Copper Mine Monopoly - How building a copper mine is like buying a house

1. Copper mine monopoly
(or why building a copper mine is like buying a house)
LONDON | BEIJING | SANTIAGO | WASHINGTON | SEATTLE | PHILADELPHIA | RALEIGH | SYDNEY | RIO DE JANEIRO | RHODE ISLAND | PITTSBURGH
John Sykes (Consultant – Copper)
Mining Journal Base Metals Seminar
9th October 2009 31 Mount Pleasant, London
WC1X 0AD UK
Tel +44 20 7903 2000
www.crugroup.com
© 2009 CRU International Limited confidential

2. Copper mine monopoly
Rules of the game
• Why play the game?
• Whilst uncertainty remains in the short term…
• The worst is over…
• And there will be fundamentally higher long term prices
• How to play the game – picking your copper project
• Choose your:
• Region
• Budget
• Risk
• By-products
• Timeframe
• Now select your copper project (if you can)
• How to win the game
• Or how building a copper mine is like buying a house
2/17 Monopoly image courtesy of Hasbro
© 2009 CRU International Limited confidential

3. Short term copper prices in context
Uncertainty remains in the short term…
Historic copper price CRU Analysis Quarterly forecast (unpublished) CRU PRM 2010 Simulation
US$/t US$/lb 5.00
Upside:
10000 Demand recovery 4.50
Investor sentiment
Weak dollar 4.00
High energy prices
8000 100%
3.50
3.00
50%
6000
2.50
0%
Downside: 2.00
4000 Manufacturing stagnates
Market surplus builds 1.50
Chinese demand poor
Chinese imports weak
2000 1.00
0.50
0 0.00
All prices are in real terms – 2009 $
3/17
© 2009 CRU International Limited confidential
Data: CRU Analysis

4. Medium term copper prices in context
The worst is over… (fingers crossed)
Historic copper price CRU Analysis Quarterly forecast (unpublished)
US$/t US¢/lb 5.00
10000 4.50
4.00
8000
3.50
3.00
6000
2.50
2.00
4000
1.50
2000 1.00
Industrialisation + Housing = credit Chinese - Period of = slow global
of China boom bubble stimulus & surplus run recovery 0.50
collapse scrap drought down
0 0.00
All prices are in real terms – 2009 $
4/17
© 2009 CRU International Limited confidential
Data: CRU Analysis

5. Long term copper prices in context
Fundamentally higher long term prices
Historical Copper Price CRU Analysis Quarterly Forecast (unpublished) CRU Analysis Long Term Marginal Cost (unpublished)
US$/t World War 1 US¢/lb 5.00
10000 4.50
Vietnam War 4.00
8000 Oil crisis Rise of
China + 3.50
Iranian commodity
Korean crisis? 3.00
Revolution
War
6000 Great Collapse
Depression of Soviet 2.50
World War 2 Union
Asian Flu 2.00
4000
1.50
2000 Dot.com 1.00
Pre-war Post-war Reconstruction Demand miniaturisation / Rise of China
build up collapse of Europe, Japan substitution & supply & resource 0.50
& USA efficiency improvements scarcity
0 0.00
1972
1900
1904
1908
1912
1916
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
2024
2028
All prices are in real terms – 2009 $
5/17
© 2009 CRU International Limited confidential
Data: CRU Analysis

6. Biggest deposits in Chile and Asia
Average project resource size vs resource grade vs contained copper
1.750 Very high grade deposits typically
found in Africa, but overall do not
contain as much copper as porphyries 10Mt
1.500 in Asia and the Americas. contained
copper
Massive greenfield deposits
generally only found in Asia,
1.250 Africa massive porphyries in Chile are
Resource Grade (%)
Still some relatively large and mostly now brownfields 5Mt
high grade greenfield discoveries contained
in Peru and some in Australasia Asia copper
1.000 Chile
Australasia
0.750 Other S&C America
Europe
0.500
Peru
North America
0.250
Europe, N. America and Australasia’s biggest deposits are brownfield,
whilst greenfield discoveries are increasingly small and low grade
0.000
0 500 1000 1500 2000 2500 3000
Resource size (tonnes of ore)
6/17
Data: CRU Copper Mine Project Profiles 2009 © 2009 CRU International Limited confidential

7. Asia & Peru will be increasingly important
Location of new production from 98 key projects during each period
2009-12 (Economic Recovery) 2013-16 (Back to boom?) 2017+ (Into the future…)
Mainly Asian
greenfields
Mainly Chilean
brownfields Mainly Peruvian
Africa North America Chile Peru Other
greenfields
7/17
Data: CRU Copper Mine Project Profiles 2009 © 2009 CRU International Limited confidential

8. Mines going deeper underground…
Type of new production from 98 key projects during each period
2009-12 (Economic Recovery) 2013-16 (Back to boom?) 2017+ (Into the future…)
Backlog of large open pits to
develop Increasing scarcity of good
surface deposits
Underground Combined Open Pit
8/17
Data: CRU Copper Mine Project Profiles © 2009 CRU International Limited confidential

