2.21 Chapter 21 - Business - Case

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Chapte

er 21 – BUSINESS CASE
C

21 BUS
SINES
SS CA
ASE
21.1 INTRO
ODUCT
TION
The purp
pose of this chapter
c is to assess the ffinancial valu
ue of the PdF
F Project.

This chaapter describ


bes the proce
ess undertakken in the ec conomic evalluation of thee PdF Projec
ct as well
as summ marises the results
r and findings
f of th
he financial modelling
m and
d analysis. TThe following
g aspects
of the eeconomic evvaluation unddertaken in the lead-up to publicatio on of the BF FS are disccussed in
detail:

 Economic assumptions
s; and
 Results of the BFS fina
ancial modellling.

apter has be
The cha een develope ed with the support of independentt specialists as well as in-house
manageers in all area
as related to financial
f asp
pects of the Project.
P

The finaancial mode el evaluatess a base caase and se ensitivities around this case. The potential
profitability of the Pro
oject has bee
en measured ollowing key financial critteria:
d using the fo

 Annual and
d cumulative
e cash flows;
 Net Presen
nt Value (NP
PV), before an
nd after taxe
es;
 Internal Ra
ate of Return (IRR); and
 n and payback periods.
Break-even

The eco onomic evaluation has been condu ucted on a post-tax, pre e-finance baasis. Througghout the
analysiss process, it assumes
a 100
0% equity inn order to ass
sess the Project cash flow
ows before th
he impact
of debt interest and repayment
r calculations.
c

The fina
ancial model is expressed
d in real term
ms and with th
he results su
ummarized inn Table 21.1..

Table 21
1.1 – Key Prroject econo
omic results
s
Unit
U Tota
al
NPV 9% d
discount rate (Affter Tax) (USD million) 1,54
42
IRR (Afterr Tax) (%)
( 19.8%
Initial CAP
PEX (USD million) 2,000
0.3
Sustaining
g CAPEX (USD million) 998
8
Average O
OPEX (USD/t dry FOB) 24.8
83

Assumin
ng a discount rate of 9%, the NPV aftter tax is ove
er USD 1.5 billion and IRR
R is close to 20%.

21.2 ASSU
UMPTIONS

21.2.1 Project sc
chedule

The CAP
PEX schedule is based on
o the overalll Project sch
hedule.

BAMIN – P
PdF Project BFS
S, August 2016

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Chapter 21 – BUSINESS CASE

 Project Execution Phase: The Initial CAPEX spend will commence July 2017, at the start of
Project development and construction, and continue through till March 2020 at the Mine Site
(33 months), and until August 2020 at the TUP (38 months).
 Operations Phase: Commencement of operations is planned for April 2020 at the Mine Site,
and September 2020 at the TUP. At this time, the Initial CAPEX will have been expended.
OPEX and Sustaining CAPEX spend will then commence and continue until the end of the
life of mine in 2049.

21.2.2 Macro-economic assumptions

The following key macro-economic assumptions have been incorporated in deriving a Project NPV.

21.2.2.1 Model terms

Financial modelling is expressed in real terms, at a date of June 2016. All cost and price inputs have
been developed during 2016.

21.2.2.2 Discounting

A base case discount rate of 9% (real) has been applied. The NPV is calculated as from July 1, 2017,
which is based on a discounted cash flow valuation of the post-tax, pre-finance cash flows resulting
from the financial model.

21.2.2.3 Foreign exchange rate

Costs have been entered in the financial model in the currency in which they are expected to be
incurred, which in turn has been based on detailed, strategic procurement analysis conducted by
BAMIN and its engineering consultants.

In real terms, the financial model converts local BRL costs to USD. The exchange rate used has been
forecast by CRU in July 2016, averaging 3.63 BRL against the USD over the life of mine. Figure 21.1
shows the historical exchange rate and the accentuated depreciation of the BRL between 2011 and
2015. This is mainly a result of two forces: the valorisation of the USD due to the recovery of the US
economy and the crisis in the Brazilian economy.

The Brazilian Central Bank forecast of August 2005 shows a flat exchange rate of around 3.60 which
is very similar to CRU July 2016 forecast currently being used in the financial model.

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Chapte
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Figure 2
21.1 – Annual average exchange
e ra
ate (BRL/US
SD) 2000-202
26

Figure notte:
Source: BAMIN
N
Bacen – Banco
o Central do Brasil

21.2.3 Costs and


d revenue

All cost assumption considered in the mod el are valid as of June 2016, and aare in constant price
terms. TThe revenue e assumption n used in the e financial analysis
a his Project aare in 2015 constant
of th
price terrms. There iss further upside if the Re
evenue assum mption was tot be broughht in line with
h the cost
assumpttion to 2016 terms. The financial
f moddel start date
e for Project developmennt and construction is
July 1, 2
2017.

21.2.4 Initial CAP


PEX

The Initial CAPEX requirement


r is the ‘startt-up’ capital required to initiate the PProject and fund the
construcction phase up to the commenceme
c ent of operaations. The total estimatted Initial CAPEX
C is
USD 2,0000 million. This
T includes
s a 9.45% co ontingency (U USD 1,828 million
m withouut contingenc
cy). Refer
to Chaptter 17 – Costs Summary, Table 17.1 for more dettails.

