Archive for Ore

More evidence — This from PwC — of the global resource mine slowdown

Management consultants PwC have published another report about global trends in the mining industry.

Mine 2015 examines the 40 largest mining companies in the world.

Here are some tidbits.  Those 40 companies as a group are market valued today at about $800 billion. That represents a halving of their value calculated four years ago.

The report has the interesting name “The gloves are off”.

Pone take away is the mining Shareholders are literally “ticked off” about the estimated $27 billion in corporate write offs because of poor investment decisions made by overly aggressive managers between 2006 and 2013.

Under pressure from shareholders, many of the top 40 companies cut capital spending 20% in 2014. Many of the so called greenfield projects are the ones taking the biggest hit. The company exploration budgets have been particularly cut.

Over the last 2 years, “the majors cut back their exploration spending by more than half to about $4.9 billion in 2014. The drop was from about $6.3 billion spent in 2013 and $12 billion spent in 2012. This is consistent with trends reported by multiple otyerbnewscsources.

The report makes note that the so called junior miners in this list of 40 has witnessed the worst in terms of their ability as a market group to raise greenfield exploration capital.

Obviously, many of the supporting rail and port projects have also been hurt, suspended, or dropped.

Contact PwC for more details.

Brazil proposes US $64.5 Billion infrastructure plan reports IRJ

 

IRJ report

So far, zero economic feasibility assessment to back up the strategic concept planning.

About one third of total federal plan is for rail projects.

Details that exist can be found at: http://www.railjournal.com/index.php/central-south-america/brazil-launches-dolus-645bn-national-infrastructure-plan.html?channel=536

A few of my critical observation are here:

1)

The government’s previous attempt to attract private funding for rail projects under the 2012 Logistics Investment Programme (Pil) was a complete failure as it did not receive any bids.

2) Under this 2015 new plan, Brazil’s National Bank for Economic and Social Development (BNDES) will be allowed to provide finance at low interest rates for up to 70% of the cost of a project provided there is also some private funding.

3) Most of the railway investment will be for new line construction.

— Reais 7.8 billion for 2 sections of the North-South Railway

— Palmas – Anápolis and Barcarena -Açailandia;

— Reais 4.9 billion for Anápolis – Estrela D’Oeste – Três Lagoas;

— Reais 9.9 billion for Lucas do Rio Verde – Mirituba.

— Reais 7.8 billion for the Rio de Janeiro – Espírito Santo railway;

4)

A major new speculative Trans-Andes 3,500 km long line; — Reais 40 billion for Brazil section of new line line to Peru

5)

Expansion of capacity on existing Brazil rail lines

— Reais 16 billion for track-doubling schemes, etc.

6)

“BYE BYE to OPEN ACCESS!

The federal government appears to have abandoned the European open access business model. There is no discussion now about the previous proposals to separate infrastructure from operations for new lines with multiple freight operators.

Instead, future Rail freight concessions will mirror those on the existing network with one company responsible for maintaining and operating each line — as in the North American model.

The intention of the government is now to increase confidence in these projects for the needed private investors.

What do you think of this?

China Rail may lose more than 100 million tons of domestic iron ore business

Multiple sources report that as much as 200 million tons of annual Chinese domestically mined iron ore might now be closed as the global prices paid are too low to support that local business.

One source is Vale’s Chief Executive Officer Murilo Ferreira. He made the market shift assessment at a conference in Rio de Janeiro.

Some of that iron ore is moved by rail, and some by water or by truck to China’s steel mills. No one has released numbers yet as to the possible business loss impact on the Chinese rail freight network.

The sourcing difference will likely come to China via ocean ships from Australia and Brazil as the two currents lowest priced suppliers.

Incremental gains will come from Africa and other marginal mines to ports rail links that have a good cost “to source and deliver” price scenario while the delivered price paid at China coastal ports is less than $100 a ton.

What is your estimate of the impact on China Rail traffic?

Botswana

“Botswana government defers royalties to help hard-pressed mining companies” says news headline

9TH June 2015   Published by  MARTIN CREAMER   (miningweekly.com) –

The government of Botswana is bringing relief to profit-squeezed mining companies in its nation by allowing them to defer the payment of mineral royalties.

