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Strategies in Volatile Times – MineAfricaJames E. Kofman – Vice Chairman, UBS Securities Canada
January 13, 2009
2
UBS: Global Investment Bank of Choice for Canadian Companies
Source: FP Datagroup, Bloomberg
C$2.9 billion
Joint bookrunner on private placement and joint lead manager on
bought deal equity offering2008
US$460 million
Joint bookrunner on convertible bond offering
2008
C$267 million
Joint bookrunner on bought deal equity
unit offering
2008
US$2.8 billion
Financial advisor on restructuring
Pending
US$17.1 billion
Financial advisor on merger with Thomson
Corporation
2008
€3.0 billion
Joint bookrunner on3-year fixed
rate bond issue
2008
In a challenging year who led the largest deals in Canada?
Bringing global capabilities to our Canadian clients
Largest M&A Transaction
Largest Equity Offering
Largest Corporate Debt Offering
Largest Equity-linked Offering
Largest Public Equity Unit Offering
Largest Corporate Restructuring
3
What Went Wrong, Subprime Loan to CDO
Mortgage Loans ABS Bonds // ABX Index ABS CDO CDO of CDO
AAA Bond
AA Bond
A BondBBB Bond
Unrated EquityBBB Bond
Unrated Equity
A Bond
AAA Bond
AA Bond
BBB Bond
AA BondA Bond
AAA Bond
Unrated Equity
$1B of subprime mortgage
loans
4
Looking Back at 2008
It begins with the financial crisis
NATIONALISEDNATIONALISED
NATIONALISEDNATIONALISED
NATIONALISEDPart-NATIONALISED
Rescue package
COLLAPSED & Sold
Rescue package
COLLAPSEDTaken over
Taken over
Rescue package
Rescue package
Rescue package
Rescue package
Rescue package
Rescue package
Rescue package
Rescue package
SPV Package
Rescue package
Rescue package
Rescue package
Rescue package
Rescue package
Rescue package
5
The Tangled Web
Investment Banks
Bond defaults hit money
market funds
Money market fund exposure
CP market seizing
Swap counterparties
dump collateral
Stock prices hit
Failure of interbank funding
Insurance of structured
notes
AIG
Difficulty in wholesale
funding
Fear of systemic risk
Confusion from scale
and complexity
CDS counterparty
exposure
Commercial banks
Falling equities
Risk aversion, high cash
levels
Long only funds
Withdraw stock lending
on counterparty
concerns
Short squeeze on “hard to
borrow” stocks
Reduce net equity
positions
Fear of under performance at
year end
Hedge funds
30% + in cash
Fears of mass redemptions
Corporates
Lending tightened
“2/20” and Regulation Changes
6
0
100
200
300
400
500
1984 1988 1992 1996 2000 2004 2008
TED
Spr
ead
(3m
T-b
ill v
s. L
IBO
R)
Interbank Lending Cost
TED Spread
Down 329 pts from the peak
Current = 135
7
Credit Default Swaps
Entity 31-Dec 19-Sep 12-Sep 1-Jan
117 153 150 49
189 204 188 73
290 369 186 68
119 145 130 50
155 331 367 125
402 554 240 98
201 226 136 50
128 486 400 106
8
Relative Credit Market Performance World Equity Indices
Market Value and Performance
Last
Trade 2008 YE
Americas Value % Chg % Chg (USD)
Dow Jones 8,776 (33.8) (33.8) S&P 500 903 (38.5) (38.5) Nasdaq 1,212 (41.9) (41.9) S&P/TSX 8,988 (35.0) (47.1) Mexico Bolsa 22,380 (24.2) (40.5) Brazil Bovespa 37,550 (41.2) (55.3)
Europe/Africa/Middle East DJ Euro Stoxx 50 2,448 (44.4) (46.8) FTSE 100 4,434 (31.3) (49.5)
Asia/Pacific
Nikkei 225 8,860 (42.1) (27.7) Hang Seng 14,387 (48.3) (47.9) S&P/ASX200 3,722 (41.3) (52.8) Shanghai SE A Share 1,912 (65.4) (62.9)
0.00
4.00
8.00
12.00
16.00
20.00
24.00
Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08
Yie
ld (%
)
10-Year Treasury Rates
6-Month LIBOR Rates
Broad Market Index
20.00
2.37
1.85
9
Market Volatility
VIX Index Number of Days where S&P Declined 1.5% or More
5
15
25
35
45
55
65
75
85
2001 2002 2003 2004 2006 2007 2008
VIX
Inde
x
September 11
Accounting scandals
War in Iraq
Economic concerns
Credit concerns
1720
22
31
37
49
13
42
4
19
55
0
10
20
30
40
50
60
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Num
ber of
day
s
10
The “Un-Wind”
Oil vs. Banks Trade (WTI vs. BKX index) DJAIG Commodity Index
