Industry Capital, Operating and Geopolitical Developments

Industry Capital, Operating and Geopolitical Developments Sector Case Example in Iron Ore Rebecca Gordon CRU Strategies June 2013 Chancery House 53-64 Chancery Lane London WC2A 1QS UK Tel: +44 20 7903 2000 Fax: +44 20 7903 2172 517, Tower 2 Bright China Chang An Building 7 JianguomenneiAvenue Beijing 100005, China Tel: +86 10 6510 2206 Fax: +86 10 6510 2207 Augusto Leguía Norte Nº 100 of.506 Las Condes Santiago Chile Tel: +56 2 2231 3900 Fax: +56 2 2231 4314 PO Box 1269 Langley WA 98260 USA Tel: +1 360 321 4707 Fax: +1 360 321 4709 B/407, Citi Point, JB Nagar Next to Kohinoor Hotel AndheriKurla Road Andheri (E) Mumbai 400 059 India Tel: +91 22 6687 5757 Fax: +91 22 66875758

Presentation Outline Preamble – what is the world worried about? … and what does it mean for our industry? » Capital – the scarcest of all commodities? • Focus on iron ore • - What happened last year? • - Outlook for 2013 and beyond • - Kazakhstan vs West Africa : high level comparison 2

What is keeping investors awake at night?... • World Economic Forum Top 10 predictions suggest worst is behind us... Data: World Economic Forum, CRU. 3

...and what might this mean for mining? • Rising tide that floats all boats has receded – but opportunities exist... • Lower % growth is still big absolute volume growth • Other populous areas may enter more metal intensive phase, albeit slowly • We are now used to $100/bbl oil, our forecasts see this as stable, +ve for costs • Easing inflation good for most, might be bearish for gold? • Finance is still a big issue • US$ relatively flat – removing a potential price driver – but US economy has low metal intensity Demand is there for new projects But investors have more choice now 4

CRU Commodity Heat for 2013: prices remain flat • CRU expects a lacklustre year for commodity prices: 9of 22 commodity prices will rise over 2013 while 13 will see declines. None of the commodity is expected to sit in Hot & Freezing extremes Hot > 15% Warm 5% to 15% Mild 0% to 5% Cool 0% to -5% Cold -5% to 15% Freezing < -15% DATA: CRU, 2013 annual average price forecast (nominal $ or benchmark) versus 2013 Q1 average actual prices 5

CRU Commodity Heat for 2017 • CRU expects commodity prices to increase 14% on average out to 2017. 13 of 22 commodity prices will rise out to 2017 while other 9 will see declines. Hot > 15% Warm 5% to 15% Mild 0% to 5% Cool 0% to -5% Cold -5% to 15% Freezing < -15% DATA: CRU, 2013 annual average price forecast (nominal $ or benchmark) versus 2013 Q1 average actual prices. 6

But – The scarcest of all commodities is $$$ “Worst conditions for 40 years” What are the sources for finance for the mining industry? “PEOPLE WITH MONEY” “PEOPLE WITH CHOICES” Once bitten, twice shy... …twice bitten, invest in ABM! “Anything But Mining” 7

Raising money is tough: number of new listings related to mining has fallen... • Number of new listings related to mining DATA: HKE (2012 no data), TSX, AIM. 8

...and equity raised has fallen even further • $M of equity raised DATA: TSX, ASX (mining & metals), AIM [$ million]. 9

The money is there and as confidence returns, investors make choices to switch to riskier assets Rising bond yield = falling bond price DATA: MSCI World Equities; S&P GSCI Commodities: bond yields are the average of German and US 10 year govt debt; Haver Analytics, CRU 10

...but we have seen this before • This search delivers a news story from Australia dated Feb 21, 1928 - “Exceptional condition of the money market” - “Heavy fall in tin stocks” • But don’t worry (!!) – the option holders are “still very hopeful” of achieving success before the deadline of March 14... DATA: Google, Sydney Morning Herald, 1928 11

Exploration is mining’s “R&D” department... • As of December 2012: 600 companies on TSX with < $200k working capital • Feb 2013: 45 of 146 mining companies in AIM have “barely... a year” • As for ASX: rough estimate of ~100 companies running on “fumes” “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change” Charles Darwin Will companies fold? Experience shows that it’s the weakest that adapted fastest... DATA: Personal communication. 12

..and time has shown it to be resilient • Single asset exploration companies : is this the best use of talented management? • Size does matter–but large is a turn-off for the markets right now… • Opportunities exist out there and we will see small deals as the junior market “adapts”... “SMART MONEY IS SORTING THROUGH THE WALKING DEAD...” 13

