Zora Toor
James Kwok
Emily-Jane Bartel
Tingming (Rick) Sun
Agenda
• Industry Overview
• Teck
• Freeport-McMoran
• BHP Billiton
Copper
• An Internationally traded commodity
• Prices:
– Volatile
– Cyclical
– Determined by the major metals exchanges
• New York Mercantile Exchange (COMEX)
• London Metals Exchange (LME)
• Shanghai Futures Exchange (SHFE0
copper
Copper Prices
copper
Copper prices
• Prices: Largest yearly increase on record in 2009
– Increased 153%
• US$1.32/lb at the end of 2008 on the LME
• US$3.33/lb at the end of 2009 on the LME
– Average Price for 2009 = US$2.34
• Down US$0.83
– Average Price for 2008 = US$3.17
• Currently
– Prices are trading approximately 42% higher than
in 2009 average prices
copper
Copper Demand
• Copper demand exceeded 18 million tonnes in 2009
– Reflects the rate of underlying world economic growth, particularly in
industrial production and construction
• Global copper consumption fell by 1.3% in 2009
–
–
–
–
–
North America: Demand down 9%
Europe: Demand down 12%
Germany: Demand down 12%
France: Demand down 9%
China: Demand up 42%
copper
Copper Demand
• Factors affecting demand
– Global Economic Conditions
• Instability Decreases Demand (US. and Europe)
– Industrialization
• Increases consumption (China and India)
• Copper imports by China advanced to a record in 2009,
driving global prices up 140 percent.
copper
Copper Demand
copper
Copper Demand
copper
Copper Demand
copper
Copper’s unique properties
• Electrical Conductivity
o Exceptional current carrying capacity
• Corrosion Resistance
o In the presence of moisture, copper retains its
functionality for centuries
• High thermal conductivity
o Can heat up to eight times better than other metals
copper
Copper’s unique properties
• Antimicrobial Effect:
– A significant deterrent to the transmission of
fungal and bacterial disease
• Ease of Fabrication and Formability
o Its strength and formability make copper idea for
applications where repetitive actions stress the
components
• Springs, electrical switches, electrical connectors and fasteners
copper
outlook
• Consumption Expected to Increase
– To support the development of emerging markets, notably in China,
India and Brazil
– Driven by the expansion of green technology
• Hybrid vehicle requires 13-23 more kilograms of copper than a non-hybrid
vehicle
• A wind turbine requires over three tones of copper, amounting to 1.6
percent of the overall weight of the structure
• Energy-efficient and infinitely recyclable
– Increased use of antimicrobial properties
• In 2008 the US Environmental Protection Agency registered 275
copper alloys as antimicrobial materials
– Suitable for hospitals because of the fast rate at which germs die on
copper surfaces
copper
Risks and Uncertainties
Economic and political changes
Copper price volatilities
Environmental Conditions
Licenses and permits
Availability of materials
Energy price volatilities
Foreign exchange rate risk
Interest rate risk
Laws and regulations
Weather
Lower ore grades
Equipment failure
Availability of equipment
Price volatilities of substitutes
copper
Potential Hedging strategies
•
•
•
•
Energy Prices
Copper Prices
Exchange Rates
Interest Rates
copper
coal
• The world’s most abundant and widely distributed fossil fuel
• Was the most important source of the the world’s primary
energy until it was taken over by oil in the late 1960s
• 70% of the total world coal production is consumed for
electricity generation
• Uses:
–
–
–
–
coal
Electricity generation
Steel production
Cement manufacturing
As a liquid fuel
Coal consumption
Consumption
•China: 2.7 billion tons
•US: 1.02 billion
•Worldwide: 6.65 billion tons
Coal
Coal consumption
• Since 2000, global coal consumption has grown
faster than any other fuel
• Consumption in 2009:
