National Resources Insights - final draft

NATIONAL
RESOURCES
INSIGHTS

2017

ferrierhodgson.com

CONTENTS Page
5
Section 6
01 WELCOME 10
02 MINING AND MINING SERVICES 12
03 IRON ORE 16
04 LNG/CSG 18
05 COAL 20
06 COPPER 24
07 GOLD 26
08 NICKEL 28
09 ZINC 30
10 ALUMINIUM 31
11 LITHIUM 31
12 HOW FERRIER HODGSON CAN HELP 33
13 SPECIFIC CASE STUDIES
14 OUR TEAM

2 Ferrier Hodgson National Resources Insight 2017 Ferrier Hodgson National Resources Insight 2017 3

WELCOME

National Resources Insights 2017

In this publication we reflect on the causes of the turbulence in the national resources
sector from 2016 to date. We review the challenges and issues of each major Australian
commodity and consider the outlook for you and your clients.
Much of the uncertainty in the market has come from fluctuating commodity prices,
slower demand growth and reduced miner cash flow, all of which has led to lower
exploration spending. This was further exacerbated by unclear regulation on royalties,
several States and Territories introducing moratoriums on gas fracking and an increased
amount of environmental campaigning against coal. Global political, financial and
jurisdictional changes to mining legislation have also impacted the sector.
While cash flows have reduced overall it is positive to see that diversified miners and gold
producers have been reporting considerably stronger operating cash flows driven by an
uptick in bulk commodity prices and the success of cost reduction strategies. Cash flow
growth has been largely directed to debt reduction and a modest increase in rather than
slowing exploration and investment. Some new mines are being developed although they
will primarily replace expected exhaustion of existing resources.
The mining services sector continues to feel the impact of miners’ reduced capex
spend, cautious investment decisions and reduced operational spending. Consolidation
strategies focusing on M&A activity and restructuring operations have been put in place
to ensure financial stability.
Ferrier Hodgson have been advising companies, financiers and other stakeholders in the
mining and mining services sector on business strategy, restructuring, turnaround and
financial performance for over 40 years.
We hope you find this publication resourceful.

Ferrier Hodgson advises Signature to go here. Signature to go here. Signature to go here.
companies, financiers and
other stakeholders in the James Stewart Will Colwell Martin Jones
mining and mining services Practice Leader, Melbourne Practice Leader, Brisbane Practice Leader, Perth
sector on business strategy and
financial performance, and has Signature to go here. Signature to go here. Signature to go here.
deep experience in the sector
for over 40 years. Peter Gothard Martin Lewis Peter McCluskey
Practice Leader, Sydney Practice Leader, Adelaide National Resources Practice
4 Ferrier Hodgson National Resources Insight 2017 Leader, Melbourne

Ferrier Hodgson National Resources Insight 2017 5

02 MINING AND MINING SERVICES The 2017 federal budget A look at the likelihood of major
demonstrated the importance of projects proceeding
Exploration Declines the mining and resources sector
to Australia’s economic growth Our 2016 edition highlighted the decline in
Trends of ‘going lean’ and ‘preparing for change’, through a clear focus on efficiency, Australia’s investment pipeline since 2012. With the
continued to impact many miner’s exploration regulation in the regions and total value of committed projects falling a further
budgets. renewables. 13 percent or AUD26 bn over the last 12 months,
Most key commodity prices are not forecast to nothing has changed.
increase or decrease significantly over the next Government commitment to the sector With only seven Australian projects (two coal, three
12-24 months, albeit there may be some volatility gas/oil and two copper/gold) progressing to the
over short periods. For example, iron ore recovered The key initiatives are: committed phase in 2016, billions of dollars of
to over USD90 a tonne during March 2017 only to - AUD19.6 m for the Coalition of Australian investment will be needed over the next 10 years if
quickly drop below USD70 a tonne in April 2017 and Governments Gas Market Reform Group to develop the mining industry is to maintain its status quo, for
had stabilized near USD60 in October 2017. strategies to improve gas market efficiency and example:
Resources and energy exploration expenditure transparency. - Rio Tinto has identified that to overcome mine
declined 32 percent from AUD4.1 bn to AUD2.8 bn - AUD30.4 m to undertake scientific base-line depletion, 50mt per annum of iron ore capacity is
in Australia in 2016 and is a huge 63 percent drop measurements and assess any potential impacts on required every five years.
from the 2012 peak of AUD7.6 bn. waterways and acquirers from unconventional gas - BHP’s Yandi mine, which produced 30 percent of
Copper and gold were the only two commodities projects to better inform safe gas development BPH’s iron ore, is expected to be replaced by the
to increase expenditure on exploration from 2015 - AUD146.6 m for building a solar thermal plant beginning of 2020.
to 2016 with copper increasing 12 percent from at Port Augusta and for a bilateral Asset Recycling - Fortescue Metals announced in July 2016
AUD121 m in 2015 to AUD136 m in 2016 and gold agreement targeting investment in energy that planning is underway to replace its Firetail
increasing 29 percent from AUD476 m in 2015 infrastructure. mine within five years, expecting to spend up to
to AUD618 m in 2016. The largest decreases over It was disappointing that the budget did not USD1.5bn between 2019 and 2021.
the period were in coal, petroleum and diamonds include: Numerous projects have been stuck at the feasibility
declining 46 percent, 48 percent and 63 percent - An announcement to extend the AUD100 m stage for at least three years and are unlikely to
respectively. Exploration Development Incentive Program progress further in the current environment. If they
Overall global exploration spending has dropped 72 beyond 30 June 2017. The program was established are removed from the pipeline, the AUD158 bn of
percent between 2015-2016. to provide junior miners with incentives for projects at the feasibility stage may realistically
greenfield exploration expenditure. be only AUD42 bn. It is unlikely that these stalled
The outlook for Australia - Volatile - Any new measures or incentives to attract projects will progress at their current level of
commodity prices although attractive renewed investment in mining exploration to assist investment although they may progress if options
for Investors in redressing the significant decline in this area over emerge that require a lower capital investment.
the past five years. The Office of the Chief Economist (OCE) considers
The 2016 Fraser Institute Survey of mining the outlook for resources and energy investment
companies placed Western Australia, South remains subdued over the short to medium term.
Australia, Northern Territory and Queensland in Investment will be focused on capacity replacement
the global first quartile for mineral investment projects that will typically use existing proprietary
attractiveness. The other Australian states, notably rail and port infrastructure and be funded internally.
New South Wales, were placed in the third quartile Only the most competitive projects will proceed.
principally due to regulatory constraints.
The 2017 Federal Budget seeks to address this Ferrier Hodgson National Resources Insight 2017 7
with AUD500,000 to enable the Commonwealth
and States to be more collegiate in developing
streamlined policies and accelerate development of
new gas markets.

