vk.com/id446425943

Capital cycle favours rising returns

Renaissance Capital

14 January 2019

Metals & Mining

Stretched balance sheets and poor operating cash generation from low commodity prices have forced management teams to focus on cash preservation and capital efficiency for the sake of survival. This limited investment in new supply. Capex for the 32 companies in Figure 17 fell by around 70% from 2012-2018E.

Figure 17: Resource sector capex, $mn

Mining capex has fallen by 70% since

2012…

Capex, $mn

Anglo

ARM

Assore

BHP

South32

Exxaro

Kumba

Rio Tinto

Fortescue

Glencore

Vale

Amplats

Impala

Lonmin

Northam

RBPlats

Tharisa*

AngloGold

Gold Fields

Harmony

Polymetal

Polyus

Sibanye

Merafe

Codelco*

Freeport*

Southern Copper*

Teck Resources*

Norilsk

Alrosa

PhosAgro

Acron

100,000

80,000

60,000

40,000

20,000

0

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018E

2019E

*Not covered by Renaissance Capital; estimates based on company guidance.

	Source: Company data, Renaissance Capital estimates
Sector capex/depreciation, which averaged around 2x over the past 16 years, is still only	…and is not enough to replace
at around 1.1x, which is not enough to replace depleting mines, in our view.	depleting mines

Figure 18: Capex/depreciation ratio over time
3.5x
										3.2x
3.0x
						2.8x
2.5x
		2.3x												Average, 2003-18E, 2.0x
2.0x
1.5x	1.5x
													1.3x			1.1x
1.0x
														0.9x				1.1x
0.5x
2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E

Note: Chart includes Alrosa, Anglo American, Antofagasta*, ARM, Assore, BHP, Codelco*, Exxaro, Fortescue, Freeport*, Glencore, Kumba, Norilsk, Rio Tinto, South32, Southern Copper*, Teck*, Vale, Amplats, Impala, Lonmin, Northam, RB Plat, AngloGold, Gold Fields, Harmony, Polymetal, Polyus and Sibanye.

*Not covered by Renaissance Capital; estimates based on company guidance.

Source: Company data, Renaissance Capital estimates

We believe current commodity prices and our forecasts do not incentivise new mine	Project returns do not incentivise
project approvals. We calculate estimated returns on new (average) mine projects of	new supply
around 8% using our 2019 commodity price forecasts.

12

vk.com/id446425943

Renaissance Capital

14 January 2019

Metals & Mining

Figure 19: Return on incremental capital (RoIC), based on assets at estimated replacement cost

	20%
	18%					17%		18%	17%
	16%
	14%
	12%
$/t												Estimated incentive return, 10.0%
	10%
																	8%
	8%
	6%		5%																7%
	4%						5%
	4%
	2%												3%
	0%
	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E

Note: Chart includes Alrosa, Anglo American, Antofagasta*, ARM, Assore, BHP, Codelco*, Exxaro, Fortescue, Freeport*, Glencore, Kumba, Norilsk, Rio Tinto, South32, Southern Copper*, Teck*, Vale, Amplats, Impala, Lonmin, Northam, RB Plat, AngloGold, Gold Fields, Harmony, Polymetal, Polyus and Sibanye.

*Not covered by Renaissance Capital; estimates based on company guidance.

Source: Company data, Renaissance Capital estimates

We believe the sector typically invests in volume growth when expected returns on investment increase above 10%. The chart below shows that sector capex rose above estimated maintenance levels when expected returns (per chart above) rose above 10%. Given poor expected returns at consensus commodity price forecasts and management teams’ focus on value-creation, medium-term capex guidance of $900-1,000 per copper equivalent (Cu eq) tonne remains below levels required to maintain production over the long term. We estimate capex required to maintain production over the long term at around $1,180/Cu eq tonne.

Capex guidance remains below levels required to maintain production over the long term

Figure 20: Mining sector capex per Cu eq unit (2019 real)

3,500

3,000

2,500

2,000

$/t

1,500

1,000

500

0

									3,006
					2,165			2,436		2,410				Estimated capex required to
							1,694				1,812			maintain volumes, $/t, 1,180
1,149	1,393	1,087	1,358	1,640		1,555						1,341	917	898	727	968	993	901
2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E

Note: Chart includes Alrosa, Anglo American, Antofagasta*, ARM, Assore, BHP, Codelco*, Exxaro, Fortescue, Freeport*, Glencore, Kumba, Norilsk, Rio Tinto, South32, Southern Copper*, Teck*, Vale, Amplats, Impala, Lonmin, Northam, RB Plat, AngloGold, Gold Fields, Harmony, Polymetal, Polyus and Sibanye.

*Not covered by Renaissance Capital; estimates based on company guidance.

Source: Company data, Renaissance Capital estimates

13

vk.com/id446425943

Renaissance Capital

14 January 2019

Metals & Mining

We therefore forecast mine production to decline over the next 10 years. This could support rising commodity prices and sector returns over the medium term.

Figure 21: Copper equivalent production*, kt

	50,000
	49,000
kt	48,000								2021E, 47,349
production,	47,000
	46,000					2019E, 46,227
equivalent	45,000
	44,000																	2028E, 43,960
Copper	43,000
	42,000
	41,000
	40,000
	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E	2027E	2028E	2029E	2030E

*All volumes converted to copper equivalent tonnes using RenCap long-term commodity price forecasts.

