1 2 Mining Activity & Investment in Latin America

1

Australia‐Latin America:

The Business Outlook

Mining Activity & Investment

in Latin America

Mining Investment & Finance 2012

Grace Hotel, Sydney11‐13 September, 2012

Address given by:

Jose BlancoSenior Partner, Blanco Partners&Chairman, Australia‐Latin America Business Council

2Latin America possesses outstanding mining credentials

Advantages Challenges

Abundant reserves

Diverse geology

World‐leading deposits

Largest share of exploration budget

Key markets have low to moderate risk profile

Developing capital markets

Deepening engagement with China

Growing Australian footprint

Australia is more Africa‐focused and its knowledge base is relatively modest

Perception of Canadian dominance

Low level of personal connections

Disconnect between mining and local capital markets

Some markets come with relative higher risk

Infrastructure challenges vary ‐ water, energy, transport

Positions of some indigenous communities / resource nationalism

3Global nonferrous exploration budgets by region, 2011

Source: Metal Economics Group, 2012 – Corporate Exploration Strategies

$4.5bn

Estimated Global Nonferrous Exploration Budget Totals1993 ‐ 2011

4Top destinations for nonferrous exploration, 2011

Source: Metal Economics Group, 2012 – Corporate Exploration Strategies

5Location of significant Gold and Base Metals drill results announced 2011

Source: Metal Economics Group, 2012 – Industry Monitor, Exploration Activity Service

6Latin America possesses world‐class mining projects

Cerrejon Coal Mine, Colombia

Yanacocha Gold Mine, Peru

Carajas Iron Ore Mine, Brazil

Chuquicamata Copper Mine, Chile

Salar de Uyuni Salt Mine, Bolivia

7M&A activity slows (a) in and (b) from Latin America in 2011

Source: Ernst & Young ‐Mergers, Acquisitions and capital raisings in minerals and metals report, 2011 Trends – 2012 Outlook

FACT: Deal doing and project financing have become progressively harder

8Aspects of Latin America that you need to keep in mind

Not a single, homogeneous region ‐ be conscious of the differences!!

What is the prevailing and trending political regime?

What is the operating regulatory environment?

What are the cost structures?

What is the legal regime?

Degree of increased uncertainty about mining policy and policy stability in some markets

Certain markets have responded to strong mineral prices and corporate profits with degrees of increased resource nationalism

Australian investors place lower valuation on Australian‐owned assets in Latin America than elsewhere ‐ ASX ‐v‐ TSX investor perceptions

Shortage of high‐level executives with required ‘dual’ knowledge of both Australian and Latin American project components ‐ it is a case of both what you know and who you know

There is not a widespread following amongst Latin American investors for resource company equities beyond the major national icons

9Sovereign ratings reflect much improved economic positions

Source: S&P, Fitch, Moody’s. All ratings are as at August, 2012

Country S&P Fitch Moody’s

Chile A+ A+ Aa3

Mexico BBB BBB Baa1

Brazil BBB BBB Baa2

Peru BBB BBB Baa3

Colombia BBB‐ BBB‐ Baa3

Bolivia BB‐ B+ Baa3

Venezuela B+ B+ B2

Argentina B B B3

Ecuador B B‐ Caa2

Investment grade = greater finance options

10Sustained economic improvement reflects improved fundamentals

Source: Francis Stenning, Bolsa de Lima

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

A+ A+ A+ A+ A+

A A A A

A‐ BBB+ BBB+ BBB+

BBB BBB BBB BBB BBB

BBB‐ BBB‐ BBB‐ BBB‐ BBB‐ BBB‐ BBB‐

BB+ BB+ BB+ BB+

BB BB BB BB BB BB

BB‐ BB‐ BB‐ BB‐

B+

CHILE

COLOMBIA

BRASIL

PERU

MEXICO

Chile

Mexico

Colombia

Peru

Brazil

11Latin American GDP growth forecasts 2012‐13 (%)

Source: BBVA Research

Lower forecasts due more to local factors than external ones

Turbulence in EU markets and lower global growth are affecting all Latin American countries to varying degrees

August 2012 Forecast May 2012 Forecast

12Able to withstand global shock, but impact would be considerable

Source: BBVA Research

Solid growth during 2008/09 recession reflects improved economic conditions and break with the past

Good levels of international reserves and low levels of external debt ‐ provide scope to deal with sudden halt in capital inflows

LatAm Countries: International reserves (%of GDP) LatAm Countries: Government gross debt (%of GDP)

13Latin America’s global connectivity growing fast

1 Intra‐regional using exports onlySource: International Trade Centre and HSBC, figures considering merchandise trade and continental Latin America

Trade between Latin America and other regions was USD 1.4 trillion¹ in 2010 (6% of world trade)

Latin America trade forecast to grow to USD 3 trillion by 2020 (7.6% CAGR)

Latin America includes some of the fastest growing cross‐regional trade corridors (e.g. China to Brazil, 37% CAGR ‐ Latin America to Asia, 20% CAGR)

14Mineral exports comprise large slice of Latin America’s trade flows to Asia

Source: BBVA Research and COMTRADE

Trade Flows ‐ Latin America to AsiaCommodities, 2012

FACT: Growing Chinese/Asian investment in Latin American resources sector

48%

15Importance of mining varies greatly in the region . . . . .

