Copper Situation & Trends Present & Future

Transcription

1 Copper Situation & Trends Present & Future Javier Targhetta Senior Vice President Marketing and Sales Freeport McMoRan Copper & Gold, USA President Atlantic Copper FREEPORT-MCMORAN COPPER & GOLD INC. Mr. Peter Ford, Session Chairman: Our next speaker, Mr. Javier Targhetta, has spent many years in the field of metallurgy after completing his studies in Spain. In 1990 he was appointed as Chief Executive Officer of Atlantic Copper, which was subsequently acquired by FMI, and as of July 2005 he not only holds the position of CEO but also is responsible for FMIs copper and gold worldwide sales as Senior Vice President of that division. He serves in a number of boards of corporations in Europe and for the benefit of our people in the audience, I can tell you, he can answer questions in Spanish, English, German, French and Italian. Please welcome Mr. Javier Targhetta! Mr. Javier Targhetta: Good morning Ladies and Gentlemen! First I would like to cover the evolution of Freeport over the last 30 years, a very fascinating story. After that I will try to cover, what seems to be your main interest today, how the copper market is today and will develop in the future. Copper Situation & Trends Present & Future Javier Targhetta page 35

2 ERTSBERG In 1936, high in the mountains of the island of New Guinea, a young Dutch geologist, Jean Jacques Dozy, made a remarkable discovery: Ertsberg, a glistening black outcropping of highgrade copper ore. Ertsberg, the largest above-ground deposit the world had ever seen, had initial reserves of 33 million metric tons. The mining history of Freeport in metals starts in 1936, when a Dutch geologist, Jean Jacques Dozy, discovered in Indonesia the largest above-ground copper reserve in the world. The first mine, Ertsberg, that Freeport has been mining since 1972, was depleted in the late 80 s to early 90 s. Grasberg was discovered in Both, Ertsberg and Grasberg, are Dutch words, they stand for mountain of ore and mountain of grass, respectively. Copper Situation & Trends Present & Future Javier Targhetta page 36

3 GRASBERG Freeport geologists led an expedition to Ertsberg in Rights to the mine were negotiated. After pioneering a near-impossible road through swamps and mountains, Freeport first produced copper from Ertsberg in Grasberg About 15 years later, Freeport discovered Grasberg. Ertsberg Grasberg, though always looming just across the broad alpine swamp, was in those days nothing more than part of the scenery. Here you can see a picture of the area. All the documents and maps that Dozy and his colleagues had developed during World War II got lost. Freeport geologists went there in 1960 and, so to speak, rediscovered this reserve. Grasberg was discovered in 1988, it is several times as big as Ertsberg. Copper Situation & Trends Present & Future Javier Targhetta page 37

4 DEVELOPMENT & EXPANSION We We quickly quickly developed developed aa pit pit plan. plan. We We also also began began studying studying the the possibility possibility for for further further expansions, expansions, so so that that we we would would be be prepared prepared if if our geologists found more reserves as we fully expected they our geologists found more reserves as we fully expected they would. would. We did Expansion Expansion Expansion Grasberg Discovered 000 s t/d t/d 000 s Expansion Historical Mill Rate Compared with the earlier Ertsberg mine Grasberg shows an impressive evolution starting in Today the daily production runs around 230,000 tons per day. The 4 concentrators today represent the 4 stages of expansion as time went by. In the pictures that surround the graph you can see the various aspects of the pit, how it first was a mountain and now how it became a big hole in the earth. Copper Situation & Trends Present & Future Javier Targhetta page 38

5 FREPORT S ACQUISITION of PHELPS DODGE Created World s Premier Publicly Traded Copper Company World Class, Long-lived, Geographically Diverse Operations Attractive Project Pipeline Supports Growing Production Profile A big milestone in Freeport s history has been in March of this year when the acquisition of Phelps Dodge by Freeport was completed. We created the world s largest listed copper producer, also the biggest molybdenum producer and the 5th or 6th largest gold producer. More than the size that Freeport has reached in terms of production, to us the geographical diversification, that Freeport has reached through this acquisition, is much more important. In the recent past most of our assets and values were concentrated in one country, Indonesia, we now can say that they are reasonably broken down between 3 areas in the world, namely Indonesia, USA and South America. In addition, our portfolio of pipeline projects has increased significantly. Copper Situation & Trends Present & Future Javier Targhetta page 39

