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Mining Commodity Attractiveness

Industry Analysis
March 2007

Monitors Mining Credentials


Work Type
Monitor has a solid knowledge of the mining industry across several dimensions
Monitors Mining Work Monitors Mining Work Monitors Mining Work by Monitors Mining Work by
by Discipline
by Industry
Geography
Step in the Value Chain
(% of work)
(% of work)
(% of work)
(% of work)
IT
Organization

Precious
Metals
Diversified

Asia/Pacific
Global
S. America

Operations
N.
America

Minerals
Strategic
Transactions

Logistics
Exploration
Mine
Develop.
Process and
Beneficiation

Europe

Mining and
Extraction

Africa

Across all
the value
chain

Finance

Metals
Strategy

Source: Monitors Knowledge Management System


2

Monitors Mining Credentials


Selected Examples of Monitors Work in the Mining Industry
Monitor has extensive experience consulting to mining houses around the globe, undertaking
over 100 mining engagements in the last 10 years, covering a broad range of topics:

Portfolio
Portfolio
Optimization
Optimization
Strategy
Strategy
Inter-mine synergies
Inter-mine synergies
Portfolio
Portfolio
reconfiguration
reconfiguration
Market optimization
Market optimization
Real options analysis
Real options analysis

Innovation
Innovation Process
Process

Diagnosis
of
Diagnosis of gaps
gaps

Development
Development of
of strategy,
strategy,
process
process and
and
implementation
implementation

Corporate Strategy
Corporate Strategy
Scenario planning
Scenario planning
Design acquisition campaign
Design acquisition campaign
Integrated individual LOM plans into one
Integrated individual LOM plans into one
group plan strategy
group plan strategy

Activity
Activity Based
Based Management
Management

ABC
ABC Analysis
Analysis

ABM
ABM Implementation
Implementation

Finance
Innovation

Engineering and
Projects

Mining
Mining Cluster
Cluster
Analysis
Analysis

Industry-wide
Industry-wide cocooperation
operation

M&A Support
M&A Support
Post-merger integration
Post-merger integration
for leading global
for leading global
aluminum player
aluminum player
Assisted in a bid for a
Assisted in a bid for a
large South American
large South American
mineral asset
mineral asset

Supplier
Supplier Agreements
Agreements

Negotiation
Negotiation support
support

Commodity
Commodity linked
linked
pricing
pricing analysis
analysis

Mining
and
Extraction

Logistics

Developed
Developed Human
Human
Resource
Resource Strategy
Strategy for
for
Mines
Mines

Incentive
Incentive schemes
schemes

Marketing Strategy
Marketing Strategy

Downstream strategic
Downstream strategic

Human Resources
Exploration Mine
Development
(and
financing)

alliances
alliances

Process and
Beneficiation

Optimise mine to
Optimise mine to

Sales and
Marketing

market matches
market matches

Introduced new business


Introduced new business

performance measures
performance measures

Asset
Asset Divestiture
Divestiture

Helped
Helped identify
identify and
and

divest
divest non-core
non-core and
and nonnonperforming
performing assets
assets

Growth Planning
Growth Planning
Developing, ranking and
Developing, ranking and
prioritising capital projects
prioritising capital projects
Optimizing mine design
Optimizing mine design

Logistics
Logistics Analysis
Analysis

Methods
to
Methods to reduce
reduce stock
stock holding
holding

Optimized
Optimized inter-mine
inter-mine stock
stock transfer
transfer

Operational Efficiency
Operational Efficiency

Optimized overhead structure


Optimized overhead structure
Increased mine and plant
Increased mine and plant

efficiencies
efficiencies

Monitors Mining Credentials


Three Illustrative Examples
Case
Description

Key Challenges

Our Approach and Outcomes

Discipline Region

Industry

Value
Chain

Gold

Mining and
Extraction

Corporate
Strategy

Monitor facilitated strategic planning sessions with


executive management;
Developed a perspective on the outlook for gold; StressOver the last decade,
shareholder value for the
tested selected gold producers to determine their
company's industry has
respective financial performance at different gold price
declined due to decreasing
levels;
Articulated gold price scenarios;
valuation multiples (tied to the
outlook for gold prices) despite Conducted a review of the diversified mining sector,
improving business
Undertook a detailed review of the company's
fundamentals. Monitor was
competencies and assets through a number of internal and
engaged to help form a
external interviews, supported by external benchmarking
perspective about the
data;
Profiled a variety of industries (Coal, Precious Gems,
attractiveness of a variety of
strategic options both within and Industrial Minerals, Aggregates);
The insights, perspectives and supporting data were
outside of the gold sector.
integrated into the strategy review committee's thinking
which were accepted by the Board of Directors.

Strategy

North
America

Innovation
Management

The company wanted to


implement a better process to
identify and manage ideas and
translate them into high value
projects.

We developed a pilot innovation process at the Zinc


business unit and then rolled the process to other BUs. The
result was a much richer set of opportunities for the
business, and significant cost savings

Organization

South
Across all
Diversified
America
value chain

Corporate
Strategic
Planning and
Portfolio
Management

The brief was to select a set of


"platforms" across the
organization that could be used
to initiate a process of
knowledge sharing between
divisions and thus improve
operational performance
throughout the company.

The task was split into three modules: 1. Selecting


knowledge sharing platforms; 2. Choosing appropriate
knowledge sharing mechanisms; and 3. considering human
asset implications of the knowledge sharing process. The
knowledge sharing (and the platforms and mechanisms
proposed), strategic planning and portfolio management
are crucial to the core business and form a key part of the
companys growth through merger agenda.

Organization

Source: Monitors Knowledge Management System


4

Global

Diversified

Across all
value chain

Gold

Sustained Gold price and increased consolidation will stabilize Return


while decreasing Risk
Dynamics in The Past

Future Outlook

(2001 2006)

(next 5 to 10 years)

Return
Return

Return
Return

Growing demand
Jewellery growth in
developing economies
Flight to safety
Weak US$
Increased economic
uncertainty
Growth in ETFs

Tight supply
Primary supply decrease
Increased consolidation
Tighter control on
secondary supply
Central Bank sales
Increased scrap sales
(00-05: 7% CAGR)

Demand growth sustained


Sustained jewellery
growth in developing
economies
Gold continues to act as
A store of wealth
Hedge against US$
Maturing ETF growth

Increasing costs
Increased slope of the cash cost curve

Costs increase further


Increase in average cost of production; high cost new
entrants

Prices from US$ 300/oz to US$ 600/oz

Prices US$ 600/oz

Return Growth

Return Stable

Risk
Risk

Supply catching up
Top players further
consolidating
Continued scrap growth
Primary supply to meet
residual demand
increase
Decreasing Central
Banks sales

Risk
Risk

Increased efficiency and


market control by larger
players
Consolidation

Increased visibility
Central Banks
agreement
Steeper cash cost curve

Volatility Decrease

Further consolidation in
the industry

Even steeper cash cost


curve

Volatility Decrease
5

Copper

Chinese demand and supply will increase the Risk while keeping the
average Returns constant
Dynamics in The Past

Future Outlook

(2001 2006)

(next 5 to 10 years)

Return
Return

Return
Return

Growing demand
Growing Chinese
demand
Industrial: Power and
electricity,
construction
Middle class: A/C,
automotive

Lagging supply increase


Historical investment
short of current demand
Declining grade in major
mines
Supply disruptions
Fast stock depletion
since 2002 to partially
offset supply shortage

Softening demand growth


Tight supply balance
Slowing Chinese
New capacity just
demand growth
enough to meet
increased demand
CAGR from 14%
Mostly from China,
down to 8%
Demand from new
Latin America and
North America
automotive applications
Increasing consolidation
Offset by growing
to allow higher control
substitution by
Aluminum
Stable costs
No changes in cash cost curve

Relative cost decrease


Growing mine size driving economies of scale
Prices from US$ 1,500/t to US$ 6,500/t

Prices US$ 6,500/t; gradually down to above historic average

Return Growth

Return Stable

Risk
Risk

Risk
Risk

Doubling exposure to Chinese demand and supply


Inventories at historic lows

Volatility Increase

Uncertainty in speculative / investor sales


Increasing exposure to Chinese demand and supply
Low inventories at the start of the period

Volatility Increase

Source: Monitor analysis


6

Lead

BRIC will soon compensate for the recent Western supply shortage and
hence reduce the average industry Returns
Dynamics in The Past

Future Outlook

(2001 2006)

(next 5 to 10 years)

Return
Return

Return
Return

Stable demand growth


(2% CAGR)
Asia-Pacific demand
growth
China 5% CAGR
between 01-05
China net importer
since 04
Mainly auto batteries
and infrastructure
Pull from financial
investors / funds

