1/18/2013

Managing in a Commodity World

Mike OShaughnessy, Director, Business Planning
Jim Popowich Mining Guy at Large
January, 2013

Diversified, Low Risk,

Long Life Portfolio
Teck Coal (100%)
2nd

Worlds
largest seaborne
met coal producer

Growth, Diversity and

Cost Competitive Production

>25 year mine life

Potential Quintette production
in 2014

Quebrada
(76.5%)
QuebradaBlanca
Blanca
(76.5%)

Red Dog
Fort Hills

Current operations to 2016

with cathode production
expected to continue until
2018; 40-year resource

Frontier & L421

Highland Valley

Oil Sands

Teck Coal

Fort Hills: 20%

Trail

Frontier: 100%

Pend Oreille

Lease 421: 50%

3.5b bbl contingent resource
First production by 2017

Plan to triple production; with

$5.6b capital project
Andacollo
Andacollo(90%)
(90%)

Duck Pond

Recently completed
expansion that quadrupled
production

Antamina
Quebrada Blanca

>20 year mine life

Relincho

Red
RedDog
Dog(100%)
(100%)
Large scale, low cost zinc
production
~20 year+ mine life, with
potential to increase further

Large, low cost copper-zinc

co-product mine
Current operations to 2028

Six open-pit operations

>100 year resources

Antamina
Antamina(22.5%)
(22.5%)

Andacollo

Highland Valley (97.5%)

Refinery

Mine

Advanced Project

Trail: Top 5 zinc/lead facility in the world

Mine life to 2026

Potential to extend mine
life by an additional 10-20 yrs

Note: References throughout to mine lives are based on Teck reserve estimates (or where indicated resource estimates) and current production rates. Actual mine lives may vary

1/18/2013

Continued Improvement in Safety

- Employee and Contractor

Teck Coal best ever year

Oct YTD Total Recordable Injury

Frequency of 1.45, 31% down on
same time last year
Lost Time Injury Frequency of 0.23,
85% down
Frequency of High Potential Incidents
also down

Contractor statistics showing

continual improvements improved
expectation setting and supervision,
and emphasizing all work on site at
the one standard
Random Drug and Alcohol testing in
place and functioning well at Cardinal
River, currently being rolled out to Elk
Valley mines

Outline
Supply/Demand balance
The macro demand picture
Supply running to stand still
How stable is your revenue?
o Drivers of price S/D balance
o Other factors
Steelmaking Coal Case Study
Fertilizer Case Study
The DCF
4

1/18/2013

The Supply/Demand Balance

Commodity super-cycle

Commodity Price Increases CPI Adjusted - US$

(Base Year 1960 = 100%)

CPI(YoY)
6

2012

2010

2008

2006

2004

2002

2000

0%
1998

0%
1996

2%
1994

4%

20%
1992

40%

1990

6%

1988

8%

60%

1986

10%

80%

1984

100%

1982

12%

1980

14%

120%

1978

140%

1976

16%

1974

18%

160%

1972

20%

180%

1970

200%

1968

22%

1966

24%

220%

1964

240%

1962

26%

1960

260%

Average

Source: USGS Mineral Information, LME, Bloomberg

1/18/2013

Economics 101 the supply

and demand relationship
Demand

Price

Supply

PanicBuying

Price($/unit)

Units

CostDriven
FloorPrice

UnitsAvailable
7

UnitsofProductionorConsumption

Supply, demand and the

commodity cycle
Supply

Demand

Excess Supply

Supply Shortfall

Price($/UnitofProduction)

SuperCycle
Time

FloorPrice

BasedonUsualDemand
andSupplyResponse
Time

1/18/2013

Multidecadematerialchange
indemanddrivenby
Urbanization of 1.4 billion people between 2005 2025
Industrialization of emerging economies
The move to middle class, replacement vs. additional demand
Population growth
BRICS (Brazil, Russia, India, China, South East Asia) expected to
sustain high economic growth

World commodity demand expected to double over

the next 15 to 20 years.
9

Source: UN 2011

The driving force global GDP

70%
50%

8.0%

40%

7.0%

30%

6.0%

LongTermRealGDPForecast(YoY)

Emerging

1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016

9.0%

ShareofGlobalGDP
Developed

5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1.0%

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

RealGDP(%ChangeYearoverYear)