o Around 5.8 billion tonnes of hard coal
o Around 953 million tonnes of brown coal
• The biggest market for coal is in Asia
o Currently accounts for 56% of global coal consumption
coal
Coal production
Production
•China: 2.78 billion tons
•US: 1.06 billion tons
•Worldwide: 6.78 billion tons
coal
Coal production
Country
1980
1985
1990
1995
2005
2006
Canada
40.44
67.08
75.32
82.65
74.47
72.75
United States
829.70
883.64
1029.08
1032.97
1131.50
1162.75
N. America
874.15
957.45
1112.99
1125.88
1217.82
1248.17
C. & S.
America
12.07
20.48
32.86
40.12
80.63
85.97
Europe
1333.13
1462.35
1332.10
959.74
799.05
792.97
Middle East
0.99
1.38
1.21
1.25
1.47
1.68
Africa
137.99
197.28
201.13
234.92
276.13
275.31
Australia
116.05
171.83
225.78
266.55
414.04
419.58
China
683.59
961.52
1190.38
1536.97
2430.30
2620.50
India
125.85
189.93
247.57
320.56
471.72
498.86
Indonesia
0.63
2.32
11.63
45.45
168.03
213.17
Japan
22.48
19.03
11.31
6.96
0
0
N. Korea
48.62
57.32
51.03
34.50
38.15
39.14
S. Korea
20.53
24.85
18.98
6.31
3.12
3.11
Vietnam
5.73
6.17
5.28
10.88
38.39
45.06
Asia & Oceania
1038.35
1455.15
1791.66
2263.18
3612.97
3886.33
World Total
4186.39
4894.81
5353.78
5106.69
6490.86
6806.99
Coal prices
• Prices are trading approximately 42%
higher than in 2009 average prices
o A result from increased demand and
constrained supply, which results in a tight
market and upward pressure on prices
• Price fluctuations are caused by disruptions
of supply and demand
o Substantial disruption in China’s economic
growth
o Increased supply of hard coking coal from
domestic Chinese suppliers
o Developments of new resources of high
quality hard coking coal
o Infrastructure improvements in Australia
and Mozambique
coal
outlook
• 2010 is expected to be a year of transition as the global
economy recovers from the recession
o Indicators are showing signs of strength
• Demand for metallurgical coal snapped back dramatically
compared to 2009 and is continuing to grow
o Asian economies are recovering rapidly and are importing
metallurgical coal at a fast pace
• Demand for thermal coal is also on the rise due to:
o A colder winter in the US
o Higher natural gas prices
o Improved economy
• Demand is expected to rebound further
copper
Risks and Uncertainties
Unforeseen adverse geologic conditions Equipment problems
Credit Risk
Economic recession
Reductions of purchases
Deferral of deliveries by major
customers
Passage of new or expanded
regulations
Increase of mining costs
Environmental and coal mining laws
and regulation change
Availability and cost of credit
Inability to contract miners to fulfill
delivery terms of their contracts
Delays in obtaining or the inability to
obtain required permits for operations
Unavailability of transportation for coal
shipments
Inability to secure high-quality coal
reserves
coal
zinc
• Zinc is the fourth most common metal
– Iron, aluminum, and copper are the others
• More than 50 countries around the world mine zinc ore
– Largest Producers:
• Australia, Canada, China, Peru and the United States
• Mining methods:
– Mined underground:
• 80% of the world’s zinc
– Mined in open pits:
• 8% of the world’s zinc
– Combination:
• 12% of the world’s zinc
zinc
Zinc Prices
Prices are mainly affected by global supply and demand
zinc
Zinc prices
- Market prices are affected by many variables including:
-
Regional supply and demand
Political and economic conditions
Inflation expectations
Speculative activities
Production costs in major producing regions
- Since March 2009 to the end of the year, the price of zinc
more than doubled
- LME stocks increased on 42%
zinc
Zinc Demand
• Nearly 11 million tons of zinc were consumed worldwide in 2009
• In 2009, China imported 61% more zinc concentrates than in 2008
– China imported 640,000 tonnes in 2009, while in 2008 it imported 112,000
• Global consumption is estimated to have declined by 5% in 2009
