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INTERVIEW:

Dundee Corporation

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INTERVIEW:

Pan American Silver

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INTERVIEW:

KGHM

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INTERVIEW:

Coeur Mining

Metals mired in global uncertainty


Gold, silver and copper price report 2014

www.pwc.com/ca/mining

Annually, PwC surveys gold mining companies from around the world. This year, we also include copper and silver companies from a cross-section of approximately 150 senior, mid-tier and junior companies.

Contents

2
4 6

Metals struggle to find footing in 2013 A dim year for gold

PWCS POINT OF VIEW:

14 16 18

Silver has seen better days

24 26 28

INTERVIEW:

Coeur Mining

INTERVIEW:

Pan American Silver

Points of interest

Gold ETFs a washout in2013

Oversupply concerns weigh on copper

Mining Excellence at PwC

INTERVIEW:

Dundee Corporation

20 22

INTERVIEW:

Q&A with KGHM

Back Contacts cover

10

Minings New Frontier: Digging deeper into sustaining costs

Coping with lower commodity prices

ii

Survey participants
Adriana Resources Inc. Africo Resources Ltd. Agnico Eagle Mines Ltd. Aldridge Minerals Inc. Alexco Resource Corp. Almaden Minerals Ltd. Americas Bullion Royalty Corp. Amerigo Resources Ltd. Amerix Precious Metals Corp. Apogee Silver Ltd. Augusta Resource Corp. Banro Corp. Barrick Gold Corp. Braeval Mining Corp. Brigus Gold Corp. Brixton Metals Corp. Cangold Ltd. Capstone Mining Corp. Carlisle Goldfields Ltd. Caza Gold Corp. Centerra Gold Inc. China Gold International Clairmont Metals Corp. Claude Resources Inc. CMC Metals Ltd. Codelco Coeur Mining Inc. Colossus Minerals Inc. Compass Gold Corp. Concordia Resource Corp. Copper One Inc. CopperZONE Resources Ltd. Cream Minerals Ltd. Creso Exploration Inc. Crocodile Gold Inc. Defiance Silver Corp. Delta Gold Corp. Detour Gold Corp. Dong Won Resource Group Dundee Precious Metals Inc. Eagle Hill Exploration Corp. East Africa Metals Inc. Eco Oro Minerals Corp. Edgewater Exploration Ltd. Eldorado Gold Corp. Elgin Mining Inc. Exeter Resource Corp. Firesteel Resources Inc. First Majestic Silver Corp. Fortuna Silver Mines Inc. Fortune Minerals Ltd. Franco-Nevada Corp. Frontline Gold Corp. Gibraltar Mines Ltd. Ginguro Exploration Inc. Goldcorp Inc. Golden Arrow Resources Corp. Golden Star Resources Ltd. Goldgroup Mining Inc. Goldrush Resources Ltd. Great Panther Silver Ltd. Helio Resource Corp. Hudbay Minerals Inc. Hunter Dickinson Inc. IAMGOLD Corp. Impact Silver Corp. INV Metals Inc. Karmin Exploration Inc. KGHM Polska Miedz SA Kincora Copper Ltd. Kinross Gold Corp. Kiska Metals Corp. Luna Gold Corp. Lundin Mining Corp. Lupaka Gold Corp. Magellan Minerals Ltd. Marathon Gold Corp. Marlin Gold Mining Ltd. Masuparia Gold Corp. McEwen Mining Inc. Midas Gold Corp. Minaurum Gold Inc. Minerx Inc. New Gold Inc. Newmont Mining Corp. Northern Star Resources Ltd. NovaCopper Inc. NovaGold Resources Inc. Orca Gold Inc. Orex Minerals Inc. Orsu Metals Corp. Orvana Minerals Corp. Oxygen Capital Corp. Pan American Silver Corp. Pilot Gold Inc. PJX Resources Inc. Platinum Group Metals Ltd. PMI Gold Corp. PNG Gold Corp. Potash Corp. Red Eagle Mining Corp. Redzone Resources Ltd. Regis Resources Ltd. Ressources Appalaches Inc. Royal Nickel Corp. Sandstorm Gold Ltd. Santa Fe Metals Corp. SD Gold International Semafo Inc. Sherritt International Corp. Silver Bear Resources Inc. Silver Standard Resources Inc. Silver Wheaton Corp. Silvermet Inc. Strait Minerals Inc. Sulliden Gold Corp. SUN Gold Sunset Cove Mining Inc. Superior Copper Corp. Tamaka Gold Corp. Tankoos Yarmon Group Tanzania Minerals Corp. Taseko Mines Ltd. Teck Resources Ltd. Thane Minerals Inc. Turquoise Hill Resources Ltd. TVI Pacific Inc. U.S. Silver & Gold Inc. Unity Mining Ltd. Vale Canada Ltd. Victoria Gold Corp. Votorantim Cement North America Wesdome Gold Mines Ltd. Wildcat Exploration Ltd. Yamana Gold Inc. Yellowhead Mining Inc. Yukon Zinc Corp. Zazu Metals Corp.

McLeod Williams Capital Corp. Stonegate Agricom Ltd.

Cobar Consolidated Resources Ltd. Graymont Corp.

International Tower Hill Mines Ltd. Quaterra Resources Inc.

PwCs POINT OF VIEW

Metals struggle to find footing in 2013

Its been another tough year for mining companies. Lower commodity prices put more pressure on company profits and squeezed shareholder returns across the industry. That led many investors to put their money elsewhere, creating what were calling a confidence crisis across the mining sector.

