Mining Companies
Lorna Tam
Sandy Gao
Natalie Kim
Johnny
Luka Miodragovic
What is Mining?
Mining is the extraction of valuable minerals or other
geological materials from the earth.
Materials recovered by mining include
 Coal , copper, gold, silver, diamonds, iron, precious
metals, lead, limestone, nickel, and phosphate.
Any material that cannot be grown from agricultural
processes, or created artificially, is usually mined.
Mining Industry
Two sectors
 Specialization in exploration for new resources
 typically made up of individuals and small mineral
resource companies dependent on public investment
 Specialization in actual mining
 typically large and multi-national companies sustained
by mineral production from their mining operations
Stages in the Life of a Mine
Stages in the Life of a Mine
Stages in the Life of a Mine
Stages in the Life of a Mine
Risks Associate With Mining
Market Risk
Revenues are highly dependant on market prices
Prices are affected by:
 Growth and political conditions of consuming economies
 Currency exchange fluctuations
 Global supply and demand
 Availability and cost of substitute materials
 Speculative activities
 Production levels and costs of other mining countries
Operational Risks
Geological problems, including earthquakes and other
natural disasters
Occurrence of unusual weather or operating conditions
Metallurgical and other processing problems
Mechanical equipment failure and facility performance
problems
Lower than expected ore grades or recovery rates
 estimates are based upon engineering evaluations of
assay values derived from samplings of drill holes and
other openings
Operational Risks
Delays in the receipt of or failure to receive necessary
government permit
Uncertainty of exploration and development
Energy represents a significant portion of the production
costs of our operations
 Electricity, diesel fuel and natural gas
Labour disputes
 Occupational health
 Labour standards
Operational Risks
Ability to attract and retain skilled and experienced
employees
 Shortage of skills could limit ability to meet
contractual requirements
Industrial accidents
Long term sales contracts
 Loss of any contracts require company to sell at
prevailing market prices, which might expose it to lower
metal prices compared to contract prices
 Default or modification of the sales contracts could
prohibit additional loans or require the immediate
repayment of outstanding loans depending on covenants
of credit facilities
Operational Risks
Mine closure regulations
 Operations in the United States are subject to various
federal and state mine closure and mined-land
reclamation laws (requirements of these laws vary
depending upon the jurisdiction
 Bureau of Land Management (BLM) regulates mining
operations located on unpatented mining claims located
on federal public lands
 Mines are required to post increasing amounts of
financial assurance to ensure the availability of funds to
perform future closure and reclamation
Operational Risk In Foreign Countries
Political instability and civil strife
Changes in foreign laws and regulations, including those
relating to the environment, labor, tax, royalties on mining
activities, and dividends or repatriation of cash and other
property to the US
Foreign currency fluctuations
Import, export, and trade regulations
Insurance
Cost of insurance dramatically increased as a result of
worldwide economic conditions
Liability for environmental damage or other hazards which
may be uninsurable or for which it may elect not to insure
because of premium costs
Environmental Laws and Regulations
Regulations include:
 Clean Air Act
 Clean Water Act
 Resource Conservation and Recovery Act
 Metals Mines Reclamation Act
Laws are continually changing and becoming more
restrictive
Obtain permits issued by federal, state and local
regulatory agencies
 Some require periodic renewal or review of conditions
which they cannot predict if they could renew or new
conditions imposed
Subject to claims for natural resource damages where
the release of hazardous substances is alleged to
have injured natural resources
Environmental Laws and Regulations
Compliance with these laws and regulations imposes
substantial costs and significant potential liabilities
Often impose liability with respect to divested or terminated
operations, even if the operations were terminated or
divested many years ago
Parties to pay for remedial action or to pay damages
regardless of fault
Credit and Interest Rate Risk
Credit Risk
 Default or modification of sales contracts could prohibit
additional loans or require the immediate repayment of
outstanding loans depending on covenants of credit facilities
Interest Rate Risk
 Financing for operations from credit facilities are sensitive to
interest rates
 Important to hedge against interest rate risk so cash flow is not
affected for operations
Phelps Dodge
Phelps Dodge
Phelps Dodge (PD) is a producer of:
 Copper , Carbon black, Magnet wire, Continuous-cast
copper rod
World’s major producer of copper and molybdenum
Consists of two divisions
 Phelps Dodge Mining Company (PDMC)
 Integrated producer of copper and molybdenum
 Phelps Dodge Industries (PDI)
 produces engineered products principally for the
global energy sector
Acquisition of Phelps Dodge
Freeport-McMoRan bought out Phelps Dodge for $26 billion
Stockholders approved of the deal on March 21, 2007
 98 percent of stockholder votes supported the merger
The largest publicly traded copper producer
Phelps Dodge shareholders are to receive $88 per share in
cash and 0.67 of a share of Freeport stock (about $126.50 a
share)
The buyout ends Phelps Dodge's 78-year run on the NYSE
 The new company will trade under the symbol of FCX
Future
If copper prices hold at the current rate of around $2.50 a
pound, Freeport will be able to quickly pay off its debt. At
existing prices, the new company will generate an estimated
$6.5 billion in operating cash.