6 Ferrier Hodgson National Resources Insight 2017

Key issues being faced Monitoring of operating costs and As part of this strategy new or existing lenders
synergies will want to see viable business plans which
Tough contractual terms continue demonstrate that the debt can be repaid and hence
Contractors remain conscious of overhead and all of the issues above need to be considered to
We expect that current market conditions for mining operating costs and are seeking to bottom out these make a business plan worth considering.
service contractors will remain tough for the near costs. As we saw in the Emeco merger, the company
term and certainly into 2018. has sought to reduce costs by taking advantage Despite higher commodity prices,
To win work, contractors are providing equipment of various synergies such as consolidating labour mining services missed the party
to clients with no minimum hours’ usage and workforce, sharing technology and combining
standby charges, preferring to simply get logistics operations. Close scrutiny of contract Despite receiving extra cash in 2016 due to higher
equipment on site to earn form of revenue to meet pricing and management of contracts will also commodity prices, particularly in the thermal and
their ongoing finance commitments. Equipment be critical to ensure that the already record low coking coal sectors, miners focused on reduction of
hire in many cases remains on short-term contracts margins are achieved. Given present market debt facilities, continued cost cutting, and investing
and new equipment manufacturers are feeling the conditions, we also expect that major financiers will in automated and semi-automated processes rather
brunt of the mining investment downturn with the continue to work with clients in financial distress to than expanding existing contracts with mining
significant decline in new equipment purchases. engineer strategies to improve working capital and services.
The continued use of the ‘termination for to exit their exposure through workout situations
convenience’ clause may see a pause on investment over time, practically where such strategies have a A look forward - driving automation for
in new plant and equipment. Nevertheless with realistic chance of being successfully achieved. mining operations
low utilisation rates, capacity exists to take on
considerable demand growth before investment Some mining service providers are The move into automated and semi-automated
in new plant is necessary. This is tempered by the growing processes for mines continued in 2016 and
continual change in cost pressures which will dictate transportation efficiency will continue to be a key
that the operating costs and environment impact The recent and continuing drive by miners to focus. FMG, after some teething problems reported
is minimised, which generally precludes older increase their operating cost efficiency has in late 2016 that it was achieving 20 percent
equipment. provided a source of growth for services that enable productivity improvement from its autonomous
2017 has witnessed Caterpillar Inc, the world’s larger wider cost reduction. Equipment automation, trucks at its Solomon operations. Usage of
maker of construction and mining equipment, remote control, machine condition monitoring autonomous trains has also been explored by Rio
halting a four year sales decline as global machine and advanced mine scheduling are examples of Tinto with questions over whether they are viable
sales rose by one percent in the three months to productivity enabling investments that experienced for long haulage looking to dictate whether they
March 2017. However, construction sales in Asia rapid uptake. Operational data, software, IT will be rolled out more widely.
have driven this growth and this may continue given infrastructure and data analytics providers are Greater drilling accuracy will also be aided by the
announcements in regard to Silk Road development growing substantially, while the traditional labour introduction of autonomous blasthole drilling which
plan announced by China and materials mining service companies see FMG said it aims to have in place by the end of 2017.
demand for their products stagnate at best. It will provide greater accuracy and speed in the
Client payment terms still extended As these services become more prevalent, the drilling process. BHP are using blasthole drilling
dynamics of mining services will change to a more and Roy Hill are considering its implementation.
Miners and in turn mining services contractors skilled workforce that can maintain the equipment. While costs remain the same, drilling hours have
have adjusted their working capital forecasts and improved from 8.5 hours to 11.5 hours in a 12-hour
debt obligations to meet the new cycle of receipts Restructuring debt shift. Increased blasthole accuracy and improved
from customers. Any disputes or uncertainties on ore fragmentation can deliver improvements for
invoicing will further delay the payment process There are a number of contractors in the market loading, hauling and processing.
and in some cases may be utilised as a stall tactic who have continued to seek to restructure and / or
to gain greater credit terms. It is not uncommon refinance their debt obligations. For example, Boart Technology is well advanced
for credit terms to be pushed out to 120 days Longyear’s debt restructure in September 2017. to automise excavators and
from date of invoice. Evidence of the gap between dozers too, the development of
mining companies’ public announcements of earlier automised equipment will benefit
payment terms and actual payments is yet to be regional Australia.
measured.
Ferrier Hodgson National Resources Insight 2017 9
8 Ferrier Hodgson National Resources Insight 2017

03 IRON ORE Long term analysts view on
price is falling.

In December 2013 they stood
at USD120 per tonne. By
December 2021 they are set to
fall to under USD60

The global market - competition is fierce Earlier this year, New Zealand billionaires the Todd Asia - China imports slide down Exports are
family struck a deal with the WA Government forecast to increase
Australia and Brazil’s are projected to increase their to develop a new AUD5 bn plus Pilbara iron ore the volume of Chinese iron ore imports have by 8.3 percent in
share of global iron ore exports, from a combined project, the Balla Balla deposit. It is estimated recently been turbulent. They reached the highest 2018.
79 percent in 2016 to 84 percent by 2022 at the that this would be a 6 – 10mt a year iron ore point on record in 2016 at 1.04bt, but fell to just
expense of high cost, low grade producers such as mine. An MOU was also signed with a China State over a third of that tonnage (353.1mt) in the first Ore quality discount widens
China and Iran. Construction Engineering Corporation in March four months of 2017. China is not projected to be a
2017 for construction of the project with a final substantial source of import demand growth in the Mines producing lower quality product of typically
Australia - rising exports and production investment decision. outlook period, with imports projected to remain 57-58 percent iron missed a significant proportion
steady at 1.1bt until 2022. of the peak in prices for the benchmark 62 percent
Australia continues to be a key producer of low South America – Brazil’s set for an Inventories at Chinese ports have been increasing iron grade. China’s regulatory pressure on high
cost, high grade iron ore and a major player in the export increase as doubts persist over the slowing Chinese emission, low efficiency steel producers and its
global iron ore export market as its contribution Government stimulus, leading to weaker demand. strategic program to close 150mt per annum of this
rose to 809mt in 2016, it is forecast to increase by Underpinning Brazil’s growth is Vale’s S11D project Along with robust supplies, these factors have class of steel capacity, reduced the demand of low
8.3 percent and three percent in 2017 and 2018 at the Carajás complex, which shipped its first ore in begun to take a toll on iron ore prices. A spike in grade buyers. The spike in coking coal prices also
respectively, before growing at a slower pace to January 2017 and will ramp up annual production to iron ore prices, like that in February 2017, could increased the demand for higher grade iron ores
reach 917mt in 2022 (57 percent of seaborne trade). 90mt by 2020. This should bring Vale’s C1 cash costs incentivise domestic iron ore mines to restart as a method of minimising total raw material costs.
The future is bright as there will be an increase in to below USD10 a tonne, further assisted by the production in China. Conversely, increasingly The traditional price spread between 58 percent and
local production from the iron ore majors including ongoing use of the large 400,000 deadweight tonne stringent environmental regulations could further 62 percent iron grades widened considerably with
BHP Billiton, Rio Tinto and FMG. BHP Billiton is Valemax bulk carriers. limit Chinese domestic production of iron ore. industry forecaster Wood Mackenzie expecting the
expected to ramp up production to 290mt by 2018– A change in the pace of mine closures could wider quality spread to remain.
19, supported by productivity improvements and Anglo American’s 26.5mt Minas-Rio mine in Brazil substantially impact global seaborne trade, and
additional capacity at the Jimblebar mining hub. will also likely ramp up to full capacity by 2020 and consequently has implications for the iron ore price Looking forward to costing and tech –
Rio Tinto will also increase production through the 31mt Samarco mine, which ceased operations and Australia’s exports. optimisation is key
projects such as the 10mt Silvergrass mine, and in November 2015 (following a catastrophic tailings
the likely commissioning of the 70mt Koodaideri. dam burst), is also likely to restart during the next M&A activity In October 2017 iron ore was at USD60 a tonne,
Rio Tinto’s proposed Auto Haul program will also five-year period. seaborne iron ore prices are down below the level
aid production, as it will deliver increased system 2016 proved to be a very challenging year for the they touched in October 2016. This price has the
capacity and lower costs per tonne mined over the resources sector and particularly iron ore. This was potential to decline over the coming year due to
next few years characterised by volatile prices, slow growth and high port stocks in China combined with a supply
uncertainty. These challenging circumstances were surge from Vale’s S11D, Roy Hill and Rio Tinto’s
reflected in the low level of deal activity. Pilbara projects. BHP Billiton’s projects demand
One of the notable transactions was the Balla growth is expected to be tepid, absorbing little of
Balla Project (Pilbara, WA) in August 2016, TIO the supply expansion.
(NZ) Ltd, a subsidiary of the New Zealand Family The vast majority of Australia’s iron ore mines are
company Todd Corporation, which closed an offer low-cost and high-quality, with 90 percent of mines
for approximately 52.6 percent of the outstanding expected to remain viable at prices below USD50
shares in Flinders Mines Ltd. The offer of AUD.025 a tonne in 2022. Continuing mine optimisation
per share valued the deal at approximately AUD38 and productivity measures are required to stay
m. While 2017 looked promising it is feared there competitive, however smaller miners must also
may be little deal activity, as in 2016. The Mba Delta apply new technology and change to retain their
Ironsand Project (Fiji) is also in the pipeline following cost competitiveness.
an announcement by Waratah International (Asia)
Limited in March 2017 that it plans to acquire Amex
Resources Limited for AUD89 m.

