Stainless Steel Materials - South African Fund Manager Presentation : June 2003 Dr Chris Pointon - President, Stainless Steel Materials Customer ...

 
Stainless Steel Materials - South African Fund Manager Presentation : June 2003 Dr Chris Pointon - President, Stainless Steel Materials Customer ...
Stainless Steel Materials

South African Fund Manager Presentation : June 2003
Dr Chris Pointon – President, Stainless Steel Materials Customer
Sector Group
SSM already has a established production and marketing
presence

             The Hague - Marketing

                                                                          QNI
                                                                        Yabulu
                                                                        Refinery

                                                                                    Philippines
                                                                                              New
                                                                        Indonesia            Caledonia
                                                                        Western
Cerro Matoso                                                            Australia
 Colombia                          Operations
                                                              South Africa
                                   Exploration              Samancor Chrome
SSM SA Fund Manager Presentation   Ni/Cr marketing office
Page 2   June 2003
Stainless Steel Value Chain
          Raw Materials                       Melting by Grade             Product Form End Use
4.5 Mt                                      75% Austenitic                      70%
            Stainless                                                                           30% Process
US$ 2.5 Bn Steel Scrap                                                                          Plant
                                                               12 Mt
                                                                            Flat products       10% Building &
                                             AISI 300 series   US$ 24 Bn                        construction
                                                                            Sheet/Strip/Plate
                                                 18% Cr
 650 kt                                           8% Ni                                         25% Transport
             Primary Nickel
 US$ 4Bn                                        70% Fe
                                                                                                20% Food &
                                                                                 30%            Beverages
                                                                                                handling
 4 Mt                                                                       Long Products
 US$ 3 Bn     Ferrochrome                                                    Bar/rod/wire       15% Consumers
                                            24% Ferritic/Martensitic
                                                                3 Mt
                                             AISI 400 series                    80%             Automotive
                                              12 - 17% Cr       US$ 4Bn
US$ 0.5 Bn? Other Ferroalloys                 80 - 90% Fe                                       Consumer
              & Slag Formers                                                 Flat Products
                                                                                                Durables
                                            1% Mn Grades
7 Mt                                                            1 Mt            20%             Building &
US$ 0.7 Bn                                  AISI 200 Series    US$ 1Bn      Long Products       Construction
               Steel Scrap
         SSM SA Fund Manager Presentation
         Page 3   June 2003
Stainless Steel is the fastest growing major use of metals, and
will continue to grow strongly
             Stainless Slab Production – million tonnes
25
 25

20                                                               China
 20

15                                                 Russia             Other
 15

10                                                              Japan
 10

                                                             W. Europe
 55

 00                                                               USA
 1970
  1970               1975
                      1975         1980
                                    1980   1985
                                            1985     1990
                                                      1990    1995
                                                               1995       2000
                                                                           2000

SSM SA Fund Manager Presentation
Page 4   June 2003
Chrome Value Chain – >80% of ore converted to FeCr, and
       75% of FeCr used in stainless steels
                        Independent                        Low-carbon
                                                                                    5%
                        Alloyers                           ferrochrome                    Other uses   25%
                           15%
                                                          Medium-carbon
 Ore                                                                                3%
                                                          ferrochrome
 Production
     82%    Integrated                                    High-carbon
            Alloyers                                      ferrochrome &                   Stainless Steel
                                                                                          Production      75%
               85%                                        Charge chrome             92%

                         Chemical
       10%               Producers
                                                           * Percentages based on
                                                           contained chrome units

         8%              Refractories                     Ferrochrome
                                                          production 2000
                         & Foundries                      LCFeCr = 240 kt
Total = 13 Mtpa                                           MCFeCr = 140 kt
       SSM SA Fund Manager Presentation                   HCFeCr = 4900 kt
       Page 5   June 2003              Source: Samancor
Austenitic Stainless has maintained a strong growth trend.
             Primary Ni and FeCr inputs will grow proportionately faster as
             scrap supply is constrained
                           Primary Growth - Rising to 5%pa
                           Secondary Growth - Exceeding Primary                                CAGR Projections
                                                                                             1989-2002 2003-2010
             6,000                                                                     16000     5.4%     >5%

