Telephone:    +61  7    3249  3000    |    Facsimile:  +61  7    3249  3001    |    Email:  admin@metallicaminerals.com.au  Web:  www.  metallicaminerals.com.au    |  Postal:    GPO  Box  122,  Brisbane  QLD  4001    |    Office:    71  Lytton  Road,  East  Brisbane  QLD  4169  

Bauxite  Primer    

What  is  it?  

Aluminium  comprises  about  8%  of  the  earth’s  crust.  It  is  the  third  most   abundant   element   in   the   crust   and   the   most   plentiful  metallic  element,  but  is  never  found  on  its  own  in  nature.  Bauxite  is   the   ore   most   commonly   mined   for   aluminium.   Bauxite   is   a  naturally   occurring   material   composed   of   30–54%   aluminium  oxide,  Al2O3,  (alumina),  the  rest  being  a  mixture  of  silica,  various  iron  oxides,  and  titanium  dioxide,  and  other  impurities  in  minor  or  trace  amounts.      

Bauxite  is  mined  via  surface  mining  /  open-­‐cut  methods  in  which  the   topsoil   and   overburden   are   removed   by   bulldozers   and  scrapers.  The  underlying  bauxite  is  mined  by  front-­‐end  loaders  or  hydraulic   excavators.   Some   bauxite   ores   are   merely   dried   and  shipped.  Other  bauxite   is  beneficiated  after  crushing  by  washing  to   remove   some   of   the   clay,   reactive   silica   and   sand  waste   and  then  dried  in  rotary  kilns.  The  ore  is  then  transported  to  refineries.    

Bauxite  may  be  as  hard  as  rock  or  as  soft  as  mud  and  may  occur  as  compacted   earth   (both   friable   and   re-­‐cemented),   small   balls  (pisolites),  or  hollow,  twig-­‐like  material  (tubules).   Its  colours  may  be  buff,  pink,  yellow,  red,  or  white,  or  any  combination  of  these.  

Not   all   bauxites   are   created   equal.  Some   are  more   sought   after  than   others.   The   overall   chemistry   of   bauxite   determines   its  commercial   usage   and   the   cost   of   dissolution   in   the   process   of  converting  metallurgical   bauxite   to   alumina   (the  Bayer  process).    The   three   structural   forms   of   bauxite   are   gibbsite,   a   trihydrate  [Al(OH)3,  also  written  as  Al2O3.H2O  in  oxide  notation],  boehmite,  a   monohydrate   [AlO(OH),   written   as   Al2O3.H2O   in   oxide  notation]  and  diaspore,  which   is  a  polymorph  of  boehmite  but   is  denser  and  harder.  

What  is  it  used  for?  

Bauxites   are   typically   classified   according   to   their   intended  commercial   application:     abrasive,   cement,   chemical,  metallurgical,  refractory,  etc.        

The  bulk  of  global  bauxite  production   (approximately  85-­‐90%)   is  used  in  the  metallurgical  application  as  feed  for  the  manufacture  of  alumina  via  the  Bayer  process.      In  the  Bayer  process,  bauxite  is  digested   (leached)   with   a   solution   of   sodium   hydroxide   NaOH  (aka  caustic  soda)  at  high  temperature,  under  pressure.  

Dissolution   of   monohydrate   minerals   requires   higher  temperatures,   pressures   and   higher   concentration   of   caustic  soda.      

 

 

 

     

 

 

 

The  costs  of  alumina  production  are  therefore  significantly  higher  versus  using   trihydrate  gibbsite.  For   this   reason  gibbsite   is  more  highly  sought  after  by  alumina  refineries.    

Yet  another  factor  to  consider  is  the  reactive  silica  content  of  the  ore.  The  amount  of  reactive  silica  is  particularly  important  as  this  form   of   silica   consumes   (or   ‘robs’)   the   caustic   soda   needed   to  make   alumina,   increasing   production   costs.     Thus   low   reactive  silica  is  desirable.  

