Resource Capital Research

Iron Ore: Price Fundamentals Analyst: Dr Trent Allen Sector outlook and iron ore price forecast Spot prices increased in 3-4Q10, which should flow through to contract prices in 1Q11. The quarterly iron ore contract price, indexed to the spot market, fell 13.3% into 4Q10…

… but is expected to gain 7.7% into 1Q11.

The index price gain has been triggered by rising (relative) operating costs and some short-term supply shortages.

Iron ore contract prices are set to increase by 7.7% into 1Q11, triggered by a increase in spot market prices 3-4Q10. Overall, the iron ore market remains stable, after a volatile period extending from the GFC to the collapse of the annual benchmark pricing system and the introduction of quarterly iron ore contracts in 2Q10. Spot prices (China imports) reached US$186/t for 62% Fe CFB in April 2010, due to global economic regrowth but fell to US$116/t in July 2010 with increasing iron ore supply and destocking by Chinese steel mills in anticipation of lower prices as growth moderated. Consequently, there was a 13.3% drop in the quarterly contract fines price for 4Q10, to USc205/dmtu or US$127/t at 62% Fe (average of the previous quarter’s spot price, with a one month lag). A gain of 7.7% to USc220.9/dmtu or US$137/t at 62% Fe fines is expected for the quarterly price in 1Q11, because spot prices rose in the September-November index window. Lump should be USc248.2/dmtu (12.4% premium). The current spot price for China imports is US$164.7/t, 11% below the April post-GFC high. The internal Chinese spot price (Hebei) is 1370RMB/t, only 2% below the April high of 1400RMB/t. The gains could have been triggered by:  Australian and Brazilian producers passing on an increase in US$ operating costs, due to higher A$/US$ and Real/US$ exchange rates.  Supply difficulties in India, especially the Karnataka Government’s ban on iron ore exports (citing illegal mining and conservation of resources) which has removed ~30mtpa from supplies; also, the monsoon in western India and supply disruption by Maoist insurgents.  Seasonal restocking by Chinese steel mills.  Anticipation of short term supply shortages, until significant mine and infrastructure expansions begin to take effect, beyond 2H12. Iron ore fines CFB prices (China port), contract versus spot at 62% Fe. The contract price tracks the average spot for the previous quarter, with a 1 month lag. 200 180 160 140

US$/t at 62% Fe CFB

120 100 80

60 40 20

Spot

December Quarter 2010, Iron Ore Review

Vale contract

Forecast

Jun-11

Apr-11

Feb-11

Dec-10

Oct-10

Aug-10

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

Aug-09

Jun-09

Apr-09

Feb-09

0

Dec-08

The system of setting 12 month contract prices proved to be inflexible, in the face of a growing and volatile spot market. This chart of CFB prices assumes freight of US$20/t.

Source: Bloomberg, RCR

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

25

Resource Capital Research

Higher iron ore spot prices have affected the biggest buyer, China …

Rising iron ore prices have significantly affected the Chinese iron industry. China’s iron ore output from January to November 2010 was 959mt, for a forecast annual 1046mt (RCR), which would be 23.5% increase on 2009. In contrast, imports are forecast to be 618mt, only a 2.7% gain on 2009. It is likely that China is avoiding higher-priced imports by boosting internal production. China iron ore imports vs output (5 years).

100 90 80 70

(mt, monthly)

… where imports are flat or falling but output should increase ~22.5% year-on-year.

60 50 40 30 20

10 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10

0

Source: Bloomberg

Total crude steel production in 2010 should increase 18.3% over 2009, to ~1387mt. Growing intensity of iron ore use by China over the past decade has changed the iron ore market.

Imports

Output

Overall, iron ore price trends broadly reflect changes in global steel supply. Based on the IISI index, crude steel production is forecast to be 1387mt in 2010, an 18.3% increase on 2009. ABARE forecasts a further 11% increase to 1.5bt in 2011. In terms of market outlook, the biggest factor in the post GFC recovery – the urbanisation of China and India – is ongoing and should drive growth in the iron ore and steel markets for the foreseeable future. Real US dollar contract iron ore prices are above 20 year and 50 year long term trends (US PPI adjusted). This suggests the iron ore market, like other commodity markets, continues to adjust to the impact of increased global aggregate demand due to the rapid rate of Chinese growth over the past six years.

Contract prices should be relatively flat through 2011.

