GROUP 2 PRESENTATION:
MINERAL AND MATERIALS
Prepared by: Haili Yin
Li Regan Sun Fai
Yi He
AGENDA
• Introduction to Industry:
• Copper
• Petroleum
• Aluminium
• Companies:
• Freeport-McMoRan
• BHP Billiton
• Rio Tinto
COPPER
• Conductor of heat and electricity, a building
material, and a constituent of metal alloys
• International traded commodity
• Prices of copper:
• Reflect the worldwide balance of copper supply and
demand
• Volatile
• Cyclical
COPPER
• Prices are determined by the major metals
exchanges:
• London Metal Exchange (LME)
• New York Mercantile Exchange (NYMEX)
• Shanghai Futures Exchange
COPPER PRICES
• Spot price ranged
from a low of $2.86
per pound to a high
of $3.38 per pound
• $2.88 per pound at
December 31,2014
COPPER DEMAND
• By end-use market:
• Construction (30%)
• Consumer products (28%)
• Electrical applications
(19%)
• Transportation (12%)
• Industry machinery (11%)
COPPER PRODUCTION
• Key point: Copper usage increased 12% in 2014 while
mine production increased just 3%
POTENTIAL RISKS
• Operating Risks:
• Laws and
Regulations
• Equipment shortage
• Environmental
condition
• Technology
•
Market Risks:
– Copper price
– Interest rate
– Foreign exchange
risk
– Substitutes
– Economic and
political issue
POTENTIAL HEDGING ACTIVITIES
• Energy Prices
• Copper Prices
• Exchange Rates
• Interest Rates
PETROLEUM
• Comes from Latin: “petra” (meaning “rock”) and
“oleum” (meaning “oil”).
• Colour: from yellow to black
• Formed by a large number of dead organisms,
compressed in intense heat and pressure
PETROLEUM
• It consists of hydrocarbons of different
molecular weights, but they all contain
element C!
• Uses fluid catalytic cracking to change
complex molecules into simpler ones
• Used in the modern day era as fuel during
combustion
PETROLEUM PRICES
PETROLEUM DEMAND
PETROLEUM SUPPLY
• OPEC is a major factor in supply and price
(Organization of the Petroleum Exporting Countries)
PETROLEUM--RISK AND
UNCERTAINTIES
• Business Risks:
• Failure to discover
new resources
• Increased cost and
schedule delay
• External Risks:
• Change in demand
in major markets
• Changes in
currency exchange
rates
• Laws and
regulations (for byproduct as well!)
PETROLEUM--POTENTIAL HEDGING
STRATEGIES
• Possible methods:
• Contracts
• Interest Rate Swaps
• Cross Currency Rate swaps
ALUMINUM
• Final product of a three-stage production process
• Bauxite: natural ore
• Alumina: refining process
• Aluminum
• Light, strong, flexible, corrosion-resistant and
infinitely recyclable
• One of the most widely-used metals
• Transportation
• Machinery
• Construction
ALUMINUM
• An Internationally traded commodity
• New York Commodities Exchange
• London Metal Exchange
• Worldwide Production
• China is the largest aluminum producer and has the
highest growth rate
• Prices
• Contango
• Cyclical
• Price affected by demand and supply
ALUMINUM PRICE
ALUMINUM DEMAND
• Factors affecting demand
• Global Economic Conditions
• Instability Decreases Demand (US. and Europe)
• Industrialization
• Changes in demand transportation vehicles
• Changes in the construction market
• Changes in containers and packaging
• Energy Costs
GLOBAL ALUMINUM DEMAND - INDUSTRIES
GLOBAL ALUMINUM SUPPLY
GLOBAL ALUMINUM DEMAND AND SUPPLY
FREEPORT-MCMORAN
COMPANY BACKGROUND
 One of the world’s largest producers of copper and
gold
 Headquarters in Phoenix, Arizona
 Operating location: North America, South America,
Indonesia, Africa
 Traded as NYSE:FCX and S&P 500 Component
LOCATIONS OF OPERATING MINES
OWNERSHIP INTEREST OF FCX
PRODUCTS AND SALES
• Sales of copper (60%):
• Copper concentrate (44%)
• Copper cathode (31%)
• Continuous cast copper rod (25%)
•
•
•
•
Sales of oil (20%)
Sales of gold (7%)
Sales of molybdenum (6%)
Others (7%)
RISK FACTORS
• Financial risks
• Market prices of copper, gold and/or oil
• Debt and other financial commitments may limit the
financial and operating flexibility
• Mine closure and reclamation regulations impose
substantial costs on operations
• Financial assurance is required to support their obligations