Slight supply deficit


Limited new capacity
China biggest
contributor
Supply disruptions
Significant decrease
in Western World
smelting capacity
Deficit only partially
offset by re-cycling
increase

Continued stable demand


growth
Sustained demand
growth in China and
South Korea
Car exports
Further pull from fuel
efficient vehicles &
renewable energy
storage

Prices from US$ 500/t to US$ 1,200/t

Prices gradually down to US$ 600/t

Return Growth

Return Decrease

Risk
Risk

Supply to meet demand


BRIC supply growth
Smelting capacity
increase in India and
China
Continued global
increase in recycling

Risk
Risk

Asia Pacific / Chinese demand growth


Chinese supply growth (>5% CAGR)
Increased fragmentation
Top 5 market share from c.38% (00) to c.34% (00)

High Volatility

Further Asia Pacific demand growth


Further Chinese supply growth
Uncertainty around consolidation

Volatility Increase
7

Zinc

Supply uncertainty, M&A activity and Chinese growth will increase average
Return and Risk for Zinc
Dynamics in The Past

Future Outlook

(2001 2006)

(next 5 to 10 years)

Return
Return

Return
Return

Strong demand growth


Strong Chinese demand
growing at 17% CAGR
Growth in galvanized
steel
Stable but modest
growth in the West

Recent significant supply


deficit
Low investment and
depleting reserves
Major supply
shortage in 05
China driving new
supply
6% CAGR
Fragmented supply

Slight decrease in rate of


global demand growth
Slowing Chinese growth
5 year government
plan; 7% CAGR
Low substitution threat
Further increase in cash
costs
Continued structural
increase and flattening
in the cash cost curve

Increasing cash costs


Structural production cost increase

Supply to establish a tight


balance
Supply/demand
rebalance by 08
China to grow at 9%
CAGR and balance
its Zinc position
India growing
supplier (16%
CAGR)
Sustained fragmentation
in the medium term

Prices from US$ 900/t to US$ 1,400/t by 05 and US$ 3,000/t by 06

Prices US$ 4,000/t; gradually down to above historic levels

Return Stable

Slight Return Increase

Risk
Risk

Risk
Risk

Positively impacted by stable global industrial


production cycle
Minor impact of recent M&A activity among top players
Streamlining of assets

Slight Volatility Decrease

Further Chinese growth


Cash cost curve slope decreasing

Volatility Increase
8

Contents

Overview by Industry
Gold
Copper
Lead
Zinc

Supply Chain Overview Gold


Major miners are forward integrated
Process
Process

Mining
Mining

Ore
Ore Processing
Processing

Semi-Finished
Semi-Finished
Goods
Goods

Refining
Refining

End
End Markets
Markets44

USD 33Bn1,4

Description
Description

Ore sampling,
examination and
extraction
Drilling
Blasting
Loading
Hauling

Ore crushing and


processing
Low-grade ore
Cyanide solution
to dissolve gold

High-grade ore

Refining out remaining


impurities from gold
Melting
Electrolysis
Molding into bars

Grinding mill for


further
processing

Producing semis for


jewelers/ offering
precious metals
services
Homogenization,
sampling, refining
Production of
various semis

Major uses:
Jewellery, by
Artisans
Wholesalers
Integrated
manufacturers

Output
Output

Ore containing
gold and other
materials

Raw gold
material

10

Metalor
Garfield Refining
Company

Alloys and semifinished products


Coins and medals
Other

Net retail
investment2
ETFs3
Industrial / dental
uses

ETG6 (ca. 90%

total market in gold


backed securities)
Major
Major
Major jewellery

Players
Players
manufacturers
Johnson Matthey
(Italy, Turkey and
Smaller companies:
India5)
Semar (Italy)
Major electronics
Argor (Switzerland)
companies
Note:
1. Values are for 2005 2. Net Retail Investment refers to bar hoarding, medals and imitation coins purchased by individuals 3. Exchange Traded
Funds (ETFs) are gold backed, listed securities 4. In 2005, mining companies accounted for about 62% of global gold supply, while gold
scraping and reserve liquidation by Central Banks, not included in this graph, accounted for the rest, totaling $53B 5. E.g. InterGold, Diva
Jewellery, FubulaRoma 6. ETG Securities is listed on the New York, London, Australia, Johannesburg and Paris stock exchanges and is 100%backed by allocated gold bars held by custodian HSBC; as of 1 June 2006 it exceeded $9.2 billion, representing 92% of market share
Source: Datamonitor, Barrick Gold website, Web research, Monitor analysis

Newmont
AngloGold
Barrick Gold
Gold Fields

99.9% pure gold


bars
Low-grade scrap
Floor sweepings

Cutting,
polishing and
retailing

Industry Past Performance


Total Investment Return has significantly increased in the past 5 years
Decreasing margins have not influenced investor sentiment
Financials of Specialized Players, Gold Industry (19912005)
Avg. Financials

Standard
Deviation
(15 years)

15 years

5 years

Last Year3

EBIT Margin

12.4%

11.2%

10.2%

6.9%

ROA

6.9%

4.8%

2.5%

4.2%

ROIC

9.7%

5.8%

6.0%

5.9%

Total Investment
Return

14.2%

27.6%

25.8%

35.1%

Note: Companies used: Newmont, Anglogold, Barrick, Gold Fields, Placer Dome
Source: Thomson One Banker, Monitor analysis
11

Industry Outlook
Gold is expected to remain an attractive industry

Demand
Demand and
and Supply
Supply
Dynamics
Dynamics

Sustainable demand
growth
ETF growth
Flight to safety
Weak US$
Jewelry growth in
developing world
Matching supply
Growth in Scrap sales
Smaller player entry in
mining
Central banks net
sellers
Declining sales

Stabilizing Prices

Rivalry
Rivalry

Exogenous
Exogenous Factors
Factors

Controlled value chain


Forward integrated top
players getting
stronger
Fragmentation to
decrease with price
Very steep cost curve
reducing industry
volatility
Slope increasing
Prices increasingly set
on spot sales
High prices driving a
Sellers market

Increased Control of
Value Chain by Miners

Source: Monitor analysis


12

Low threat of
substitution
Established volatility
hedge
Increased industrial
uses
Some threat from
platinum in jewelry
Low barriers for new
entrants

Low Threat of Substitution;


Low Entry Barriers

ETFs will continue to drive demand along with increased jewelry sales in
developing world
Demand projections by CS are highly optimistic
CAGR CAGR
0005 0510

Usage Across Time (Tonnes)


Total

-1%

128%
ETFs
Bar Hoarding 3%

By Value
9901
Decline

0105
Growth

CAGR CAGR
0510 0510

Usage Across Time (USD bn)

3%
15%
7%

Total
ETFs

9%
154%

8%
19%

Net Retail

30%

3%

Industrial

0%

3%

Industrial

9%

14%

Jewelry

-3%

2%

Jewelry

6%

6%

Economic
Economic Growth
Growth

Price
Price Expectations
Expectations

Flight
Flight to
to Safety
Safety

Innovation
Innovation

Jewellery
Jewellery Demand
Demand

Net
Net Retail
Retail Investment
Investment

ETFs
ETFs

Industrial
Industrial and
and Dental
Dental
Demand
Demand

Declining

economy
Low promotion
Growing

economy
product

Improved

Expectations

of price
growth drive demand
Mainly in India,
Japan, Vietnam and
Middle East

Weak

US$
Oil price uncertainty
ETFs facilitate
transactions
Mainly in the West

New

uses in Electronics
(MP3 players, Flat
screen TVs) and
automobiles, mainly in
wires and plating
Mainly in Japan and the
U.S.

offering
in developing
* 2010
forecast
world was calculated at 500 USD/oz 2. Net Retail Investment includes bar hoarding, medals and imitation coins purchased by individuals 2.
Sales

Note:
Exchange Traded Funds (ETFs) are gold backed securities 3. Industrial and Dental Uses: Electronics (e.g., gold plated circuit board contacts, gold plated
connectors), dental alloys, biomedical applications 4. China, Russia and Japans Central Banks expected to increase their gold reserves
Source: GFMS, World Gold Council, Credit Suisse Standard Securities, Datamonitor, Monitor analysis
13

India, China and the Middle East are driving demand, while 2006 price hike
and volatility decreased jewelry demand levels
The
The 0506
0506 Example
Example
Regional Split, Jewellery + Net
Retail Investment, 2005

Regional Split, Jewellery +


Net Retail Investment, 2006
Price change CAGR = 39%
(combined with 8-month
high volatility)