10 Ferrier Hodgson National Resources Insight 2017 Ferrier Hodgson National Resources Insight 2017 11

04 GAS AND LNG The growing global supply surplus has meant that The Eastern Australia energy crisis
the focus of the industry has now switched from
Australia is forecast finding the next major LNG project to ensuring With Australia being the second biggest exporter
to see its LNG that current projects remain viable. While large of LNG in the world, it is surprising there is talk of
exports increase amounts of Australia’s exports are under long term an energy crisis, particularly for the eastern states
from 37mt in 2015 to oil price indexed contracts, many include clauses of Australia. The Australian Energy Market Operator
77mt in 2022 that allow buyers to reduce purchases to minimum has flagged that rolling power outages could occur
levels. If spot prices continue to diverge from the oil in eastern Australia as early as summer if domestic
indexed price, it is likely that the capacity utilisation supply isn’t changed. Future energy prices have
of LNG projects in Australia may decline or planned almost doubled compared to 2016 and Queensland
expansions are deferred. recorded the highest power prices for the March
The oversupply could have particular impact on 2017 quarter.
higher cost Queensland LNG projects. These projects The causes of the energy crisis are seen as:
rely heavily on Coal Seam Gas (CSG) for their feed - Closure of coal fired ‘base load’ electricity
gas, which require hundreds of new wells to be generators in South Australia and Victoria
drilled each year. This puts them higher on the cost - Strain on eastern gas market as domestic supplies
curve than Australia’s other LNG ventures which are diverted to the export market - Santos is buying
use conventional sources for feed gas, such as the third party gas from the domestic market to use
Gorgon Project offshore of Western Australia. Coal at its export facility in Gladstone. Wood Mackenzie
Seam LNG is less robust than conventional LNG has forecast that the project will rely on third party
plant economics, as it has no by-product revenue gas for almost 40 percent of its feedstock for the
stream from condensate or LPG. next five years, taking away 20 percent of the gas
expected to be available for the eastern market for
the domestic market.

Prices set to rise The Australian view In relation to the Eastern Australia energy crisis, impact on Australian
industry operational and future investment decisions includes:
Oil prices were expected to rise steadily throughout In Australia, LNG, Gas and Petroleum project
2017, as the OPEC agreement seeks to reduce investment significantly outweighed that of any - In March 2017 Hardware manufacturer Alchin Long Group in
production by 1.8 m barrels a day. However, the other sector. Sydney’s west accepted a near-doubling of its electricity price from
August 2017 US Energy Information Administration Australia is forecast to see its LNG exports increase AUD55.30 per megawatt-hour to AUD109.70.
energy review does not record any reduced from 37mt in 2015 to 77mt in 2022. This is the result
production so far in 2017. of recently completed projects such as Santos’s - Glencore said in May 2017 it was is reconsidering AUD50 m
The price of oil has been on a roller coaster ride in APLNG venture in Gladstone and Chevron’s Gorgon investment at its Mount Isa copper smelter. It may also stop
the nine months of 2017 and was around USD54/bbl project on Barrow Island in Western Australia. importing to the Townsville copper plant.
in October. Further developments including the Wheastone,
Most Australian liquefied natural gas (LNG) Icyths and Prelude projects are expected to come - In June 2017 Coogee Chemicals announced it will ship a methanol
continues to be sold to key North Eastern Asian online before 2019. plant in Melbourne’s west to the United States for reassembly due to
markets under contracts as long as 15 to 25 years. While Australia does not provide much LNG to a more certain gas supply.
Asian LNG contract prices declined in line with the Europe, their import levels are still an important
oil price during 2016, hitting record lows in mid-year consideration. - In June 2017 the Adelaide recycling business Plastics Granulating
but then recovered to around USD7.2 per gigajoule If European LNG imports do not grow as strongly Services reported it has been forced to close due to power bill
in early 2017. as predicted, US and Middle Eastern LNG may be increases from AUD80,000 to AUD180,000, resulting in a loss of 35
However, the story is not so positive for the longer redirected towards the Asian market, bringing jobs.
term spot price. As the global LNG supply outstrips stronger competition and lower spot prices to
demand, prices are expected to reach a low of USD4 Australia. Globally the biggest increase in the export - In June the Australian Government implemented the Australian
per gigajoule in 2019 at the peak of a supply surplus. market is set to come from the United States. Domestic Gas Security Mechanism, which has the objective of
ensuring sufficient supply of natural gas for Australian domestic
12 Ferrier Hodgson National Resources Insight 2017 needs.

Ferrier Hodgson National Resources Insight 2017 13

The price of oil and gas has been
on a rollercoaster in 2017. In
September 2017 the price was
around USD 54/bbl.