(e.g. Bonds)
RISK FACTORS
• International risks
• International operations are subject to political, social and
geographic risks
• The company’s business may be adversely affected by
political, economic and social uncertainties in Indonesia
• Tenke minerals district may be adversely affected by
security risks and political, economic and social instability in
the DRC
RISK FACTORS
• Operational risks
• Mining and oil and gas operations are subject to operational risks
• Labor unrest and activism could disrupt the operations
• The mining production depends on the availability of sufficient
water supplies
• Indonesia and Africa mining operations involve additional risks
because of the difficult location
• Development projects are inherently risky and may require more
capital than anticipated
• Others
RISK FACTORS
• Environmental risks
• Subject to complex and evolving environmental laws, such as
CERCLA
• Remediation of environmental conditions on mining properties
that have not been operated in many years
• Unexpected environmental impacts from Indonesia mining
operations could incur increased costs
• Regulation of greenhouse gas emissions and climate change
issues may adversely affect the company’s operations
RISK FACTORS
• Other risks
• Holding company structure may impact the ability to
service debt and stockholders’ ability to receive dividends
• Anti-takeover provisions in the company’s charter
documents and Delaware law may make an acquisition of
the company more difficult
DISCLOSURES ABOUT MARKET RISKS
• Commodity Price Risk
• Foreign Currency Exchange Risk
• Interest Rate Risk
COPPER PRICE VS. FCX STOCK
PRICE
INCOME STATEMENT
CASH FLOW STATEMENT
CASH FLOW STATEMENT CONT’D
BALANCE SHEET
BALANCE SHEET CONT’D
RISK MANAGEMENT PHILOSOPHY
“FCX does not purchase, hold or sell derivative
financial instruments unless there is an existing asset or
obligation, or it anticipates a future activity that is likely
to occur and will result in exposure to market risks,
which FCX intends to offset or mitigate. FCX does not
enter into any derivative financial instruments for
speculative purposes, but has entered into derivative
financial instruments in limited instances to achieve
specific objectives. ”
FINANCIAL INSTRUMENTS
• Commodity Contracts:
• Forward, futures and swap contracts
• A variety of crude oil and natural gas commodity
derivatives, such as swaps, collars, puts, calls and
various combinations of these instruments
• Derivatives do not contain credit risk-related
contingent provisions
• As of December 31,2013 and 2012, FCX had
no price protection contracts relating to
mine production
FAIR VALUE HEDGES
• Using Copper Futures and Swap Contracts
• FCX receive the COMEX average price in the month of
shipment
• The customers pay the fixed price they requested
• Three steps to follow:
• Determine the fair value of both hedged item and
hedging instrument at reporting date
• Recognize any change in fair value on the hedging
instrument in profit or loss
• Recognize the hedging gain or loss on the hedged
item in its carrying amount
FAIR VALUE HEDGE TRANSACTIONS
Realized gains (losses) & Unrealized gains (losses)
FINANCIAL INSTRUMENTS
• Derivatives not designated as hedging instruments
• Embedded Derivatives
• Crude Oil and Natural Gas Contracts
• Copper Forward Contracts
EMBEDDED DERIVATIVES
• A provision in a contract that modifies the cash flow of
a contract by making it dependent on some
underlying measurement
• Incorporated into a host contract
• Accounted for separately form the host contract when
it is not closely related to the host contract
• Provides price certainty
EMBEDDED DERIVATIVES
Summary of FCX’s embedded derivatives
at December 31,2014
Crude Oil and Natural Gas
Contracts
• FCX has crude oil options, crude oil and natural
gas swaps as a result of the acquisition of PXP
• Not designated as hedging instruments
• In order to limit the effects of crude oil price
decreases
• Composed of crude oil put spreads consisting of
put options with a floor limit
CRUDE OIL AND NATURAL GAS