60%

2.0%

Global

Developed

Emerging

3.0%
4.0%
10

Source: IMF Nov/12

12

2010

Developed

200,000

China

India

Developed

China

India

Developed

China

1,200,000

North America, population 343M

DEVELOPING ECONOMIES 6.15B

Japan, population 127M

2000

Europe, population 331M

1990
India

Developed

China

India

1,600,000

South Korea, 49M

Russia, population 142M

South America, population 588M

11

Arab World, population 357M

Other, population 2,433M

India, population 1,171M
China, population 1,338M

1/18/2013

Urbanization Levels
PopulationDistribution

1,400,000

1,000,000

RURAL

800,000

600,000

400,000

URBAN

SourceUNOctober, 2012
2020

How increases in the standard of

living affects commodity demand

EMERGED ECONOMIES 0.85B

Source Rio Tinto and World Bank

1/18/2013

Putting the Growth into Perspective

Population of emerging markets almost 5x greater
than the developed regions shown
2011Stats
Population(millions)
GDPgrowthrate
GDP($trillions)
GDP/capita
AutoSales(millions)
Autosper1000people
SteelProduction(mt)
SteelIntensity(kg/person)
HCCSeaborne(mt)

China
1,347
8.70%
$6,988
$5,186
10
38
705
400
17

India
1,210
7.96%
$1,843
$1,523
2
17
78
50
20

Brazil
192
3.28%
$2,518
$13,087
3
249
36
150
13

USA
313
1.82%
$15,064
$48,097
13
810
86
250
0

Japan
128
1.50%
$5,855
$45,814
4
593
109
500
33

Korea
49
4.10%
$1,126
$23,169
2
346
65
1,050
16

Germany
82
1.95%
$3,628
$44,352
3
534
46
450
7

Based on relative statistics the BRIC(S) still have a

long way to go

13

Source: Population and GDP from IMF 2012, Auto sales from 2012 Scotia Bank report,
Steel and HCC information from Wood Mackenzie 2012

Demand for Commodities

GlobalSteelProduction

2,500
2,000

Other
Japan
India

Germany
USA
China

Korea
Brazil

1,500
1,000
500
0
2000

2010

2020

GlobalSteelMakingCoalImports
400
350
300

Other
Japan
India

Germany
USA
China

GlobalIronOreImports
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

Korea
Brazil

250
200
150
100
50
0
2000
14

2010

2020

Other
Japan
India

2000

Germany
USA
China

Korea
Brazil

2010

2020

Source: WoddMac, IEA

1/18/2013

Demand for Commodities

GlobalOilConsumption
120
100
80

Other
Japan
India

Germany
USA
China

Korea
Brazil

60
40
20
0
2000

2010

2020

GlobalZincConsumption

GlobalCopperConsumption
30,000

Other
Japan
India

25,000
20,000

Germany
USA
China

20,000

Korea
Brazil

15,000

Other
Japan
India

Germany
USA
China

Korea
Brazil

10,000

15,000
10,000

5,000

5,000
0

0
15

2000
2010
Source: WoddMac, IEA

2020

2000

2010

2020

Challenges facing the resource sector

Global financial crisis

Has the economy recovered? Is another correction coming?
Availability of future projects
Large easy projects already found and developed
Lead time to project start, political risks, regional risks
Challenges at current operations
Resource depletion, higher strip ratios, falling head grade, longer hauls,
deeper mines
Sustainability
Water, biodiversity, energy, community, people, product stewardship,
cumulative effects, air and environment
Cost escalation and scarce raw materials
Energy, labour, equipment, tires, supply chain
Protectionism

16

1/18/2013

Supply side struggling to

respond
New projects are becoming riskier

Source
Rio Tinto
17

and costlier

Source Anglo

Supply side struggling to

respond
Currentoperationsarecontinually
fallingshort

18

Source BHP

Workinghardtostandstill

Source Xstrata

1/18/2013

Competition for finite resources

Engineer and Trades people shortages
are not an anomaly to Western Canada
(Australia, Chile and others)

4,500
4,000

Oil Sands

Not enough equipment to go around

Teck Coal

3,500
New Hires

3,000
2,500
2,000
1,500
1,000
500
0

19

Source: Estimates based on announced growth plans

Source Rio Tinto

Impact on an Industry Long Term

An industry undersupplied going forward

20

Source: Credit Suisse

10

1/18/2013

How stable is your revenue stream?

21

So how stable is your revenue stream?