India
23%

Other
34%

Other
29%

India
26%

Greater China1
9%

Turkey 8%

U.S.
12%

Investment
Investment

Consumption
Consumption

India
India

Jewelry demand: -14%


Price volatility

Mainly

bars and coins


Diwali celebrations
Religious traditions
Savings vehicle

Turkey 9%

Middle East
13%

Total = 3,092 tonnes

Demand CAGR = -15%

China
China

U.S.
13%

bars

Top global jewelry


demand per head
Dubai, global gold
trading centre

Coins

as gifts
Marriage
Childbirth
Haji pilgrimage

and coins
Year of the Pig
Olympics

Middle East
12%

Total = 2,638 tonnes

Middle
Middle East
East

Jewelry demand: --Getting more


sophisticated and
diversified

Commemorative

Greater China1
11%

Turkey
Turkey
Jewelry

demand: -15%
Tourism and
economic slowdown
Price volatility

Net

Retail Investment:
+12%
Inflation hedge

Note: 1. Greater China includes: China, Hong Kong, Taiwan 2. 2006 figures are based on actual data
Source: World Gold Council Gold Demand Trends (February 2007), WGC The Role of Gold in India (September 2006), Monitor analysis
14

Increasing scrap sales will drive supply in the short term


Gold scrap sales increase and Official sales decline forecast by
CS are aggressive

CAGR
CAGR
20002005 20052010

Global Supply by Source Across Time (tonnes)

Mine
Mine Supply
Supply

Mine supply slow


growth
South Africa
decrease
High price drive small
player entry

Gold
Gold Scrap
Scrap Supply
Supply

High price drives fast


growth of scrap sales

Source: GFMS, World Gold Council, Credit Suisse Standard Securities, Monitor analysis
15

Total

2%

-1%

Official Sales

6%

-40%

Gold Scrap

7%

7%

Mine production-1%

1%

Official
Official Sales
Sales Supply
Supply

Central Banks net sellers


for a while
c.25% (>30kt) of total
gold stock
In 1999, major Central
Banks agreement to
sell less than 500 t/y

A number of new mines will come on line in the short term


Gold Supply by Location Across
Time (tonnes), 00-05

Examples of New Mines

CAGR
20002005
0.2%

Cowal1

Total
3,791

3,746

3.0%
6.8%

Australia
Start in 2006
~70 tonnes
capacity
Pascua-Lama1

Chile

/ Argentina
Start in 2009
~ 850 tonnes
capacity

3.7%
-3.9%
-4.8%

Akyem2
Ghana

-2.8%

Start in 2008
~12 tonnes
capacity

3.2%

Note: 1. Owned by Barrick 2. Owned by Newmont 3. Gold supply figures reported by the Yellow Book are different to the ones by the World Gold
Council
Source: 2005 Virtual Metals The Yellow Book, Datamonitor
16

However, supply will have a continued difficulty to keep up with demand


2010 deficit forecasted by CS is unlikely to be as high
Supply and Demand, Gold, 20002015F

Tonnes

Estimate
Estimate by
by Credit
Credit Suisse
Suisse
Standard
Securities
Standard Securities

Past
Past

Demand
Demand

Supply
Supply

Future
Future

Until late 90s, early 00s,


low demand by investors
Strong dollar
Fears on the extent of
the official sector selling

In late 90s, early 00s,


low exploratory
investments
Negative price
outlook

02-to-date, strong demand


by investors
Weak $US
Flight to safety
BRIC economic growth
Agreement in official sector

In recent past, higher


exploratory investments
Positive price outlook

Strong growth of China, India and Middle East driving


jewelry demand
Sustained flight to safety
Industrial uses growth

Slow growth of mine supply


Increased gold scraping
Net officials sales decrease

Source: Credit Suisse Standard Securities The Gold Report (February 2007), Monitor analysis
17

Historically, world crises, oil price and official sales have driven the Gold
price

Annotated Gold Price


Iranian oil crisis and Russian
invasion of Afghanistan

Washington Agreement on
Gold announced 1999

Swiss National Bank announces


plan to sell 400t of gold
Black majority rule in
South Africa in 1994

Second
Gulf War,
2003

USD / Oz

Stock Market Crash


October 1987

BoE reveals plan to


sell 415t of gold

First Gulf War,


1991

Source: GFMS, Datastream, Deutsche Bank Global Markets Research


18

Terrorist attack in the U.S.

Consensus forecast indicates mid-term prices stabilizing above historic levels


Gold price expected to test USD 800/oz levels in short term on the
back of fast increasing primary demand and supply slow growth
Gold Price Forecast
Morgan
Stanley

Credit Suisse

Citigroup

Gold Price
(USD/oz)

UBS
JPMorgan

Source: Credit Suisse Standard Securities, Bloomberg


19

Consensus
Consensus
price
price
forecast
forecast of
of
over
USD
over USD
500/oz
500/oz

Golds very steep cost curve shows low industry volatility


Only the cash costs of the most costly assets are above the 5Y
average price
Gold Mining Cost Curve (2005)

5Y Average Price
Pierina Mine

Operating
Cost
(USD/oz)

South America
Reserve: 2m oz
Operating costs: 134 USD/oz

Bulyanhulu Mine
Goldstrike Open Pit

North America
Reserve: 14m oz
Operating costs: 215 USD/oz

Africa
Reserve: 11m oz
Operating costs: 342 USD/oz

5Y Average Demand
10%

25%

40%

55%

70%

Cumulative Production (000 oz)


Source: Metals Market Sentiment Quarter 3, Monitor analysis
20

85%

100%

Historic cost curves of Gold production show that the slope is getting
steeper with time, thus further reducing industry volatility

2002, 2003 and 2004E Gold Mining Cost Curve, 02-04E

2003
Total Cash
Costs (USD/oz)

y = 3.1722x + 88.294

2004E

y = 2.4958x + 93.874

y = 1.7935x + 91.134

2002

Cumulative Production
Source: BMO, Monitor analysis
21

Although Gold is a fragmented industry, top miners are strengthening their


positions

M&A Examples

Competitors Market Shares, Gold


Mining, 2005
Newmont
8%
AngloGold
8%
Barrick Gold
7%

Other
68%

Larger players strengthen their position through


acquisitions
In 2005, Barrick Gold acquired Placer Dome
Barrick might be currently valuating a
takeover bid for Newmont Mining
In 2007, Kinross bought Bema
Late 1990s downturn left smaller producers
vulnerable to acquisition or bankruptcy
Capacity Added by Major Players, 2006

Gold Fields
5%
Placer Dome
4%
Total Sales in 2005 = ca. 33B USD

Source: A User Guide to Commodities (Deutshe Bank, July 2006), Datamonitor, Company Annual Reports, Monitor analysis
22

Big, forward integrated miners have bargaining power over their customers

Gold Value Chain


Bargaining
Power
High Med Low

Mining
Mining

Big, Forward Small


Integrated Miners
Material
Material
Flow
Flow

Newmont,
AngloGold
Barrick Gold,
Gold Fields

Processing
Processing
(Smelting
(Smelting // Refining)
Refining)

Production
Production of
of SemiSemiFinished
Finished Goods
Goods

Big,
Small Mostly Small
diversified, Players, Players
22% EBIT
e.g., E.g. Cookson (UK),
margin
Metalor Algemeine Gold
(Germany), Semar
(Italy), Argor
Johnson
(Switzerland)
Matthey

Note:

End
End Markets
Markets

Jewelers (In India,


Italy, Turkey, China,
US, some major: e.g.
Richemont, Tiffany,
Zales)
ETG (ca. 90% of goldbacked securities)
Electronics
companies

1. ETG Securities is listed in the New York, London, Australia, Johannesburg and Paris stock exchanges and is 100%-backed by allocated gold
bars held by custodian HSBC; as of 1 June 2006 it exceeded $9.2 billion, representing 92% of market share
Source: Web research, Monitor analysis
23

Barriers to entry are low in Gold mining

Est. Capex for Small Projects


USD m

Capital
Capital Investment
Investment
1/22/15

Low
Low Capex
Capex Required
Required

1/22/15

Share of Global
Capacity

0.04%

0.04%

Gold Mine Supply, 2005


South Africa
12%
Others
28%

Political
Political Context
Context
Low
Low Supply
Supply
Concentration
Concentration

China
10%
Other Africa
10%
Canada
5%

Environmental
Environmental Issues
Issues
Minor
Minor

USA
11%

No
No part
part of
of the
the
world
world has
has more
more
than
15%
of
than 15% of global
global
production
production

Australia
10%

Peru
7%

Russia
7%

Acid Mine Drainage, for new mines in particular


Costly collection and treatment programs

Source: Barrick Gold Company Annual Report, Newmont Mining Corporation Annual Review, The Yellow Book, World Gold Council, Monitor analysis
24

Gold has a low threat of substitution on basic uses


There are significant opportunities for increased use of gold in
industrial applications
Some
Some Threat
Threat from
from
Gold
Substitutes
Gold Substitutes
in
in Jewellery
Jewellery