– Although by the end of 2009 global demand started to pick up as economic conditions
began to improve
zinc
Zinc Demand
zinc
Zinc Demand
Zinc production and consumption is on the rise
Zinc
Zinc’s unique properties
•
•
•
•
•
•
•
High Strength
Formability
Light weight
Corrosion Resistance
Aesthetics
Recyclability
Low Cost
zinc
Zinc Demand
Zinc is mainly used for:
• Protective coating on steel to prevent
corrosion (galvanizing)
• Die casting for precision components
• Construction Material
• An alloying metal with copper to
make brass
• Chemical compounds in
pharmaceuticals, cosmetics, rubber,
primer and paint
• Micronutrients for humans, animals
and plants
zinc
Zinc production
– Worldwide production of zinc
in 2008 is estimated at over
11.6 million tons
• According to International Lead
and Zinc Study Group (ILSG),
global mine production fell by
over 300,000 tonnes of zinc in
2009 ove
Zinc
outlook
– In 2010, it is estimated that zinc metal demand will increase above
trend growth, particularly in industries such as construction,
automotive and transport
• Restocking of inventories will occur
– Mine production and ultimately refined production is expected to
increase at a greater rate than demand for 2010
Zinc
Potential risks
Share price subjected to volatility
Market condition
Metal prices subject to volatility
Uncertainty of acquiring required
permits or community access
arrangements
Uncertainty of Estimation of Mineral
Resource & Reserves
Political Instability
Economic Uncertainty
Risks associated with regulatory
compliance
Current exploration conditions
Fluctuation of Mineral Prices
Foreign currency fluctuations
Competition
Zinc
Ticker: TCK
About teck
• Canada’s largest diversified mining, mineral
processing and metallurgical company
• Headquartered in Vancouver, Canada
• Produce copper, metallurgical coal and
zinc, molybdenum and specialty metals, with several
oil sands development
• 13 mines in Canada, the USA, Chile and Peru
About teck
About teck
Profits and Revenues
• Copper: produced 313,000 tonnes, 40% of profits and 31% of
revenue.
• Coal: production reached 23 million tonnes, share of
production was 14 million tonnes. 35% of revenue and 42% of
profits
• Zinc: 663,000 tonnes of zinc in concentrate and 270,000
tonnes of refined zinc. 30% of revenue and 15% of profits
About teck
Profits and Revenues
Market Profile
52wk Range: 5.19 - 41.90
Volume:
5,552,157
Avg Vol
(3m):
5,435,060
Market Cap:
23.65B
P/E (ttm):
11.96
EPS (ttm):
3.36
Risk Exposures
•
•
•
•
•
•
•
Liquidity
Foreign exchange
Interest rates
Commodity price
Credit risk
Capital market
Do not have practice of trading derivatives
Financial Instruments
•
•
•
•
•
•
Cash and cash equivalents are designated as held for trading.
Temporary investments are designated as available-for-sale
Investments in Marketable Securities
Short-Term Debt and Long-Term Debt
Derivative Instruments: embedded
Certain derivative investments may qualify for hedge
accounting.
Financial Instruments
Foreign Exchange
– Primarily: USD Lesser Extent: Chilean peso
– Majority operating expense: CAD
– hedged a portion FCF from USD sales until 2013 with US
dollar forward sales contracts
Financial Instruments
Interest Rate
– Arises from cash and cash equivalents, floating rate debt
and interest rate swaps.
– Borrow at fixed rates to match the duration of long lived
assets
– Floating rate funding may be used
• As at December 31, 2009, with other variables
unchanged, 1% change in LIBOR rate would have $36
million effect on net earnings.
Financial Instruments
Commodity Price
• Changes in fair value caused by settlement adjustments to
receivables and payables and forward contracts for zinc
and lead
• Zinc and lead forward contracts outstanding
Financial Instruments
Liquidity
– Planning, budgeting and forecasting processes to help
determine funding requirements to meet various
contractual and other obligations.