(today and tomorrow)
Supply / demand balances
Substitution / demand destruction
Diversification (regional, sector, commodity)
Position on cost curve (capital vs operating cost flexibility)
Brownfield vs. Greenfield time to market
Competitors changes to the market
Going beyond the discounted cash flow to the option analysis
Local currencies
Customers ability to pay
Hedging
Balance Sheet strength
22

11

23

$5.00
$4.50
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00

$5.00
$4.50
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00

24
1970

1968

1966

1964

1962

1960

CPI(YoY)
Potash
1980

1978

1976

1974

1972

Zinc
Oil

Zinc(US$/lb)

Copper(US$/lb)
$120

$450

$400

1988

1986

1984

1982

Nickel
CokingCoal

01/01/2009
01/03/2009
01/05/2009
01/07/2009
01/09/2009
01/11/2009
01/01/2010
01/03/2010
01/05/2010
01/07/2010
01/09/2010
01/11/2010
01/01/2011
01/03/2011
01/05/2011
01/07/2011
01/09/2011
01/11/2011
01/01/2012
01/03/2012
01/05/2012
01/07/2012
01/09/2012
01/11/2012

01/01/2009
01/03/2009
01/05/2009
01/07/2009
01/09/2009
01/11/2009
01/01/2010
01/03/2010
01/05/2010
01/07/2010
01/09/2010
01/11/2010
01/01/2011
01/03/2011
01/05/2011
01/07/2011
01/09/2011
01/11/2011
01/01/2012
01/03/2012
01/05/2012
01/07/2012
01/09/2012
01/11/2012

Copper
Uranium

1998

1996

1994

1992

1990

Aluminum
Gold

2008

2006

2004

2002

2000

Iron
Average

2012

2010

260%

01/01/2009
01/03/2009
01/05/2009
01/07/2009
01/09/2009
01/11/2009
01/01/2010
01/03/2010
01/05/2010
01/07/2010
01/09/2010
01/11/2010
01/01/2011
01/03/2011
01/05/2011
01/07/2011
01/09/2011
01/11/2011
01/01/2012
01/03/2012
01/05/2012
01/07/2012
01/09/2012
01/11/2012

01/01/2009
01/03/2009
01/05/2009
01/07/2009
01/09/2009
01/11/2009
01/01/2010
01/03/2010
01/05/2010
01/07/2010
01/09/2010
01/11/2010
01/01/2011
01/03/2011
01/05/2011
01/07/2011
01/09/2011
01/11/2011
01/01/2012
01/03/2012
01/05/2012
01/07/2012
01/09/2012
01/11/2012

1/18/2013

Commodity super-cycle

Commodity Price Increases CPI Adjusted - US$

(Base Year 1960 = 100%)
CommodityPriceIncreasesCPIAdjusted CDN$(BaseYear1960=100%)

240%
26%

24%

220%
22%

200%
20%

180%
18%

160%
16%

140%
14%

120%
12%

100%
10%

80%
8%

60%
6%

40%
4%

20%
2%

0%
0%

Source: USGS Mineral Information, LME, Bloomberg

Short Term vs Long Term

$100

OilWTI(US$/bbl)

$80

$60

$40

$20

$0

$350

HardCokingCoal(US$/tonne)

$300

$250

$200

$150

$100

$50

$0

Source: CRU steel, LME, EIA

12

1/18/2013

Diversification of Revenue - BHP

25

Diversification how and

where to grow
(bubblesizeindicatesrelativemarketcapitalization)

12

BHP

Glencore

10

Commodities

8
Anglo
6

Xstrata
RioTinto
Teck

2
Codelco

Antofagasta

Fortescue

0
0
26

VALE

PotashCorp
Barrick
FirstQuantum
Cliff Resources
Mosaic
FreeportNewmont
Suncor
Expertsinsinglecommoditiesandmultiplejurisdictions
4

Source: Stock market July, 2012

10
Countries

12

14

16

18

20

13

1/18/2013

What is your true margin?

Example Chilean Mine
CopperPrice(US$/lb)

5.00
4.50

US$
ChileanAdjusted

4.00
3.50
3.00
2.50
2.00
1.50
1.00

27

02/11/20

02/09/20

02/07/20

02/05/20

02/03/20

02/01/20

02/11/20

02/09/20

02/07/20

02/05/20

02/03/20

02/01/20

02/11/20

02/09/20

02/07/20

02/05/20

02/03/20

02/01/20

02/11/20

02/09/20

02/07/20

02/05/20

02/03/20

02/01/20

02/11/20

02/09/20

02/07/20

02/05/20

02/03/20

0.00

02/01/20

0.50

Source: Bloomberg, LME

What to use for pricing assumptions

1yrAvg
3yrAvg
5yrAvg
10yrAvg

Zn($/lb)
$0.88
$0.96
$0.91
$0.92

Ni($/lb)
$7.94
$9.55
$9.54
$9.64

Cu($/lb)
$3.61
$3.71
$3.40
$2.73

Al($/t)
$2,137
$2,270
$2,275
$2,181

Fe($/t)
$135
$152
$152
$105

Pot($/t)
$550
$455
$499
$327

Oil($/bbl)
$95
$90
$86
$70

HCC($/t)
$192
$228
$222
$155

Au($/oz)
$1,648
$1,464
$1,165
$792

US/CDN
1.00
0.99
0.96
0.89

Historic perspective
Use multiple approaches and use the most conservative or
justify otherwise
Understand what analysts are using for forward pricing
assumptions
Short term vs long term price assumptions
Pricing sensitivity analyses
NPV and payback period
28