Example
Platinum jewelry growth in
early 90s
1988: 2,000 watches
1994: 10,000 watches
New applications
E.g. MP3 players, Flat
Screen TVs
Greater use in automobiles
Improved quality and
efficiency
New industrial and medical
uses1
Mercury traps2
Chemical catalysts
Medical diagnostic
equipment
Cancer treatments

However, cost 3 times higher:


29% more raw material
Higher production costs

Opportunity
Opportunity
in
in New
New
Industrial
Industrial and
and
Electronics
Electronics Uses
Uses

Note: 1. Nano-technology usage 2. To remove mercury from coal-fired power station emissions
Source: World Gold Council Gold Demand Trends (February 2007), Internet, Monitor analysis
25

Gains mainly in Japan and the


U.S.
New uses drive industrial
demand growth

Contents

Overview by Industry
Gold
Copper
Lead
Zinc

26

Supply Chain Overview Copper


Major miners are forward integrated
Process
Process

Mining
Mining

Pyrometallurgical
Pyrometallurgical
Route
Route
(Smelting
(Smelting and
and
Refining)
Refining)

HydroHydrometallurgical
metallurgical
Route
Route (SX(SXEW*)
EW*)

EBIT Margin 38%1

Description
Description

Ore mining
Different grades
Two main forms:
Sulfides
(80% of
global copper
ores), leading
to 1st route
Oxides,
leading to
SX-EW route

Output
Output

Major
Major
Players
Players

Mine ore
Containing less
than 1% copper

Codelco
BHP Billiton
Groupo Mexico

Ore crushing and


grounding to powder
High temperature
processes to
oxide sulfur and
other impurities
99.0% purity
Electro-refining

Leaching, and SX-EW


stages
SX
Solution
contacted with
solvent
EW
Electrochemically
purified

99.9% pure copper


deposited in the
cathode

99.9% or purer
copper

TransforTransformation
mation

End
End Markets
Markets

EBIT Margin 11%1


First and second
transformation
Transformation
into semi
products

Major uses:
Energy cables
Construction (plumbing
and other fixtures)
Electronics (chips,
tubes, etc.)
Transportation
(radiators, brakes)
Industrial machinery
Consumer goods (e.g.,
TV cathode rays)

Copper
products
Wire rods,
shapes,
billets,
cakes

Norddeutsche Affinerie
Nippon Mining and Metals
Cumerio

Note:

* SX-EW stands for Solvent Extraction Electrowinning 1. EBIT Margin figures are Cumerios 2006 recurring EBIT Margins. Cumerios Copper
products include the production of wire rod, specialty rod and profiles, shapes and wires
Source: Credit Suisse Metals and Mining Primer NA, Scotia Capital, Web research, Monitor analysis
27

Industry Past Performance


So far, Copper has been a high risk/ high return industry
In recent past, Price hike has caused a spectacular growth in margins

Financials of Single Metal Producers, Copper Industry (19912005)


15 Years

5 Years

Last Year

Standard
Deviation
(15 Years)

EBIT Margin

20.4%

24.7%

42.9%

11.4%

ROA

7.1%

8.9%

17.9%

4.3%

ROIC

8.6%

11.3%

23.2%

5.7%

TSR

41.9%

61.7%

74.5%

51.9%

Avg. Financials

Note: Companies used: Southern Copper, Sterlite Industries, First Quantum Minerals, Antofagasta, Boliden, Phelps Dodge and Grupo Mexico. TSR
does
not include figures for Southern Copper
Source: A User Guide to Commodities (Deutshe Bank, July 2006), Thomson One Banker, Monitor analysis
28

Industry Outlook
Copper is expected to sustain its high risk/ high return profile
Demand
Demand and
and Supply
Supply
Dynamics
Dynamics

Softening demand growth


Slowing Chinese demand
growth
CAGR from 14% down to
8%
New applications in
automotive
Offset by growing substitution
by Aluminum
Tight supply balance
New capacity just enough to
meet increased demand
Mostly from China, Latin
America and North
America

Stable Prices in Short Term,


then Gradually Decreasing

Rivalry
Rivalry

Exogenous
Exogenous Factors
Factors

Fragmented industry
Top 5 held about 40% of total
in 2005
Increasing M&A activity
New Chinese players
Relatively stable costs
Slight flattening of the cash
cost curve
Trend towards bigger, open
pit mines
Balanced value chain
Bargaining power balance
between major miners and
buyers
E.g. major cable
producers

Balanced Value Chain

29

Medium barriers for new


entrants
1/3 of global reserves in
difficult locations
Significant price substitution
threat
Aluminum mainly for
electrical cables and A/C
Other for piping
Some opportunity in new
automotive applications

Medium Barriers to Entry;


Significant Price
Substitution Threat

Demand will keep growing, driven by construction activity and new uses in
automotive
Refined Copper Demand 2005*

Total Refined Copper Demand (20012010E)

3.4%

Other
11%
Transport
11%

CAGR CAGR
2001 2005
2005 2010E

Construction
37%

4.4%

Kt

Industrial
Machinery
15%
Electronic
Products
26%

Key
Key Demand
Demand Driver
Driver

Trends
Trends by
by Application
Application

Industrial
Industrial Production
Production (IP)
(IP)

Construction
Construction

Electronics
Electronics

Automotive
Automotive

Others
Others

Chinese

Some

New

Increased

20072008
G7 economies IP to grow at
2% y-y
Chinese IP to grow at 19% yo-y

growth
Substitution risk
for cabling, piping
& plumbing
Some substitution
from fibre optics

growth

applications
and improved
technology in car
manufacturing
(e.g., brake
tubing)

Note: * The 2005 split by application refers to the Copper Consumption by End Use for Western World only
Source: RBC Capital Markets estimates, Brook Hunt, Monitor analysis
30

energy
savings by copper
applications

In the future BRIC Copper demand is expected to soften


Primary Copper Consumption by Location Across Time (20012010E)
Total

Kt

China
China
20002006
China: from 15% to 25% of world
copper consumption
Industrial: Power & Electricity,
Construction
Middle class: A/C, automotive

India,
India, Eastern
Eastern Europe
Europe
20062010
Analysts see
Chinese demand
growth softening

Above global average


growth rates
However, unable to
replace potential
shortfall in Chinese
demand

CAGR
0510E

3.4%

4.4%

11.0%

2.9%

7.8%

5.8%

-0.6%

2.8%

12.1%

6.1%

-2.8%

2.3%

-2.4%

2.9%

4.4%

3.7%

14.4%

7.7%

U.S.
U.S.
20012005
Declining industrialisation
20052010
Construction growth
Hurricane Katrina

Source: RBC Capital Markets estimates, Brook Hunt, Mo Ahmadzadeh (Global Market Trends Conference), Monitor analysis
31

CAGR
0105

Chinese industrialization choices will drive world Copper demand

Korea
Korea and
and Taiwan
Taiwan have
have
shown
very
strong
shown very strong
increases
increases in
in copper
copper
intensity
per
capita
intensity per capita as
as
they
they industrialized
industrialized
since
since the
the 1970s
1970s

Chinese
Chinese slope
slope at
at
average
average of
of one
one of
of S.
S.
Korea
and
Taiwan
Korea and Taiwan

Refined Cu Consumption per Capita


(Kg / Person)

Copper Demand Intensity of GDP (19502002)


High apparent
consumption for
export oriented
manufacturing
economies?

Y=0.0022x+5.2314

Y=0.0014x-2.7037

Y=0.0003x+0.434

Y=6E-05x+7.1529

Chinese Cu Consumption and


GDP Per Capita

GDP per Capita (2002 USD / Person)

Y=0.0017x+0.0898

Chinas
Chinas position
position today
today
(>doubled
in
10
years)
(>doubled in 10 years)

GDP: USD / Capita


Source: BHP Billiton Can Chilean Copper Maintain Its Market Share?
32

Japan
Japan followed
followed aa path
path of
of slower,
slower, but
but
consistent,
consistent, increases
increases in
in copper
copper
demand
demand intensity
intensity of
of GDP
GDP (per
(per
capita)
capita) during
during its
its post-WWII
post-WWII
industrialization
industrialization

Supply will grow steadily driven by added capacity in China, Africa and the
Americas
CAGR CAGR
0105 0510E

Total Refined Copper Production by Location, 2001-2010E (Kt)


Total

Source: RBC Capital Markets Estimates, Brook Hunt, Scotia Capital, Monitor analysis
33

1.4%

4.9%

Oceania
-4.5%
Russia
1.0%
Africa
4.2%
Other Eastern 2.8%
Bloc
Western Europe-0.9%