Speaking at the thirteenth Botswana Resource Sector conference, Minerals, Energy and Water Resources Minister Onkokame Kitso Mokaila said the government was applying this short-term relief and would continue to assist the mining industry on a case-by-case basis for mutual benefit.

“What keeps me awake at night is how we enable business to earn a return on their investment and at the same time have national benefit,” Mokaila told the conference

Emphasized at the conference was the importance of working collaboratively.

Leaders from Mongolia to Mali and South Africa to India need to understand his message.

Stop looking for a hand out and get into the global competitive struggle for the long term.

Sovereign position means little in a global battle for markets when the so called super cycle is in retreat for the next few years. Only those that figure this out and form true partnerships for the shared investment risks can take the high ground and likely succeed.

The others?  They will struggle. History has shown us this pattern repeatedly.

Mines, ports, and rail infrastructure are all part of the logistics package for those that want to be world class providers.

The Botswana Minister made himself available for prolonged questioning from the floor.

For more details, see: http://www.miningweekly.com/article/botswana-government-defers-royalties-to-help-hard-pressed-mining-companies-2015-06-09

Map identifies regional location of Botswana

South Africa South32 possible slowdown at Samancor Furnaces will hurt Transnet Rail traffic plans

A Bloomberg report on June 9th suggests that South32 Ltd., the mining company spun off from BHP Billiton may reduce the value of its 60 percent stake in a South African manganese venture. To read the entire article, go to http://bloom.bg/1JBmno1 I

t will delay restarting three of the 4 ferro-manganese furnaces in its Samancor venture with Anglo American. Reason for the cutback relates to the recent 20% global price decline.

South32 is reported as negotiating with Transnet SOC Ltd., the South African logistics operator to secure additional rail and port capacity for the export of manganese ore from Samancor’s Hotazel mines in the Northern Cape province.

The future rail movement volume depends on global ore prices and the rail and port negotiated rates per ton. If the global slowdown in resources from manganese to coal and iron ore continues into 2017 or beyond, the result will lower Transnet Rail’s achievement of their current 7-year strategic plan.  How might Transnet respond to these market forces?

CHANGING MARKETS and the need for a Rail Plan B  (hit the more key for added information)

Read more

More evidence of Mounting Risks to Keep Africa Growing

Still largely a very poor region, Africa faces economic hurdles is its hopes for growth

A Bloomberg report on 2 June shows evidence that African nations are facing mounting risks as they seek to extend two decades of stellar economic growth.

Stellar but uneven.

To read the entire Bloomberg report, go to http://bloom.bg/1RHYdJ

 

Here are some important points for my associates in the African rail industry.

In May The International Monetary Fund lowered its 2015 growth outlook for sub-Saharan Africa by 1.25 percentage points to 4.5%

Based on multiple sources of evidence, economic growth in both Nigeria and South Africa is clearly slowing. “Sustaining Africa’s growth is going to prove increasingly challenging,” says Peter Attard Montalto (an economist at Nomura International Plc in London) in a conversation with Bloomberg reporters. Montalto points out that “competition for trade and investment within the continent is increasing. All countries will need to step up their game.”

THE NEED TO STEP UP THEIR GAME

Are the key government leaders, policy makers and company executives from companies meeting at this week’s World Economic Forum in Cape Town paying attention?

The forum will discuss growth in the context of a continent where 72% of the Sub Saharan population still lives in or at the brink of poverty (UN data). In numbers, that is a staggering 585,000,000 estimated souls.

IF (actually very likely) global commodity prices remain low or worse even decline further — then the African governments will have to go increasingly to a Plan B government budget cut approach. Most are not use to that tactic.

On the positive side, There is still selective growth in Africa.

Ernst & Young released a report to the public this week that shows Africa attracted $128 billion in foreign direct investment during 2014. That marked an increase year over year. However, the number of projects dropped by 8.4%.

On the negative side, a large number of mine and rail and port projects are on hold. Many indefinitely. My readers and clients have discussed this pattern before. Tonight’s report is just another confirmation of the pattern.