Source: Bloomberg, LME, Bank of Canada as of 2011

14

1/18/2013

Summary - How Stable is Your Revenue

Stream Today and Going Forward?
Supply/demand balances
Substitution
Diversification (regional, sector, commodity)
Position on cost curve
Brownfield vs. Greenfield time to market
Competitors changes to the market
Going beyond the discounted cash flow to the option analysis
Stakeholders and risks associated
Local Currencies
How many of you are dart players?
29

Steelmaking Coal a Case Study

30

15

1/18/2013

Per Capita Finished Steel Consumption

Rationale behind market growth projections

700kg/capita

31

*Source: Neil Bristow, 2010

Steelmaking Coal is a Vital Ingredient in

the Steelmaking Process
Blast Furnace Ironmaking

Vast majority of global steel

made via blast furnace
technology

Pellets
Iron Ore

Coking coal is a key input in

the blast furnace ironmaking
process
Two main functions of coking
coal (once coked) in the
furnace:

Sinter

Limestone
Coking Coal
Coke

Reductant
Strength to hold physical
burden within the vessel

Source : WSA, Teck

Blast Furnace
(Ironmaking)

To Converter
(Steelmaking)

32

16

1/18/2013

HCC Niche Market

Influenced by Many Moving Parts (2011)
Steel
1,542Mt

BOFHotMetal

EAFRecycle

1,095Mt

445Mt

SteelmakingCoal
1,095Mt

33

LandSteelmakingCoal

SeaborneSteelmakingCoal

854Mt

241Mt

SeaborneSSCC

SeabornePCI

SeaborneHCC

50Mt

39Mt

152Mt

Source: Wood Mackenzie 2012

Global Car Sales

GlobalAutoSales

70

Sales(millionsofcars)

60

4.7

50
40
30

1.6
6.3
0.3
0.3

2.2

2.7

1.9
6.6
0.6
0.6

1.7
6.7
0.6
1.3

7.6
0.8
2.7

7.8
1.0
4.2

17.1

16.7

17.0

17.3

3.3
8.1
1.2
5.2

4.3
3.7
8.7
1.3
5.0

1.5
7.3

19.8

19.4

19.6

19.3

1.9
9.4

10.5
2.0
10.0

18.8

15.9

199099 2000 200103 200405 2006

2007
SouthAmerica
OtherAsia
India

2008
China

11.6
2.1
10.9

16.1

16.7

16.5

16.6

12.7

14.0

15.2

16.7

17.6

20

16.4

8.9

11.2

18.3

14.3

10

3.9

4.5

0
2009
2010
Europe

2011
2012
NorthAmerica

NoteEuropeincludesRussia

34

Source: Scotiabank, Global Auto Report

17

1/18/2013

Impact of Global Slowdown on the Steel

Sector
44%

50%

6%
0.1%

0.9%

11%

0.7%

0.1%

0%

0%

0.0%

6%
5%

11%
10%
5%
7%
9%
6%
2%
4%
10%
11%
4%
10%
6%
4%
2%
3%
7%
1.2%

11%

23%
16%

15%

2%
3%

10%

3%
5%
4%
0%
6%
4%

20%

20%

30%

22%
26%

34%

40%

GlobalAuto
35

19%

33%

20%

13%

7%

40%

36%

30%

19%
20%
25%
21%
22%

20%

4%

Q1/08 Q2/08 Q3/08 Q4/08 Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12
10%

GlobalSteel

GlobalSteelExChina

Source: Volkswagen, Global Insight, CRU steel, World Steel Association, IMF

China Projection

36

China

80

30,000

70
SeaborneHCC

25,000

60
GDP

20,000

50
40

GDP($millions)

China moves from an exporter to

importer of hard coking coal
Chinas steel mills getting bigger
and bigger increasing the
requirement for hard coking coal
Average GDP growth projected at
6%
Large internal and land coking
coal sources cant keep up with
steel market
Chinese HCC production starts
trailing off after 2016
Mongolian HCC production
peaks in 2020
Beyond 2026 see increasing levels
of EAF steel production

SeaborneHCCImports

15,000

30

10,000
20
5,000
10
0

Source: Wood Mackenzie

18

1/18/2013

India Projection
60

6,000

50

SeaborneHCC
GDP

40

4,000
30

3,000
20
2,000
10

1,000

37

5,000
GDP($millions)