21.2.4
4.1 Initial CAPEX brreakdown

The Initial CAPEX brreakdown by


y activity as sshown in Figure 21.2.

BAMIN – P
PdF Project BFS
S, August 2016

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Chapte
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Figure 2
21.2 – Initiall CAPEX

The Initial CAPEX iss driven by th


he port, proce
ess plants, mine
m and rail,, in decreasinng order.

 The infrasttructure and export logisstics CAPEX (water, pow wer, railway aand port) am
mounts to
USD 1.024 4 million, acc
counting for ssome 50% off the Initial CAPEX.
 The process plants CA
APEX amou
unt to USD 389
3 million, accounting
a ffor 19% of the
t Initial
CAPEX;
 The mine CAPEX
C amounts to USD 174 million, accounting for 9% of thee Initial CAPE
EX
 The Owne ers cost (wh
hich includess EPCM) as ssociated witth the Projeect developm ment and
constructio
on amounts to USD 156 m million, accounting for 8%
% of the Initiaal CAPEX; an
nd
 A continge
ency of 9.45%
% (9.6% for the Mine Sitte including the
t rolling stoock and 8.9%% for the
port) has been applied to the Ini tial CAPEX,, totalling US
SD 173 millioon. The con ntingency
percentagee has been calculated
c ussing the Mon
nte Carlo Anaalysis as expplained in Ch
hapter 17
– Costs.

an also be viiewed in term


The Initial CAPEX ca ms of the majjor cost elem
ments as shoown in Figure
e 21.3.

BAMIN – P
PdF Project BFS
S, August 2016

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Chapte
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Figure 2
21.3 – Initiall CAPEX by cost centre
e

The ma ajority of thee Initial CAPEX (59% or USD 1,176 million) will w be spennt on buildings and
construcction works. Equipment account
a for 4
40% (or USD D 793 million) of the plannned expenditture. Pre-
operatin d and capital spares are rrelatively neg
ng costs, land gligible costs
s.

21.2.4
4.2 Initial CAPEX prrofile

alysis assume
The ana es a creditorr period of 30
0 days during
g the constru
uction phase..

The Figuure 21.4 shoows a four yeear distributio


on of the exp
pected capita
al spend betw ween 2017 and a 2020.
The bulkk of the expe
enditure incurs during 20 018 (41%, USSD 822 millio
on) and the ddistribution iss skewed
toward tthe last year of constructtion (2020 haaving a 3 moonth period prior
p to the sttart of the Opperations
Phase).

Figure 2
21.4 – Initiall CAPEX dis
stribution (ex
xcluding co
ontingency)

181

750

605

291

Tax ince
entives

The Initiial CAPEX requirement


r is USD 2,0000 million inc
cluding a con
ntingency of 9.45%. Almost all of
this tota
al (USD 1,9255 million) is depreciable as per the tax
t regime of Brazil. Onlly USD 75 million
m are
non-dep preciable cre
edits which will
w be recog gnised as re ecoverable credit
c and wwill be set offf against
future taaxes payablee during the e Operationss Phase. Th his has not been
b considdered in the financial
model.

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PdF Project BFS
S, August 2016

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Chapte
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As a result of the location with hin the North


h-Eastern region of Brazzil, the Projeect is eligible for tax
incentive
es described
d under SUD DENE rules. This rule ennables depre
eciation of deepreciable CAPEX
C to
n the first 12 months of o
be accelerated within operations. See
S Chapter 19 – Tax, forr more detaill.

21.2.5 Sustaining
g CAPEX

Sustaining CAPEX is the term used to desscribe the on ngoing capittal investmennt, which is required
during th
he operationnal life of the Project in o
order to enabble realisation of the full business op perational
plan. Th
he Sustainingg CAPEX ha as been calcculated to bee USD 998 million
m over thhe life of the
e Project.
The tota
al sustaining capex translates into US SD 3.25/t product.

The majjor element (50%) of Su ustaining CAAPEX is cen ntred on the mining ope rations, as shown
s in
Figure 221.5. Owing tot the detaileed mining sch hedule produuced, BAMIN N has been aable to sprea
ad out the
capital in
nvestment re equired (in particular
p rela
ating to mining fleet for the
t movemeent of ore an nd waste)
over thee life of mine. All of the Sustaining
S CAAPEX will bee self-funded from operattions. The Sustaining
CAPEX is detailed in n Chapter 17 7 – Costs.

Figure 2
21.5 – LoM Sustaining
S CAPEX
C

The pro
ofile of Sustaaining CAPE EX is presen nted by activ
vity in Figure
e 21.6. The early build-u
up of the
mining ffleet can be seen
s in the early
e e replacement and increaase in fleet size.
years, and then the s The
TMF raisse between 2027
2 and 20031 is also evvident.

A large railway Sustaining CA APEX occurss in 2020, thet first yea


ar of the opperation, due to the
acquisitiion of additio
onal consists required as the production ramps up p to full capaccity.

