© Orica Limited Group

Gold Outlook

David Thurtell, Market Intelligence Lead, (AusPac & Asia), Orica Limited 27 June 2013

2

Executive Summary 2

Price Moves 4

Demand 7

Supply 17

Outlook 23

Appendix 26

Contents

CONFIDENTIAL: Information contained in this document is strictly confidential.

3

Executive Summary

• Structural shifts in the 13 years to 2012 all pushed gold higher. Gold became more accessible to retail investors (through ETFs and Commodity Indices), hedging became unfashionable, the US$ fell, there was a recycling of petro-dollars into gold (as OPEC revenues surged), and central banks gave greater transparency to their sales programmes and then turned from being sellers to being buyers. The Global Financial Crisis then raised safe-haven demand, and the associated Quantitative Easing programmes by the major central banks also stimulated gold demand.

• The (apparent) end of the Eurozone sovereign debt crisis and a realization that central bank Quantitative Easing programmes were ending (and were not inflationary anyway), has seen a portfolio shift out of gold over the past eighteen months. This shift accelerated sharply in April 2013.

• A large amount of gold has hit the market in a very short space of time, just as India (the world’s largest gold-consuming nation) has moved to restrict purchases.

• The gold price cycle high has definitely been seen. As the price slumps, supply and demand responses are now starting to act as automatic stabilizers.

• High-cost mines now have negative margins. High-cost mine closures and further reviews are being announced. Global mine output could fall by around 15% over the medium term (concentrated in Australia and Africa), and new projects and expansions delayed/shelved.

• We expect gold to trade a $1,000 to $1,750/oz range over the rest of the decade.

4

Price Moves

5

• From just under $1,800/oz in early October 2012, the gold price has dropped by about $500/oz.

• A number of factors appear to have driven the falls:

› Investors finally appear to have given up on the expectation that Quantitative Easing programmes (by the major central banks) will result in an inflation breakout. Moreover, some of the QE programmes themselves are set to be wound back.

› Some investors feared reserve sales by European countries under financial distress.

› Equity market strength, particularly in the U.S. and Japan, has drawn funds out of the gold market. A rising US$ is also hurting gold demand.

› Indian restrictions on gold imports and on bank lending for gold have hurt demand in the world’s largest gold consuming nation.

› Poor ‘technical’ or charting signals triggered ‘sell’ recommendations.

Prices fall sharply

0

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25

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45

50

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

GOLD VS SILVER USD/oz USD/oz

Silver (rhs)

Gold (lhs)

Source: Bloomberg

6

• Taking the currency impact out of the US$ gold price – by expressing it in EUR’s – shows that the safe-haven factor was a strong influence in August 2011. The (EUR) gold price surged, while ‘risk’ assets sold off.

• The sell-off in gold in 2013 has come as US equity prices rise and the US Federal Reserve signals the end of its bond buying programs.

The safe-haven factor has been influential

60

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100

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120

130

140

60

70

80

90

100

110

120

130

140

Jan-11 May-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13

Chinese Equities

S&P 500

Oil Price

1 Jan 2011 = 100 1 Jan 2011 = 100

AUD/USD

EUR GOLD

'RISK' PRICES VS GOLD

Source: Bloomberg

Copper

7

Demand

8

• From over 3,000 tonnes in the few years before the turn of the century, jewellery demand fell by more than 1/3

to around 2,000 tonnes per year in more recent years.

• Industrial demand was more resilient than jewellery demand. Typically, industrial demand comes from areas

that are less price-sensitive. That is because gold is more likely to be a small component of the overall

product, unlike gold jewellery.

• The sharp price fall so far in 2013 should stimulate jewellery and industrial demand, lending support to the

price.

Gold fabrication demand has been hurt by the price gains of the past decade

0

450

900

1350

1800

0

180

360

540

720

1995 1998 2001 2004 2007 2010

INDUSTRIAL DEMAND VS GOLD PRICE

Industrial demand (lhs)

Price (rhs)

$/oztonnes

550 tonnes

450 tonnes

0

300

600

900

1200

1500

1800

0

600

1200

1800

2400

3000

3600

1995 1998 2001 2004 2007 2010 2013

JEWELLERY DEMAND VS GOLD PRICEJewellery

demand (lhs)Price (rhs)

$/oztonnes

2500 tonnes

2000 tonnes

3100 tonnes Source: World Gold Council

9

• India and China account for 50-66% of world jewellery demand. In India, gold has large cultural significance,

with bridal dowries often coming in the form of a large amount of gold jewellery.