Where and on What?

E&Y found that 44% of the investment went to projects in the real estate, hospitality and construction industries 25% went for oil, natural gas and coal 9 of the world’s 15 fastest-growing economies are in Africa

SLOWING INVESTOR CONFIDENCE

EY surveyed more than 500 business executives in 30 countries Growth could slow they felt because of a combination of factors

Those identified include: 1) Africa’s political instability, 2) Corruption 3) Poor security 4) Lack of infrastructure including transport and electricity These plus a scarcity of skilled labor are the biggest deterrents to investors.

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What will come out of this week’s forum?

What leaders will leave with a sense of urgency and change?

Stay tuned and we can discuss later when more facts emerge.

Sent from Jim’s iPad

Tanzania — another nation betting on high ore and coal exports to back railways

Too many expect to prosper by building their rail policy on the now sputtering resource super cycle. Tanzania is the latest with a Plan A flawed strategic assumption.

Tanzania ministries continue to articulate building their railway projects in the face of mounting evidence of fundamental market demand/supply changes you have read in my economic blog themes.

There appears to be little due diligence about the ore and coal based traffic railway mix they are using in searching for railway infrastructure investors.

The headline in Bulk Materials April news reports says “Tanzania seeks rail funding” The government of Tanzania has apparently appointed Rothschild to secure funding for its three planned new railways. Two of the three rail projects are designed to facilitate coal and iron ore exports.

This seems to ignore the changing market dynamics of a long term over supply for those commodities.

Tanzania planners do realize that they will require a large commercial loan investment scheme to finance their rail. The price tag at this conceptual level of planning is admitted to be a whopping estimated US$14 Billion. That is the equivalent of about three Panama Canal upgrade projects.

Today at a design level we can describe as a high level concept feasibility, the cost variability of their capital estimates could be only about 60% or so accurate. Sometimes more accurate. But unlikely. That suggests a critical need for more due diligence risk assessment.

Before investors write check for checks for such projects, they want a 15% of so level of feasibility confidence.

Here is what is missing.

There is no publicly available and transparent railway projected future Income Statement feasibility report. The ability of the proposed Tanzania railroad to pay all of its operating expenses from its future revenues and then have sufficient net earnings left to pay future bond interest and principle is a great unknown at this point.

Instead they have a nicely stated conceptual grad plan discussions available as a MARKET SUPPLY factor  — yes.  But so few financial and marketing details. Only the engineering capital cost number is out there. That suggests “risks”.

In North American terminology, maybe that is why the project term “scheme” is being used in some of the project promotion literature. The economic use of a project scheme wording suggests risk in the US use of the English language.

NEVERTHELESS… the published news reports suggest rumors that some lenders have been found and are willing to consider commercial loan terms of about 20 years for the Tanzania rail project. Have those investors done their due diligence on the ability of the bonds to be paid off if the super resource cycle of the past decade of China steel consumption shifts?

No one is publicly saying so far. At least not is reports that I globally scan.

The current economic  assessments of global commodity consumption out towards 2025 by independant analysts like Citigroup and Goldman Sachs (see my previous reports) suggests a new Plan B set of assumptions should be considered before investing.

Comments by leading regional ministries do not suggest they are thinking that way yet. Instead, Transport Minister Samuel Sitta told some reporters that “We are in competition with the Port of Mombasa… so we need to be efficient.”

That is probably an understatement.

Fortunately, he can still get due diligence help before the project execution begins.  A solid market assessment and projection of possible financial returns against that market DEMAND side could be done in about four months time.

To read the news report, go to: http://www.bulkmaterialsinternational.com/htm/n20150526.964554.htm Sent from my iPad

Long term ten year challenge of lower iron ore prices for rail planners

From Mongolia to South Africa and Brazil to West Africa the “go go” former strategic outlook for big new rail and port projects that bet on iron ore NEED SERIOUS DUE DILIGENCE rethinking.

This is an economic message I have been beating the drum about with my customers, friends, and readers for the past three years.

