The nickel market outlook: from over-supply to

shortage?
h t ?
April 2014
Jim Lennon
C
Consultant
l to Macquarie
M i Research
R h
jim.lennon@macquarie.com

In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the
reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer.
Nickel: from worst to best…
 The January 12th absolute ban on exports of nickel ore from Indonesia changes
everything in the nickel market.
market
 From being the worst performing metal in recent years, nickel has the potential to be the
best performing metal in 2014-16.
 The export ban removes up to 450kt of ferronickel/nickel pig iron production from the
market, equal to 25% of 2013 global nickel use – in the short run (next two years at least),
there are limited substitutes for this nickel.
 Impact on the market is delayed by large stocks of nickel ore in China and elsewhere of
around 250-300kt nickel and of course large refined stocks on LME and in China.
o e e , these
 However, ese sstocks
oc s will rapidly
ap d y deplete
dep e e in 2014/5
0 /5 and,
a d, more
o e importantly,
po a y, thoseose
controlling those stocks will hold on to them more tightly if they think prices will rise.
 Once stocks are depleted, it is a mystery where supply will come from! This is a repeat of
the situation leading up to 2006/7.

Page 2
Nickel: the Indonesian supply flood has been stopped
 Huge requirements for new capacity driven by explosion in Chinese demand since 2000.
 Chinese demand remains strong and demand outlook is bright.
 Nickel
Ni k l shortage
h t up tto 2006/07 but
b t th
then:
1. Growth in 200-series stainless steel (1-2% Ni) as a substitute for 300-series (8-9% Ni).
2. Processing
g of low-grade
g laterite nickel ores into nickel pig
p g iron in China.
3. $40bn+ spent by the nickel industry to expand production.
 Nickel market moved into large structural over-supply.
…however:
 Soaring capex and major technical challenges have made non-Chinese investments
economically unviable.
 Chinese NPI (nickel pig iron) was a low-capex/high opex solution to meeting demand
growth; however, China has limited mine reserves of nickel so it is highly reliant on raw
material imports, especially from Indonesia.
 Indonesia has banned exports of unprocessed mineral products from 2014. There is no
substitute for Indonesian ore.
Page 3
LME nickel price rallies 25% from January 2014 low

19000 300000

275000
18000

nnes
E cash price: $/t

250000

E stocks: ton
17000
225000

16000 200000

175000
LME

LME
15000
150000
14000
125000

13000 100000
May-13
Oct-12

Apr-13

Oct-13

Apr-14
Jul-12
Aug-12
Sep-12

Nov-12
Dec-12
Jan-13
Feb-13

Jun-13
Jul-13
Aug-13
Sep-13

Nov-13
Dec-13
Jan-14
Mar-13

Feb-14
Mar-14
LME price LME stocks
Source: LME, Macquarie Research, April 2014

Page 4
Nickel
c e sstocks
oc s a
are
e higher
g e than
a for
o aanyy o
other
e base
metal…but control of these stocks is the key

Estimated total stocks for base metals: end-Feb 2014

(weeks of annual consumption) Current nickel stocks
30 28.5 30
27.4 China other
1000
Raw Materials
25 25 900 China SRB (e)
Other
Exchange 800
20 20 700 Reported
Producer
600
Non-LME Ex-

'000t Ni
15 13.0 15 500 China
400 LME
10 8.3 8.2 10
300
6.2 Non-China in
200 raw materials
5 5
100 China in raw
materials
0 0
0
End-Feb 2014
Al Ni Zn Cu Sn Pb

Source: LME, INSG, ICSG, ILZSG, IAI, COmex, SHFEMacquarie Research, April 2014

Page 5
C ese nickel
Chinese c e ore
o e stocks
s oc s starting
s a g to
o fall,
a , bu
but who
o
owns it and when will it be used?
 End-2013
End 2013 estimated ore stocks close to
35mt, of which 25mt of high-grade
Estimated Chinese nickel ore stocks Indonesian nickel ore.
35000

30000
 Ni content of stocks probably close to
25000
300kt, around 7-7.5 months.
 However, many nickel pig iron producers
'000t gross weight

20000

15000 only have 1-3 months holdings with

10000 traders and large producers controlling
5000 the bulk of stocks.
 Cuts to nickel pig iron production likely to
0
Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- Mar-
12 12 12 12 12 12 13 13 13 13 13 13 14 14
Port Plant start soon.

Source: Umetal, Macquarie Research, April 2014

Page 6
Ore prices critical in costs – starting to soar and
sellers of ore socks likely to delay sales
Quotes for nickel ore exports
p move sharply
p y higher
g

70
65
60
55
50
$/t fob

45
$

40
35
30
25
20
May-10

May-11

May-12

May-13
Nov-10

Nov-11

Nov-12

Nov-13
Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14
Philippine 1.8%Ni
1 8%Ni ore Indonesia 1.8%Ni
1 8%Ni ore

Source: SMM, Macquarie Research, April 2014

Page 7
LME longs
o gs soa
soar and
a d rising
s g cancelled
ca ce ed warrants
a a s make
a e
stocks harder to obtain

Huge rise in LME open interest points to large spec longs LME cancelled warants as percent of total LME stocks
2000000 19000
50%

