Goldfield Perumí.2013

The Mining Economy: How to grow grow, not shrink shrink, the pie
NICK HOLLAND Chief Executive Officer

September 2013
Resource Nationalism is entirely rational

Definition: Countries efforts to extract maximum value and developmental impact for their people from their finite natural resources
Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013
.particularly as stated under fiscal pressure
$30T
80% 60 40
20
10
20 0
2003 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 2011 Source: World Bank
But Resource Nationalism is viewed badly Resource nationalism

a key threat to mining
Bl kR k, Oct BlackRock O t 2011
Miners encounter the hard rock of resource nationalism

The Telegraph (UK), Nov 2011
Resource nationalism plagues the oil market market

Wall Street Journal, Mar 2012
Resource nationalism: the usual suspects or a wider problem?

RigZone, May 2012
Resource nationalism is miners number one fear and major threat to global security
Mining.com, December 2012
Resource Nationalism #1 on mining risk list

Ernst & Young, Aug 2011
Canadas veto of Petronas deal raises spectre of resource nationalism

Daily Telegraph (UK), Oct 2012
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
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 sector Source: IHS Global Insight; Mine: PwC Mine 2013
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 I In reality, lit margins i and d returns t 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)
Margins in the gold sector are under pressure

At first glance, it might appear theres a bigger slice to take Our industry has made this pie look more attractive than it is I In reality, lit margins i and d returns t from mining are in decline
Gold industry example: margins in rapid decline

Margins M i under d greater t pressure as gold price has since fallen as low as $1300/oz
Gold price 80 60
US$/oz $1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2006 2007
Margin 100%
Avg cash costs

40
Avg capex
% margin (RHS) 2008 2009 2010 2011 2012 Q1
20 0 2012 Q2
Source: Streetwise reports website
as they are for the Top 40 global miners

At first glance, it might appear theres a bigger slice to take Our industry has made this pie look more attractive than it is I In reality, lit margins i and d returns t from mining are in decline Similarly the top 40 mining companies are experiencing serious financial troubles
%
35 30 25 20 15 10 5 0
Gearing ratio Return on capital employed Net profit Return on Equity
Top 40 Mining Giants - financial distress
2007
2008
2009
2010
2011
2012
Source: PWC Review of global mining trends 2012
Industry is not self-funding at present

At first glance, it might appear theres a bigger slice to take Our industry has made this pie look more attractive than it is I In reality, lit margins i and d returns t from mining are in decline Operating cash flows not sufficient to cover investments
Note: Data based on PwC Mine 2012 analysis of top 40 companies Source: IHS Global Insight; Mine: PwC Mine 2013 ;Note: Gearing ratio = Net borrowings / Equity
10
Investors are deserting the sector

At first glance, it might appear theres a bigger slice to take Our industry has made this pie look more attractive than it is I In reality, lit margins i and d returns t from mining are in decline Operating cash flows not sufficient to cover investments Equity model is at breaking point
11
Industry is halting new investments

At first glance, it might appear theres a bigger slice to take Our industry has made this pie look more attractive than it is I In reality, lit margins i and d returns t from mining are in decline Operating cash flows not sufficient to cover investments Equity model is at breaking point Mining investments under threat A harsh environment with new projects increasingly being delayed and cancelled
Sources: Factiva, Literature search
12
and cutting back on existing operations

At first glance, it might appear theres a bigger slice to take Our industry has made this pie look more attractive than it is I In reality, lit margins i and d returns t from mining are in decline Operating cash flows not sufficient to cover investment Equity model is at breaking point Mining investments under threat Existing mines under pressure from price decreases and cost increases; greater taxes will aggravate the problem
150 jobs go as Tanami closes mine

The West Australia\n April 24, 2013
South African miner Amplats closes shafts and cuts jobs

BBC Jan, J 2013
Xstrata's Sinclair mine in WA to close, follows closure of nearby Cosmos

Dow Jones - May 2, 2013
Brunswick Mine closes Bathurst-area operation: Unemployment hit 20.2% 20 2%

