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

2. Agenda Introduction to Industry: Companies: Copper Petroleum Aluminium
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. Copper Demand By end-use market: Construction (30%)
Consumer products (28%)
Electrical applications (19%)
Transportation (12%)
Industry machinery (11%)

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

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

9. Potential Hedging 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)
OPEC crude oil production is an important factor affecting global oil prices. OPEC sets production targets for its member nations and generally, when OPEC production targets are reduced, oil prices increase.

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
Bauxite
Bauxite is the natural ore used to make aluminium. It is refined into alumina which is smelted into aluminium metal. Our wholly- and partly-owned bauxite mines are located in Australia, Brazil and Guinea.
Alumina
Alumina (aluminium oxide) is extracted from bauxite via a refining process. Approximately four tonnes of bauxite are required to produce two tonnes of alumina, which in turn makes one tonne of aluminium metal. Our wholly- and partly-owned alumina refineries are located in Australia, Brazil and Canada.
Aluminium
Aluminium is a unique and versatile modern metal. Light, strong, flexible, corrosion-resistant and infinitely recyclable, aluminium is one of the most widely-used metals in the world. Its largest markets are transportation, machinery and construction. Our smelters are mainly concentrated in Canada. We also have plants in France, Australia, New Zealand, Iceland, the UK and Oman.

18. Aluminum An Internationally traded commodity Worldwide Production
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 Industrialization
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

22. Global Aluminum Demand - Industries

23. Global Aluminum Supply

24. Global Aluminum Demand and Supply

25. Freeport-McMoRan

26. Company Background
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

27. Locations of operating mines

28. Ownership Interest of FCX

29. PRODUCTS AND SALES Sales of copper (60%): Sales of oil (20%)
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%)

30. Risk Factors 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)

31. 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

32. Risk Factors 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

33. Risk Factors 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

34. Risk Factors 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

35. Disclosures about market risks
Commodity Price Risk
Foreign Currency Exchange Risk
Interest Rate Risk

36. Copper price VS. FCX stock price

37. Income Statement

38. Cash Flow Statement

39. Cash Flow Statement cont’d

40. Balance Sheet

41. Balance Sheet cont’d

42. 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. ”

43. 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

44. 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

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

46. Financial Instruments
Derivatives not designated as hedging instruments
Embedded Derivatives
Crude Oil and Natural Gas Contracts
Copper Forward Contracts

47. Embedded Derivatives
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

48. Embedded Derivatives
Summary of FCX’s embedded derivatives at December 31,2014

49. 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

50. 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

51. Copper Forward Contracts
Entered by Atlantic Copper, FCX’s wholly owned smelting and refining unit in Spain
Designed to hedge its copper price risk whenever its physical purchases and sales pricing periods do not match
Hedge against changes in copper prices
Market-to-market hedging gains or losses recorded in cost of sales
Net forward copper purchase contracts for 13 million pounds at average contract price of $2.9 per pound

52. Summary of (Losses) Gains
Recognized in income before income taxes

53. Unsettled Derivative Financial Instruments

54. Credit Risk
Exposed to credit loss when financial institutions with which FCX has entered into derivative transactions are unable to pay
FCX uses counterparties that meet certain credit requirements
Review the creditworthiness of these counterparties
The maximum amount of credit exposure associated with derivative transactions was $379 million at December 31, 2014

55. BHP Billiton

56. BHP Billiton
Multinational mining, metals and petroleum company (top producers in major commodity)
Headquarter: Melbourne, Australia
Was Created in 2001, by merging of Australian Broken Hill Proprietary Company Limited (BHP) and the Angelo-Dutch Billiton plc. (dual-listed company in London and Melbourne)
As of 30 June 2014, the market capitalization of BHP Billiton reached US $179 billion.
Around 123,800 employees and contractors in 21 countries (130 locations around the world.
Products include: Iron Ore, coal, manganese, gold, petroleum, aluminium, silver, copper, etc.
Australian Broken Hill Proprietary Company Limited operated silver and lead mine.
Angelo-Dutch Billiton plc operated potash (salts that contained potassium and water soluble)

57. NA petroleum
South America Copper and aluminium
Australia coal, aluminium, petroleum, copper, etc.

58. BHP Billiton Revenue and EBIT

59. BHP Billiton Income Statement

60. BHP Billiton Balance Sheet

61. BHP Billiton Cash Flow Statement

62. BHP Billiton Risk Factors
External risks:
Fluctuations in commodity prices and ongoing global economic volatility
Currency exchange rate fluctuations
Reduction in Chinese demand
Business risks:
Failure to discover/acquire new resources, maintain them or develop new operations
Potential change to their portfolio of assets through acquisitions and divestments

63. BHP Billiton Risk Factors Continued
Financial risks:
If the liquidity and cash flow available to the company severely decreases, then major capital programs cannot be properly funded.
May not recover their investments in mining, oil and gas assets due to change in industry structure or price of commodities.
Operational risks:
Cost pressures and reduced productivity
Sustainability risks:
Safety, health, environmental and community issues, along with incidents/accidents and regulations may also affect the company’s people, operations and reputation, etc.

