Investment Trends in Mining & Metals - How Has This Impacted Financing for Projects in Africa ? Rajat Kohli, Standard Bank

Investment Trends in Mining & Metals

How Has This Impacted Financing for Projects in Africa ?

Presented by Rajat Kohli

Prevalent industry trends

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Aug

-14

Pri

ce

(re

ba

sed

)

Gold Copper Zinc Iron Ore

Commodity price performance

10 year relative base, bulk and precious metals performance

Source: Bloomberg, FactSet as at 24/11/14

10YR 5YR 3YR 1YR 6M

Precious metals (USD/oz)

Gold 1,198 166% 2% (29%) (4%) (7%) (37%)

Base metals (USD/t)

Copper 6,731 110% (3%) (6%) (5%) (4%) (34%)

Zinc 2,300 104% 2% 22% 23% 10% (50%)

Iron Ore 74 352% (25%) (46%) (46%) (27%) (61%)

Commodity Spot PricePerformance Performance

since peak

3

LTM 6 Months 3 Months 1 Month 1 Week

(1%)

(3%)

(6%)

(11%)

(17%)

TSX Diversified Metals &Mining Index

FTSE 350 Mining Index

JSE Mining Index

HSBC Global Mining Index

ASX 300 Mining & MetalsIndex

(14%)

(8%)

(16%)

(14%)

(16%)

6%

0%

(3%)

(3%)

(7%)

6%

1%

2%

2%

(4%)

(15%)

(11%)

(17%)

(18%)

(18%)

Equity indices performance

Source: Bloomberg as at 24/11/14

Mining Indices

4 Miners face severe financing challenges in the equity capital markets…

Steep reduction in new mining issues as equity markets cool on sector

92

70 69

3038 40

1,140

1,442

1,156

814

594

686

0

200

400

600

800

1,000

1,200

1,400

1,600

0

10

20

30

40

50

60

70

80

90

100

2009 2010 2011 2012 2013 2014E

Vo

lum

e (

de

als)

Equ

ity

Pro

cee

ds

(USD

bn

)

Equity Proceeds Deal volume

1

Source: Dealogic

Note:

1. 2014E represents YTD Q3 2014 annualized to reflect full year estimate

5 …Though debt funding remains available

Debt raised has been less severely affected

76 78110

157

117132

154

212

240

175

212

230

230

290

350

332 329

362

192215

270

345

306

438

441

487

558

501

441

384

0

100

200

300

400

500

600

700

800

0

50

100

150

200

250

300

350

400

2009 2010 2011 2012 2013 2014E

Vo

lum

e (

de

als)

De

bt

Pro

cee

ds

(USD

bn

)

Bonds Loans Deal volume (Bonds) Deal volume (Loans)

1

Source: Dealogic

Note:

1. 2014E represents YTD Q3 2014 annualized to reflect full year estimate

6 Selected African debt transactions in LTM

Company Date Facility Use of proceeds Amount

(USDm)

AngloGold Ashanti 17-Jul-14 RCF General Corporate Purposes;

Refinancing 1,000

Gold Fields 14-Jun-14 Term Loan

Refinancing;

Working Capital;

General Corporate Purposes

1,440

First Quantum Minerals 02-May-14 Term Loan / RCF General Corporate Purposes;

Repay Debt 3,000

Optimum Coal Mine 26-Feb-14 RCF

Working Capital;

General Corporate Purposes;