45%
1750000
LME future open interest: tonnes

40%
17000 35%

$/tonne
1500000
30%

Price: $
25%
1250000
15000 20%

15%
1000000
10%

750000 13000
5%
May-13

Jul-13

Aug-13
Jan-13

Feb-13

Mar-13

Jun-13

Sep-13

Oct-13

Nov-13

Feb-14

Mar-14
Apr-13

Dec-13

Jan-14

Apr-14

0%

May-13

Jul-13
Jan-13

Feb-13

Mar-13

Mar-14
Apr-13

Jun-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Apr-14
Open interest LME price

Source: LME, Macquarie Research, April 2014

Page 8
Projected market balance if the ban is enforced

250 2008-13:
2008 13 540kt 12
2003-07: 141kt surplus

eek's use
186
200 2014-18f: 10
alance

deficit 136
150 122 462kt 8

s stocks in we
ply/demand ba

93
100 deficit 6
48
50 32 36
10 4 4
0

LME/prducers
2
'000t supp

-12
-50 -26 -33
-40
0
-100
-88
-111 -100
-150 -117 -2
145
-145

L
-200 -4
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014f

2015f

2016f

2017f

2018f
B l
Balance (LHS) St k iin weeks
Stocks k off use (RHS)

Source: INGS, Macquarie Research, April 2014

Page 9
2013 prices well into cost curve – worst since early-
1980s
Nickel industry costs and LME price
40 000
40,000

35,000
nne Ni)

30,000
Costs and prices ($/ton

25,000

20,000

15,000

10,000

5,000

0
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
9th Decile Upper quartile Median Lower quartile LME Price

Source: Wood Mackenzie, LME, Macquarie Research, April 2014

Page 10
The Indonesian ban
From January 12,
12 2014,
2014 exports of unprocessed nickel products (Ni content
<4%) banned in line with 2009 Indonesian Mining Act.
Macquarie had expected a partial ban with companies building plants being
granted export licence extensions – this was rejected by Indonesian Parliament.
No sign of a change, although Parliamentary elections in April 2014 and
Presidential election in July 2014 may change personnel and policy – we,
however, see this as unlikely, especially as plans to build processing plants
come to fruition.
Incredible
c ed b e g
growth
o in Indonesian
do es a nickel
c e ore
oe
output…mainly destined to China
Indonesian apparent nickel ore production ('000t Ni)

800 40% Ore to China

700 Ore to Europe

% of world prroduction
600 30%
Ore to Australia
500
Ni

617
'000t N

Ore to Japan
400 20%
403 Aneka Tambang
300 338
PT Vale
200 134 10%
51 62 71
0 1 6
100 0 0 0 0 % of world finished
nickel production
0 0%
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013
2

2
Source: INSG, Indonesian trade statistics, Macquarie Research, April 2014

Page 12
More
o e than
a half
a o of C
Chinese
ese nickel
c e pproduction
oduc o from
o
Indonesian nickel ore!
Split of Chinese nickel production

800 714 800

700 700
600 541 600
500 445 409 500
000t Ni

400 256 400

315 177
'0

300 254 300

216 67
187 43
200 134 16 35 200
102
0 5
100 100
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013

Conventional - Jinchuan Conventional - Other

NPI from Philippines ore NPI from Indonesian ore

Source: INSG, CNIA, SMM, Macquarie Research, April 2014

Page 13
The changing face of nickel – stagnation in sulphide
production as laterites take off – mine production basis
World sulphide nickel mine production by country World laterite nickel mine production by country
Indonesia
1600 Philippines
900 Turkey
1400 China
800 Myanmar
Canada 1200 Ukraine
700 Australia Albania
Russia Papua New Guinea
600 1000
USA Madagascar

'000tt Ni
Zambia Venezuela
NI

500
'000t N

800
Zimbabwe Serbia
400 Finland Russia
Brazil
600
Dominican Rep.
300 Botswana Guatemala
S.Africa 400 Macedonia
200 China, P.R. Australia
200 Cuba
100
Colombia
0 0 Brazil
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

N.Caledonia
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2

Greece

Source: INSG, Macquarie Research, April 2014

Page 14
Indonesian nickel exports: incredible growth

Indonesian exports of nickel ore

70

60
Indonesian ore exports (m wmt gross weight)
% change 50

es wet basis
China (+HK) Australia Greece Japan Ukraine Others Total YoY
2005 0.07 0.95 0.10 2.03 0.49 0.06 3.70 13.6%
2006 0.66 0.71 0.15 2.07 0.73 0.08 4.39 18.6% 40
2007 5 43
5.43 0 37
0.37 0 39
0.39 1 85
1.85 0 59
0.59 0 39
0.39 9 03
9.03 105 4%
105.4%

million tonne
2008 6.59 0.51 0.35 1.83 1.01 0.31 10.59 17.3%
2009 7.88 0.00 0.39 1.46 0.58 0.12 10.44 -1.5% 30
2010 14.35 0.84 0.24 1.45 0.63 0.21 17.73 69.9%
2011 36.23 0.96 0.57 1.86 0.71 0.51 40.84 130.4%
2012 43.54 1.45 0.64 1.55 1.20 0.06 48.45 18.6% 20
2013 59.17 1.57 0.46 1.98 1.48 0.14 64.80 33.8%

2013 % share 91.3% 2.4% 0.7% 3.1% 2.3% 0.2% 100.0% 10

0
2005 2006 2007 2008 2009 2010 2011 2012 2013

China (+HK) Australia Greece Japan Ukraine Others

Source: Indonesian trade statistics, Macquarie Research, April 2014

Page 15
Indonesian
do es a nickel
c e ore
o e exports:
e po s massive
ass e growth
go but
bu
low value add