Policy failures of successive state governments in Looking forward – increased energy Asia drives up global LNG demand With Australia being the second
Eastern Australia. Victoria has a moratorium on the prices and liquidity biggest exporter of LNG in the
exploration of onshore gas until at least 2020 while The volume of global LNG imports is expected world, it is surprising there
the New South Wales government has actively Energy prices for Australia’s eastern states are to increase by around six percent per year is talk of an energy crisis,
curtailed many new developments forecast to increase significantly over the next few until 2022. This growth will be driven by falling particularly for the eastern
years. AIG estimates the impact of increased energy domestic production in Europe as well as growing
The US view prices on the Australian economy to be AUD10-12 consumption in India and other emerging Asian states of Australia
bn over the period. The mining and manufacturing countries. The biggest increase will come from
US gas has traditionally been earmarked for its large sectors are expected to be largest hit as they China, with consumption of gas projected to
domestic market. However, the shale oil and gas represent 50 percent of business electricity demand. increase by 65 percent to 330bn cubic metres.
revolution has seen a surplus created and exports US LNG is unique in that almost all exports have While Japan is by far the largest importer of LNG, it
begin to grow. Wood Mackenzie forecast US LNG no destination restrictions, unlike Australia’s long will look to reduce their imports by 2.5 percent per
exports in 2017 of 11mt, which is up from the 4 mt term contracts with Asian customers. This could year for the next five years. The country’s nuclear
in 2016. see a large increase in the liquidity of LNG markets, reactors are gradually being brought back online
Four import terminals are being converted into moving pricing away from long term contracts to after new safety regulations were introduced
export facilities, enabling the total North American spot markets, but only as those contracts come to following the 2011 Fukushima disaster. The demand
export capacity to increase to 60mt by 2022. This the end of their term. from South Korea is also expected to see limited
is even before President Trump’s plan to remove growth as it looks to introduce more coal and
environmental protections put in place by the nuclear power to its energy mix.
Obama administration to further take advantage
of an estimated USD50 trillion in untapped shale,
oil and natural gas reserves. President Trump has
openly stated that he seeks to reverse the trade
deficit with China, and exporting LNG is seen as a
means to address this.
Australia’s proximity to Asia, relative to the US, has
historically allowed for cheaper transportation costs.
However, the expansion of the Panama Canal has
opened up opportunities for the US shale industry.
Previously, only six percent of the global fleet of
LNG tankers were able to pass through the canal.
The increased width and depth of the shipping
lanes means that this figure has now increased to
90 percent, reducing transport times by 11 days
and costs by a third to key Northern Asian markets.
These markets account for around two thirds of the
global LNG export market.

14 15

05 COAL

Coal is here to stay Global coking production and consumption is Asia – the spotlight on ASEAN countries The greater focus on energy efficiency was
forecast to increase over the period 2016 to 2019 demonstrated on 21 April 2017 in England as
In 2016 Australian thermal coal production from 1.08bt to 1.13bt, in line with forecast global Demand for thermal coal from China and India is the country didn’t use any coal for electricity
remained steady at 202mt, the same as 2015, while steel consumption. There is discussion of a general forecast to decline on average four percent and two generated over a 24-hour period, the first time
coking coal production was down four percent to change from quarterly contract price to a spot or percent per year over the period 2017 to 2019 as this has happened since the industrial revolution.
231mt in 2016. index price that is similar to the iron ore market. they want to rely on local production. Both countries While energy efficiency is driving down power
While a number of mines closed in 2015 and early Global trade of thermal coal is forecast to contract still require imports of high quality thermal coal consumption this is balanced out with the
2016, this was offset by increasing production at on average 1.5 percent per year from 1.03bt to as they have insufficient economic local supply to increasing power consumption of large data entities
some mines and restarting other mines that had 986mt in 2019. meet the requirements from new coal power plants such as Google.
previously been put on care and maintenance, in that use super-critical technology (and higher
response to the sharp price increase in Q4 2016. quality coal). Significant capital has been invested in M&A: activity hampered by a lack of
Stronger prices for both thermal and coking coal these new coal fired power plants with thermal coal lenders lending
in 2016 and 2017 underpinned this change, with needed for the lifespan of these stations.
miners taking the opportunity to become cash flow In early 2017 thermal coal import demand was There was a recurring trend in 2016 of assets being
positive. expected to be driven by the ASEAN and South taken to the market by Rio Tinto and Anglo with
Korea markets. However, since the May 2017 little buyer interest. Anglo withdrew the assets in
Australian production set to vary South Korean elections, the Prime Minister has light of the peaking coal prices.
implemented his cleaner air policy by closing Notable coal transactions during 2016/17 were:
While the global trade of thermal coal is forecast 10 aged coal fire power stations and increasing - Rio Tinto sold its Blair Athol coal mine for
to decline nearly five percent over 2017 to 2019, taxes on coal. ASEAN countries demand has been AUD1 in July 2016. In addition, the vendors paid
production in Australia is expected to increase recast from a growth of three percent to 747mt to AUD80 million to the purchaser towards mine
one percent with exports declining one percent. remaining static at round 729mt over the period rehabilitation costs. The buyer, TerraCom said it
Global and Australian coking coal production and 2017 to 2019. plans to rehabilitate 50 hectares of previously
consumption is set to increase around five percent mined area while also trying to bring the mine back
and three percent respectively between 2017 to Europe and North America – the green into operation.
2019. focus causes decline - Anglo American announced the sale of its
Foxleigh coal mine in late August 2016. The buyer
Price fluctuation continues The domestic European and North America coal comprises a joint venture of Middlemount South,
usage is in decline as they switch fuel preference to POSCO and Nippon Steel.
Thermal coal FOB Newcastle exports hit a high of gas, nuclear and renewable energy as sources for - In June 2017 Rio Tinto outbid Glencore as it
USD100 per tonne in November 2016 which had not power generation. confirmed China backed Yancoal Australia as the
been seen since April 2012. The 2016 price peaks preferred buyer for its Australian Coal & Allied.
had not been predicted by analysts with the price These mines in Australia’s Hunter Valley region
increase being primarily driven by supply shortages have a high quality coal allying omissions fears
as Chinese authorities restricted coal mining to 276 to a certain extent. Yancoal increased its offer to
days a year. AUD2.69 bn from AUD2.45 bn, adding AUD240 m
Hard coking coal price hit a high of USD310 per in unconditional guaranteed royalty payments to a
tonne in November 2016, a level not seen since cash offer of AUD2.45 bn.
2011. Following relaxation of the Chinese supply
restrictions and recovery of Queensland mines from Ferrier Hodgson National Resources Insight 2017 17
Cyclone Debbie, by October 2017 prices dropped
back to USD96 per tonne and USD185 per tonne for
thermal and hard coking coal respectively.

Global view

Globally there were several announcements on
restarting coking coal production, which has
slowed since October 2016. The majority of restarts
were either new owners, junior miners or from
Mozambique. After years of decline USA thermal
and coking coal exports were up 58 percent for the
first quarter 2017 compared to the same period last
year.