Will copper prices remain stable, allowing Freeport to
quickly pay off the $17.5 billion in debt it took on to buy
Phelps Dodge?
If copper price plunges, the new company may end up on
the rocks. Freeport is partially financing the buyout with $6
billion in junk-based bonds and $10 billion in bank loans.
Sales
US Mining Operations
 Majority of the copper from Phelps Dodge’s US mining
operations is cast into rod
 Rod sales to outside wire and cable manufacturers
constitute 74% of PDMC’s US sales in 2006
South American Mines
 Production is sold as copper concentrate or as copper
cathode.
 Candelaria mine sells copper concentrate to copper Asian
smelters(Japan) under long-term contracts
 Ojos del Salado concentrate is sold to local Chilean
smelters.
 Sales prices are based on LME prices
Worldwide Competitors
Primary US producers
Numerous foreign producers, metal merchants,
custom refiners and scrap dealers
Some major producers outside the US have cost
advantages
 richer ore grades, lower labor costs and, in some cases, a lack
of strict regulatory requirements
 US mines has less political risk
Other materials that compete with copper
 Aluminum, plastics, stainless steel and fiber optics
Recent Prices
COMEX copper prices averaging $3.089 per lb in 2006
 $1.407 above the average for 2005
Metals Week Dealer Oxide mean price $24.75 per lb in 2006
decreased 22% from the 2005 mean price of $31.73 per lb
Copper and Molybdenum Price
Phelps Dodge’s reported ore reserves are economic at
 copper price of $2.02 per pound
 molybdenum price of $24.30 per pound
 most-recent three-year historical average price
Phelps Dodge develops its business plans using
 a long-term average COMEX copper price of $1.05 per pound
 average molybdenum price of $5.00 per pound
The per lb COMEX copper price average
 $1.17(10 yr), $1.13(15 yr) and $1.12(20yr)
The per lb Metals Week molybdenum mean price
 $9.73(10yr), $7.88(15 yr) and $6.66(20yr)
Executives
J.
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Steven Whisler
Chairman of the Company since May 2000
CEO since January 200
President from Dec. 1997 to Oct. 2003
Chief Operating Officer from Dec. 1997
to Jan. 2000
 President for PDMC from 1991 to Oct. 1998
 Joined Phelps Dodge’s corporate office in New York in 1981
University of Colorado, B.S. in business (accounting)
University of Denver College of Law , J.D.
Colorado School of Mines, M.S. in mineral economics and D.
Sc. in engineering (Hon.)
Advanced Management Program at Harvard Business School
Certified Public Accountant in the State of Arizona
Executives
Timothy R. Snider
Elected President and COO in Nov. 2003
Senior Vice President from 1998
President and COO of FCX
Began 37-year career with Phelps Dodge
as a laborer in underground mining
operations in Bisbee, Ariz.
 Previous president of PDMC
 Northern Arizona University, B.S. in chemistry and geology
(1979)
 Advanced management program of the Wharton School at U.