While the drop in prices for some metals hasnt been as severe as during the 200809 global recession, the fall from record or near-record levels in 2011 has created some setbacks. A drop in commodity prices has led to lower revenues for mining companies, causing most to cut back on operations and spending. In some extreme cases, companies have taken billions of dollars worth of write downs to account for the lower value of their assets compared to only a couple years earlier. Few commodities in the mining sector have escaped the downturn caused by global economic uncertainty and volatile markets. Gold, silver and copper are among the most closely watched metals. Theyve also been some of the hardest hit in 2013. Gold started the year trading just below $1,700 (US)1 per ounce, but by the summer fell to around $1,200. The commodity, considered a currency and a hedge against inflation, began losing its lustre after the US Federal Reserve signaled it would cut back its stimulus program. That led to a stronger US dollar and gold demand weakened, with fewer investors turning to it as a safe haven. As the year draws to a close, gold prices are hovering around $1,300, down considerably from a record above $1,900in 2011.

Silver is more of a multi-purpose metal, acting as both a currency and an industrial play for investors, given its use in a widerange of applications such as jewelry and medical equipment. The price of silver plummeted by about 40% in 2013, starting the year around $32 per ounce and falling below $19. In fact, its the worst performing metal of 2013. Silver hit an inflation-adjusted record of just under $50 in April 2011. Oversupply is partially to blame for the drop in silver prices in 2013. Its correlation with gold as a store of value for some investors also contributed to its price depreciation in recent months. Copper is largely an industrial metal, used in everything from plumbing to automobiles and computers and its demand often reflects the health of the economy. Growing demand for copper means theres more manufacturing and construction underway around the world, which is good for the price of the red metal. The reverse is also true when copper demand falls. The price of copper has fallen from about $3.70 per pound at the start of the year to just above $3 by the end of the year. Thats well below the metals record of $4.60 in early 2011. Oversupply is also to blame for coppers price drop, due largely to slowing global growth, particularly in China, the worlds largest consumer of the metal. Chinas economic growth is slowing to between 7% and 8%, after years of double-digit gains.

To put things into perspective, Chinas economic growth is still considered strong. Thats providing hope for mining companies that continue to sell their commodities to the worlds second-largest economy. The gradual economic recovery in the US and Europe should also help to increase demand long-term for commodities. While 2013 has been a tough year for miners, the industry is positioning itself for a time, hopefully in the not too-distant future, when fundamentals will improve. Still, luring investors back into the mining space will require strict cost management strategies and responsible investment in production growth. Miners are already heading in the right direction on both fronts. We believe the long-term fundamentals supporting metal prices remain strong and will help to drive the industrys turnaround story. While gold, silver and copper may not reach record levels in the near future, we expect prices to increase, alongside a stabilizing global economy. After all, its called a mining cycle for areason.

Global Mining Leader, PwC

John Gravelle

years sharp fall in the (gold) price has put the This industry under more pressure than it has known for

almost a decade and heightened investors interest in miners true profitability. Financial Times, September 16 2013.

1. All prices in the report are in US dollars

A dim year for gold

Gold has been the big mining story of 2013. The metal, which surpassed $1,900 per ounce in 2011, fell to around $1,200 in 2013.

What gold prices are you applying to your reserves in 2013? (individual responses)
<$1,000 $1,000 $1,250 >$1,250

9
4

34 33

Where do you see the price of gold within the next 12 months?
Increase Decrease Stay the same

The price drop has reignited the bull-versusbear debate over bullion, with some calling for an end to the high-price of gold, while others call it a blip for a metal that will continue to serve as a backstop currency for central banks and investors alike. Regardless of this age-old battle, gold miners are preparing for another challenging year ahead. Expectations for where the gold price is headed are conservative, with the exception of a few very bullish companies. Among gold miners surveyed, 47% said they expect the price to increase in the next 12 months, which is down from 88% with the same hopes a year ago reflecting lower levels of confidence. Last year, none of the respondents expected the price of gold to drop. This year, 7% said they expect gold to head lower in the next year, while 46% expect the price to remain roughly the same. When we did this survey a year ago, and gold was trading near $1,800 per ounce, most executives expected the metals long-term price to trade at around $1,400. There was a similar forecast when the survey was conducted two years ago. While the forecasts are more muted today (see results below), given that the spot price of gold has fallen to about $1,300, the long-term forecasts show companies continue to show belief in their long-term pricing estimates with a price of $1,369 (down only 2% from last year). When asked what gold price companies are using to determine reserves, the average among respondents was $1,251 per ounce, with a range of between $900 and $1,500.
What is the long term price of gold?

For resources, the average was $1,284, with a range of between $800 and $2,000. The average price of gold for 2014 being used for impairment testing among respondents is an average of $1,309 an ounce, according to the survey results, and ranges from a low of $1,000 to a high of $1,600. Those predictions increase over time. For instance, the forecast for 2016 gold prices is an average of $1,378 an ounce, with estimates ranging from $1,000 to $1,900. The fight between the bulls and bears intensifies in the long-term, with the average price predicted to be $1,369, and a range between $1,000 and $2,000 for beyond 2016. Today, most companies are focused on near-term pricing data to estimate their reserves. According to our survey, reserve prices are based on a number of factors including internal estimates, historical average prices, forward curve, spot and consensus pricing as the three-year trailing average price become less relevant in a declining price environment. When it comes to long-term pricing, 33% of respondents said they relied on managements internal estimates and consensus, while 14% looked at the forward curve, 13% considered historical averages and 9% the spot price. For reserve pricing determinations, 65% turned to managements internal estimates, 39% looked at consensus, 23% historical averages, 15% spot price and 9% the forward curve.