Reported Indonesian nickel ore exports - mostly but Value of Indonesian nickel ore exports Average fob value of Indonesian nickel ore exports per
not just China tonne fob
70 1.8
1.69 70 25%
64.8 24%
1.6
60 1.49 60
1.43
1.4 20%
18% 19% 19%

Ni recpovered as % LME price

50 48.4 50 18%
1.2 17%
million tones wett basis

16%
40.8 15%
40 14%

mt
40

$US/wm
1.0
$USbn

67
30 59.2 0.8 30
1.45
10%
0.61 49 49
1.25
43.5 0.6 0.52 0.53 1.16
20 17.7 20
36.2 35
30 31
04
0.4 27 26 5%
10.6 10.4 0.28
9.0 10
10 0.22
4.4 14.3 0.2 0.35
6.6 7.9 0.28 0.23
5.4
0 0.7
0.15 0 0%
0.0 0.03 2006 2007 2008 2009 2010 2011 2012 2013
2006 2007 2008 2009 2010 2011 2012 2013
China Australia Japan Ukraine Greece Other China Australia Japan Ukraine Greece Others Ore/tonne fob Ni in ore as % of LME price

Source: Indonesian trade statistics, Macquarie Research, April 2014

Page 16
Some room for doubt on actual nickel exports?
Chinese nickel ore trade with Indonesia Indonesia-China nickel ore trade from both sides
8 70

7 58.6
60

6 50
43.1

nes
41.1
es

5
million tonne

million tonn
40 36.1
33.9
4
30 25.7
3
20
14 3
14.3
2 12.2
10 6.6 7.4 7.6 7.2
1
0
0 2008 2009 2010 2011 2012 2013
2008 2009 2010 2011 2012 2013
Indonesian exports to China
Chinese imports Indonesian exports Chinese imports from Indonesia

Source: GTIS, Macquarie Research, April 2014

 Since January 2011: total Indonesian exports to China: 138mt; Chinese imports from Indonesia:
101mt = 27% difference implies Chinese reported imports mostly on dry basis?
Page 17
Average
e age CCFR value
a ue of
o Chinese
C ese imports
po s iss too
oo high
g
relative to actual reported values
Average fob and cfr values in Indonesia-China
Indonesia China nickel ore
trade
140

120 115
105
as reported

100 88

80 73
66
$/tonne a

60
44
40 35 32 29
24 25
20
20

0
2008 2009 2010 2011 2012 2013

Indonesian exports
p Chinese imports
p from Indonesia

Source: GTIS, Macquarie Research, April 2014

Page 18
Philippines
pp es mostly
os y not
o recovered
eco e ed as nickel
c e oore
e ((iron
o
ore)
I d
Indonesia
i and
d Philippines
Phili i share
h in
i global
l b l mine
i Recoverable
R bl nickel
i k l ore production
d ti in
i Indonesia,
I d i
35% production New Caledonia and the Philippines
1200
ction

30%
1000
% of world mine produc

25%

ntained nickel
800
20% 755

600
15% 544

'000t con
473
10% 400 263
184
195 183 183
5% 200 128 147
98 98
63 86
125 130 128 132 160
0% 103 93
0
2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013
Indonesia Philippines New Caledonia New Caledonia Philippines Indonesia

Source: INSG, Dimenc, Trade data and Macquarie Research estimates, April 2014

Page 19
What can replace Indonesian ore?
 Close to 450kt of Indonesian nickel ore used in 2013 in China, Japan and Europe.
Stockpiles of 250-300kt ore can be used to replace lost imports but traders hold bulk of
the ore stocks
stocks.
 Most of Indonesian ores are saprolite ores (1.7-2.0% Ni, 15-20% Fe) used mainly in
electric furnaces to make high-grade (8-12% ni) nickel pig iron (NPI).
 Most
M t ore from
f Philippines
Phili i are lilimonite
it ores (0
(0.8-1.3%
8 1 3% Ni,
Ni 45-50%
45 50% Fe)
F ) used
d mainly
i l in
i blast
bl t
furnaces to make low-grade (1-4% Ni) NPI or pig iron with no nickel recovery. Potential
for maybe 30-60kt extra high grade/low grade Pilipino ore.
 New Caledonia may supply more ore to Japan and Australia but most expansion
committed to SMSP/Posco ferronickel plant in Korea, which is being expanded from
30ktpa to 54ktpa.
 Guatemala mine expansion by Solway Group (Skye Resources Fenix project) could
supply 15-20ktpa for Ukraine ferronickel plant to replace Indonesian feed.
 No other significant potential nickel ore suppliers to replace Indonesian ore.
 Stainless steel scrap and substitution within stainless grades to lower nickel likely.
likely
Supp y iss still
Supply s coming
co g from
o new
e projects
p ojec s ex-
e
China…but (thankfully) at well below capacity!
000t Ni Year Year Year Year Year Change Change Change Change
Process Capacity Start-up 2010 2011 2012 2013 2014F 2011/10 2012/11 2013/12 2014/13F
VNC (Goro) HPAL 57 1Q 11 0 8 6 15 30 7.4 -1.9 9.6 14.7
Onça Puma FeNi 50 1Q 11 0 7 6 2 16 7.0 -1.0 -4.1 14.1
Ravensthorpe HPAL 39 2H 11 0 6 33 38 38 57
5.7 27 2
27.2 52
5.2 -0.1
01
Kevista Conc 11 2Q 12 0 0 4 9 10 0.0 3.9 5.1 1.0
Enterprise Conc 40 2016 0 0 0 0 0 0.0 0.0 0.0 0.0
Eagle Conc 25 2014 0 0 0 0 2 0.0 0.0 0.0 2.0
Koniambo FeNi 60 1Q 13 0 0 0 1 23 0.0 0.0 1.4 21.6
Talvivarra Bioleach 30 4Q 09 10 16 13 10 15 57
5.7 -3.2
32 -2.8
28 49
4.9
Barro Alto FeNi 40 1Q 11 0 6 22 25 26 6.3 15.3 3.5 0.9
Ambatovy HPAL 60 2Q 12 0 0 6 25 43 0.0 5.7 19.5 17.4
Taganito HPAL 30 2H 13 0 0 0 1 21 0.0 0.0 1.0 20.4
Ramu HPAL 32 2H 12 0 0 5 11 22 0.0 5.3 6.1 10.6
Sk e Reso
Skye Resources
rces FeNi 20 Late 13
Late-13 0 0 0 0 3 00
0.0 00
0.0 00
0.0 30
3.0
Taguang FeNi 23 1Q 13 0 0 0 3 14 0.0 0.0 3.1 10.4
Total 517 11 43 94 142 262 32.1 51.3 47.6 120.8
YoY change 11 32 51 48 121