CONTRACTS
The outstanding crude oil option contracts at
December 31,2014
• The deferred option premiums and accrued
interest associated with the crude oil option
contracts totaled $210 million
COPPER FORWARD CONTRACTS
• Entered by Atlantic Copper, FCX’s wholly owned
smelting and refining unit in Spain
• Designed to hedge its copper price risk whenever its
physical purchases and sales pricing periods do not
match
• Hedge against changes in copper prices
• Market-to-market hedging gains or losses recorded in
cost of sales
• Net forward copper purchase contracts for 13 million
pounds at average contract price of $2.9 per pound
SUMMARY OF (LOSSES) GAINS
Recognized in income before income taxes
UNSETTLED DERIVATIVE FINANCIAL
INSTRUMENTS
CREDIT RISK
• Exposed to credit loss when financial institutions with
which FCX has entered into derivative transactions
are unable to pay
• FCX uses counterparties that meet certain credit
requirements
• Review the creditworthiness of these counterparties
• The maximum amount of credit exposure
associated with derivative transactions was $379
million at December 31, 2014
BHP BILLITON
BHP BILLITON
• Multinational mining, metals and petroleum company (top producers in
major commodity)
• Headquarter: Melbourne, Australia
• Was Created in 2001, by merging of Australian Broken Hill Proprietary
Company Limited (BHP) and the Angelo-Dutch Billiton plc. (dual-listed
company in London and Melbourne)
• As of 30 June 2014, the market capitalization of BHP Billiton reached US
$179 billion.
• Around 123,800 employees and contractors in 21 countries (130 locations
around the world.
• Products include: Iron Ore, coal, manganese, gold, petroleum,
aluminium,
silver, copper, etc.
BHP BILLITON REVENUE AND EBIT
BHP BILLITON INCOME STATEMENT
BHP BILLITON BALANCE SHEET
BHP BILLITON CASH FLOW
STATEMENT
BHP BILLITON RISK FACTORS
• External risks:
• Fluctuations in commodity prices and ongoing global
economic volatility
• Currency exchange rate fluctuations
• Reduction in Chinese demand
• Business risks:
• Failure to discover/acquire new resources, maintain them or
develop new operations
• Potential change to their portfolio of assets through
acquisitions and divestments
BHP BILLITON RISK FACTORS
CONTINUED
• Financial risks:
• If the liquidity and cash flow available to the company severely
decreases, then major capital programs cannot be properly
funded.
• May not recover their investments in mining, oil and gas assets due
to change in industry structure or price of commodities.
• Operational risks:
• Cost pressures and reduced productivity
• Sustainability risks:
• Safety, health, environmental and community issues, along with
incidents/accidents and regulations may also affect the
company’s people, operations and reputation, etc.
BHP BILLITON FINANCIAL RISK
MANAGEMENT
BHP BILLITON STATEMENTS
• “The natural diversification in our portfolio of
commodities, geographies, currencies, assets and
liabilities is a key element in our risk management
approach.”
BHP BILLITON RISK EXPOSURES
• Market risk: movements of
• interest rates
• foreign currencies
• commodity prices
• Liquidity risk
• Credit risk
BHP BILLITON MARKET RISK
MANAGEMENT
BHP BILLITON
MARKET RISK: INTEREST RATE RISK AND FOREIGN
CURRENCY RISK
• The risk in which the value of investment may
change due to altering the future cash flow
• Methods used by BHP:
• Interest rate swaps
• Cross currency interest rate swaps
BHP BILLITON MARKET RISK: INTEREST RATE RISK AND
FOREIGN CURRENCY RISK
BHP BILLITON
MARKET RISK: INTEREST RATE RISK AND
FOREIGN CURRENCY RISK
• However, the company is still subject to translational exposure, which is the foreign
exchange gains and losses on foreign currency denominated provisions for closure and
rehabilitation at operating sites, capitalized in property, plant and equipment.
BHP BILLITON MARKET RISK:
COMMODITY PRICE RISK
BHP BILLITON MARKET RISK:
COMMODITY PRICE RISK
BHP BILLITON LIQUIDITY RISK
• Liquidity risk: Risk of not being able to settle
obligations when they are due.