• Their growing middle classes are becoming wealthier, and jewellery is a de facto investment vehicle.

• Any slowdown in those economies (such as we are now seeing) will affect gold demand.

India and China dominate jewellery demand

0

20

40

60

80

100

120

140

160

180

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

Jewellery Demand

CHINESE GOLD DEMAND

Investment Demand

tonnes

Source: Thomson Reuters GFMS

0

100

200

300

400

500

600

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

R.O.W

India

China

WORLD JEWELLERY DEMANDtonnes

Source: Thomson Reuters GFMS

10

• Indian demand has been hurt by the (Rupee) price rises of the 2000-12 period. The USD gold price rose

AND the Indian Rupee has declined on FX markets. From almost 300 tonnes per quarter in late 2010 and

early 2011, demand has declined by 25%.

• To prevent a further deterioration in the current account deficit, in June the Indian government moved to try

to restrict imports of gold, by raising import duty to 8% (up from the current 1% at the start of 2012), and by

moving to restrict Indian banks from lending for the purpose of gold purchases. In July, the Government ruled

that importing banks and agencies must set aside 20% of imported gold for re-export.

Indian gold demand has been hurt by the price gains of the past decade

10

20

30

40

50

60

70

80

90

100

0

40

80

120

160

200

240

280

320

360

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

INDIAN GOLD DEMAND VS RUPEE GOLD PRICE

Rupee Gold Price (rhs)

Indian Gold Demand (lhs)

tonnes Rupee/oz

Source: Thomson Reuters GFMS

-35

-30

-25

-20

-15

-10

-5

0

5

10

Dec-93 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13

INDIAN CURRENT ACCOUNT DEFICITUSD billion

Source: Bloomberg

11

• After the Global Financial Crisis (GFC), bar and ETF demand surged, as investors sought safe-havens. As a

result of the GFC, some managers had their mandates changed to only allow physically-backed gold

holdings. This strategy aimed to avoid the counterparty risk associated with futures contracts.

• Since the peak in November 2012, the combined holdings of Comex longs and ETFs has fallen by 1000

tonnes (33%). Bar sales have probably matched that, but the data is 7 weeks away. The $64 question now is

‘how much more gold will ETF and bar investors sell?’ The risk is that Comex players go heavily short.

• So the equivalent of over half a year’s mine supply has hit the market in a short space of time. This has

happened at the same time that Indian gold consumers have had large obstacles placed in front of them.

Investment demand has been important - The rally saw bar demand dwarf ETF demand

0

300

600

900

1200

1500

1800

2100

0

500

1000

1500

2000

2500

3000

3500

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

GOLD HOLDINGS - ETF & COMEXtonnes

ETF holdings (lhs)

Comex Fund Long (rhs)

Sources: CFTC, ETF Securities

USD Gold Price (rhs)

price

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2000 2002 2004 2006 2008 2010 2012

ETF's and related Products (tonnes)

Bar and coin hoarding (tonnes)

Gold Price (USD/oz)

BAR,COIN, ETF DEMAND VS GOLD PRICE

Source: World Gold Council

12

• Until 2009, turning points in the US$gold price

had coincided very closely with turning points

in the US$.

• The mooted ending of the US Federal

Reserve’s Quantitative Easing programme

has sparked a rush back into the US$.

• That is, the ‘carry’ trade is ending, and so the

US$ will enjoy a resurgence.

• The resurgence of the US$ has adverse

implications for gold demand.

Is gold a decent currency hedge? Probably...

0.80

0.95

1.10

1.25

1.40

1.55

1.70

1.85

2.00

2.15

2.30

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Jan-72 Jan-77 Jan-82 Jan-87 Jan-92 Jan-97 Jan-02 Jan-07 Jan-12

US$ GOLD PRICE VS US DOLLARUS$/OZ SDR

Turning points

Turning points

US$depreciation

US$ gold price (lhs)

US$ TWI (rhs)

Source: Bloomberg

13

• The inflation outbreaks associated with the OPEC oil crises of

the 1970s saw spikes in the gold price. Many investors came

to regard gold as an inflation hedge. We think the recycling of

petro-dollars into gold by Middle Eastern countries – where

gold has widespread historical acceptance – could have been

of more significance. Each major oil spike has seen Middle East

money flow out of the Western banking system.

• Since the early 1980s, there have been many periods when

gold and inflation have gone in opposite directions.