CBC News - May 1, 2013
Sibanye Gold to Cut 1,110 Jobs to R t Return B Beatrix ti W West t to t P Profit fit
Bloomberg May 29, 2013
13
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 In reality, reality margins and returns from mining are in decline Operating cash flows not sufficient to fund investment Equity model is at breaking point Mining investment is under threat The revenue pie shows just how little there is still to take
Note: Data based on PwC Mine 2012 analysis of income statements from top 40 companies but scaled up to represent the whole mining sector Source: IHS Global Insight; Mine: PwC Mine 2013
14
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 fi fiscal lt take k jeopardise further investment The result: loss of jobs and longterm government revenues
15
No development without growth

GDP growth is essential for governments targeting effective development and economic transformation.
Increased political stability/ certainty
Increased investor confidence
+
Capacity to deliver t d li
+
Increased investment
Development + Economic Transformation
Increased growth
Countries must both g grow AND develop p. Growth OR development is untenable

Source: Brenthurst Initiative, 2003
16
Growing the right pie: Mining GDP

GDP growth is essential for governments targeting effective transformation Mining GDP is the right pie, especially for resource-rich g countries developing In 2010 the economies of 40 countries were driven to a significant extent by mining: Metals and Minerals accounted for >25% of exports
BRICS 2010
Direct mining share of GDP 2% ($200B)
7 other resource rich countries 2010
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)
17
The Mining Economy has large multiplier effects

GDP growth is essential for governments targeting effective transformation GDP is the right pie, especially for resource-rich developing countries Mining punches above its weight with its GDP multiplier effect
1
GDP contribution of mining (indexed)

3 0.9 2.6
1.0
Mining has boosted RSA GDP by y R468 0.3 billion or 18.7% of 0.4 total GDP
~2.5x for South Africa ~3.2x for Ghana ~1.7x in Peru
Direct 1st round Indirect Induced Total direct mining Impact impact impact and indirect effect of mining
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
18
Job and livelihood multiplier effect is significant

GDP growth is essential for governments targeting effective transformation GDP is the right pie, especially for resource-rich developing countries Mining punches above its weight with its GDP multiplier effect One direct mining job supports one indirect job and one impacted job in SA, one job supports on average around nine dependents
Number of jobs and livelihoods supported by each mining worker 30 4 14 20
~27x for S. Africa ~28x for Ghana
27
10
~18-19x in Peru
1 0
Mine worker Direct Secondary Informal Total sector direct and impact and tertiary indirect sectors impact
Note: Peru study based on five mines and Ghana study based on analysis of one mine Source: The Rise of Resource Nationalism report (South African Institute of Mining and Metallurgy, February 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); IDC and Quantec study
19
Benefits go beyond jobs

GDP growth is essential for governments targeting effective transformation GDP is the right pie, especially for resource rich countries Mining punches above its weight with its GDP multiplier effect g in mining g creates j jobs, , Investing investment and uplifts communities Multiplier benefits go beyond jobs
Capital inflows Skills / education Catalyst for other industries
Technology transfer
Infrastructure
Community development
20
Growing mining activity has a dramatic impact

Mining impact on GDP
GDP growth is essential for governments targeting effective transformation GDP is the right pie, especially for resource-rich developing countries Mining punches above its weight with its GDP multiplier effect Investing in mining creates jobs and uplifts communities A 1% increase in mining in just 12 countries creates ~$8-9B of value in Year 1
BRICS and 7 resource rich countries
Direct impact of mining =3% 5% ($340B)
2.6x
Full multiplier effect of mining 7% % = 12% ($850B)
Impact of a 1% increase in mining activity ti it in i BRICS and d 7 other th resource rich countries after:
One Year
$8-9B
Source: ICMM: Minings contribution to sustainable development October 2012; Indirect effect estimated at 2.5X 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; First figure is weighted average; Second figure is numerical average
21
Mining impact on GDP

GDP is the right pie, especially for resource-rich developing countries GDP growth is essential for governments targeting effective transformation Mining punches above its weight with its GDP multiplier effect Investing in mining creates jobs a uplifts communities A 1% increase in mining in just 12 countries creates ~$8-9B of value in Year 1 compounded over several years it is even more significant i ifi t
BRICS and 7 resource rich countries
Direct impact of mining 3% = 5% ($340B)
2.6x
Full multiplier effect of mining 7% % = 12% ($850B)
Impact of a 1% increase in mining activity ti it in i BRICS and d 7 other th resource rich countries after:
One Year
Five Years
Ten Years
$8-9B
$45B
Source: ICMM: Minings contribution to sustainable development October 2012; Indirect effect estimated at 2.5X 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; First figure is weighted average; Second figure is numerical average
>$90B
22
Growing GDP through mining is the win - win pie

