MYTHS AND FACTS OF CHINESE DEMAND FOR PERUVIAN ORES

Penfold LimitedXXVIII Convencion Minera

Arequipa September 12, 2007

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PRESENTATION OVERVIEW

Penfold Story Chinas Zinc and Lead Outlook Peruvian Trade with China Basic Myths Basic Facts Thoughts for Perus Mining Industry

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PENFOLDS STORY

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Trading Investment Asset Management

OUR BUSINESSES:

China West Mining Chinas largest Zn/Pb miner FerrAus- Fe ore in Western Australia Raw Materials Supply LME Trading and Commodity Equities

SUCCESSES TO DATE:

CHINA ZINC/LEAD OVERVIEW

Mining and Smelting Consumption Trade Balance Regulatory Issues Effect on Peru Conclusions for Peru

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Map.gif

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f

Production 1996-2007 (kmt)

Zinc Mine ProductionLead Mine Production

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HUGE RISE IN ZINC/LEAD MINING PRODUCTION

Major China Zn/Pb Mines Greenfield & Expansions

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GROWING DOMESTIC SUPPLY

> Mines largely in remote, Western China

> Government assisting with infrastructure

> No direct foreign investment

> Small mines are majority of production

CHINA ZINC AND LEAD MINING

Bayanuer

Tumurtin-Obo

Dongshengmiao

Chengzhou

Gacun

Ganluo

Lanping

Dulong

CHINAS ZINC MINING

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CHINAS ZINC LEAD MINING

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CHINAS ZINC LEAD MINING

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CHINAS ZINC MINING INDUSTRY DOMINATED BY SMALLER MINERS

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ANNUAL OUTPUT BY MINE SIZE

Source: CHR Metals Ltd

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f

Zinc Metal Production

HUGE RISE IN ZINC/LEAD METAL PRODUCTION

Production 1996-2007 (kmt)

Lead Metal Production

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DOMESTIC ZINC/LEAD CONCENTRATE PRICING

RISING PRICES LIFTING ALL BOATS, BUT SMELTER SHARE BETTER THAN INTERNATIONAL!

Domestic mines getting higher percentage of metal prices for their concentrates.

But higher prices mean smelters better off and very profitable!

China Domestic Zn/Pb Concentrate Price as % of Metal Price

35%

45%

55%

65%

75%

85%

2000 2001 2002 2003 2004 2005 2006 2007Zinc Lead

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High treatment charges encouraging expansion of smelting.

Emergence of integrated producers. Mining moving to Western China, so smelting

moving to Western China.

Some stranded zinc smelters in eastern China may import more Peruvian concentrates.

ZINC SMELTING EXTREMELY PROFITABLE

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SMELTER EXPANSIONS IN WESTERN CHINA

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SMELTER EXPANSIONS IN WESTERN CHINA

Zinc Smelter: Western ChinaZinc Smelter: Eastern ChinaLead-Zinc Mining Area

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> Competition to Peruvian Mines

> Hard to identify> Huge Freight

Advantage

> Funded by Government-to-Government Deals

CHINAS BORDER REGION GROWING RAPIDLY

PERUS COMPETITIVE POSITION AT RISK!

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Source: Penfold basis China Customs Data

China Imports of Mineral Concentrates (2004-2007)

Source:UBS

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CHINA: MACRO STORY INTACT

TRADE BALANCE

DEMAND LENDING

CONSTRUCTION

CHINA GALVANIZING: GROWING QUICKLYWITH POTENTIAL TO GROW EVEN LARGER

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Source: CHR Metals

China: Annual Galvanized Sheet Capacity/Production by Segment

CHINA ZINC METAL CONSUMPTION: BOOMING!

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CAGR 7.3%

CAGR 12.8%

CAGR 16.2%

CAGR 9.8%

(Ktons, annual)

Source: CHR Metals

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CHINA ZINC METAL CONSUMPTION

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Source: AsianMetal, February 2007

Stronger government enforcement on environmental protection policies such as Shaoguan Smelter shutdown for two months.

More investment into environmental protection facilities at smelters are ongoing which are adding to higher costs.

But still some small furnaces are operating in mountainous areas stimulated by high commodity prices.

Government targeting polluting industries via VAT rebate reductions, restrictions on tolling, export taxes, and quotas.

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ENVIRONMENTAL ISSUES COMING TO BEAR

CONCLUSIONS: ZINC

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Zinc is basically a domestic business with smelters relying on increasing domestic concentrate production to supply booming domestic demand.

Chinas trade position of concentrates and metal driven by swings in the arbitrages between concentrates and metal.

China can move from a net importer to a net exporter of metal, or vice versa, very easily.

China to put ceiling on TCs and floor on zinc prices.

CONCLUSIONS: LEAD

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Increase in lead ingot production slowing due to tight raw material supply.

Export will decrease mainly due to the removal of export tax rebate and export tax.

Domestic concs production continues growing but at a slow pace.

China mine production remains strong. Border Trade is threatening traditional

concentrate imports. Domestic Chinese zinc and lead metal

consumption is continuing very strong. Stricter macro/environmental policies

are starting to change the industry.

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CONCLUSIONS: OVERALL

Peruvian Concentrates are Competitive,BUT: Freight rates, Voyage times, and Financing are hurting competitiveness moving forward.

China is a Long Term Buyer of Peruvian Ores,BUT: Border Trade is starting to cut into Perus market share.

Peru is well positioned to take advantage of Chinas boom in commodity demand,BUT: The vast majority of business is through the trade with no direct business and lack of product control.

Chinese Strategic Investments are Targeting Peru,BUT: Competition is emerging from both China domestic and border regions.

MYTHS AND FACTS OF CHINESE DEMAND FOR PERUVIAN ORES:

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CHINAS EFFECT ON FLOW OF PERUVIAN METAL PRODUCTION

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Source: GS JBWere Research (CRU International; IISI; TEX Report; EIA; BP Statistical Review)

THANK YOU FOR YOUR ATTENTION

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WWW.PENFOLDLIMITED.COM

PERUS COMPETITIVE POSITION AT RISK!CONCLUSIONS: ZINCCONCLUSIONS: LEADCONCLUSIONS: OVERALLMYTHS AND FACTS OF CHINESE DEMAND FOR PERUVIAN ORES:CHINAS EFFECT ON FLOW OF PERUVIAN METAL PRODUCTION