                                                                                       14000     6.7%   >4.5%
             5,000
                              Austenitic Steel Production
                              (Right Hand Scale)
                                                                                       12000     3.1%    >5.0%
             4,000      Stainless Steel Scrap (*)                                      10000

                                                             High Carbon Ferrochrome
        kt
             3,000                                           Production                8000

                                                                                       6000
             2,000
                                        Primary Nickel
                                                                                       4000
                                        production                                               4.4%    >5%
             1,000
                                                                                       2000

                  0                                                                   0
                  1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

             SSM SA Fund Manager Presentation
             Page 6   June 2003
Note:   * Excludes internal scrap
The primary nickel supply business has high financial and
technical barriers to entry
                                                           High Capital
                                                       Intensity, Technical
                                   Barriers to entry       Complexity

                                        HIGH
                                                        Capital Efficient
                                                            Growth

                                       Industry
Supplier power                          rivalry         Buyer power
         HIGH                      MODERATE TO HIGH    MODERATE TO HIGH
                                                        Market demand
                                                       growing @ 4-5%pa

                                      Threat of
                                     substitution          Growth
                                                         Sustainability
                                        LOW
SSM SA Fund Manager Presentation
Page 7   June 2003
A primary nickel supply gap is set to emerge over the present decade. Only three
major projects at Feasibility. Lead times for new projects are 7-10 years.
The majority of current production is from sulphide mines, but most new nickel
projects will be from laterite ores.
Mt
        Nickel reserves                  Nickel production
1.7

                             sulphide 25%
1.6                                          oxide          sulphide 60%
                                              40%
          oxide 75%                                                                 Use
1.5
                                                                                “Supply Gap”
1.4

                                                                                   BHPBilliton
1.3
                                                                                VBN
           Market surplus                                                     Goro
1.2
                                                                     Brownfield expansions
1.1
                                     Capacity in 2002 less sulphide depletion

1.0
        2000       2001       2002    2003   2004    2005     2006    2007   2008    2009    2010

SSM SA Fund Manager Presentation
Page 8   June 2003
Cerro Matoso Project – Colombia – 99.8% Ownership
                Production History
50,000                                                                                                 2.50

                                                                               US$/lb Ni (Real 2003)
45,000
40,000
35,000                                                                                                 2.00
30,000
25,000
20,000
                                                                                                       1.50
15,000
10,000
 5,000
    0
                                                                                                       1.00
           83     88      93        98    2000   2001     2002   2003
                                                                                                                1998     1999    2000     2001     2002   2003

           Reserves : 46.9Mt @ 1.93% Ni                                                                                         Year Ending June
           Resources : 65.4Mt @ 1.75% Ni
           NB based on 1.1% Ni cut-off                                                                                          C1 Cost    C3 Cost
                                            Lost Time Injury Frequency Rate

                                5
                                4
                                3
                        LTIFR

                                2
                                1
                                0
                                         1998           1999            2000                             2001          2002        2003
         SSM SA Fund Manager Presentation                         Year Ending June
         Page 9   June 2003
The QNI strategy

