goldfield perumí.2013

7/27/2019 goldfield perum.2013

1/35


2/35

Resource Nationalism is entirely rational

Definition:

Countries efforts to extract maximum value and developmental impact for their people from

their finite natural resources

2Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013


3/35

.particularly as stated under fiscal pressure

$30T 80%

2060

10

40

0 02003 2004 2005 2006 2007 2008 2009 2010 2011

Central Government Debt ($T) Central Government Debt as % of GDP


Includes the 41 countries who have continuous central government debt data from 2003 to 2011Source: World Bank


4/35

But Resource Nationalism is viewed badly

Resource nationalism

a key threat to mining


a key threat to mining

Miners encounter thehard rock of resource

Miners encounter thehard rock of resource

ac oc , ctac oc , ct



The Telegraph (UK), Nov 2011The Telegraph (UK), Nov 2011

Resource nationalism isResource nationalism isWall Street Journal, Mar 2012

Wall Street Journal, Mar 2012

Resource nationalism:Resource nationalism:

miners number one fearand major threat to

global security

miners number one fearand major threat to

global securitythe usual suspects or awiderproblem?

RigZone, May 2012

the usual suspects or awiderproblem?

RigZone, May 2012

Mining.com, December 2012Mining.com, December 2012

Canadas veto ofCanadas veto of

Resource Nationalism#1 on mining risk list

Ernst & Young, Aug 2011

Resource Nationalism#1 on mining risk list

Ernst & Young, Aug 2011

spectre of resourcenationalism

Daily Telegraph (UK), Oct 2012

spectre of resourcenationalism

Daily Telegraph (UK), Oct 2012



5/35

What is the disconnect?

Too many fingers in the wrong pie

Mining profits

Not growing the right pie The Mining Economy to create jobs, fuel development and attract investment capital



6/35

Too many fingers in the wrong pie

At first glance, it might appear theres a bigger slice to take.


Note: Data based on PwC Mine 2012 analysis of income statements from the top 40 companies but scaled up to represent the whole mining sectorSource: IHS Global Insight; Mine: PwC Mine 2013


7/35

Mining industry is going through tough times

At first glance, it might appear

theres a bigger slice to take

Our industry has made this pie

look more attractive than it is

n rea y, marg ns an re urns

from mining are in decline


Note: Cost per tonne is the weighted average of 8 major gold producers by total ore mined; average grade is the weighted average of 8 major gold producers by total ore mined;

Major Gold producers: AngloGold Ashanti, Barrick, Harmony, Kinross, Goldcorp, Gold Fields, Newmont and Newcrest.Source: Gold Fields company data; annual reports, Condemned to Excellence report(IAMGOLD Corporation, Dec 2012)


8/35

Margins in the gold sector are under pressure



Gold industry example: marginsin rapid decline



$1,800 100%

MarginUS$/oz

arg ns un er grea er

pressure as gold price hassince fallen as low as$1300/oz



1,200

1,400

1,600

80Gold price

Avg cash costs

600

800

1,000

40

0

200

0

20

2006 2007 2008 2009 2010 2011 2012 2012

% margin (RHS)


Source: Streetwise reports website


9/35

as they are for the Top 40 global miners



Top 40 Mining Giants - financialdistress



25

30

%



Similarl the to 40 minin 10

15

20

companies are experiencing

serious financial troubles0

5

Gearing ratio Return on capital Net profit Return on Equity

2007 2008 2009 2010 2011 2012


Source: PWC Review of global mining trends 2012


10/35

Industry is not self-funding at present







O eratin cash flows not

sufficient to cover investments


Note: Data based on PwC Mine 2012 analysis of top 40 companiesSource: IHS Global Insight; Mine: PwC Mine 2013 ;Note: Gearing ratio = Net borrowings / Equity


11/35

Investors are deserting the sector









Equity model is at breaking point



12/35

Industry is halting new investments


theres a bigger slice to takeA harsh environment with new projects increasingly

being delayed and cancelled








Mining investments under threat


Sources: Factiva, Literature search


13/35

and cutting back on existing operations



Existing mines under pressure from pricedecreases and cost increases; greater taxes

will aggravate the problem


look more attractive than it is 150 jobs go as Tanami closes mineThe West Australia\n April 24, 2013




Xstrata's Sinclairmine in WA to close,follows closure ofnearby Cosmos

South African minerAmplats closes

shafts and cuts jobs

sufficient to cover investment

Equity model is at breaking point Brunswick Mine closes Bathurst-area

Dow Jones - May 2, 2013 an,

Mining investments under threat

.

