SPEAKER: Allan Trench, mining author, and academic (UWA/Curtin)

LOCATION: Perth

DATE: October 2012

ASX INVESTMENT TALKS

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© Copyright 2012 ASX Operations Pty Limited ABN 42 004 523 782. All rights reserved 2012.

Risk and value in the mining sector

PERSONAL PERSPECTIVES ON

RISK & VALUE FOR AUSTRALIA’S

NEXT GENERATION MINING

COMPANIES

Allan Trench*

ASX Investment talks, October 2012

* Centre for Exploration Targeting (UWA, Curtin), also Consultant CRU Group

Allan Trench* & Dan Packey^

Risk & Value Framework

23 mineral markets

52 company case studies

Plus Appendices on -

Country Risk

Recent ASX IPOs

A-Z of Commodity Demand

* Centre for Exploration Targeting (UWA, Curtin), also Consultant CRU Group

^ Energy & Mineral Economics Graduate School of Business, Curtin University

Currently A Tough Equity Market for

Mineral Sector Juniors

Ten Minerals Equity Trends for 2012

1. Gold to stay in favour

2. Fewer ‘lumpier’ mineral resources IPOs

3. Strained supply infrastructure to support bulk commodities

4. Base metals to follow the global economy

5. Seeds of the coming Zinc price squeeze (well beyond 2012)

6. Speciality commodities will test investor patience

7. Mergers and acquisitions to flourish

8. ‘Greener’ uranium to gradually return to favour

9. The market is primed for discovery – cash awaits on the sidelines

10. It won’t be different this time

Source: A Trench 2012 http://www.asx.com.au/resources/investor-update-newsletter/201202-hot-commodities-in-2012.htm

Getting Beyond “It’s a stock-pickers’ market” and “Market Volatility to continue”

“Of all those expensive and uncertain projects, however, which bring bankruptcy upon the greater part of the people who engage in them, there is none perhaps more perfectly ruinous than the search after new mines”.

Adam Smith 1776 “The Wealth of Nations” p.562

Personal Perspectives on Value & Risk

“When one man alone meets the expense for a long time of a whole mine, if good fortune bestows on him a vein abundant in minerals, or in other products, he becomes very wealthy. If, on the contrary, the mine is poor and barren, in time he will lose everything that he has expended on it. But the man who, in common with others, has laid out his money on several mines in a region renowned for its wealth of metals, rarely spends it in vain, for fortune usually responds to his hopes in part”.

Agricola 1556 “De Re Metallica”

Also pictured H.M. Markowitz 1952 Author of “Portfolio

Selection” Journal of Finance

Personal Perspectives on Value & Risk

• The „win and lose‟ of the metals & mining sector

results from the interplay of value & risk factors • The mining industry knows (often all too well) the

many illusions of apparent value & risk • Industry research on value & risk (e.g. equity

analysis) can act to perpetuate the many illusions that exist

• Fundamental research on exploration value

(accretion) & risk (recognition & mitigation) needs to identify & explain the illusions – and then determine the reality.

Personal Perspectives on Value & Risk

• Demand-Side (Market) Risks

– Macro level (economic analysis)

– Micro level (specific metal consumption analysis)

• End use analysis

• Substitution/Demand-Side Technology Development

– Investment „demand‟ types (New)

• Supply-Side Risks

– Primary Supply

• Mine Production (& Supply-Side Technologies)

• Project Delivery

• Exploration Outcomes

– Secondary Supply

• Scrap (new scrap, old scrap)

• Stocks (visible, „invisible‟).

A Traditional Mineral Economics

Perspective on Industry Risk & Value

Still Recovering from the GFC

80

84

88

92

96

100

104

-6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50

index of OECD IP

Current Mid-1970s

Early 1980s

Early 2000s

Early 1990s

months after cyclical peak

Chinese metal consumption growth as a proportion of all metal growth

2000 - 2010

Ch

ine

se

gro

wth

as %

glo

ba

l

gro

wth

The Chinese Economy is Pivotal

Source: J Johnson (Beijing) CRU Group 2011

Fo

reca

st U

S$

/MT

Investment Factors $2,560 Copper Fundamentals $5,850

Source: CRU Copper Price Perspective, March 2012

www.crugroup.cn www.crugroup.com

Supply

Demand

Inventory

Short term

Traders

Hedge

Funds

Index

Funds

Total

Price

Market

Shortage China

Balance

Energy Currency

MID - 2012

COPPER

EXAMPLE

China still driving prices in 2012:

Investment factors are also key

• Commodity- „Type‟

– Convex value accretion

– Concave value accretion

• Company- „Type‟

– Explorer/Developer/Miner Risk & Pay-offs

– Corporate Risk Profile

• Portfolio Effects

– Mine/Project: Single-Asset Risk

– Exploration: Scale/Risk/Spend

We need to look beyond Traditional

Mineral Economics Perspectives on Value

& Risk in the Markets

Convex minerals:

• Gold

• Tin

• Copper

• Nickel sulphide

Concave minerals:

• Rare Earths

• Graphite

• Nickel laterite

• Vanadium

• Rare earths!

Source: A. Trench, 2011; J Sykes 2011

Commodity-Type Influences Exploration

Value

• Project/Technical risk versus. Corporate Risk

– Important to understand the difference between the two:

Project Risk

Corporate Risk

Incre

asin

g r

isk

Exploration Feasibility Development Production De-commissioning

Corporate Risks are Critically Different to

Technical Risks

Managing the Corporate

Risk ‘Peak’ :

• Single Asset Risk

• Financing mix

• Ownership Structure

• Asset Performance

• External factors

• Commodity Price

• Capital Markets

• Rare earths!

CRU Group Metals Outlook to 2016:

Still More Hot Than Not

• Recovery from the Global Financial Crisis creeps forward:

Commodity demand functions tracking global recovery

• Overall „Global Warming‟ of commodity prices to at least 2016

• Selective commodity price „winners‟ across each of the LME

metals sector, steel raw materials, precious metals and

fertilisers/chemicals/speciality metals sectors.

Palladium, Tin, Zinc, Uranium, Alumina,

Aluminium, Platinum, Lead, Nickel, Met Coke

Vanadium, Phosphate DAP, Cobalt

Iron Ore

Manganese, Gold, Copper, Coking Coal

Potash, Ammonia, Urea, Silver, Sulphuric Acid,

Sulphur

CRU Commodity Heat Chart for 2016: Many Winners CRU expects to see diverging prices trends, some significant rises while others languish

Hot

> 15%

Warm

5% to 15%

Cold

-5% to 15%

Freezing

< -15%

Mild

0% to 5%

Cool

0% to -5%

* 2016 annual average price forecast (nominal $ or benchmark)

versus 2012 Q2 average actual prices

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