16 Ferrier Hodgson National Resources Insight 2017

06 COPPER Australia – slow growth and interesting The top ten copper
times ahead producers are:
Production increases, prices rebound
and costs are uncertain Australia’s contribution to the increased global 1. Codelco
production was minor with its copper production in 2. Freeport
Six of the world’s top ten copper mining companies 2015-16 up 1.8 percent to 990 metallic content kilo 3. Glencore
increased output and all who reported production tonnes compared to 2014-15 of 972 metallic content 4. BHP Billiton
costs disclosed a significant reduction in unit costs. kilo tonnes. 5. Southern Copper
In March 2017, the OCE reported that refined world New major copper projects in Australia remain at a 6. KGHM
copper production increased by seven percent to low level. Over the last two years only two projects 7. Rio Tinto
reach 20.6mt in 2016 with Peru, Indonesia, Canada have moved from the publicly announced phase 8. First Quantum
and the USA leading the increase. However, Chile, to the feasibility stage phase and only one project 9. Antofagasta
the world’s largest producer, saw a four percent has moved from the feasibility stage phase to the 10. Vale
decline. committed phase. While the start-up dates for these
Mining company, Teck reported in March 2017 projects have not been included in the OCE data, CRU and Wood Mackenzie consider the copper
that at a global demand growth of 2.1 percent, it is unlikely they will be ready to meet the forecast market to be close to balanced in 2017 and
521 kilo tonnes, of new supply is required annually supply deficiency commencing from 2019. Six forecast a sustained supply deficit beyond 2018,
through to 2025. However, but after 2019 global projects have not moved from either the publicly accompanied by price increases. The copper price
mine production is predicted to fall around 230 kilo announced (one) or the feasibility stage (five) for to increase around 24 percent in 2017 to average
tonnes per year as ore grades continue to decline around two years. USD6,054 per tonne and is predicted to come
and reserves are depleted. 2017 has been an interesting year for copper miners, from strong Chinese demand, President Trump’s
The 2016 average price of USD4,860 per tonne smelters and refiners in Queensland, where the infrastructure plan and supply disruptions in
decreased by 12 percent from USD5,502 per tonne price of power has risen 100 percent in three years Chile, Indonesia and Peru. Many analysts are still
in 2015. Prices strengthened substantially in the and is predicted to continually rise. In May 2017, predicting prices to move higher to 2019, as set out.
first half of 2017 averaging USD5,750 per tonne, and it was reported that Glencore advised the Federal
in October, it further rose to USD6,830 per tonne. and Queensland governments that it was not in a
Business intelligence company, CRU reported in position to guarantee the continued operations of
February 2017 that copper miners 2016 cash costs its smelter and refinery, instead reviewing these
have fallen for the third year due mainly to the operations annually. This serves as a warning flag
strong US dollar, low oil prices and proactive cost for production in the state and will be interesting to
cutting actions by mine owners. Notwithstanding monitor.
the improved cost position, the average 2016
copper price was weaker than 2015 therefore higher Global outlook – Demand is set to grow,
cost producers were still loss making. CRU considers can it be met?
that at the 2016 price of USD4,860 per tonne,
around 11 percent of copper miners were cash flow Global demand is expected to be driven by
negative. emerging economies, renewable energy and new
power generation, electric vehicles and equipment.
18 Ferrier Hodgson National Resources Insight 2017 World production is forecast to increase from 20.7
kilo tonnes in 2016 to 22.9 kilo tonnes in 2022,
representing around a 1.8 percent annual increase
over the period. This is below the global demand
growth discussed earlier in the publication and
therefore a supply shortfall is predicted.

Ferrier Hodgson National Resources Insight 2017 19

07 GOLD

Australia’s production at highest level America – politics played a role in 2016 was the second best year for ETFs on
demand record. Demand for gold by gold-backed ETFs and
Production reached a high of 9.3 m ounces in similar marketable securities was 531.9 tonnes,
2016. This increase was accompanied by higher Declining production in the Americas was due up 660.2 tonnes from a net short position of 128.3
AUD dollar gold prices which improved operating to lower ore grades. Production at Penasquito in tonnes in 2015. Although there will be a decrease
margins. Mexico declined by four tonnes in 2016 when ore between 2016 - 2019, this is the highest level of
The price of gold averaged AUD1,713 per ounce in grades fell from 1.08 grams a tonne to around 0.69 demand from ETFs since 2009.
2016, 12 percent higher than the previous peak set grams a tonne.
in 2011 during the commodity price boom. At the Gold has typically been a hedge against inflation London’s calling a higher gold price
end of October 2017, gold was USD1,273 per ounce. and a safe haven in times of economic uncertainty.
Whilst the closure of a number of mines is expected This was demonstrated by the three-year price The London Bullion gold price increased by eight
to reduce Australian production towards the end highs in the lead up to the 2016 US election. The percent to average USD1,248 per troy ounce in 2016.
of 2022, Australia’s gold production is projected sharp increase in demand was due to heightened Investment demand rose rapidly in the first half of
to peak before then in 2018–19, reaching 10.2 m uncertainty in the global economy leading into the 2016, on the back of political uncertainty stemming
ounces. US Federal Election, however the fourth quarter from England’s referendum on EU membership.
Exchange rates have been favourable to Australian of 2016 saw outflows following President Trump’s However, investment demand declined in the
producers shown in the divergence of price conciliatory acceptance speech and the Federal second half, in anticipation of an increase in US
between the USD and AUD $/oz. This has provided Open Market Committee’s (FOMC) interest rate rise. interest rates (later realised). The gold price fell back
a buffer to Australian producers and will remain a On an annual basis, the US dollar gold price modestly as a result and gold fabrication demand
considerable factor when assessing the viability of increased for the first time in 2016, ending a three- (for use in jewelry and technology) was subdued
Australian gold mining operations. year downtrend. The US Federal Reserve increased throughout the year.
interest rates in March, and is expected to gradually Central bank demand was the lowest since 2010
Figure 10.8: US dollar versus Australian dollar gold price raise the Fed Funds rate over 2017 to 2019, to reach with the net purchases of 383.6 tonnes, 33 percent
2,000 three percent. Rising US interest rates improve the lower than 2015, due in part to increased pressure
returns on US dollar-denominated financial assets, on foreign exchange reserves. Despite this, 2016 was
1,600 which increases the opportunity cost of holding the seventh consecutive year of net purchases by
gold, a non-interest bearing asset. Interestingly, central banks. Gold prices have recovered in 2017,
Dollars a troy ounce 1,200 demand for gold decreased across all major sectors rising to over USD1,273 per troy ounce in October,
excluding Exchange Traded Funds (ETFs). however they remain eight percent below the peak
800 of 2016.

400

0 Oct-07 Oct-09 Oct-11 Oct-13 Oct-15 Oct-17
Oct-05

Spot price (US$) Spot price (A$)

Global production is shining too and Asia – dull production with a low
competition is buoyant jewelry demand

Global supply increased in 2016 by 2.8 percent to Production declines in Asia were largely due to a
4,525 tonnes despite a fall in mine output due to 15 tonne loss from a number of Chinese operations
increased recycled supply. However, mine output fell suspended for safety and environmental reasons.
for the first time in the past eight years and was led There was also a seven year low for jewelry demand
by falls in production in both Asia and America. with rising prices for much of the year, regulatory
and fiscal hurdles in India and China’s softening
economy were key reasons for weakness in the
sector.