SeaborneHCCImports

Average GDP growth projected

at 6%
No internal or land coking coal
source
Teck 33% freight differential
relative to Aussies
Beyond 2026 flip to a higher
proportion of semisoft coal

7,000

India

Source: Wood Mackenzie

Changes in Seaborne Hard Coking Coal

Demand Growth
350
Source: World Steel Association, Wood Mackenzie

SeaborneHardCokingCoalDemand(mt)

300

Other,11
CIS,13
Other,10
CIS,10

250

Europe,44

100%

150
Other,10

50

38

Europe,35
Brazil,10
OAsia,5
Korea,11

Europe,50
OAmerica,7
Brazil,31

OAsia,19

OAsia,26

Other,5

Korea,18

Korea,18

Europe,35

Japan,32

Japan,31

Brazil,13
OAsia,8
Korea,16

India,45

India,52

China,69

China,63

2021

2031

Japan,33

Japan,36

India,20

India,12

China,17

2001

2011

China expected to increase demand by 50mt

China and Mongolia coal producers cant keep
up with steel growth and plateau

India and other markets set to drive the next

decades

OAmerica,6
Brazil,20

200

100

China continues to play a big and complex role

in the market

India up about 30mt

Brazil up approximately 20mt
Other Asia grows by a combined 20mt
(Vietnam, Malaysia, Thailand among others)
CIS more active on the seaborne market
(Ukraine)

EAF steel (recycling) begins to dampen

demand as markets mature and move past
industrialization

Source: Wood Mackenzie

19

1/18/2013

The Demand Side 2000 - 2010

Poised for growth

250%

Crude
Steel

Hot
Metal

Seaborne
Steelmaking Coal

Seaborne Hard
Coking Coal

200%

150%

100%

50%

75%

90%
30%

0%

22%

2000 2010 Steel growth met with internal supply, seaborne not materially impacted
39

Source: Wood Mackenzie

The Demand Side 2010 2020

Poised for growth

250%

Crude
Steel

Hot
Metal

Seaborne
Steelmaking Coal

Seaborne Hard
Coking Coal

200%

150%

90%
100%

75%
100%
90%

50%

75%
0%

90%
30%

22%

2010 2020 Steel growth continues but local suppliers cant keep up. India emerges
40

Source: Wood Mackenzie

20

1/18/2013

The Demand Side 2020 2030

Poised for growth

250%

Hot
Metal

Crude
Steel

Seaborne Hard
Coking Coal

45%

200%

150%

Seaborne
Steelmaking Coal

40%

40%
90%

100%

28%

75%
100%
90%

50%

90%

75%

30%

0%

22%

2020-2030 China levels out, other emerging markets grow, but bigger pie
41

Source: Wood Mackenzie

Major Steelmaking Coal Basins

Russia Kuzbass Large
reserves, but very long
route to coast and export
markets
Poland
Moderate reserves,
deep, long route to coast
and export markets

Western Canada
High project development and
operating costs, particularly in
northern British Colombia, rail
and port constraints near term

Appalachia
Increasing costs, regulations,
declining reserves

Tavan Tolgoi, Mongolia

High political risk, no
infrastructure in place, captive
to Chinese market

Shanxi, China
Dangerous, high-cost mining
conditions, costs escalating
on regulatory burden and
RMB appreciation

E Siberia Elga
Challenging infrastructure,
much delayed project

Indonesia Central
Kalimantan
High political risk, transport
logistics uncertain

Mozambique Tete/Moatize
Good mining conditions,
challenging infrastructure
Bowen Basin
large reserves, wide range
of qualities, Increasing
costs, lower quality, no lowhanging fruit

Basin Maturity
Major seaborne supply basin
Major prospective supply basin
Major domestic supply basin

42

*Source: Neil Bristow, 2010

21

1/18/2013

Seaborne Steelmaking Coal Market

Other World, 19%

Other Canada, 1%Teck, 9%

Other USA, 14%

BMA, 21%

Anglo, 9%
Other Australia,
17%

43

Xstrata, 6%
Rio Tinto, 4%

Source: AME

The balancing act: what to do

2006 the super cycle might
be real
2007 review of mines for profitability
due to CDN dollar appreciation
2008 ramping up on record prices and
then hitting the brakes with the Global
Financial Crisis
2009 25% drop in volumes, how do we
keep our people employed and stay in
business
2010 back on the growth path
2011 stay the course
2012 quarterly volatility and over
supply
2013 back on the path?