6 WORLD S LEADING COPPER COMPANIES Top 10 Copper Producers (2007E) (000 t) Codelco Pro Forma FCX BHP Billiton Xstrata Rio Tinto Anglo American Source: Brook Hunt 1Q07 Report. Rankings based on net equity ownership. Grupo Mexico KGHM Polska Miedz RAO Norilsk Kazakhmys This graph shows the ranking of copper producers in the world after our acquisition of Phelps Dodge. The second column represents Freeport. It says ProForma, because it is the addition of both pre- and post-acquisition of Phelps Dodge and Freeport production. Copper Situation & Trends Present & Future Javier Targhetta page 40

7 GEOGRAPHICALLY DIVERSE Freeport's Major Mines, Development Projects, Smelters & Wire Rod Plants North America 1 Mine Reserves Cu 24.8 billion lbs Mo 1.7 billion lbs Mine Production Cu 1.5 billion lbs Mo 69 million lbs Smelter/Refinery Cathode Prod. 265 kmt Wire Rod Production 1 million mt South America 2 Copper Copper/Gold/Silver Molybdenum Smelters & WR Plants Smelter/Refinery Cathode Prod. Europe 250 kmt Indonesia 3 Mine Reserves Cu 35.2 billion lbs Au 37.2 million ozs Ag 116 million ozs Mine Production Cu 1.1 billion lbs Au 1.6 million ozs Ag 3.1 million ozs Smelter/Refinery Cathode Prod. 250 kmt Mine Reserves Cu Mo Mine Production Cu 14.7 billion lbs 0.1 billion lbs 910 million lbs Reserves Africa Cu 2.6 billion lbs Note: Reserves and annual production net to pro forma FCX; Reserves as of December 31, Production figures are based on average annual estimates for Co 0.3 billion lbs 1 Cu operations: Morenci (85%), Sierrita (100%), Bagdad (100%), Chino/Cobre (100%), Tyrone (100%), and Miami (100%) Cu development: Safford (100%) Primary Mo: Henderson (100%) and Climax (100%) with feasibility study expected on Climax in Candelaria/Ojos del Salado (80%), Cerro Verde (53.6%), El Abra (51%) 3 Grasberg (90.64%), Gresik (25%) I was talking about geographical diversification and in addition a significant degree of downstream integration, so you see mining operations, smelters, refineries and wire plants on this map. In very different areas of the world there are diverse operations owned and run by Freeport. Copper Situation & Trends Present & Future Javier Targhetta page 41

8 2007 OUTLOOK Market Capitalization (as of Oct 1): $50 Billion Pro Forma Sales Outlook (1): Copper: 1.5 Million Mt. Gold: 2.1 Million Oz. Molybdenum: 31,000 Mt. Modeled Operating Cash Flow (2): $6+ Billion for 2007 Capital Expenditures: ~ $1.8 Billion for 2007 (1) 2007e includes pre-acquisition sales of 505 mm lbs of copper, 22 k oz of gold and 17 mm lbs of molybdenum (2) Assumes prices of $3.25/lb Copper, $650/oz Gold, and $25/lb. Molybdenum for the second half of 2007, each 20 change in copper in the second half would impact this estimate by approximately $300 MM, each $50/oz change in gold would have an approximate $10 MM impact, and each $2.00/lb change in molybdenum would have an approximate $30 MM impact. Note: Amounts are projections; see cautionary statement. Here you see a few numbers regarding our company. Our market capitalization is $50bn, our sales for 2007 will be 1.5mil metric tons of copper, 2.1mil ounces of gold and 31,000 metric tons of molybdenum. The capital expenditures of approximately $1.8bil for 2007 are mainly used for sustaining our current business, but they will not provide a return or we expect revenues out of them. Our sales in terms of dollars will be $15bil in So, when looking at real prices, we see that today's price is more or less the same as the average of the period Why is it then surprising us? Simply because it showed a very steep rise over the last two years after more than 30 years of steady real decline. Copper Situation & Trends Present & Future Javier Targhetta page 42

9 GLOBAL COPPER CONSUMPTION by First Use Cu Alloys 17% Other 11% Wire Rod 55% Tube 10% Sheet/Strip 7% Source: Brook Hunt Now let us get into how do we see the copper market as we speak. First you can see how important your business is as part of the worldwide consumption of copper. Your share is more than one half. Our company is concentrating on this business in particular. It is not only the highest percentage in terms of quantity but it is also the highest quality required in copper products. Therefore, as our company pays enormous attention to quality, it is obviously a sector that we very closely watch. It is a sector where we have traditionally been in for many years, and now with the acquisition we show even more so a very strong presence in this field. Copper Situation & Trends Present & Future Javier Targhetta page 43

