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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 2
.particularly as stated under fiscal pressure

$30T 80%

60
20

40

10
20

0 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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 3
But Resource Nationalism is viewed badly

Resource nationalism Miners encounter the


a key threat to mining hard rock of resource
Bl kR k Oct
BlackRock, O t 2011 nationalism
The Telegraph (UK), Nov 2011
Resource nationalism
plagues the oil market
market Resource nationalism is
Wall Street Journal, Mar 2012 miners number one fear
and major threat to
Resource nationalism: global security
the usual suspects or a Mining.com, December 2012

wider problem?
RigZone, May 2012 Canadas veto of
Petronas deal raises
Resource Nationalism spectre of resource
#1 on mining risk list nationalism
Ernst & Young, Aug 2011 Daily Telegraph (UK), Oct 2012

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 4
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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 5
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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 6
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

IIn 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)

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 7
Margins in the gold sector are under pressure

At first glance, it might appear Gold industry example: margins


theres a bigger slice to take in rapid decline

Margins
M i under
d greatert
Our industry has made this pie pressure as gold price has
look more attractive than it is since fallen as low as
US$/oz $1300/oz Margin
$1,800 100%
IIn reality,
lit margins
i and d returns
t
1,600 Gold price
from mining are in decline
1,400 80

1,200
60
1,000
Avg cash costs
800
40
600
400 Avg capex 20
200 % margin (RHS)
0 0
2006 2007 2008 2009 2010 2011 2012 2012
Q1 Q2

Source: Streetwise reports website

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 8
as they are for the Top 40 global miners

At first glance, it might appear Top 40 Mining Giants - financial


theres a bigger slice to take distress
35
Our industry has made this pie
30
look more attractive than it is
25

%
IIn reality,
lit margins
i and d returns
t 20
from mining are in decline
15

Similarly the top 40 mining 10

companies are experiencing 5


serious financial troubles
0
Gearing ratio Return on capital Net profit Return on Equity
employed

2007 2008 2009 2010 2011 2012

Source: PWC Review of global mining trends 2012

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 9
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

IIn 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

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

IIn 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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 11
Industry is halting new investments

At first glance, it might appear A harsh environment with new projects increasingly
theres a bigger slice to take being delayed and cancelled

Our industry has made this pie


look more attractive than it is

IIn 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

Sources: Factiva, Literature search

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 12
and cutting back on existing operations

At first glance, it might appear Existing mines under pressure from price
theres a bigger slice to take decreases and cost increases; greater taxes
will aggravate the problem

Our industry has made this pie 150 jobs go as Tanami closes mine
look more attractive than it is The West Australia\n April 24, 2013

IIn reality,
lit margins
i and d returns
t Xstrata's Sinclair
from mining are in decline South African miner mine in WA to close,
Amplats closes follows closure of
shafts and cuts jobs nearby Cosmos
Operating cash flows not BBC Jan,
J 2013
Dow Jones - May 2, 2013
sufficient to cover investment

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


operation: Unemployment hit 20.2%
20 2%
CBC News - May 1, 2013
Mining investments under threat
Sibanye Gold to Cut 1,110 Jobs to
R t
Return B
Beatrix
ti W Westt to
t PProfit
fit
Bloomberg May 29, 2013

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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 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
l ttake
k

jeopardise further
investment

The result: loss of jobs and long-


term government revenues

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 15
No development without growth

GDP growth is essential for governments targeting effective development and economic
transformation.

Increased
political stability/ Increased
certainty investor
confidence

+
+
Development
+ Economic
Capacity
+ Transformation Increased
tto deliver
d li
+ invest-
ment

Increased
growth

Countries must both g


grow AND develop.
p
Growth OR development is untenable

Source: Brenthurst Initiative, 2003

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 16
Growing the right pie: Mining GDP

GDP growth is essential for


7 other resource
governments targeting effective BRICS rich countries
transformation 2010 2010
Direct mining share
Mining GDP is the right pie, of GDP 2% ($200B)
especially for resource-rich
developingg countries

In 2010 the economies of 40


countries were driven to a
significant extent by mining:
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)

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 17
The Mining Economy has large multiplier effects

GDP growth is essential for GDP contribution of mining (indexed)


governments targeting effective 3
transformation
0.9 2.6
GDP is the right pie, especially for
resource-rich developing
Mining has boosted
countries
2
RSA GDP by y R468
0.3

Mining punches above its weight


billion
0.4
or 18.7% of ~2.5x for
South Africa

with its GDP multiplier effect total GDP ~3.2x for


1.0
1 Ghana

~1.7x in
Peru

0
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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 18
Job and livelihood multiplier effect is significant

GDP growth is essential for Number of jobs and livelihoods


supported by each mining worker
governments targeting effective
30
transformation 4 27

GDP is the right pie, especially for 14


resource-rich developing 20
~27x for S.
countries Africa

~28x for
Mining punches above its weight Ghana
with its GDP multiplier effect 10 8
~18-19x in
Peru
One direct mining job supports
one indirect job and one impacted 1
job 0
Mine Direct Secondary Informal Total
worker impact and sector direct and
tertiary indirect
in SA, one job supports on sectors impact
average around nine dependents