Penn (1996)
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Executives
Ramiro G. Peru
 Executive Vice President in Oct. 2004
 Senior Vice President and CFO in Jan. 1999
 Senior Vice President for Organization Development and
Information Technology from Jan. 1997
 Vice President and Treasurer from 1995
Executives
Richard C. Adkerson
 CEO and director of Freeport-McMoRan
Copper & Gold Inc.
 Co-Chairman of the Board of McMoRan
Exploration Co. (MMR).
 Prior to joining Freeport-McMoRan in 1989,
he was a Partner and Managing Director of
Arthur Andersen & Co., where he headed the
firm’s Worldwide Oil and Gas Industry Practice.
 From 1976 to 1978, he was a Professional Accounting Fellow
with the Securities and Exchange Commission in Washington,
D.C. and a Presidential Exchange Executive.
Mississippi State University, B.S. (Hon.), MBA degree.
Advanced Management Program of the Harvard Business
School
Executive Compensation
Whisler
Snider
Snider
Income Statement
Balance Sheet
Financial Highlights
Financial Highlights
Risk Factors
Copper and Molybdenum Price Volatility
Increased Energy Costs
Copper price Protection Programs
Pressure on the Copper Production Costs
Mine Closure Regulations
Subject to Complex and Evolving Laws and Regulations
Uncertain level of Ore Reserves
Operational Risks
Risk Factors
Copper and Molybdenum Price Volatility
 Copper market is volatile and cyclical
 During the past 15 years, COMEX prices per lb have ranged
from a high $4.076 to a low of 60.4 cents
 Molybdenum market is more volatile and cyclical than copper
 During the past 15 years, Metals Week prices have ranged
from a high of $40.00 per lb to a low of $1.82 per lb
Copper Fixed-Price Rod Sales Hedging / Copper Price Protection
Programs
Risk Factors
Copper Price Protection Program risk
Risk Factors
Increased Energy Costs
 Energy is a significant production cost
 Principal sources are electricity, diesel fuel and natural gas
multi-year energy contracts / self-generation / diesel fuel and
natural gas hedging / price protection programs
Pressure on Copper Production Costs
 Relatively high cost structure
 Competitors’ mines located outside US have lower costs
 Due to strong demand, even high cost reserves are mined
Overall increase in worldwide production costs
Hedging Philosophy
“We do not purchase, hold or sell derivative financial
instruments unless we have an exiting asset or obligation or
we anticipate a future activity that is likely to occur and will
result in exposing us to market risk. We do not enter into
any instruments for speculative purposes. We use various
strategies to manager our market risk, including the use of
derivative instruments to limit, offset or reset or reduce our
market exposure. Derivative financial instruments are used
to manage well-defined commodity price, energy foreign
exchange and interest rate risks from our primary business
activities.”
Hedge Programs
Copper Fixed-Price Rod Sales Hedging
Copper Price Protection Programs
Metal Purchased Hedging
Gold and Silver Price Protection Program
Copper Quotational Period Swap Program
Diesel Fuel/Natural Gas Price Protection Program
Interest Rate Hedging
Foreign currency Hedging
Copper Fixed-Price Rod Sales Hedging
Fixed sales price instead of the COMEX average price
Enter copper futures and swap contracts
619M(2006), 492M(2005) and 381M(2004) lbs of copper
sales were hedged
The sensitivity analysis of copper futures contracts to
change in copper prices
 if copper prices dropped 10% at the end of 2006, copper
futures contracts would result in a net loss of $30M.
 All losses would have been offset by a gain in sales
Copper Price Protection
Protection against unanticipated copper price decreases
Purchase zero-premium copper collars and copper put
options to protect 2005, 2006, and expected 2007 global
copper production
These transactions do not qualify as hedge accounting
treatment (SFAS No.133)
 Adjusted to fair market value based on the forward curve price
and implied volatility as of the last day of the recording period
Copper Price Protection
As of Dec.31, 2006, Phelps Dodge had for 2007
 If the forward curve price had increased 10% at the end of
2006, option contracts would have reduced NI by $ 130M.