10 COPPER PRODUCTION / CONSUMPTION by Areas Mine production 16.1MM MT, Refin. copper production 18.7MM MT, Refin.copper consumption 18.2MM MT E. World (exc China) N. America Europe Japan, S Korea, Taiwan & Philippines China & India South America Africa Australia & Rest of Asia Mine Production Refined Cu Production Consumption All Numbers in mtpy Source: Brook Hunt (2007 Estimate) This graph shows, in my opinion, 2 major things: For one thing it defines the flow of copper (concentrates and finished products) in its different forms between the continents. It shows the unbalance from production to consumption, e.g. in South America with a very large production and a low consumption. The opposite to South America can be seen in Europe or in Asia, where low mining production is met by high consumption. But I also like to draw your attention to the fact that close to 60% of global consumption can be found in Asia. When we discuss the next slides you will see how this percentage has shifted over the last 17 years. Copper Situation & Trends Present & Future Javier Targhetta page 44

11 1990 = 9.4 MM MT MINE PRODUCTION Rest of World 26% Africa 12% Australia & Asia 11% North America 29% Chile 18% Rest of S. America 4% Rest of World 20% 2007 = 16.1 MM MT Africa 6% Australia & Asia 15% North America 14% Source: Brook Hunt Rest of S. America 9% Chile 36% If we look at the mining production we will notice one of the important shifts. In 1990 total mining production in North America and Africa together was 41%, compared to South America where it was only 22%. The situation has dramatically shifted in the last 17 years, it got almost reversed: North America and Africa together 20% and South America 43%. When we have a look at refined copper production, in 1990 Asia accounted for only 22% vs. today for 42%. This is another important shift in the world scenario. But when we move to the consumption of refined copper we see even more impressive changes. In 1990 we saw Asia accounting for 30% vs. Europe plus North America accounting for 55%. Nowadays Europe plus North America make up 38% and Asia 50%. Again we see a complete shift in the situation of refined global copper consumption. I believe that the Western world has not realized how the world has changed. Especially in Europe we have a certain resistance to realize that Europe is not the bellybutton of the world anymore. Copper Situation & Trends Present & Future Javier Targhetta page 45

12 REFINED COPPER PRODUCTION 1990 = 10.8 MM MT Rest of World 20% CIS 12% North America 24% Africa 7% Rest of S. America 4% Australia & Asia 17% China 5% Chile 11% North America 13% 2007 = 18.8 MM MT Rest of World 13% CIS 8% Africa 4% Australia & Asia 24% Rest of S. America 3% Chile 17% China 18% Source: Brook Hunt REFINED COPPER CONSUMPTION 1990 = 10.9 MM MT Rest of World 15% Europe 33% North America 22% Rest of Asia 10% China 6% Japan 14% 2007 = 18.2 MM MT Rest of World 12% Europe 23% North America 15% Japan 7% Source: Brook Hunt Rest of Asia 19% China 24% Copper Situation & Trends Present & Future Javier Targhetta page 46

13 COPPER PRICE Copper price shows a steep decline in real terms for the last 33 years Thanks to recent price soar, return on capital is fostering new mining investment There is, of course, a very interesting thing and we are fascinated by it, it is the copper price. The following 2 graphs show how the copper price has apparently and in real dollars been evolving since Both curves look very differently, with the real prices trend being almost one half in 35 years, having reached an all time low in the early 2000 s with 65 cents per pound of copper. Copper Situation & Trends Present & Future Javier Targhetta page 47

14 COPPER PRICE Copper Price Trend (MoD) USc/lb Apparent trend in prices COPPER PRICE USc/lb Decline trend in real prices Real Copper Price Trend (2006 US$) Copper Situation & Trends Present & Future Javier Targhetta page 48

15 RISING MINING COST Mine production cost has risen rapidly in the last two years. C1 Cash Costs (c/lb Paid Cu) Between 50 and 100% rise from 2004 to 2006 for 75% of total production Cumulative Production (Paid Copper kt) Brook Hunt & Associates Ltd 2007 Here you can see the change in mining cost. In a very short period of time, just 2 years from 2004 to 2006, we experienced a drastic increase in cost. This means in terms of net present value we can consider these changes as dollars of today. Copper Situation & Trends Present & Future Javier Targhetta page 49