As global economic growth eases after the strong gains of 2H09 and 1H10, contract prices should stabilise and approach a longer term trend, remaining steady through 2011 at an average USc222/dmtu (US$138/t at 62% Fe) for fines. This is higher than our September 2010 forecast for the same period, due to the increase in 1Q11 contract prices discussed above. Prices should decline somewhat as new supply comes in after 2H12 (we have forecast a 15% decrease in 2Q12, so 2012 average is USc201.4/dmtu).

RCR’s long term iron ore forecast is for US$55/t at 62% Fe content.

Long-term prices will be tied to iron ore production versus steel usage of the main consumers. RCR’s long-term forecast is for US$55/t FOB at 62% Fe for fines, with a 20% lump premium.

December Quarter 2010, Iron Ore Review

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

26

Resource Capital Research Monthly average contract prices for iron ore fines: US$/t, range December ‘90 to December ’10 (20 years), US PPI normalised. 240

Iron ore fines (Fe 64.5%), Brazil to Europe, FOB US¢/Fe unit, real)

220

Source: UN, Metal News, FerroAlloyNet, US Bureau Labor Statisitics

200 USc/dmtu (PPI normlised to Apr '82)

The new quarterly pricing system of 3 month spot averages indicates that the 2Q11 quarterly price could be similar to 1Q10, or perhaps fall slightly. Steady prices through 2011 and 2012 would see the market price approach the 20 year real (polynomial) trend.

180 160 140 120 100 80

60 40 20 0 Dec-90

Dec-92

Dec-94

Dec-96

Dec-98

Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12

Monthly average contract prices for iron ore fines: US$/t, range 1960 to 2010 (50 years), US PPI normalised. 240

Iron ore fines (Fe 64.5%), Brazil to Europe, FOB US¢/Fe unit, real)

220

Source: UN, Metal News, FerroAlloyNet, US Bureau Labor Statisitics

200 USc/dmtu (PPI normlised to Apr '09)

Contract prices are well above trend on a 50 year scale. This trend suggests a midrange, long term price of ~US¢90/dmtu, or US$55/t at 62% Fe. This is an upwards revision of our US$50/t from 3Q10, due to the strengthening and stabilising iron ore market.

180 160

140 120 100

80 60 40

20 0

The main external risks to our price forecasts: Our forecasts depend on stability in the US dollar, relative global economic stability and consistent iron ore supplies, and the continuation of the contract price system.

December Quarter 2010, Iron Ore Review



Relative strength of the USD.



Continuing global economic uncertainty, relating at the moment to the issue of European national debt; and also near-term tightness of iron supplies, especially from India.



Potential price volatility from ongoing changes in the structure and pricing of iron ore sales agreements, e.g. the continuation of shorter term contracts or even the abandonment of the benchmark system and a broader move to cash based / spot market sales.

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

27

Resource Capital Research Selected iron ore and steel indices, current values, tonnage forecasts and percentage changes over time

Indices, 8 December 2010

Units

Period

Most recent

Current value

% change, 1 mth

% change YOY

Australia iron ore exports value, monthly

A$m

Monthly

November

4406

-6.4

95.9

4660

-0.8

US$/t US$/t RMB/t US$/t

Quarterly Spot Spot Spot

4Q10 Current Current Current

127.2 164.7 1370 194.0

7.5 6.2 10.9

111.3 64.0 59.3 77.3

150.1 1263 174.2

-13.3 -0.4 4.8 1.0

mt mt mt

Monthly Monthly Weekly

November November Current

45.7 95.5 74.7

-13.1 2.1 4.0

-8.3 10.0 8.5

48.1 96.3 72.8

-4.4 -0.2 -2.3

US$/t

Spot

Current

595.0

-2.0

18.5

606.4

US$/t

Spot

Current

651.0

-0.5

17.5

mt

Monthly

November

117.6

4.6

(based US$) Daily

Current

2173

US$/barrel

Current

88.7

Contract iron ore fines, 62% Fe (Pilbara) FOB China fines, import spot 62% CFR (Met. Bulletin) China fines, internal spot price Hebei/Tangshau China pellets, import spot price CFR China ore and concentrate imports China output China inventory Hot rolled coil (Iron & Steel Steel Benchmarker) Standard plate (Iron & Steel SteelBenchmarker World Export Market ) Crude Steel Production Index, Global (Int'l Iron & Steel Institute [IISI]) Baltic Dry Index Oil price, West Texas Intermediate (WTI) Cushing Crude

Spot

3 month % change from Forecast % Change % below average previous 3 mths Total YTD CY2010 from 2009 Max, 5 yrs max 42246

46086

67.1

138^

41 186.5 1610 267.5

-11.7 -14.9 -25.4

64.6 101.6 78.7

-29.2 -6.0 -5.9

0.7

1113.0

-46.5

655.0

-2.1

1251.0

-48.0

3.7

114.2

-4.4

124.6

-5.6

-12.4

-28.1

2530

-13.8

11793

-81.6

2.1

22.1

80.0

3.0

145.3

-39.0

^ Price for 1Q11 is based on average spot price indices for September to November.