7%

47%

46%

The numbers were roughly the same in determining resource prices among gold producers. The survey shows 39% of gold producers believe their costs will be similar in the next 12 months as they were in 2013 and 28% expect them to fall. Only 12% expect costs to increase. As for the factors driving cost adjustments, about half of gold miners surveyed (49%) cited mine sequencing and grade mix as a main factor, followed by wage costs (29%), input commodity prices (22%), and a mix of either lower-or-higher-cost mines in the production mix (8%).

$2,500 2,000 1,500 1,000 500 0 2014


Low

% change between 52 week high and 52 week low Gold Companies


2009 2010 2011 2012 Oct 31, 2013 44% 33% 39% 38% 53% 67%

S&P Capital IQ Gold Concensus

Seniors

2,000

Mid-Tiers 76% 54% 56% 55%

1,500

1,000

2015

2016
Average

Long-term
High

500

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Low

Median

High

Gold ETFs a washout in 2013

Nothing demonstrates investors recent exit from gold as clearly as the sell-off in exchange-traded funds (ETFs).

Gold ETFs holdings (millions of ounces)


100 80 60

Silver ETFs holdings (millions of ounces)


800 700 600 500

40 20

400 2009 2010 2011 202 2013 300 2009 2010 2011 202 2013

According to the World Gold Council, gold demand to the end of the third quarter of 2013 was down 12% compared to the same period a year earlier, driven almost entirely by outflows from ETFs. Tactical investors in western markets exited their positions as they began to speculate on the early tapering of US quantitative easing amid signs of apparent improvementin the US economy, the World Gold Council (WGC) says in its Gold Demand Trends report for Q3 2013. By the end of September, ETFs had seen outflows to the tune of almost 700 tonnes. Thats after steadily rising inflows since atleast 2008 (see chart). Most of that selloff happened in the second quarter, at the same time the price of gold fell sharply to around $1,200per ounce. It was a washout, according to the WGC. However, it believes there will be aturnaround in the coming months. We have almost seen a cessation of outflows and, in fact, we had some net inflows globally in the last two to three weeks into November, Marcus Grubb, Managing Director, Investments at the World Gold Council, told Mineweb. It wasnt all bad news for ETFs in the commodities sector. While investors fled gold, many headed into other commodities investments such as silver, energy and platinum. According to ETF Securities, assets in commodity exchange-traded products (ETP)2 rose by $8.4 billion to $135.9billion in the third quarter of 2013, which was the first quarterly rise since the third quarter of 2012. That includes a wide-range of commodities from metals and energy to agriculture products. The rise was driven by a combination of price increases and the largest quarterly inflows into non-gold commodity ETPs since the first quarter of 2012, ETF Securities says.

The rise in investors allocations to commodities reflects a general improvement in investor sentiment towards the asset class as the global industrial cycle has picked up, confidence in Chinas growth prospects have improved and the prices of a number of key commodities have dropped to perceived attractive accumulation levels, says Nicholas Brooks, head of research and investment strategy at ETF Securities. Assuming the global manufacturing revival continues, and US and European political issues do not derail the general improvement in the global economic outlook, we believe that Q3 2013 potentially marks an important positive turning point for commodities. Excluding gold, key commodity ETPs saw $1.9 billion of inflows in the third quarter, more than compensating for the outflows in Q2, ETF Securities says. When gold is included, global commodity ETPs saw $2.3 billion of outflows in the third quarter. Still, ETF Securities says thats a substantial improvement when compared to the record $19.6 billion of outflows in the second quarter of 2013. Silver ETPs performed strongly, as the price of the metal stabilized in the $22perounce range, with $706 million of net inflows in the third quarter compared to three months earlier.

Silver ETFs have also been rising steadily over the past five years (see chart). After seeing a more than 50% decline in the silver price from its peak, it appears that investors view silver as one of the better value ways to gain exposure to the turn in the global industrial cycle, says ETF Securities in its third-quarter report. Its hybrid nature as both an industrial metal and as a store of value hard currency like gold appeals to many investors who recognize we are experiencing a cyclical pick-up in growth, but remain concerned about growing developed country debt levels and continued risks of currency debasement stemming from extraordinarily easy monetary policies. There was $195 million in industrial metal outflows in the third quarter, which ETF Securities saw as surprising given the improved outlook for demand in China, the worlds largest consumer of these metals such as copper and nickel. The most likely explanation for the trend is that despite the improving demand outlook, the expected increased supply of a few key industrial metals, particularly copper has kept investors away, says ETF Securities. Therefore it appears that in Q3 investors chose to play the rebound of the industrial cycle through platinum, silver, oil and broad commodities rather than industrial metals.

have almost seen a cessation of We outflows and, in fact, we had some net inflows globally in the last two to three weeks into November.
Marcus Grubb, Managing Director, Investments atthe World Gold Council

2. ETP is the umbrella term used to describe ETFs, exchange-traded commodities (ETCs), exchange-traded notes (ETNs), and US Grantor and other statutory trusts. They are collateralized or uncollateralized open-ended securities listed on a stock exchange tracking an underlying asset.

INTERVIEW

Dundee Corporation

As a self-described gold bug, you might expect Dundee Corp. founder and CEO Ned Goodman to be disillusioned by the commoditys recent price drop.