9. Low capital cost versus low operating cost
Regional comparison of relative financial advantages
Business Operating Cost Unit Capital Expenditure (US$/t/y)
(US$/t/y)
Copper
3,500 20,000
18,000 Copper Eq.
3,000
16,000
2,500 14,000
2,000 12,000
10,000
1,500 8,000
1,000 6,000
4,000
500
2,000
0 0
Unit capital expenditure =
total capital expenditure /
average annual production
9/17
© 2009 CRU International Limited confidential
Data: CRU Copper Mine Project Profiles

10. Performance of key copper by-products
By-products move in different cycles
Gold Silver Molybdenum Cobalt Copper
200
180
160
Indexed price (Jan 2007 =100)
140
120
100
80
60
40
20
0
Jan-08
Jan-07
Oct
Oct
Jan-09
Jul
Jul
Jul
Apr
Apr
Apr
copper price = LME 3mth; gold & silver price = LBMA; cobalt price = Metal Bulletin; molybdenum price = CRU
10/17 Based on nominal prices
Data: CRU Analysis © 2009 CRU International Limited confidential

11. Key copper regions offer differing risk profiles
Indication of risk balance of copper mine project development regions
Greater
political Asia Africa
risk Future
development?
Peru
Chile
Australia
N. America
Greater Europe
technical
risk
Higher capital Higher operating
costs costs
11/17
Source: CRU Analysis © 2009 CRU International Limited confidential

12. Junior-owned projects the most affected
Average cumulative delay to projects over 2005-2009 (in years)
0 1 2 3 4 5
Peru
Australia/Europe/N.Ameri…
Africa/Asia/PNG
Other S&C America
Chile
Diversified Major
Copper Major
Mid-tier
Junior
Greenfield
Brownfield
Concentrates
EW Cathodes
12/17
© 2009 CRU International Limited confidential
Data: CRU Analysis

13. Future production dominated by majors
Share of production of 98 key copper mine projects
11%
Codelco
9% Anglo American
39% Xstrata
9% Rio Tinto †
BHP Billiton
7% Other Majors *
Others
7% * Other majors refers to Vale,
Freeport-McMoRan,
18% Southern Copper,
Antofagasta, Teck, Vedanta
Resources & Kazakhmys
†Assumes the post-2021
ownership structure of Grasberg
13/17
Data: CRU Copper Mine Project Profiles © 2009 CRU International Limited confidential

14. Antamina Toromocho Quellaveco Cananea Morenci Pebble
Executive Summary & Analysis section
$30 B $2.5B $3.0B $100M $40 B $50 B $250M $5.0B
$5.0 B
$25 B
Olympic
Udokan
Dam
$5.0 B
$15B
Mount Isa Oyu Tolgoi
Community
Community
Chest
Chest
$1.5B
$75 B
Cloncurry Grasberg
$100M
$100M
$10 B
Vale
Copper
$90 B
$1.0B
Colombia Andina
$500M
$750M
$100 B
Bolivia Escondida
$500M $250M $5.0B $100M $5.0B $2.5B
DR Lumwana 14/17
Zambia KGHM Boliden
Congo
© 2009 CRU International Limited confidential
Data: CRU Analysis

15. Potential tactics in copper mine monopoly
(or how building a copper mine is like buying a house)
Rich hostages The middle man
• Get the prime properties, charge enormous • Buy the utilties and transport infrastructure to get a
rent competitive advantage
• Near impossible to be bought out of this • Security of supply and logistics reduces project
position risk
• Can lead to high internal standards becoming • Can be expensive and not add the same value as
an obstacle to investment investing in mine development
Poor man’s row Scattergun
• Buy the cheap properties and aggressively • Buy a bit of everything
develop them • Stops industry consolidation and makes you a
• One of the few ways of successfully entering strategic key
the industry • Can be expensive, unwieldy and not provide
• Quite high risk for potentially not great returns sufficient value
Medium is the message “They’re not making it anymore”
• Buy the “middle” properties and seek to add • Borrow heavily, but whatever becomes available
value • There’s only a limited supply of mines so value in
• Can offer greater returns for lower risk the long term is always upwards
• Can also offer lower returns for greater risk • Very high risk…
15/17
© 2009 CRU International Limited confidential

16. …but remember when choosing your strategy
Conclusions
• World class copper deposits are increasingly rare
• New greenfield resources are not as good as the older brownfield resources
• There is an increasing trade off between political and geological risk
• There is also an increasing trade off between capital costs and operating costs
• By-product revenues are becoming increasingly important to project planning
• The difficulties in developing projects mean increasing delays and longer
development timeframes
• The industry is potentially organically consolidating
16/17
© 2009 CRU International Limited confidential

17. Thank you for
listening
Today’s information source:
CRU Copper Mine Project Profiles
(2009 Edition)
Today’s speaker:
John Sykes
Consultant – Copper Production
John.Sykes@crugroup.com
+44 (0) 20 7903 2082
© 2009 CRU International Limited confidential