The Susstaining CAP PEX is expected to be a average at around


a USD 40 million peer years. Fro om 2047
onwardss, as the min ne approaches exhaustio on the capitaal equipmentt is left to runn-down its re
emaining
useful life to coincid
de, as best as possible,, until the last year of production
p inn 2049. Therrefore no
Sustaining CAPEX iss planned for the last thre
ee years of the
t operation n.

BAMIN – P
PdF Project BFS
S, August 2016

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Chapte
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Figure 2
21.6 – Annual Sustainin
ng CAPEX

21.2.6 Operating
g expenditu
ure

The OPE EX is a functtion of production tonnagge (variable cost)


c and cossts that channge little rega
ardless of
tonnagee (fixed costss). The detaiiled producti on schedule e has been used
u as the basis for all variable
costs. Total OPEX (variable
( + fix
xed) over the stimated to bbe USD 7,614 million,
e life of the Project is es
including
g closure cossts and CFEM (mineral ro oyalty), as shhown in Figuure 21.7.

Figure 2
21.7 – LoM OPEX
O

The ave OB. All unit operating ccosts in the financial


erage operatting cost is USD 24.83//t product FO
model are in USD pe
er dry tonne.

Figure 2 21.8 presentts the avera


age LoM un e key costs are mining and rail
nit costs by activity. The
ckyard operration and unloading). Together, these account for
logistics (i.e. rail freight stoc
approximmately 60% ofo the overall unit cost.

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PdF Project BFS
S, August 2016

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Chapte
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Figure 2
21.8 – Unit OPEX
O by acttivity

21.2.6
6.1 Fixe
ed OPEX

erage fixed costs for the Project are e


The ave estimated to be USD 8.26/t product, at full capac
city. They
have been categorissed into the fo
ollowing con
nstituents:

 SG&A: consisting of overhead co osts for adm


ministering the
t businesss during op
perations,
or 10% of op
accounts fo perating costss;
 Labour: req
quired for all activities, acccounts for 12%
1 of the op
perating costts;
 Outsourced
d services: allowing
a for th
he contractin
ng of third pa
arties; and
 Closure co
ost: expende ed at the end
d of the mine d over a 5 yeear period starting
e life, spread s in
the year after
a final ye
ear of conceentrate produ
uction. The closure cosst is estimate ed to be
approximately USD 70 million, in re
eal terms.

Figure 2
21.9 presentss the fixed co
osts by cost ccenters.

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PdF Project BFS
S, August 2016

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Chapte
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Figure 2
21.9 – Fixed
d OPEX brea
akdown

The ave
erage fixed unit cost of th
he Project pe er tonne of concentrate sold
s is USD 88.26/t at full capacity,
amounting to 33% off total operatting costs). T
The key cost centres are:

 Labour, acccounting for 35%;


 SG&A, acccounting for 29%;
2
 Outsourced
d services, accounting
a fo
or 21%;
 Other services, accoun
nting for 12%
%; and
 curred at the very end of the Project, and so has a small impa
The closurre cost, is inc act on the
overall Pro
oject econom mics.

Varia
able operatin
ng costs

The aveerage variable


e cost is estiimated to be
e USD 16.56//t product, att full capacityy. This is 67%
% of total
operatin
ng costs.

Figure 2
21.10 breaks down the va
ariable cost b
by cost centrre.

BAMIN – P
PdF Project BFS
S, August 2016

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Figure 2
21.10 – Varia
able OPEX Breakdown
B

The maiin variable co


ost drivers arre:

 power and fuel, accoun


nting for arou
und 17% and
d 22% respec
ctively;
 maintenance and cons sumables, acccounting for 23%. Minin
ng maintenaance accountts for the
majority of the maintenance costs ((69%); and
 trackage rights, the larg
gest single vvariable cost, accounting for 25%.

21.2.6
6.2 OPE
EX profile

The OP PEX profile iss presented in Figure 2 1.11. The re elative propoortion of varriable (direct variable
production costs an nd tracking costs)
c to fixe
ed costs (thee remainder) is fairly coonsistent and d can be
clearly sseen here. Th ost are incurrred post production for five years.
he closure co

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PdF Project BFS
S, August 2016

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Figure 2
21.11 – Annual OPEX

Figure 2
21.12 presents the breakd
down of OPE
EX by cost ce
entre.

Figure 2
21.12 – OPE
EX by cost centre

21.2.6
6.3 OPE
EX summaryy

The ave
erage annua al OPEX is USDU 24.83/t product sold d. Fixed cos
sts (labour, ooutsourced contracts
c
and other services) account forr around 33% % of the av verage total (operating aat full capacity). This
means tthat the Proje
ect has limite
ed vulnerabiliity to relative
ely low opera
ating levels.

The cosst of trackage


e rights is th
he single larg e OPEX and account forr around 25%
gest variable % of total
OPEX.

Comparring the costts by activity


y, mining an
nd railway costs
c are the main drivvers of the operating
o
expenditture. When combined,
c ov
ver 59% of th
he OPEX is spent
s within these two coost centres.

BAMIN – P
PdF Project BFS
S, August 2016

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Chapter 21 – BUSINESS CASE

21.2.7 Revenue

The Project will have two high quality iron ore products, namely direct shipping ore (DSO) and direct
reduction pellet feed (DRPF). These will be produced and sold into two separate markets.