Repay Debt

232

Aureus Mining 17-Dec-13 PF Development of the New

Liberty Gold Project 100

Sibanye Gold 10-Dec-13 RCF General Corporate Purposes 242

London Mining 28-Nov-13 Term Loan / RCF Expansion of Marampa 200

Sishen Iron Ore Company 26-Nov-13 RCF General Corporate Purposes 1,082

Source: Dealogic as at 28/11/14

Focused on

larger caps with

established

asset base,

largely

refinancing

existing facilities

Fewer

conventional

financings

apparent for

juniors as

industry

conditions have

become more

challenged

The Impact on Producers

8 How do producers respond in this environment ?

1. Cost cutting and capital discipline

2. Restore balance sheets

3. Portfolio optimisation

4. Innovative funding solutions

1

2

3

4

9

Gold industry C1 cost curve: 2012 vs. 2013

Source: SNL

Average: USD828/oz

Average: USD851/oz

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

2013 2012 Average 2013 Average 2012

Cost cutting is already feeding through to the bottom line 1

10

9 11 17 18

-

14

35

22 24 7

30

64

26

1

2

11

23

6 17

23

31

45

38

46

66

82

82

-

20

40

60

80

100

120

140

2005 2006 2007 2008 2009 2010 2011 2012 2013

Value (USD'bn)Dividends and buybacks, net of share issues

Acquisitions and investments, net of disposals

Capex, including exploration

Capital shifting from investment to investor returns and deleveraging

Source: Glencore

Note:

1. Includes Anglo American, BHP Billiton, Freeport, Rio Tinto, Teck, Vale, Vedanta, Glencore and Xstrata

1

Major mining companies’ capital allocation 2005 - 2013

11 De-leveraging an imperative as profitability declines

0%

10%

20%

30%

40%

50%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Gearing Top 40 miners ROCE of Top 40 miners

0%

5%

10%

15%

20%

25%

2009 2010 2011 2012 2013

ROCE Adjusted ROCE (excluding impairment, after tax)

Source: PWC

2

Cash flow generation New equity raise Subsidiary IPOs Asset disposals

Several de-leveraging tools exist

12 Share prices not conducive to raising equity (or selling assets)

Equity and commodity values % of 3 year high

Source: FactSet as at 24/11/14

99%

46%

24%

71%

80%

62%

68%

38%

28%

87%

74% 74%

39%

31%

53%

71%

94%

54%

0%

20%

40%

60%

80%

100%

Alc

oa

Ang

lo A

meri

can

Barr

ick

Gold

BH

P B

illiton

Chalc

o

Fre

ep

ort

-McM

oR

an

Gle

ncore

Go

ldcorp

New

mon

t

Norlis

k

Rio

Tin

to

Sou

thern

Co

pp

er

Te

ck R

eso

urc

es

Vale

Ved

an

ta

% of 3 Year High Gold Copper Iron Ore

13 Portfolio optimisation can have multiple benefits

Focus on lowest cost, most cash flow generative assets

Prioritise scarce capital

Enhance management focus

De-leverage

Provide shareholders with choice of investment strategy

3

Acquisitions to upgrade portfolio Asset disposals De-mergers

Portfolio optimisation tools

14 M&A volumes have plummeted…

Sharp decline in M&A due to value mismatch, lack of confidence and focus on cash preservation

68

94

156

131118

56

1,245

1,472 1,498

1,273

1,068

645

0

200

400

600

800

1,000

1,200

1,400

1,600

0

20

40

60

80

100

120

140

160

180

2009 2010 2011 2012 2013 2014E

Vo

lum

e (

de

als)

De

al v

alu

e (

USD

bn

)

Deal value Deal volume

1

Source: Bloomberg

Note:

1. 2014E represents YTD Q3 2014 annualized to reflect full year estimate

3

15

Narrowing valuation differential between producers and developers points towards a ‘buy over build’ strategy

Source: Broker research, FactSet

1.32

0.99 0.980.92

0.88 0.85 0.820.78

0.680.64

0.58

0.42

0.900.83

0.660.61

0.45 0.440.37 0.36

0.25

Average: 0.82x

Average: 0.54x

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Barr

ick

Gold

Sou

thern

Co

pp

er

New

mon

t

Ved

an

ta

Go

ldcorp

Gle

ncore

BH

P B

illiton

Rio

Tin

to

Fre

ep

ort

-McM

oR

an

Te

ck R

eso

urc

es

Ang

lo A

meri

can

Vale

Flin

ders

Min

es

Ban

da

nna

Tre

vali

Pan

ora

mic

EM

ED

Tig

er

Sun

da

nce

Cape

Lam

bert

Nevad

a C

opp

er

Mining producers Mining developers

…In spite of ‘bargain’ valuations – particularly for producing assets 3

16

-

20

40

60

80

100

0

5,000

10,000

15,000

20,000

25,000

30,000

2009 2010 2011 2012 2013 2014

Africa Asia AustralasiaEurope North America South AmericaDeal Volume (RHS)