Quite the opposite. I have never been so bullish on gold in my entire career, says Ned, a legendary Canadian investor whose firms investments include real estate, agriculture, asset management, precious metals, energy andinfrastructure. His optimism comes from a belief that the US is mishandling its finances, through what he calls botox economics. Thats the stimulus money the US Federal Reserve has been injecting to plump up the economy. Theyre trying to make everything look good. Its an illusion, Ned says. The US is in deep trouble. Thats why, despite the sinking price of gold in recent months, Ned remains bullish on bullion for its reputation as an investment haven. In fact, he believes the bull market for gold and gold stocks that began around the turn of the century will continue, even though the metal has slumped from its record above $1,900 in 2011 to just above $1,200 in late 2013. While he believes the drop in golds price in recent months is disappointing, Ned recommends investors pay attention to the sector.

In Dundees 2012 annual report, Ned says he expects an unbelievable opportunity for significant gains in the months to come. The overall market for gold is still in a bull market but the current situation is acting like a bear market, he writes. The view that we are continuing with is that gold and gold stocks are very inexpensive, below real value. Ned believes the fundamentals for gold havent changed. While the US Fed has talked about tapering, Ned expects the U.S. and some European countries to continue excessive printing of money in the near term to prop up their economies. One reason he cites is labour participation in the US, which is near an all-time low as more people drop out of the workforce, while unemployment remains high. The entire so-called US economic recovery we are witnessing is almost entirely driven by those ultra low interest rates and money printing they are enjoying, his annual report states.

As for the mining sector as an investment, Ned says its increasingly difficult to find exceptionally good buys across the sector right now. Part of the problem is that junior companies dont have cash to advance projects, while seniors are also holding back on as they work to clean up their balance sheets. Im favoured to mining companies that have good reserves in the ground that they can take out when they want. The current moment isnt the time to take [the ore] out because the price is too low, so they have to sit tight, he says. That means investors need to be patient too, while abiding by the Warren Buffett philosophy of value investing. Buffett has said, and I certainly agree, that the best philosophy for successful investing is to buy something for a lot less than it is really worth, Ned wrote in his annual report. He also buys a gold stock every day, which in this market could mean a number of value plays.

Minings New Frontier: Digging deeper into sustaining costs


In a climate of high commodity prices, a focus on mine site cash costs may be appropriate to identify where on the cost curve operations sit. However cash costs alone, the industrys traditional yardstick of operational efficiency, do not capture many of the expenses required to maintain a sustainable, value adding mining operation.

10

With margins squeezed by the recent decline in commodity prices, investors and analysts increasingly want more transparent disclosure of total costs. It is clear that the greatest area for improved reporting lies in the reporting of all-in production costs and capital expenditures. Improved reporting means increased transparency (more information), and consistency of definitions across the industry. Sustaining costs such as spending to maintain and replace equipment may be ratcheted back at times of low metal prices to conserve cash. However, these investments cannot be eliminated entirely without posing a high risk to a mines longterm productivity. As with cash costs, there is no reporting standard that currently requires companies to disclose sustaining or growth capital. However, the World Gold Council has taken a step towards formalizing the concept with the publication in June 2013 of a guidance note on the components of all-in sustaining costs and all-in costs that gold mining companies can use as part of their overall reporting disclosure.

A PwC survey of the top 40 global mining companies by market capitalization found that, as of the third quarter of 2013: 14 companies publish a figure for sustaining capital, and only seven provide an all-in cost figure. Only six companies -- Barrick Gold, Goldcorp, Gold Fields, Kinross Gold, Newmont Mining and Vale SA -- disclose their definition of sustaining capital. As these numbers show, very few companies currently disclose their allin costs or a sustaining capital value, and even less provide a definition of what is included within sustaining capital. Some companies have raised concerns about the extra cost and effort required to prepare details of sustaining and growth capital in addition to normal financial reporting requirements. But the main concern is uncertainty -- even confusion over the definitions used by companies for significant capital expenditure items, more specifically, what is a sustaining cost and what is a growth cost?

Development costs, exploration costs and general and administrative (G&A) expenses are among the most challenging grey areas. All of these reasons have made companies hesitant to be early adopters however many are internally exploring the concepts without disclosure so that they can be prepared if pressured by shareholders and analysts to disclose, or at a minimum respond to market queries. The concept of all-in costs should be a relevant and useful yardstick for the investment community as well as for miners themselves to benchmark and compare companies and operations. A clear picture of sustaining and growth costs is a valuable tool to demonstrate effective cost management over the longer term, and thus improve capital spending discipline. In the current environment, it is critical to achieve tight discipline of capital expenditures, which means tightly defining what are truly sustaining costs so that greater visibility is gained in the capital allocation process.

If all-in sustaining costs and all-in costs are not being used in 2013, in 2014 will you:
Use all-in sustaining costs/all-in costs Continue to use cash costs

What is the Companys overall approximate all-in sustaining cost forecast for 2014? Per ounce for gold companies
Greater than $1,300

5% 9%

41% 59%

$1,201$1,300

Less than $900

66%

$1,101$1,200

14% 25%

$1,001$1,100

$901$1,000

23%

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What costs have you reduced and by how much to address lower revenue levels?