Growth leads to more investment The result: increased employment, development and national GDP growth How do we get there? It has been done before
23
Peru acted to continue growth

The Humala government recently enacted similar policies to continue growth: Proactively engaged with industry and communities in a full review of all the options E Ended d d up with ith a pragmatic ti focus on rent taxes Seeks to ring-fence benefits for regions and projects linked to mining to help address sensitive local community issues
GDP at PPP (indexed to 100)
800
Direct mining was 9% of GDP in 2010
CAGR (80-12)
600
Peru
1990:Fujimores govt govt. liberalisation
6%
400
2011: Humala elected
200
1980s: Period of hyperinflation
0
0 0 5 5 5 0 20 0 19 8 19 8 19 9 19 9 20 0 20 1 0
Source: World Bank data, March 2013
24
Botswana partnered to grow the pie

Strong long term partnership to ensure mutual success 40-year y partnership p p to drive benefits for both Botswana and Debswana Limited government involvement in production Government invested in social transformation including infrastructure and education
1,000
GDP at PPP (Indexed to 100)

2,000
CAGR (80-12)
Direct mining was >33% of GDP in 2010

1,500
Botswana
10%
500
SADC Index
6%
0
19 80 19 85 19 90 19 95 20 00 20 05 20 10
Note: SADC region GDP per capita has been calculated as total regional GDP / population. Countries included in the index are Angola, Botswana, Dem. Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe. Data excludes Zimbabwe before 2000 and it also excludes Namibia before 1990 Source: IMF data, March 2013
25
Starting point: Ore bodies

Long term collaborative partnerships (Miners, Governments, Labour, Communities Dev. Communities, Dev Agencies) Agencies) leading to more investment The result: increased employment, development and GDP growth
______________________________________
Rising Ri i costs t of f mining. i i 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?

26
Starting point: Ore bodies
1. They cant be moved, changed or replaced
2. Development is expensive and inherently risky with long lead times
3 Development has a major impact on 3. communities and the environment
27
What can you do with them?
You either have ore bodies or you dont
If you have them and theyre economically viable, environmentally sound and socially acceptable, acceptable develop them
Determine full socioeconomic viability by taking the potential economic multiplier impact into account
However, this is not possible in the absence of investors
28
But how do investors feel about the sector today
Equity investors have become frustrated as miners have spent their money y with little to show for it Cash, not growth, is king: Miners are cancelling new projects and closing existing mines: returns just do not warrant the risk Thi This leaves l ore bodies b di undeveloped d l d that th t are economically i ll and d socially i ll viable (when the GDP multiplier is taken into account) Moreover, the full potential benefit from mining on communities and the environment i t is i not t always l being b i addressed dd d or delivered d li d
29
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 2 Recognise that both a mining licence and a social 2. social licence licence are required to operate 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
30
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
Ring-fenced benefits to drive value in host communities and beyond

31
Example: Development of local suppliers at Cerro Corona

2013-2014 Establish the foundation
To adjust GFLC's information system to be able to identify local suppliers in our system and in large contractors' systems To identify competitiveness gaps of local suppliers To prepare a training and technical assistance i t plan l for f local l l suppliers li in i order to improve competitiveness To select an external operator to execute a training and technical assistance plan for local suppliers
2015-2016 Pro-active and innovative

To guarantee competitiveness gaps are closed for 75% of local suppliers To ensure 50% of local suppliers have at least 3 important clients To ensure over 50% of local suppliers' employees are from the di t i t of H district Hualgayoc lg o To replace suppliers from Lima for competitive suppliers from Hualgayoc and Cajamarca
2017-2018 Long-term sustainability