                                                                         Ore processing plants
                                        Optimise Yabulu margins          at world class
                                                                         orebodies with
                                        • Incremental value-added        expansion of refinery
Stabilise Yabulu operation                                               part of Yabulu
                                          product development.
                                        • Incremental Ni and Co
• Zero harm                                                              • Phase I:
                                          production increases:
• Catch-up maintenance.                                                   Concurrently develop
                                             •YOI quick payback
• Commence installation of                                                Ravensthorpe and
                                              project suite
 modern management                                                        Yabulu Extension
                                             •LGSO strategy
 practices.                                                               Projects.
                                        • Cost reduction initiatives:
                                             •Small group projects       • Phase II:
Utilities due for                                                         Develop 2nd Ore
                                             •Capitalise on gas at
completion in FY04                                                        Processing project at
                                              Yabulu site
                                             •Best management             suitable orebody with no
                                              practices, particularly     further expansion of
                                              Maintenance                 Yabulu
                                        • Establish own mine for up to
                                          one third of ore supply.       Feasibility Study
     SSM SA Fund Manager Presentation
     Page 10 June 2003
                                        In Progress
QNI Yabulu – Australia - 100% Ownership
                     32,000                                                                                      9
                                                                         LTIFR
                     31,000                                                                                      8
                                                                                                                 7
                     30,000
         Tonnes Ni
                                                                                                                 6

                                                                                                                      LTIFR
                     29,000                                                                                      5
                     28,000                                                                                      4
                                                                                                                 3
                     27,000
                                                       Nickel - Tonnes                                           2
                     26,000                                                                                      1
                     25,000                                                                                      0
                                         1998          1999       2000           2001          2002   2003
                                                                 Year Ending June
                                           Yabulu Site Cash Cost of Production after Cobalt Credits

                                  3.25
                       US$ / lb

                                  3.00

                                  2.75
                                         Normalised on FY03 Assumptions:
                                         LME $3.44    US$/A$ 0.584      Oil A$301/t      Coal A$60/t
                                         LMB $7.34    Insurance A$5.7m   Naphtha A$734/t
                                  2.50
                                                FY00               FY01                 FY02            FY03
SSM SA Fund Manager Presentation                         Site Cash Cost of Production after Cobalt Credits
Page 11 June 2003
                                                         Linear (Site Cash Cost of Production after Cobalt Credits)
YER nickel project benchmarks well and enhances the
                              competitiveness of Yabulu Central Refinery
                           3.50

                           3.00
                                                                                                                       Higher capex has eroded
US$/lb (C3 Costs 2005)

                           2.50                                                                                              C3 position

                           2.00

                                                                                                                                                                                                  Inco Sudbury
                                                                                                                                                 SLN Expaned
                                          By-product Ni

                                                                                            Voisey's Bay
                                                                        Mt Keith Expanded

                                                                                                                 Yabulu + YER

                                                                                                                                                                                                                                            Murrin Murrin
                           1.50

                                                                                                                                                                                                                      Yabulu

                                                                                                                                                                                                                               Pamco
                                                                                                                                  PT Inco
                                                          CMSA

                                                                                                                                                                   Goro
                                                                 YER

                           1.00

                           0.50

                           0.00
                                      0                                200                                                       400                                      600              800                                    1000                         1200
                                                                                                                                                               Nickel (ktpa)
                         US$/lb
                                                                                                                                                                                                                                      Feasibility
                         18.00
                                                                                                                                                                                                                                    study estimate
                         16.00
                                                                                                                                                                                                                                   excluding power
                                                                                                                                            Prefeasibility study                                                                        plant.
                         14.00                                                                                                                  estimate.
                         12.00
                                                                                                             YER
                         10.00             Feasibility study capex
                          8.00
                                           estimate to concentrate
                                                     only.                                                                RNO
                          6.00

                          4.00

                          2.00

                          0.00     Voisey's Bay                                                                                                                                          Murrin
                                                                                                                                Koniambo                       Cawse            Bulong                           Lomo de               PT Inco              Goro
                                                                 CMSA                                      YER
                                   Mine & Conc                                                                                                                                           Murrin                   Niquel
                                                                                                                                             Greenfield & Brownfield Capacity per lb
                                 SSM SA Fund Manager Presentation                                                                               (excludes working capital & inflation)
                                 Page 12 June 2003
The FeCr industry has high internal rivalry, low barriers to
  entry, but growth is strong and there is no substitute, except for
  scrap
                         Low capital cost per tonne FeCr capacity
                                           Barriers to Entry