Source: Company Reports, Macquarie Research, April 2014

Page 21
Our supply assumptions by main supplier - finished
'000t finished Ni 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F
Vale 209 218 231 255 279 290 295 305 315 327
Norilsk Nickel 286 279 276 275 275 277 280 280 280 280
Jinchuan Nickel 127 128 143 128 150 150 150 150 150 150
BHP Billiton 83 108 115 113 114 112 110 107 107 107
QNI 36 37 34 34 30 30 30 30 30 30
Xstrata 106 107 102 114 127 132 142 147 152 152
Anglo American 49 57 51 55 48 71 77 79 80 80
Sumitomo MM 68 70 75 89 92 94 97 102 102 102
Eramett
E 54 56 51 59 63 65 65 65 65 65
Chinese NPI 282 361 500 375 175 150 150 150 150 150
Indonesian NPI 0 1 2 5 40 100 150 200 250 275
Other Chinese 36 52 60 80 90 95 100 100 100 100
Cubaniquel 31 27 22 16 27 28 28 28 28 28
Sherritt 35 34 34 34 36 38 40 40 40 40
Ambatovy 0 6 25 43 55 60 60 60 60 60
Pamco 26 38 39 33 39 39 39 39 39 39
Minara/Glencore 30 36 44 44 44 44 44 44 44 44
Aneka Tambang 20 18 19 20 25 35 45 50 50 50
Larco 19 19 18 18 18 18 18 18 18 18
SNNC 17 22 25 29 40 45 50 50 50 50
Votorantim 21 21 23 26 27 27 27 27 27 27
Cunico 33 29 29 29 29 29 29 29 29 29
Others 69 64 58 76 92 107 110 110 110 110
Disruption allowance 0 0 0 -70 -96 -102 -107 -110 -114 -116
Total World 1633 1788 1977 1879 1818 1934 2029 2099 2162 2197
Change t y-o-y 178 155 189 -98 -61 115 95 70 63 35
Change % y-o-y 12.2% 9.5% 10.6% -4.9% -3.2% 6.3% 4.9% 3.5% 3.0% 1.6%

Source: Company Reports, Macquarie Research, April 2014

Page 22
Intermediate supply flows – little room to
supplement NPI feed sources with sulphides?
Change Change Change Change Change Change Change
'000t ni 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2012/11 2013/12 2014/13F 2015/14F 2016/15F 2017/16F 2018/17F
L t it
Laterites
Ramu Pal inter. 0.0 0.2 15.1 22.0 28.0 31.0 31.0 31.0 0.2 14.9 6.9 6.0 3.0 0.0 0.0
PT Vale matte 69.5 66.2 79.4 79.5 85.0 90.0 90.0 90.0 -3.3 13.2 0.1 5.5 5.0 0.0 0.0
First Quantum Ravensthorpe PAL inter. 5.7 28.7 38.1 40.0 40.0 40.0 40.0 40.0 23.0 9.4 1.9 0.0 0.0 0.0 0.0
Vale VNC PAL inter. 7.7 3.4 6.9 8.0 7.0 7.0 7.0 7.0 -4.3 3.6 1.1 -1.0 0.0 0.0 0.0
SMM Taganito PAL inter. 0.0 0.0 1.0 22.0 30.0 30.0 32.0 35.0 0.0 1.0 21.0 8.0 0.0 2.0 3.0
New Caledonia Ni in ore 61.7 67.1 57.4 65.0 80.0 90.0 95.0 100.0 5.4 -9.7 7.6 15.0 10.0 5.0 5.0
Philipino Ni ore exports 75.0 125.0 160.0 200.0 225.0 230.0 240.0 250.0 50.0 35.0 40.0 25.0 5.0 10.0 10.0
I d
Indonesian
i nii ore 385 0
385.0 451 0
451.0 672 0
672.0 75 0
75.0 00
0.0 00
0.0 00
0.0 00
0.0 66 0
66.0 221 0
221.0 -597.0
597 0 -75.0
75 0 00
0.0 00
0.0 00
0.0
Guatemala ni ore 0.0 2.4 8.0 12.0 15.0 15.0 15.0 15.0 2.4 5.6 4.0 3.0 0.0 0.0 0.0
Sub-total laterites 604.6 744.0 1037.9 523.5 510.0 533.0 550.0 568.0 139.4 293.9 -514.4 -13.5 23.0 17.0 18.0