CBC News - May 1, 2013

Sibanye Gold to Cut 1,110 Jobs to


e urn ea r x es o roBloomberg May 29, 2013


14/35

This is why mining earnings is the wrong pie

At first glance, it might appear theres

a bigger slice to take

Our industry has made this pie look

more attractive than it is

,

mining are in decline

Operating cash flows not sufficient tofund investment


Mining investment is under threat

The revenue pie shows just how little

14

there is still to take

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013

Note: Data based on PwC Mine 2012 analysis of income statements from top 40 companies but scaled up to represent the whole mining sectorSource: IHS Global Insight; Mine: PwC Mine 2013


15/35

This is the lose - lose pie

The more everyone takes, the

greater the risk the pie shrinks:

Rising costs of mining

combined with a greater

sca a e

jeopardise furtherinvestment

The result: loss of jobs and long-

term government revenues



16/35

No development without growth

GDP growth is essential for governments targeting effective development and economic

transformation.

Increasedinvestor

confidence

Increased

political stability/certainty

Capacity

Development

+ EconomicTransformation

+

invest-ment

o e ver+

Increasedgrowth

Countries must both row AND develo .


Growth OR development is untenable

Source: Brenthurst Initiative, 2003


17/35

Growing the right pie: Mining GDP

GDP growth is essential for

governments targeting effective

transformationBRICS2010

7 other resourcerich countries

2010

Mining GDP is the right pie,especially for resource-rich

developing countries

Direct mining share

of GDP 2% ($200B)

In 2010 the economies of 40

countries were driven to a

Metals and Minerals accounted

for >25% of exports


Source: ICMM: Minings contribution to sustainable development October 2012;Note: Top 7 countries selected from top 20 countries other than BRICS by 2010 production value and where production values is greater than 5% of GDP.

These include Australia, Chile, Peru, Ukraine, Ghana, Zambia, Papua New Guinea (South Africa included in BRICS)


18/35

The Mining Economy has large multiplier effects



transformation3

GDP contribution of mining (indexed)

GDP is the right pie, especially forresource-rich developing

countries

Mining has boostedRSA GDP by R4682

0.9 2.6

Mining punches above its weight

with its GDP multiplier effect

billion or 18.7% oftotal GDP

11.0

0.4

0.3~2.5x for

South Africa

~3.2x forGhana

~1.7x inPeru

0 Directmining

1st roundImpact

Indirectimpact

Inducedimpact

Total directand indirect

effect ofmining


Source: Facts about mining ins South Africa (South Africa Chamber of Mines, November 2012), The Socio-Economic Impact of Newmont Ghana Gold Limited (Newmont

Ghana Gold Limited, June 2011), The economic contribution of large scale gold mining in Peru (World Gold Council, May 2012). South Africa: IDC and Quantec study


19/35

Job and livelihood multiplier effect is significant



transformation30

4 27

Number of jobs and livelihoodssupported by each mining worker


countries ~27x for S.20

14



~28x forGhana

~18-19x in10 8

One direct mining job supports

one indirect job and one impacted

job 0 Mine

1

Direct Secondary Informal Total

in SA, one job supports onaverage around nine dependents

tertiarysectors

indirectimpact


Note: Peru study based on five mines and Ghana study based on analysis of one mineSource: The Rise of Resource Nationalism report (South African Institute of Mining and Metallurgy, February 2012), The Socio-Economic Impact ofNewmont Ghana Gold Limited (Newmont Ghana Gold Limited, June 2011), The economic contribution of large scale gold mining in Peru (World Gold Council, May 2012);