-1.1%
-3.0%
21.1%

North America -7.0%

5.9%

Asia

1.8%

3.2%

China

14.4%

Latin America

-0.4%

4.5%
-0.7%

8.2%

4.9%

SX-EW will grow at faster rates than electro-refinery production and will
drive copper supply by 2010

CAGR
CAGR
20012005 20052010E

Total Refined Copper Production by Source, 2001-2010E (Kt)


Total

1.4%

4.9%

SX-EW
Production

0.9%

11.1%

ElectroRefinery
Production

Total
Total Supply
Supply

SX-EW
SX-EW Production
Production

20042006
4% decline in ore grade for
22% of mine supply

2000s
Marginal growth
By 2010
Rapid growth
Technology offsetting
deposits depletion

Supply struggling
to keep up

Note: SX-EW stands for Solvent Extraction Electrowinning


Source: RBC Capital Markets Estimates, Brook Hunt, Scotia Capital, Monitor analysis
34

Electro-Refinery
Electro-Refinery
Production
Production
By 2010
Steady growth

1.5%

3.6%

In the mid-term, supply and demand balance will be tight


Scotia Capital and RBC supply forecasts differ significantly
Supply and Demand, Copper (20012010E)

Kt

Past
Past

Demand
Demand

Supply
Supply

2005
Decline of 0.6%
Consumer de-stocking
Tight physical supply
Record high prices

Future
Future
2006
Global growth rebounded
at 4.5%
Potentially higher without
Chinese de-stocking and
price-induced substitution

20072008
Global growth abovetrend rates, at 5.4%
End of Chinese destocking

2009beyond
Growth rate of 3.5%
Chinese share of
consumption rise expected
to decrease

Near Future
Disruptions and declining ore replaced by new projects
Majority of new supply by 2010 from existing
operations and projects already approved

20032006
Supply consistently below demand
Production disruptions and declining ore
Deficit closed by de-stocking

Source: RBC Capital Markets Estimates, Brook Hunt, Scotia Capital, Monitor analysis
35

Until the end of the 90s Copper prices were decreasing

Annual Average U.S. Producer Copper Price (19591998)

1992
Dollars

USD/t

High
production
and strong
consumption
Production
cutbacks to
stabilize
prices

Strong demand
Vietnam war: stockpile
releases
Longest, most severe
strike to date

Price volatility
Recession
and high
inventories
Growth and
low stock
levels

Years
Source: USGS Metal Prices in the U.S. Through 1998, Monitor analysis
36

Recession
Draw down of
high inventories

Price volatility
8789 growing
world consumption
93 stagnant world
demand and rising
inventories

Asian crises
Global
capacity growth

Recently, inventory deficits and supply disruptions have lead to a price


peak, which is expected to remain in the short-term

Total Refined Copper Inventories and Price (19842010)


Forecast

LME
Prices (RS)
Weeks of
Consumption
(LS)

Critical
Level (LS)

USD/t

Source: RBC Capital Markets Estimates, Bloomberg, Brook Hunt


37

In the long term, analysts expect price to stabilize at ca. 2,500 USD/t
Forecasts show differences in the Short-term, but tend to agree on
the Long-term price
Copper Price Trends (19912020)
Scenario 3

USD/t

Scenario 2

LME high-grade
Historical Price

Scenario 1

Note:

Price forecasts: Scenario 1 is a forecast from Codelco assuming a World Consumption Annual Growth Rate of 4%, expressed in 2004 Currency;
Scenario 2 is a forecast from Codelco assuming a World Consumption Annual Growth Rate of 3.5%, expressed in 2004 Currency; Scenario 3 is a
forecast from RBC Capital Markets and Brook Hunt, expressed in Nominal LME Cash Price
Source: Codelco Trends in the Copper Industry (April 2005), RBC Capital Markets Estimates, Bloomberg, Brook Hunt
38

The Copper cash cost curve is expected to slightly flatten


Overall industry costs will remain stable
Copper Cash Cost Curve (2006E)
6,740

2006
2010

3,300

2006 price

Forecast
Demand

2,800

20012005
average
Demand

Kansanshi

2,400

USD/t

20012005
average price
USD/t

Copper Total Cost Curve (2006E vs. 2010E)

3.750

Kansanshi

2,000
1,550

OK Tedi
Antamina

OK Tedi

1,100

Antamina
PT Freeport Indonesia

660
220
-220

2006
Demand

PT Freeport Indonesia

-660
-1,100
0%

Cumulative Percent of Global Production

25%

50%

75%

Cumulative Percent of Global Production

Mining Cost Breakdown

Decreasing
Decreasing Labour
Labour Cost
Cost

Increasing
Increasing Energy
Energy Cost
Cost

Source: RBC Capital Markets Estimates, Brook Hunt, Monitor analysis


39

Trend
Trend for
for
Higher-capacity,
Higher-capacity,
Large-scale,
Large-scale,
Open-pit
Open-pit mines
mines

100%

Copper is a fairly fragmented industry with top players accounting for 40%
of total share in 2005
Top players are expected to lose market share between 2005 and
2010 because of local players entry in China and other developing
countries
Mined Volume Market Shares

Recent M&A Activity, Selected Deals of Top Players

In 2007, Freeport acquired Phelps Dodge


In 2005, BHP Billiton acquired WMC
In 2005, Grupo Mexico merged its Minera Mexico assets with SPCC

Note: 1. 2010E market shares inferred from new refined production levels (adjusted for mined volume) 2. SPCC = Southern Peru Copper Corporation
Source: ICGS, Outlook 2000, Company Production Data, Morgan Stanley, Magnus Ericsson 1999, Yahoo Finance, Monitor analysis
40

Big forward integrated miners share bargaining power with major buyers
Among other markets, Copper is traded in London Metal Exchange
(LME) and New York Commodity Exchange (COMEX)
Bargaining
Power
High Med Low
Mining
Mining

Copper
Copper

Big,
Forward
Integrated
Miners

Other
Miners

Sales
Sales
Process
Process
Codelco,
BHP Billiton,
Groupo
Mexico

Processing
Processing
(Converting
(Converting // enriching)
enriching)

Smelters, Refiners

Norddeutsche Affinerie,
Nippon Mining and Metals
Cumerio

Source: Web research, Monitor analysis


41

Production
Production of
of SemiSemiFinished
Goods
Finished Goods

End
End Markets
Markets

Diversified Players

Cable Manufacturers, e.g.,


ABB

Other Players

Plumbing Manufacturers
Electronics Companies
Industrial machinery
companies

The location of 1/3 of global reserves poses some barriers to entry


Est. Capex for Small Projects

USD

Capital
Capital Investment
Investment

1/22/15

1/22/15

Share of Global
Capacity

0.13%

0.28%

Global Copper Reserves Base, 2004

Chile
31%

Other
32%

Political
Political Context
Context
Mexico
5%
Mongolia
5%
Indonesia
8%

Environmental
Environmental
Issues
Issues

DRC, Peru, Indonesia, Mongolia and Mexico account


for 1/3 of global reserves

Compared to the Western world, these countries


tend to show more
Uncertain political and economic environments
Changes in laws and fiscal policies

D.R.C.
12%
Peru
8%

Local
Local network
network critical
critical to
to operate
operate in
in these
these areas
areas

Smelter decontamination plans, solid and liquid waste and tailings disposal
E.g., environmental impacts due to the space necessary for tailing deposits
Application of thickened tailings technology to reduce space necessary under study

Source: Australia Commodities vol. 13 no. 2 (June 2006), Brook Hunt, Monitor analysis
42

Copper is facing an increasing price substitution threat by Aluminum and


other materials
Titanium
Titanium and
and steel
steel
Optic
Optic Fibre
Fibre
Plastic
Plastic

Heat

exchanges

Telecommunication
Piping

applications

& plumbing fixtures

Power

Aluminium
Aluminium

cables, electrical equipment, automobile


radiators, cooling and refrigeration tubes
20052006
Copper semis growing at lower rates than
aluminium semis
China: 7% copper semis consumption growth
vs. 20% aluminium semis
Aluminium power cables below 35kV
A/C applications (15% of total Chinese
copper demand)
India: Sharp increase of aluminium power
cables

Automotive
Automotive

New

Threat
Threat of
of
Substitution
Substitution
(Based
(Based on
on Price)
Price)

New
New Technologies
Technologies
and
and Uses
Uses

Others
Others

Copper
Demand

applications (e.g., brake tubing)

Increased

energy efficiency by Copper usage

Source: DB, Scotia Capital, Morgan Stanley, Norilsk Nickel Annual Report 2005, Copper Development Association, Monitor analysis
43

Copper
Demand

Contents

Overview by Industry
Gold
Copper
Lead
Zinc

44

Supply Chain Overview Lead


Major players are vertically integrated
Process
Process

Mining
Mining

Smelting
Smelting

Refining
Refining

End
End Markets
Markets11

USD 3.196 bn*

Description
Description

Ore extraction
Usually mined from
underground
Ore beneficiated to raise
lead content
Zinc, iron and waste rock
removed