What are the majors doing? • Raising money just fine • Meeting the new boss... • C$0.75bln - May 2013 • €0.75bln bond - Apr. 2013 • A$1.0 Bln note issue – Oct, 2012 • €2.0 Bln bond – Sep, 2012 • £1.75 Bln bond – Sep, 2012 • €2.0 Bln bond – May, 2012 • €1.75 Bln fixed rate notes – Dec, 2012 • US$3.0 Bln fixed rate bonds – Aug, 2012 • US$2.5 Bln fixed rate bonds – Mar, 2012 • US$1.5 Bln notes – Sep, 2012 • €0.75 Bln notes – Jul, 2012 DATA: Ernst &Young,(2012) Companysources 14

So – a capital strike or a timely pause? • Capital raising in 2012, lowest since 2008/9 • M&A down – hardly surprising after the last decade binge cost $1.1 trillion and a trinity of CEOs at Rio, BHP and Anglo... • Consumers (of resources) are investing 15

The big consumers are active overseas, China >> Japan >> India… • Of 6,276 active projects in production, feasibility or reserves development: China has involvement in 206, Japan 135 and India 29 Note: Exploration involvement not included DATA: Metal Economics Group. 16

Let’s look at iron ore A market that is great to be in, but if “your name’s not on the list, you can’t come in...” Volatility Weakening prices? New supply regions emerging? Kazakhstan vs West Africa Chancery House 53-64 Chancery Lane London WC2A 1QS UK Tel: +44 20 7903 2000 Fax: +44 20 7903 2172 517, Tower 2 Bright China Chang An Building 7 JianguomenneiAvenue Beijing 100005, China Tel: +86 10 6510 2206 Fax: +86 10 6510 2207 Augusto Leguía Norte Nº 100 of.506 Las Condes Santiago Chile Tel: +56 2 2231 3900 Fax: +56 2 2231 4314 PO Box 1269 Langley WA 98260 USA Tel: +1 360 321 4707 Fax: +1 360 321 4709 B/407, Citi Point, JB Nagar Next to Kohinoor Hotel AndheriKurla Road Andheri (E) Mumbai 400 059 India Tel: +91 22 6687 5757 Fax: +91 22 66875758

Through December 2012, steel mill profitability in China improved, lifting sentiment among raw materials buyers… National EBITDA margin for a sample of Chinese steel mills, % Note: (1) EBITDA margin is based upon mills selling 50% of their material to contract buyers and 50% on the spot market. DATA: CRU. 18

…and encouraging iron ore restocking, alongside a quarter on quarter uptick in underlying demand Imported iron ore inventory on hand on a weekly basis at a sample of Chinese steel mills, days Note: Sample of 55 small and medium sized steel mills where production in each is less than 5 Mt/y (covering mills in Tangshan, Handan, Xingtai, Shandong, Shanxi). • DATA: CRU, MySteel. 19

Although Australian exports have surged as majors post robust gains, supply concerns have mounted elsewhere… Australian exports of iron ore, Mt Australian iron ore exports by company, Mt DATA: GTIS, Companyreports, CRU. 20

…as Indian tonnages drop, along with a fall in availability of Chinese port stocks and Brazilian spot cargos in December y/y change in Indian exports of iron ore, % Exports of iron ore from Goa, India, Mt DATA: CRU, GTIS. 21

In fact, 2012 has been a poor year for Brazilian production given near zero growth in Vale’s output LHS: y/y change in Brazilian production of iron ore, Mt RHS: Production of iron ore from Vale, Mt DATA: CRU, GTIS, CompanyReports. 22

Worries over supply tightness led to a buying frenzy in China and a spike in prices - iron ore and coal are at near parity Differential between spot iron ore(1) and spot coking coal prices (2), $/t Iron ore spot prices, CFR China, $/t Note: (1) Spotiron ore refersto 62% Fe fines, CFR China. (2) Spotcokingcoalrefersto hardcokingcoal, FOB Australia DATA: CRU. 23

Iron Ore price ceiling found at $141/t – why no higher? • CRU believes that underlying demand in China is not as strong as the sharp price decline suggests (Chinese crude steel production higher than demand). • Iron ore restocking has, temporarily, ceased in China as stock levels are healthy and even on the high side, at near 40 days on hand. • Mills were becoming increasingly unwilling to accept the higher raw materials prices, given the impact that this is likely to have on margins thanks to the far slower increase in steel prices. • The beginnings of a reversal in mood emerged in mid-January as many buyers felt the iron ore prices had overshot – some of this was fuelled by market speculation itself. 24