                                                  LOW
                                                                   Depends upon SS cycle
SA to remain ore-long                                               and scrap availability

                                                Industry
  Supplier power                                                        Buyer power
                                                 rivalry
           HIGH                                   HIGH                 HIGH/CYCLICAL

                                               Threat of
                                              substitution
                                                  LOW
  SSM SA Fund Manager Presentation   No substitute for Cr, but scrap cyclical
  Page 13 June 2003
Ferrochrome demand growth outlook is robust – supply side is
       thus the issue
 14,000                                                                                                                                50,000
                     Ferrochrome Demand (LHS)
                     Stainless Steel Production (RHS)                                                                                  45,000
 12,000           •Stainless growth 2005 – 2020: assumed 5% per annum
                  •Ferrochrome demand = Stainless + other uses consumption                                                             40,000
                  •Growth rate of secondary chrome units decline from 2005 onwards
 10,000                                                                                                                                35,000

                                                                                                                                       30,000
  8,000

(kt)                                                                                                                                   25,000 (kt)

  6,000
                                                                                                                                       20,000

  4,000                                                                                                                                15,000

                                                                  1990-        1995-          2000-          2005-      2010-
                                                                                                                                       10,000
                             Grow th Rates                        1995         2000           2005           2010       2020
  2,000                      Total Ferrochrome demand
                             growth (%)                           4.7%         3.0%           4.0%           4.7%       5.2%
                             No. of standard 120 kt
                                                                                                                                       5,000
                             furnaces required per
                             annum                                    1.3        1.0           1.6            2.4         3.8
       0                                                                                                                               0
           1990

                   1992

                          1994

                                 1996

                                          1998

                                                 2000

                                                        2002

                                                               2004

                                                                        2006

                                                                               2008

                                                                                       2010

                                                                                               2012

                                                                                                      2014

                                                                                                                2016

                                                                                                                       2018

                                                                                                                                2020
       SSM SA Fund Manager Presentation
       Page 14 June 2003
South Africa dominates the primary FeCr sector and will have
      the major share of future expansions
                                                       Kazakhstan
World Chrome Ore Reserves
                   Zimbabwe
                                               India
                                                           7%     Finland
                                                1%                  1% Other
                          19%                                             2%

        South Africa
           70%

                                   Asia      Other
                                   12%        8%              Samancor
World Primary Chrome        Zimbabwe
                                                                16%
Supply                         7%
                                                                               Xstrata
                                                                                20%

                                                                                ASA
                                                                                 1%
                                 Scandinavia                   Hernic   Feralloys
                                       9%    Kazchrome           5%        5%
      SSM SA FundSource:
                  Manager Presentation
                           Samancor                    SA Chrome
                                                15%
      Page 15 June 2003                                   1%
Ferrochrome falling price trend is a continuing challenge to the
  industry
      USc/lb (Real)
160
            CAGR Price (80 - 00) = -3.24%                                   Largest risk s to cost
140                                                                         •Reductants
                                                                            •Electricity
120

