1

• Current Developments

MINING

Surviving the Global Financial Crisis in the Mining Sector

Session 3 – Understanding the Key Indicators of Your Company’s Ability to Weather the Storm

February 28, 2009

2© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Agenda

• Introductions• Broader industry and recent events• Fundamentals of Demand & Supply • Cash is king• Mergers and acquisitions• Forecasting and scenario planning• Stakeholder discussions• Find your dance partners• Mining M&A levels• Recent deals

3© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

The broader industry and recent events

• Surviving the short-term problems will be trickier for some.• Base metals have been more negatively impacted than precious

metals.• Junior exploration and development companies will be starved of

capital.• High cost producers in an environment of declining prices.• Many companies have halted production and have begun to defer

investment.

4© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Not all are created equal

• Stocks measured by the Toronto Stock Exchange’s S&P/TSX global mining index were down 40% for 2008.

• Companies with poor liquidity bore the brunt of the decline.

• Prices for base metals such as zinc, copper and nickel are well off their highs.

• Over priced a year ago or under priced today?

Source: Capital IQ

Market capitalizations now versus one year ago

Canadian based company Metal/mineral

Market cap one year ago

(CAD $millions)

Market cap currently

(CAD $millions)

% decrease

POTASH CORP OF SASKATCHEWAN Potash 48,000 33,100 31%

CAMECO CORP Uranium 13,750 7,529 45%

DENISON MINES CORP Uranium 1,702 323 81%

FIRST QUANTUM MINERALS LTD Copper 5,803 1,931 67%

EQUINOX MINERALS LTD Copper 3,112 1,090 65%

IVANHOE MINES LTD Copper-gold 4,087 1,544 62%

QUADRA MINING LTD Copper-gold 980 233 76%

TECK COMINCO LTD-CL B Copper-zinc 15,885 2,462 85%

HUDBAY MINERALS INC Copper-zinc 2,499 814 67%

LUNDIN MINING CORP Copper-zinc-nickel 3,778 399 89%

FNX MINING CO INC Nickel 2,581 352 86%

5© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Demand & Supply

• Assuming companies can survive the next 18 to 24 months, there remains reason for optimism in that the market fundamentals of supply and demand still line up very well for the mining industry.

• Companies that display best practices will emerge from this downturn prepared to capitalize on upcoming opportunities.

6© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

• Once China’s GDP = Japan’s, it will demand 3x the amount of copper and 8x the amount of nickel consumed today

Demand & Supply

9

Source CRU, Global Insight

0

10

20

30

40

50

60

70

China Japan S. Korea Taiwan

Intensity of Copper Consumption2007Per Capita Cu Consumption (lbs)

Source AME, Global Insight

2x

4x

7x

0.0

5.0

10.0

15.0

20.0

25.0

China Japan S. Korea Taiwan

Intensity of Nickel Consumption2007

Per Capita Ni Consumption (lbs)

7x 8x

14x

4.6 MM tcopper consumed 330 k t

nickel consumed

7© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

• It takes 7 and 9 years to bring a major mining project from discovery to production

-Increasingly, this timeline is being extended due to infrastructure constraints and development bottlenecks

• This, combined with the poor exploration expenditure in the 1990s and early 2000s, means that significant new supply of many commodities will not be available until the next decade

Demand & Supply

7

0 1 2 3 4 5 6 7 8 9

Source Morgan Stanley estimates

Discovery

Drilling Program

Evaluation/Pre-Feasibility

Feasibility Study

Approval

Funding

Construction/Pre Stripping

Mining

Years

Long Lead Times Delaying New Supply

Typical Project Development Timeline

8© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Cash is king

• The strength of a company’s balance sheet can be measured by management’s ability to preserve cash. Some considerations include:• Currency to use for operations – local currency or US dollars• Where is your cash?• Hedging strategies for foreign exchange and interest rates• Functional currency determination• Working capital management – collect customer payments quicker, stretch

suppliers and minimize inventory• Capital commitments• Minimize commitments, renegotiate contracts and actively defer potential

contingent liabilities beyond the short-term• Refinance or reposition parts of the company for sale• Going concern

9© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Mergers and acquisitions (1)

• In the last five years, acquisition strategies focused on:• Large companies becoming larger, more stable through acquisition• Larger companies were more attractive to shareholders and financiers• Larger companies were better able to launch large-scale projects

• A new tier of “super major” companies (> $100 billion market cap) was created.• The number of deals surged from 2005 to 2007 and the value escalated for the

biggest deals (CAD$1 billion plus) from 8 in 2005 to 25 in 2007.• Rio Tinto set a new top deal bar with its USD$ 43 billion purchase of Alcan.• State-owned mining companies from Brazil (Vale) and China (Jinchuan,

Chinalco, China Minmetals) had a significant influence in restructuring the industry.

10© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Mergers and acquisitions (2)

• In the current economic environment there is even more pressure on mergers and acquisitions.

• Gold companies and base metal companies with large projects in production continue to generate cash flow.

• Middle-tier companies with one or two projects run the risk of being driven into negative cash flow by cost increases.

• Junior exploration and development companies, with no revenue, may face difficulties accessing equity or debt financing.

• To avoid bankruptcy, middle-tier and junior exploration and development companies may need to arrange strategic mergers or other arrangements to raise funds and reduce costs.

11© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Forecasting and scenario planning

• Management of cash flows is becoming more important:• the ability to accurately forecast 18 to 24 months into the future• identify funding shortfalls well in advance• build flexibility into the forecasting process through scenario planning• run cash flow forecasts for each site and jurisdiction, be wary of consolidated

forecasts • consider the tax implications of repatriating cash to the home country• consider the implications of your corporate structure – the lack of tax treaties

between countries and the impact of possible withholding taxes

12© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Stakeholder discussions

• It is increasingly important to keep the various stakeholders informed and limit surprises.

• Stakeholders include local communities, NGOs, environmental advocates and lenders.

• Project suspensions can create new issues where good relations with stakeholders can be a benefit to mining companies.

• Recent example – Hudbay and Lundin.

13© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Find your dance partner

• Sources of funding could come from non-traditional sources such as Russia, Japan and China.

• However, companies must assess the risk of new partners to the ownership and management profile.

14© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Number of mining deals 3

2005 2006 2007 2008

Total number of mining deals1 653 1,054 1,403 1,283

Where the acquiror is Chinese 2 7 22 74 111

Chinese acquiror makes foreign acqusition 6 10 19 17

Foreign target is Canadian 0 2 4 6

Foreign target is American 4 3 5 2

Foreign target is Australian 1 0 3 4

Foreign target is other Asian 0 2 4 3

Foreign target is European, African, Latin American 1 3 3 2

Mining M&A levels

• The mining industry will continue to see high levels of M&A activity, but for different reasons.

(1) Mining defined as Aluminum, Diversified Metals and Mining, Coal and Consumable Fuels, Gold and Precious Metals and Minerals.

(2) Chinese acquiror defined as all entities based in Hong Kong, China, Taiwan and Macau.

(3) Excludes share buy-backs.Source: Capital IQ

15© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Recent deals

• Recent deal announcements• Toshiba lead consortium’s $223 million, 20% investment in Uranium One• Chinalco’s $19.5 billion investment in Rio Tinto• Minmetals $1.7 billion offer for Oz Minerals• Fortescue Metals in talks with Anglo American and China Investment Corp

about possible financing to develop a new mine and a second port• Iamgold’s $140 million acquisition of Orezone (gold deposit in West Africa),

which Orezone could not afford to develop on its own.

16© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

Presenters contact details

Lee HodgkinsonKPMG LLPPartner, Assurance416 777 8351lhodgkinson@kpmg.cawww.kpmg.ca

Jamie SamogradKPMG LLPDirector, Transaction Advisory416 777 3078jwsamograd@kpmg.ca www.kpmg.ca