 The DSO will amount to 117 Mt over 10 years of operation. The DSO will be a sinter feed
with an iron ore content of >64%.
 The DRPF will have a higher Fe content of >68%, thereby attracting a premium, and will
constitute a major proportion of total sales at >190 Mt over 30 years of operation). The
DRPF product price assumes a 10% premium.
 Should the market demand a lower grade concentrate than the DRPF, BAMIN’s processing
facilities are able to produce a blast furnace concentrate (BFC) with a Fe grade just over
67%, which has a wider market than the DRPF

Revenue in the financial model is also subject to production losses. Production losses occur during
the mining operations through loss and dilution, during processing and product transportation. The
financial model applies a 0.1% to the volume of product shipped/sold. This has the effect of reducing
the revenue generated due to the expected loss of product throughout the material handling
processes.

BAMIN assumes that sales will meet 99.9% of the planned production output from the Mine Site
(allowing for the assumed handling losses).

BAMIN’s market strategy is to export 100% of the output. Therefore, it has been assumed that 100%
of revenue will be in USD.

Iron ore price forecast

The price forecasts used in the financial model has been developed by CRU. See Chapter 19 –
Market Study and Commercial Plan, for further details. The model uses two baseline forecasts:

 DRPF – BAMIN assumes a sales price which includes a 10.0% premium; and
 DSO – BAMIN’s assumes a sales price with no premiums or discounts.

Figure 21.13 presents the price forecasts, in 2015 terms, used in the financial model.

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Figure 2
21.13 – Price
e forecast

g-term price is:


The long

 USD 67.9/ttdry for BAMIN


N’s DRPF grrade productt at 68.5% Fe
e and
 USD 58.6/ttdry for BAMIN
N DSO prod uct at 65% Fe.
F

All saless prices assu


umed are FO
OB Brazil, at tthe BAMIN TUP
T in Aritag
gua).

Revvenue breakd
down

The min ne plan was prepared


p on the basis of producing up to 10 Mtpa
a DSO in the first 13 yearrs and up
to 7 Mtppa DRPF durring all LoM which
w is 30 yyears .Over the
t LoM som me 39% of prroduction willl be DSO
and 61% % of the prod
duction will be
b DRPF. Fig gure 21.14 and
a Figure 211.15 show thhe relative strength of
selling D
DRPF grade product com mpared to thee DSO.

Figure 2
21.14 – Sale
es Tonnage by Product Fig
gure 21.15 – Sales Reveenue by Pro
oduct

Revvenue summa
ary

DRPF ssales over th he life of the e calculated


e Project are d to be 188 Mt and DSO O sales 1199 Mt. The
forecastt total sales revenue for the Project is approximmately USD 19
1 billion. Thhe annual re
evenue is
presenteed in Figure 21.16.

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PdF Project BFS
S, August 2016

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Figure 2
21.16 – Annual sales tonnage, reve
enue and op
perating marrgin

21.2.8 Working capital


c requ
uirements

The Prooject working capital requ uirement is th


he composition of a num
mber of elemeents includin
ng first fill
costs, deebtors, crediitors and sto on ramps up, the workingg capital requirement
ockholdings. As productio
increasees for some or all of the Project life. The underly
ying assumpptions for eacch of these elements
e
are summmarized in thhe following sections.

Firstt fill

First fill iis the term used to descrribe the mate erials require
ed during the first attemptt to run each
h stage of
the prod duction proce ess from starrt to finish. T
These include e costs for mill
m balls and reagents wh hose cost
has bee en calculated d to be approoximately US SD 0.9 million and is treaated as a onne-off workin ng capital
item, ap duction begi ns in 2020. Other items such as spaare parts, wa
pplied directlyy before prod arehouse
stock an nd lubricants, spare tyres etc. have be een considerred in the capex.

Debtors and cred


ditors

Debtors are the dela


ay in paymen
nts made to BAMIN by itts customers s (cash inflow
ws). Hence this
t is an
equivale
ent number of
o revenue daays. For the sstudy this ha
as been assu
umed to be 330 days.

Creditorrs are the deelay in BAMMIN making p payment to its suppliers (cash outfloows). This has
h been
calculateed as an equ of production
uivalent number of days o n costs. For the study thiis has been assumed
a
to be 30
0 days. The same
s payment period ha s also been assumed du uring the Projject Executio
on Phase
and appplied to the CAPEX.

Stoccks

In the fin el, there is a provision forr 3 different types


nancial mode t of stock, namely:

 The RoM stock (unprrocessed ore e stockpiled between th he mine andd plant). No working
ovision has been made for this sto
capital pro ock in the model.
m Althouugh conventtionally it
should be treated as work-in-prog gress and reflected
r in the balancee sheet, insttead, the
mining cosst is charged in the year tthat it is mine
ed to annual OPEX rega rdless of whether the
material is processed or
o not. This ttreatment ex xaggerates th
he OPEX in tthe early yea
ars and it

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PdF Project BFS
S, August 2016

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Chapte
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is not posssible to deriv


ve a true esti mate of costt of goods so
old. Howeveer, this is bala
anced by
a lower woorking capital requiremen t. In reality, this
t treatmen
nt has a zeroo impact on th
he NPV;
 Finished product stocks. These are e held at both g terminal (att the mine) and at the
h the loading
port. Thesee stocks include a strateg
gic stock at the
t port and at the loadinng terminal asa well as
a working stock at the e port whichh fluctuates annually
a bas
sed on prod uction and shipment
s
assumption ns. The assu umption is th
hat on averaage a strateggic stock of oone ship loaad will be
held at the port and minnimal stock a
at the Mine Site;
S and
 Materials and
a consummables stockks. These have been in ncluded to aassume 10%
% of the
operationa
al expenditure
e of the yearr being held at
a any point in
i time.