Sulphides
First Quantum Kevista conc 0.0 1.6 8.5 10.0 18.0 20.0 20.0 21.0 1.6 6.9 1.5 8.0 2.0 0.0 1.0
Norilsk Tati conc 9.3 12.2 6.4 4.0 8.0 12.0 12.0 12.0 2.9 -5.8 -2.4 4.0 4.0 0.0 0.0
Norilsk Lake Johnson conc 1.7 8.8 2.8 0.0 0.0 0.0 0.0 0.0 7.0 -5.9 -2.8 0.0 0.0 0.0 0.0
Gl
Glencore Xstrata
X t t Australia
A t li conc 17 0
17.0 11 7
11.7 41
4.1 00
0.0 00
0.0 00
0.0 00
0.0 00
0.0 -5.3
53 -7.6
76 -4.1
41 00
0.0 00
0.0 00
0.0 00
0.0
Bindura Nickel Trojan conc 0.0 0.0 5.0 10.0 10.0 10.0 10.0 10.0 0.0 5.0 5.0 0.0 0.0 0.0 0.0
Norilsk/ARM Nkomati conc 11.6 19.2 23.8 24.0 24.0 24.0 24.0 24.0 7.6 4.6 0.2 0.0 0.0 0.0 0.0
BHP Billiton conc 9.9 9.6 11.6 10.0 10.0 10.0 10.0 10.0 -0.3 2.0 -1.6 0.0 0.0 0.0 0.0
Panoramic Resources conc 18.4 19.4 21.1 22.0 22.0 22.0 23.0 25.0 1.0 1.7 0.9 0.0 0.0 1.0 2.0
Mincor Resources conc 8.79 9.06 9.13 9.5 9.5 9.5 10.0 11.0 0.3 0.1 0.4 0.0 0.0 0.5 1.0
First Quantum Enterprise conc. 0.0 0.0 0.0 0.0 5.0 20.0 35.0 40.0 0.0 0.0 0.0 5.0 15.0 15.0 5.0
Lundin Eagle conc 0.0 0.0 0.0 2.0 15.0 20.0 20.0 20.0 0.0 0.0 2.0 13.0 5.0 0.0 0.0
W t
Western Areas
A conc 26 1
26.1 26 3
26.3 26 3
26.3 26 5
26.5 27 0
27.0 27 0
27.0 28 0
28.0 30 0
30.0 02
0.2 00
0.0 02
0.2 05
0.5 00
0.0 10
1.0 20
2.0
Belvedere Resources conc 2.2 2.3 0.9 0.0 0.0 0.0 0.0 0.0 0.1 -1.4 -0.9 0.0 0.0 0.0 0.0
Asian Mineral Resources Ban Phuc conc 0.0 0.0 1.0 7.0 7.0 7.0 10.0 12.0 0.0 1.0 6.0 0.0 0.0 3.0 2.0
Royal Nickel (Dumont) 0.0 0.0 0.0 0.0 0.0 0.0 5.0 15.0 0.0 0.0 0.0 0.0 0.0 5.0 10.0
Talvivaara conc 16.1 12.9 10.1 15.0 20.0 20.0 25.0 30.0 -3.2 -2.8 4.9 5.0 0.0 5.0 5.0
Mirabela Nickel conc 15.3 19.3 15.6 16.0 16.0 16.0 16.0 16.0 3.9 -3.6 0.4 0.0 0.0 0.0 0.0
BHP Billiton matte 52.7 38.1 33.2 22.0 20.0 20.0 20.0 20.0 -14.6 -4.9 -11.2 -2.0 0.0 0.0 0.0
Angloplats matte 0.0 0.0 5.8 0.0 0.0 0.0 0.0 0.0 0.0 5.8 -5.8 0.0 0.0 0.0 0.0
S b t t l sulphides
Sub-total l hid 189 2
189.2 190 4
190.4 185 5
185.5 178 0
178.0 211 5
211.5 237 5
237.5 268 0
268.0 296 0
296.0 13
1.3 -5.0
50 -7.5
75 33 5
33.5 26 0
26.0 30 5
30.5 28 0
28.0

Total 793.7 934.4 1223.4 701.5 721.5 770.5 818.0 864.0 140.7 289.0 -521.9 20.0 49.0 47.5 46.0

Source: Company Reports, Macquarie Research, April 2014

Page 23
New capacity has high average capital costs…
costs
PAL '000tpa $m Ferronickel '000tpa $m
Start-up
Start up Capacity Capex $/t cap Acid plant Refinery Start-up
Start up Capacity Capex $/t cap
Murrin Murrin 1999 40 1700 42500 x x Gwangywang 2008 30 720 24000
Coral Bay Stage 1 2005 12 220 18333 Onca Puma 2011 52 3200 61538
Ravensthorpe original 2007 40 3000 75000 x x Barro Alto 2011 40 1900 47500
VNC (Goro) 2010 60 6000 100000 x x Koniambo 2013 60 6300 105000
Ramu 2012 32 1800 56250 x Taguang Taung Nickel 2013? 22 850 38636
Ambatovy 2012 60 5500 91667 x x
Taganito 2013 30 1600 53333

Total above 222 17900 80631 Total above 204 12970 63578
Source: Company Reports, Macquarie Research, April 2014

 Average PAL capital costs = $80,000/tonne of capacity, while ferronickel plants coming
in at close to $65,000/t of capacity.
 By contrast, older NPI plants had capacity costs of <$5,000/t of capacity and newer
rotary kiln electric furnace (RKEF) capacity is around $15,000/t of capacity.
 400kt+ of RKEF capacity built/under construction in China!