Under
supply

Over
supply

44

22

1/18/2013

Cost Inflation
DeliveredCostChanges
BHPDeliveredCost
BHPcostinflation

$180

600%

TeckCoalDeliveredCost
TeckCoalcostinflation
500%

CostUS$/tonne

$160
$140

400%

$120
$100

300%

$80
200%

$60
$40

100%

CostInflationrelativetoH1/04

$200

$20
$0

0%
H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1
2004

2005

2006

2007

2008

2009

2010

2011 2012

45

Teck Coal Cost Position

Actively concentrating efforts
to minimize cost inflation
Eliminated price-participation
from distribution agreements
Changes in Australia royalty
system increasing comparative
costs
Appreciation of the Australian
(and to a lesser extent
Canadian) dollar drastically
impacting the relative US$/t
cost curve

46

23

1/18/2013

Steelmaking Coal Spot Prices

Unsustainably Low
Steelmaking Coal Price Assessments vs.
Quarterly Benchmark Price (US$/t)

Hard coking benchmark prices

have declined significantly and
have impacted high cost and
low quality producers

400
375
350
325

Escalating demand and

periodic supply disruptions
have led to volatile pricing

300
275
250
225

Coal is not coal is not coal,

therefore, margin curve is
better gauge to assess the
market impact of lower prices

200
175
Platts FOB 64 Mid Vol
Platts FOB Prem Low Vol
Platts FOB Peak Downs
Quarterly Contract Settlement

150
125
100

Source: Platts, Argus, McCloskey and Energy Publishing

47

Seaborne Steelmaking Coal

Margin Curve is What Matters
Margin curve highlights the
importance of coal quality

Seaborne Steel Making Coal Margin Curve

High cost, low quality coals

should be eliminated first

100

US$170/tonne benchmark
price could squeeze out
approximately 52-58mt of
seaborne metallurgical coal

50

Total announced YTD

production cuts hover around
30mt on an annualized basis
High quality HCC remains
supply constrained

(US$170/t benchmark price, FOB)

~20% of Global
Production
Uneconomic

-50

-100
0

30

60

90 120 150 180 210 240 270

Million tonnes
Source: Woodmac, Platts, TEX Report, AME, company reports and Teck estimates

48

24

1/18/2013

Not all coal is equal

Historic Coal Prices (US$/t)

$350
$300
$250

Premium HCC
Semi-Soft Coking

$200

Low Volatile PCI

$150

Thermal

$100
$50

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

$0

49

Forward Looking Benchmark Hard

Coking Coal Price (US$/t)
350

Analyst Price Forecast ($USD/MT)

325
300
275
250
223

225

210

200

183

225

225

230

233

190

190

195

210

207

189

190

190

190

175
150

150

169

165

160

125

Analyst Forecasts - Low

100

Analyst Forecasts - Mid

170

160

160

150

150

2015

2016

178
141

Analyst Forecasts - High

75
Q1 2013

50

223

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

2014

Long Term
(Nominal)

Source: Macquarie Bank, Wilson, HTM, RBS, ANZ, Standard Bank, BoA, Merrill Lynch, Investec, Deutsche
Bank, Morgan Stanley, UBS Credit Suisse, Wood Makenzie CRU, Deloitte, Access Economics, BREE

25

1/18/2013

Hard Coking Coal Prices

(US$/tonne)

Strong Global Demand Leading to

Record Coking Coal Prices
$350
$300
$250
$200
$150
$100
$50

1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012

$0

51

Source: Teck, McCloskey

Hard Coking Coal Prices ($/tonne)

...But Inflation and Exchange Rate Impact

Revenue
$350

Coal Price US$/tonne (Nominal)

Coal Price US$/tonne (Real)
Coal Price CDN$/tonne (Real)

$300
$250
$200
$150
$100
$50

1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012

$0

52

Source: Teck, McCloskey, Bank of Canada

26

1/18/2013

$350
$325
$300
$275
$250
$225
$200
$175
$150
$125
$100
$75
$50
$25
$0

Costs (FOB) Real

Coal Price CDN$/tonne (Real)
Oil ($/bbl) Real

1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

Hard Coking Coal Prices and Costs

($/tonne)

Cost Increases Also Tend to Mitigate

Higher Commodity Prices (Teck Coal
costs)

53

Source: Teck, McCloskey, Bank of Canada, EIA

The Customer and Their Ability to Pay

54

$250
$200

$1,000
$800

$150

$600

$100

$400

$50

$200

Steel Price (US$/tonne)

$1,200

Steel HRC (US$/tonne)

Thermal (US$/tonne)
Coal HCC (US$/tonne)
Iron Ore (US$/tonne)
WTI Oil (US$/bbl)

$0
2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

$0
1984

Oil, Coal and Iron Prices (US$/tonne)