566 959

1272

618 1046

1387

2.7 23.5

18.3

Source: Bloomberg, RCR

In summary, the iron ore and steel indices here studied have gained significantly year on year (e.g. prices, 18.5% for Hot Rolled Coil to 111.3% for contract iron ore fines) but have been fairly level for the past quarter. Spot iron ore prices are relatively flat quarter on quarter (-0.4% to +4.8%) but have risen month-on-month (between 7.5% and 10.9%). Similarly, steel prices and tonnages are level or down quarteron-quarter (+0.7% to -4.4%) but are flat or rising month-on-month (-0.5% to +4.6%). In China, inventory levels are 8.5% higher than 12 months ago. China has increased iron ore production in the past 12 months - we forecast a 23.5% rise to 1046mt for CY10. This is significant when compared to flat or even declining imports: China is likely trying to avoid paying high import prices by self-producing. Based on the spot price index, the 1Q11 contract iron ore price should be ~US$138/t FOB for ore with 62% Fe, an ~8% increase on 4Q10. Note that current freight rates (the difference between FOB and CFR prices) are ~US$10/t for Capesize shipping from Australia (Dampier, WA) to China (Qingdao), ~US$25/t from Brazil (Tubarao) to China and ~US$15/t (Supramax) from India (Paradip) to China. The Baltic Dry Index (BDI), which is an average of dry bulk shipping indices, reflects the current levelling of economic growth (-28.1% YoY) and a possible oversupply of bulk carriers. December Quarter 2010, Iron Ore Review

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

28

Resource Capital Research Selected industry news and property transactions, 2009-2010

BHP Billiton and Rio Tinto’s planned JV has collapsed …

… while on the legislative front in Australia, details of a new resources tax are being thrashed out.

Globally, the industry is expanding, with iron ore majors looking to west Africa for new capacity …

… and a variety of iron ore projects changing hands, with a premium for DSO hematite (higher grade) over magnetite projects.

In October 2010, BHP Billiton and Rio Tinto ended plans to establish a 50:50 production joint venture worth US$116b, covering their Western Australian iron ore assets. The deal collapsed due to objections from customers, and Asian and European competition regulators, as well as the strengthening financial position of RIO since the agreement was struck. In December 2010, a WikiLeaks cable revealed that in 2009, BHP may (unsurprisingly) have campaigned with the Australian government against the planned $21bn deal between Rio and China's state-owned aluminium corporation, Chinalco. The Australian Government’s planned Resource Super Profits Tax (RSPT), proposed in May ’10, was replaced in July ‘10 by the Mineral Resource Rent Tax (MRRT). The RSPT, which was to apply a 40% tax to some mineral profits in addition to company tax, caused outrage in the Australian mining community and led in part to the June ’10 resignation of the Prime Minister, Kevin Rudd. The MRRT could feature a 30% rate applied differently and only to bulk commodities. BHP and RIO have turned their attention to the emerging iron ore hub of west Africa. In June 2010, BHP signed a mineral development agreement with Liberia, where it plans to invest $US3bn in four iron ore leases. Rio Tinto is also investing heavily in Guinea, where it has a $US2.9 billion deal with its biggest shareholder, China's Chinalco, to develop the Simandou Iron Ore Project. Rio shares the Simandou district with the third global iron ore giant, Vale, which in April 2010 paid US$2.5bn (US$500m up front) for a 51% interest in nearby leases. The strong global economic recovery has resulted in numerous mineral property transactions, including some for iron ore. The US$/t ratio at which these deals occur can be of use in predicting the value of potential future asset sales. In 2010, both DSO and magnetite projects sold for a wide range of values (see below), with DSO on the whole worth more per tonne due to (usually) higher Fe grades (e.g. 60% against 30%). Other factors are resource status, share of project, and project location. Some iron ore property transactions settled in 2010

Property Name

Type

US$m/t

Resource, mt

US$m value^

% transacted

Country

Buyer

DSO Iron Ore Project

DSO

4.72

79

300.0

80%

Canada

Tata Steel

Schefferville Iron Ore Project Mayoko Iron Ore Project

DSO DSO

4.58 1.77

79 33

291.0 47.0

80% 80%

Canada Congo

Yangqueqing Magnetite (Ti-V) Mine Hercules Iron Ore Deposit Jupiter Iron Ore Deposit Simandou Iron Ore Project Hamersley Iron Ore Project Roper Bar Iron Ore Project