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jan-07 May-07 Oct-07 Mar-08 Jul-08 Dec-08
Oil
/ KBW
Ban
k In
dex
(Exc
hang
e Ra
tio)
From peak to current: (65%)
From "BS" event to peak: +108%
60
80
100
120
140
160
180
Jan-04 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08
DJA
IG C
omm
odity
Inde
x (reb
ased
to
100)
`
11
CS/Tremont Hedge Fund Index
Redemptions Start
Hedge Fund-Owned Share Performance
(47)
(39)
(21)
(14)
(60)
(50)
(40)
(30)
(20)
(10)
-
2008 YTD Sept-Dec 08
Pric
e pe
rfor
man
ce (%
)
High % Ownership by HFs Low % Ownership by HFs
350
370
390
410
430
450
Jan-
06
Apr
-06
Aug
-06
Dec
-06
Apr
-07
Jul-0
7
Nov
-07
Mar
-08
Jul-0
8
Nov
-08
CS/
Trem
ont H
edge
Fun
d In
dex
12
Equity Funds Flow
Canadian Domestic Equity Mutual Fund FlowsUS Mutual Fund Flows
2006 2007 2008
(80)
(60)
(40)
(20)
0
20
40
J FMAM J J ASONDJ FMAM J J ASONDJ FMAM J J ASON
Ave
rage
Mon
thly
U.S
. Equ
ity F
low
s (U
S$bn
)
(2.5)
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Oct
07N
ov07
Dec
07Ja
n08
Feb0
8M
ar08
Apr
08M
ay0
Jun0
8Ju
l08
Aug
08Se
p08
Oct
08N
ov08
Net
Sal
es e
xcl.
Re-in
vest
ed D
istr
ibut
ions
(C$b
n)
13
A Weakening Labour Market Has Cut Into Consumer Confidence
Financials Led Us Here…Now It’s The Economy
40
60
80
100
120
1978 1983 1988 1993 1998 2003 2008
Uni
vers
ity o
f M
ichi
gan
Con
sum
er S
entim
ent In
dex
0
2
4
6
8
10
12
US U
nemploym
ent Rate (%)
US Unemployment Rate (%) Consumer Sentiment Index
14
The Case For and Against Equities…
Equities have had their worst year since the MSCI World Index began in 1969
Equities have fallen 45% from their October 2007 peak in price terms
Global equities trade at a trailing PE of 11.1 times, the lowest PE since 1982
Over 80% of the MSCI World universe is now trading at PE multiples of less than 20x trailing earnings
At less than 1.5x, current global P/BV is at a level last reached in 1984
Today’s global dividend yield is 3.8%, a yield last seen in 1984
FOR AGAINST Global growth is expected to fall sharply in
2009 to 1.0%
Profit margins typically trough going into a recession, allowing margin expansion to drive a strong rebound in earnings. Profit margins remain close to their peak, threatening earnings recovery
In previous earnings cycles, global earnings have fallen 30-40% from their peak, but so far EPS is down only ~20%
Downgrades to earnings estimates have only begun
TED spreads remain well in excess of historic “norms”
Equity volatility has reached new heights
Equities look cheap compared to historical levels…
…but significant global volatility and economic concerns pose a serious risk
15
TSX Had Been Outperforming Global Markets
Total Relative TSX Performance to MSCI World Index (US$)
The Canadian markets have outperformed the world indices for eight of the last ten years
14.4%
(26.4%)
6.4%
20.3%
3.9%
19.7%
5.8%
21.7%
(3.9%)
18.1%
7.1%
(5.8%)
(1.2%) (4.5%)
(6.8%)
(35%)
(25%)
(15%)
(5%)
5%
15%
25%
35%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Rela
tive
%ou
tper
form
ance
(US$
)
16
Global Equity Issuance
Canadian Equity Issuance Global Equity Issuance
14
23
18
10
17 17
23
13
18
29
21
0
5
10
15
20
25
30
35
40
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Proc
eeds
(C$b
n)
0
75
150
225
300
375
450
# of issues
Proceeds (C$bn) Number of issues
0
5
10
15
20
25
30
35
40
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
75
150
225
300
375
450
Proceeds (C$bn) Number of issues
622
943
783
602572
450
345
457
366
529
629
0
250
500
750
1,000
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Dea
l Val
ue (U
S$bn
)0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
# of Issues
0
5
10
15
20
25
30
35
40
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
75
150
225
300
375
450
Proceeds (C$bn) Number of issues
17
2.00%
2.75%
3.50%
4.25%
5.00%
5.75%
6.50%
7.25%
8.00%
8.75%
9.50%
10.25%
O N D J F M A M J J A S O N D
Yie
ld (%
)
+75
+125
+175
+225
+275
+325
+375
+425
+475
+525
+575
+625
Corporate Spread Index (bps)
Implied Yields 10-yr UST Corporate Spread Index