$300

Source: Teck, McCloskey, EIA, Wood Mackenzie, The Steel Index

27

1/18/2013

Steelmaking Coal Key Takeaways

The importance of infrastructure and the supply chain

Reserve and resource base size matter
The industry has seen significant inflation in prices and in
costs
Volatility and uncertainty are now a part of the business
Coal is not coal is not coal. Pricing varies based on market
condition and desirability of a specific product
Can your customer (and their customer) afford the raw
materials

55

The Fertilizer Industry: A Case Study

56

28

1/18/2013

Nominal Prices (not adjusted for inflation)

Corn Prices

$ BU

Monthly Average of Daily Close of Front Month Futures Contract

9.0
Source: CME

8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Soybean Prices

$ BU

$ BU

Monthly Average of Daily Close of Front Month Futures Contract

Hard Red Winter Wheat Prices

Monthly Average of Daily Close of Front Month Futures Contract

12

18
Source: CME

16

11

Source: KCBOT

10

14

9
12

10

6
5

4
4

2
1

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Real Prices (adjusted for inflation)

Corn Prices - Inflation Adjusted in 2012 Dollars

$ BU

Monthly Average of Daily Close of Front Month Futures Contract

18
Source: CME and U.S. Deparment of Labor

16
14
12
10
8
6
4
2
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

HRW Wheat Prices - Inflation Adjusted in 2012 Dollars

$ BU

Soybean Prices - Inflation Adjusted in 2012 Dollars

$ BU

Monthly Average of Daily Close of Front Month Futures Contract

Monthly Average of Daily Close of Front Month Futures Contract

30

60

Source: CME and U.S. Department of Labor

Source: CME and U.S. Department of Labor

50

25

40

20

30

15

20

10

10

0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

29

1/18/2013

Are real prices real?

The two previous charts show the price of corn since 1970 in both nominal and real terms. Nominal values
are not adjusted for inflation. Real values are adjusted for inflation and gauge purchasing power over time.
For example, the nominal price of corn, measured as the monthly average of the daily closing price of the front
month futures contract, traded at $2.97 per bushel in August 1973. The nominal value is the actual price a
farmer received for a bushel of corn back then. The real or inflation-adjusted value for the August 1973 price
in 2012 dollars is $15.15 per bushel. That means a farmer would have to receive $15.15 for a bushel of corn
today in order to buy what $2.97 bought in August 1973.
The chart shows that real price of corn was higher during the bull run of the 1970s than during the price spikes
of 2008. Put another way, the real price of corn has declined over time even after the sharp increases in
nominal prices during the last few years. But that is no surprise. Real prices change over time depending on
factors such as productivity growth or efficiency improvements and real prices of agricultural commodities
have trended downward over time due to the tremendous increases in productivity during the last 100 years.
However, since 2007, real prices of corn and many other commodities have trended upward due to a
combination of factors including the impact of rapid economic growth in China and India on food demand, the
exponential growth in biofuels production and several disappointing harvests. A key question is will
productivity growth increase fast enough to keep pace with demand growth in the future. History says yes but
many analysts now project that the days of steady declines in real agricultural commodity prices are behind us
and argue that one of the greatest challenges of this century will be to feed a growing and more affluent
population and still conserve increasingly scare land, water and other resources.

A linkage between oil and soft commodities

prices: The case of corn prices
The Case For
Corn demand for U.S. ethanol production sets market price
Key drivers of corn prices are the price of oil and exchange rates
Strong economic growth & weak dollar cause oil prices to increase
Higher oil prices boost U.S. ethanol economics/production
Higher ethanol production increases corn demand
Higher corn demand increases crop nutrient demand
Traditional drivers matter less?
The Case Against
Prices have decoupled during the last two years
All drivers matter