20 Ferrier Hodgson National Resources Insight 2017 Ferrier Hodgson National Resources Insight 2017 21

The rising price of gold in 2017 appears mostly Ferrier Hodgson National Resources Insight 2017 23
driven by geo-political concerns, investor
uncertainty, historically low real interest rates and
rising inflation. However, the current upturn in US
economic growth and rising US dollar is expected to
dampen investor interest in gold throughout 2018.

M&A activity

The value of gold transactions was down 20 percent
to USD11.1 bn in 2016, while the total number
of transactions increased 32 percent. Investment
activity has enabled mid-tiers to consolidate
their positions, reduce burdensome debt, while
improving liquidity and free cash flow.
At the forefront was Barrick Gold’s sale of its 50
percent interest in the Round Mountain mine and
100 percent of the Bald Mountain mine to Kinross
Gold Corporation for USD610 m in cash in January
2017. This marked a further step to achieving its
USD3 bn debt reduction target.
In August 2016 Evolution Mining Limited completed
a raising AUD40 m, while in September it completed
the sale of the Pajingo gold mine and surrounding
exploration tenements to Minjar Gold for an
AUD41.9 m upfront cash payment and one percent
net smelter royalty of up to AUD10 m.
In December 2016, the spin-off of Metals X Limited,
Westgold Resources Limited began trading, which
floated at AUD372 m. Also of note was Minjar Gold’s
(a subsidiary of Shanghai-listed property developer
Shandong Tyan Home) unsuccessful USD1.3 bn bid
for a half stake in Kalgoorlie’s Super Pit. The deal
was stymied as gold fell sharply from USD1,321 an
ounce to just USD1,173 following President Trump’s
election and Chinese authorities crack down on
investment outside China.
In October 2017, copper gold exploration company,
Kalamazoo Resources Ltd reported it iwll accquire
between 8 to 100 percent in three prospective
Pilbara gold projects.

Outlook for gold

Over the short to medium term, gold prices are
projected to decline at an average annual rate of
4.9 percent to around USD1,096 in 2019, however,
a range of factors could trigger temporary rallies in
prices.
Investor demand is unlikely to gather momentum
while interest rates are rising and major economies
continue to grow, even if growth remains relatively
weak. These include price corrections in bond or
equity markets, poor economic data emanating
from the United States or China, and concerns over
rising populism and nationalism.

22 Ferrier Hodgson National Resources Insight 2017

08 NICKEL Where do we stand? Production at eight nickel mines in the Philippines
was suspended pending the results of an audit of
Nickel stocks and price The OCE estimates that world mined nickel the nation’s mining industry. The results, delivered
production decreased by three percent in the in February 2017, recommended that 23 of the
16 24,000 December 2016 quarter year on year, and decreased nation’s mines, together responsible for over half the
by more than seven percent over the 2016 year to country’s nickel output, be closed leading to a price
14 21,000 1.99mt. In 2017 world mined nickel production is recovery to USD11,000 per tonne by March. These
expected to settle for 2.15 mt. actions may have been short lived as by May 2017
12 18,000 World nickel consumption increased by eight this decision was being reviewed. The OCE noted
percent in 2016 to 2.03mt, rebounding from the that the decrease in mined nickel production in the
Weeks slow growth of 0.5 percent in 2015. The OCE notes Philippines was partially offset by increased output
US$ a tonne that this growth was supported by a recovery in in Indonesia. Indonesia’s increased production is
10 15,000 stainless steel production, which grew by seven forecast to grow further following a partial lifting
percent in the first three quarters of 2016. of a three-year ban on nickel ore exports in January
8 12,000 Nickel prices are recovering from a level of USD8,498 2017.
per tonne in the March quarter 2016, having been Downward pressure on nickel prices at the
6 9,000 on a roller coaster ride in 2017. The London Metal beginning of 2017 stemmed from Indonesia’s
Exchange (“LME”) nickel price averaged USD10,278 announcement to ease a three-year ban on nickel
4 6,000 per tonne in the March quarter of 2017 and USD ore exports. Indonesia’s move to increase exports is
9,251 per tonne in the June 2017 quarter, and expected to unlock significant supply and impact
2 3,000 USD10,522 in September 2017 quarter. Australia nickel producers such as Independence
Continued uncertainty around the impact of Group and Western Areas.
0 2010 2012 2014 2016 2018 2020 0 government decisions in the Philippines (mine Despite the healthy recovery in nickel consumption
2008 2022 suspensions) and Indonesia (reopening exports) will growth the sector continues to suffer from a
keep the price volatile. substantial inventory overhang. LME stocks of
Weeks of consumption Price 375,000 tonnes are equivalent to an excessive 9.6
A rollercoaster ride in Australia weeks of supply cover. This supply overhang will
Source: Bloomberg (2017) London Metal Exchange; take a number of years of supply deficits to work
International Nickle Study Group (2017) Department of In Australia the OCE data showed a 50 percent down to the point where sustained price increases
Industry, Innovation and Science (2017) increase in publicly announced projects for 2016 are triggered.
year on year, most likely due to favourable industry
Australia's nickel export volume and values forecasts. This increase however was met with a 50 Looking ahead
percent decrease year on year for projects reaching
350 6 the feasibility stage, likely as a result of nickel prices At current prices, approximately 50 percent of
bucking the trend and trading below forecast prices. global nickel producers are operating at a cash
300 5 Australia’s nickel exports for the December quarter loss, with some high-cost producers expected to
declined by 42 percent in volume year on year. In exit the market. The effects of mines and refineries
250 2017 exports are on track to decline by 20 percent being placed on ‘care and maintenance’ due to low
4 in value to AUD2.3 bn and 32 percent in volume to prices has been reflected in declining nickel exports.
172,000 tonnes. Australia’s mined nickel production Capital Economics, a London-based research house,
200 is forecast to increase by 0.5 percent in 2017 while forecast nickel prices to reach USD11,500 per tonne
3 refined nickel production in Australia is forecast to by year end. Most analysts are less optimistic on
decrease by 21 percent primarily due to the closure the outlook with the price forecast to average
150 of Queensland Nickel’s Yabulu refinery. USD10,600 per tonne in 2017.
2 Notwithstanding the recent decline in mined global
Asia’s impact - China and Indonesia nickel production, the OCE estimates that world
100 push up production mined supply will increase by 8 percent in 2017.
It estimates that world refined nickel production
50 1 The OCE estimates that world refined nickel is forecast to grow by 7.67 percent in 2017 with
US$ a tonne production only increased by 0.5 percent over global consumption of nickel projected to grow by
2016-17 A$ billion the year to 1.98mt with a spike in December 2016 5.6 percent in 2017. Analysts’ consensus is a rising
attributable to increased output in China and nickel price. However, we consider price of nickel is
0 0 Indonesia. likely to stay at a floor of USD10,000 per tonne until
2007-08 2017–18 2019 while excess stock is worked down, with price
2009-10 2011-12 2013-14 2015–16 growth after 2020.
Volume Value (rhs)