Or last year available 2010Source: PriceWaterhouse Coopers – Statistics Canada, BCRP, Banco de Chile

16. . . . . with Chile and Peru leading by a large margin

Or last year available 2010Source: PriceWaterhouse Coopers – Statistics Canada, BCRP, Banco de Chile

17Correlation between mining importance and policy “friendliness”

Source: Fraser Institute 2011/12 Survey, PriceWaterhouse Coopers

* Chubut Region Only

18Mining importance is reflected in accessibility of geological data



19Legal regime has major impact on investment attractiveness

** Chubut Region Only


20Socioeconomic issues impact upon investment climate

** Chubut Region Only

* Includes local purchasing, processing requirements or supplying social infrastructure


21Politics matter to investment



22Corruption Perceptions Index 2011

Source: Transparency International

22 Chile 7.225 Uruguay 7.032 Botswana 6.139 Puerto Rico 5.649 Rwanda 5.050 Costa Rica 4.8

23Global rankings by commodity

Commodity Brazil Chile Mexico Peru

Copper 1 2

Silver 5 1 2

Iron Ore 3

Lead 4

Zinc 3

Gold 5

FACT: Region is also in Top 5 producers for molybdenum, bauxite, rhenium, and nitrates.

24Substantial mining sector investment pipeline over next decade

Source: * CESCO –estimates include all mining industries, excluding energy. Do not include exploration or refineryǂ SONAMI upgrade, April 2012

Estimated Mining Investment in Latin America(Selected Countries)

Country Investment(USD billion*)

Term

Chile 100ǂ 2020

Brazil 68 2015

Peru 56 2020

Colombia 22 2020

Mexico 13 2012

Argentina 10 2015

25Outbound capital flows – junior IPOs (2011)

Source: Ernst & Young ‐Mergers, Acquisitions and capital raisings in minerals and metals report, 2011 Trends – 2012 Outlook

Global focus ‐ Latin America more than holds its own

26Prominence of TSX for mining companies active in Latin America

Source: TSX and TSXV

Unless indicated otherwise, all numbers as at 31 December, 2011

But, the tide is turning and will accelerate towards ASX . . . . and

27Latin American stock markets are evolving

≠ Data as at 31 August, 2012 * Data as at 31 December, 2011

Integration of the stock markets of Chile, Colombia and Peru launched November, 2010, with Mexico to join in next phase

Allows investors in each country to buy specific listed stocks from any of the other countries

Gives investors greater choice and diversification ‐ brings new issuers to market ‐ increases competition

17 Canadian companies have dual listings – TSX/MILA raised $220m in 2009/10

Challenges include: tax issues ‐ settlement remains bilateral ‐ volume is small

# Issuers≠: 604 Market Cap*: US$ 600bn

# Issuers≠: 476 Market Cap*: US$ 408bn

# Issuers≠: 373 Market Cap*: US$ 1,228bn

28Latin American stock markets ‐ look beyond the glamour

Brazil’s BOVESPA requires all company financials translated into Reaisand into Portuguese by an auditor recognised by the Brazilian regulator

Peru’s BVL (and therefore MILA) only requires translation into Spanish of internationally recognised financials

If not TSX, ASX or AIM, where?

29Snapshot ‐ Bolsa de Valores de Lima

Source: Francis Stenning, Bolsa de Valores de Lima

54%

14%

15%

7%

8%1%

Mining

Financial

Others

Public Services

Industry

Agrarian

Insurances

A.F.P.

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011

51% 50% 53% 50% 49%

49% 50% 47% 50% 51%

Mining Others

2%12%

23%

8%21%

5%

10%

11%

5% 3%AFP

Financial

Misc.

