t of shorts said to be still open 20,000t of copper sold in auction A further 20,000t to be sold shortly Some foreign traders claim to have refused Chinese short trades Chinese officials at SRB HQ playing Mahjong - ! $70/t backwardation makes copper short positions costly to maintain Copper mines: Copper mines High graded production over the past 18 months Now having to mine lower grade sections Fortunately these areas contain valuable by-product materials like ‘molybdenum’ Molybdenum prices rose dramatically due to: Strong steel production growth high grading of copper grades in Chilean copper mines Shortage of skilled mining engineers Management teams stretched to limit Lack of some parts for large dump trucks Equity analysis: Equity analysis Forecasting done on hopefully conservative longer term assumptions $1/lb used for copper from 2007 onwards We are more interested in longer term volume growth Eg in Iron ore and manganese as well as the base and precious metals Clients want to see potential for upside BUT do not want to see unrealistic forecasts Rising costs are a concern But will prevent some higher-cost mines from opening and will cause others to close despite continuing high prices .: . The London Stock Exchange The end of the an age: The end of the an age Mining shares led an era of global economic and political expansion Independence led some economies into a marked slowdown despite non-conflict transition to home rule in many areas Nationalisation ZCCM - Zambia Bisichi – nationalisation of tin assets in Nigeria Consolidation by oil majors in 60s and 70s Shell bought Billiton in the Netherlands BP bought Seltrust (RST) Exxon bought Anaconda Oil majors sold off mining portfolios in 80s and 90s Shell sold assets to Gencor Exxon sold Disputada Few LSE listed miners: Few LSE listed miners Small companies collapsed Few miners survived Consolidation = mergers and acquisitions Bankruptcies Poor economic environment Asian Crisis Low gold prices – not helped by UK government Poor supply demand fundamentals + Copper crisis – Mr 5% (Hamanaka) Poor market environment Consolidation by banks Brokers focusing on larger companies Few new IPOs went ahead Regulation: LSE Regulations are tough Past cycles left a legacy of specific to the mining sector regulation Remember the Poseidon nickel boom: Stocks listed in Australia but funded out of London The London Stock Exchange: The London Stock Exchange …has a long history of mining FCAB (railroad) now Antofagasta Consolidated Gold Fields defense against Hanson De Beers Consolidated Mines Part of Anglo American JCI, Rand Mines, Simmer & Jack Roan Selection Trust (RST) Bought by BP, sold some assets to Rio Tinto Anglesey Mining The world’s largest copper mine in early 19th century LSE Rio Tinto sole FTSE miner in 1990s Antofagasta - listed but not included in the FTSE Allshare Rebirth: Rebirth AIM - Origins as a lightly regulated market for smaller companies BUT regulation is tighter than it seems The Stock Exchange makes corporate financiers justify their actions through in depth review a sort of unseen and subtle regulation Hopefully ths has slowed the number of listings and should prevent brokers with out sufficient expertise from floating companies they do not fully understand AIM started with mainly technology listings Originally only one major fund involved for first few years Now nearly all fund groups invest Overseas funds and companies are increasingly using AIM US listings moving to AIM for lighter regulation Very few miners listed in first years of AIM due to low metals prices from: Asian Crisis and general economic slowdown AIM fast track encourages companies to AIM for secondary listing London has greater capital base to access than any other market New beginnings: New beginnings Why AIM AIM market has become popular as alternative to LSE Asset transfers – acquisitions / disposals are much easier and costs are lower Funding available for new companies Lighter regulation enables young companies to list Lower listing costs encourage directors Why Mining Deconsolidation of mineral properties by Majors Tethyan Copper, Monterrico Metals, African Diamonds etc…. Skilled explorers and miners available following consolidation In the 80s and 90s staff transferred into other industries Talented people can now build proper mining companies on the back of capital from the market place with good assets Shell company listings have been principally stopped Capital availability for exploration, feasibility and development Better commodity supply demand outlook Dual listings: Dual listings Fast track listing process encourages dual listing Reality is due diligence must still be done for fund raising Admitted companies (inc AIM) 2,396 domestic companies 469 international companies 1250+ AIM Market capitalisation UK listed: $ 2,804 billion Non-UK listed: $ 4,063 billion AIM: $79 billion Equity turnover (Jan 04-Dec 04) $ 4,327 billion domestic $ 4,810 billion international AIM: $30 billion Income: Income How big is the London market for mining and resource companies ? 