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Group 2 Presentation: Mineral and materials

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.

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Group 2 Presentation: Mineral and materials

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  1. Group 2 Presentation: Mineral and materials Prepared by: Haili Yin Li Regan Sun Fai Yi He

  2. Agenda • Introduction to Industry: • Copper • Petroleum • Aluminium • Companies: • Freeport-McMoRan • BHP Billiton • Rio Tinto

  3. 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

  4. Copper • Prices are determined by the major metals exchanges: • London Metal Exchange (LME) • New York Mercantile Exchange (NYMEX) • Shanghai Futures Exchange

  5. 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

  6. CopperDemand • By end-use market: • Construction (30%) • Consumer products (28%) • Electrical applications (19%) • Transportation (12%) • Industry machinery (11%)

  7. CopperProduction • Key point: Copper usage increased 12% in 2014 while mine production increased just 3%

  8. PotentialRisks • Operating Risks: • Laws and Regulations • Equipment shortage • Environmental condition • Technology • Market Risks: • Copper price • Interest rate • Foreign exchange risk • Substitutes • Economic and political issue

  9. PotentialHedging Activities • Energy Prices • Copper Prices • Exchange Rates • Interest Rates

  10. 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

  11. 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

  12. Petroleum Prices

  13. Petroleum Demand

  14. Petroleum Supply • OPEC is a major factor in supply and price (Organization of the Petroleum Exporting Countries)

  15. 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 by-product as well!)

  16. Petroleum--Potential Hedging Strategies • Possible methods: • Contracts • Interest Rate Swaps • Cross Currency Rate swaps

  17. 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

  18. 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

  19. Aluminum Price

  20. 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

  21. Global Aluminum Demand - Industries

  22. Global Aluminum Supply

  23. Global Aluminum Demand and Supply

  24. Freeport-McMoRan

  25. CompanyBackground • 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

  26. Locations of operating mines

  27. Ownership Interest of FCX

  28. 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%)

  29. RiskFactors • 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)

  30. 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

  31. RiskFactors • 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

  32. RiskFactors • 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

  33. RiskFactors • 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

  34. Disclosuresabout market risks • Commodity Price Risk • Foreign Currency Exchange Risk • Interest Rate Risk

  35. Copper price VS. FCX stock price

  36. IncomeStatement

  37. Cash Flow Statement

  38. Cash Flow Statement cont’d

  39. Balance Sheet

  40. Balance Sheet cont’d

  41. 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. ”

  42. 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

  43. 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

  44. Fair Value Hedge Transactions Realized gains (losses) & Unrealized gains (losses)

  45. FinancialInstruments • Derivatives not designated as hedging instruments • Embedded Derivatives • Crude Oil and Natural Gas Contracts • Copper Forward Contracts

  46. EmbeddedDerivatives • 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

  47. EmbeddedDerivatives Summary of FCX’s embedded derivatives at December 31,2014

  48. 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

  49. 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

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