64. BHP Billiton Financial Risk Management

65. BHP Billiton Statements
“The natural diversification in our portfolio of commodities, geographies, currencies, assets and liabilities is a key element in our risk management approach.”

66. BHP Billiton Risk Exposures
Market risk: movements of
interest rates
foreign currencies
commodity prices
Liquidity risk
Credit risk

67. BHP Billiton Market Risk Management

68. BHP Billiton Market risk: interest rate risk and foreign currency risk
The risk in which the value of investment may change due to altering the future cash flow
Methods used by BHP:
Interest rate swaps
Cross currency interest rate swaps

69. BHP Billiton Market risk: interest rate risk and foreign currency risk
Fair value: rational and unbiased estimate of the potential market price of the good, service or asset
Objective factors: supply vs demand, production costs, replacement costs, etc.
Subjective factors: risk characteristics, individually perceived utility, etc.

70. BHP Billiton Market risk: interest rate risk and foreign currency risk
However, the company is still subject to translational exposure, which is the foreign exchange gains and losses on foreign currency denominated provisions for closure and rehabilitation at operating sites, capitalized in property, plant and equipment.

71. BHP Billiton Market Risk: Commodity Price Risk

72. BHP Billiton Market Risk: Commodity Price Risk

73. BHP Billiton Liquidity Risk
Liquidity risk: Risk of not being able to settle obligations when they are due.

74. BHP Billiton Credit Risk
Credit risk: non-performance of the counterparties’ contract

75. BHP Billiton Fair Values

76. BHP Billiton Fair Values

77. BHP Billiton Sensitivity Analysis
Level 3: Valuation is based on inputs that are not based on observable market data.

79. Company Overview
British-Australian multinational corporation with headquarters in London, UK, and a management office in Melbourne, Australia
A leading global mining and metals company
Focus on finding, mining and processing the Earth’s mineral resources in order to maximize value for shareholders
Dual-listed company traded on the London Stock Exchange and the Australian Securities Exchange

80. Executives Chairman: Jan du Plessis
Director of Rio Tinto since 2008, he was appointed chairman in 2009
Chairman of British American Tobacco plc. between
From 1998 to 2001, President and CEO of Ford Motor Company
CEO: Sam Walsh AO (Melbourne)
Director of Rio Tinto since 2009, he was appointed chief executive in 2013
Joined Rio Tinto in 1991, following 20 years in the automotive industry at General Motors and Nissan Australia

81. Operation Operating in 5 major businesses Aluminum product group
Copper product group
Diamonds & Minerals product group
Energy product group
Iron ore product group
P1-2

82. Operation Locations

83. General Performance

84. General Performance

85. Consolidated Income Statement

86. Finance Income and Finance Costs

87. Consolidated Statement of Comprehensive Income

88. Consolidated Balance Sheet - Assets

89. Other Financial Assets

90. Consolidated Balance Sheet- Liabilities and Equity

91. Consolidated Cash Flow

92. Consolidated Cash Flow

93. Risk Management Framework
Managing risk effectively is an integral part of how we create value, and fundamental to our business success
“Three lines of defense” model
Ownership of risk by the operations
Control of risk by Group functions and management committees
Assurance of our systems by Group Audit & Assurance
p14

94. Financial Risk Management
Funding and exposure management
Fundamental part of long-term strategy of the Group
Treasury operations
Treasury policy
p147

95. Financial Risk Factors
Foreign exchange rate risk
Interest rate risk
Commodity price risk
Credit risk
Liquidity and capital risk management
p152

96. Foreign exchange risk Geographic diversity of sales and operations
Important currencies
US dollars
Australian dollars
Canadian dollars
Cross currency interest rate swaps
p147

97. Foreign Exchange Risk
Net debt of the Group

98. Foreign exchange risk Hedging strategy
Not believe in active currency hedging
Review its exposure on a regular basis
Reserves the right to enter into hedges
Monthly treasury report

99. Interest Rate Risk
Risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates
Borrow and invest at floating interest rate
Based on historical correlation between interest rates and commodity prices

100. Interest Rate Risk Hedging strategy Interest rate derivatives
Hedging result

101. Commodity Price Risk
Normal policy is to sell products at prevailing market prices
Products sold under contracts and spot market
Copper, aluminum
Products that are “ provisionally priced”
Copper concentrate

102. Credit Risk
The risk that a counterparty will not meet its obligations, leading to financial losses
Exposed to credit risks
Operating activities
Financing activities

103. Credit Risk
Maximum credit risk exposure of financial assets

104. Liquidity and Capital Risk Management
Objective is to safeguard the business as a going concern whilst maximizing returns of shareholders
Provide the Group a high degree of financial flexibility at a low cost of capital
Maintain an “A-” credit rating

105. Sensitivities Analysis
Foreign exchange risk

106. Sensitivities Analysis
Interest rate risk
Commodity price risk