The  majority  of  the  resulting  alumina  produced  from  this  refining  process  is  in  turn  employed  as  the  feedstock  for  the  production  of  aluminium   metal   by   the   electrolytic   reduction   of   alumina   in   a  molten   bath   of   natural   or   synthetic   cryolite   (Na3AlF6),   the   Hall-­‐Héroult  process.  

The  quantities  of  bauxite  used   in  the  production  of  aluminium  is  as  follows:  4-­‐5  tonnes  of  bauxite  yields  2  tonnes  of  alumina  from  which  is  produced  1  tonne  of  aluminium  

Current  market  snapshot  

Global  alumina  capacity  is  forecast  to  grow  by  29.6%  over  the  next  ten  years,  reaching  179.6M  tonnes  by  2024.  Metallurgical  grade  alumina  capacity  expansion,  primarily  in  China,  will  be  the  main  driver  for  this  growth.  Approximately  302MT  pa  of  bauxite  supply  is  required  to  fulfill  demand  from  the  alumina  industry.    

 

 

 

   

 

 

2015%Bauxite%Supply%Demand%Breakdown%

2015%Bauxite%Supply%

2015%Bauxite%Demand%

302%

103%

199%

93%

106%

55%

48%

61%

42%Integrated%

China%

China%Integrated%%Mines%

China%ThirdBParty%%Mines%

China%Imports%

RoW%

Third%Party%

(including%transfers%at%a%market%price)%

RoW%

46%%54%%

MonoBhydrate%%

RoW%69m%t%

MonoBhydrate%%

China%93m%t%

Trihydrate%%140m%t%

Source%CRU,%July%2016%

Processing  requirements  for  the  extraction  of  Alumina        Gibbsite    Boehmite      Diaspore  

Temperature  0C   1450   2500   Higher  Pressure  psi   75psi   550psi   Higher  

Telephone:    +61  7    3249  3000    |    Facsimile:  +61  7    3249  3001    |    Email:  admin@metallicaminerals.com.au  Web:  www.  metallicaminerals.com.au    |  Postal:    GPO  Box  122,  Brisbane  QLD  4001    |    Office:    71  Lytton  Road,  East  Brisbane  QLD  4169  

China's  net  alumina   investment  requirement,  or   level  of  capacity  additions,  is  expected  to  peak  in  2025  at  10M  tpy,  while  the  world  ex.   China   is   forecast   to   require   15M   tpy   of   net   new   alumina  capacity   over   the   period   to   2040.   Production   of   alumina,   and  subsequently  aluminium,  can  only  continue  to  grow  if  the  sector  is  supplied  with  sufficient  quantities  of  bauxite.  However,  this  didn't  seem  so   certain   in  2014  due   to   Indonesia's   raw  ore  exports  ban.  More   recently   the   Indonesian   government   has   flagged   the  potential  for  some  relaxation  of  that  ban,  however  details  are  yet  to   be   released.   It   is   expected   that   export   permits   will   only   be  granted  to  those  groups  who  have  constructed  alumina  refineries,  or   have   material   cash   commitments   to   build   new   alumina  refineries  in  country.    

Since   2005,   when  China   installed   the   first   few   low-­‐temperature  refineries,  it  generally  relied  on  the  more  cost  effective  Indonesian  gibbsite.   The   implementation   of   Indonesia's   unprocessed  minerals  export  ban  in  January  2014  put  an  end  to  this.  

However,   Chinese   refineries   and   traders   had   already   amassed  significant   stocks  of   Indonesian  bauxite   in   the   run-­‐up   to   the  ban  so   this   was   not   an   immediate   problem.   And   within   months,  Malaysia   came   to   the   rescue,   essentially   limiting   any   potential  positive   impact   on   bauxite   prices   as   a   result   of   the   Indonesian  ban.  

The  emergence  of  Malaysia  as  a  strong  bauxite  supplier  was  short  lived   as   new  mines   caused   conflicts   over   land   use   and   pollution  from   unregulated   mining   and   transporting   of   bauxite.   As   a  consequence   the   Malaysian   government   banned   all   bauxite  mining   activity   in   the   main   production   area   around   Kuantan   in  early   2016   and   with   subsequent   extensions   the   ban   remains   in  place  to  the  end  of  March  2017.    