Source: Company data, Renaissance Capital estimates

14

vk.com/id446425943

Management remains focused on value-creation

Mining is transforming into highly efficient industrial processes through improved operating models, product optimisation, mechanisation, automation and improved IT utilisation.

Renaissance Capital

14 January 2019

Metals & Mining

Labour productivity has improved by 38% since 2012

Productivity improvement is a sustainable way to reduce unit costs.

We calculate that labour productivity, defined as copper equivalent production per employee, has improved by 38% since 2012.

Figure 22: Change in labour productivity, June 2012-June 2017, %

	120%	100%+
	100%		84%
%
productivity,	80%			70%	68%	63%
	60%						58%	54%	52%	51%
Change in labour	40%										35%	33%	30%					Average, 38.4%
	20%													18%	18%	15%	15%	6%
																			3%
	0%
	-20%																			-1%	-4%
		Fortescue	BHP	Rio Tinto	ARM	Vale	Amplats	Glencore	Anglo	Kumba	Tharisa*	Northam	Freeport	Gold Fields	Impala	RBPlat	Teck*	South32	AngloGold	Lonmin	Sibanye

Note: Gold Fields and Sibanye is calculated from June 2013, South32 from June 2014.

Source: Company data, Renaissance Capital

Higher productivity could be achieved through improved safety, mechanisation, automation, more efficient infrastructure and scale. Figures 23 and 24 show changes in production volumes and the number of employees at mining companies. The drop in

Fortescue’s and Exxaro’s labour force relates to the completion of capital projects and a reduction in capex, while BHP’s labour force reduction was the result of right-sizing initiatives. Anglo American’s productivity improvement was aided by restructuring and disposals of labour-intensive divisions.

15

vk.com/id446425943

Figure 23: Change in workforce, June 2012-June 2017, %

100%	90%

	80%
	60%
%	40%
workforce,
	20%	7%
in	0%
Change	-20%	0%	-4%	-6%	-6%	12%-	15%-	15%-	17%-	22%-	29%-	32%-
	-40%
	-60%
	-80%

Sibanye

Northam

Tharisa

Freeport

RBPlat

Teck

Lonmin

South32

Impala

AngloGold

Glencore

Rio Tinto

Vale

Note: Glencore is calculated from 2012, Gold Fields and Sibanye are calculated from June 2013, South32 is calculated from June 2014.

Figure 24: Change in production, June 2012-June 2017, %

Renaissance Capital

14 January 2019

Metals & Mining

Average, -19.2%

-35%	-39%	-43%	-43%	-48%	-50%
Kumba	Anglo	ARM	Amplats	Gold Fields	BHP	Fortescue-66%

Source: Company data, Renaissance Capital

Change in production, %

150%

100%

50%

0%

-50%

-100%

100.0%+	100.0%+
	53.8%	35.0%	33.0%	21.6%	15.6%	12.7%	10.8%	6.4%	5.0%	4.8%	1.9%	0.9%

Average, 12.0%

-0.3%

-6.4%

-8.3%

-10.7%

-12.2%

-13.8%

-14.9%

-20.1%

-38.1%

Fortescue

Sibanye

Northam

SCCO

Tharisa

Impala

Glencore

Rio Tinto

Vale

RBPlat

Codelco

ARM

Harmony

Freeport

Teck

Anglo

Kumba

BHP

South32

Amplats

AngloGold

Lonmin

Gold Fields

Note: Glencore is calculated from 2012, Gold Fields, RBPlats, Harmony and Sibanye are calculated from June 2013, South32 is calculated from June 2014.

Source: Company data, Renaissance Capital

16

vk.com/id446425943

Renaissance Capital

14 January 2019

Metals & Mining

Unit costs have dropped by 20% since 2012

Increased labour productivity and weaker producer currencies have aided a 20% drop in unit costs since 2012.

Figure 25 shows unit cost inflation from June 2012 to June 2017. Companies that increased productivity over the period, such as Fortescue, BHP and Rio Tinto, managed to more than offset mining inflation and posted reductions in unit costs.

Figure 25: Dollar unit cost inflation/(reduction), June 2012-June 2017, %
30%		19%									% Change, Jun 12 - Jun 17							Average
20%
10%			7%
0%
-10%				-4%	-6%	-8%
-20%							-10%	-13%	-13%	15%-		15%-	19%-	19%-	19%-	23%-	24%-	25%-	25%-
					Average, -20%
-30%
-40%
-50%
-60%
-70%
-80%		Codelco	Impala	AngloGold	Freeport	Sibanye	Lonmin	SCCO	Anglo	Harmony		Kumba	Tharisa	RBPlat	Amplats	Northam	Gold Fields	Exxaro	Teck

Note: Glencore, Tharisa, Harmony and Sibanye are calculated from 2013.

Iron ore producers have achieved the biggest cost savings since 2012

-26%	-26%	-32%	-38%	-45%	-45%
						-67%
ARM	Glencore	South32	Vale	BHP	Rio Tinto	Fortescue

Source: Company data, Renaissance Capital estimates

17