Source: ABS (2016) International trade in goods and services,
cat. No. 8412.0; Bloomberg (2016) London Metal Exhange;
Department of Industry, Innovation and Science (2016)

24 Ferrier Hodgson National Resources Insight 2017 Ferrier Hodgson National Resources Insight 2017 25

09 ZINC

World mining output stable and there The China Effect M&A Activity Australia’s expenditure
are good prospects for future growth on zinc, lead and silver
Refined zinc production was largely steady in The value of silver, lead and zinc transactions was exploration decreased by
In 2016, zinc mine production rose 2.2 percent to 2016 at 14.0mt. Production was constrained to up 21 percent to USD2.1 bn in 2016, while the total nine percent in 2016, totaling
12.8mt. Increased production at existing mines some extent by mine closures and the suspension number of transactions increased 89 percent to 36 AUD46.5 m over the year.
was largely offset by the scaling back or closure of of smelter operations due to operational issues percent. Key drivers of investment activity include
operations owing to ore depletion at major mines. (including difficulties in accessing concentrates). portfolio consolidation through divestment and Global outlook – prices set to rise and a
The London Metals zinc price averaged USD2,091 However, this was offset by the commissioning of strategic growth to ensure security of supply while spotlight on China
per tonne in 2016, eight percent higher than 2015. new refined zinc capacity, primarily in China. zinc supply remains constrained.
Starting at under USD2,000 a tonne, the zinc price Over the medium term, refined zinc consumption On 30 December 2016, MMG entered into a The zinc price has risen in 2017, in line with changes
rose strongly through the year, reaching over is projected to increase at an average annual rate conditional share sale agreement with EMR Golden to global fundamentals, averaging over USD2,670 a
USD2,700 a tonne by the end of the year. of 1.9 percent a year, to 15.9mt in 2022. A factor Grove Holdings Pty Ltd, an entity owned and tonne for the year. As at late October2017 the price
supporting this growth is expected continuation of managed by EMR Capital, for the purchase of MMG of Zinc broke the USD3,200 a tonne barrier.
Australia – production to match strong urbanization in regional China and higher output Golden Grove Pty Ltd for USD210 m with Golden In 2018, prices will be supported by constrained
demand from emerging economies at newly built zinc smelters in China. Production Grove producing 38,128 tonnes of zinc and 12,194 production and modest consumption growth in the
growth will be moderated by constrained mined tonnes of copper in 2016. automobile and infrastructure sectors.
Australia’s mined zinc production is forecast to supply, with some smelters operating at below The responsiveness of producers to recent high
decrease to 843,000 tonnes in 2016-17 from capacity due to the difficulty of obtaining feedstock. prices presents a significant risk to the outlook. If
1,197,000 tonnes in 2015-2016, a decrease of 30 prices stay strong, we may see Glencore restarting
percent. Production is projected to edge up to operations, but only once they are comfortable with
1003,000 tonnes in 2018-19. the level of price and there is a supply deficit.
New mines scheduled for completion include
MMG’s Dugald River Project and Independence
Group’s Stockman operation. These supply additions
will offset the planned closures of Endeavour,
Cannington, Golden Grove and Jaguar, as they reach
the end of their operating life.
The projected increase in zinc consumption in
emerging economies, and tightening availability
of mined zinc will support strong demand for
Australia’s exports. Despite these opportunities,
Australia’s export capacity will be constrained by the
capacity of the remaining mines with the closure of
MMG’s 500,000 tonne per annum Century mine in
early 2016.

26 Ferrier Hodgson National Resources Insight 2017 Ferrier Hodgson National Resources Insight 2017 27

10 ALUMINIUM

Australia leads the pack As evident from the below graph power costs Global – price increases due to Following pressure in early
for Australian aluminium smelter have increased reduction in inventory 2016 due to continued global
Australia continues to be a leader in global significantly over recent years and are forecast to capacity and build-up of stocks,
production of bauxite, alumina and aluminium. continue on that path. Following pressure in early 2016 due to continued particularly in China, there has
Although no refinery or smelters were developed Reduced production will negatively impact on the global capacity and build-up of stocks, particularly been a 25 percent increase in
or closed in Australia during 2016 the industry has export volumes (with expectations of 6.1 percent in China, there has been a 25 percent increase in global aluminium prices since
experienced stress following the power outage decrease in 2016-2017 to 1.35mt), similarly export global aluminium prices since our 2016 publication our 2016 publication as a result
at Alcoa’s Victorian Portland smelter in December values are forecast to drop (with expectations of a as a result of global reduction in inventory. In of global reduction in inventory.
2016 which caused major port damage and resulted decrease by 2.8 percent to AUD3.20bn). October 2017, the price per tonne was USD2118.
in significantly reduced operating capacity. Stress During the first half of 2017, both Rio Tinto and Looking forward, the price is forcast to drop
was further caused by the increased power prices Metro Mining Limited have progressed with modestly in 2018 and 2019.
in Queensland and the decision taken by Rio Tinto the development of bauxite mines near Weipa, Global forecasts are trending towards demand
to reduce production at its’ Boyne Island plant. The Queensland, with the largest being the Rio Tinto growth, particularly from the automotive industry as
reduced production of approximately 45,000t of mine. Production will commence in 2019 and 2018 it seeks more ways to be greener and cost effective.
aluminium equates to approximately AUD100 m at respectively. However, supply issues will be magnified following
current exchange rates. The Portland power outage China’s decision to reduce their own production by
and increased electricity prices in Queensland 30 percent during 2017-2018 winter period in an
are forecast to result in reduced production by effort to tackle its pollution issues. Given that China
approximately eight percent in 2016-2017. The currently accounts for approximately 50 percent
forecast for aluminium production levels thereafter of the world’s aluminium production the market
remain steady. impact will be interesting to watch. Any further cut
The measures taken already this year by Rio Tinto to backs in production or closures by plant operators
reduce operating costs are likely to continue and be will likely drive price increases if consumption
replicated by other operators until affordability in increases.
energy costs is addressed. President Trump’s stated intention to spend USD1
tn on new infrastructure projects over the next ten
Source: Department of Industry, Innovation and Science (2017) years, has the potential to boost demand in the US Outlook – increasing US demand and
for aluminium locally and abroad. Despite that and cost pressure in Australia
given that China accounts for the majority of global
aluminium consumption China will continue to be Australian operators face challenges to make money
the driver for the global performance of aluminium. despite the increase in aluminium prices.
This is driven by pressure on Australian smelters to
contain costs, particularly electricity costs which can
account for 25-40 percent of production costs. To
make matters more challenging for operators, there
is the underlying risk of climate change policies
which make the financial viability of the smelters
questionable.
Notwithstanding a forecast increase in Australian
export bauxite volume from 20,971kt in 2015/16 to
23,807kt in 2015/16, the value of bauxite is expected
to decrease from $1,009 million to $994 million,
primarily due to lower bauxite prices. These are
revised down figures as the OCE reports that China’s
regulatory clamp down on pollution is expected to
have a larger impact on Australian exports in 2017
than first thought. Further risks to Australian bauxite
production and exports will come from emerging
bauxite exporters, including Fiji and Papua New
Guinea.