Expansion projects

Exploration

23%
Capital Project development

G&A

56%

57%

32%
A truer measure of overall costs can demonstrate to governments, employees and others that the industry operates on more slender margins than often seems to be the case based on a cash-cost model. Transparency on costs can help management make the case for difficult decisions, such as workforce reductions, care-and-maintenance announcements and divestitures. The prospect of continuing tight margins for the foreseeable future suggests that analysts and shareholders will keep up the pressure on miners for improved disclosure. The World Gold Council guidance provides a good framework, however standardisation of definitions and levels of disclosure would certainly facilitate external comparison of companies and understanding of the sustainability of operations. Companies can be reluctant to lead in making disclosures where inconsistencies may exist, though from our discussions, most would follow once clear guidelines and definitions are put in place. The longer term question is whether companies continue to desire and drive transparency around disclosing full costs? If prices start to increase, will the focus from shareholders and analysts be diminished? In a forecasted period of expected tight margins, we should expect the focus to remain for a while to come.

What are your two most important business imperatives in 2014?

Cost management 66% Raising nancing 55%

decades, we have disguised our true costs to look For better to providers of capital by focusing solely on cash costs, rather than reporting all the costs that go into mining. This created the impression that, even at present depressed prices, the industry is making healthy profits, when it is, in fact, marginal.

Nick Holland, Gold Fields chief executive, writing in Business Day (South Africa), August15 2013.
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How are you reporting costs in 2014?

How will your costs change during the next 12months? Percentage of respondents for each
commodity

What are the key drivers for the change incosts? Percentage of respondents for each
commodity

Cash costs Adjusted operating costs All-in costs All-in sustaining costs Other % 0 5 10 15 20 25 30

Significantly higher Moderately higher Similar levels Decreased costs Dont know % 0 10
Gold

Wage costs

Input commodity prices

Mix of lower/higher cost mines in the production mix

20

30
Silver

40

50

60

70

Mine sequencing and grade mix

Copper

Other

% 0

10
Gold

20
Silver

30

40
Copper

50

60

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Silver has seen better days

Silver has had a terrible year. It started 2013 trading at around $32 per ounce, but then fell to around $18 by mid-year. Thats a reversal from 2012, when silver was the best-performing metal, ranging in price between about $26 and $37.

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While it was a tough year for silver miners to make a profit, our survey shows theyre optimistic for 2014. Among survey respondents, 53% said they expect the price of silver to increase in the next 12 months, while 38% expect it will remain at current levels. Only 9% are anticipating the price of silver to fall further in the next year. These statistics are similar to how gold companies responded to our survey. The long-term silver price being used for impairment testing among respondents was an average of $22 for 2014, and ranged between $15 and $28. The average increased to $23 for 2015 and beyond.

When asked what silver price companies are using to determine reserves, the average price was $22 per ounce, and ranges from a low of $17 to a high of $28. For resources, the average price was $22, with a range of between $19 and $28. Among silver miners surveyed, the most important input used to determine the reserve price was managements internal estimates (65%), followed by consensus pricing (20%), historical price averages (13%), spot prices (7%) and forward curve (3%). For resource prices, the numbers were higher for managements internal estimates (74%) and lower for historical averages (19%), while other factors were consistent with reserve price determinations.

When it comes to long-term pricing of silver, 55% of respondents said they relied on managements internal estimates, 19% looked at the consensus, 16% the historical average, 6% spot prices and 3% the forward curve. About two-thirds (61%) of silver miners expected their cash costs to remain the same in 2014, while 21% are preparing for higher costs and 18% for lower costs. Silver producers said the key drivers for costs include mine sequencing and grade mix (54%), followed by wages (29%), input commodity prices (29%) and a mix of higher and lower grades in the production mix (18%).

What silver prices are you applying to your reserves in 2013? (individual responses)
<$20 $20$25 >$25

What is the long term price of silver?

S&P Capital IQ silver concensus

$35 30

12 15

25 20

15 10 5 2014
Low

2015
Average

2016

Long-term
High

45 40 35 30 25 20 15 10 5 0

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Low

Median

High

15

INTERVIEW

Pan American Silver Corp.

Like most mining companies, Pan American Silver Corp. has been forced toadjust to slumping metal prices.

Photo courtesy of Pan American Silver Corp.

16

As silver prices fell to around $20 per ounce in recent months, from above $30 at the start of 2013, the company scoured its operations across Mexico, Peru, Bolivia and Argentina for cost savings. The results showed up in its third-quarter earnings, when the company reported lower expenses on higher production. That helped to offset a drop in revenues and net income due to lower commodity prices. Weve taken the long-term approach and said What can we do here to recognize that the price of silver isnt $30 anymore? Its much closer to $20, says Geoff Burns, Pan Americans President & CEO. Unfortunately, the adjustments made included laying off about 1,000 people, orabout 10 per cent of its workforce, while maintaining projected silver and gold production. Silver production rose 7% in the third quarter and Pan American achieved a new quarterly record for gold production. At the same time, it trimmed its mine site production costs by 9% compared to the same period last year, which resulted in a healthy 25% reduction in its cash costs per ounce. Pan Americans full-year 2013 guidance is for 25 to 26 million ounces of silver and 125,000 to 135,000 ounces of gold. It says cash costs will be below the original forecast of $11.50 to $12.80, net of byproduct credits. It also expects to produce 38,500 to 41,500 tonnes of zinc, 12,500 to 13,500 tonnes of lead and 4,500 to 5,000 tonnes of copper for 2013. While the restructuring efforts were difficult moves, Geoff believes they were necessary to help strengthen the company.