Metal Purchase Hedging
Metal (aluminum, copper and lead) swap contracts to hedge
metal purchase price exposure on fixed-price sales contracts
Metal hedge swaps for 57M (2006), 33M(2005) and
23M(2004) lbs of metal sales
As of Dec. 31, 2006, Phelps Dodge had outstanding swaps
on 33M lbs of metal purchases maturing through Feb 2008
If market price had dropped a hypothetical 10% at the end
of 2006, it would have had a net loss from the swap
contracts of $5M.
 All losses would have been offset by a gain in purchases
Diesel Fuel/Natural Gas Price Protection
Energy price protection programs for North American and
Chilean operations to reduce its exposure to price increases
in Diesel Fuel and Natural Gas products
 Combine diesel fuel and natural gas call option contracts and
fixed-price swaps
During 2006, 2005, and 2004, it had 58M, 61M and 56M
gallons of diesel fuel purchases hedged, respectively.
 Gain in these hedge transactions were offset by a loss in the
underlying diesel fuel purchases
Interest Rate Hedging
Objectives
 Reduction of the variability in interest payments
 Protection against significant fluctuations in the fair value of
debt
However, as of Dec.31, 2006 and 2005, Phelps Dodge did
not have any interest rate swap programs
Foreign Currency Hedging
Forward exchange contracts or currency swaps to minimize
the effects of exchange and interest rates fluctuation
 Protect the functional currencies of international subsidiaries’
transactions
 Exposures to the British Pound, Euro, South African Rand and
U.S. Dollar.
 As of Dec.31, 2006, it had forward exchange contracts
outstanding for $19M maturing through May 2007
A hypothetical negative exchange rate movement of 10%
would have resulted in a potential loss of $2M.
 The loss would have been offset by a gain in related underlying
transactions
Consolidated Statement of CF
Statement of Shareholder’s Equity
Statement of Shareholder’s Equity
Corporate Profile
Incorporated in 1992
The only primary palladium producer in U.S.
Common Shares:
Stillwater Mining Company (NYSE: SWC)
Current Stock Price
as of March 30, 2007: $ 12.73
Market Capitalization: $ 1,149 million
Total Shares Outstanding: 91.60 million
Profile
One of the world's leading producers of platinum group
metals (PGMs)
The only significant primary producer of palladium in the
Western Hemisphere
Extraction: two mines in southern Montana
Concentration and refining: a site near Columbus, Montana,
to a purity of 60% PGMs, then shipped to Johnson Matthey
for final refining of palladium, platinum and other metals at
a facility in New Jersey.
Profile
The Company's 28-mile long JM Reef in Montana is the
highest grade ore-body containing platinum group metals
(PGMs).
In 2006 the Company’s PGM production increased 8% to
601,000 ounces of PGMs.
In 2007 the company expects PGM production to increase
by 5% and plan to increase its PGM capacity more than
800,000 ounces.
Platinum: Uses and Sources
Palladium: Uses and Sources
Rhodium: Uses and Sources
World PGM Production
Stillwater Properties
Proven Ore Reserves
Developed State
Upgrade infrastructure
- 2006: Four major projects completed
- 2007: smelter furnace addition
Increase proven reserves
- Key driver on production growth
- Primary development, diamond drilling
Proven Ore Reserves
Transforming the Mines
Continue to Advance Safety systems
Increase Developed State of Mines
Expand selective mining methods
Increase production levels
Reduce operating costs
Increase Production
Production
Process Volumes
Officers
Francis R. McAllister (age 63)
Current Position:
Chairman of the Board and Chief Executive Officer
The Board of Directors of Cleveland Cliffs, Incorporated, an iron
ore mining company.
Education:
The Advanced Management Program at Harvard Business School
MBA from New York University
Bachelor of Science - Finance from the University of Utah
Previous Positions:
Chairman and Chief Executive Officer with ASARCO Incorporated.
Executive Vice President — Copper Operations with ASARCO
Incorporated.
Chief Financial Officer with ASARCO Incorporated.
various professional and management positions with ASARCO
Incorporated.