IDC and Quantec study


20/35

Benefits go beyond jobs



transformationSkills / education

Multiplier benefits go beyond jobs

Capital inflowsCatalyst for other

industries

GDP is the right pie, especially forresource rich countries



Investin in minin creates obs,

Infrastructure Community developmentTechnology transfer

investment and uplifts

communities



21/35

Growing mining activity has a dramatic impact



transformation

BRICS and 7 resource rich countries


countries

Full multiplier

effect of mining

=

Direct impactof mining

2.6x

7%



($850B)

=($340B)

Impact of a 1% increase in mining

Investing in mining creates jobs

and uplifts communities

One Year

ac v y n an o er resourcerich countries after:

countries creates ~$8-9B of valuein Year 1

$8-9B


Source: ICMM: Minings contribution to sustainable development October 2012; Indirect effect estimated at 2.5XNote: Top 7 countries selected from top 20 countries other than BRICS by 2010 Production value and where Production values is greater than 5% of GDP.These include Australia, Chile, Peru, Ukraine, Ghana, Zambia, Papua New Guinea; First figure is weighted average; Second figure is numerical average


22/35

GDP is the right pie, especially for

resource-rich developing

countries

BRICS and 7 resource rich countries

GDP growth is essential forgovernments targeting effective

transformation

Full multiplier

effect of mining

=

Direct impactof mining

2.6x

7%



($850B)

=($340B)

Impact of a 1% increase in mining

Investing in mining creates jobs

a uplifts communities

One Year Five Years Ten Years

ac v y n an o er resourcerich countries after:

countries creates ~$8-9B of valuein Year 1 compounded over

several years it is even more-

22

s gn can

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013

Source: ICMM: Minings contribution to sustainable development October 2012; Indirect effect estimated at 2.5XNote: Top 7 countries selected from top 20 countries other than BRICS by 2010 Production value and where Production values is greater than 5% of GDP.

These include Australia, Chile, Peru, Ukraine, Ghana, Zambia, Papua New Guinea; First figure is weighted average; Second figure is numerical average

45B >$90B


23/35

Growing GDP through mining is the win - win pie

Growth leads to more

investment

The result: increased

employment, developmentand national GDP growth

How do we get there?

It has been done before



24/35

Peru acted to continue growth

The Humala government

recently enacted similar policies

to continue growth:800

(80-12)GDP at PPP (indexed to 100) CAGR

Direct mining

Proactively engaged with

industry and communities in afull review of all the options

600Peru 6%

1990:Fujimores

in 2010

n e up w a pragma c

focus on rent taxes

Seeks to ring-fence benefits400

2011: Humala

elected

.liberalisation

linked to mining to help

address sensitive local

community issues

200

1980s: Period of

0

1980

1985

1990

1995

2000

2005

2010

hyperinflation


Source: World Bank data, March 2013


25/35

Botswana partnered to grow the pie

Strong long term partnership to

ensure mutual success

40- ear artnershi to drive

2,000

GDP at PPP (Indexed to 100)

Botswana 10%

(80-12)CAGR

Direct mining

benefits for both Botswana

and Debswana

Limited government

1,500

GDP in 2010

involvement in production

Government invested in

social transformation

1,000

education 500Index

6%

0

1980

1985

1990

1995

2000

2005

2010


Note: SADC region GDP per capita has been calculated as total regional GDP / population. Countries included in the index are Angola, Botswana, Dem. Republic ofCongo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe. Data excludes Zimbabwebefore 2000 and it also excludes Namibia before 1990

Source: IMF data, March 2013


26/35

Starting point: Ore bodies

Long term collaborative

partnerships (Miners,

Governments, Labour,

, .

leading to more investment

The result: increased

employment, development and

GDP growth

______________________________________

s ng cos s o m n ng.

combined with a greater fiscal

take

jeopardise further investment

The result: loss of jobs, a

shrinking pie


How do we grow the win - win pie?


