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ECONOMIC OVERVIEW June 2017
China Stabilising after Strong March Quarter

Macro conditions looked mixed in May, but a ramp-up in June Quarter construction activity saw most indicators point to better demand conditions. The data looked blurred because of a strong Chinese March Quarter, stimulated by near record loan activity in the December Quarter of 2016. On the flipside, the US started to recover from a slow March Quarter, and the Euro economies breathed a sigh a relief from a conformist French election win.

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STEEL June 2017
Can POSCO bring FINEX to the mainstream?

A Korean consortium, including POSCO, has emerged as the preferred bidder for Arrium’s steelmaking assets. Arrium has been under the administration of KordaMentha since April 2016. Whilst specific details are yet to emerge, we do know that POSCO plans to invest up to US$1bn to modernise the plant and introduce its patented FINEX technology to Australia.

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COPPER June 2017
Capital Intensity of New Copper Mines

The big new Las Bambas, Cobre Panamá, Aktogay and Bozshakol mines have high capital intensities of more than US$7.8/lb of annual copper capacity. Las Bambas has a capital cost of US$6.6bn due to its remote location and the need to construct a new town, while Cobre Panamá’s US$5.48bn capex includes a new power plant and port facility, and processing low-grade ores. Aktogay and Bozshakol also have low-grade ore, which requires greater ore volumes to be processed per tonne of copper.

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ALUMINIUM June 2017
Price Volatility and Environmental Scrutiny

Since early May, over 4Mtpa of refining capacity in China has been announced as curtailed, or planned to be curtailed. These stoppages are due to poor profitability in the face of three primary issues—firstly, the falling alumina price with weakening smelter demand; secondly, increasing bauxite sourcing issues and raw material prices; and thirdly, increased environmental scrutiny as inspection teams begin assessing province emissions.

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NICKEL June 2017
The Battle to Regain Lost Ground

Australia’s nickel industry is in decline, losing market share as production declines, reserves are exhausted, and operations lose cost competitiveness. Recent times have seen several major closures as operations have been unable to remain economic in a period of depressed nickel prices. Will Australia’s nickel industry retreat quietly into insignificance, or will it find new ways and opportunities to regain lost ground?

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ZINC June 2017
Mississippi Valley Type Zinc Deposits

Mississippi Valley Type (MVT) zinc deposits have long been a stable source of high-quality, high-grade zinc concentrate, accounting for 5% of global mined zinc. However, over the next 15 years, AME expects many large long life MVT mines to close, reducing the amount of clean zinc concentrate available. New mines on MVTs are not expected to replace the lost production as a lack of suitable deposits and high operating costs limit the number of MVTs being developed.

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LNG June 2017
Spreads Tighten as Gas Markets De-Link from Oil

The oil price crash has reduced the gas spread between Europe, Asia and the US over the past few years. Going forward, the rise of hub-priced US LNG will keep gas spreads closely aligned to Henry Hub prices going forward. We expect smaller spreads will benefit companies with geographically diverse and flexible portfolios as arbitrage profits shrink.

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IRON ORE June 2017
Status of South African Iron Ore Production

South African production is derived from four deposits in the Northern Cape, with a unique and complex history of formation. High site and transport costs to export markets are partially offset by the quality of the products. However, replacement of these deposits remains a crucial issue for the long-term sustainability of the industry.

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THERMAL COAL June 2017
Optimism Renewed

With price increases in excess of 15% in 2016, and global export thermal coal demand anticipated to rise 5% in 2017, optimism has returned for thermal coal producers eyeing expansion plans in order to take maximum advantage. Export capacity additions are forecast to total 155Mt over the next three years, with over 75% destined for the Asian market. The two largest thermal coal exporters, Indonesia and Australia, are expected to remain dominant, accounting for ~60% of capacity additions from 2017–2019.

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OIL & GAS June 2017
What Can Shale E&Ps Oil Hedging Positions Tell Us

US E&P companies have increased crude oil hedging by almost 50% from 2Q 2016 to 1Q 2017. Indeed, the majority of US companies have hedged part of their production for 2017. The increase in shale production in recent years can be seen in the WTI futures market. While open interests reach record high levels, long-term future contracts are steadily falling.