To ensure 75% of GFLC's local suppliers are competitive and p their sales and profits. p improve To promote a cluster of mine suppliers in Cajamarca to contribute to the development of mining in the Region and create local jobs.
Total purchases from local suppliers 2012: US$31m (14% of total) Estimated Cost: US$500,000 over next two years
32
How to align national interests with investors

The role of governments 1. Seek collaborative partnerships with miners who are better able to operate and develop ore bodies and who are good social partners 2 P 2. Put t in i place l stable, t bl competitive titi tax t systems t that allow equity investors to earn competitive riskweighted returns, with governments benefitting increasingly from the upside 3 Ensure full impact of mining is taken into 3. account when assessing economic viability and social acceptability (requires a good understanding of the multiplier benefit as well as the full costs of mining) 4. Create a climate conducive to responsible investment: provide policy certainty (and then stick to the rules); develop infrastructure and the broader economy; partner to manage input costs; help miners to procure locally 5. Adopt a use it or lose it approach (within an overall win:win context) to ensure all socially acceptable/ economically viable ore bodies can be developed p
33
Not easy to do, but the upside is vast
Challenge Partnership p
Mitigation Working g and collaborative p partnerships p between miners, governments, labour and communities Balance long-term growth strategies with short-term fi fiscal li imperatives ti Total transparency in reporting individual asset performance Long-term commitments from governments not to change the rules of the game Simple rules of the game that align interests and can be applied to all assets
Balance
Transparency
Certainty
Simplicity
34
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 Result: loss of jobs, a shrinking pie` pie
Governments who recognise investors need fair risk-weighted returns Miners who recognise the need to deliver full potential socio-economic returns Labour / Communities who temper demands to what can be delivered/ sustained
35

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The Mining Economy: How to grow grow, not shrink shrink, the pie

NICK HOLLAND Chief Executive Officer

Resource Nationalism is entirely rational

.particularly as stated under fiscal pressure

2003 2004 2005 2006 2007 2008 2009 2010 2011

But Resource Nationalism is viewed badly Resource nationalism

Miners encounter the hard rock of resource nationalism

Resource nationalism plagues the oil market market

Resource nationalism: the usual suspects or a wider problem?

Resource Nationalism #1 on mining risk list

Canadas veto of Petronas deal raises spectre of resource nationalism

What is the disconnect?

Too many fingers in the wrong pie

Mining industry is going through tough times

Margins in the gold sector are under pressure

Gold industry example: margins in rapid decline

Avg cash costs

Source: Streetwise reports website

as they are for the Top 40 global miners

Top 40 Mining Giants - financial distress

Source: PWC Review of global mining trends 2012

Industry is not self-funding at present

Investors are deserting the sector

Industry is halting new investments

Sources: Factiva, Literature search

and cutting back on existing operations

150 jobs go as Tanami closes mine

South African miner Amplats closes shafts and cuts jobs

Xstrata's Sinclair mine in WA to close, follows closure of nearby Cosmos

Brunswick Mine closes Bathurst-area operation: Unemployment hit 20.2% 20 2%

This is why mining earnings is the wrong pie

This is the lose - lose pie

No development without growth

Increased investor confidence

Development + Economic Transformation

Countries must both g grow AND develop p. Growth OR development is untenable

Growing the right pie: Mining GDP

7 other resource rich countries 2010

The Mining Economy has large multiplier effects

GDP contribution of mining (indexed)

~2.5x for South Africa ~3.2x for Ghana ~1.7x in Peru

Job and livelihood multiplier effect is significant

Benefits go beyond jobs

Growing mining activity has a dramatic impact

BRICS and 7 resource rich countries

Direct impact of mining =3% 5% ($340B)

Full multiplier effect of mining 7% % = 12% ($850B)

Mining impact on GDP

BRICS and 7 resource rich countries

Direct impact of mining 3% = 5% ($340B)

Full multiplier effect of mining 7% % = 12% ($850B)

Growing GDP through mining is the win - win pie

Peru acted to continue growth

2011: Humala elected

Source: World Bank data, March 2013

Botswana partnered to grow the pie

GDP at PPP (Indexed to 100)

Direct mining was >33% of GDP in 2010

Starting point: Ore bodies

How do we grow the win - win pie?

Starting point: Ore bodies

1. They cant be moved, changed or replaced