140 mining companies on AIM £7,176m on AIM for mining £7,816m for Oil & Gas – 76 companies £14,992m for Resources 6 miners in the top 50 AIM companies 37 IPOs & 14 introductions £204m raised AIM total market value = £47.4bn Fund Weightings: Fund Weightings Generalist funds still look underweight Funds attracted by IPO discounts to estimate asset value Tracker funds FTSE 100 led FT250 & FT350 indices FT Allshare New funds Merill Lynch Income fund RAB Capital funds Investment follows growth Dividends Share buybacks Profits Acquisitions Flow of funds: Flow of funds Acquisitions put funds back into the market WMC – by BHP Billiton CVRD – Cameco CNOC – PetroKazakhstan* Falconbridge - Inco Stake building and Joint venture participation Celtic Resources – Barrick Gold Highland Gold – Barrick Gold TranSiberian Gold – AngloGold European Nickel – BHP Billiton Tethyan Copper – BHP Billiton Co-operative agreements Jubilee Platinum – BHP Billiton Why London ?: Why London ? London hosts more funds than any other financial center: Specialist Mining funds General Small cap funds - these make up by far the largest part of the market Special situations funds - Very selective in their approach, generally momentum driven Takeover fund specialists - Hedge funds: Basically unregulated funds traditionally they balanced shareholdings with short selling more commonly we find these funds are predominately holding equity flexibility is attractive for investors: short selling – difficult in very small stocks Can switch investment types more easily than conventional funds Private investors - Often invest early in anticipation of an IPO Companies - Invest for optionality LSE & AIM 80% of European IPOs: LSE & AIM 80% of European IPOs LSE 69 new firms had joined raising 6.1 billion pounds ($10.6 billion). 52 were initial public offerings amounting to 6 billion. In 2004, 68 new companies raising £5bn 423 companies introduced in total vs 131 IPOs on NYSE and 166 IPOs on Nasdaq In 2000 companies raised a record £17bn 20 more IPOs this year raising £1bn Kazakhmys raised £661m AIM 389 new companies listed raising £3.4bn so far this year 2004 - 355 companies listed raising £2.8bn Where does it end ?: Where does it end ? Is this a new era of global growth ? – YES ! Never in the field of human shopping have so many started to consume so much Or is this just another cycle - NO ! Will there be a boom / bust cycle within this new megatrend When will it end ? Inflation is taking time to gain pace China estimates 100mt of surplus steel for export Chairman Mao caused China to overproduce steel bankrupting the economy in the 1950s Chinese auto production estimated to be double demand Are the authorities limiting auto demand SRB selling copper to collapse prices Crisis: Crisis Potential crisis ! Energy supply issues raise energy prices The world can generate a much greater proportion of energy from renewable sources. Huge new hydro-electric projects in China, Africa, Latin America Steel surpluses Currency Chinese – pressure for revaluation US – Will the US dollar slide from here Europe – Strong Euro is limiting growth prospects Other large miners: Other large miners Xstrata Copper, Coal, Zinc Good at enhancing mine performance Higher cost, greater leverage Most leveraged of all the miners Kazakhmys Copper – new listing Great cash flow Kazakhstan mines, German assets But little information seems to be available particularly on costs – costs may be a moving target Vedanta Copper smelting, aluminium, zinc Expanding copper and aluminium India and Zambia More related to treatment and refining charges due to exhaustion of Australian copper minesCopper miners: Copper miners Antofagasta World class mine at Los Pelambres Solid production track record FTSE 100 status A privilege to hold First Quantum Minerals* Strong production growth Proven track record Good mine builders and operators Significant proportion of shares held by UK / European institutions African Copper* New mine planned at Dukwe Known copper discoveries on licence area Future leverage to copper