27/35

Starting point: Ore bodies

1. They cant be moved, changed orreplaced

2. Development is expensive andinherently risky with long lead times

.communities and the environment



28/35

What can you do with them?

you dont

If you have them and theyreeconomically viable,

environmentally sound and

Determine full socio-economic viability by taking

the potential economic,

them

account

However, this is not possible in the absence of investors



29/35

But how do investors feel about the sector today

Equity investors have become frustrated as miners have spent theirmone with little to show for it

Cash, not growth, is king: Miners are cancelling new projects andclosing existing mines: returns just do not warrant the risk

s eaves ore o es un eve ope a are econom ca y an soc a yviable (when the GDP multiplier is taken into account)

Moreover, the full potential benefit from mining on communities and theenv ronmen s no a ways e ng a resse or e vere



30/35

How to align national interests with investors?

The role of mining companies

1. Acknowledge the role mining companies have played historically in exploiting resources and

people

.

3. Develop practices that crack the code on long-term sustainable community development beyond life of mine

4. Engage with government on how to fund infrastructure development, fuel growth in other

sectors and improve social outcomes



31/35

Making progress but more needs to be done

Moving from philanthropy to systematic creation of shared value, recognising the impact of the

GDP multiplier effect

31Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013Ring-fenced benefits to drive value in host communities and beyond


32/35

Example: Development of local suppliers at Cerro Corona

Establish the Pro-active and Long-term

2013-2014 2015-2016 2017-2018

To adjust GFLC's informationsystem to be able to identify localsuppliers in our system and in large

To guarantee competitiveness gapsare closed for 75% of localsuppliers

To ensure 75% of GFLC's localsuppliers are competitive andimprove their sales and profits.

contractors' systems

To identify competitiveness gaps oflocal suppliers

To prepare a training and technical

To ensure 50% of local suppliershave at least 3 important clients

To ensure over 50% of local

suppliers' employees are from the

To promote a cluster of minesuppliers in Cajamarca tocontribute to the developmentof mining in the Region andcreate local jobs.

assistance p an or oca supp iers inorder to improve competitiveness

To select an external operator toexecute a training and technicalassistance plan for local suppliers

s r c o ua gayoc

To replace suppliers from Lima forcompetitive suppliers fromHualgayoc and Cajamarca

Total purchases from local suppliers 2012: US$31m (14% of total)Estimated Cost: US$500,000 over next two years



33/35

How to align national interests with investors

The role of governments

1. Seek collaborative partnerships with minerswho are better able to operate and develop orebodies and who are good social partners

. u n p ace s a e, compe ve ax sys emsthat allow equity investors to earn competitive risk-

weighted returns, with governments benefittingincreasingly from the upside

.account when assessing economic viability andsocial acceptability (requires a good understandingof the multiplier benefit as well as the full costs of

mining)4. Create a climate conducive to responsible

investment: provide policy certainty (and thenstick to the rules); develop infrastructure and thebroader economy; partner to manage input costs;

5. Adopt a use it or lose it approach (within anoverall win:win context) to ensure all sociallyacceptable/ economically viable ore bodies can bedevelo ed



34/35

Not easy to do, but the upside is vast

Challenge Mitigation

Partnership Working and collaborative partnerships betweenminers, governments, labour and communities

Balance Balance long-term growth strategies with short-termsca mperat ves

Transparency Total transparency in reporting individual asset

Certainty Long-term commitments from governments not tochan e the rules of the ame

Simplicity Simple rules of the game that align interests and canbe applied to all assets



35/35

Conclusion: Winning nations will choose the high road

Engage to develop collaborative long term partnerships

increase investment

Drive GDP growth: every 1% increase is worth ~$8-9B in

just one year in just 12 developing countries________________________________

Fight for a share of declining profits

but radically reduce investment in the long term

` ,

Governments who recognise investors need fair risk-weighted returnsMiners who recognise the need to deliverfull potential socio-economic returnsLabour / Communities who temper demands to what can be delivered/ sustained


goldfield perumí.2013

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