Coupons remain stable during Bear Stearns crisis in March
All-in yields moved drastically wider, but have tightened
Investment Grade Credit Market Conditions
2007 2008
18
High Yield Debt Volume
High Yield Debt Volume (US$bn)
Liquidity has dried up
3844
68
116
138
101
52
91
65
139
155
112
167
155
53
1 0 10
40
80
120
160
200
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Oct
-08
Nov
-08
Dec
-08
(US$
bn)
19
Global Debt/Equity Ratios
20%
30%
40%
50%
60%
70%
80%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008E
Global Corporate Net Debt to Equity (Nonfinancial Companies)
20
M&A Activity and Share Price Movement
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Dea
l Vol
ume
(US$
bn)
200
400
600
800
1,000
1,200
1,400
1,600
1,800
MSC
I Price Index
Global M&A Deal Volume (US$bn) MSCI World Price Index
21
Factors Impacting the Global M&A Market
Financial need is the key reason to sell
Buyers balancing desire to preserve cash with unwillingness to issue shares at depressed prices
High premiums expected due to depressed share prices
Companies reluctant to buy while length and severity of the market downturn is still unknown
Activity expected to pick up once the “worst is over” and the markets stabilize
Hostile approaches are increasingly common due to gap between buyers’ and sellers’ price expectations
Large and well-financed buyers want clarity on forecast price decks before buying companies in the commodity space
Emerging market nations are still meaningful players in the M&A market
From the Seller’s Perspective
From the Buyer’s Perspective
Other Factors and Considerations
Acquisitions likely to be relatively “small”
22
Housing Cycles are Long in Both Directions Market Recoveries Take Time
Crises Do End
Quarters prior to and after recapitalisation plan
-8 -7 -6 -5 -4 -3 -2 -1 0 1 8765432
120
115
110
105
100
95
90
85
80
Bank re-capitalisation index = 100 in quarter
of re-capitalisation
Equity price index, average of previous crises
Source: UBS research, based on experiences of US, Finland, Norway and Sweden in late 1980s / early 1990s
(60)
(40)
(20)
0
20
40
60
80
100
1892
–189
4
1895
–190
1
1906
–190
7
1908
–191
0
1913
–192
1
1922
–192
5
1926
–193
2
1933
–194
0
1943
–194
7
1956
–196
8
1973
–197
6
1980
–198
4
1985
–198
9
1990
–199
7
1998
–200
6
% c
hang
e U
.S. r
esid
entia
l pric
es
U.S. residential price % increase (decrease)
3 years
7 years
2 years
3 years
9 years
4 years
7 years
8 years
5 years
13 years4 years
5 years
5 years
8 years
9 years
23
100
150
200
250
Jan-00 Jul-02 Jan-05 Jun-07 Dec-09 May-12Case-Shiller Index Case-Shiller Futures
(23%)
(10%)
Emerging from the Credit Crunch
Recapitalization, failure and consolidation of banks
Capitulation in capital markets
Distressed asset liquidity
Enduring legislation
– Industry Regulation
– TARP
– Market rules (eg. short sale, CDSs)
– Hedge funds
– Nationalization
– Rating agencies
– Accounting rules
– Reverse Glass-Steagall
Real estate price stability Banks resume lending
1 2 3
4 5 6
0 200 400 600 800 1,000 1,200
Enron
Worldcom
WaMu
Lehman
AIG
Pre-Bankruptcy Assets (US$bn)
3844
68
116
138
101
52
91
65
139155
112
167155
53
1 0 10
40
80
120
160
200
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Oct
-08
Nov
-08
Dec
-08
(US$
bn)
0
100
200
300
400
500
1984
1988
1992
1996
2000
2004
2008
TED
Spr
ead
(3m
T-b
ill v
s. L
IBO
R)
24
Redefined Metals & Mining Landscape
Global Mining Companies—2008 Peak vs 2008 YE
243
192
83
155
36
90
4129
2232
56
78
4635
2720
3032345060
112
269999
1223 18 14 123014
0
50
100
150
200
250BH
P Bi
llito
n
Val
e
Chi
naSh
enhu
a
Rio
Tint
o
Barr
ick
Ang
loA
mer
ican
Ang
lopl
ats
Gol
dcor
p
New
mon
t
SCC
Nor
ilsk
Kin
ross
Xst
rata
Free
port
Alc
oa
Impl
ats
Peab
ody
Ener
gy
Teck
Mar
ket C
apita
lizat
ion
($bn
)
As of 12/30/08 As of 5/30/08
24
25
Weakened Commodity Price Performance
Relative Commodity Performance—Since 5/30/08
(1%)
(33%)
(40%)
(47%) (48%)(51%)
(62%)(65%)
(70%)
(60%)
(50%)
(40%)
(30%)
(20%)
(10%)
0%
