Economia Minera - Cerro Corona PDF

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
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
What is the disconnect?
Too many fingers in the wrong pie

Mining profits
Not growing the right pie

The Mining Economy to create jobs, fuel development and attract investment capital
Too many fingers in the wrong pie
At first glance, it might appear theres a bigger slice to take.
Note: Data based on PwC Mine 2012 analysis of income statements from the top 40 companies but scaled up to represent the whole mining sector
Source: IHS Global Insight; Mine: PwC Mine 2013
Mining industry is going through tough times
At first glance, it might appear

theres a bigger slice to take
Our industry has made this pie

look more attractive than it is
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)
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
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
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
30
25
%
IIn reality,
lit margins
i and d returns
t 20
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
Industry is not self-funding at present


IIn reality,
lit margins
i and d returns
t
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
Investors are deserting the sector


IIn reality,
lit margins
i and d returns
t

Equity model is at breaking point
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

IIn reality,
lit margins
i and d returns
t

Mining investments under threat
Sources: Factiva, Literature search
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
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
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
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
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
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)
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
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
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

resource rich countries

with its GDP multiplier effect Technology transfer Infrastructure Community development
Investing
g in mining
g creates jjobs,,
investment and uplifts
communities
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

resource-rich developing 2.6x Full multiplier
Direct impact
of mining effect of mining
countries 7%
%
= 12%
=3%
5%
($850B)
($340B)
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
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)
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
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
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
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
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?
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
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
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
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
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

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
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
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
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

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The Mining Economy: How to grow

grow, not shrink

Central Government Debt ($T) Central Government Debt as % of GDP

Resource nationalism Miners encounter the

Too many fingers in the wrong pie

Not growing the right pie

At first glance, it might appear theres a bigger slice to take.

At first glance, it might appear

Our industry has made this pie

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

Source: Streetwise reports website

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

Similarly the top 40 mining 10

companies are experiencing 5

2007 2008 2009 2010 2011 2012

Source: PWC Review of global mining trends 2012

At first glance, it might appear

Our industry has made this pie

Operating cash flows not

Note: Data based on PwC Mine 2012 analysis of top 40 companies

At first glance, it might appear

Our industry has made this pie

Operating cash flows not

Equity model is at breaking point

Our industry has made this pie

Operating cash flows not

Equity model is at breaking point

Mining investments under threat

Sources: Factiva, Literature search

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

At first glance, it might appear theres

Our industry has made this pie look

Operating cash flows not sufficient to

Equity model is at breaking point

Mining investment is under threat

The revenue pie shows just how little

The more everyone takes, the

Rising costs of mining

combined with a greater

The result: loss of jobs and long-

Countries must both g

Source: Brenthurst Initiative, 2003

GDP growth is essential for

In 2010 the economies of 40

Source: ICMM: Minings contribution to sustainable development October 2012;

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

Mining punches above its weight

with its GDP multiplier effect total GDP ~3.2x for

GDP growth is essential for Number of jobs and livelihoods

GDP is the right pie, especially for 14

GDP growth is essential for Multiplier benefits go beyond jobs

GDP is the right pie, especially for

Mining punches above its weight

GDP is the right pie, especially for

GDP growth is essential for

Growth leads to more

The result: increased

How do we get there?

It has been done before

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

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

Long term collaborative

leading to more investment