Financial Instruments
Credit Risk
• Arises from the non-performance by counterparties of
contractual financial obligations
• Manage credit risk for trade and other receivables through
established credit monitoring activities
• Maximum exposure: carrying value of our cash and cash
equivalents, receivables and derivative assets
Financial Instruments
Derivatives and Hedges
• Cash Flow Hedges
o At December 31, 2009, US dollar forward sales contracts with a
notional amount of $284 million remained outstanding. Matures
varying 2010-2013
• Economic Hedge Contracts
o As at December 31, 2009, the 114 million pounds of zinc forward
purchase contracts were offsetting positions to the 114 million
pounds of zinc forward sales contracts
• Do not apply hedge accounting to the commodity forward
sales contracts
Sensitivity Analysis
Derivatives
Balance Sheet
Balance Sheet
Income Statement
Cash Flow Statement
Cash Flow Statement
Cash Flow Statement
FREEPORT-MCMORAN
COPPER & GOLD
Ticker: FCX
Market Profile
52 Week Price
Range
90.55- 26.32
Average Daily
Volume
21M
Dividend Yield
0.80%
Shares Outstanding
453M
Market
Capitalization
33.64B
Price/Earnings
13
Return on Equity
66%
Debt to Capital
101.4
About Freeport-McMoRan
• World’s largest copper company
• Produce copper, gold and molybdenum
• Operations in North and South America, Africa and
Indonesia
• Grasberg, Indonesia has largest gold and copper
mines in the world
Acquisition
• March 21, 2008 acquired Phelps Dodge
• Helped solidify FCX’s copper position
• Mines in North and South America and the Tenke
Fungurume minerals district in DRC Congo
• Acquired Phelps Dodge’s customers and commodity
contracts
Reserves
• Recoverable and probable reserves
o Copper: 104.2B pounds
o Gold: 37.2M ounces
o Molybdenum: 2.59B pounds
Locations
Corporate Structure
Key Products
• Copper Concentrate
• Copper Cathode
• Continuous Cast Copper Rod
World’s Leading Copper Producers
Sales by pounds
Metal
Pounds Sold
(billions)
Copper
4.1
Gold
2.6
Molybdenum
58
Contribution to Revenue
2%
5%
17%
Copper ($11,326B)
Gold ($2,591B)
Molybdenum ($792M)
76%
Other ($331M)
Risk Exposures
• Market prices for copper, gold and
molybdenum
• Foreign exchange
• Interest rates
Historical LME Copper Prices
LME Copper Price vs. FCX Stock Price
Sensitivity Analysis
• Assuming $3.25/lbs copper
o $0.10/lbs change would impact operating cash flows by
$260M
• Assuming $1,100/ounce gold
o $50/ounce change would impact operating cash flows by
$50M
• Assuming 12/lbs molybdenum
o $1/lbs change would impact operating cash flows by $45M
Financial Instruments
“FCX does not purchase, hold or sell derivative
financial instruments…”
• No price protection programs as of Dec 31/2009 and
2008
• Current positions as a result of Phelps Dodge (FMC)
acquisition
Eligible for Hedge Accounting
• Copper Futures & Swap Contracts
o FMC copper rod customers require fixed market price
o FCX hedges to receive COMEX average price in shipment
month
1) Enter into copper futures & swap contracts
2) Liquidate futures contracts
3) Settle copper swap contract during shipment
As of Dec 31/2009: 35M lbs at $3.01 avg; Nov 2010 maturity
Fair Value Hedge Transactions
Unrealized gains recognized in income
Financial Instruments
Ineligible for Hedge Accounting
•
•
•
•
•
Embedded Derivatives
Copper Forward Contracts
Atlantic Copper
Copper Futures & Swap Contracts
FMC Copper Collars
o Price protection
Financial Instruments
Ineligible for Hedge Accounting
• Embedded Derivatives
o Contract price has a fixed and market price
components
o Provides price certainty
o Eliminates need for separate hedging programs
o Normally fall under eligible hedge accounting
As of Dec 31,2009:
662M lbs at $3.34; May 2010 (sales)
213 M lbs at $3.34; April 2010 (purchases)
Financial Instruments
Ineligible for Hedge Accounting
• Copper Forward Contracts
o April 2009: lock in $1.86/lb on 355lbs of PT Freeport
Indonesia’s provisionally priced copper sales at March 31,
2009
o Final priced from April to July 2009
o To reduce short term volatility in earnings and CFs
o Recorded in revenues
o Has not entered in to forward sales contracts for
provisionally priced copper sales since 2009
Financial Instruments
Ineligible for Hedge Accounting
• Atlantic Copper (Smelting and Refinery)
o Enters in to Forward Copper Contracts when physical
purchases and sales pricing periods do not match
o Gains or losses recorded in cost of sales
As of Dec 31, 2009: Net 8M lbs at $3.19 avg; Jan 2010 maturity
Financial Instruments
Ineligible for Hedge Accounting
• Copper Futures & Swap Contracts
o Due to terms in sales contracts with some of
FMC’s copper rod customers
o Recorded in revenues
• As of Dec 31, 2009: 3M lbs at $2.64 avg; Dec 2010 maturity
Financial Instruments
Ineligible for Hedge Accounting