• The sell-off in global bond markets sparked by the likely end of

U.S. Quantitative Easing has coincided with a sell-off in gold.

• Bonds are an alternate investment to gold. Both have safe-

haven characteristics but, unlike gold, bonds have a yield.

• Bond yields have seen their lows, and are likely to climb further

over the next few years, as central banks stop buying bonds

and the world economy recovers.

Is gold a decent inflation hedge? Probably not...

0

4

8

12

16

-

500

1,000

1,500

2,000

Feb-70 Feb-76 Feb-82 Feb-88 Feb-94 Feb-00 Feb-06 Feb-12

GOLD PRICE VS US INFLATION RATE

US$ gold price (lhs)

US core inflation(rhs)

annual % changeUS$/oz

OPEC IOPEC II OPEC III

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

USD GOLD VS REAL 10 YR BOND YIELDSUSD/oz %

Real 10-year bond yield

(rhs inverted)

USD Gold Price (lhs)

Source: Bloomberg

14

• The 1999 agreement by a group of European central banks to

restrict reserves sales to 400 tonnes per year (and subsequent

agreements capping sales at 500tpy), gave much greater

transparency to the gold market and sparked the start of a 13-

year rally in the gold price.

• Over the past decade, centrals banks collectively have turned

from being sellers of 500 tonnes per year to being buyers of

that amount: safe-haven demand against the macroeconomic

and sovereign debt backdrop. Also, to guard against the impact

of currency de-basement that Quantitative Easing programmes

could create.

• The question from here is, will central banks follow the pack

and sell, or take advantage of lower prices to increase their

holdings? Central banks hold gold for liquidity and

diversification purposes, less so because they think the price

will rise. We don’t believe central banks were participants in

the recent sell-off, in fact, some appear to have bought.

Central bank transactions

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1500

1800-750

-500

-250

0

250

500

7501995 1998 2001 2004 2007 2010

OFFICIAL SECTOR SALESVS GOLD PRICE

Sales/Purchases (lhs)

Price (rhs)

$/oztonnes

Source: World Gold Council

15

• Emerging nations may seek to raise the amount of gold to

levels typical of the West (around 15%). Where they can,

they usually buy domestic mine output, in order to help

domestic job creation.

• Is the push to have the same level of reserves as Western

countries valid? Some argue that Western countries

accumulated their gold reserves merely by accident: as a

by-product of the gold standard and the Bretton-Woods

exchange rate/monetary policy regime.

• Countries such as the U.S. have a policy of not selling their

(8,300 tonnes) of gold reserves. Countries like China,

Japan and India have relatively low official holdings of gold.

(India holds around 17,500 tonnes in private hands.) If

China’s central bank holdings were to get to 15% of

reserves (the world average), it would need to buy 9,236

tonnes of gold.

Central bank transactions

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

US CBGA Signatories

China India Other World

GOLD AS % OF TOTAL RESERVES

Gold

Other

Source: World Gold Council

16

• ETFs gave ‘mums and dads’ an alternate way of

investing in gold than buying gold equities.

• ETFs were cursed by miners as having ‘stolen’ their

investment dollar. But miners should have applauded

ETFs, since they helped the gold price, thus raising

miner’s revenues and making it easier for miners to

raise finance.

• The variation in the amount of funds invested in gold

mining companies doesn’t correlate closely with the

moves in ETF holdings, suggesting ETFs didn’t have

a significant effect on miner’s ability to raise equity.

• Gold equities have leverage to the gold price, where

most gold ETFs don’t. Unlike gold mining companies,

ETFs can’t discover new deposits nor buy gold

opportunistically by taking over ‘cheap’ peers.

ETF’s impact

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450

1990 1993 1996 1999 2002 2005 2008 2011

GOLD MINERS' MARKET CAPITALIZATION VS ETF HOLDINGSmn

ouncesmn

ounces

ETF holdings (lhs)

Price-deflated market capitalization (rhs)

17

Supply

18

• Gold mine production has been very slow to respond to

the rise in the gold price over the 11 years to 2012.

Early in the period, there could have been doubts in the

minds of mine management, both about how far the gold

price could rise and the sustainability of the rise. And

projects take time to bring to the market.

• Typical to any mineral commodity boom over the past

200 years, miners are now criticised for having paid too

much, both to acquire existing mining targets and/or to

expand their own operations. Large write-downs are now

happening.