-

75

150

225

300

375

450

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2009 2010 2011 2012 2013 2014

Africa Asia AustralasiaEurope Middle East North AmericaSouth America Deal Volume (RHS)

Mining & Metals M&A

Average deal size (USD’m) – All bidders Value by target region – All bidders (USD’m)

Average deal size (USD’m) – China bidders Value by target region – China bidders (USD’m)

405 465

578

399

243 268

0

200

400

600

800

1,000

1,200

1,400

1,600

2009 2010 2011 2012 2013 2014

Africa Asia AustralasiaEurope Middle East North AmericaSouth America Global Average

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014

China RoW

China’s share of global M&M

M&A (by value)

529

189 320

253 322 376

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2009 2010 2011 2012 2013 2014

Africa Asia AustralasiaEurope North America South AmericaGlobal Average

Total M&M

volumes have

declined

significantly as

has average deal

size

China’s share of

global sector

M&A has been

averaging c20%

3

17

Average deal size by bidder region (USD’m)

-

7

14

21

28

35

42

49

0

4,000

8,000

12,000

16,000

20,000

24,000

2009 2010 2011 2012 2013 2014

Africa Asia Australasia China Europe Middle East North America South America Deal Volume (RHS)

M&A into Africa

Value by bidder region (USD’m)

180 171

491 322

85 72

-

200

400

600

800

1,000

1,200

2009 2010 2011 2012 2013 2014

Africa Asia Australasia China Europe Middle East North America South America Global Average

Looking at

African sector

M&A , the peak

was in 2011,

mirroring the

industry as a

whole

China’s share

similarly peaked

in 2011 with a c.

30% market

share

Average deal

value has also

declined

Source: MergerMarket

Note:

1. 2014 represents YTD Q3 2014

1

1

3

18 Notable China-Africa investment interest

Year Target Company / Asset Target

country Commodity Bidder

Deal Value

(USDm)

2014 Eastern Platinum SA Platinum Hebei Zhongbo Platinum 225

2014 Soremi Investments ROC Copper China National Gold Group n.a.

2014 Langer Heinrich

(25% stake) Namibia Uranium China Uranium Corporation 190

2012 Palabora Mining SA Copper Consortium led by Hebei Iron & Steel 338

2012 Discovery Metals Botswana Copper Cathay Fortune 873

2012 Extract Resources (57% stake) Namibia Uranium CGNPC 1,250

2011 Sundance Resources Cameroon Iron ore Hanlong Mining Investment 1,048

2011 Anvil Mining DRC Copper Minmetals Resources 1,300

2011 Gold One International SA Gold Consortium led by Baiyin Non-Ferrous Group 536

2011 African Minerals

(25% project stake)

Sierra

Leone Iron ore Shandong Iron and Steel 1,700

2011 Metorex DRC Copper Jinchuan Group 1,320

Source: MergerMarket, Public disclosure

3

19 Mining companies turning to alternative funding solutions

JVs and strategic partnerships

Private capital: SWFs, PE, HNWI, Trading Companies

Streams and royalties

Convertibles

4

20 Private capital in Africa: partially plugging the equity (and debt ?) hole

Recent PE mining investments Estimated private capital available to mining

Acquirer Target Value (USD’m)

Cupric (BNRI) Hana Mining 68

QKR Navachab Mine 110

Greenstone

Resources* Orbis Gold 20

Appian Natural

Resources Roxgold 12.5

Taurus Hummingbird

Resources 85

Tembo Capital Toro Gold Undisclosed

USD8bn

USD10-15bn

USD10-20bn

USD24.5bn

0 5 10 15 20 25 30

Bloomberg

Baker & McKenzie

EY

Preqin

USD’bn

Source

Source: Public disclosure

Note:

1. Preqin estimate inclusive of oil

Average: USD15bn

4

* Subsequently terminated

21 Streams can fill a funding gap, but upside is capped 4

22 Medium-term implications

Capex cuts and investor sentiment will eventually squeeze supply

Acquisitions can drive value over the medium term

Quality, long-life assets will make money through the cycle

Capital is available but more selective

Mining is a cyclical business !

More pain to come – but this will lay the foundation for a better future

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