DSO DSO DSO DSO DSO DSO

1.64 1.10 0.70 0.60 0.14 0.11

18 59 1,890 2,255 143 117

29.4 32.6 1324.4 1350.0 10.0 2.6

100% 50% 100% 100% 51% 20%

Tata Steel Stirling Minerals China Vanadium TitanoChina Magnetite Mining Australia MCCM Capital Brazil ECE (China) Guinea Chalco (China) Australia Saint Istvan Gold Australia Western Desert

Bukit Ibam Magnetite Mine Bahia Magnetite Project Roche Bay Magnetite Project Buena Vista Magnetite Deposit Beyondie Magnetite Project Fermont Magnetite Project Fermont Magnetite Project Cairn Hill Magnetite (Cu-Au) Mine

Mag Mag Mag Mag Mag Mag Mag Mag*

7.34 0.38 0.15 0.07 0.05 0.03 0.03 3.12

1 1,960 357 109 561 603 603 14

3.1 735.0 55.3 8.0 6.1 8.8 5.2 21.9

51% 100% 100% 100% 20% 50% 32.5% 49%

Malaysia Brazil Canada USA Australia Canada Canada Australia

Mt = ma gne ti te; DSO = di re ct s hi ppi ng ore , he ma ti te.

December Quarter 2010, Iron Ore Review

*Al s o coppe r, gol d.

Esperance Mining Eurasian Nat. Resources Advanced Explorations Richmond Mining Emergent Resources Champion Minerals Champion Minerals Sichuan Taifeng Group

Seller New Millennium Capital Corp New Millennium Capital Corp Cape Lambert Huilixian Yangqueqing Ironclad Mining Unknown Rio Tinto Cazaly Resources Itochu Grange Resources Zamin BM NV Roche Bay KMD LLC De Grey Mining Fancamp Exploration Sheridan Platinum IMX Resources

^ Incl ude s ca s h, s ha re s a nd e xpl ora ti on s pe nd.

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

29

Resource Capital Research Iron Ore Equity Performances

Australian junior iron ore company stock prices have gained 38% in the past 12 months.

Canadian juniors are 23% below yearly highs and 147% above yearly lows

Yearly equity performances of 58 Australian listed iron ore juniors, with a combined market capitalisation of A$36.9bn, have strongly outperformed the S&P/ASX200: prices gained an average 38% in the past 12 months (ASX200 +0.6%), gained 25% over the past three months, and gained 4% over the past 1 month (ASX200 -1.5%). The companies’ share prices, on average, are 28% below their 12-month highs but 96% above their 12-month lows. The best performers on our list include Sphere Minerals Ltd (ASX:SPH), up 299% for the year due to a takeover bid by Xstrata, which wants SPH’s iron ore projects in Mauritania; and Avonlea Minerals Limited (ASX:IRD), which gained 150% in three months (promising iron ore and rare metal exploration in Namibia). Canadian listed stocks have also performed strongly, with 48 companies showing an average 12 month increase of 78% including a 3 month rise of 43%, and sitting 23% below yearly highs. One of the best 12 month performers was Advanced Explorations Inc (+311%), which was re-rated in Sep ’10 after forming agreements with Chinese partners to develop its Roche Bay Project. Main uses and demand

China is the world’s major producer of steel and user of iron ore.

Iron ore’s primary use is for steel making. Steel production is a good measure of iron ore consumption, although the correlation is not direct due to lags from stockpiling, as well as waste in the steel-making process and the re-use of scrap steel. (In the US, scrap steel consumption in 2008 was estimated to be 48mt, compared to raw steel production of 55.9mt – in fact, in the US auto industry in 2008 the recycling rate was 106%, meaning more steel was produced by recycling old vehicles than was used to make new ones). The world’s main steel producing nation is China, with 550mt (48.5%) of the estimated global raw steel production in 2009 of 1,133mt. This was up from 500mt (37.6%) in 2008 and 478mt in 2007. Raw steel and pig iron production, 2008 and 2009 [units mt]

Three of the top five steel producers are in Asia. China and Russia are in the top five for both consumption and production of iron ore.