Weather
Population growth
Income growth
Food AND energy demand

Agricultural fundamentals continue to look positive due to several

fundamental factors

30

1/18/2013

The case for: strong correlation 2008-10

Corn
$ BU

Daily WTI Crude Oil vs. Corn Nearby Futures Prices

Jan 2, 2008 to Dec 31, 2010

8.0
Source: NYMEX & CME

7.5
7.0

y = 0.0343x + 1.671
R = 0.6361

6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
20

40

60

80

100

120

140

160

Oil - $ BBL

The case against: decoupling of prices since

2010
WTI Crude Oil vs. Corn Nearby Futures Prices

Corn
$ BU

8.50
8.00

Jan 2, 2011 - Dec 28, 2012

y = -0.0021x + 7.0697
R = 0.0007

7.50
7.00
6.50
6.00
5.50
Source: NYMEX & CME

5.00
70.0

80.0

90.0

100.0

110.0

120.0

$ BBL

31

1/18/2013

Mosaic share price vs. corn price

Mosaic Stock Prices vs Nearby Corn Futures Prices

MOS
Share Price

MOS
Share Price

Daily Closing Prices from Jan 2, 2008 to Dec 31, 2010

180

Daily Closing Prices from Jan 3, 2011 to Dec 28, 2012

Source: Yahoo! and CME

160
140

Mosaic Stock Prices vs Nearby Corn Futures Prices

100
90

Source: Yahoo! and CME

120

y = 4.3712x + 31.089
R = 0.0723

80

y = 25.439x - 46.556
R = 0.7424

100

70
80
60

60

40
50
20
0

40
2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

5.0

5.5

6.0

6.5

7.0

Corn Price - $ bu

7.5

8.0

8.5

Corn Price - $ bu

Fertilizer Prices
MOP Prices
$ ST

Blend Grade fob U.S. Midwest Warehouse

1000
900
800

Source: Green Markets

700
600
500
400
300
200
100
0

Sulphur Prices
c&f Tampa

Source: Fertecon

Granular Urea Prices

$ ST

NOLA Barge

850

700

750

600

Source: Green Markets

Source: Green Markets

500

fob Tampa Vessel

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
$ LT

DAP Prices

$ MT

1300
1200
1100
1000
900
800
700
600
500
400
300
200
100

650
550

400
300

450
350

200

250

100

150
50

0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

32

1/18/2013

More People, More Food,

More Consumption
Large sections of farm being converted into corn for fuel
A growing population with an appetite for meats as opposed to
rice (a larger middle class)
Same area to grow food and an increasing population means
we need ways to become more productive with the resources
we have

65

Discounted Cash Flow

66

33

1/18/2013

The importance of the DCF

Provides an opportunity to assign value to future cash flows and
todays terms and compare projects with different time horizons

DCF =

++

DCF = discounted value of cash flow

CF = cash flow in each year
r = discount rate, puts a risk or value of money today vs in a future
period as investor could put their money elsewhere

rd = return on debt (loan/bond rate) , Wd = amount of debt,
re = return expected by shareholders, We = market capitalization
Ever increasing project lead time creating focus on DCF
67

Simple DCF Model

NewCoalS1
Year

Year
0

($100)

($100)
1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

$250

$250

$250

$250

$250

$250

$250

$250

$250

$250

$250

SiteCostsVariable($/t)

$45

$45

$45

$45

$45

$45

$45

$45

$45

$45

$45

Transportation($/t)

$35

$35

$35

$35

$35

$35

$35

$35

$35

$35

$35

$0

$170

$170

$170

$170

$170

$170

$170

$170

$170

$170
$170

Capital($millions)
Production(mtonnes)
CommodityPrice($/t)

10

SiteCostsFixed($millions)

OperatingMargin($/t)
Profit pretax($millions)

$100

$270

$170

$170

$170

$170

$170

$170

$170

$170

Tax($millions)

$30

$81

$51

$51

$51

$51

$51

$51

$51

$51

$51

Profit posttax($millions)

$70

$189

$119

$119

$119

$119

$119

$119

$119

$119

$119

$70

$172

$98

$89

$81

$74

$67

$61

$56

$50

$46

DiscountedCashFlow($millions)
CashFlow($millions)
NPV($millions)

68

$1,330
$865

Discount rate of 10%

34

1/18/2013

DCF Scenarios

SummaryComparison
S1

S2

S3

S4

S5

S6

production/year

minelife

10

10

10

capital($millions)

200

400

200

400

200

400

commoditypriceUS

250

250

250

250

150

150

discountrate

10%

10%

8%

8%

10%

10%

69

DCF Scenarios

SummaryComparison
S1

S2

S3

S4

S5

S6

production/year

minelife

10

10

10

capital($millions)

200

400

200

400

200

400

commoditypriceUS

250

250

250

250

150

150

discountrate

10%

10%

8%

8%

10%

10%

$1,330

$1,470

$1,330

$1,470

$685

$825

$865

$1,169

$933

$1,220

$469

$681

CashFlow
NPV
70

35

1/18/2013

Dangers of the DCF

What if the project is in too early a phase for a dcf? Multiples
and industry comparables are useful
Heavily dependent on the discount rate and your price
assumptions, do you have it right?
What if your project misses the cycle?
Value of management and their ability to move with the cycle
(increase or decrease capacity depending on market
conditions)
Always need to keep an eye on the balance sheet to make
sure you can pay your bills
71

What do we know for certain?

The rules of the game have changed

We will continue to see tremendous volatility in the
commodity sector
You cant control everything, but you can reduce your
risk by doing your homework
The mining industry is going to be a very exciting
business in the years to come

72

36

1/18/2013

Thank you!

73

APPENDIX

74

37