Resource Nationalism: How to grow, not shrink, the pie the pie Nick Holland CEO Gold Fields GIBS, 15 August 2013
Resource Nationalism is entirely rational… Definition: Countries’ efforts to extract m axim um value and developm ental im pact for their value and developm ental im pact for their people from their finite natural resources 2 Resource Nationalism - S ... al v25 <office> <office>
…particularly as states are under fiscal pressure Central Government Debt ($T) Central Government Debt as % of GDP 80% $30T 60 % of GDP 20 40 40 10 20 20 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011 Note: Includes the 41 countries who have continuous central government debt data from 2003 to 2011 g Source: World Bank 3 Resource Nationalism - S ... al v25 <office> <office>
But Resource Nationalism is viewed badly “Resource nationalism a “Miners encounter the hard key threat to mining” rock of resource nationalism” BlackRock , Oct 2011 , Th T l The Telegraph (UK), Nov 2011 h (UK) N 2011 “Resource nationalism plagues “Resource nationalism is the oil market Wall Street Journal , Mar 2012 the oil market” miners’ number one fear and ’ b f d Wall Street Journal Mar 2012 major threat to global security” “Resource nationalism: the usual Resource nationalism: the usual Mining.com , December 2012 suspects or a wider problem?” “Canada’s veto of Petronas deal RigZone , May 2012 raises spectre of resource raises spectre of resource “Resource Nationalism #1 on nationalism” Daily Telegraph (UK), Oct 2012 mining risk list” Ernst & Young, Aug 2011 4 Resource Nationalism - S ... al v25 <office> <office>
What is the disconnect? 1 1. Too many fingers in the wrong pie Too many fingers in the wrong pie – Mining profits 2. Not growing the right pie – The Mining Economy to create jobs, fuel g y j , development and attract investment capital 5 Resource Nationalism - S ... al v25 <office> <office>
Too many fingers in the wrong pie • At first glance, it might appear At first glance it might appear there’s a bigger slice to take Mining Net Profit - pre Tax and Royalties: Global 2012 = ~$280B Royalties 9% Net Profit post Dividend 25% Direct corporate tax 25% Dividends 42% Government Government Company N t 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 D t b d P C Mi 2012 l i f i t t t f th t 40 i b t l d t t th h l i i t Source: IHS Global Insight; Mine: PwC Mine 2013 6 Resource Nationalism - S ... al v25 <office> <office>
Why? Wrong cost metric • At first glance, it might appear At first glance it might appear Gold example there’s a bigger slice to take • Our industry has made this pie O i d t h d thi i 'Cash cost' hides 'C h t' hid G ld Gold miners need to i d t unprofitability of gold think differently about look more attractive than it is mining costs by focussing on cash costs GATA, August, 2009 , g , Nick Holland, August, 2012 , g , not all-in sustaining costs t ll i t i i t average total production cost was $1170/oz, compared with an average reported cash cost of $773/oz reported cash cost of $773/oz Gold analyst, Bell Potter, Jan 2013 More Gold Miners Come Clean on Costs transparency After Lost 6 Years f 6 needed on Bloomberg, February 2013 gold The (gold) industry has to change production production and make sure they're very cost transparent around how they BlackRock, December report costs 2012 Northern Star Resources January 2013 Northern Star Resources, January 2013 7 Resource Nationalism - S ... al v25 <office> <office>