China Japan Russia Korea, Republic Ukraine Brazil United States Germany France United Kingdom Italy Other countries World total (rounded)

Pig iron 2009 2008 540 471 61 86 40 48 26 31 25 31 22 35 18 34 17 29 7 12 7 11 5 11 96 133 864 932

Raw steel 2009 2008 550 500 79 119 55 69 47 53 28 37 24 34 56 92 29 46 12 18 9 14 18 30 226 318 1,133 1,330 Source: USGS

December Quarter 2010, Iron Ore Review

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

30

Resource Capital Research The USGS estimated that global steel production in 2009 was 1133mt. The IISI crude steel production index indicates production for 2009 was 1172mt. Production in 2010 is likely to be higher, at 1387mt. Ranking of individual steel producers, 2007 to 2009 2009

The largest individual steel producer in 2007-2009 was ArcelorMittal (UK).

2007

2008 Company

Country

Rank

mmt

Rank

mmt

Rank

mmt

1

73.2

ArcelorMittal

UK

1

103.3

1

116.4

2 3 4 5 6

40.2 38.9 30.4 29.6 27.6

China China China Korea Japan

5 3 7 4 2

33.3 35.4 27.7 34.7 37.5

na 5 11 4 2

31.1 28.6 20.2 31.1 35.7

7

26.4

China

9

23.3

8

22.9

8 9 10 11 12 13 14 15

26.4 26.3 21.9 20.2 17.3 16.8 15.3 16.2

Hebei Steel Group Baosteel Group Wuhan Steel Group POSCO Nippon Steel Jiangsu Shagang Group Shandong Steel Group JFE Tata Steel Anshan Steel Shougang Group Severstal Evraz U.S. Steel

China Japan India China China Russia Russia USA

11 6 8 17 22 14 15 10

21.8 33 24.4 16 12.2 19.2 17.7 23.2

8 3 6 na 23 15 17 10

23.8 34 26.5 16.2 12.9 17.3 16.2 21.5

Source: Metal Bulletin (2009), World Steel Association (2008, 2007)

The top Chinese steel producers, driven by Government stimulus in the GFC, increased production in 2009 by 20.4% - compared to a non-China decline of 19.6%.

In 2009, the largest individual supplier of steel was ArcelorMittal with 73.2mt, a 29.1% reduction from 103.3mt in 2008. Four of the top five companies were the same in 2009 and 2008, and three were from China. The year-on-year changes in production are strongly bimodal: for these 15 companies, the Chinese producers increased production by 20.4%, while the non-Chinese producers decreased output by an average 19.6%, which shows the speed at which the stimulus-driven Chinese steel sector recovered from the GFC. Iron ore production and reserves

In 2009, the three major iron ore suppliers, by nation, were Australia (BHP & Rio Tinto), China, and Brazil (Vale). ABARE is forecasting a 9.2% increase in the iron ore trade from 2009 to 2010.

December Quarter 2010, Iron Ore Review

In 2009, the largest iron ore producers in grade equivalent terms (62.5% Fe) were Australia (394mt), China (365mt) and Brazil (300mt). Total production was ~1688mt, a -2.7% year-on-year decline from 2008. The three largest individual producers outside China were CVRD (Vale) of Brazil, Rio of Australia/UK and BHP of Australia. In terms of absolute tonnes, China was the largest producer at 880mt, but much of this was at low grades. According to Australian Government agency ABARE, the global seaborne iron ore trade was ~ 914mt in 2009, up 3% from 887mt in 2008, and is expected to increase to 998mt in 2010 (9.2%). The biggest exporter in 2009 and 2010 was and is expected to be Australia, with 352mt (38.5%) and 394mt (39.5%) respectively.

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

31

Resource Capital Research Global stainless steel production (kt)

After falling during three consecutive years, into the GFC, global stainless steel output has recovered.

Source: Vale

Global iron ore imports plus China domestic production

Increasing iron ore consumption by China, both under contract and at floating prices (i.e. spot), has driven recent market growth.

Source: BHP Billiton

Chinese regional steel intensity (use per capita 2009) As nations and regions develop, steel intensity per capita grows with GDP. China is approaching mid-range intensity on a global scale but many provinces are just beginning to climb the intensity curve. This implies consistent or increasing steel demand for the foreseeable future.

December Quarter 2010, Iron Ore Review

Source: Rio Tinto, Global Insight China regional Service

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

32

Resource Capital Research National mine production and reserves of iron ore (mt)

Australia China* Brazil India C.I.S Africa North America Other countries Other South America Europe World total

Mine production (mt) 2009 2008 % change 394 345 14.2 365 363 0.6 300 346 -13.3 221 215 2.8 176 190 -7.4 68 65 4.6 67 99 -32.3 40 40 0.0 32 39 -17.9 25 33 -24.2 1,688 1,735 -2.7

*Grade equivalent iron ore production, at 62.5% Fe. China ROM ore is 880-900mt Source: USGS, UNCTAD, Metalytics, RCR