prices New mine plan to add value *Numis Securities acts as broker and advisorSteel related raw materials: Steel related raw materials Consolidated Minerals* Manganese ore Chromite ore Nickel concentrates Australian production Sales into China and Europe Strong profit growth High dividend yield International Ferro Metals* Ferrochrome production South African operations Chinese direct investment of $35m Direct offtake agreement by JISCO First production in 2007 proven management team Proven but improved technology *Numis Securities acts as broker and advisorNickel miners: Nickel miners LionOre Mining Nickel and gold Activox technology for complex nickel ores Australia and Botswana Botswana nickel mine flooded in December reducing production European Nickel Heap leaching nickel oxide ores Large scale pilot trial works well Turkish mine is pre-stripped Scale up being planned following trial Albidon* Munali nickel project in Zambia Expanding resource raises value Team have mine building expertise Mine could produce 15,000tpa + significant cobalt production *Numis Securities acts as broker and advisorZinc miners: Zinc miners Griffin Mining Zinc mine jv in China Waiting for news of production Australian and Chinese management jv will test business relationship with China Stock has done well for private investors ZincOx Resources* Developing zinc oxide projects in Turkey the US and the Yemen Turkish and US projects relate to the recycling of Electric Arc Furnace Dust EAFD Management developed Scorpion zinc project in Namibia Anglo American acquired Reunion Mining for the Scorpion project *Numis Securities acts as broker and advisorGold miners (Russia assets): Gold miners (Russia assets) Peter Hambro Mining Strong production track record Low gold production costs < $150/oz Strong gold production growth Targeting 1moz gold production per year New project acquisitions add value Company is considered dominant gold producer in the Amur region of Russia Highland Gold Poor production performance Some difficult new projects Good leverage to gold prices Celtic Resources Uncertainty over key Russian gold asset Now in legal dispute Problems with new Kazak gold operation Numis Securities acts as broker and advisorDiversified miners: Diversified miners Anglo American Gold, platinum, diamonds, copper, pulp & paper, Tarmac, coal Restructuring to break out value Reducing South African exposure BHP Billiton Iron ore, coal, petroleum products, aluminium, Copper Strong growth in iron ore Australian focus Rio Tinto Iron ore, coal, aluminium and copper Strong growth in iron ore US dollar cost base Platinum miners: Platinum miners Lonmin Top three pgm miners Long history New growth through acquisition of Messina (Limpopo) pgm mine Aquarius Platinum Pool & share arrangements at Kroondal and Mariakana mines Low production costs continuing pgm production growth Jubilee platinum* Tjate platinum resource – huge potential Tjate is adjacent to working pgm mine Madagascar co-operation with BHP Billiton Future leverage to copper prices *Numis Securities acts as broker and advisorMine developers: Mine developers Anglo Asian* Gold production Copper projects – new projects and former copper mines. Copper mine operated by Siemens in the 1900s Assets along the Tethyan Copper belt in Azerbaijan Deposits discovered y the Germans and Russians during periods of occupation Monterrico Metals Copper project in Peru 1.2bn tonnes of copper ore and rising Similar grades and characteristics to Antofagasta’s giant Los Pelambres copper mine in Chile Capital cost estimated at over $900m *Numis Securities acts as broker and advisorWhat happens when the music stops: What happens when the music stops Commodity prices fall Income funds will look elsewhere Will other sectors be as strong Margin pressures in many other sectors Quality companies should continue to perform Antofagasta Underweight funds waiting to buy stock on corrections Equities are being bought on setbacks In conclusion: In conclusion Two years of boom We have had enough now Mine managers need holidays Consultants need a rest Brokers need to see their families Fund managers need to see some returns We need a pause in economic growth Could China please slow down for a bit Could the US slow its construction boom Could India hold back before industrial production takes off Could Eastern Europe wait a while longer before catching up with the rest of Europe Could Perhaps this is too much to ask You do not have the permission to view this presentation. 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