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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 19
Benefits go beyond jobs

GDP growth is essential for Multiplier benefits go beyond jobs


governments targeting effective Catalyst for other
Capital inflows Skills / education industries
transformation

GDP is the right pie, especially for


resource rich countries

Mining punches above its weight


with its GDP multiplier effect Technology transfer Infrastructure Community development

Investing
g in mining
g creates jjobs,,
investment and uplifts
communities

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 20
Growing mining activity has a dramatic impact
Mining impact on GDP
GDP growth is essential for BRICS and 7 resource rich countries
governments targeting effective
transformation

GDP is the right pie, especially for


resource-rich developing 2.6x Full multiplier
Direct impact
of mining effect of mining
countries 7%
%
= 12%
=3%
5%
($850B)
($340B)
Mining punches above its weight
with its GDP multiplier effect
Impact of a 1% increase in mining
activity
ti it in
i BRICS and d 7 other
th resource
Investing in mining creates jobs rich countries after:
and uplifts communities
One Year
A 1% increase in mining in just 12
countries creates ~$8-9B of value
in Year 1
$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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 21
Mining impact on GDP
GDP is the right pie, especially for BRICS and 7 resource rich countries
resource-rich developing
countries

GDP growth is essential for


governments targeting effective 2.6x Full multiplier
Direct impact
of mining effect of mining
transformation 7%
%
= 12%
3%
= 5%
($850B)
($340B)
Mining punches above its weight
with its GDP multiplier effect
Impact of a 1% increase in mining
activity
ti it in
i BRICS and d 7 other
th resource
Investing in mining creates jobs rich countries after:
a uplifts communities
One Year Five Years Ten Years
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 $8-9B $45B
$45B >$90B
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

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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 23
Peru acted to continue growth

The Humala government GDP at PPP (indexed to 100) CAGR


recently enacted similar policies (80-12)
800 Direct mining
to continue growth:
was 9% of GDP
Proactively engaged with in 2010
industry and communities in a Peru 6%
600
full review of all the options 1990:Fujimores
E
Ended
d d up with
ith a pragmatic
ti govt
govt.
liberalisation
focus on rent taxes
400 2011: Humala
Seeks to ring-fence benefits
elected
for regions and projects
linked to mining to help
address sensitive local 200
community issues
1980s: Period of
hyperinflation
0
0

0
8

1
19

19

19

19

20

20

20
Source: World Bank data, March 2013

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 24
Botswana partnered to grow the pie

Strong long term partnership to GDP at PPP (Indexed to 100) CAGR


(80-12)
ensure mutual success 2,000
Botswana 10%
Direct mining
40-year
y partnership
p p to drive was >33% of
benefits for both Botswana GDP in 2010
and Debswana 1,500

Limited government
involvement in production
1,000
Government invested in
social transformation
including infrastructure and SADC
6%
500 Index
education

0
80

85

90

95

00

05

10
19

19

19

19

20

20

20
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

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

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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 27
What can you do with them?

You either have ore bodies or


you dont

If you have them and theyre Determine full socio-


economically viable, economic viability by taking
environmentally sound and the potential economic
socially acceptable,
acceptable develop multiplier impact into
them account

However, this is not possible in the absence of investors

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 28
But how do investors feel about the sector today

Equity investors have become frustrated as miners have spent their


moneyy 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 nott always
l being
b i addressed
dd d or delivered
d li d

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

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


Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 31
Example: Development of local suppliers at Cerro Corona

2013-2014 2015-2016 2017-2018

Establish the Pro-active and Long-term


foundation innovative sustainability

To adjust GFLC's information To guarantee competitiveness gaps To ensure 75% of GFLC's local
system to be able to identify local are closed for 75% of local suppliers are competitive and
suppliers in our system and in large suppliers p
improve their sales and profits.
p
contractors' systems
To ensure 50% of local suppliers To promote a cluster of mine
To identify competitiveness gaps of have at least 3 important clients suppliers in Cajamarca to
local suppliers contribute to the development
To ensure over 50% of local of mining in the Region and
To prepare a training and technical suppliers' employees are from the create local jobs.
assistance
i t plan
l for
f local
l l suppliers
li in
i di t i t of H
district Hualgayoc
lg o
order to improve competitiveness
To replace suppliers from Lima for
To select an external operator to competitive suppliers from
execute a training and technical Hualgayoc and Cajamarca
assistance plan for local suppliers

Total purchases from local suppliers 2012: US$31m (14% of total)


Estimated Cost: US$500,000 over next two years

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 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. Putt in
i place
l stable,
t bl competitive
titi tax
t systems
t
that allow equity investors to earn competitive risk-
weighted 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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 33
Not easy to do, but the upside is vast

Challenge Mitigation
Partnership
p Working
g and collaborative p
partnerships
p between
miners, governments, labour and communities

Balance Balance long-term growth strategies with short-term


fi
fiscal
l iimperatives
ti

Transparency Total transparency in reporting individual asset


performance

Certainty Long-term commitments from governments not to


change the rules of the game

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

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


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

Resource Nationalism: How to grow, not shrink the pie | Nick Holland | September 2013 35