Officers
Gregory A. Wing (age 56)
Current Position:
Chief Financial Officer
Education:
M.B.A in Accounting and Finance from the University of
California at Berkeley
Bachelor of Arts in Physics from the University of California
at Berkeley
Previous Positions:
Vice President of Finance and Chief Financial Officer with
Black Beauty Coal Company
Manager of Financial Planning and Analysis with Pittsburg
and Midway Coal Mining Company (a subsidiary of Chevron
Corporation)
Senior Analyst in Corporation Planning with Chevron
Corporation
Financial Highlights
Financial Performance
Income Statement
Consolidated Balance Sheets
Statements Of Cash Flows
Risk Factors - Price
Sole Source of Revenue is sale of PGMs, so main
risk is price fluctuation
Factors beyond the company’s control that can
influence the price:
 Global Supply & Demand
 Speculative Activities
 International Political and Economic Conditions
 Exchange Rates
 Production level and costs in other PGM
producing countries – mainly Russia and South
Africa
Risk Factors - Price
Contraction in US could lead to volatility of
PGM prices due to downturn in sale of
automobiles and electronics
Weakening South African rand could make
South African PGM producers more
competitive
Risk Factors – Customers
Dependent on Ford and GM who are its
two major customers
Long-Term contracts locked in a price
GM and Ford bonds no longer investment
grade
If fail to pay, Company would have to sell
at a possibly lower open market price
Company may not be able to lock in good
prices when contracts come up for renewal
which would require it to curtail or shut
down ops.
Risk Factors - Other
Relatively high cost primary producer
Difficult to provide accurate production
forecasts
Some risks associated with mining may
not be covered by insurance
Possible liability for environmental damage
Uses hedging instruments which may lead
to loss
Contractual Hedge
Enter into Long-Term contracts that
establish floors and ceilings
Derivatives Usage
Fixed Forwards, Cashless Put and Call Collar
Options and Financially Settled Forwards
Used to Hedge Metal Prices and Interest Rate Risk
Loss of $15.8 million in 2006
Highly Effective Hedges – Fair Value of
Derivatives offset changes in the hedged
transaction very well due to high correlation
between hedged transaction and financial
instrument
Commodity Price Risk
Financially Settled Forwards accounted as cash
flow hedges
Financially Settled Forward contracts cover half of
its anticipated platinum sales until June 2008.
Hedged 113,500 ounces of platinum sales at an
average price of approximately $988/ounce.
Financially Settled Forwards
PGM Recycling
Interest Rate Risk
Other Comprehensive Income
Contains $31.1 million of realized hedging
losses offset by $29.3 million change in
fair value of derivatives held
$25,000 difference is the unrealized loss
on investments held for sale
Comprehensive Income in Detail
Change in Stockholder’s Equity
Year
2004
Change in net unrealized gains on
derivative financial instruments, net of
tax
(4,145,000)
2005
(12,639,000)
2006
1,824,000
As of December 31, 2006, unrealized loss for
hedges that mature in 2006 was $15.1 million
Fair Value
Stillwater classifies it as the price to sell an
asset or to pay to transfer a liability (exit
price) not the price paid to acquire an
asset or assume liability (entry price)
Derivatives must be recognized on the
balance sheet, and, if the derivative is not
designated as a hedging instrument,
changes in the fair value must be
recognized in the earnings in the period of
the hedge
Stock Options
Estimated at the date of grant using the BlackScholes option pricing model
The effect of stock options on diluted weighted
average shares outstanding was 85,341 in 2006
Options expire 10 years after the grant
May consist of incentive stock options (ISOs) or
non-qualified stock options (NQSOs), stock
appreciation rights (SARs), nonvested shares or
other stock-based awards, with the exception that
non-employee directors may not be granted SARs
and only employees of the Company may be
granted ISOs.
Nonvested Shares
Options Valuation
The weighted average fair value of options
granted during 2006 was $5.86, which was
calculated using the Black-Scholes optionpricing formula.
Options Activity
Options Outstanding and Exercisable