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METALLURGICAL COAL June 2017
Resource Reservations

China’s metallurgical coal imports are expected to rise 10% in 2017 to 65Mt. In 2016, the country produced 1Bt of ROM metallurgical coal, mainly higher volatile semi-soft and semi-hard coking coals. Despite export prices rising sharply in 2016, China’s hard coking coal (HCC) ROM production was proportionally less than either its HCC coke mix requirements, or its HCC resources, indicating China is importing to conserve its own resources or obtain better quality and lower cost coal.

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STEEL June 2017
Modi-fying India’s Steel Industry

India recently released its National Steel Policy 2017, highlighted by a significant downgrade to its forecast of steel production growth. The new production target of 300Mtpa of capacity by 2030 brings India’s vision in line with AME’s forecast that we have maintained for the past 2 years. However, even if this ambitious target is met, India will still fall well short of the average steel production and consumption rates expected of a developing economy.

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COPPER May 2017
Rising Energy Costs

Despite producer efforts to improve energy efficiency and reduce costs, energy use in copper mining is rising. As global mined copper output increases, ore grades decline, open pits get deeper, ore gets harder and use of seawater is more widely adopted, total energy demand and energy used per tonne of copper produced are increasing. BHP Billiton’s Escondida faces higher energy demand when its new desalination plant is commissioned and three concentrators are operating from late 2017.

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NICKEL May 2017
The Changing Shape of China’s NPI Industry

China’s NPI Industry has proven very resilient in the face of low prices over the past two years, despite NPI operations being widely considered marginal swing producers. While this is somewhat true, many of the larger and more integrated operations have continued operations as smaller higher cost operations have left the market, leading to industry consolidation in the face of increasing challenges including declining ore grades.

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ALUMINIUM May 2017
Changing Landscape of Alumina

China’s increased aluminium smelting capacity over the last 15 years has been supported by the development of significant domestic alumina capacity to satisfy the Smelter Grade Alumina (SGA) demand. This change in geographic aluminium production, along with energy costs and raw materials supply sources, has had a major impact on alumina producers outside China. The last few years have seen these competitive pressures lead to curtailments and product changes in a number of previously established SGA suppliers.

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ZINC May 2017
In the Penalty Box

The 2017 benchmark zinc treatment charge is US$172/t of concentrate. Spot treatment charges are US$30-40/t. The global zinc concentrate market is forecast to be in a 108kt deficit in 2017. Chinese smelters are threatening extended maintenance periods. These market dynamics are causing pain for smelters as they try to secure concentrate feed. The last point of negotiation for concentrate deals could be concentrate penalties.

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COAL May 2017
Glencore Settles with Tohoku at US$85/t

Reports have come out today that Glencore and Tohoku Electric have concluded contract negotiations for the 2017–2018 Japanese financial year, at US$85/t FOB Australia. Tohoku previously settled contracts with other miners at US$81–84/t. Settlement talks were delayed as the market awaited clarity following Cyclone Debbie, and while Glencore held out for a price above US$90/t. Glencore conceded, but should still be satisfied.

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OIL May 2017
Nigeria's Oil Uncertainties

Nigeria’s oil production still 1Mbpd below 2011 peaks despite increased production in Q1 2017. Political deadlock about the new Petroleum Industry Bill has seen capital investment levels and number of new projects decrease since 2008. Proposed greenfield developments in the pipeline require a break-even price of US$60¬90/bbl. Currently, there is 800kbpd in future projects that remain unsanctioned.

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LNG May 2017
Australian Government Export Controls

The Australian Government has imposed an export control on LNG producers to ensure supplies in the domestic market. We expect Santos’ 7.8Mtpa GLNG facility to be mainly affected by this new regulation, because over 60% of its feed gas comes from the domestic market. Going forward, the regulation will force LNG exporters to increase their investment into domestic gas sources despite their relatively high cost.

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STEEL May 2017
China's Cheap Scrap

China’s crackdown on Induction Furnaces may remove up to 50Mtpa of production from mid-2017. An excess of scrap availability may shake up scrap pricing and use within the industry. A successful removal of Induction Furnace production may be a double win for China’s BF & EAF production.

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THERMAL COAL May 2017
Burning Down the House

China has seen a renaissance in the use of coal for power generation over the past nine months, as growth in power generation from other sources, particularly hydro, has not been sufficient to satisfy growth in electricity demand. With supply restrictions on domestic Chinese mines in place since April 2016, China’s increased electricity demand has been met by imported thermal coal. Thus, imports have surged and are likely to remain strong.