Gold Silver Zinc Nickel Aluminum Nat. Gas Copper Oil
Rela
tive
Perf
orm
ance
Sin
ce M
ay 3
0, 2
008
(100
%)
26
Gold Equities versus Gold Price Relative Performance
Gold Equities Significantly Oversold Relative to Gold Price
0.05
0.10
0.15
0.20
0.25
0.30
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08
XA
U/G
old
XAU/Gold
$415 $438 $517 $637 $834 $882
Average = 0.22x
27
What Happened to the Materials Bull MarketWhy are commodity prices struggling…
– Demand weakness2009 global GDP expected to be 1.0%, likely pushing surpluses up and negating positive effects of poor supply growth
– De-leveragingHedge fund selling has resulted in high volatility and pressure in the asset class
– Fund redemptionsFurther selling pressure generated from less sophisticated money
– US dollar strengthRecent strength has added to selling pressure in commodities. Could be a catalyst if reversed
– Chinese growth concernsDomestic construction activity and steel consumption has slowed
– Regulatory pressuresConcerns regarding disruptive impact of speculators in commodities markets – further regulation expected
1
2
3
4
5
6
28
Mining M&A Activity
Canadian Mining M&A Global Mining M&A
M&A activity in the sector has fallen off dramatically after a record year in 2007
83
105
23
61
96
32
0
20
40
60
80
100
2001
2002
2003
2004
2005
2006
2007
2008
Val
ue (U
S$bn
)
(67%)
73
29
4333
75
190 195
108
0
40
80
120
160
200
2001
2002
2003
2004
2005
2006
2007
2008
Val
ue (U
S$bn
)
(44%)
29
Top 2008 Mining M&A Deals—Canada
Canadian Deals
Date
Announced Target Acquiror
Deal Value
(C$mm)
07/29/08 Fording Teck 14,416
03/18/08 Royal Utilities Income Fund Sherritt International 1,380
08/22/08 Penfold Capital Severstal Resources 1,222
07/31/08 Gold Eagle Mines Goldcorp 1,211
11/21/08 Lundin Mining HudBay Minerals 1,008
07/24/08 Aurelian Resources Kinross 895
03/31/08 Metallica Resources New Gold 612
11/14/08 Forsys Metals Corp. George Forrest International 538
06/23/08 Skye Resources HudBay Minerals 507
07/14/08 Cadence Energy Barrick 401
30
Top 2008 Mining M&A Deals—Global
Global Deals
Date
Announced Target Acquiror
Deal Value
(C$mm)
07/29/08 Fording Teck 14,416
03/14/08 IPSCO Inc Evraz Group SA 4,025
03/03/08 Zinifex Ltd Oxiana Ltd 3,774
01/17/08 IronX Mineracao SA Anglo American PLC 3,493
07/17/08 New Hope-New Saraji Project BHP Billiton Mitsubishi 2,384
10/02/08 Northam Platinum Ltd Impala Platinum Holdings Ltd 2,281
02/02/08 J Mendes Ltda Usiminas 1,900
03/03/08 Oriel Resources PLC Mechel OAO 1,626
02/08/08 SHV North America Corp Nucor Corp 1,440
10/02/08 Mvelaphanda Resources Ltd Impala Platinum Holdings Ltd 1,395
31
Financing Alternatives and Potential Investors
Private equity funds
Convertible bonds
Corporate debt - Bank debt - Public debt - Term Loan B
Asset sales / JV
Royalty / streams
Common stock / warrants
Sovereign wealth funds
Royalty / streaming companies
Strategic investors
Generalist investors
Mining sector investors
Types of Financing
Potential Investors
Hedge funds
Other
1
2
3
4
5
6
Project finance
7
32
What are the Corporate Implications?
Understand direct / indirect exposure M&A opportunities for the strong / vulnerability for the rest
Market recovery will take time Commodities
Cost of capital will rise Shareholder relations are more important than ever
Global growth will slow and a “G7” recession is forecast
De-levering will elongate the recovery
“Do it when you can, not when you have to”
Market will be motivated to re-open on valuation attractiveness
Higher spreads, fees and tighter covenants likely
Cyclical weakness vs. secular strength
Supply contraction as high cost producers exit
Preserve liquidity
Use cash wisely
Raise capital to provide financial cushion
Be cautious about share buybacks
33
Is Humour a Sign of Capitulation?
“A banker, eh? Can you make a living at that?” “Honey, we’re homeless”
ON
E W
AY
WALL ST
First National
Bank & Grill
Source: The New Yorker, October 6, 2008
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