Worrking capital profile


p

The ann nual change in working capital


c has a an important effect on cash flows andd minimising
g this can
lead to improved pro
ofitability. Figure 21.17 illu
ustrates the net working capital annuual movemen
nts

Figure 2
21.17 – Annual working
g capital

21.2.8
8.1 Working capital summary

20 the impacct of working capital on th


After 202 he Project is a fairly insignificant.

21.2.9 Deferred costs


c

BAMIN has incurred d USD 104 million


m in pre--operating an
nd pre-consttruction costss. These cos
sts under
Brazilian
n taxation re
egulations ca
an be carried d forward to the beginning of the Opperations Ph hase and
then exppensed at a maximum
m rate of 30% pe er annum. Th his has been modelled in the financial model.

21.2.10 Taxes

The Prooject’s tax ob x incentives, have a signnificant impact on the


bligation and eligibility forr various tax
cash flow
w. This secttion provides
s a short desscription of howh taxes haave been appplied in the financial
model. SSee Chapter 18 – Taxes for further de etails.

BAMIN – P
PdF Project BFS
S, August 2016

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Chapter 21 – BUSINESS CASE

21.2.10.1 Income tax reduction

The financial model incorporates a number of detailed income tax assumptions. A combination of
rebates, expenses, and tax offsetting has been developed in line with appropriate tax guidance.

21.2.10.2 Accelerated depreciation

Assets qualifying for eligibility under the terms of the SUDENE incentive plan can be depreciated
under accelerated terms in the first 12 months of use, up until a cut-off point at the end of 2018. It is
reasonably expected that the period for which the benefit is applicable will be extended. Therefore, for
the purposes of this BFS, the Initial CAPEX identified as eligible (all with the exception of specified
non-depreciable taxes: PIS, COFINS & ICMS) is treated as accelerated depreciation.

21.2.10.3 Other tax incentives

ICMS recovery is assumed to be granted for the purposes of the financial analysis. The ICMS cost is
incurred and BAMIN assumes that it will sell 50% of the credit, adding USD 260 million back into the
cash flow during the LoM. This percentage will be negotiated during the Operations Phase and could
result in a potential upside of the NPV of up to USD 80 million.

21.2.10.4 Output Tax Obligation

Output taxes are those payable on profits during operations. They have been applied in the model as
follows.

Income taxes (IRPJ and CSLL)

With the guidance of tax advisors, BAMIN has assumed that it will obtain income tax benefits (see
Chapter 18 – Taxes, SUDENE rules) for projects located in the northeast of Brazil. The benefits allow
for a 75% reduction in the income tax rate of 25%, bringing the income tax (IRPJ) rate to 6.25% for
the first 10 full years of operations. Accordingly the income tax rate applied for the first 10 complete
years of operations is 15.25%; comprising 9% compulsory social contribution (CSLL) plus 6.25%
income tax (IRPJ). The period both before and after this 10 years, see tax rate revert to the usual
34%; consisting of a 9% compulsory social contribution plus 25% income tax.

CFEM

CFEM taxes (mineral royalties) on revenue has been assumed consistent with relevant legislation.
The calculation takes 2% of revenue less logistical operating costs associated with the transportation
of finished product.

21.2.10.5 Tax payment profile

The tax payable by BAMIN over the life of the Project is summarised in Figure 21.18.

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Chapte
er 21 – BUSINESS CASE
C

Figure 2
21.18 – Annual tax paya
able

In line w
with expectations, the income tax (ccomprised off CSLL and IRPJ in Braazil) accountts for the
majority of BAMIN’ss output tax obligation. O Of key significance is th he step channge in this obligation
o
which occcurs from 2031 onwards s. This is ow ing to the ex
xpiry of the SUDENE bennefit which the Project
receivess during the first
f 10 full ye
ears of operaations. Otherr taxes are negligible throoughout the life
l of the
Project.

The CFEEM paymentts, at a flat ra


ate of 2% off revenue, arre small in co
omparison too the corpora
ate taxes
payable.

21.2.1
10.6 Inpu
ut tax obligattion

Input taxxes are thosse payable on the purcha ase of equipment, materials and servvices require ed during
Project sset-up and operations.
o The
T value off these taxes s has been included in tthe cost assu umptions
but idenntified separaately in orde
er to calcula ate tax incen
ntives such asa rebates w where applic cable. All
payable input taxes have been calculated
c in consultation
n with local Brazilian tax aadvisors. Theese have
been pro ovided in the
e form of inpputs to the finnancial model. They are included in the model in nput cost
assumpttions. Regarding sensitivity analysiis and adjus sting the coosts, this haas been done on a
proportioonal basis. This approa ach cannot b be accurate but is deem med to be w within an ac cceptable
tolerancce range. Thee tax cost asssumptions a are thought to
o be conservvative as in re
reality, a proc
curement
strategyy would evolvve to optimisee the tax obliigations whe
erever possibble.