The   industry-­‐wide   consensus   is   that   Malaysia   won't   be   able   to  resume  significant  bauxite  exports  due  to  social  issues,  an  inability  to  reliably  supply  product  and  a  lack  of  bauxite  resources  near  to  existing  ports.  The  research  team  at  Wood  Mackenzie  believes  the  country's   supplies  will   dry   out   in   the  medium-­‐term   i.e.   between  2017   and   2018.   So   from   where   will   they   source   bauxite?  While  Indonesia   recently  again  relaxed  the  ban  on  bauxite  ore  exports,  the   shifting   regulatory   environment   has   undermined   Indonesia’s  position  as  a  reliable  supplier  of  bauxite  

In   light   of   the   supply   uncertainty   from   Indonesia   and  Malaysia,  Chinese  buyers  have  been  driven   further  afield   to   secure   supply.  This  has  seen  Guinea,  in  West  Africa,  receive  substantial  attention.  Guinea  currently  exports  circa  10MTpa  to  China.  While  Guinea  has  plans   to   increase   production   and   ample   bauxite   resources   –  estimated  at  7  billion  tonnes  –  the  shipping  distances  to  China  are  vast  and  its  status  as  a  reliable  supplier   is  not  proven.  Rio  Tinto’s  issues   in  Guinea   have   been   well   documented.   Furthermore,   the  2015   Fraser   Institute   of   Survey   of   Mining   Companies   ranked  Guinea   as   one   of   the   least   attractive   investment   destinations  globally  –  coming  in  at  103  out  of  109  locations  based  on  the  level  of   regulatory   and   environmental   uncertainty,   amongst   other  indicators.    

 

 

Who  produces  it?  

In   2015   the   production   of   bauxite   was   302   million   tonnes.   The  bauxite  market   is   very   fragmented   in   terms  of   supply.  The   top  5  producers   for   example   account   for   around   40%   of   total   supply.  Below  is  a  representation  of  the  major  global  bauxite  trade  flows  

 

 

 

 

 

 

 

 

 

 

 

Historically,   there  has  been  a  distinct   separation  of  markets   into  Atlantic  and  Asia-­‐Pacific  basins  whereby  Australia  and   Indonesia  had  been  the  key  suppliers  to  China  while  Brazil  and  West  African  product  is  sent  to  the  US  and  European  markets.  

However,  this  traditional  bifurcation  has  begun  to  blur  somewhat.  As   noted   previously,   Chinese   demand   and   supply   issues  encountered   by   traditional   producers   has   seen   increasing  volumes  from  Guinea  exported  to  China.  Also  a  portion  of  future  Guinean  supply  is  committed  to  planned  refineries  located  in  the  Middle  East.    

Who  consumes  it?    

China  completely  dominates  the  consumption  of  bauxite.  This  is  a  function  of  the  rapid  and  vast  build  out  of  aluminium  production  capacity   in  China   in   the   last   decade.  China’s   imports   of   bauxite  have   grown   from  2.2MTs   in   2005   to   50MTs   in   2015   at   the   same  time  as  Chinese  domestic  bauxite  quality  and  sources  of  domestic  supply  have  deteriorated.  

How  is  it  traded  and  priced?  

Bauxite   is   not   an   exchange   traded  product,   nor   is   its   pricing   set  under   long   term   benchmark   transactions.   Most   pricing   is   done  under  bilateral  negotiations  between   the  miner  and   the  offtaker  for   mutually   agreed   terms   and   with   the   price   subject   to   a  premium  or  discount  to  a  reference  price  based  on  based  on  the  silica  and  ‘available  alumina  (Al203)  in  the  ore.    

The  reference  price  commonly  used   is  the  CBIX   Index  run  by  CM  Group.   It   is   an   independent   and   impartial   assessment  of  China’s  imported  bauxite  market  based  on  a  value  in  use.    