• FMC Copper Collars
o Ensures a minimum price, retains market upside
o Acquired FMC’s 2007 price protection program of $423M
o Zero premium copper collars for 486M lbs at $2/lbs, and
put options 730M lbs $0.95/lbs
• As of Dec 31, 2007: Put options expired
• As of Jan 2008: Payout of $598M to settle call options
• FCX does not intend to have similar hedging programs
Unsettled Fair Value Hedge Transactions
Recorded on balance sheet
Ineligible Hedge Transactions
Realized and unrealized gains recognized in income
Financial Instruments
• Foreign Currency Exchange Contracts
o From time to time FCX enters in to forward exchange
contracts
o Most of revenue denominated in USD
• Decreases when USD weakens relative to:
o
o
o
o
o
Indonesian rupiah
Australian dollar
Chilean peso
Peruvian nuevos sol
Euro
As of Dec 31, 2009: No outstanding contracts
Financial Instruments
• Interest Rate Swap Contracts
o From time to time FCX enters in to interest rate
swaps
o Fixed to floating rate swaps to take advantage of
lower market rates
o 19% of outstanding subject to variable interest
rates
As of Dec 31, 2009: No outstanding contracts
Stock-Based Compensation
• 5 stock- based compensation plans
• Reported according SFAS 123 -R
• Option price = fair market value of the common shares on the
day of the grant
• Fair value of stock options determined using Black- Scholes
model
• Option’s maximum term is 10 years
• Options granted vest proportionately over a three- year
period
Stock-Based Compensation
• Restricted stock awards
o Share not fully transferable until certain
conditions have been met
• Ex: EPS targets
• Stock appreciation rights (SARs)
o Cash payment based on the increase in the value
of a stated number of shares over a specific period
of time
Stock Based Compensation Cost
Balance Sheet
Balance Sheet cont’d
Income Statement
Cash Flow Statement
Cash Flow Statement cont’d
Cash Flow Statement cont’d
About
• It formed from a merger between BHP and Billiton
• The world’s largest diversified natural resources
company.
• We have 40,990 employees and 58,000 contractors
working in more than 100 operations in over 25
countries.
• The world’s third largest producer of copper, and a
leading producer of lead and zinc.
Revenue and EBIT
Risk Factors
•
•
•
•
•
•
Commodity prices fluctuations
Currency exchange rate
Reserves
Chinese demand
Government actions and political events
Environmental impacts
Factors affecting Earnings
Growth Projects
Risk Exposure
• Liquidity risk
• Credit risk
• Market risk (Currency risk, interest rate risk)
• Fair value
Liquidity Risk
• Arises from the possibility that it may not be able to
settle or meet its obligations as they fall due.
• Strong liquidity position with US$8.4 billion of cash
on hand, and is supported by the solid A credit
rating.
Credit risk
• Arises from the non-performance by counterparties
of their contractual financial obligations towards the
Company.
• The BHP Billiton Group maintains group-wide
procedures covering the application for credit
approvals, granting and renewal of counterparty
limits and daily monitoring of exposures against
these limits.
• The maximum exposure to credit risk is limited to the
total carrying value of relevant financial assets on the
balance sheet as at the reporting date.
Sensitivity Analysis
Currency & Interest rate
• 1% point increase in the US LIBOR interest
rate
 Decrease BHP Billiton's profit before taxation by
US$6 million (2008: US$31 million).
 The estimated impact on equity is US$5 million
(2008: US$21 million).
Financial Instruments
eligible for Hedge Accounting
• Interest rate swaps held for hedging purposes are
generally accounted for as fair value hedges
• Forward exchange contracts held for hedging
purposes are generally accounted for as cash flow
hedges.
Fair value hedges
Net finance costs
Cash Flow hedges
• The effective portion of changes in the fair value of
derivatives as cash flow hedges is recognized in
equity.
• The gain or loss relating to the ineffective portion is
recognized in the income statement.
• When the hedged item affects profit or loss,
amounts in equity are recycled in the income
statement.
Cash flow hedges
recognized income and expense
Financial instruments
Ineligible for Hedge Accounting
Available for sale and trading investments
- They measure at fair value
- Gains and losses on the remeasurement of trading
investments are recognized in the income statement
- Gains and losses on the remeasurement of available for sale
investments are recognized in equity, and in the income
statement when realized by sale or redemption
Available for sale investments
Balance Sheet
Balance Sheet cont’d
Income Statement
Cash Flow Statement
Cash Flow Statement cont’d
Changes in Equity
QUESTIONS??