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The challenges of mining

The challenges of mining. Rio de Janeiro August 16, 2012. A successful case. Metals price behavior. 1. 2. Populist times. 3. Agenda. A successful case. 1. 2. 3. Metals price behavior. Populist times. Vale, a successful case of privatization. Annual avg in US$ million¹.

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The challenges of mining

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  1. The challenges of mining Rio de Janeiro August 16, 2012

  2. A successful case Metals price behavior 1 2 Populist times 3 Agenda

  3. A successful case 1 2 3 Metals price behavior Populist times

  4. Vale, a successful case of privatization Annual avg in US$ million¹ State-owned Private sector owned 1943-1997 1998-2011 (A) (B) (B)/(A) Investment 667 8,248 12.4x Revenue 1,726 21,126 12.2x Net income 270 7,834 29.0x Dividend 72 2,041 28.3x ¹ nominal values deflated by the US CPI

  5. Fifteen years ago Vale was a typical Brazilian export-oriented company Vale in 1997 Belgium USA Japan China Brazil Legend Operations Offices Exploration offices Headquarter Stock Exchange

  6. A global reach Vale in 2012 Hong Kong Stock Exchange

  7. Investment to meet the long-term growth dynamics of emerging economies • Investment-based demand products for housing and infrastructure. • Consumption-based demand products for durable goods and proteins.

  8. Success was not due to chance or to cyclical factors Real metals price index¹ Real terms index ¹ The IMF metals price index is based on a basket of metals (copper, aluminum, iron ore, tin, nickel, zinc, lead, and uranium). Sources: IMF and Vale

  9. After plunging from 1980 to 2000, real iron ore prices are trending upward Iron ore real prices US$ per metric ton US$ per metricton ¹ Long-term trend according to Hodrick-Prescott filter Sources: Vale and USGS

  10. A successful case 1 2 3 Metals price behavior Populist times

  11. Macro factors have a large influence on commodity prices Price variance associated to macro factors 1979-2011 % Food 45-50 Oil 85-90 Natural gas¹ 17-20 Base metals 60-65 ¹ US Source: IMF

  12. Commodity price co-movement

  13. Metals prices are associated to industrial production Global IP Metals price index¹ ¹ The IMF metals price index is based on a basket of metals (copper, aluminum, iron ore, tin, nickel, zinc, lead, and uranium). Sources: IMF and JPMorgan

  14. 16 12 8 4 0 1972 1977 1982 1987 1992 1997 2002 2007 2012 Industrial production is the most volatile component of the GDP, imparting a volatile environment to base metals prices Global IP growth volatility¹ ¹ 24-month rolling standard deviation of %3m, saar monthly IP change Source: JP Morgan

  15. The strong EM-led recovery in IP growth has generated metal price increases much greater than in the recoveries from past recessions Metal prices in recoveries from past global recessions¹ Global industrial production % 3mma, saar¹ ¹ Global recessions: 1974, 1981-82, 1990-91, 1998 and 2001. ² Percentage change from last trough to recent peak (Al: 2,785$/t on 3/5/11; Cu: 10,148$/t on 14/2/11; Ni: 29,030$/t on 21/2/11) Sources: Vale and JPMorgan

  16. Commodity prices tend to be negatively correlated with shocks to the value of the US dollar Correlation between US NEER and metals prices¹ ¹ Correlation between rolling two-year standard deviations of monthly changes in US NEER and commodity prices; Jan/10 – May/12.

  17. Changes in financial markets instability tend to be negatively correlated with base metals prices Metals prices and the VIX Two-year rolling correlation between daily changes in the VIX and base metals prices

  18. Nickel and copper prices are highly volatile Daily returns % Nickel Copper Sources: DIRI/DETM and Bloomberg

  19. As well as iron ore prices Daily returns %

  20. Nickel real prices cycles1 Shaded areas represent periods of downswings. ¹ Real prices, base year = 2012.

  21. Copper real prices cycles1 Shaded areas represent periods of downswings. ¹ Real prices, base year = 2012.

  22. Real metals price cycles ¹ months

  23. The behavior of metals prices shows some similarities to stock prices: difficult to predict, fat tails and volatility clustering

  24. A successful case 1 2 3 Metals price behavior Populist times

  25. Natural resources nationalism

  26. Some fallacies about commodities • A gift from God. • The Dutch disease. • The natural resources curse.

  27. Vale - R&D investment – 2007- 2011 US$ 5.7 bilion

  28. Global mining capex US$ billion¹ Real prices ¹ 2009 prices. Source: Vale estimates.

  29. Despite the restrictions, natural resources have contributed to increase total productivity in Latin AmericaRelative TFP (US=1.0) Source: “On the evolution of TFP in Latin America”, P. Ferreira, S. Pessôa and F. Veloso , Economic Inquiry, 2012.

  30. Is there a natural resources curse? • Commodities andeconomicdevelopment ¹ 2011 values Sources: Vale, Haver Analytics, IMF, Penn World Tables, MIDC-SECEX, StatCan and Statistics Norway,

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