 

 

 

 

 

 

World&Bauxite&Trade&–&Major&Flows&

Source'USGS;'CMGroup;'http://images.mofcom.gov.cn/wms'

Australia&Indonesia&

Cameroon&Brazil&

Guyana&Suriname&

Guinea&

India&

Greece&

Ghana&Jamaica&

China&

Telephone:    +61  7    3249  3000    |    Facsimile:  +61  7    3249  3001    |    Email:  admin@metallicaminerals.com.au  Web:  www.  metallicaminerals.com.au    |  Postal:    GPO  Box  122,  Brisbane  QLD  4001    |    Office:    71  Lytton  Road,  East  Brisbane  QLD  4169  

What  have  prices  been  doing  historically?  

On   a  CIF   basis   bauxite   prices   have   traded   between   the   low  US$40s  per  tonne  to  the  mid  US$70s  per  tonne  over  the  last  5  years.  Below   is   a   chart   of   the  CBIX   Index   price,   highlighting   the   price  drivers  over  this  period.    

 

 

 

 

 

 

 

 

 

 

 

 

 What  have  prices  been  doing  very  recently?  

Below  is  the  most  recent  price  data  from  CBIX  as  of   late  January  2017.    

 

 

 

 

 

 

 

 

 

 

 

 

Current  industry  trends  and  issues  

The  global  market  outlook  for  bauxite  demand   is  positive  with  a  genuine   supply   gap   emerging.   As   the   chart   below   from   CRU  highlights,   from   2017   onwards   the   bauxite   market   will   need   all  probable  projects  to  proceed  in  order  to  meet  forecast  demand.    

   

 

 

 

Post  2020   the   supply  outlook  becomes  even   less   certain  with  all  possible   projects   being   required   to   meet   expected   demand.  Rarely   is  supply  added  to  any  commodity  market  without  delays  being  encountered.    

 

 

 

 

 

 

 

 

 

 

 

 

There   are   several  market   trends   evident   that   auger  well   for   the  bauxite   price   outlook.   Firstly,   the   growth   in   global   aluminium  demand  driven  by  global  GDP  growth  –  especially  from  the  auto  and   aircraft   industries   -­‐   is   supportive   of   continued   growth   in  bauxite   requirements.   Forecast   aluminium   production   growth  rates   will   require   nearly   20%   growth   in   bauxite   supply   by   2020  alone.    

 

 

 

 

 

 

 

 

 

 

 

 

Secondly,  there  is  China’s  ever  growing  requirements.  China  is  not  naturally  well  endowed  with  quality  bauxite.   Its  bauxite   reserves  are   estimated   at   830MT,   accounting   for   only   3%   of   the   global  reserve  according  to  the  USGS.    

 

 

 

 

Historical*Bauxite*Price*Performance*

Recent&CBIX&Bauxite&Index&Performance&

40#

45#

50#

55#

60#

4&Nov

#

11&N

ov#

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25&N

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16&D

ec#

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ec#

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Global&Bauxite&Supply&and&Demand,&201592040&&

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2015# 2017# 2019# 2021# 2023# 2025# 2027# 2029# 2031# 2033# 2035# 2037# 2039#

Million#tonn

es#

Operating# Possible#Committed# Probable# Bauxite#demand#

Source#CRU,#September#2016#

Solid&Growth&Forecast&for&Aluminium&Demand&Drives&Alumina&and&Bauxite&Demand&

Source'Global'Alumina'demand,'Harbor'Aluminium,'April'2016'(1)'Alumina'Limited'estimate'based'on'an'average'2.5'tonnes'of'bauxite'per'tonne'of'alumina'

Alumina'marke

t'in'millions

'of'ton

nes'

3.8%&CAGR&(Global)&

3.3%&CAGR&(Global,&excluding&C

hina)&

RoW'

Growth&requires&additional&~58&tonnes&per&annum&of&bauxite&by&20201&

Other'Asia''15%'CAGR'

Middle'East''4%'CAGR'