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IRON ORE May 2017
Production at Risk

The iron ore price has begun to fall during the second quarter of 2017 and is expected to remain subdued for the medium term. With the continued ramp up of Roy Hill and S11D and the probable return of Samarco; a surplus is likely to exist in the short term. Given the expectations of a surplus and lower prices we have examined which type of operations are most at risk and culling of production is most likely to occur.

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METALLURGICAL COAL May 2017
The Next Wave of Supply

With global import demand forecast to increase 7.4% in 2017, producers of metallurgical coal are dusting off previously-shelved development and expansion plans to capitalise on favourable market conditions. These additions in export capacity are anticipated to total 80Mt over the next three years. Dominant exporter Australia is only anticipated to account for ~30% of these additions, with competitors Canada, Mongolia and Russia all vying to claim valuable market share.

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ALUMINIUM April 2017
China's Oversupply Control

China has halted 2mtpa of aluminium smelter developments in Xinjiang province. This action is widely believed to be the prelude to broader Chinese aluminium capacity control as China’s Capacity Control Protocol aims to cut capacities which have failed to comply with NDRC No.1494 [2015]. We believe the impact of the announcement might be overstated, given the existing productive capacity available within China.

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ZINC April 2017
Capital Intensity of New Zinc Mines

Zinc concentrate shortfalls over 2016 and 2017 are prompting renewed interest in new zinc mines. No greenfield zinc project of more than 100ktpa has come on line since Goldcorp’s Peñasquito mine was commissioned in 2009. Poor zinc prices and excess capacity have held back the development of long-known large projects. This is now changing with an influx of investment in new and idled zinc mines..

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COPPER April 2017
The Copper Mega Mines

Three of the top five copper mines experienced disruptions in early 2016. BHP Billiton’s Escondida and Freeport’s Cerro Verde were impacted by strikes in the March Quarter. Freeport’s Grasberg is in dispute with the Indonesian government and was unable to export concentrates. These three mines supply 10% of global copper in concentrate. Drawn out returns to normal output at Escondida and Grasberg and potential disruptions at other major mines may push copper prices higher.

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METALLURGICAL COAL April 2017
The Best New Coking Coal Projects

Higher prices and growing demand has seen more interest in new coking coal projects. AME looks at three projects with great potential; Mezhegey, Jan Karski and Red Hill. Overall, these projects could add 25.4Mtpa of product, requiring around US$7–8bn of funding.

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IRON ORE April 2017
Haulage Distances at Open Pit Mines

The haulage distance from the pit to the primary crusher or the waste dump is typically the single largest contributor to operating cost in the mining segment of an open cut operation and is a major factor in determining mobile fleet numbers and configuration. AME’s assessment of haulage costs in the Pilbara places them in the range of 20%-60% of the total mining cost. AME has incorporated detailed analysis of haulage distances over time into the new EVO engineering model for costing mining operations. Detailed examination of pit layouts during haulage distance estimation also provides insights into mine planning.

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THERMAL COAL April 2017
Vietnam: The Benefits of a Falling Coal Price

Vietnam to consume 220Mtpa of thermal coal by 2030. Vinacomin has high production costs, cannot complete in export market if prices below US$80/t. If thermal coal prices remain around or below US$80/t in the future, Vietnam could become a huge importer.

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LNG April 2017
Shifts in the LNG Trading Structure

LNG trade is rapidly changing. Strengthened buyer positions are reducing contract length and volumes, and increasing the penetration of hub-pricing. These changes create attractive market conditions for trading houses, better prepared to optimise portfolios, manage risk and deal with price fluctuations. The latest Egyptian tender in Nov 2016 (96 cargoes) was dominated for the first time by large intermediary players including Glencore, Trafigura, Vitol and Gunvor.

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STEEL April 2017
The Coke Connection

LVPCI supply disruptions as a result of North Korean sanctions could result in Chinese steelmakers looking for alternate sources of PCI suitable coals. PCI is a proven means of increasing blast furnace productivity and decreasing operating costs. Coke performs a fundamental role within the blast furnace, high volume blast furnaces require high strength coke in order to provide support to the burden.

