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BILLITON’S JUNIOR EXPLORATION STRATEGY IN AUSTRALIA

BILLITON’S JUNIOR EXPLORATION STRATEGY IN AUSTRALIA. www.billiton.com. BILLITON. UK based, LSE listed diversified mining company (floated July 1997) Roots in Gencor (South Africa) and the metals assets of Shell Number 39 in the Footsie 100

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BILLITON’S JUNIOR EXPLORATION STRATEGY IN AUSTRALIA

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  1. BILLITON’S JUNIOR EXPLORATION STRATEGY IN AUSTRALIA www.billiton.com

  2. BILLITON • UK based, LSE listed diversified mining company (floated July 1997) • Roots in Gencor (South Africa) and the metals assets of Shell • Number 39 in the Footsie 100 • Market capitalisation A$23 Bn (Rio Tinto A$41 Bn BHP A$38 Bn)

  3. Summary of Investment Programme Investment breakdown since LSE listing (US$ millions) Source: Annual reports; Group Finance records; Note: Values include expansion capex & acquisition enterprise values

  4. Scope of Business in Australia Net Operating Assets: US$3.2B (approx 1/3 of group total) Alumina: Worsley Joint Venture (86% interest) Nickel: QNI (100% owned) Yabulu refinery Manganese: GEMCO & TEMCO (60% owned) Samancor joint venture Coal: COAL (100% owned) Hunter Valley operations Base Metals: New Business Division Initiatives

  5. E & D Locations Grand Falls Vancouver London The Hague Beijing Central West Kunming East China Lima Johannesburg Santiago Melbourne

  6. Distribution of Exploration Spend US$ M 1999 / 2000 1998 / 1999 • Latin America 6 14 • Africa 3 10 • Australasia 5 6 • China 4 3 • Other 8 3 • TOTAL 26 36(excl. Rio Algom)

  7. Exploration Expenditure/Revenue

  8. Discovery Track Record DISCOVERIES PER 5 YEAR PERIOD SENIOR COMPANY EXPLORATION EXPENDITURES DISCOVERIES EXPLORATION, US DOLLARS 1971 2000 Sources: CRU, Gamah, 2000

  9. Business Environment Drivers, 1998/99 MAJORS • Poor industry performance - imperative to cut costs • Disillusionment with “big company” exploration • Impatience with long lead times • Questioning value of exploration JUNIORS • Many well managed, with attractive property portfolios • Venture capital drying up (post BreX, falling gold price) • Even in a tight market funding 50% of global exploration

  10. Junior Explorer’s Cash Flow

  11. Our Hypothesis • The exploration business needs to address: • Discovery costs/rates • A route forward - Strategic alliances with quality junior companies • Groups establishing strategic alliances now will dominate the marketplace in a few years - look at the pharmaceuticals

  12. Discovery Big Pharma & Biotech • Junior sector developed in 1973 • Response to high discovery costs and low success rate • Trade-off some discovery value for external R&D investment • Sector valued at $US 200 billion today • Dominant supplier of new products to Big Pharma

  13. US Biotech Performance Source: BioVenture Consultants Stock Report 6/25/99

  14. PIERINA US Biotech AcquisitionsBy Producers VOISEYS BAY US $MILLIONS INDIVIDUAL ACQUISITIONS (Names not shown) Source: BioVenture Consultants, BioWorld

  15. 1400 companies Can. $10 billion expenditure 5000 new compounds 5 Stage III tests One FDA approved drug $250 million per discovery 1500 companies Can $800 million expenditure 1000 new projects 5 discoveries 1 new mine $100-200 million per discovery Biotechnology vs Exploration JUNIOR EXPLORATION BIOTECHNOLOGY • Fully supported by Big Pharma • Partial support from majors Source: Discovery data Fenton Scott Source: Robbins Roth

  16. Implications for Exploration • R&D success rates are improved in small entrepreneurial firms • Cost per discovery also reduced • Exploration is comparative with biotech R&D from an investing perspective • Senior companies must play a lead role in changing market perceptions of junior exploration

  17. Deal Structures JV INTEREST COMPANY PROJECT MiningCo. EQUITY INTEREST COMPANY PROJECT MiningCo. PROJECT EQUITY+JV INTEREST COMPANY MiningCo..

  18. The Billiton Australia Generic Deal Billiton Investors Junior “A” Right to J.V. • Billiton subscribes for shares in “A” • Billiton subscription funds spent on project “1” • Billiton has option to own 70% in “1” by disproportionate funding after expenditure of subscription • “A” is manager and charges fee • “A” spends other treasury funds at its discretion on “2” etc Junior Project “1” Junior Project “2” etc

  19. Billiton: enter UJV or ‘walk’ Billiton: earn more, ‘sit’ or sell Partner: opt for royalty or abate UJV : Pre-FS to production Subscription Phase UJV : 51% Earn-in UJV : 70% Earn-in Billiton project equity Jointly 70 : 30, fund to 90%, or 100% 0 % 51% at vesting 51% to 70% Partner project equity Jointly 30 : 70, abate to 10% & loan carry, or royalty (COPI or NSR) 100 % 49% at vesting 49% to 30% The Australian Generic Deal

  20. The Alliance Strategy Billiton Partner Financial strength Fast acting Technology Risk seeking Project management Low cost Innovative Venture capital oriented Respective strengths of large & small companies allied for mutual benefit

  21. Due Diligence Criteria • Management and Technical Teams - capabilities, history, performance, skills, experience, ethics (business, safety, environmental), personal references, previous jobs • Quality of Drill Targets - remodel selected data, field visit, check assays, maps and sections • Corporate - ASX compliance, filings, financial status and history, previous deals, liabilities, housekeeping • Legal - validity of mineral title, outstanding litigation

  22. What’s in it for Billiton • Immediate access to capabilities and projects • Exploration better valued • Possibility to leverage exploration dollars • Participation in market response to “bonanza” discovery

  23. What’s in it for our Partner • Technology - geophysics (covered areas) • Billiton’s name, reputation and expertise • Equity subscribed at more than current market • Ability to leverage the Billiton subscription • Pre-agreed terms for funding to commercial production • Alliance partnership

  24. Minotaur Resources Ltd Project generation -> Bonython Hill, Mabel Ck., Andamooka, Lake Eyre, Mt Woods JV’s Malachite Resources NL Project generation -> Dalmuir, Giants Reef Mining Ltd Bluebush, Barkly, Alexander, Rosella Gunson Resources Ltd Mt Gunson tenements Pegmont Mines NL Pegmont Deeps, May Downs, Gun Ck. Equinox Resources Ltd Norbotten (Sweden), Ethiudna Existing Deals

  25. Australia – Operations & Exploration Venture Locations GEMCO Giants Reef Yabulu NiS JV’s (QNI) Pegmont Malachite Equinox (Sweden) Bayswater Gunson Worsley Ravensthorpe Ni (QNI) Minotaur TEMCO Equinox

  26. Some Issues • Deal Stream for large base metal targets limited • Future generative activities? • Integrating the Rio Algom philosophy • The scale trap • Last but not least, merge with BHP

  27. The Scale Trap • $500 Million MiningCo. • $50 million project is 10%- many to be found • $5 Billion MiningCo. • $500 million project is 10%- very rare • Future $50 Billion MiningCo. • $5 billion project is 10%- non existent • Exploration becomes irrelevant to growth

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