21.2.11 Operation
nal assump
ptions

The Pro
oject team an
nd other connsultants havve developed the Initial CAPEX, Su staining CAP PEX and
OPEX bby undertakin
ng basic, andd some detaailed, enginee
ering studies
s. The follow
wing key assu
umptions
have been made in developing
d th
he BFS finan
ncial model:

21.2.1
11.1 Mine assumptio
ons

BAMIN has estimated a JORC Code comp pliant Minera


al Resource.. Following tthe technica
al studies
undertakken, comprissing this BFS, a JORC Code comp pliant Ore Reserve of 5661 Mt at an average
of 42.4% Fe has been derived.
grade o d Thiss forms the basis of thee financial m
model and economic
e
evaluatio
on.

All opera
ations, includ
ding at the mine,
m are asssumed to op
perate 360 days a year w
with 5 days stoppage
s

BAMIN – P
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Chapte
er 21 – BUSINESS CASE
C

for plann
ned annual maintenance
m .

No resid
dual mining asset
a value has
h been reccouped at the
e end of the Project.
P

21.2.1
11.2 Plan
nt and TMF a
assumptions
s

An Itabirrite Plant willl produce an


n annual ma aximum 7.5 Mtpa
M DRPF. Additionallyy, a simpler Hematite
Plant will produce an n annual maximum 11 M Mtpa DSO. Thhis forms the
e basis for alll mining andd process
engineering. The an nnual producttion tonnage t average total product
es vary and the ct being 15.9 Mtpa for
the first 13 years and wing 17 years. This leads to a projeccted life of mine
d 6 Mtpa durring the follow m of 30
years.

The TMF will be buiilt in phases over the life


e of the Proje
ect. The firstt phase will bbe during the Project
Executio
on Phase. Significant
S Su
ustaining CA APEX is the en incurred between
b 20227 and 2030 0 for the
works on
n the spillway and saddlee dams.

21.2.1
11.3 Railway and sto
ockyard assu
umptions

A small strategic sttockpile of DSO


D and D RPF produc
cts will be stored
s at thee loading terminal in
Caetité.

The fina
ancial model assumes tha
at, in real term
ms, the track
kage tariff is flat at BRL 114.00/t wet railed.

21.2.1
11.4 Porrt assumption
ns

At the p w be both a strategic sttockpile of DSO


port, there will D and DRRPF productts. The port handling
capacityy is more thaan BAMIN’s forecast pro oduction. Therefore theree will be spaare capacity
y for third
party ussers. There iss a therefore
e the potentiial for increa
ased revenue
e beyond whhat is reflecte
ed in the
Project e
economic evvaluation.

It has be
een assumed
d that the port will be ope
erational all year
y round.

BAMIN deems thatt the port will w constitute e an asset with a commmercial vallue, though none is
considerred in the ecconomic evaluation of the
e Project in th
he BFS.

21.2.1
11.5 Pow
wer assumpt ions

BAMIN w will make a contribution to the set-up p and conne ection costs relating
r to thhe provision of power
to all sites. This is th
he power CA APEX. Howe ever, BAMIN N will not hav
ve any involvvement in the day-to-
day ope eration of thee power gene eration or disstribution cen
ntres and as such will inccur no opera ating cost
relating to this other than via the tariff agreem
ment with CO OELBA.

21.2.1
11.6 Watter assumpti ons

The finaancial model assumes that, in real te


erms, the cos
st of water production wiill not rise. The
T water
off-take agreement will
w meet the water requirrement of operations at all
a sites.

21.3 FINAN
NCIAL RESULT
R TS
This secction outline
es the key results
r from financial an
nd cash flow
w modelling. The viabilitty of the
Project, based upon n the assumptions outlin ed above, hash been tes sted using a range of techniques
and thenn subjected to
t a sensitivitty analysis.

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Chapte
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21.3.1 Base case


e results

The keyy Project econ


nomic indica
ators are sum
mmarised in Table
T 21.2.

Table 21
1.2 – Econo
omic evaluattion results
Unit
U Tota
al
NPV 9% d
discount rate (Affter Tax) (USD million) 1,54
42
IRR (Afterr Tax) (%)
( 19.8%
Initial CAP
PEX (USD million) 2,000
0.3
Sustaining
g CAPEX (USD million) 998
8
Average O
OPEX (USD/t dry FOB) 24.8
83

Based oon the assummptions developed by BA MIN in the leead-up to BFS publicationn in August 2016,
2 the
projected cash flowss yield a postt-tax NPV of USD 1.54 million
m and an
n IRR of 19.88%.

The ann
nual CAPEX, OPEX and revenue
r for tthe duration of the life of mine are shoown in Figurre 21.19.