Output
Output

Lead concentrate
(70%)

Primary ore concentration:


Froth flotation
Smelting
Furnace and gas reduce
lead oxide to metallic
lead
Silver, gold and copper
removed

(smaller players)

Lead bullion

Major
Major
Players
Players

Refining
Bullion refried by
pyrometallurgical methods

BHP Billiton
Doe Run
Xstrata
State of China
Teck Cominco
Anglo American
Zinifex

Major uses:
Auto ignition starters
Uninterruptible and
standby power supplies
Paint, glass and ceramics
additives
Ammunition
Solder
Pipes and cable coverings

Lead bullion of
>99.85% purity

(smaller players)

Automotive industry
Power consumers
Materials manufacturers

Note:
* Value from 2005 1. Semis producers not included
Source: Global Diversified Metals and Mining (Datamonitor Apr 2006), Nonferrous Metals: Industry Structure (U.S. OTA Sept 1990), Monitor analysis
45

Industry Past Performance


Lead appears to be a high risk/ high return industry

Financials of Single Metal Producers, Lead Industry (20022005)


15 Years

5 Years

Last Year

Standard
Deviation
(5 Years)

EBIT Margin

N/A

14.7%

10.2%

3.8%

ROA

N/A

12.3%

11.4%

4.8%

ROIC

N/A

13.6%

12.5%

5.4%

TIR

N/A

53.9%

-1.2%

56.7%

Avg. Financials

Note:

1. Used Financials of Ivernia and Thye Mining Industrial Company Ltd for TIR and of Thye for the other metrics 2. Total Investment Return =
(Market Price Year End + Dividends Per Share + Special Dividend -Quarter 1 + Special Dividend-Quarter 2 + Special Dividend-Quarter 3 +
Special Dividend-Quarter 4) / Last Year's Market Price-Year End - 1) *100
Source: A User Guide to Commodities (Deutshe Bank, July 2006), Thomson One Banker, Monitor analysis
46

Industry Outlook
Lead is expected to sustain its risk/ return profile
Demand
Demand and
and Supply
Supply
Dynamics
Dynamics
Sluggish growth
BRIC auto consumption
Demand for fuel efficient
vehicles in the West
However, recycling
deters high growth
Supply expected to meet
demand in short term
Smelting capacity
restored
Increased mining
capacity
Steady increase in
secondary output
In mid-term supply issues
from existing mines
depleting

Prices to Decrease in Short


Term then Increase Again

Rivalry
Rivalry

Exogenous
Exogenous Factors
Factors

Very fragmented industry


No significant sign of
change

Transparent price setting


mechanism
Prices set on LME

Fragmented Industry

Source: Monitor analysis


47

Relatively low threat of


substitution
No strong substitute for
lead in batteries
Opportunity from nuclear
waste containment
applications
Some entry barriers
Longer time to ramp up
operations
Environmental threat

Low Threat of Substitution;


Medium Entry Barriers

Demand growth for Lead has been sluggish


Batteries is the main usage area
CAGR
0105

CAGR
0510

Total

2.19%

2.02%

1/22/15

Non-battery
Use

1.63%

1.48%

Battery Use

2.44%

2.24%

Global Lead Demand by Usage (20012010E)

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22
/15

1/22
/15

1/22
/15

1/22
/15

1/22
/15

1/22
/15

kt

Lead Usage by Category (2005)

Ammunition
6%

Rolled
Extrusions
7%

Key
Key Battery
Battery Uses
Uses

Cable
Sheathing
3%

Pigment
12%

Batteries
72%

Starting, lighting
and ignition
replacement 45%
Traction 11.5%
Stationary 15.5%
TOTAL 72%

Batteries for automotive industry


Rising vehicle population boosting demand for
replacement batteries
Heavier batteries required in high compression
motor vehicles
Hybrid vehicles
Potential energy storage options
Renewable energy technologies

Source: DB Jul 2006, Lead GSBR Feb 2006, Ivernia Presentation Feb 2007, LME Metals 2006, Monitor analysis
48

Western demand for fuel efficient vehicles and BRIC auto consumption will
drive demand in the future
Lead recycling deters industry growth
Lead Consumption by Region (20012010E)
1/22/15
1/22/15
1/22/15
1/22/15

1/22/15
1/22/15

1/22/15
mt

1/22/15

1/22/15
1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15
1/22/15

1/22/15

1/22/15

1/22/15
1/22/15

1/22/15

1/22/15

CAGR
0105

CAGR
0510

Total

2.2%

2.0%

Rest of World
Japan
Latin America

0.9%
0.5%
2.3%

0.6%
0.3%
2.1%

North America

1.2%

1.0%

Asia-Pacific

5.0%

4.6%

Europe

1.3%

11.0%

1/22/15

Drivers
Chinese
Chinese

Auto consumption

Battery exports

Demand for critical


infrastructure and
telecommunications towers

Emerging
Emerging Economies
Economies

North
North America,
America, Europe,
Europe, Japan
Japan

Auto consumption rising


in India, Malaysia, Brazil
and South Africa

Fuel-efficient autos require larger batteries


(but not all use lead-acid batteries)

Auto consumption modest or flat

>80% of lead is recycled, resulting in flat percapita consumption

Source: The Lead Market Charge (Abra Mining Dec 2005), Lead A Global Strategic Business Report (GIA Feb 2006), Monitor analysis
49

Lead supply is migrating from the West to China


. . . driven by smelting capacity closure in the US

Lead Mine Production by Region (20032007)


1/22/15

1/22/15

1/22/15

1/22/15
1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

Lead Mine Production, China and


Rest of World (20032007)

CAGR
0307
3.89%
7.24%

1/22/15

1/22/15

5.24%

1/22/15

1/22/15

-0.46%

1/22/15

1/22/15

1/22/15

CAGR
0307
1/22/15

1/22/15

5.21%

2.92%
1/22/15
kt

1/22/15

1/22/15

1/22/15
Africa

1/22/15
Europe

1/22/15

1/22/15

1/22/15

1/22/15
Oceania

5.50%
kt

1/22/15
Americas

1/22/15

Asia

1/22/15

1/22/15
China

Smelting
Smelting Capacity
Capacity Changes
Changes

1/22/15

1/22/15

Rest of World

China
China

Smelting output growth in China, India and Europe


Recent smelter closures in the U.S.
However,
Shortage of concentrate / raw materials may constrain
increased Chinese refined lead production in the future

Source: GFMS BMMR Jan 2006, LME analysis, Monitor analysis


50

Largest miner, producer, consumer and exporter of


lead in 2005
Increased domestic demand has decreased exports
to rest of world
Chinese export tax rebate on lead and lead
products recently cancelled

The Lead market has remained fairly balanced

Refined Lead*, Supply and Demand (20012010E)


Demand

Supply

mt 1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

Past
Past

Supply
Supply

Demand
Demand

1/22/15

1/22/15

1/22/15

1/22/15

Present
Present // Future
Future
Increases in demand driven by developing countries,
especially for automotive industry (dominated by
China also India, Brazil)

Demand driven by fuel efficient vehicles in the West

Smelting capacity shortage in the West

Increasing supply from China and Australia

Recycling deters fast growth

40% of lead comes from mined production, remaining 60%


from recycling

Lead has the highest rate of recycling of all metals

Since 2005, refined lead production increasing


Smelting capacity restored
Increased mine capacity
Steady increase in secondary output
In Mid-term existing mines depleting

* Refined lead includes primary (mined) and secondary (recovered from post-consumer) lead production Source: USGS, Ivernia AR 2005, Monitor analysis
51

Historic Lead price has been volatile

Annual Average Lead Price (19591998)

1992
Dollars

USD/t

Source: USGS
52

Lead stocks are replenishing after a deficit in 2004


Lead Inventories and LME Price (20022006)

kt

LME stocks currently low, but high prices


encourage investment
Lower prices expected in near future due to
mine production increase
Long-term supply expected to tighten as
existing mines close

Significant deficit of refined lead in 2004


Jan 2003: Metaleurop closes NoyellesGodault lead/zinc refinery (110 ktpy)
Feb 2003: MIM closes Avonmouth lead/zinc
smelter/refinery (35 ktpy)
Dec 2003: Doe Run closes Glover smelter
(130 ktpy)
Since 2005, refined lead production
increasing
Easier availability of concentrate from
increased mine capacity
Steady increase in secondary output

USD/t

Global Lead Surplus (20002010E)

kt

1/22/1 1/22/1 1/22/1 1/22/1 1/22/1 1/22/1 1/22/1 1/22/1 1/22/1 1/22/1 1/22/1
5
5
5
5
5
5
5
5
5
5
5

Source: Ivernia AGM Jun 2006, GFMS BMMR Jan 2006, LME Metals 2006, Monitor analysis
53

Lead price is expected to decrease in the medium term . . .


