3rd Annual FeTech Conference 2012

26 September 2012

Simon Price

Director

1

Today’s contents

1. Market and the iron ore price – how are we tracking?

2. Financing iron ore projects in today’s environment

3. Questions?

2

Iron ore price

While iron ore prices are a lot higher than they used to be… the recent AUD price has made life

tough for Australian producers (as bad as the GFC)…

Source: Bloomberg as at 18 Sep 12 and IMF Research.

0.60

0.70

0.80

0.90

1.00

1.10

40

80

120

160

200

Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12

Exchange Rate(USD per AUD)

62% Fe Fines (US$/t)

62% Fe Fines CFR China USD per AUD

45

55

65

75

85

95

105

115

125

135

Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12

Index (rebased to June 2011)

Iron (62% Fines) Gold Silver Copper Nickel Zinc

We had the buffer of a very weak AUD during GFC, but not this time...

62% fines today are worth a lot more than in the 70s and 80s...But prices are ~35-40% off their peak, and have fallen

harder than other commodity prices...

The AUD iron ore price has fallen to levels comparable to the GFC

40

80

120

160

200

Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12

62% Fe Fines (A$/t)

62% Fe Fines CFR China

0

40

80

120

160

200

Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10

62% Fe Fines (US$/t)

3

What has caused this sharp drop in price?

Slowing global economic growth, rising iron ore inventory levels and reduced steel demand by the

construction, infrastructure etc. sectors in China…

Source: WorldBank, Consensus Economics (Jun 12), Bloomberg as at 18 Sep 12, CRU, World Steel Association.

GDP growth has slowed across the globe Iron ore inventories have been rising in China Steel output has stalled as demand wanes

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

05A 06A 07A 08A 09A 10A 11A 12F 13F

YOY Real GDP Growth (%)

US China Japan

Australia EU UK

Russia

0

20

40

60

80

100

120

Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12

China Iron Ore Port Stockpiles (Mt) YOY Chinese Steel Consumption Growth (%)

0%

5%

10%

15%

20%

25%

30%

35%

04A 05A 06A 07A 08A 09A 10A 11A 12F 13F 14F 15F

4

Will it recover?

It did after the GFC!

The sharp drop in seaborne demand due to rising inventories and falling steel demand in 2008 were followed by a

re-stocking and demand recovery due to government stimulus

What’s different this time?

– The degree of stimulus may not be the same

– Any major expenditure / fiscal initiatives are waiting for the pending leadership transition in China

– Global demand and sovereign risk concerns remain

– Many are beginning to question China’s capital-investment / debt-driven infrastructure and construction model,

as the transition is made to a more domestic consumption-driven economy, steel growth may stall

... But the re-stocking will still come

– Sign of a recovery already

– Back to “normal” Q1/Q2 next year?

5

0

200

400

600

800

1,000

1,200

1,400

1,600

0 10 20 30 40

Korea

Japan

China (forecast

2011-2040

Germany

USA

Long term demand fundamentals – China’s urbanisation

The transformation of the iron ore sector has been driven by the step changes in steel demand

caused by China’s urbanisation – a process that will continue over many years to come.

Source: Rio Tinto Presentation “Driving Global Growth” (Jun 12), National Bureau of Statistics of China.

Steel Consumption per Capita (kg)

Real GDP per Capital (US$’000)

Urban Population (%):

XINJIANG

QINGHAI

NEI MONGOL

GANSU

NINGXIA

SHAANXIXIZANG

SICHUANCHONGQING

YUNNAN

GUIZHOU

GUANGXI

HAINAN

HUNANJIANGXI

ZHEJIANG

FUJIAN

GUANGDONG

HONG KONGMACAU

Shanghai

SHANGHAI SHI

Guangzhou

ChengduJIANGSU

ANHUIHUBEI

HENAN

SHANXI

SHANDONG

Beijiing

Shenyang

HEBEIBEIJING SHI

TIANJIN

LIAONING

JILIN

HEILONGJIANG

China is still climbing the steel intensity curve... The hinterland of China is still awaiting urbanisation...

6

0

200

400

600

800

1,000

1,200

1,400

1,600

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

F

20

13

F

20

14

F

20

15

F

Iron Ore Seaborne Exports (Mt)

Rising steel consumption requires more iron ore... from outside

China

As China’s steel consumption grows, the required supply of iron ore grows. If China’s domestic

costs continue to rise / stay high, the solution is to grow imports.

Source: National Bureau of Statistics of China, China Iron & Steel Association, Econwin, China Metals, Macquarie Commodities Research (Feb 12), CRU.

85

120

136

150

161

0

20

40

60

80

100

120

140

160

180

200

2008 2010 2011F 2012F 2013F

62% Fe N.China Equivalent (US$/t )

Taxes Logistic Labour Electricity Others

Iron ore production costs in China continue to rise... Seaborne supply of iron ore is forecasted to increase...

7

Rising costs underpin the iron ore price

Capital and operating costs for new iron ore projects have increased around the world over the last 5

years.

Notes:

1. In 2011-dollar terms.

2. In 2020-dollar terms.

Source: Mineral Council of Australia.

Capital costs in Australia have doubled and ROW increased 50% Australian operating costs have risen also...