28 Ferrier Hodgson National Resources Insight 2017 Ferrier Hodgson National Resources Insight 2017 29

11 LITHIUM South America – production booms 12 HOW FERRIER HODGSON CAN HELP

What is Lithium? SQM, the world largest lithium carbonate miner WE DELIVER: Administration/Finance
and a top lithium carbonate producer in Chile,
Lithium is a soft, silvery-white alkali metal that is ramped up production in 2016 by 20 percent to Strategy - Forecast cash flow modelling and sensitivity analysis
highly reactive and flammable. It never occurs freely 48,000 tonnes. The Chilean government also gave - Information technology and systems review
in nature, but only in (usually ionic) compounds, Albemarle Corporation permission to increase - Strategic planning - Balance sheet review
such as pegmatitic minerals which were once the its lithium brine extraction at its La Negra facility, - Staff restructuring - Tenement review
main source of lithium. Due to its solubility as an based on natural brines from the Salar de Atacama. - research and product analysis - Hedging review and development of alternate
ion, it is present in ocean water and is commonly Production in Argentina increased almost 60%, - SWOT analysis financing strategies
obtained from brines. primarily owing to new brine operations. - Debt restructuring, IPO and equity preparation - Change management
Lithium carbonate has approximately 18.8 percent - Financial planning and research - Due diligence and strategic business analysis
lithium metal content while lithium hydroxide has Australia – production expansion and - Operational restructuring - Independent expert opinion
approximately 16.5 percent. Some production is price impact - Asset valuation
described in terms of lithium carbonate equivalent - Asset sale option
(“LCE”), this is simply to be consistent across various Talison Lithium (jointly owned by China’s Tianqi
products. To convert lithium metal to lithium Group and Albemarle), operator of the Greenbushes Operational Product/Inventory
carbonate, a multiplier of 5.323 is applied. spodumene project in Western Australia, has also
announced plans to increase capacity, while Tianqi - Performance measurement and incentive programs - Operational strategy review
How do we use it? Group has begun construction of its AUD400 m - Review of mining methods and resources - Supply chain analysis
lithium processing plant in Kwinana which will have - Project evaluation - Pricing analysis
Lithium is mainly sold as lithium carbonate but also the capacity to produce about 21,120 tonnes LCE of - Cost structure review - Contractual and legal review
as lithium hydroxide. Both of these compounds lithium hydroxide a year. - Minng benchmarking - Facility structure analysis
are used to produce the cathodes for rechargeable Despite available capacity, spot lithium carbonate - Productivity analysis - Security planning
batteries, taking advantage of lithium’s extreme prices in China increased up to 300%, briefly - Restructuring program design
electrochemical potential and low density. Batteries exceeding AUD20,000 per tonne, based on an - Plant and equipment assessment
are the leading application for lithium, accounting acute, but likely temporary, shortage of imported - Occupational health and safety review
for approximately 53 percent of total demand, spodumene from Australia. - Site remediation
including batteries for electric vehicles, which The rest of the world experienced spot price
accounted for approximately 20 percent of total increases of approximately 40 to 60 percent from Ferrier Hodgson National Resources Insight 2017 31
lithium demand. Lithium carbonate is also used in those of 2015, owing to lithium demand moderately
applications such as ceramic and enamel frits and exceeding supply. For large fixed contracts,
heat resistant glass (ceramic glass). Industrial Minerals reported a 14 percent increase in
average U.S. lithium carbonate prices.
Global production – Australia and South
America dominate Looking forward to battery powered
cars
Around 80 percent of global production originates
from Chile, Argentina and Australia. Global mine Lithium supply security has become a top priority
production of lithium metal rose an estimated 11 for technology and manufacturing companies in
percent in 2016 to 35,000 tonnes (186,305 tonnes the United States and Asia such as Tesla Motors and
LCE), according to the US Geological Survey with Panasonic. Strategic alliances and joint ventures
lithium demand for battery applications are driving between technology companies and exploration
this increase. Current global operations are running companies continue to be established to ensure
at 71 percent of an estimated 49,400 tonnes a reliable, diversified supply of lithium for battery
(262,956 tonnes LCE) capacity. suppliers and vehicle manufacturers.
Tesla is currently constructing a lithium-ion battery
30 Ferrier Hodgson National Resources Insight 2017 plant in Nevada capable of producing up to 500,000
lithium-ion vehicle batteries per year. The plant was
expected to be vertically integrated, capable of
producing finished battery packs directly from raw
materials by 2018.

2017 marks Lithium’s debut in
the Ferrier Hodgson National
Resources Insights with the
boom being driven by its use in
next generation batteries and
electric cars.

13 OUR TEAM

Our national resources team combines the corporate restructuring skills and
sector knowledge to meet your specific requirements and turnaround. The team
has the relevant experience to assist you in understanding the available options,
agree solutions and successfully manage any implementation in a timely manner.

Peter McCluskey Martin Jones Wayne Rushton Andrew Smith

National Resources Practice Partner Partner Partner
Leader, Melbourne Perth Perth Perth

+61 3 9604 5109 +61 8 9214 1405 +61 8 9214 1408 +61 8 9214 1423
+61 419 303 302 + 61 418 919 403 +61 418 919 423 +61 407 274 840
[email protected] [email protected] [email protected] [email protected]

Will Colwell Peter Gothard Wayne Woodward Stewart Howe

Partner Partner Mining Specialist Mining and Energy Specialist
Brisbane Sydney Newcastle Melbourne

+61 7 3834 9205 +61 2 9286 9950 +61 3 9600 4922 +61 3 9600 4922
+61 417 789 205 +61 409 276 395 [email protected] +61 410 479 005
Will [email protected] [email protected] [email protected]
Robert Malt
Ryan Eagle Morgan Kelly Andrew Rodgers
Executive Director
Partner Partner Brisbane Mining and Mining Services
Sydney Sydney Specialist, Brisbane
+61 7 3834 9243
+61 2 9286 9949 +61 2 9286 9874 +61 416 264 317 +61 7 3834 92
+61 421 988 290 +61 417 869 627 [email protected] +61 412 429 856
[email protected] [email protected] [email protected]
Tom Birch
Martin Lewis Tim Michael Andrew Love
Director
Partner Partner Perth Mining Specialist
Adelaide Brisbane Sydney
+61 7 3834 9285
+61 8 8100 7657 +61 7 3834 9228 +61 407 224 055 +61 2 9286 9902
+61 417 869 627 +61 412 090 170 [email protected] +61 419 678 135
[email protected] [email protected] [email protected]

Gerry Brophy James Dampney

Mining and Infrastructure Partner
Specialist, Brisbane Sydney

+61 7 3834 9218 +61 2 9286 9967
+61 416 827 163 +61 4 5104 8143
[email protected] [email protected]

32 Ferrier Hodgson National Resources Insight 2017 Ferrier Hodgson National Resources Insight 2017 33

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