BHP BILLITON CREDIT RISK
• Credit risk: non-performance of the counterparties’
contract
BHP BILLITON FAIR VALUES
BHP BILLITON FAIR VALUES
BHP BILLITON SENSITIVITY ANALYSIS
COMPANY OVERVIEW
• British-Australian multinational corporation with
headquarters in London, UK, and a management
office in Melbourne, Australia
• A leading global mining and metals company
• Focus on finding, mining and processing the Earth’s
mineral resources in order to maximize value for
shareholders
• Dual-listed company traded on the London Stock
Exchange and the Australian Securities Exchange
EXECUTIVES
Chairman: Jan du Plessis
• Director of Rio Tinto since 2008, he was
appointed chairman in 2009
• Chairman of British American Tobacco plc.
between 2004-2009
• From 1998 to 2001, President and CEO of Ford
Motor Company
CEO: Sam Walsh AO (Melbourne)
• Director of Rio Tinto since 2009, he was
appointed chief executive in 2013
• Joined Rio Tinto in 1991, following 20 years in
the automotive industry at General Motors
and Nissan Australia
OPERATION
• Operating in 5 major businesses
•
•
•
•
•
Aluminum product group
Copper product group
Diamonds & Minerals product group
Energy product group
Iron ore product group
OPERATION LOCATIONS
GENERAL PERFORMANCE
GENERAL PERFORMANCE
CONSOLIDATED INCOME
STATEMENT
FINANCE INCOME
AND FINANCE COSTS
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
CONSOLIDATED
BALANCE SHEET - ASSETS
OTHER FINANCIAL ASSETS
CONSOLIDATED BALANCE SHEET- LIABILITIES
AND EQUITY
CONSOLIDATED
CASH FLOW
CONSOLIDATED
CASH FLOW
RISK MANAGEMENT
FRAMEWORK
• Managing risk effectively is an integral part of how
we create value, and fundamental to our business
success
• “Three lines of defense” model
• Ownership of risk by the operations
• Control of risk by Group functions and management
committees
• Assurance of our systems by Group Audit & Assurance
FINANCIAL
RISK MANAGEMENT
• Funding and exposure management
• Fundamental part of long-term strategy of the Group
•
•
Treasury operations
Treasury policy
FINANCIAL RISK FACTORS
•
•
•
•
•
Foreign exchange rate risk
Interest rate risk
Commodity price risk
Credit risk
Liquidity and capital risk management
FOREIGN EXCHANGE RISK
• Geographic diversity of sales and operations
• Important currencies
• US dollars
• Australian dollars
• Canadian dollars
• Cross currency interest rate swaps
FOREIGN EXCHANGE RISK
• Net debt of the Group
FOREIGN EXCHANGE RISK
• Hedging strategy
•
•
•
•
Not believe in active currency hedging
Review its exposure on a regular basis
Reserves the right to enter into hedges
Monthly treasury report
INTEREST RATE RISK
• Risk that the value of a financial instrument or cash
flows associated with the instrument will fluctuate
due to changes in market interest rates
• Borrow and invest at floating interest rate
• Based on historical correlation between interest rates and
commodity prices
INTEREST RATE RISK
• Hedging strategy
• Interest rate derivatives
• Hedging result
COMMODITY PRICE RISK
• Normal policy is to sell products at prevailing market
prices
• Products sold under contracts and spot market
• Copper, aluminum
• Products that are “ provisionally priced”
• Copper concentrate
CREDIT RISK
• The risk that a counterparty will not meet its
obligations, leading to financial losses
• Exposed to credit risks
• Operating activities
• Financing activities
CREDIT RISK
• Maximum credit risk exposure of financial assets
LIQUIDITY AND CAPITAL RISK
MANAGEMENT
• Objective is to safeguard the business as a going
concern whilst maximizing returns of shareholders
• Provide the Group a high degree of financial
flexibility at a low cost of capital
• Maintain an “A-” credit rating
SENSITIVITIES ANALYSIS
• Foreign exchange risk
SENSITIVITIES ANALYSIS
• Interest rate risk
• Commodity price risk