100

 80

 60

 40             CAGR Cost (80 - 00) = -4.3%

 20
 80

                              85

                                                  90

                                                                       95

                                                                                            00
19

                            19

                                                19

                                                                      19

                                                                                           20
  SSM SA Fund Manager Presentation
  Page 16 June 2003                  Source: CRU, Samancor Analysis
South Africa has failed to create industry discipline for FeCr
       growth, and has exported most of the value of its dominant
       supplier position
           Index SA production and Revenue (1996-2002)                            ‰ SA Accounted for the 100%
                                                                                    of net increase in FeCr world
              Revenue in real US$ based on CRU US Import list price – 50-55%
180%
                                                                                    capacity since 1995 (1.53Mt)
                  SA FeCr Production                                                 ™Xstrata 620 kt
160%
                                                                                     ™ Hernic 260 kt - new entrant
                  SA FeCr Revenue
140%                                                                                 ™ SA Chrome 230 kt – new entran
                                                                                     ™ Assmang 200 kt
120%                                                                                 ™ Samancor 160 kt
                                                                                     ™ ASA 60 kt – new entrant
100%
         CAGR
         Production + 6.6%
         Revenue -2.0%
80%                                                                              ‰ SA has been the price setter in
                                                                                   the industry in the past 7 years
60%
        1996          1997       1998     1999      2000       2001       2002
                                                                                 ‰ But the total revenue to SA
                                                                                   industry declined in real terms
                                                                                   since 1996
       SSM SA Fund Manager Presentation
       Page 17 June 2003
BEE and the Ferrochrome business
                                                                                                              6000                                                               700

• The historic trend in SA capacity growth will                                                               5500
                                                                                                                                                                                 600
                                                                                                                                                                                        Capacity
  continue. Entry barriers will be lower, as                                                                                                                                     500
                                                                                                                                                                                        additions

  producers will not be able to retain unutilised                                                             5000
                                                                                                                                                                                 400    Demand

                                                                                                       (kt)
  resources.                                                                                                  4500
                                                                                                                                                                                 300
                                                                                                                                                                                        Supply

• However, costs will rise - Rand, reductant                                                                                                                                     200
                                                                                                              4000
  costs, increased electricity prices, social                                                                                                                                    100

  obligations for South African producers.                                                                    3500
                                                                                                                     1999   2000   2001    2002     2003      2004     2005
                                                                                                                                                                                 0

                                                                                            Capacity additions               40    220      260     348       482          336
• Will HDSA participation in FeCr Smelters be                                               Demand                   4530   4599   4409    4717     5011      5076     5374

  profitable?                                                                               Supply                   4622   4918   4040    4350     4976      5458     5794

  Hence HSDA business focus will likely center                                                                          SA Project IRR ~ 12.5% Real

                                                    Cr Realized price CIF US c/lb
  on:                                                                               38

                                                                                    36

                                                                                    34
       • Procurement                                                                32

                                                                                    30

       • Mining and ore preparation                                                 28

                                                                                    26

       • Community development
                                                                                    24

                                                                                    22

                                                                                    20

       • New smelting where there is a genuine                                       0.08        0.1             0.12       0.14         0.16          0.18
                                                                                                                                 Electricity Price R c/kWh
                                                                                                                              8 R:US$ 9 R :US$ 10 R:US$
                                                                                                                                                                     0.2         0.22     0.24

         low cost position
  SSM SA Fund Manager Presentation
  Page 18 June 2003
Samancor Chrome (60% Ownership) : a Turnaround Asset

                                                    PRODUCTION FACILITIES
                                                        SOUTH AFRICA
                                                                                                                                                                                    !

                                                                                                                                                                            !
                                                                                                                                                            !                                       !

                                                                                                                        WCM                         !

                                                                                                        !
                                                                                                                        !                       !                             Tubatse (incl ECM)
                                                                                                                                                                                            !

                                                                                                                                                                             MFC/MTC
                                                                                                                                !           !
                                                                                                                                    ! !
                                                                                                                                                                        !

                                                                                                                                        !
                                                                                                                                                                    !

                                                                                                                                                                            Ferrometals/IC3
                                                                                            !                                                                                           !

                                                                                !                                                                       !
                                                                                                                        !
                                                                                                                                                                                        !
                                                                                                                !

                                                                                                                                                        !                                               !
                                                                !                                                                                                                                           !
                     !
                                                                                                !

                                                !
                                                                                                                    !

                                                                                                            !
                                                                                                                                                                                !               !

                                                                                                                                                                                                                Chrome Ore
                            !

                                                        !
                                                                                    !
                                                                                                    !

                                    !

                                                    !
                                                                                                                                                                !
                                                                                                                                                                                                                Ferrochrome
                                                                                                                    !