Figure 2
21.19 – LoM
M CAPEX, OP
PEX and rev
venue

21.3.2 Project prrofitability

The Proj oject demonsstrates good profitability. The early los sses are exp
plained mainnly by the acc
celerated
deprecia ation of fixed
d assets with hin the first 1
12 months of o operations
s and the buuild-up of Ro
oM stock.
The ope erating margin is on average over ha es. Tax has a relatively marginal
alf of total gross revenue
impact o on profit until 2031 whe en the SUD DENE benefit on IRPJ comes c to ann end. Figure 21.20
illustrate
es Project pro
ofitability pre
e-finance.

BAMIN – P
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S, August 2016

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Chapte
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Figure 2
21.20 – Proffit and loss

21.3.3 Project ca
ash flows

Figure 221.21 showss the undisc counted free cash flow over the life e of the Proj
oject. The cu umulative
investme ent and subssequent paybback in cash
h flow terms follow
f the sta
andard ‘J-currve’. The cas
sh flow is
characte e Initial CAPEX. Once op
erised by the perations be
egin, expenditure reducess, revenue in ncreases
rapidly, as does cassh flows which remains positive for the rest of the Project liife. Cash breeak-even
occurs inn 2021.

Comparring Figure 21.21


2 and Figure 21.22, the effect of
o discounting g at 9% is eevident. Ann nual cash
flow stea
adily reducess over time and
a there is a marked droop-off in the cumulative
c tootal with time
e.

From the e discountedd cash flows, the full inve


estment payb
back occurs in 2023 or aabout four ye
ears after
the startt of operation
ns.

BAMIN – P
PdF Project BFS
S, August 2016

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Chapte
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C

Figure 2
21.21 – –Und
discounted free cash fllow after tax
x (undiscoun
nted)

Figure 2
21.22 – Disc
counted free
e cash flow a
after tax, at 9% discoun
nt rate

21.3.4 Sensitivity
y analysis

Using th
he base case e results, ana alysis of the key cost, rev venue and macro-econom
m mic assumpttions has
been coonducted in order
o to testt the Projectt’s sensitivity
y to possible
e changes inn these assu
umptions.
The resulting chartss illustrate the likely impa act of chang ges on the key
k financial indicators (N
NPV and
IRR).

NPV
V sensitivity to
t discount ra
ates

Figure 2
21.23 illustrattes the Proje
ect’s sensitivvity to the 9%
% discount ra The red line indicates
ate applied. T
the basee case assu umption. The e point at wh hich the curv t x-axis is the discoun
ve crosses the nt rate at

BAMIN – P
PdF Project BFS
S, August 2016

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Chapte
er 21 – BUSINESS CASE
C

which NPV equals zero.


z In otherr words, this is the base case
c IRR. Thhis chart effeectively demo
onstrates
that the Project is stiill attractive at
a a significanntly higher discount rate.

Figure 2
21.23 – Postt-tax NPV ve unt rate
ersus discou

NPV
V & IRR sens
sitivity to iron
n ore prices

Figure 2
21.24 depictss NPV and IRRR curves w e Project is aas expected sensitive
with steep grradients. The
to changges in iron ore prices. The chart sshows that with w a 30% rise in pricees, the Projject NPV
doubles. Correspond dingly should
d prices fall b
by 30% the Project
P becommes profit neeutral.

Figure 2
21.24 – Postt-Tax NPV and IRR vers
sus iron ore prices

NPV
V & IRR sens
sitivity to Initia
ial CAPEX

The Pro oject is less sensitive


s to the
t Initial CA APEX. Erro! Fonte de re
eferência nãão encontra ada.If the
Initial CAAPEX were to rise by 30% above th he 9.45% co
ontingency le
evel as definned in the ba
ase case
then the e Project wo ould still retu
urn around USD 1.0 billiion NPV dis
scounting at 9%, and an n IRR of
15.3%. Conversely if the Projec ct Initial CA
APEX were to drop by 30%,
3 the NPPV would im mprove to
around U USD 2.0 billion, with an IRR of aroun d 27%.

BAMIN – P
PdF Project BFS
S, August 2016

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Chapte
er 21 – BUSINESS CASE
C

Figure 2
21.25 – Postt-Tax NPV and IRR vers
sus Initial CA
APEX

NPV
V & IRR Sens
sitivity to Susstaining CAP
PEX

The Prooject is also less sensitiv ve to Sustai ning CAPEX X. With eitheer a rise or ffall in the Sustaining
CAPEX within the ra ange tested, the IRR rem mains within a few perce entage pointss of 20%, se ee Figure
21.26. T
This highlightts that the tim
ming of the e
expenditure has a great impact on thhe level of se ensitivity.
Assuminng a rise andd fall 30%, the NPV resultts in USD 1.445 billion and
d USD 1.63 bbillion respec ctively.

Figure 2
21.26 – Postt-Tax NPV and IRR vers
sus Sustainiing CAPEX

NPV
V & IRR sens
sitivity to ope
erating cost

Figure 221.27 shows the Project’s s sensitivity tto OPEX, bo


oth fixed and variable. Booth NPV and
d IRR are
sensitive
e to OPEX. A 10% reduction in O OPEX, would result in an NPV risse of over 12%, to
USD 1.7 7 billion, and an IRR of ab
bout 21%.