Going forward, we anticipate the strongest gains in Chinese, and thus world, hot metal production next quarter (for 2013) q/qchange in world and Chinese hot metal production, Mt 2013 World = 5.5% China = 6.3%ç DATA: CRU, WSA. 25

2013 will be plagued by pockets of weak supply from Brazil and India, keeping market fundamentals tight… Exports of iron ore from Brazil and India, Mt 2009 – 2011 India CAGR = -17% Brazil CAGR = 11.5% 2011 – 2013 India CAGR = -39% Brazil CAGR = 1.1% DATA: GTIS, CRU. 26

…however, the effects of this will be tempered by rapid growth from Australian miners LHS: Exports of iron ore from Australia, Mt RHS: q/q changes in exports of iron ore from Australia, % Seasonal dip in supply due to adverse weather DATA: GTIS, CRU. 27

Prices will hold steady y/y in 2013, but beyond –prices will weaken... • Growth in steel production (globally) will ease… • ...so, increases in iron ore demand will also slow • Europe and Japan will recover (i.e. re-visit 2008 levels by mid-decade), and Middle East growth will be strong • Q3 price crash knocked the juniors back... • ...but the majors are expected to continue their expansion (Aus and Brazil > 72% share of total exports by 2017; mainly exploiting India’s reversal from net exporter to net importer (!)) • West African juniors have aggressive plans, although it will be modest by comparison to traditional sources • Plentiful supply of lower cost ore will increase China’s reliance on imported ore and... SOURCE: CRU. 28

...this will knock out Chinese marginal production from the market, leading to expectations of falling prices Chinese production of iron ore, indexed, 2008 = 100 X-axis: Quarterly Chinese iron ore production, Mt Y-axis: Spot prices for 62% Fe fines, CFR China, $/t Note: prices shown are real, 2012 US dollars. DATA: CRU, GTIS. 29

Although smaller mines will close, the government will support consolidation and modernisation... • Representative global cost curve China, Small private mines Real prices just slipping below $100 CFR China (62% Fe) by 2017 With potential to fall lower into the 2020’s X China SOEs/large private mines Operating cost High-cost emerging producers Lower-cost emerging producers “PEOPLE WITH CHOICES” “PEOPLE WITH MONEY” Majors DATA: CRU. 30

So –what about the next supply region?West Africa vs. Kazakhstan • Contained Fe by project stage(%) 12 projects Kazakhstan– 0.9 Bt 68 projects West Africa – 31.6 Bt Note: All projects reporting a resource are included DATA: MEG, ENRC,Arcelor Mittal, CRU. 31

On in-situ grade: Africa leads… ...and it’s cheaper to ship iron ore to China from West Africa than from Kazakhstan “PEOPLE WITH MONEY” “PEOPLE WITH CHOICES” DATA: MEG. CRU. 32

...even politically Africa is ahead of Kazakhstan • Policy Potential Index (the “ability to do business” there) PPI Score 1stQ Canada 2ndQ Mauritania 3rd Q Guinea Kazakhstan 4thQ DATA: Fraser Institute Data, March 2013 33

...and politics does impact investment • Percentage of Fe contained that is owned or optioned by Japan / China / India Kazakhstan DATA: MEG, CRU. 34

Summary Juniors • Investors are exercising choice • Exploration juniors are survivors... Majors / Operators • Operating costs are the focus and they will come down General • China and Japan need resources, and it will ever be thus… Iron Ore • Short term picture looks good, but incumbents hold all the cards… • Kazakhstan starts at a disadvantage to other countries when trying to attract finance: • Policy climate is non-favourable • Logistics pose great challenge for accessing China etc. Total freight for iron ore from Kazakhstan to Tianjin port is ~$100/t leaving less profit margin to miners. 35

Thank-you Rebecca Gordon Managing Consultant CRU Strategies rebecca.gordon@crugroup.com Chancery House 53-64 Chancery Lane London WC2A 1QS UK Tel: +44 20 7903 2000 Fax: +44 20 7903 2172 517, Tower 2 Bright China Chang An Building 7 JianguomenneiAvenue Beijing 100005, China Tel: +86 10 6510 2206 Fax: +86 10 6510 2207 Augusto Leguía Norte Nº 100 of.506 Las Condes Santiago Chile Tel: +56 2 2231 3900 Fax: +56 2 2231 4314 PO Box 1269 Langley WA 98260 USA Tel: +1 360 321 4707 Fax: +1 360 321 4709 B/407, Citi Point, JB Nagar Next to Kohinoor Hotel AndheriKurla Road Andheri (E) Mumbai 400 059 India Tel: +91 22 6687 5757 Fax: +91 22 66875758

Industry Capital, Operating and Geopolitical Developments