Page 24
O e iss a b
Ore big
g factor
ac o in C
Chinese
ese NPI cos
costss bu
but the
e
price is not static!

Chinese RKEF nickel pig iron cost breakdown Published Chinese import ore price (1.8% Ni ore from
Theoretical for coastal plant Indonesia)
100% 140 30%
14% 11% 9% 8% 10%
28%
11% 13% 12% 120
13%
15% 26%

$/tonne cfr China (ex-VAT)

Ni content as % of LME
sh costs

21% 100 24%

25% 25%
28%
22%
31% 80
% of total cas

20%
60
18%

59% 54% 40 16%

52% 50%
40% 14%
20
12%
0% 0 10%
2009 2010 2011 2012 2013 YTD 2009 2010 2011 2012 2013

Ni ore Electricity Carbon Other Ore price Ni in ore as % LME

Source: SMM, Macquarie Research, April 2014

Page 25
 $/tonne ex-VAtt

ore

12000
14000
16000
18000
20000
22000
24000
Jan-100
Mar-100
May-100
Jul-10
0
Sep-100 NPI cos

Price: 8-13% NPI

Nov-100
Jan-111
Mar-111
May-111
costss o
Jul-11
1

Costs: 10% Ni - Inner Mongolia

Sep-111
Nov-111
Jan-122

Source: SMM, Mysteel, Macquarie Research, April 2014

Mar-122
May-122
Jul-12
2
on their

Sep-122
Nov-122
Jan-133
Mar-133
May-133

Costs: 10% Ni - Coastal

Jul-13
3
e way

Sep-133
Nov-133
Jan-144
Mar-144

$/tonn
ne ex-VAT

Page 26
12000
14000
16000
18000
20000
22000
24000
ay up – us

Jan-100
Mar-100
May-100
Jul-10
0
using

Sep-100
Nov-100
Price: 8-13% NPI

Jan-111
Mar-111
Costs: 12% Ni - RKEF

May-11
1
Jul-11
g spot

Sep-111
Nov-11
Jan-122
Mar-122
May-122
Jul-12
2
Sep-122
Nov-122
Jan-133
spo quotes

Mar-133
May-133
Jul-13
3
o

Sep-133
Costs: 12% Ni - Conventional
quo es for

Nov-133
Jan-144
Mar-144
LME ou
outperforms
pe o s Chinese
C ese domestic
do es c pricing
p c g – too
oo
much finished stock in China?
Chinese and non-Chinese nickel prices Price premiums and discounts in China

ex-VAT
1000
$US/tonne Ni ex--VAT

8
18000 500

ce: $US/tonne Ni e
0

16000 -500

-1000
1000

Pric
Price: $

14000 -1500

-2000

-2500
12000
May-13

Nov-13
Jan-13

Feb-13

Mar-13

Apr-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

-3000

May-13

Nov-13
Jan-13

Feb-13

Mar-13

Apr-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14
LME cash price 8-13% Ni electric furnace NPI

Ni in SS scrap (EU/US) inc Fe Jinchuan metal price 8-13% Ni - LME price LME minus Jinchuan metal price

Source: LME, SMM, CRU, Macquarie Research, April 2014

Page 27
Indonesia verses Chinese NPI plants?
 Ore costs substantially lower if plants built at mines (barging costs in Indonesia are high).
 Labour costs are higher
g in Indonesia ((2-3x)) and skilled workers hard to get.
g
 Power costs might be comparable, if power was available (need to build power plants).
 Chinese efficiencies may not be readily transferrable to Indonesia?
 Ancillary costs and engineering services substantially higher in Indonesia.
 New RKEF plants in China are at/near stainless plants enabling hot metal transfer.
 Capital costs would be substantially higher than in China (3x higher?):
1. In China, infrastructure such as ports, rail, power, engineering services, etc are already in
place (essentially “free” to a new producer).
2. Chinese experience in building overseas (e.g., Ramu in Indonesia, Sino Iron in Australia)
shows low-cost and quick build Chinese model is easily not transferable off-shore.
3. If Chinese investors,, law requires
q foreign
g equity
q y share to g
go below 50% after start-up.
p

Chinese NPI can’t be exported: 17% non-refundable VAT and 25% export tax
Page 28
The economics of NPI is p
phenomenal compared
p to
conventional processes at current ore prices
The "economics"
economics of new capacity - based on today
today's
s parameters
90000
80000
80000
70000 65000

60000
$/tonne

50000 45000

40000
$

27000
30000
21375 19375
1700017875 15000 15125
20000 13000 12500
10000 11500
10000 5000

0
PAL (recent) FeNi (recent) Old NPI New NPI (RKEF) Indonesian NPI?
Capex Opex Incentive price

This is a very rough guide to the economics of new capacity

Source: Company data, Wood Mackenzie, Macquarie Research, April 2014

Page 29
How
o much
uc would
ou d it cost
cos too build
bu d capacity
capac y in
Indonesia and is it likely?
Until the first plant is built
built, capex and timing are speculative but $15bn+
investment would be needed to replace existing Chinese NPI capacity.
By comparison, reported 2013 Indonesian nickel ore exports of 48mt generated
revenue of $1.7bn
$ (and probably profits of less than $0.5bn).
$
Unrealistic to expect such a large investments to be made quickly. First plant
(Tsingshan) not likely to start before mid
mid-2015
2015.
Even if willing, it would take many years to realise (5 years+ from now?).
It is tempting to say that raising revenue from 20% of LME price to
80-90% of price is “good” for the country…but ONLY if it is
profitable to do so!