16 CAPITAL COST ESCALATION 2006 & 2007 Updates Prior Capex Latest Capex Project Date US$M Date US$M US$ Escalation Collahuasi Exp Q Q % Muliashi Q % Kinsenda (restart) Q Q % Aguas Tenidas restart Q Q % Cerro de Maimon Q Q ,6 46% Cerro Casale Q Q % Sulphur Springs Q A$100M Q A$213M 100% KOV jul abr % Kalukundi may abr % Las Cruces mar M mar M 22% Pascua feb % Quellaveco jun feb % Boleo Q feb % Rio Blanco nov feb % Los Bronces Exp nov feb % Brook Hunt 2007 Galore Creek Q C$1.6bn Q C$2.23bn 38% Prominent Hill 2004 A$350M ago-06 A$775M 121% Lumwana oct ago % Agua Rica jun jun % Gaby Sur H ene % Northmet Q sep % Wolverine dic-04 C$100M may-06 C$155.7M 56% Piedras Verdes Q Q % Petaquilla dic % Galore Creek Q C$1600M Q C$2230M 50% Varvarinskoye ene dic % White Range mar-06 A$56M jun-06 A$94M 28%* Petaquilla Q % Andacollo ago % Las Cruces may M mar M 18% Miheevskoye nov jun % Another interesting phenomenon is how the capital expenditures have escalated for new projects, some budgets have doubled or increased by 40% to 60% from 2004 to This shows how much mining companies must reconsider projects, when it comes to pushing them forward. The return on capital in many of these projects has halved. Copper Situation & Trends Present & Future Javier Targhetta page 50

17 DEMAND E 2010E 2012E 2014E 2016E 2018E CHINA EUROPE NORTH AMERICA JAPAN Source: Brook Hunt Now let us see how in our opinion the copper market will be going forward. There is nothing new to say about the demand when looking at the various parts of the world. China shows a steep increase, Europe due to Eastern Europe shows somewhat of a modest increase in demand and the North American demand stays completely flat. A couple of comments are necessary: One is on China. When one goes to Beijing, Shanghai or Hong Kong one comes to the question: How can this growth can go any further? But then you must look at the country side. China is now determined to develop the poorest areas, in order to stop the flow of migrating people to the big cities. I think, this phenomenon will last for a long time. Now you have about 25mil people migrating from the Western and poorest regions of China, that is comparable to the population of the Netherlands moving away each year. This is not sustainable. The Chinese leaders know that and they know how to change that and they will do it. My second comment is about India. India starts from a lower level of consumption, around half a million tons of copper per year with an increase of about 10% per year. There is a very strong determination to enhance the infrastructure, that will in turn enhance the GDP in the years to come. They have a very ambitious program of electrification in India, whereby they will invest in the generation of new MW from now to Around 80mil new households will be built in that same time. Similar developments can be seen in many other countries in Asia. Copper Situation & Trends Present & Future Javier Targhetta page 51

18 MINE SUPPLY ( 000 Tm) Base case High Prob. Projects Prob. Projects Possible Projects Source: Brook Hunt Here is our view of the mining supplies. The red area shows the development of supplies without any growth. The other colors indicate the increase due to highly probable, probable and possible projects. In my opinion it is not so important how much this is growing, rather the pace of growth is important. Here is where the mining companies encounter the biggest hurdles, in terms of remoteness where new mines will be developed, in terms of the lower grade of the ores which have been found. It is also difficult to find and get supplies of the key mining machines to develop the mines. The availability of qualified human resources will be critical. So, the determination to develop the mines is there, the deposits are there. There will be the supply trying to satisfy the demand, but we have to overcome the hurdles mentioned before. One should not turn a blind eye on these difficulties. Copper Situation & Trends Present & Future Javier Targhetta page 52

19 Rest of World 20% 2007 = 16.1 MM MT Africa 6% MINE PRODUCTION by Areas Australia & Asia 15% North America 14% Rest of S. America 9% Chile 36% North America 16% Rest of World 8% 2017 = 30.9 MM MT Africa 9% Australia & Asia 24% Source: Brook Hunt Rest of S. America 18% Chile 25% Looking at mine production in the future, we will only see some minor changes. South America will remain as the biggest producer accounting for 43% of production. Regarding the volume of production it will almost double in the next 10 years. Copper Situation & Trends Present & Future Javier Targhetta page 53

20 CONCLUSION Copper consumption has shifted from old economies, North America and Europe, to Asia and specially China, and this is not a reversable change Mine production and capital costs have risen rapidly in the last two years on a structural basis, rather than cyclical Mine cost structure indicates that a higher long-term average price will be necessary in the future to secure mine supply Demand growth? MINING COMPANIES ARE STRONGLY COMMITED TO SATISFYING GLOBAL COPPER DEMAND FINAL COMMENT Total investment in Grasberg amounts to over $ 6 billion FCX Capital expenditure ~$1.8 billion for Exploration ~$125 million 000 s t/d Historical Mill Rate Expansion Expansion Expansion Expansion Grasberg Discovered Copper Situation & Trends Present & Future Javier Targhetta page 54