Glen Mpufane ICEM State of Current Global Minerals and Extractive Industries

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STATE OF CURRENT GLOBAL

MINERALS AND EXTRACTIVEINDUSTRIES

GLEN MPUFANE

ICEM GLOBAL MINING AND DGJOP OFFICER:

ICEM

Fourth International Mining and Maritime Conference4-7 October 2011 / DURBAN SOUTH AFRICA



INTRODUCTION.

GLOBALISATION

Globalization has greatly impacted the ability of workers to organize andbargain collectively.

International trade and capital flows have increased, along with foreign directinvestment and cross-border M&A

Transnational corporations, which employ increasing numbers of the world’sworkers, have become the dominant economic actors,

“a focal force in integrating national and international economies in global andregional production networks and in coordinating and controlling these production chains and networks” (Riisgaard, Lone , at http://www.ilo.org/public/english/).

As a result of these changes, the paradigms and patterns of labor relations havealso changed



.

The political economy of the extractive industry is constantlyundergoing change.

Consolidation plus super-profits plus resource scarcity in mininghas shifted power from mining consumers to producers.

A trend to greater resource taxation because of the super-profits

The imperatives of climate change and Sustainability

Trend towards increased use of migrant/temporary/overseaslabour



(INTRO. CONT.)

Influence of China

Influence of India Trends of State Activism



EXAMPLES OF GOVERNMENT

INTERVENTION AUSTRALIA

BRAZIL

GUINNEE SOUTH AFRICA

VENEZUELA

NAMIBIA

PERU ZIMBABWE

CANADA



.

RESOURCE NATIONALISM

TOUGHER WAGE NEGOTIATION



.

The mining and metals sector led the global economy to recovery ascommodity prices soared on the back of buoyant demand fromemerging markets.

While it was the financial sector that led the world into a recession, themining and metals sector was leading the world out of the recession(Michael Lynch-Bell, Global Mining & Metals Transactions Leader,Ernst & Young, UK: 2011)

The emerging economies, particularly resource rich developingcountries are changing the rules of the game against the background of a historical shift in mining.



Distribution of global mine production among

regions, %

Source: Calculations by Raw Materials Group



Historical Shift of Mininga combination of a large and

growing

demographic profile, rising

incomes, above-averageGDP growth and government-led

policies aimed at

developing infrastructure and

industry



.



GLOBAL DISTRIBUTION

OF MINERAL RESERVES



Mine and Metal Production



Emerging Economies Dominating Metal/Mining

Production



.

According to the BMI special report on frontier mining,

their forecast is that this trend (shift) is set to continue,largely driven by the increase in the GDP of the emerging

economies.

In about 2016, the GDP of the developed economies andthe emerging economies will cross over and the share of

the GDP of emerging economies will overtake that of the

developed economies

This will, accordingly, have a significant impact for the

mining sector from both a demand and supply side

perspective.



.

Emerging markets will be the largest drivers of demand

growth for industrial commodities over the forecast period,

and this will have a significant impact on the demand for

services from global mining and extraction companies.

This will be as a result of a combination of a large and

growing demographic profile, rising incomes, above-

average GDP growth and government-led policies aimed at

developing infrastructure and industry



.

Emerging markets are forecast to grow by an average 5.5%

per annum out to 2020, whereas, developed countries willlag significantly by 2.2% per annum over the same period.

These high growth rates in emerging markets will be led by

the BRIC (Brazil, Russia, India & China) countries, but

frontier markets will also play a key role.

According to the BMI forecast, emerging markets will

account for 50.6% of global GDP by 2016 from 37.8% in

2010 and in the process will surpass that of developingcountries. Moreover, by the end of the forecast period in

2020, emerging markets will account for 56.5% of global

GDP.



.

Strong growth in emerging markets will fuel demand forconsumer durables, housing, infrastructure as well as

telecommunication all of which, will in turn stimulate the

mining sector.

For example, Steel and steel-related products account forabout 55% of a light vehicle, Similarly growth in the

infrastructure sector will be driven by India, Indonesia

China and Brazil, which will see average growth of 9.4%,

7.8%, 6.4% and 6.3% respectively. In terms of the power sector, an increase in electricity

generation is forecast as rapid rates of urbanization in

emerging markets put a strain on existing capacity



.

Combined, the infrastructure and power sector will provide

a boon to iron ore, steel, copper, zinc and lead as well as

other commodities.

Already emerging markets and particularly China have

dramatically increased their share of consumption of raw

materials, and this will continue to see both local and

international mining companies branch out into frontier

countries in search of large, high-grade deposits.



MINERALS AS DRIVERS OF DEVELOPMENT



Uses of the major metals

Aluminium: Transport, packaging, construction, hightension power lines

Copper: Electrical conductors, construction, transport

Gold: Investment, jewellery, electronics

Lead: Batteries, pigments, ammunition, radiation shielding

Nickel: Stainless steels, electroplating

Platinum: Jewellery, catalysts

Silver: Electronics, sterlingware

Tin: Tinplate in packaging, solder, pigments

Zinc: Galvanizing, brass and bronze



.