• These write-downs and the declining gold price are

making it extremely difficult for gold mining companies

and explorers to raise equity or issue debt. (LONG

TERM BULLISH)

Mine production – slow to rise, but likely not slow to fall

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900

1200

1500

1800

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500

1000

1500

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2500

3000

1995 1998 2001 2004 2007 2010 2013

MINE PRODUCTION VS GOLD PRICE

Mine production (lhs)

Price (rhs)

$/oztonnes

2600 tonnes

2850 tonnes

2500 tonnes

Source: World Gold Council

19

• The global gold hedge book has diminished to almost nothing

in recent years, as shareholders pressured mining company

management (in the late 1990s and the early 2000s) to give

them upside exposure to the gold price. This repurchasing –

of roughly 340 tonnes per year (tpy), from 2001 until 2009 –

was a significant source of gold demand. Since there are

virtually no hedges left to buy back, this source of ‘demand’

can no longer provide a positive impetus for the gold price.

• As a consequence of the de-hedging, virtually every

significant gold miner is therefore now fully exposed to the

price downside.

• Miners could have been reluctant to hedge (or buy ‘puts’) until

they were sure the medium-term price highs had been set. If a

large number of miners now decide (or are forced by their

banks) to start hedging and/or buy puts, there could be

significant downward pressure on the price (BEARISH).

Gold miner hedging - will it make a comeback?

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13

Source: Societe Generale/GFMS Hedge Book

OUTSTANDING GLOBAL HEDGE BOOKtonnes

20

• The current consensus is to include the cost of

sustaining output (by making new discoveries)

as part of costs.

• The ‘total cash plus sustaining cost’ curve

shows a clear indication of mine profitability. At a

price of $1,400/oz, 98% of production capacity is

cash positive. At $1,200/oz, 92% of capacity is

cash positive. A further fall in prices to $1,050

will cause 17% of capacity to become cash

negative, resulting in corresponding mine

closures if this price fall is sustained.

Gold mining costs - the vast majority of mines are still profitable

21

• If the price sustains recent falls, significant output cutbacks are likely amongst high-cost producers (BULLISH).

Projects are being shelved, which also supports the price longer term. Based on the price falling to a low of

$930/oz in 2017 and then rebounding to $1,300/oz, GFMS are expecting mine production to fall by 1/6 over the

next decade to about 2,400 tonnes. That will remove about 500 tonnes from annual mine supply.

• Countries/regions likely to be most heavily affected include Australia and Africa.

Gold mining cuts - how big could they be/where might they occur?

0

40000

80000

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160000

0

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80000

120000

160000

Sep-95 Sep-98 Sep-01 Sep-04 Sep-07 Sep-10 Sep-13

GOLD MINE SUPPLY

Australia

South Africa

Source: WBMS

kg per quarter

Peru

ChinaUnited States

Russia

kg per quarter

Indonesia

1,200

1,000900800700

1,100

500

200

1,800

100

600

1,700

0250 2,0001,7501,500

1,6001,5001,4001,300

1,2501,0007500 500

400300

Tota

l Cas

h C

ost (

US

$/oz

)

Paid gold (t)

Europe

CIS

Asia

NA

LATAM

Africa AusPac

GOLD MINING BY REGION AND COST

22

• Scrap gold supply is positively related to the gold price and to

financial and economic crises. Scrap supply spiked during the

Asia Crisis of 1998, and then rose gradually during the 2000-

2007 period, as rising prices encouraged jewellery holders to

trade-in their pieces. The GFC saw scrap supply surge.

• However, in the 2010-12 period, scrap supply declined despite

further rises in the gold price.

• Scrap supply may have also been adversely affected by an

easing of the global financial crisis.

• These factors suggest that the surge in scrap has run its

course.

• India’s recent restrictions could affect scrap supply.

• The recent slump in the gold price will therefore hurt scrap

supply (BULLISH). If sustained, the US$500/oz drop could cut

scrap supply by 300-400tpy.

Gold scrap supply - likely to cushion the fall

0

300

600

900

1200

1500

1800

0

300

600

900

1200

1500

1800

1995 1998 2001 2004 2007 2010

SCRAP SUPPLY VS GOLD PRICE

Price (rhs)

$/oztonnes

Scrap supply (lhs)Price (rhs)

tonnes

1700 tonnes

1000 tonnes

700 tonnes

Asia crisis

Source: World Gold Council

23

Outlook

24

• Mine and scrap supply cuts in the short term, combined with a recovery in investor demand (High Scenario)

– 10% cutback in mine supply and 400 tonne fall in annual scrap supply. At the same time, investor interest recovers, as QE takes longer to end than currently expected. Central banks raise their buying, with China an official buyer.