Page 30
Big
g falls
a s in C
Chinese
ese nickel
c e ppig
g iron
o pproduction
oduc o in 2H
2014; nickel market in 1H surplus, 2H deficit
Estimated and projected Chinese NPI
production
160 145
140 132 130
120 112 111 105
93 94 95
100
'000t Ni

73 75 69 79 75
80 65 65
60
40
20
0
Q111
Q211
Q311
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
Q114F
214F
314F
414F
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q

Q2
Q3
Q4
Source: SMM, Macquarie Research, April 2014
We assume some Indonesian NPI…but not so soon
Nickel pig iron production
600 600
502
500 2 500
425
400
400 362 380 400
5 350
'000t Ni

1
282 300
300 250 275 300
250
215 200
150
200 159 40 100 200
87 106
100 71 100
20
0 0
2014F

2015F

2016F

2017F

2018F

2019F

2020F
2005

2006

2007

2008

2009

2010

2011

2012

2013

China: 0.5-2%Ni BF China 4-8%Ni BF China: 9-10%Ni old EF

China: 9-15%Ni RKEF Indonesia

Source: SMM, Macquarie Research, April 2014

Page 32
Nickel use in stainless can change!
Austenitic ratio on world steel production World stainless production share
78% 200+300 series combined
100%

90%

23%

24%

24%
24%

24%
24%
24%

25%
26%
76%

26%

7%

8%
9%

0%
2

27
2

2
2

2
2

28
2

2
2
29

30
80%

74% 70%
00+300)

60%

otal
% of to
% of total (20

50%

57%

55%
72%

57%
57%

58%
68%
68%

58%
65%

59%
71%
72%
72%
72%
40%

70% 30%

20%

20%
20%
17%
68% 10%

15%

14%
13%
12%
9%

9%
8%
5%
4%
4%

4%
0% 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013
66%
1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

200 series (1-2% Ni) 300 series (8% Ni) 400 series (no nickel)

Source: INSG, ISSF, Macquarie Research, April 2014

Page 33
Austenitic ratio depends on price…
Nickel price and world stainless austenitic ratio
78% 55000

76% 45000

Price: $/tonne (2013$)

74% 35000
Austenittic %

72% 25000

70% 15000

68% 5000

66% -5000
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Austenitic ratio Nickel price

Source: LME, ISSF, Macquarie Research, April 2014

Page 34
Sc ap use peaked
Scrap pea ed whene price
p ce wasas high
g in
2006…potential for growth as ni price rallies?
Secondary nickel share in stainless steel
750 50%

700 48%
'000t ni in purrchased scrap

650 46%

Scra rratio %
600 44%

550 42%

500 40%

450 38%

400 36%

2013
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2
2

2
Ni in purchased scrap Scrap ratio %

Source: ISSF, Macquarie Research, April 2014

Page 35
NPI accou
accounted
ed for
o major
ajo sshare
aeo of nickel
c e used in
China in 2012 – replacement for scrap use in ROW
Chinese nickel use by type Nickel use ex-China by type

17%
Ni in scrap
Ni in scrap
38% 40% NPI
NPI 42%
FeNi FeNi
Metal/utility/oxide
Metal/utility/oxide

38%
0%
7%
18%

Source: INSG, Macquarie Research, April 2014

Page 36
C ese stainless
Chinese s a ess iss grabbing
g abb g market
a e share
s a e from
o
rest of world – 4.5mtpa swing since 2003!
Chinese net imports of stainless steel
3000 20%
2500

nd
15%
5%

% of non-Chiinese deman
2000
S products

1500 10%
1000 5%
500
'000t SS

0 0%
-500 -5%
-1000
-10%
-1500
-2000 -15%
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013
Chinese net imports China trade as % of non-Chinese demand

Source: GTIS, Macquarie Research, April 2014

Page 37
Nickel demand in stainless: all about China
Stainless steel production by area ('000t)
Year Year Year Year Year Year Year Change
'000t 2007 2008 2009 2010 2011 2012 2013 2007-13
USA 2171 1925 1618 2201 2074 1978 2056 -5%
5%
Japan 3885 3567 2606 3427 3256 3132 3171 -18%
Europe 8093 7819 5972 7485 7552 7450 7172 -11%
Korea 1942 1743 1677 2049 2157 2167 2143 10%
Taiwan 1515 1297 1468 1514 1203 1106 1081 -29%
India 2045 1980 2002 2119 2271 2470 2688 31%
China 7108 6787 9396 11907 14066 16111 19461 174%
Other 1438 1208 1086 1160 1088 1121 1112 -23%
Total 28196 26325 25824 31862 33666 35536 38884 38%
Total Ex-China 21088 19538 16429 19955 19600 19424 19423 -8%

% change yoy
USA -12.1% -11.3% -16.0% 36.0% -5.8% -4.6% 3.9%
Japan -4.9% -8.2% -26.9% 31.5% -5.0% -3.8% 1.2%
E
Europe -13.5%
13 5% -3.4%
3 4% -23.6%
23 6% 25 3%
25.3% 0 9%
0.9% -1.4%
1 4% -3.7%
3 7%
Korea -15.4% -10.2% -3.8% 22.2% 5.3% 0.5% -1.1%
India 14.1% -3.2% 1.1% 5.9% 7.1% 8.8% 8.8%
China 45.6% -4.5% 38.4% 26.7% 18.1% 14.5% 20.8%
Other -0.4% -16.0% -10.1% 6.8% -6.1% 3.0% -0.8%
Total 0.5% -6.6% -1.9% 23.4% 5.7% 5.6% 9.4%
Total Ex-China -9.0% -7.4% -15.9% 21.5% -1.8% -0.9% 0.0%