According to data from the World Bureau of Metals

Statistics, in 2000 China accounted for a very small share

of global consumption for a host of metals, but by 2010

China was the single largest consumer of several base

metals, accounting for 35-40% of the global total.



.



China in the world iron and steel economy:

per cent of world



.PROJECTIONS FOR CHINA’S COMMODITY IMPORT

DEMAND UP TO 2020

.

1033015034M cubic

meters

Wood

201 26040.3M tonnesMeat

10360133M tonnesManganese

10600203M tonnesCopper

207 40081011M tonnesCoal

4805026M tonnesSoy

201940186091M tonnesOil

10380710148M tonnesIron Ore

Avg.p.aTotal2020LatestUnitCommodity

2006-2020 % ChangeDemandAnnual



.

China’s continued achievement of it’s five year plans

growth targets over the past 30 years, and the likelihood of

the achievement of the current 12

th

five year plan growthtarget makes China a certain bet to continue to be the

driver of the commodity boom



WORLD’S TOP MINING COMPANIES (BHP Billiton, Vale and Rio Tinto)

The market capitalisation of third place Rio Tinto is double the size of the nextlargest player, China Shenhua, which declined 25% in value during 2010.

BHP Billiton’s market capitalisation further strengthened, putting it clearlyabove the rest.

Price and production increases in iron ore were major drivers of

the growth by the top three.

The total, at US$510bn, comprises no less than 26% of the aggregate US$2trillion market value of the world's biggest 100 mining companies, measuredby value.

Source: Capital IQ.



.

The factor most common to the three super groups is iron

ore; the three account for about two-thirds of the world's

lucrative seaborne iron ore market. Vale used to be the

biggest, but in early June 2009, Rio Tinto and BHP Billiton

announced an iron ore joint venture for the two companies'

Pilbara, Australia iron ore operations. The value of the full

joint venture, now formalized, is no less than US$116bn



SEABOURNE IRON MARKET

The global seaborne iron ore market (i.e., iron ore that is exported byocean trade routes to coastal or near coast steel making plants)represents approximately 42% of total iron ore production and totalledapproximately 944 million t in 2009.

Australia (384 million t) and Brazil (266 million t) dominate the exportmarket with just over 68% of total exports in 2009

India (119 million t) and South Africa (44 million t) are also significantcontributors to the seaborne market.

Vale, BHP Billiton Limited and Rio Tinto plc produced 596 million tof iron ore in 2010, representing approximately 63% of the seaborne

market These three companies largely dictate the price of seaborne iron ore

through negotiations with some of the world's largest importersincluding mills in China and Japan



Iron Ore Trade and Production



.



GLENCORE’S INITIAL PUBLIC OFFERING

The pricing of Glencore's public offer implies thecommodities trading company would have a market valueof $61 billion or R403.8 billion.

In fact the company's listing is one of London's largest ever

with Glencore set to be the first company in 25 years andonly the third ever to enter the FTSE 100 index on the dayof listing

Glencore's equity makes it slightly bigger than AngloAmerican and puts it among the world's top-five

commodities groups, which also include BHP Billiton, RioTinto and Vale.



.

INTEGRATION IN THE MINING AND METAL



INTEGRATION IN THE MINING AND METAL

EXTRACTIVE RESOURCES INDUSTRIES

Concentration on core competencies – (Outsourcing) – to

integration - horizontal integration ( M&A) and vertical

integration (Supply Chain)

Vertical integration trends have been shaped by an increasein global demand for metals and the growing importance of

securing stable supplies of increasingly scarce resources.

Additional objectives often include gaining greater control

over the price of production inputs and to provide for

future growth prospects.



CONTINUED

Xstrata

Rio Tinto

Vale

BHP Billiton

Anglo American

Arcelor Metal



. Vale has taken a 27% stake in the Brazilian steel

production assets owned by ThyssenKrupp CSA. Thisequity investment is combined with an

exclusive iron ore supply agreement, solidifying a domestic buyer for Vale’s Brazilian iron ore.

Vale is also adding a number of bulk iron ore ships to theirin-house fleet

Vale is also involved in downstream vertical integration,which involves huge investments in infrastructure build,

such as roads, ports, etc



Mergers and Acquisitions

Emerging economies and Frontier Mining countries

Across Asia – Pacific, deal value surged on 2009 levels,targeting gold, coal and steel

In Africa, deals grew 407% as companies from every

region in the world turned to the continent in a bid tosecure future supply

Failed attempted deal by BHP Billiton for Rio Tinto

Failed attempted Xstrata move on Anglo American

Glencore’s Initial Public Offering



(Continued)

On the back of re - capitalisation and excess capital fromstronger prices, most companies are venturing into

“riskier” regions such as West Africa, South America andAsia-Pacific, especially Papua New Guinea and Mongolia.