China'4.3%&CAGR&China)&

0'

50'

100'

150'

2015' 2016F' 2017F' 2018F' 2019F' 2020F'

Telephone:    +61  7    3249  3000    |    Facsimile:  +61  7    3249  3001    |    Email:  admin@metallicaminerals.com.au  Web:  www.  metallicaminerals.com.au    |  Postal:    GPO  Box  122,  Brisbane  QLD  4001    |    Office:    71  Lytton  Road,  East  Brisbane  QLD  4169  

However,   China’s   domestic   sources   of   bauxite   are   falling   as  product  quality  deteriorate  and  mines  get  deeper.  The  decline   in  domestic  open  pit   sources  of  bauxite   in  China  has   improved   the  cost  competitiveness  of   imports   from  suppliers   such  as  Australia  significantly.    

 

 

 

 

 

 

 

 

 

 

 

China’s   quest   for   raw   materials   for   its   aluminium   smelters   and  alumina   refineries   promises   to   deliver   a   15-­‐year   boom   for  exporters   of   bauxite,   according   to   Rio   Tinto   Group.   Chinese  bauxite  imports  are  expected  to  rise  40-­‐45%  in  the  next  five  years  according  to  Alumina  Ltd  to  reach  close  to  80MT  a  year  by  2021  from   56mt   imported   in   2015.   Over   the   next   20   years   bauxite  imports  could  be  as  high  as  160mt/year.    

 

 

 

 

 

 

 

 

 

 

 

As   China’s   appetite   for   bauxite   has   increased   its   reliance   on  imports   of   ore   from   Indonesia   likewise   increased   rapidly   with  approximately   80%   of   its   bauxite   supply   coming   from   the   by  2011/2012.     As   noted   earlier,   China   is   working   hard   to   identify  alternative  supply  sources.  This  offers  an  opportunity   for  bauxite  producers  in  Australia  to  increase  market  share  into  China  further.    

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What  is  the  cost  curve?  

According   to  CRU,   the   final   tranche   of   global   annual   demand   is  currently  being  met  by  a  very  steeply  increasing  cost  curve  as  the  below   chart   highlights.   The   marginal   cost   of   production   is  approaching  US$50/dmt.  

 

Declining(Domestic(Bauxite(Quality(in(Key(Alumina(Producing(Provinces(

3"

4"

5"

6"

7"

8"

9"

2006" 2007" 2008" 2009" 2010" 2011" 2012" 2013" 2014" 2015" 2016" 2020" 2025"

Alumina/Silica"ratio

"

Domestic)Bauxite)production)not)keeping)pace)with)demand)

Chinese'Bauxite'Import'Dependency'Expected'to'Increase'

Chinese'bauxite'import'requirements'remain'high'

•  New)domestic)resources)not)sufficient)to)meet)demand)longer)term)

•  Domestic)bauxite)resources)with)lower)quality)and)higher)costs)

•  Current)new)investments)and)announcements)in)alumina)refineries)in)coastal)areas)dependent)on)imported)Bauxite)

Bauxite)equivalent)costs) Domestic)Bauxite)production)

0)

20)

40)

60)

80)

100)

120)

140)

160)

180)

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2006

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2010

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2011)

2012

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2014

)

2015

)

2016

)

2017)

2018

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2019

)

2020

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Million)tonnes)

China&Bauxite&Imports,&Volume&and&Price&by&Country&

Source:(China(Customs(

USD/tonne(CIF(

0"

10"

20"

30"

40"

50"

60"

70"

80"

90"

100"

2009" 2010" 2011" 2012" 2013" 2014" 2015"Indonesia( Australia( India( Brazil( Guinea( Malaysia(

Bubble(size(represents(volume(((((((((((((((=(~5(million(tonnes(

CRU$Bauxite$Cost$Curve$

Source'CRU'and'Alcoa'analysis'

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0' 20' 40' 60' 80' 100' 120' 140' 160' 180' 200' 220' 240' 260' 280' 300' 320'

$/dmt'

Production'(mn'dmt)'