Source: ISSF, INSG, Macquarie Research, April 2014

Page 38
Ou nickel
Our c e supp
supply/demand
y/de a d balance
ba a ce to
o 2020:
0 0 big
bg
question – where will supply come from?
`000t 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f
Total SS production 35536 38884 41431 43925 46741 49168 51258 53531 55848
% Change 5.6% 9.4% 6.6% 6.0% 6.4% 5.2% 4.2% 4.4% 4.3%
300-series SS prod. 20037 21602 23234 24596 26117 27328 28815 30441 32262
% Change 4.1% 7.8% 7.6% 5.9% 6.2% 4.6% 5.4% 5.6% 6.0%
Nickel Consumption 1652 1790 1891 1963 2050 2117 2199 2288 2376
% Change 3.5% 8.4% 5.6% 3.8% 4.5% 3.3% 3.9% 4.0% 3.8%
Use of purchased ni in scrap 650 660 707 758 806 846 888 934 980
% change -0.5% 1.6% 7.1% 7.2% 6.3% 5.0% 5.0% 5.2% 4.9%

Nickel Supply 1788 1977 1879 1818 1934 2029 2099 2162 2197
% Change 9.5% 10.6% -4.9% -3.2% 6.3% 4.9% 3.5% 3.0% 1.6%
(of which NPI) (362) (502) (380) (215) (250) (300) (350) (400) (425)

World Market Balance 136 186 -12

12 -145
145 -117
117 -88
88 -100
100 -126
126 -179
179

LME/Producer stocks 230 349 337 193 76 -12 -113 -239 -418
Weeks' world demand 7.1 9.9 9.1 5.0 1.9 -0.3 -2.6 -5.3 -9.0
LME Cash Price (cents/lb) 795 681 726 794 907 998 1089 1179 1270
LME Cash
C h Price
P i ($/tonne)
($/t ) 17527 15002 16001 17500 20000 22000 23999 26000 26151
LME Cash Price ($/tonne) - 2013$ 17877 15002 15611 16657 18572 19931 21212 22420 22000
Source: INSG, LME, Macquarie Research, April 2014

Page 39
Important disclosures:
Recommendation definitions Volatility index definition* Financial definitions
This is calculated from the volatility of historic price
Macquarie - Australia/New Zealand All "Adjusted"
Adjusted data items have had the following adjustments
movements.
made:
Outperform – return > 3% in excess of benchmark return
Neutral – return within 3% of benchmark return Very high–highest risk – Stock should be expected to Added back: goodwill amortisation, provision for catastrophe
Underperform – return > 3% below benchmark return move up or down 60-100% in a year – investors should reserves, IFRS derivatives & hedging, IFRS impairments & IFRS
Benchmark return is determined by long term nominal GDP growth plus 12 be aware this stock is highly speculative. interest expense
month forward market dividend yield High – stock should be expected to move up or down at Excluded: non recurring items, asset revals, property revals,
lleastt 40-60%
40 60% in
i a year – investors
i t should
h ld bbe aware thi
this appraisal value uplift,
uplift preference dividends & minority interests
Macquarie – Asia/Europe
stock could be speculative.
Outperform – expected return >+10% EPS = adjusted net profit /efpowa*
Neutral – expected return from -10% to +10% Medium – stock should be expected to move up or ROA = adjusted ebit / average total assets
Underperform – expected <-10% down at least 30-40% in a year. ROA Banks/Insurance = adjusted net profit /average total
Low–medium – stock should be expected to move up or assets
Macquarie First South - South Africa
down at least 25-30% in a year. ROE = adjusted net profit / average shareholders funds
Outperform – return > 10% in excess of benchmark return Gross cashflow = adjusted net profit + depreciation
Neutral – return within 10% of benchmark return Low – stock should be expected to move up or down at *equivalent fully paid ordinary weighted average number of
Underperform – return > 10% below benchmark return least 15-25% in a year. shares
Macquarie - Canada
* Applicable to Australian/NZ stocks only All Reported numbers for Australian/NZ listed stocks are
Outperform – return > 5% in excess of benchmark return modelled under IFRS (International Financial Reporting
Neutral – return within 5% of benchmark return Standards).
Underperform – return > 5% below benchmark return Recommendation – 12 months
Macquarie - USA Note: Quant recommendations may differ from
Fundamental Analyst recommendations
Outperform – return > 5% in excess of benchmark return
Neutral – return within 5% of benchmark return
Underperform – return > 5% below benchmark return

Recommendation proportions – For quarter ending 31 March 2014

AU/NZ Asia RSA USA CA EUR
Outperform 51.32% 60.23% 41.25% 40.21% 58.52% 48.74% (for US coverage by MCUSA, 8.21% of stocks covered are investment banking clients)
Neutral 34.54% 24.97% 40.00% 53.19% 35.56% 32.77% (for US coverage by MCUSA, 6.67% of stocks covered are investment banking clients)
Underperform 14.14% 14.80% 18.75% 6.60% 5.92% 18.49% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)

Page 40
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