The good news for Pan American is that, as a consequence of that effort - of reducing, refocusing and retuning - weve become a stronger company and much more able to survive the volatile world of the silver miner, he says. We enjoyed a long time of good prices ... and within seven or eight months weve been reminded commodities is avolatilebusiness. Prices arent the only challenge facing Pan American and other miners, particularly those doing business in Mexico. In October, the Mexican Senate approved a bill to introduce a royalty of 7.5% on mine operating income, as well as a 0.5% royalty on revenues derived from silver, gold and platinum. The bill also proposes a 10% withholding tax on dividends paid to non-resident shareholders (subject to tax treaty reductions). Pan American warned in its third-quarter earnings report that this change, effective in 2014, could result in a significant noncash adjustment to deferred taxes, in the fourth quarter of 2013.

About half of Pan Americans revenues come from Mexico, which last year was around a half a billions dollars, says Geoff. While Mexico is following measures that other countries such as Peru, Australia, Chile and Canada have taken, its the magnitude of the taxes that Geoff says is tough to take. Pan American and other miners werent expecting the rates to be as high. It is going to change the amount of investment in Mexico, he says. Money flows where the potential for returns is the greatest and to any extent where you create an additional impediment to returns, money will look for a better home. He predicts some smaller companies might pull out of Mexico as a result of the new taxes, but Pan American plans to continue producing there and is evaluating expansion projects at two of its three properties there because the economics continue to make sense. Mexico is also still one of the best mining jurisdictions in the world, he says.

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Oversupply concerns weigh on copper

Among the three key metals discussed here, copper clearly outperformed in 2013. Still, the drop in price from about $3.70 per pound at the start of the year to just above $3 as we finish of the year has weighed on margins for copper companies.

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Much of the price drop seen in 2013 is said to be the result of a demand and supply imbalance, which is expected to continue into 2014. Many copper producers are anticipating another challenging year as copper inventories remain high and the global economy struggles to gain traction. Copper producers are also watching closely to see how the US Federal Reserves tapering program will impact prices next year. Possible quantitative easing tapering may affect base metals with a stronger dollar, which is in general negatively correlated with commodities prices, KGHM CEO Herbert Wirth told us. Still, hes confident the price will recover longer-term. I personally believe the commodities super cycle is not over yet and I think that there is still some room for prices to increase in the future, he said. I believe in coppers positive price outlook in the coming years. Our survey shows about two-thirds of copper miners (62%) believe the metals price will remain around current levels for the next 12 months, while 21% expect an increase and 17% a decrease.

When asked what copper price companies are using to determine reserves, the average price was $2.77 per pound, with a range of between $1.87 and $3.26. For resources, the average was $2.87, ranging from $2 to $3.50. The long-term copper price being used for impairment testing among respondents averaged $2.83. However, this forecast has a wide range of between $1.20 and $3.50. Those predictions dont change much for 2015, and increase slightly in 2016, when the average price forecast for impairment testing is $2.87 per pound, ranging from a low of $1.30 to a high of $4. The most important input used to determine the long-term price view was consensus pricing (47%), followed by managements internal estimate (41%), with historical price averages and the forward curve both at 6%.

For reserves, 67% look at managements internal estimates, 42% consensus pricing, 18% historical averages and 9% for both the spot and forward curve. Resourceprice determinations were lower for managements internal estimates (62%), and lower for consensus pricing (38%), but higher for historical averages (21%). When it comes to cash costs, 47% of copper miners expect theirs to remain at similar levels in the next 12 months compared to 2013. Meantime, 20% anticipate costs to increase moderately and 3% are anticipating significantly higher costs for their operations, compared to 30% of respondents who expects costs to decrease in 2014. What will drive costs in the coming year for copper miners? Mine sequencing and grade mix was the top response (37%) followed closely by wage costs (33%) and both input commodity prices and the mix of lower-andhigher-grade mines into the production mix at 19%. Other costs accounted for about one third (35%) of what copper miners said would drive a change in prices in 2014, including higher production fees, mine and capital expansion costs and lower cost of services in some cases.

What copper prices are you applying to your reserves in 2013? (individual responses)
<$2 $2 $3 >$3

What is the long term price of copper?

S&P Capital IQ copper concensus

21

$4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00

6 5 4 3 2 1 2014
Low

2015

2016

Long-term
High

0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Low Median High

Average

19

INTERVIEW

Q&A with KGHM

PwC partners Jacek Socha and Mariusz Dziurdzia recently sat down with KGHM CEO Herbert Wirth to discuss the current commodities market and what opportunities it presents for his company.

Photo courtesy of KGHM

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How would you describe todays commodity market? Is the super cycle over, or is this just a down part of the cycle?
Naturally, most commodity producers are positive about the potential price development of the market in the long run. Otherwise they would not invest in their core business. I personally believe the commodities super cycle is not over, and think there is still some room for prices to increase in the future. Many authorities in developing countries have understood that their greatest potential comes through increased urbanization, which requires intense commodities usage. I am an optimistic person in general, believing in progress and peoples ability to evolve and increase productivity.

How has the lower copper price impacted your company?


It has caused a moderation of the companys earnings and margins. However, thanks to hedging positions built up over the past few years, some headwinds have been alleviated. We started building our hedging position in our three core markets copper, silver and Polish zloty. Today we are benefiting from the hedging transactions. We watch the market closely on a daily basis.

What projects and initiatives are helping to drive growth atKGHM?


One of the most important projects for us right now is development of the Sierra Gorda project in Chile, which will be one of the biggest copper mines in the world, being built together in a joint venture scheme with our partner Sumitomo Metal Mining and Sumitomo Corporations. Construction of the project should be finished in the second quarter 2014 and we are focused on delivering the planned production on time. We have also two big projects located in Canada waiting for development: Victoria and Ajax. The optimal financing structure for these projects is currently under discussion.