96

150

100

195

0

20

40

60

80

100

120

140

160

180

200

2007 2011/2012Rest of the world Australia

Capital Expenditure (US$/tonne of capacity)1

20

(5)

(48)(50)

(40)

(30)

(20)

(10)

0

10

20

30

Established Pilbara Emerging Pilbara Non-Pilbara

Delivered Cost Advantage over Brazil (US¢ per dmtu, China CIF)2

8

Price outlook

After prices recover, there is a likely window of approx. 5 years to bring on new projects before long

term prices set in which make attracting finance difficult.

Demand recovery and a restocking phase will

support short term prices Q1/Q2 2013

China’s growth may slow but there is enough

urbanisation and ongoing construction that new

iron ore projects will need to be developed for

another ~5 years until supply catches up

Rising costs will continue to underpin the price...

‒ also new supply has a habit of running late...

‒ ...but the risk is that significant new supply

will push the price back down over the long

term

Azure Capital view The counter view?

“China's steel demand reached 700 mn tons in

2011. This is likely to be a high watermark for the

country. There is a downturn ongoing. Afterwards,

the demand will be stuck between 600-700 for the

next decade. I see the demand from infrastructure

and property will decline.”

“$50/ton is probably the price to expect in the long

term. It is twice the price in the 1990s. Taking into

account of the cost increase, this price is sufficient to

keep the mining industry profitable.”

Andy Xie, former chief strategist, Morgan Stanley Asia and

renowned China commentator

9

Capital market conditions

Market conditions have improved with QE3 in the past few weeks but remain fragile.

0

50

100

150

200

250

300

350

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Index (rebased to 2005)

Dow Jones Industrial Hang Seng FTSE100

Euro Stoxx 50 Nikkei 225 S&P/ASX200

0

50

100

150

200

250

300

350

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Index (rebased to 2005)

ASX 300 Metal and Mining

Major exchanges around the world have generally recovered but are still

trading below pre-GFC highs Mining stocks have been heavily sold off over the past 2 years

Source: Bloomberg as at 18 Sep 12.

10

Putting capital intensity of developing projects into perspective

Right now, it would be cheaper to buy existing production assets than to invest in developing

greenfield projects in Australia.

0

2

4

6

8

10

12

14

16

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Atlas Mount Gibson Grange¹ BC Iron

Notes:

1. Non-capex adjusted multiple excludes Southdown project.

Source: Bloomberg as at 18 Sep 12 and company announcements.

0

2

4

6

8

10

12

14

16

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Southdown(GRR)

Marillana (Wah Nam)

Razorback(ROY)

Mt Ida (JMS)

Iron Valley (IOH)

Roper Bar(WDR)

Enterprise Value (A$m) EV/Resource (A$/t) Capex (A$m) Capex/Resource (A$/t)

Enterprise value of junior iron ore producers Capital expenditure of various developing projects in Australia

EV/Resource and Capex/Resource

Enterprise Value and Capex

11

Project characteristics

Iron ore projects with the following characteristics are more likely to attract capital.

Project Characteristics

1 Sufficiently large resource &

high Fe grade product

Scale needed to payback capital

Product must be saleable

2 Competitive operating costs Opex needs to be low enough to

generate margins at LT prices of

$80-90/t CFR

3 Low capital intensity Multi-billion capital investments are

now hard to finance for all but the

most attractive projects

4 Infrastructure solution Access to existing infrastructure a

strong preference to greenfield

builds

5 Competent management

team

A critical element for attracting

capital currently

6 Production within ~3 years Commence paying back capital

before LT iron ore prices settle in

12

Beneficiated products

Beneficiated products are no longer perceived as the ‘poorer cousin’ as DSO grade falls over time.

Although beneficiated products often involve higher costs, these can be offset by a higher selling

premium.

Source: Adapted from Grange Resources Investor Presentation (Jun 12).

Lower HigherPrice

Lo

wer

Hig

her

Qu

ali

ty

DSO Fines (~58-62% Fe)

DSO Lump (~62% Fe)

Magnetite

Concentrate (~67% Fe)

Pellet (~66% Fe)

13

Recent niche investments in beneficiated products

Some recent examples of cost-competitive niche beneficiation projects that have attracted capital:

Small scale

Brazilian mines

Centaurus

South American

Ferro Metals

Low capital intensity

Domestic market opportunity

Good product quality

Centaurus recently

completed a $26m share

placement to institutional

investors on 6 Sep 2012

Iron sands Amex

Indo Mines

Very low operating costs

Low capital intensity

Lower quality product yet saleable

Indomines announced a

$50m placement to the

Rajawali Group on 24 Sep

2012

...the key issue is total costs (capex and opex), irrespective of the ore type

14

Raising funds for iron ore projects today

Iron ore was a market-favoured commodity for the past 5 years with some massive transactions

taking place. Now investors are more discerning but appetite remains.

Exploration stage Equity markets Tough but possible for the best quality

opportunities

Feasibility stage Equity markets

Strategic investors

Subject to quantum equity markets will support

studies for quality orebodies

Strategic investors from Asia for the bigger

projects

− Chinese SOE appetite has diminished

− India, HK, Korea

Construction /

Project Finance

Equity markets

Debt markets

Strategic investors

Equity markets open but sceptical of high capital

intensity / massive scale projects

Debt capital markets currently active – FMG,

Newcrest etc

Western bank project finance a bit harder,

Chinese development banks active

Strategic investors active but discerning

15

Questions?

Questions ?