China Brazil Australia India Russia Ukraine South Africa Iran Canada United States Kazakhstan Sweden Venezuela Mexico Mauritania Other countries World total

Reserves (mt) Crude Ore Iron Content 22,000 7,200 16,000 8,900 20,000 13,000 7,000 4,500 25,000 14,000 30,000 9,000 1,000 650 2,500 1,400 1,700 1,100 6,900 2,100 8,300 3,300 3,500 2,200 4000 2,400 700 400 700 400 11000 6,200 160,300 76,750

% Fe 32.7 55.6 65.0 64.3 56.0 30.0 65.0 56.0 64.7 30.4 39.8 62.9 60.0 57.1 57.1 56.4

Iron ore production by percentage of total (1,688mt in 2009)

4%

2% 1% Australia

4% Australia has the highest levels of iron ore mine production, with 23% of global supplies in 2009, followed by China (21%) and Brazil (18%). These are grade-equivalent tonnages at 62.5% Fe; China dominates runof-mine production (~900mt) but at much lower grades.

4% 23%

China

Brazil India

10%

C.I.S Other 13%

21%

Africa North America

18%

United States

Europe Source: Metalytics, UNCTAD, RCR.

December Quarter 2010, Iron Ore Review

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

33

Resource Capital Research Iron ore production by company in 2009 (>1kt, exchange-listed companies only)

Company Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Vale S.A. Rio Tinto Ltd BHP Billiton Ltd Fortescue Metals Group Ltd NMDC Ltd Mitsui & Company Ltd Kumba Iron Ore Ltd Evraz Group S.A. Cliffs Natural Resources Inc. Eurasian Natural Resources Corp. plc Sesa Goa Ltd NLMK (OJSC Novolipetsk Steel) OAO SeverStal Hancock Prospecting Pty Ltd Itochu Corporation United States Steel Corp.

Equity Production 2009 (mt)

Country

237.94 165.75 117.92 32.76 28.52 26.71 22.09 16.90 16.57 15.20 15.10 13.45 12.92 10.32 10.00 8.55

Brazil Australia Australia Australia India Japan South Africa Russia USA UK India Russia Russia Australia Japan USA

Equity Production 2009 (mt)

Company Name 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Mount Gibson Iron Ltd Exxaro Resources Ltd Nippon Steel Australia Pty Ltd African Rainbow Minerals Ltd Assore Ltd Mitsubishi Corporation Mechel OAO Grange Resources Ltd Territory Resources Ltd Sumitomo Corporation MMX Mineracao e Metalicos S.A. Anglo American plc ZiJin Mining Group Co. Ltd. Atlas Iron Ltd Murchison Metals Ltd China Natural Resources, Inc. Total

6.36 5.97 5.71 4.65 4.65 4.49 3.60 2.17 1.99 1.90 1.90 1.89 1.42 0.97 0.87 0.05 799.32

Country Australia South Africa Japan South Africa South Africa Japan Russia Australia Australia Japan Brazil UK China Australia Australia China

Source: Intierra – Resource Intelligence

Current lump price premium over fines is 12.4%.

Iron ore is sold both on long-term contract and into the spot market. It is traded as fines, lump (larger pieces with a higher Fe content) and pellets (refined). Iron ore lump earns a price premium over fines, due to its frequently higher grade and the fact that it can be used directly in steelmaking furnaces. The contract price premium of lump over fines imported to Japan is currently 12.4%. Fines are sintered to form pellets before they are used, as their small grainsize prevents the circulation of oxygen during smelting. The premium for BF (blast furnace) pellets over fines is ~20%. Higher grade DR (direct reduction) pellets attract a higher premium (up to 50%). Price history and the change to quarterly indexing

Contract prices rose more than 500% from 2001 to 2008, but 2009 contracts were set at a 36%-33% discount to 2008.

For the past 40+ years, contract prices have been set by agreement between the main iron ore suppliers and the largest steel producers, in Europe and Asia. Price negotiations occurred annually, with many agreements reached in January (Vale) or April (BHP, RIO). The first agreement reached between a major supplier and consumer was set as the annual price. The spot market, which has grown in tandem with the seaborne iron ore trade, is dominated by smaller-volume iron ore producers and buyers.

No 2009 annual benchmark contract prices with China were set, leading to the introduction of quarterly (three month) price contracts from 2Q10.