Mining industry is going through tough times • At first glance it might appear • At first glance, it might appear G ld i d Gold industry example: Costs up; Returns down t l C t R t d there’s a bigger slice to take Costs rising at ~12% Yields down 5% CAGR CAGR Operating cost per tonne Average gold yield • Our industry has made this pie • Our industry has made this pie (06-11) (06 11) (06-11) (06 11) $40/t 2.0g/t look more attractive than it is Major 30 12% gold 1.5 producers • In reality, margins and returns In realit margins and ret rns 20 20 -5% 5% Major gold 1.0 from mining are in decline producers 10 0 0.5 6 6 7 7 8 8 9 9 0 0 1 1 6 6 7 7 8 8 9 9 0 0 1 1 0 0 0 0 0 0 0 0 1 1 1 1 0 0 0 0 0 0 0 0 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 Exploration budgets up 20% New Discoveries down 7% Grassroots + 75% of late 3-yr avg potential production stage budgets stage budgets in new discoveries (mil oz) in new discoveries (mil oz) CAGR CAGR CAGR CAGR (97-11) $5B 100M (97-11) 20% Exploration 4 80 budget 3 60 3-yr avg 2 40 potential production 1 20 -7% 0 0 7 9 1 3 5 7 9 1 7 9 1 3 5 7 9 1 9 9 0 0 0 0 0 1 9 9 0 0 0 0 0 1 9 9 0 0 0 0 0 0 9 9 0 0 0 0 0 0 1 1 2 2 2 2 2 2 1 1 2 2 2 2 2 2 Note: Cost per tonne is the weighted average of 8 major gold producers by total ore mined; average grade is the weighted average of 8 major gold producers by total ore mined; Major Gold producers: AngloGold Ashanti, Barrick, Harmony, Kinross, Goldcorp, Gold Fields, Newmont and Newcrest. 8 Source: Gold Fields company data; annual reports, Condemned to Excellence report(IAMGOLD Corporation, Dec 2012) Resource Nationalism - S ... al v25 <office> <office>
Margins in the gold sector are under pressure… • At first glance, it might appear At fi t l it i ht Gold industry example: margins there’s a bigger slice to take in rapid decline Margins under greater • Our industry has made this pie O i d t h d thi i pressure as gold price has ld i h since fallen as low as look more attractive than it is US$/oz Margin $1300/oz $1,800 100% • In reality, margins and returns I lit i d t 1,600 Gold price from mining are in decline 80 1,400 1,200 60 60 1,000 Avg cash costs 800 40 600 A Avg capex 400 20 200 % margin (RHS) 0 0 2006 2007 2008 2009 2010 2011 2012 2012 Q1 Q2 Source: Streetwise reports website 9 Resource Nationalism - S ... al v25 <office> <office>
… as they are for the Top 40 global miners • At first glance, it might At first glance it might appear there’s a Top 40 Mining Giants - financial distress bigger slice to take 35 • Our industry has 30 made this pie look more attractive than it tt ti th it 25 2007 % is 2008 20 2009 15 15 • In reality, margins and I lit i d 2010 10 returns from mining 2011 are in decline 2012 5 0 • Similarly the top 40 Gearing ratio Return on Net profit Return on capital Equity mining companies are employed employed experiencing serious i i i financial troubles Source: PWC – Review of global mining trends 2012 10 10 Resource Nationalism - S ... al v25 <office> <office>
Industry is not self-funding at present • At first glance, it might appear At fi t l it i ht there’s a bigger slice to take Top 4 0 2 0 1 2 cash flow ( $ Bs) • Our industry has made this pie O i d t h d thi i 150 $137B look more attractive than it is • In reality, margins and returns I lit i d t 100 from mining are in decline 50 • Operating cash flows not O ti h fl t sufficient to cover investments 0 -$169B -50 Operating p g I nvesting g Note: Data based on PwC Mine 2012 analysis of top 40 companies 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 11 11 Resource Nationalism - S ... al v25 <office> <office>
Investors are deserting the sector • At first glance, it might appear At fi t l it i ht there’s a bigger slice to take I ndex perform ance • Our industry has made this pie O i d t h d thi i 1.5 Dow Jones look more attractive than it is Industrial Index • In reality, margins and returns I lit i d t FTSE 100 Index from mining are in decline 1.0 • Operating cash flows not O ti h fl t sufficient to cover investments HSBC global • Equity model is at breaking point mining index 0.5 2010 2011 2012 2013 Jan 2 Jan 2 Jan 2 Jan 2 12 12 Resource Nationalism - S ... al v25 <office> <office>
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