What is your outlook for copper?


Recent macroeconomic data shows signs of global economic recovery, which might cause a pick-up in overall demand, in turn driving up base metals prices. Although copper stocks are down and the number of cancelled warrants is high, global financial institutions anticipate many mining projects will add supply to the market. Additional output, if delivered without any delays, might put downside pressure on prices in the coming months. Possible tapering of quantitative easing in the US may also affect base metal prices. Still, I believe in coppers positive price outlook in the coming years.

What are your thoughts on the current copper price?


In recent quarters, copper prices have experienced a major correction after several strong years. This downtrend is mainly driven by investors increasing interest in equities markets and potential oversupply on the copper concentrate market. Scrap availability is still low, which has also led to production downtime across scrapdependent smelters. The global economic situation has also been perceived as moderately pessimistic in the recent months, leaving investors worried that the assumed growth in key countries driving commodities consumption will not be delivered.

What is your current position on M&A? Are you a buyer or seller in todays market?
KGHM has been successfully maintaining stable production level in Polish mines for many years. That said, it would be very hard to grow organically based only on local resources. The acquisition of Quadra FNX in 2012, which included Sierra Gorda and other projects, was the beginning of a new era in KGHMs history. Its allowing the company to strengthen its growth potential. Right now we are continuing to integrate all of these additional assets into KGHM, while at the same time still closely monitoring other M&A possibilities. We are looking for interesting assets, especially at the early stage of development.

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Coping with lower commodity prices

Falling commodity prices have led to an inevitable drop in revenues for mining companies. After years of spending on mergers and acquisitions and expanding operations with money generated from high metal prices, miners are now cutting back.

22

% change in metal prices 2013 (Comex)


10% 5 0 (5) (10) (15) (20) (25) (30) (35) (40) (45) Jan

Managing costs and finding financing are among the top priorities for miners amid less optimistic future price expectations, our survey shows. When asked to identify their top two business imperatives in 2014, executives selected managing their spending and raising financing. Productivity and mergers and acquisitions followed closely behind. M&A activity has been muted in the past couple of years as a result of tight financing conditions, volatile markets, and as many miners focus inward on cutting costs and managing current production over buying future growth. To fund corporate development and other activities, nearly half (47%) said they tapped equity markets over the past 12 months, despite how difficult it has been to raise this form of financing

Feb
Copper

Mar
Silver

Apr
Gold

May

Jun

Jul

Aug

Sep

Oct

Nov

given the volatile markets and lagging commodity prices. Another 23% said they turned to corporate debt, while 8% found project financing. About one-third (33%) of miners surveyed said they received no financing over the past 12 months. That result can be attributed to the difficult conditions many miners have cited when it comes to raising funds for future exploration, development or production growth.

For the coming year, 53% said they anticipate going to the equity markets to raise capital, while 29% expect to raise project financing and another 14% plan to raise corporate debt. Streaming and royalty agreements remain on the radar of miners with 6% of respondents looking at streaming agreements and 3% checking out royalty deals.

Where do you see the price of commodities within the next 12 months?

47% 46% Gold 38% Silver

53% 62% Copper

21%

17% 7% Increase Decrease 9% Stay the same

23

INTERVIEW

Coeur Mining Inc.

Coeur Mining Inc. may have been around for 85 years, but the company considers itself a newcomer in the industry lately.

Photo courtesy of Coeur Mining Inc.

24

We do describe ourselves as an 85-yearold startup because there is so much new here at this company over the last few years, said Mitchell J. Krebs, Coeurs President and Chief Executive Officer. Some of the biggest changes have taken place in 2013 alone. They include the producers purchase of Orko Silver Corp. and its La Preciosa development in Mexico. Coeur also increased its stake in Mexico-based exploration company International Northair Mines Ltd. to 19% and formed a new wholly owned subsidiary, Coeur Capital, Inc., to hold its existing and any future-acquired royalty and streaming interests, along with its portfolio of strategic equity investments. The goal of the new company is to provide stockholders with higher-margin, less-volatile free cash flow as well as diversified metal exposure and future avenues for growth, Mitch says. If that wasnt enough, Coeur also recently appointed several new executives and moved its head office to Chicago from Idaho. The changes are taking place alongside a readjustment across the industry as miners cope with the recent drop in metal prices and prepare for whats expected to be a volatile future. This industry is undergoing a tremendous amount of change, which makes it very exciting, says Mitch. There is a healthy shakeout underway that is going to end up making the industry a lot better.

Coeurs recent moves are also part of its focus to be among the most-attractive mining companies for stockholders, particularly as Mitch hopes more investors start returning to the sector. He acknowledges many investors have been scared off by the industrys big spending past, decisions that left a number of miners in financial turmoil as a result of the recent slump in commodities prices. Whats more, companies are competing with other forms of investment such as ETFs, where they dont have to risk putting their money into one stock. Companies are being forced to rethink What is their purpose for investors, why should investors buy the shares of a mining company? says Mitch. Coeur is working to attract more investors by further de-risking the company and trying to provide a more stable platform of high-margin cash flow to generate stronger stockholder returns. The company, which has a growing silver and gold portfolio, has assets in the United States, Mexico and Bolivia. It also owns strategic minority shareholdings in eight silver and gold development companies in North and South America.