› Price bottoms at $1,200/oz and steadily recovers to $1,500 by mid 2015.

• Modest mine and scrap supply cuts in the short term, and investor holdings start to steady (Base Case)

– Mine production falls by 5-10%. Investor holdings steadily level out, as QE ends. Central banks purchase around 250 tonnes annually. Indian Government takes no further action to limit purchases. Scrap supply drops sharply.

› Price bottoms at $1,000/oz and then recovers to $1,350 by mid 2015.

• Minimal mine cuts and scrap holds up in the short term, investor support drops sharply further (Low Scenario)

– Mine cutbacks are minimal and scrap supply holds up. Investors continue to liquidate their holdings. Funds go significantly short on Comex. ETF holdings fall to 1,500 tonnes. Central banks cease buying. India heightens buying restrictions.

› The price falls to $800 – eventually causing large mine closures – before staging a rebound to $1,200 by mid 2015.

Scenarios through to 2015

25

• Jewellery demand should enjoy a resurgence on the cheaper price. A $500/oz price cut could boost demand

by 300tpy over the medium term. (BULLISH). Indian demand is the greatest uncertainty in the short term.

• Industrial demand should enjoy a minor benefit from the lower price. A $500/oz price cut could boost demand

by 50tpy. (MILDLY BULLISH)

• The end of the Eurozone sovereign debt crisis and the (prospective) end of Quantitative Easing in the US,

UK and Japan is bad for gold. Investor demand has turned (probably more 1,500 tonnes have been sold),

and will only recover when the price outlook stabilises. (BEARISH)

• Central banks are likely to remain buyers of gold. Perhaps the rate of accumulation will be lower, maybe

settle at 250 tonnes per year. (NEUTRAL TO BEARISH)

• Mine supply (currently 2,850tpy) is likely to fall noticeably over the coming few years. The miners occupying

the 90th percentile on the cost curve have costs of about $1,150/oz. Some forecasters see output cuts of 400

tonnes per year, which seems plausible to us (BULLISH). But some miners may restart hedging (BEARISH).

So far, the evidence is that they have used the price weakness to buy hedges back rather than sell.

• Scrap supply is likely to fall sharply over the coming year or so, perhaps by 400 tonnes per year. (BULLISH)

Likely to trade a $1,000-1,750 range to 2020

The long-term outlook has definitely deteriorated, but the price should hold $1,000. We project gold to hold in a $1,000-1,750/oz range over the rest of this decade.

26

Appendix

27

Cost Curve Price Scenarios

750500

1,200

250

900

800

1,800

1,700

700

1,600

600

1,500

500

1,400

400

1,300

300

1,100

200

100

00 2,000

1,000

1,7501,5001,2501,000

Tota

l Cas

h C

ost (

US

$/oz

)

Paid gold (t)

800, LOW scenario

1,150, 90th percentile1,200, HIGH scenario1,239, Current price

1,000, BASE scenario

GOLD MINING BY REGION AND COST

Asia

CIS

Europe

LATAM

Africa

NA

AusPac

28

High Cash Cost Gold Mines

Mine Country Paid Gold (t) Total Cash Costs ($/oz)Laverton (Barnicoat) Australia 3.66 1,122.8

North Mara Tanzania 6.23 1,126.5

Edna May (Westonia) Australia 2.69 1,136.9

Oyu Tolgoi Project Mongolia 5.00 1,137.5

Sunrise Dam Australia 7.57 1,138.0

Paddington Australia 4.91 1,150.3

Carosue-South Laverton Prj Australia 4.29 1,154.1

Meadowbank Project Canada 9.49 1,159.2

Wiluna Australia 4.27 1,175.1

Bogoso (including Prestea) Ghana 6.72 1,183.7

Morila Mali 4.39 1,185.3

Syama Restart Mali 6.14 1,233.2

Segovia Project Colombia 4.67 1,259.5

Lihir Papua New Guinea 24.79 1,278.1

Hidden Valley (Morobe) Prj Papua New Guinea 8.42 1,306.1

Csh 217 China 5.00 1,310.9

Cadia Hill Australia 3.80 1,377.8

Buzwagi Tanzania 5.55 1,395.3

Tasiast Project Mauritania 8.66 1,779.5