Besides the focus on infrastructure support (DownstreamVertical integration), this expansion into emerging and

frontier markets also created a greater focus on sovereignrisk, notably security of tenure and changes or fluctuationsin commodity prices, tax and royalty regimes.

Dramatic escalation in the size of sovereign wealth funds

which by some estimates put it at $3 trillion.



.

2010 saw record levels of financing, the revival of IPO and

the return of share buybacks and dividends. (E&Y MA andCapital Raising in Mining and Metals 2010 report)

Total proceeds raised by the sector in 2010 reached$329.5b, a record figure and a 54% on 2009

Australia and Toronto held the highest share of IPOs byvolume, while London recovered from its 2009 obscurity

Emerging exchanges, notably Hong Kong, and Mongolia,with its partnership with the London stock exchange, cameto their own, as globally competitive resource exchanges.

SOME RECENT DEVELOPMENTS



SOME RECENT DEVELOPMENTS Canada: Xstrata has purchased First Coal for US$153mn. Part of

Xstrata's increasing coal focus.

Chile: Codelco plans to sell US4bn worth of bonds over the next 12months. Codelco plans to develop new projects to increase output.

Peru: Newmont Mining and Buenaventura plan to invest US$4bnin their Conga mine. The mine is expected to produce 580kozpa of gold in 2015.

South Africa: China's Wing Hing plans to purchase South Africangold company Taung Gold for US$580m. One of many Chinesecompanies purchasing assets overseas.

USA: Sutter Gold Mining plans to restart its Mother Lode goldmine. Elevated gold prices have made old mines economicallyviable again.

Source: BMI, Reuters



M&A IN AFRICA

Merger and acquisition (M&A) activity targeting sub-

Saharan Africa reached an all-time record in 2010.

Thomson Reuters’ '2010 sub-Saharan Africa Investment

Banking Analysis' reports that South Africa was the most

targeted sub-Saharan country.

The country was also the most active issuer of equity, and

issued the top sub-Saharan bond in 2010, worth $1,98-

billion.



.

Mining Mergers and Acquisitions 2005 to 2008



NUMBER, VALUE AND SIZE OF DEALS 2010

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Y/Y

growth

No.

Value

($m)

Av. V

($m)

Med.

V($m

392

38,747

99

8.9

380

66,745

176

5.9

475

56,347

119

5

475

46,182

97

4.4

596

26,350

44

3.1

564

65,430

116

4.8

701

175,713

251

6.2

903

210,848

233

7.2

919

126,884

138

6

1,047

60,035

57

3.2

1,123

113,706

101

5.2

7%

89%

77%

62%



COMMODITY PRICES TRANSLATE

INTO SUPER PROFITS

In 2010, post the financial crises the Top 40 miningcompanies rebounded with operating cash flows breakingthrough the $100 billion

Higher commodity prices and increased production

contributed favourably to the $51 billion, or 59%, increasein operating cash flow

With this windfall, more than $300 billion worth of capitalprograms, have been announced, of which more than $120

billion was planned for this year, doubling last year'scapital expenditure.



.

At $435 billion, revenue exceeded the $400 billion barrier

to reach the highest level ever reported, a 34% increase

over 2009. This has been driven by increases in prices inmajor commodities and a return to growth in production,

illustrating the mining industry’s come-back since the

global financial crisis.



.

IMPLICATIONS FOR TRADE

UNION STRUGGLES AND

GLOBAL SOLIDARITY



The issue of control and the enormous boom in the mining

and metals sector (extractive industries) raises seriousissues for trade unions as to how the benefits of theenormous mineral wealth possessed by many developingcountries can be shared, since the profits from metalmining are largely exported along with minerals

themselves Already governments have staked their claims through

resource nationalism

This is a critical question for countries in which metal

mining makes up the largest share of export



Dependence on Metal Mining as a Percent of

Total Exports by Country



.

Global Solidarity is a function of trade union power.

Building power in the mining sector will require theshifting of global union resources to countries in Asia,Africa and Latin America and consolidating union powerto overcome fragmentation

A more pronounced union organizing strategy to recruit

and organize both regular and contract workers.

Building Capacity in Campaigns and Joint action aroundthe value chain

Mining and Maritime Initiative must be rooted on the

ground

STRIKES COULD THREATEN GLOBAL COPPER &



.

STRIKES COULD THREATEN GLOBAL COPPER &PLATINUM SUPPLIES

According to the BMI’s Global Mining Report, the elevation in metalsprices would result in greater conflict between companies and theirworkers.

In addition to South Africa, it is expect that the greatest industrialaction would occur where unions are most powerful and thus Australia,Peru, Chile and Mexico were highlighted as hotspots for industrialaction.

These countries account for 45% of global copper output and thussustained industrial action could be price supportive. Conversely,countries where union participation and influence is weak, notably inBrazil and much of Africa the potential for strikes is far lower.



.

THANK YOU

Fourth International Mining and Maritime Conference4-7 October 2011 / DURBAN SOUTH AFRICA

Glen Mpufane ICEM State of Current Global Minerals and Extractive Industries

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