Only the strongest and lowest cost per ton-km railroad supply chains will be the sustainable economic competitors if the Citigroup strategic projections are correct

That translate to big train heavy axle technology if you as a rail and port logistics chain want to be winners going forward. Who is up for this challenge? ————-

From a Bloomberg report on May 26, 2015 “Global iron ore demand will contract over the 2020s as steel consumption growth in China peaks, according to Citigroup Inc.”

This independent due diligence estimate marks a long-run price forecast for the raw material by 32 percent.

To read the entire article, go to http://bloom.bg/1PLH5Fs

Here is below added background from a multiple of sources on this subject from my previous experience and files.

1) Global iron ore demand will contract as steel consumption growth in China peaks over the next decade according to Citigroup Inc.

2) The long-run deliver iron ore price estimate was cut to $55 a metric ton from $81 as the world’s major mining companies will add overtime to the global over supply. The expert prediction is by analyst Ivan Szpakowski. He suggests that from 2016 to 2018, prices may average $40.

3) SUPER CYCLE REVERSE “The next decade is shaping up to be a complete reversal of the past decade,” Citigroup said.

4) Marginal higher cost per ton producers and supply chains are the ones most threatened In this commercial scenario, the marginal producers will likely falter Small train higher operating cost railways won’t cut it in that kind of global competition shift. This will particularly impact planners who continue to hold onto rail design plans that use light weight less than 33 metric ton axle loads and short trains.

As one specific example, Mongolian Gobi rail planners need to wake up and adjust to a Plan B big train engineering design that some of us suggested in 2006. Twenty five or less tons per wagon axle just will not get the job done against stronger global supply chain comoetition.

5) “Perhaps the greatest structural challenge facing the iron ore market is the rolling over of Chinese iron ore demand, driven by declining domestic steel demand and rising scrap availability,’ the bank said. ‘ ‘As a result, despite growth from other emerging markets, we forecast a decline in global iron ore demand over the 2020s.’’

6) New Growth Predictions out towards 2025 Demand for seaborne iron ore in China will likely slump to 982 million tons in 2025 That marks a decline from the revised expected high market demand that will likely peak around an estimated 1.2 billion tons in 2020 according to this Citigroup forecast.

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Long supply chains feeding ore towards China and India by seaborne delivery to ports by rail will over the next decade see a drop over the period.

7) In the short term, prices for the ore at a 62% content at Qingdao will likely see periods of up and down movement. As an example, iron ore recently was paying around $47 a dry ton in April for delivery but then rose to about $63 a ton this week reports Bloomberg. Most suppliers need to get paid more than $90 in order to be financially sustainable as unsubsidized iron ore businesses.

THE STRONGEST MAY PROSPER. OTHERS WILL STRUGGLE

‘‘The two lowest-cost producers per ton of iron ore are Rio Tinto and BHP”… Other sources like Goldman Sachs have previously reported this. These two giant mone companies have a pipeline of extremely low-cost mostly brownfield capital projects “that should see their combined production exceed 900 million tons by 2025”. These two source suppliers would under these calculations account for “roughly 70 percent of global import demand,” Citigroup predicts.

For the other 30%, including a big chunk from VALE, the other grand projects may struggle to see if their logistics chains can compete.

This fundamental predicted market demand and supply model means that a bunch of rail and port blueprints around the world “need a Plan B”.

Are they holding or to their old Plan A or adapting?

Those who reach out for help and change will be the ones to prosper.

What do you think?

Sent from Jim’s iPhone

More than 60% of megaprojects mines face cost overruns –. LIKELY for rail also

WHERE IS THE DUE DILIGENCE on these ambitious project feasibility cost estimates?

This was a timely report on the internet business news

A 60% rate of large project cost over runs reported from a after the fact due diligence review.

What executives were “watching out for the investors’ interests”?

Where was the pre-project due diligence review?

As exuberance over China “go-go” growth cools down now to more realistic levels, some formerly free wheeling mine executives are probably going to be reassigned or worse.

Likely a similar fate awaits many project rail planners.

The cited EY study below is not focused on the supporting railway projects. But this significant mining failure implies similar rail project cost over run impacts from Mongolia to South Africa and from Mali to India.