In 2013, Coeur expects to produce between 18 million and 19.1 million ounces of silver and between 250,000 and 258,000 ounces of gold. Cash operating costs per silver ounce are expected to be between $9.50 and $10.50 for 2013. At its Kensington gold operation, cash operating costs per ounce for 2013 are expected to be between $950 and 1,000. Mitch says the company plans to reduce costs across its operations, and further explore in areas with the most potential. In the past some in the industry have focused on growth for growths sake and establishing as much scale as possible, he says. You dont have to be the biggest to be the best in this industry.

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Points of interest
Metals predominantly mined
What foreign exchange rate do you use for the following currencies in your mine planning?
Year US$: Canadian 1.01 1.00 1.02 US$: Australian 0.97 1.00 0.96 2011 2012 2013

71% 32% 25%

How have you raised nancing on the past 12 months?

Gold Copper Silver

Equity Corporate debt Project financing Royalties Streaming arrangement No financing raised % 0 10 20 30 40 50

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What have you done with your dividends in the past year?

Increased

5%

Maintained at the same levels

Decreased

8%

6% 81%

Have not paid dividends

Expect to increase corporate development activity in 2014

59% 78%

What geographical region(s) does your business cover?

North America South America Europe Africa Australia Asia 0 20 40 60 80 100

Do not plan on hedging their principle commodity in2014

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Mining Excellence at PwC


Delivering local solutions to global challenges
The mining sector is facing a range of competing trends and a rapidly changing global business environment. Against the backdrop of commodity price fluctuations, miners need to balance shareholder dividend expectations whilst maintaining an investment pipeline in the midst of increasing operating costs. Safety, environmental and community principles also continue to shape the industry as miners look to achieve their licence to operate and deliver on corporate responsibilities. Mining Excellence at PwC has been designed to mobilise and leverage PwCs collective global knowledge and connections to deliver an exceptional and tailored client experience, helping our clients navigate the complex industry landscape and meet their growth aspirations. Our team of specialists is exclusively focused on the sector and brings an industry-based approach to deliver value for you and your organisation.

The positive story for miners is that the long-term growth fundamentals remain in tact. But, mining companies are facing significant downward pressure. As an industry, we need to fully address the confidence crisis, before we are able to move on to the next phase of the cycle.
John Gravelle, PwC Global Mining Leader

Mining Excellence at PwC provides our clients:

leading edge knowledge and global thought leadership


With significant investment in the research behind our mining publications and a comprehensive industry learning and development program, our professionals can share both industry and technical insight with our clients, such as:
A library of industry publications designed to help challenge conventional thinking and delve into topical industry issues. This includes: global thought leadership publications including Mine and Mining Deals flagship territory publications focused on regional and industry-specific issues

connections to our vast network of mining experts and global client portfolio
We have the widest network of industry experts who work out of strategic mining hubs across the globe to help better connect you to vital mining markets. Our connections provide:
seamless client service delivered with collaborative cross-border account management maximised deal potential through a wellconnected global community of mining leaders a mobile workforce to ensure effective service delivery in even the most remote mining locations.

the delivery of an experience that meets our clients definition of value


With mining experts working around the globe, our award winning teams are helping clients deliver on specific projects and organisational growth aspirations. We offer advisory, tax and audit services to global corporations and locally listed companies. Mining Excellence at PwC complements this with:
a suite of niche mining consulting capabilities focused on optimising value across mining operations and effectively managing risk to help our clients grow their business and deliver shareholder value a comprehensive client feedback program to ensure we are always improving and delivering on individual client needs.

an extensive industry development program for our people and clients. This features our annual learning and development programs: Americas School of Mines (North America) London School of Mines (United Kingdom) Asia School of Mines

Global Mining Leader

John Gravelle Toronto

Ken Su Beijing John Campbell Moscow

Kameswara Rao Hyderabad

Jason Burkitt London Steve Ralbovsky Phoenix Ronaldo Valino Rio de Janeiro Sacha Winzenreid Jakarta

Hard Hat: The Mining Experience (Australia)

Hein Boegman Johannesburg Jock OCallaghan Melbourne

28

Photo courtesy of KGHM

29

Contacts
Global
Global Mining Leader
John Gravelle
Canada T: +1 416 869 8727 E: john.gravelle@ca.pwc.com

Key contributors
Hein Boegman Amy Hogan James Lusby Sachin Mehta Joe Rafuse Chris Sullivan A special thank you to writer Brenda Bouw
South Africa T: +27 11 797 4335 E: hein.boegman@za.pwc.com

Steve Ralbovsky

Ken Su

U.S.A T: +1 (602) 364 8193 E: steve.ralbovsky@us.pwc.com

China T: +86 (10) 6533 7290 E: ken.x.su@cn.pwc.com

Ronaldo Valino

Kameswara Rao

Brazil T: +55 (21) 3232 6139 E: ronaldo.valino@br.pwc.com

India T: +91 40 6624 6688 E: kameswara.rao@in.pwc.com

Sources
Bloomberg Capital IQ Intierra World Gold Council ETF Securities

Jock OCallaghan

Sacha Winzenried

Australia T: +61 3 8603 6137 E: jock.ocallaghan@au.pwc.com

Indonesia T: +62 21 5289 0968 E: sacha.winzenried@id.pwc.com

Frank Rittner

Jason Burkitt

UK T: +44 (20) 7213 2515 E: jason.e.burkitt@uk.pwc.com

Russia T: +7 (495) 232-5536 E: frank.rittner@ru.pwc.com

A special thank you to the executives we interviewed for this report. To view the full interviews visit www.pwc.com/ca/commoditiesdig

2013 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member rm, and may sometimes refer to the PwC network. Each member rm is a separate legal entity. Please see www.pwc.com/structure for further details. 3796-01 1213