Contract prices increased by 527% between mid 2001 and mid 2008 (fines, BHP). However, demand for iron ore fell during the global recession and this was reflected in the 33% decrease in contract price agreed between Australian producers and non-Chinese Asian buyers. The 2009 negotiations with China reached a deadlock in June 2009 and no official contract prices to China were set. The inflexibility of one year contracts, made obvious during the 2001-2008 boom and GFC, led mining companies to push for shorter term contracts in 2010. A quarterly pricing system, index to spot prices with a one-month lag, was adopted for 2Q10 (April to June) and is likely to continue into 2011.

December Quarter 2010, Iron Ore Review

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

34

Resource Capital Research Iron ore: elemental facts Most commercial iron ore occurs as hematite and magnetite in, or derived from, large Banded Iron Formations (BIF).

Iron is a chemical element with atomic number 26, specific gravity 7.874g/cm3 and the symbol Fe. It is the sixth-most abundant element in the universe and composes ~5% of the Earth’s crust. At atmospheric temperatures and pressures it is a lustrous greyish metal that oxidises easily. Most of the world's iron ore is produced from large formations of hematite (Fe2O3) and magnetite (Fe3O4). (Note, the traditional spelling of hematite is hæmatite, but this has been simplified in recent years). Iron ore, in commercial quantities, often occurs as sedimentary Banded Iron Formations (BIF), or as an erosion product of such formations called Channel Iron Deposits (CID) or Detrital Iron Deposits (DID).

Iron ore is reduced to metallic iron and can then be alloyed with other metals to make steels.

Iron ore is mostly sold as lump, fines or manufactured pellets.

Magnetite deposits are often lower grade than hematite but the ore can be improved by simple processing. Iron ore contracts are priced in Dry Metric Tonne Units (DMTU’s).

FOB prices do not include freight costs, while CFR prices do.

When heated in the presence of a reductant, iron ore will yield metallic iron (Fe). Due to its strength and abundance, iron is the most widely used of all metals, both in its native state (e.g. cast and wrought iron, which also contain carbon) and alloyed with other elements (e.g. silicon, chromium, vanadium, tungsten, molybdenum, nickel) to form steels. Stainless steel contains a minimum 11% of chromium by mass. Hematite iron ore, when mined, is commonly crushed and split into lump (i.e. golf-ball size) and fines components. There are systematic differences between the lump and fines grades. Generally the lump product is richer in iron and lower in the other minerals, compared to the fines product. The grade differences between lump and fines, together with the lump percentage, are referred to as the ‘lump algorithm’ (Source: AUSIMM). Lump ore attracts a premium due to its higher metal content. Iron ore fines can be processed into high-grade BF and DR pellets, which assist with oxygen circulation during smelting. Magnetite ore is often of lower grade than hematite (~30% vs ~60%) but can be beneficiated, often using gravity and magnetism, to form a saleable ~70% concentrate. The price of a dry tonne of iron ore is calculated by multiplying the price per dry mtu of iron (ie 10kg of iron) by the per cent content of iron in the ore, times 100. For example, if the price of iron ore fines is 97¢/Fe dmtu, then the value per tonne of ore at 62% Fe content is 97¢ x 100 x 62% = 6014¢ or US$60.14/t. Contract prices are often set as FOB, or free on board, which means they don’t include freight costs. Spot prices are usually quoted as CFR, or Cost and Freight, which means the seller has organised carriage to the destination port and added a freight charge. This varies depending on transport distance – freight from Australia to China is currently ~US$12/t, while from Brazil it is ~US$30/t. Common classification system for dry bulk carriers

Bulk carriers are named for their size, and ability to use the Panama Canal (Panamax or smaller).

December Quarter 2010, Iron Ore Review

Ship Classification Dead Weight Tons % of World Fleet

% of Dry Bulk Traffic

Capesize

172,000

10%

25%

Panamax

74,000

19%

25%

Supramax

52,454

37%

25% w/ Handysize

Handysize

28,000

34%

25% w/ Supramax

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

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Resource Capital Research Summary of main Australian iron ore ports with current capacity and planned expansions State

District

Capacity/ Expansion (mt)

Start/expansion

Vessel size

Ankatell Point

WA

Pilbara

40/350

2013/?

Cape

Aquila/FMG/MCC

Cape Lambert (Port Walcott)

WA

Pilbara

80/130/190/330

Operating/2013/ 2015/2016?

Cape

Rio Tinto (53% through Robe River Assoc)

Cape Preston

WA

Pilbara

28/150

4Q10/na

na

Dampier

WA

Pilbara

140/225/230

Operating/2011/ 2012

Port Hedland

WA

Pilbara

200/360

" additional Inner Harbour (NW Creek and Utah Point)

WA

Pilbara

" Outer Harbour

WA

Oakajee Port and Rail

Port

Owners/Planners (Fe and steel)

Capex

Comment Medium term capacity expansion to 350mtpa for third party users. EIS under way, construction from 2011. Export cap to protect other ports. May be threatened if FMG delays expansion plans due to RSPT.