BAMIN – P
PdF Project BFS
S, August 2016

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Chapte
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C

Figure 2
21.27 – Postt-Tax NPV and IRR vers
sus OPEX

NPV
V & IRR sens
sitivity to dire
ect variable costs
c

Small ch
hanges in va
ariable costs are likely to occur throug
ghout operations and shoould these chhange by
+/- 10%
% then the coorrespondingg impact on IRR will be e in the regio
on of -/+ 0.55% respectiv
vely. The
b more like -/+ 11%. Fig
change in NPV will be gure 21.28 deescribes the impact of suuch changes

21.28 – Postt-Tax NPV and IRR vers


Figure 2 sus variable
e OPEX

Analysin
ng the labour costs in iso olation showws a marginal sensitivity, as shown inn Figure 21.2 29. Since
labour ra
ates are a re all portion off the OPEX (on average around 10%
elatively sma % including overhead
o
administtrative staff, around 8% for just produ uction staff) the impact is insignificantt.

BAMIN – P
PdF Project BFS
S, August 2016

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Chapte
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C

Figure 2
21.29 – Postt-Tax NPV and IRR vs. llabour costs
s sensitivity
y

NPV
V & IRR sens
sitivity to exch
change rates

The Projject is expossed to multiple currency ttransactions.. In the main, these are eeither in BRL
L or USD.
There arre only likelyy to be relativ
vely insignificcant costs de
enominated in other currrencies. On this
t basis
the finanncial model assumes
a thaat the Projecct is only expposed to movvements in U USD and BRRL. While
100% off revenues willw be in USD since all ssales will be exported, th he majority oof CAPEX an nd OPEX
will be sustained in BRL.
B Figure 21.30 illustra ates the Project impact off exchange rrate movemeents.

Figure 2
21.30 – Postt-Tax NPV and IRR vs. e
exchange ra
ate sensitivity

Torn
nado analysis
s

Figure 221.31providees a comparison and hig ghlights the most sensitive Project aareas. The Project
P is
most seensitive to the
e iron ore price. Howeveer the tornaddo shows that the Projecct is also pa
articularly
e to a strengthening of th
sensitive he BRL againnst the USD. A relative weakening
w off the USD will provide
a corressponding up pside but as the off-set bar indicate ect is less ssensitive to currency
es the Proje
moveme ents in this direction.
d Th
he Project ecconomic inddicators are less sensitivve to the changes in

BAMIN – P
PdF Project BFS
S, August 2016

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Chapte
er 21 – BUSINESS CASE
C

OPEX, a
and least of all
a to change
es in Initial CA
APEX follow
wed by Sustaining CAPEX
X.

Figure 2
21.31 – Project tornado diagram

21.3.5 Financial summary a


and conclu
usions

The ecoonomic evaluation and se ensitivity ana he Project is capable of delivering


alysis results show that th d
a health
hy return, pending any im mpact that finnancing may y have on profitability. T
The Project economic
e
indicatorrs are presen
nted in Table
e 21.3.

Table 21
1.3 – Econo
omic evaluattion results
Unit
U To
otal
NPV 9% d
discount rate (Affter Tax) (USD million) 1,5
542
IRR (Afterr Tax) (%)
( 19.8%
Initial CAP
PEX (USD million) 2,00
00.3
Sustaining
g CAPEX (USD million) 99
98
Average O
OPEX (USD/t dry FOB) 24.83

Assumin
ng a discount rate of 9%, the NPV aftter tax is ove
er USD 1.5 billion. The IR
RR is circa 20
0%.

21.4 CONC
CLUSIO
ONS
The eco onomic evaluation and subsequent analysis ha ave found th
hat the PdF F Project delivers an
e return on investment to
attractive t its investo n presented in the BFS, from the
ors. The life of mine plan
Mine Sitte through to the port, is believed
b to b
be realistic with
w material upside
u in seleect areas.

There are a numberr of potential upsides to tthe Project, which are ye


et to be studdied and inco
orporated
into the Project. BAAMIN expec cts that theree is addition
nal value in these, andd therefore scope
s to
increase
e project retu
urns. These have
h been d efined by BA
AMIN’s manaagement andd technical teeam (see
Appendiix 21.2 – Opttimization Lis
st for BFS).

Risks ha
ave been appropriately mitigated
m thro
ough a high level of proje
ect definition , a technically simple

BAMIN – P
PdF Project BFS
S, August 2016

782 / 783
Chapter 21 – BUSINESS CASE

design, and comprehensive Project Execution and Operations Management Plans developed by an
experienced team. BAMIN has developed a risk and opportunities register (see Appendix 21.1 – Risk
Register for BFS) which will regularly be reviewed and updated throughout the Project’s life.

The Project includes a well-defined Mineral Resource; the ability to produce high quality products
attracting price premiums; an advanced stage of licencing and land acquisition, along with positive
engagement with local and government stakeholders; an export logistics solution which includes a
70% built railway line, and a port presenting an opportunity to handle third-party bulk products upon
Project commencement and into the future.

Overall, the completion of technical and economic studies to a feasibility study level that have resulted
in attractive and robust Project economics.

BAMIN – PdF Project BFS, August 2016

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