Mongolia’s rail plan execution failure out of the Gobi Desert TT fields is probably a close parallel to this report’s conclusions. Almost now a decade in only partial construction, the Mongolian project is a similar “failure to execute” on time and on budget. But here, the blames rests on government rather than executives.

MASSIVE MISS IN ESTIMATING THE TRUE PROJECT COSTS

How can so many screw up so badly?

COSTS as identified in the EY evidence were on average 60% or more over the initial predictions.

Who did the original diligence checking?

Where was the investor/banking over sight?

60% is what most of us who are economist refer to as the conceptual level accuracy of costs. That is terrible for an actual post project delivery audit..

60% is a flunking grade if judged logically.

60% suggests that there was never a serious project feasibility assessment of the market and economics.

Will this lesson learned be used by project leaders going forward now that feasibility may be even more difficult if the resources super cycle is behind us?

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The report title is: ‘Opportunities to Enhance Capital Productivity’

Here are a few highlights.

1) EY found that “an average budget overrun of 62% was reported on the 108 megaprojects investigated.”

2) “The projects considered were at various stages across the investment and project delivery life-cycle.”

3) “The projects were geographically diverse and related to the development of copper, iron-ore, gold, coal, nickel and other commodities.”

4) Cumulatively, “the projects represented global investment of $367-billion.”

5) “An estimated 50% of projects were reporting schedule delays even after remedial acceleration initiatives had been applied.”

The study spokesperson at EY is its global mining and metals advisory leader Paul Mitchell.

Mine company leaders now admit to their shareholders that with the good old high growth China days behind them… … the project managers need to be much more precise with their due diligence in order to achieve the promised investment margins. There is now a lot less room for error.

The report cites that total capital expenditure for the subject projects examined “have dropped from $142-billion in 2012 to an estimated $96-billion this year”.

For more details, please go to the Mining Weekly report from an Earnst Young special study at: http://www.miningweekly.com/article/more-than-two-thirds-of-megaprojects-face-cost-overruns-ey-report-2015-05-21

How would you score the report card based on the E&Y report?

Sent from Jim’s iPad

Bloomberg alert as Goldman Commodity Rout Snares Ships

Duluth Trip - May 2014 - MV Paul R. Tregurtha arrives in Duluth, by Pete Markham, on Flickr

Interesting transport economics in Bloomberg maritime news published on May 6, 2015.

The collapse in global rates for shipping commodities from the world’s mines to mills and utilities will persist until at least 2020 on a glut of vessels and stalling cargo growth, according to Goldman Sachs Group Inc.

Read “The World Shrinks for Goldman as Commodity Rout Snares Ships,” By Jasmine Ng at http://bloom.bg/1PpSTI5

A Few KEY POINTS.

1) The shipping lines have missed out on transferable economic lessons learned by North American railroads these past three decades.

2) Strategic planners need to balance capacity they add to their Balance Sheet to the likely downside of market demand

3) TOO MANY SHIPS “From the iron ore pits of Western Australia and Brazil’s Sudeste to the coal pits of Indonesia and South Africa, mining companies have experienced the end of the bull market in commodities,” Lelong and Cai wrote in the report dated May 6. “Now the shipping industry is feeling the impact.”

The daily charter rate for a Capesize vessel slumped below $10,000 from a peak of more than $100,000 in 2008, according to Goldman. “There’s still this structural overcapacity in dry-bulk shipping”… Goldman cited slumping rates for hauling iron ore from Western Australia to China, described as the busiest dry-bulk trade route in the world. The estimated cost of shipping one ton sank from $44 at the peak in early 2008 to $4.40, it said. Global demand for seaborne iron ore, thermal and coking coal may expand only 2 percent this year

4) HOW LONG The slows growth will likely last into 2018. That compares with an average of 7 percent between 2005 and 2014, Goldman said.

Summary Observation

The impact of too much ocean shipping capacity has direct implications as well for many global pending rail freight projects. Too much rail capacity is not a smart business plan. Emerging nations have to adapt to the new commercial realities.

What do you think?