A$145m to date

Adding 50mt by 2013 and 110mt by 2015 to existing capacity, further expansion to 330mtpa announced Jul '10

A$3.4bn

Citic Pacific

A$1.8bn (port and infrastructure)

Built for Sino Iron Project (magnetite). Citic stated in 2007 that its Cape Preston facilities could be avaiable for third party use. Magnetite slurry will be moved by 25km pipe but there is also road access.

Cape

Rio Tinto

A$2bn to date / A$101m / A$256m

Phase 2 (140mtpa) completed 2007. Third party access unlikely

Operating

Cape

BHP, FMG

na

110/155

2010/2013

Cape

NWIOA/Hancock/PHPA*

Pilbara

400/400

2015/?

Cape

BHP

A$10bn

WA

Midwest, 20km N. Of Geraldton

45/100

2014

na

Murchison Metals, Mitsubishi

A$4.3bn

Darwin iron ore berth

WA

Darwin

2/5-6

Operating/2013

Cape (current Panamax)

Darwin Ports

A$336m

Whyalla

SA

Operating

na

Onesteel

SA

Eyre Peninsula Whyalla, Eyre Peninsula

8?

Port Bonython

20

2012

na

Spencer Gulf Port Link

Port Pirie

SA

Adelaide

3-4/7-8

2011/na

na

Flinders Ports

Port Lincoln

SA

Eyre Peninsula

1.6

2011

na

Centrex

A$65m

Approved by SA Govt in 1Q10

Sheep Hill

SA

Eyre Peninsula

20

2013

Cape

Centrex, EPMA

A$150m

Potential to share among iron ore juniors in new Eyre Peninsula Mining Alliance. Now favoured long term over single site at Port Lincoln

Port Adelaide

SA

Adelaide

1.7

4Q10

na

Flinders Ports

Port Latta

TAS

NW

Port Kembla Potential total capacity by 2015

NSW

Illawarra

2.6 (pellets and concentrate) na +1760mt

Operating

Suezmax

Operating

na

Australian Bulk Minerals (90% Grange Resources Ltd) Bluescope Steel (main user)

Currently, the only export point for BHP and Fortescue iron ore. Multiple expansions planned for next 3-5 years (see below). NWIOA expansion planned for inner harbour (South West Creek) from 2010, ramp up to 2013, 20mtpa for new users. Hancock 30mtpa and up to 55mtpa from near harbour mouth, must be dredged before NWIOA. Utah Point Berth Project completed 2010 for A$225m, added 18mtpa.

A$2.1bn (NWIOA)

BHP 200mt Quantum Project, plus 200mt for third parties, from 2015, and potential to add a further 400mt within the decade; could be on hold or not needed if RIO/BHP infrastructure deal goes ahead. Bankable Feasibility Study was submitted in March 2010. The project includes 570km of rail, with spur lines to the Jack Hills and Weld Range projects. Feasibility study to cost US$300m.

na

Onsteel is unlikely to provide capacity for juniors

A$600m

Progress is slow and potential users are sceptical of current timetable

na

Western Plains Resources has negotiated access from 2011 and will build infrastructure, including a barge loader. Capex to be announced.

IMX Resources Ltd shipping 1.7mtpa from Cairn Hill from Dec '10 Magnetite pellets shipped from Savage River Project, shipped in Handymax or Panamax Could benefit possible western NSW iron ore miners

na

Abare iron ore production forecast for 2015 is 552mt, i.e., there should be ample capacity for expansion of production by 2015.

Potential capacity is 1760mt by 2015. ABARE (Australian Gov’t statistics) forecasts 552mt production by 2015, but excess port capacity could stimulate further development. Infrastructure projects are promoted by alliances of junior resource companies. These include the NWIOA (North West Iron Ore Alliance): Atlas Iron (ASX:AGO), Brockman Resources (ASX:BRM) and BC Iron (ASX:BCI); the GIOA (Geraldton Iron Ore Alliance): Crossland Resources (50% Murchison, ASX:MMX), Gindalbie Metals (ASX:GBG), Golden West Resources (ASX:GWR) and Asia Iron Ore Holdings; and the EPMA (Eyre Peninsula Mining Alliance): Centrex Metals (ASX:CXM), Lincoln Minerals (ASX:LML), Minotaur Exploration (ASX:MEP) and Iron Road (ASX:IRD) December Quarter 2010, Iron Ore Review

Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved.

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