. . . but a future deficit is expected to raise it again in 2009
Lead Price Forecast (20002010E)

Little or no supply
deficit by 2007 will
drive price decrease

Supply issues cause


price increase as
inventories fall
Chinese demand now
greater than domestic
production

Bloomberg
Forecast
Price

USD/t
Historical
Price

Source: USGS, Bloomberg, Perilya (LT forecast), Ivernia Inc., Deutsche Bank, LME Metals 2006
54

New projects
coming online
not sufficient
to cover current
demand
increases . . .
. . . maintaining
long term price
above 2000
level

Lead is a fragmented industry


In 2005 no player controlled more than 9% of the market
Mined Volume Market Share, Top 5 and Others (2005)

Mined Volume Market Share by Company (2005)


1/22/15
1/22/15
1/22/15
1/22/15
1/22/15
1/22/15

Top 9 control 47% of market

1/22/15
1/22/15

Australia
Australia
Upcoming
Upcoming
Capacity
Capacity
Increases
Increases
(2006
(2006
onwards)
onwards)

1/22/15
Others
1/22/15

1/22/15

1/22/15

1/22/15
1/22/15
1/22/15
1/22/15
1/22/15
1/22/15
1/22/15 1/22/15
1/22/15 1/22/15
1/22/15
1/22/15
Ivernia: Magellan (100ktpy)
Xstrata: Black Star (50ktpy)
Intec: Hellyer (40ktpy)
Teck Cominco: Lennard Shelf (30ktpy)
BHP Billiton: Cannington (20ktpy)
Perilya: Broken Hill (20ktpy)

Top 5
1/22/15

2000
2000
1.
2.
3.
4.
5.

Apex Silver: San Cristobel (85 ktpy)


Herald Resources: Daira (75ktpy)
Anglo: Black Mountain (40ktpy)
Hellas Gold: Stratoni (30 ktpy)
Penoles: Naica (20ktpy)

MIM Holdings (10.9%)


Doe Run (7.6%)
Pasminco (7.3%)
BHP Billiton (6.8%)
Korea Zinc (5.5%)

1/22/15

2005
2005
1.
2.
3.
4.
5.

Xstrata + Falconbridge (9.0%)


BHP Billiton (9.0%)
Doe Run (8.0%)
Zinifex (4.0%)
Anglo American (4.0%)

M&A
M&ADeals
Deals

Pasminco was restructured in late 2001, leading to Deeds of


Company Arrangement (DOCA)

Establishment of Zinifex Limited

Xstrata acquired Falconbridge in late 2006


Source: DB Jul 2006, LME Metals 2006, Company ARs, BNP Paribus Equities Sept 2001, GFMS BMMR Jan 2006, Lead GSBR Feb 2006, Monitor analysis
Other
Other

55

Time to market and environmental issues pose some barriers to entry in the
Lead industry
Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7 Year 8

Year 9

Estimated timeline to bring on new lead capacity

Time
Time to
to
Market
Market

EnvironEnvironment
ment

Political
Political
Context
Context

Approx.
Approx. 59
59
years
to
build
years to build
new
new capacity
capacity

Pre-feasibility / Feasibility study


(14 years)

Significant
Significant
environenvironmental
mental
impact
impact

Geographic
Geographic
spread
spread of
of
reserves
reserves

Capital
Capital
Investment
Investment

Avg.
Avg. Entry
Entry
Project
Project Size
Size

Development of
operational mine
(34 years)

Risk to the physical environment and industry workers


Dust mobilization
Acid water
Lead poisoning through solids migration or vagrant gases

Reserves located in developed and


developing countries
No country holds >23% of global reserves

Most lead
production comes
from mixed leadzinc mines
Also gold, silver
or copper

Ramp-up Production
(1 year)
Lead Reserves by Country (%), 2005
1/22/15
1/22/15

1/22/15

1/22/15
1/22/15
1/22/15
1/22/15
1/22/15
1/22/15
1/22/15
1/22/15
1/22/15
1/22/15 1/22/15
1/22/15
1/22/15
1/22/15

Est. Capex for Small Projects


USD

1/22/15

Share of Global
Capacity

2.73%

1/22/15

0.30%

Source: DB Jul 2006, Ivernia Magellan Technical Report Sept 2004, www.xe.com (30/03/2007), Lead the facts (ICON 2001), Monitor analysis
56

1/22/15

Low threat of substitution in basic uses is anticipated

Threat
Threat from
from
Substitution
Substitution

A
A Low
Low
Threat
Threat

LegislLegislation
ation
Nuclear
Nuclear
Waste
Waste
ContainContainment
ment
New
New Applications
Applications

LeadLeadfiberglass
fiberglass
Laminate
Laminate
Electric
Electric
Cars
Cars

Lead-acid batteries currently have no strong substitute


Other options, including new developments of energy cells, do not have the power,
portability or functionality to replace them in critical usage situations (i.e., automotive,
back-up power)
Substitution continues in secondary applications
Plastics in construction, electrical cable covering, cans and containers
Aluminium, iron, plastics and tin in packaging and protective coating

Legislation is reducing use of lead in solders for electronics and structural


applications, due to health concerns
Similarly to transition away from leaded paint and petrol

Ongoing research into titanium canisters with inner layer of lead or lead and plastic
Possible that a one-inch layer of lead could add 880 years to container life

Lead sheeting can be laminated between gypsum and fiberglass to form a superior duct
material
Helps isolate noise and dampen din of machines

Ongoing studies to improve lead-acid battery technology for powering electric cars

Source: Lead Development Association International, DB Jul 2006, Monitor analysis


57

Contents

Overview by Industry
Gold
Copper
Lead
Zinc

58

Supply Chain Overview Zinc


Miners and smelters operate independently
Process
Process

Description
Description

Output
Output

HydroHydrometallurgica
metallurgica
ll Process
Process

Mining
Mining

Ore mined, then


crushed and ground
Mine ore contains
5-15% zinc
To concentrate it,
ore crushed and
ground to obtain
separation from
other minerals
Sulfur removed
Zinc oxide
Obtained
from zinc
sulfide

Elimination of
impurities
Adding zinc dust
Then electrolytic
process
Deposited zinc is
stripped off, dried,
melted and casted
into ingots

Zinc ingots of
different grades
High, 99.95%
Special High:
99.99% zinc

Major
Major Players
Players

Xstrata
Zinifex
Boliden

Pyrometall
Pyrometall
urgical
urgical
Process
Process or
or
Imperial
Imperial
Smelting
Smelting

Production of zinc and


lead metals
IS furnace to
reduce zinc and
lead into metal
Energy intensive
Today only in
Japan, China
and Poland

Lower grade zinc


Impurities to
be removed in
zinc refinery

Korea zinc group


Umicore

Note:
1. Semis producers not included
Source: Credit Suisse Metals and Mining Primer - NA, Monitor analysis
59

End
End Markets
Markets11

Major uses:
Construction (~45%)
To galvanize steel
Heating, roofing
Transport
Automotive
manufacturers use
galvanized steel and
zinc alloys
Consumer and industrial
usage (~30%)
E.g. refrigerators and
industrial equipment

Industry Past Performance


Zinc has been a very volatile industry
However Total Investment Return appears to be stable

Financials of Single Metal Producers, Zinc Industry (19982005)


9 Years

5 Years

Last Year

Standard
Deviation
(9 Years)

EBIT Margin

15.1%

7.5%

13.0%

12.8%

ROA

5.1%

3.7%

10.3%

4.1%

ROIC

6.0%

4.7%

13.3%

4.9%

TIR

28.2%

28.9%

62.7%

69.8%

Avg. Financials

Note: 1. Used Financials for Zinifex, Volcan Cia Minera 2. Total Investment Return = (Market Price Year End + Dividends Per Share + Special Dividend
-Quarter 1 + Special Dividend-Quarter 2 + Special Dividend-Quarter 3 + Special Dividend-Quarter 4) / Last Year's Market Price-Year End - 1) *100
3. TIR data available for 1998 onwards, EBIT Margin for 1996 onwards
Source: A User Guide to Commodities (Deutshe Bank, July 2006), Thomson One Banker, Monitor analysis
60

Industry Outlook
In the future, Zinc will most likely remain a volatile industry
Demand
Demand and
and Supply
Supply
Dynamics
Dynamics

Solid demand sustained


by growth in industrial
production
Primarily driven by
Chinese growth; backed
up by 5 year
government plan
Supply lagging demand;
rebalancing in the longer
term
China to balance its
Zinc position in the
medium term
Uncertain supply for LT
needs
Inventories at all time low
levels