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NICKEL April 2017
Trends in the Nickel Intermediate Market

Trade in intermediate products forms a significant part of the nickel value chain, one which is often overlooked in favour of mined and finished nickel. Nickel intermediate products consist of nickel contained in matte, mixed sulphide precipitate (MSP), mixed hydroxide precipitate (MHP), and other intermediate nickel products including salts and oxides which require further processing before being classed as a finished product.

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ALUMINIUM April 2017
Chinese Smelting Technology Triumph

The massive increase in Chinese smelting capacity to pass 50% of world production by 2015 has seen the emergence of homegrown technology exceeding technical metrics of established Western technology providers. The reduction in energy consumption has been a major focus in the competitive aluminium smelting landscape. The technology advances and cost of implementation has seen Chinese technology providers leverage their experience to gain foreign sales.

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COAL April 2017
Global HCC Lost due to Cyclone Debbie

Severe Tropical Cyclone Debbie hit the Queensland coast on the 28th March 2017 and the subsequent flooding has impacted coal production for the past week. While the mines and the ports appear to have escaped major flooding or damage, the rail infrastructure has not been so fortunate. Rail Operator, Aurizon, has today announced that three of its five major coal haulage networks will be out of action for up to five weeks.

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COAL March 2017
Implications of Cyclone Debbie

Severe Tropical Cyclone Debbie has the potential to severely impact production and exports from Queensland’s Bowen Basin mines over the coming weeks. The Bowen basin is the largest producing metallurgical coal region in the world, with over 1.5Mt extracted each week, most of which is export coking coal.

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GAS March 2017
Argentina Taps its Vast Shale Resources

The Argentine government announced plans to develop its vast shale gas resources and eliminate LNG imports in five years. The country is the third in the world, after the US and Canada, to commercially develop tight oil and shale gas.

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STEEL March 2017
Burden Blends

When tight supply hit both the iron ore and coking coal seaborne markets, the ability to maintain a stable burden blend determines the extent to which steel producers are able to capitalise on favourable market conditions. Variations in feed availability means that burden blending and charging practises will differ. This month, AME looks at the blending opportunities in ferrous feeds where the sweet spot is to limit phosphorus and alumina content, minimising the premiums paid and allowing for maximum flexibility on procurement.

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ZINC March 2017
India's Zinc Mines Heading Underground

India’s mine production is going through significant change. The world’s largest zinc mine, Hindustan Zinc’s 750ktpa Rampura Agucha will see its share of total Indian zinc production decline from approximately 90% to 50%. The fall comes as part of Hindustan Zinc’s US$1.5bn plan over six years to expand existing underground operations and move underground at Rampura Agucha as it targets a mined metal capacity of 1.2Mtpa by FY2019. Progress towards the target has not been smooth sailing as shaft construction issues, and water ingress, ventilation and geotechnical problems, have limited the advancement.

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METALLURGICAL COAL March 2017
Mongolia Reloaded

In 2016, as global metallurgical coal imports increased 3.7% and China’s imports increased 24%, Mongolia exported 23Mt of metallurgical coal—its largest ever annual volume. Market undersupply in the December Quarter led to the premium hard coking coal contract price of US$285/t for the March Quarter of 2017, and prompted the re-start of three idled mines. While future export volumes depend on China’s domestic production, AME forecasts Mongolian metallurgical coal exports to rise around 18% in 2017.

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THERMAL COAL March 2017
The Pick of the Crop

Import demand growth of 3.7% in 2016, plus December Quarter prices averaging ~35% higher quarter on quarter, have caused a reassessment of undeveloped coal projects. Three promising thermal coal projects are Boikarabelo, Mount Pleasant and Buck Creek. A combination of coal quality, established customer bases and infrastructure synergies gives these prospective greenfield operations an advantage, with a strong potential to post positive cash margins if they are developed.

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ALUMINIUM March 2017
Seaborne Bauxite

Seaborne bauxite related to China’s huge demand has seen nearly a 200% increase in the past decade. With developments in Guinea, and to underpin the major mine development in Australia and offtakes from Australia and South America, AME foresee a further increase possible to support coastal and near coastal refineries. Chinese alumina producers may continue to exploit this pathway of raw material supply, while shipping costs remain near multi-decade lows.

