Australia from a Global Investor’s Perspective

Gold, Copper and Nickel

26 June 2013

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Contents 1. Macro-economic environment

2. Commodity markets

- Gold

- Copper

- Nickel

3. What are the options ?

4. Inbound investors

- China

- Japan

- India

5. Summary

Macro-economic environment

With commodity markets under stress due to falling prices, weakening demand and miners

struggling to add value in a high cost environment, it’s no surprise to see mining stocks

underperform in the market relative to other sectors

Tough times for mining equities

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05/10 08/10 11/10 02/11 05/11 08/11 11/11 02/12 05/12 08/12 11/12 02/13 05/13

Total Returns Comps by Global Industry

Mining Retail Telecoms Real Estate Healthcare Banks Aerospace Technology

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05/10 08/10 11/10 02/11 05/11 08/11 11/11 02/12 05/12 08/12 11/12 02/13 05/13

Diversified Miners 3 year Total Shareholder Returns

BHP Billiton Rio Tinto Anglo American Xstrata

Source: S&P Capital IQ

3. Areas of Diligence Focus What are the miners saying about the global economy

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Cautious statements regarding future growth, cost reduction is critical and potential M&A

activity due to compelling valuations

• “The global economy continues to strengthen, despite broader imbalances and underlying volatility”

(Andrew Mackenzie)

• Global growth is expected to underpin commodities demand, risks of persistent commodity oversupply

have been “overstated” particularly given the slowdown in capital projects

• “A cyclical slowdown, not the end of the secular change in demand”

• “Chinese fiscal policy easing and clear statements by the US Federal Reserve regarding their intention

to continue stimulating the US economy have boosted confidence in these economies and are

supportive of a marginally improved environment for commodity demand in 2013”

• “Cheap resource acquisition remains as a key driver of value for the industry. You can build great

companies from quality acquisition acquired cheaply”

• “Industry focus has changed with companies now focusing on maximising returns, reducing costs,

cutting capital and driving productivity”

BHP Billiton

Xstrata

Newcrest

3. Areas of Diligence Focus The current situation

• Mining companies have been negatively impacted by multiple factors:

- falling commodity prices

- high AUD / USD exchange rate

- increasing capital and operating costs

- inability to access capital – equity or debt

• However, we have seen mining companies start to proactively address these factors through:

- cost optimisation strategies

- geographic diversification

- divestment of non-core projects

- an increase in mergers and acquisitions

Explorers, developers and producers have all been negatively impacted in recent

times, however, they are rising to the challenge

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Commodity markets

3. Areas of Diligence Focus Gold

• The gold price has declined sharply over the last twelve months – due to lessening fears of the collapse

of the Eurozone and inflation, as well as strong growth in US equity markets and recent statements

made by the former US Reserve Bank chairman

• However, we need to keep perspective as 13 years ago the gold price was US$400 per ounce.

• Whilst it was tough back in those days, the cost environment was very different – as the mining boom

was still in its infancy and the AUD/USD exchange rate was weaker.

• Gold producers are shifting focus to cost optimisation and M&A activity to provide value for their

shareholders.

Apart from falling gold prices, the sector has been impacted by high costs and a

strong AUD / USD exchange rate

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1,400

1,600

1,800

2,000

Gold prices (USD/ounce)

3. Areas of Diligence Focus Copper

• The market appears to be getting more bearish on copper’s short term outlook – as underlying supply

demand fundamentals appear to be changing.

• Mine capacity growth and improving ore grades are leading to a big increase in global copper

inventories.

• Producer margins are under pressure as costs rise and copper prices decline.

• We are also seeing increased interest in M&A activity in copper producers in Africa.

• However, there are positives – the Chinese government’s commitment to accelerate infrastructure

projects provides a solid function for copper demand going into 2014 and the improving US automotive

sectors is also a positive demand story.

Copper prices have been declining, however, there are potential catalysts for

growth in the medium term

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15.55 15.97 16.05 16.03 16.75 17.14 18.38 19.42 19.85 21.23 22.05

-2%

0%

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4%

6%

8%

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

World Copper Mine Production

World Copper Mine Production (mt) y-on-y % change

3. Areas of Diligence Focus Nickel

• Nickel prices have fallen significantly over the last two years.

• Nickel inventories are also increasing significantly which will have a dampening effect on any potential

upside in nickel prices.

• Nickel consumption in emerging economies is expected to continue to grow faster than developed

economies as a result of growth in stainless steel production – however, this is based on China’s

demand for nickel pig iron which is lower on the nickel cost curve.

Nickel inventories have growth significantly which will have a dampening effect on

any potential upside in nickel prices.

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LME-Nickel Cash U$/MT

What are the options ?

Whilst it is a tough market to raise capital, there are multiple options for advanced

exploration companies, developers and producers

Option Potential Considerations

Equity raising • Value / dilution

Debt / project financing • Access / terms

External / inbound investors • Value / multiple structures / access to financing

100% divestment / merger of equals • Value / best interests of shareholders

Other forms of financing

• Commodity streaming / royalty arrangements

Divesting non-core projects • Value

What are the options ?

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Inbound investors

3. Areas of Diligence Focus China

• There has been a significant number of transactions in recent times by Chinese SOEs and private

enterprises in the gold, copper and nickel space. This is not a new phenomenon and is likely to continue

in the short to medium term.

• The key drivers of acquisitions / investments have included:

- securing supply

- strategic considerations

- financial returns.

• Chinese investors generally focus on the following criteria when considering M&A:

- low cash costs

- large resource / long life of mine

- development certainty

- supply of offtake

- % of acquisition – typically control

Chinese investors have a strong track record of M&A in the gold, copper and nickel

space in Australia

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3. Areas of Diligence Focus Japan

• There has been increasing M&A activity from Japan as its economy continues to improve.

• Japanese trading houses have a long history of acquiring interests in Australian oil and gas, iron ore,

coal (thermal and coking) and copper assets.

• The key driver of acquisitions / investments in the mining space is to secure supply via offtake – this is

generally through the acquisition of minority interests at the equity or asset level or via JV agreements.

• Board representation is less important relative to Chinese and Indian investors.

• Copper is still a key focus of Japanese trading houses, however, we have not seen significant interest in

the gold / nickel space.

The key driver of acquisitions / investments in the Australian mining sector is to

secure supply

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3. Areas of Diligence Focus India

• India is a relatively new entrant to the mining sector in Australia, and the focus has mainly been in the

coal sector

• India is one of the world’s largest consumers of gold. In 2012, India dominated the world market with

27% of the total global demand.

• This has not translated into Indian companies investing in / acquiring gold projects in Australia or

overseas.

• This is fundamentally different from the coal space where the focus has been on securing supply of long

life coal projects / long term offtake agreements. Gold can still be readily acquired on the spot market.

• Copper is still of interest to the Indian majors, however, the focus appears to have shifted to Africa.

• We have seen limited interest in the nickel space.

Indian corporates have focused on the thermal / coking coal space in Australia to

satisfy a shortage of domestic coal supply

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Summary

3. Areas of Diligence Focus Where to from here ?

• The long term trend is growth but short term dynamics are interfering:

- commodity prices have been falling

- tight access to favourable terms for capital

- higher capital and operating costs

- high exchange rate – AUD/USD.

• As capital markets have deteriorated, equity and debt investors have been largely opposed to financing

advanced exploration and development assets.

• For the vast majority of junior and mid-tier companies, this means that their best recourse for financing is

to look to Asia for sources of capital.

Set an unwavering course: tactics may change but strategy should not

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