High Prices to Normalise in


the Medium Term

Rivalry
Rivalry

Exogenous
Exogenous Factors
Factors

Highly fragmented
competitor base
Top 10 players make up
45% of total
Sustained industry
landscape in the
medium term
Slope of cash cost curve
decreasing
Structural production
cost increases
Slope decreasing

Very Fragmented Industry

61

Low to medium barriers


for new entrants
Environmental concerns
Low threat of substitution
Galvanizing cost
advantage
New usage opportunities
Hydrogen economy
applications

Low Threats, Opportunities


and Barriers to Entry

Zinc demand is highly correlated with global industrial production

Spread by Product (2005)


1/22/15

1/22/15

Zinc Demand and Global Industrial Production Growth (1990-2008E)

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15
1/22/15

Spread by End-Market Application (2005)


1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15

1/22/15
1/22/15

Source: RBC Capital Markets estimates, Brook Hunt, Credit Suisse, Monitor analysis
62

Accordingly, it is expected to show a steady growth, yet at a lower pace


compared to the recent past

Total Refined Zinc Demand (2001-2010F)


CAGR 20012005: 4.7%

CAGR 20062010: 2.7%

Kt

Source: RBC Capital Markets estimates, Brook Hunt, Credit Suisse, Monitor analysis
63

China is driving global demand for Zinc


Chinas continued focus on expanding galvanized-steel-intensive
heavy infrastructure is likely to continue for at least the next 5
years
Zinc Consumption by Location Across Time (20012010E)

Other
Russia
India
Americas

CAGR
2001
2005
4.4%
2.4%
2.7%
8.0%
0.4%

CAGR
2005
2010E
3.4%
1.3
0.7%
4.5%
1.3%

Other Asia

3.6%

2.5%

Europe

-1.6%

1.9%

China

16.9%

6.9%

Total

kt

Source: RBC Capital Markets Estimates, Brook Hunt, Morgan Stanley Research, Monitor analysis
64

With high supply growth rates, by 2010 China is expected to have balanced
its Zinc position
India is likely to become a net exporter by 2010 (+ 130 ktpa)
CAGR
2001
2005

Total Refined Zinc Production by Location across Time (20012010E)


12,569

9,672

9,894

10,132

Total

2.0%

4.5%

Other

5.6%

9.0%

-4.7%
-4.6%
6.3%

7.9%
0.6%
16.0%

L. America

2.4%

1.6%

N. America

1.1%

1.2%

Other Asia

2.8%

1.6%

-2.4%

-1.1%

6.4%

8.7%

Russia
Oceania
India

10,065

kt

Europe

32%

Long
Long Term
Term
Supply
Supply is
is aa
challenge
challenge

Few

giant zinc deposits to fill the gap of


depleting reserves
Century (600,000tpa) and Antamina
(280,000tpa) not enough to fill this gap

Pressing need to discover


new quality zinc deposits
to cover LT needs

Source: RBC Capital Markets Estimates, Brook Hunt, Morgan Stanley Research, Monitor analysis
65

CAGR
2005
2010E

China

A demand/ supply balance, even though tight, is expected in the medium


term
China effect plays a stabilizing role on both, demand and supply
side
CAGR
2001
2005

Supply and Demand, Refined Zinc (20012010E)

kt

CAGR
2005
2010E

Supply

2.0%

4.5%

Demand

4.4%

3.4%

Total Global Refined Zinc Supply

Total Global Refined Zinc Demand

Past
Past

Future
Future

Demand
Demand

2001-2005
Driven by Asian markets (90% of total increase)
Asian economies steady growth
First signs of recovery in Japanese, American and
European economies
Expectations of decline of LME and other inventories

2007
Consumption
constrained by supply
Low y-o-y growth rate
2%, vs 6% in 2006
and 5% in 2008

Supply
Supply

2004-2005
Supply shortage
Slowdown of production
Depletion of inventories
Negative effect on 2005 and 2007 consumption levels

2007-2009
Increasing production
Higher capacity utilization, due to strong demand and high prices
Vulnerability to disruptions
Appearance of new Chinese small mines because of high prices

Source: RBC Capital Markets Estimates, Brook Hunt, Scotia Capital, Monitor analysis
66

2009-beyond
Demand setting back at
trend rates
WW consumption to
rebound
China the key driver

The tight balance will keep up high prices in the short term
The long term prices expected to converge to USD 1,300/t levels
Zinc Price Trends and Forecast
High prices to constrain demand
due to lack of available supply

RBC Estimate

Bloomberg
Estimate

USD/t

Supply shortage starting 2004 has


determined sharp price increases
(commodity cycle is currently high)

Decreasing price forecasts as


supply/demand rebalance, but long
term price expected to be higher than
2001 level, driven by the strong
momentum of Chinese demand

Source: RBC Capital Markets Estimates, Brook Hunt, , Bloomberg Terminal, Monitor analysis
67

High prices in the near term are also confirmed by all-time-low inventory
levels
Inventories expected to remain well below critical levels until 2010
which will support prices at historically high levels
Total Zinc Inventory and Price
Forecast

USD /
lb

Weeks of
Consumption

1991

1993

1995

1997

1999

2001

Source: RBC Capital Markets Estimates, Brook Hunt


68

2003

2005

2006

2007

The average zinc cash cost is expected to rise and the curve to flatten in the
medium term
This is likely to increase the competitive pressure in the industry

Zinc Cash Cost Curve (2006E)

Zinc Total Curve (2006E vs 2009E)

1,650

1,650
2009E
2006E

Century
Red Dog

1,100

1,100

USD/t

Antamina

USD/t

Antamina

San Cristobal
Project

Century

550

550

Weighted
Average

Red Dog

0
Cumulative Percent of Global Production

Cumulative Percent of Global Production

Source: RBC Capital Markets Estimates, Brook Hunt


69

Zinc is a highly fragmented industry (compared to other base metals)

M&A Activity

Mined Volume Market Shares1

Xstrata acquired Asturiana de Zinc (6th


biggest producer) - 2000
Pasminco, 2nd biggest producer in 2000:
restructure process, leading to Deeds of
Company Arrangement ("DOCAs")
Establishment of Zinifex Limited,
currently 3rd biggest producer
Xstrata (7th biggest producer in 2005)
acquired Falconbridge (5th biggest
producer) - 2006

However,
Rate of consolidation stable over time
New entrants
Capacity increase by juniors

Note:
1. 2000 market shares approximated from BNP Paribas 2. 2005 market shares from Deutsche Bank
Source: Deutsche Bank, USGS, BNP Paribas, Company Annual Reports, Monitor analysis
70

Low to medium entry barriers not likely to rule out new entrants
Est. Capex for Small Projects

USD m

Capex
Capex Intensity
Intensity

1/22/15

1/22/15

Share of global
capacity

0.75%

0.15%

World Zinc Reserves (2006)


Australia
15%

Political
Political Context
Context

Other
27%%

Mexico
4%
Canada
5%
Peru
7%

Environmental
Environmental
Impact
Impact

China
15%
USA
14%

Balanced geographical distribution


of reserves

Local experience and networks may


be necessary for operating in the
emerging economies
Kazakhstan, South America,
China

Kazakhstan
14%

Discharge of toxic substances into natural streams leading to heavy metal contamination

Source: Morgan Stanley Research Estimates, Credit Suisse Metals and Mining Primer NA, Monitor analysis
71

No major threats to the use of Zinc are expected given its cost advantage in
galvanizing
New technologies will provide some opportunities for growth
New
New technologies
technologies

Hydrogen economy applications for both transport (automotive) and energy sector represent most promising growth areas

Over other forms of corrosion protection for steel


Strong cost-performance ratio

Cost
Cost advantage
advantage of
of
galvanizing
galvanizing

Zinc is shielded from


significant substitution
as its end-uses are not
substantially replicable
by other materials

50% of global zinc consumption (accounted for


by galvanizing) strongly supported
China expansion in heavy infrastructure (steel
intensive) result in strong galvanizing demand

Current high prices ( > $US2,500/mt) may


result in some limited substitution, estimated at
Ca. 200ktpa for galvanizing
Ca. 100ktpa for die-casting
Ca. 25ktpa for semis

Galvanizing substitution is
mostly recoverable when
Zn prices return to more
normal levels (after a 1 2 year lag time)

Global Zinc Production and Substitution Impact (2003-2012)

kt

Low
Low threat
threat of
of
substitution
substitution

Global Zn
Consumption
Substitution Impact
(Short-lived)

Source: DB, RBC Capital Markets, Zinifex Morgan Stanley Asia Pacific Summit (November 2006), Brook Hunt, Monitor analysis
72