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IRON ORE March 2017
Price Not Yet Enough

The iron ore price was unexpectedly resilient over 2016 and into 2017. The monthly average price reached US$80/t in December 2016 and maintained that level into January 2017 compared with a monthly average low of US$40/t in December 2015. A price over US$80/t was last achieved in October 2014. In response to the price rebound over 2016 and early 2017, are there any signs that new projects are being approved?

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COPPER March 2017
Sea Water to the Rescue

Copper operations in Chile are at significant risk of disruption whilst securing sufficient, reliable water supply for ore processing. This risk is increasing due to fresh water scarcity, drought susceptibility and increasing water demand and restrictions on its use. Chilean copper mines are increasingly moving to the use of desalinated sea water and direct use of raw sea water to meet their needs. Use of sea water, particularly desalinated water, increases capital and operating costs.

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NICKEL March 2017
The DSO Market in Flux

The seaborne laterite market has been thrown in turmoil with the recent announcement that Indonesia will relax its ore export ban. This will see the once dominant player in the DSO market return after a three-year hiatus. Furthermore, the Philippines Department of Environment and Natural Resources delivery of its Final Mining Audit Report, has resulted in the DENR calling for even more significant closures than anticipated by the industry. The uncertainty in DSO supply will provide significant volatility to the nickel market in 2017.

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LNG March 2017
America and the Great Gas Glut

An oversupplied market, under-utilisation, and an upcoming surge of LNG. Is there any hope for what was once the fuel of the future? The past few years has seen demand growth lag behind increases in liquefaction capacity, forcing operators to reduce utilisation rates as markets dry up. AME expects liquefaction capacity to increase at 8% year on year until 2020, easily outpacing demand as growth from major consumers such as Japan and Korea flatline.

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OIL March 2017
Towards the Lighter End of the Barrel

New crude oil demand patterns are being established as the demand gradually shifts from heavy industry to high-end manufacturing, commercial services, and personal consumption. The social and economic incentives to downsize industry are mounting as the country considers its environmental agenda, rising levels of urbanisation and personal income. It will accelerate the shift in product demand from middle distillates to light ends.

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GAS February 2017
How UK Oil Sector Reduced OPEX amid Low Oil Prices

The average operating expenditure of oil and gas projects in the UK North Sea (UKNS) has increased sharply over the past decade. This determinant cost component peaked at around US$29/boe in 2014 to mark a threefold increase compared to that of 2004 in same dollar values. The North Sea is a mature hydrocarbon province which has been producing since the mid-70s. The historical annual average peak of nearly 3Mbpd in 1999 was followed by a consistent decline at an average year on year rate of 4.7%.

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THERMAL COAL February 2017
The State of the Union: South Africa

With volumes totalling over 70Mt, South Africa was the fifth-largest exporter of thermal coal globally in 2016. India purchases over 50% of South African coal exports, with key policy and pricing shifts leading to the decline of once-primary customers Turkey and China, and the emergence of new consumers such as Pakistan. Nearly 70% of South African export thermal coal is produced by three companies, with Glencore the lowest cost in 2016 at US$34/t FOB on average.

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IRON ORE February 2017
Vale Carajás S11D

On 16 December 2016 Vale SA officially opened the Carajás S11D Iron Project, the largest project the company has ever undertaken. S11D’s location in the protected Carajás National Forest has heavily influenced the design of the project and adoption of technology to minimise its impact on the environment. The project will deliver 90Mtpa of high grade, low cost, iron ore fines when it ramps up to full production in 2020 and will be very competitive with Australian operations.

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NICKEL February 2017
African Nickel: An Uncertain Future

Africa’s nickel industry faces significant uncertainty, with established producers halting production, and question marks over future development. Africa produces 1.4% of world finished nickel and 5% of mined nickel, a level which has remained relatively stable since 2010. This masks significant volatility, as increased nickel production from PGM producers in South Africa and Zimbabwe and new production from Madagascar, mask the decline in output from traditional producers like Botswana.

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COPPER February 2017
Declining Copper Ore Grades

The average grade of copper ore mined has declined by 1.7% per year over the past ten years to 0.60% in 2016. The fall is due to declining grades at some of the world’s largest, long-life mines and the development of new low-grade mines. The declining grade trend will continue for these same two reasons. BHP Billiton’s 1.1Mtpa Escondida is dealing with declining grade by lifting throughput and First Quantum’s 320ktpa Cobre Panama starts up in 2018 mining ore with only 0.4% copper.

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