                                                                                        !
                                                            !               !

                                !
                                                                                                                                    !
                                                                        !                                                   !

                                            !

                                        !

                                        !                           !

                                                Reserves : 40Mt @ 42.4% Cr
                                                Resources : 570Mt @ 43.3% Cr
                                                NB based on 38% Cr cut-off
SSM SA Fund Manager Presentation
Page 19 June 2003
Restructuring of Chrome Division by a 3 Horizon Strategy

                                                                                     Reposition in Future
                                             Optimise value chain                    Industry Context
                                             through prudent                         •Understand emerging industry
                                                                                     dynamics.
Manufacturing mindset to                     investment                              •Understand SA Government
                                             •Understand future customer             approach to FeCr industry.
reposition chrome at the bottom              requirements.                           •Understand new product
of the cost curve                            •Implementing high IRR capacity         requirements in advance of the
                                             creep projects at the works.            rest of the producers by working
• Zero harm                                  •Rationalise the mines with the value   with customers.
• People lynchpin everything.                chain as the driver.
• Eliminate waste.
• ETG, furnace and mine stability,
Procurement & contractor management,
maintenance, GSAP&MES, Six Sigma.
• Site specific cost reductions.

                              •Increasing business maturity
                              •Improving market / production interface

      SSM SA Fund Manager Presentation
      Page 20 June 2003
Variable cost drivers + results against benchmark
show positive trends.
             Cost Driver                   FY00              FY01         FY02    FY03
             SEC (k/Wh/ton)                 3.98              4.08         3.79   3.90
             Ore (t/t)                      2.43              2.58         2.54   2.49
             Reductant (t/t)                0.64              0.65         0.63   0.64
             Cr Recovery (%)               79.24             72.23         74.1   76.51
             Cr content (%)                 51.3              51.1         50.9   50.9

                                   Smelter Cost (R/t Real 2000)
                1700

                1600

                1500

                1400

                1300
                              FY00        FY01              FY02         FY03
SSM SA Fund Manager Presentation                 Samancor          Benchmark
Page 21 June 2003
Supply and demand balance – Samancor production
             1400                                                                                                                900
                              Cumulative Balance (Right-hand scale)            Production               Demand                   800
             1300                                                                                                                700
                                                                                                                                 600
             1200
                                                                                                                                 500

                                                                                                                                        (000’t)
                                                                                                                                 400
   (000’t)

             1100
                                                                                                                                 300
                                                                                             Forecast
                                                                                                                                 200
             1000
                                                                                                                                 100

              900                                                                                                                0

                                                                                                                                 -100
              800                                                                                                                -200
                    Q1   Q2   Q3    Q4    Q1    Q2   Q3   Q4   Q1   Q2   Q3   Q4   Q1   Q2     Q3       Q4   Q1   Q2   Q3   Q4
                    2000 2000 2000 2000 2001 2001 2001 2001 2002 2002 2002 2002 2003 2003 2003 2003 2004 2004 2004 2004
             270
                                                Samancor Production
             250

             230
(000’t)

             210

             190

             170

             150
             SSM SA Fund Manager Presentation
             Page 22 June 2003
Conclusion
      •     Stainless steel – the highest growth major use of metals – provides a
            strong market for primary FeCr and Nickel
      •     A looming nickel supply gap is becoming apparent, a result of high
            entry barriers and inadequate returns on capital in 1990s
      •     SA will provide new FeCr capacity to meet the strong, but volatile,
            demand growth
      •     Uncontrolled FeCr capacity growth in SA has led, and may continue to
            lead, to significant value transfer to overseas customers.
      •     For Samancor Chrome, cost-efficiency is key, as input costs in SA are
            likely to increase
      •     BHP Billiton is a mature nickel producer, customer-focused with
            options for further capital-efficient growth

SSM SA Fund Manager Presentation
Page 23 June 2003
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