Agrarian

Industry

Juniors

Mining

Public Services

Insurances

Others

Listed Companies by Industry (%)Market Capitalization by Industry (%)

Mining as a % of equity trades on BVL

41 in total:‐ 21 Peruvian‐ 6 Foreign‐ 14 Junior

30Consider the alternative destinations and select the one best for you

Use Caution: Mining sentiment not as supportive as required. Degree of State control over mining activities. Argentina* (except San Juan, Santa Cruz, Salta and others) Bolivia Costa Rica Venezuela

Emerging/Watch: Improving policy settings for mining. Good potential for mining development.Watch: Dominican Republic El Salvador Panama Paraguay

Emerging: Colombia Ecuador Uruguay

Consolidated: Mining is recognised as a major driver for economic growth. Favourable policy settings. Pipeline of major projects. Brazil Chile Mexico Peru

31Mining sector snapshot ‐ Argentina

Recent history of mining development dates from 1990s • Bajo de la Alumbrera (MIM, now Xstrata Copper) • Cerro Vanguardia (AngloGold Ashanti)

• Federal constitution, but Provinces own natural resources and set the rules• clear division between pro and anti‐mining • Chubut and Mendoza provinces have prohibition on use of cyanide in mining

process

Vastly underexplored. Seen as having vast potential in:• Gold• Copper• Silver• Lithium• Uranium

Policies of Federal Government on foreign exchange and other aspects of doing business seen as detrimental to foreign investment

Pro‐Mining Provinces:‐ San Juan‐ Santa Cruz‐ Salta‐ Catamarca‐ Jujuy

32Mining sector snapshot ‐ Brazil

Brazil produces 21 minerals altogether, but iron ore accounts for 82.6% of all metal exports (+300 Mtpa), with Vale contributing approx. 80% of production

Iron ore production centred in Iron Quadrangle in Minas Gerais and Carajas in Para states, with Vale owning substantial number of smaller scale projects/prospects that are not of interest but should be exploited

Growing number of Aussie iron ore juniors, including: • CentaurusMetals• South America Ferrous Metals• Cabral Resources• Cleveland Mining

Allow for ‘custo Brasil’ – high level of bureaucracy, operating costs, complex regulatory regime, myriad of taxes

2030 Plan for the mining industry – push for downstream processing

% of Mineral Exports (2011 – USD)

33Mining sector snapshot ‐ Chile

Consistently ranks as best‐performing economy in Latin America, preferred gateway for Australian companies into South America and well‐credentialed location for regional headquarters

Outstanding geology, particularly copper and lithium, but diversifying beyond these into other minerals

Very stable and open operating regime, with firm commitment by government to support expansion of junior mining sector

Low level of ‘connection’ between mining and capital market, with only two listed mining companies

Codelco enjoys ‘national icon/asset’ status ‐ increasingly engages in joint ventures to secure growth capital

Australia‐Chile double taxation treaty negotiated, awaiting ratification by Chilean congress

Ample scope for further expansion of mining activity, but has greater ‘maturity’ than other regional markets

34Mining sector snapshot ‐ Colombia

MineralWorldranking

production

LatinAmerica

Ranking Exports

Characteristics

Coal 9th 1st 4th 96% thermal, 4% metallurgic

Gold 21st 6th ‐ Mainly alluvial extraction

Nickel 9th 2nd 2n Cerro Matoso, world’s 2nd largest producer

Emeralds 1st 1st 1st 57% of world production

Features 49% of total surface area yet to be fully explored

Government committed to supporting expansion of mining sector 11 minerals have been classified as of ‘strategic importance’ (including: copper, uranium, iron ore, platinum)

313 strategic mineral areas defined and to be awarded by auction in 2013

Relatively few multinational miners present, so ample scope for juniors and mid‐sized players

Some community opposition to mining arising from use and availability of water

35Mining sector snapshot ‐ Ecuador

No large‐scale mining industry, but proven large deposits of copper, gold and silver

Government state that it intends to support expansion of mining sector and planning to reform applicable regulations, including: Set a ceiling on mining royalties (minimum set at 5%) Delay ‘windfall’ tax until miners recover their investment

BUT ‘caution’ is advised as policy is not stable or sufficiently clear

Relatively few multinational miners present, so ample scope for juniors and mid‐sized players ‐ Extensive opportunities if Government delivers on promises

Major projects under negotiation include:

USD 1.3bn Fruta del Norte gold project (Kinross Gold Corp)

USD 1.4bn El Mirador copper project (Chinese‐owned, Ecuacorriente)

Rio Blanco gold‐silver project of International Minerals

Quimsacocha gold‐copper‐silver project of IAMGold

36Mining sector snapshot ‐ Mexico

Mineral Global Rank Production (Ton)

Silver 1 4,410,749

Bismuth 3 982

Lead 5 192,062

Molybdenum 5 10,849

Zinc 7 570,004

Gold 10 79,375

Copper 12 270,136

Over 287 foreign companies are actively exploring in Mexico ‐ very few are Australian

Of all exploration conducted, approx. 50% is by juniors

Only 13.8% of total surface area has been granted for mining concessions – ample scope for expansion

Government is supportive of mining development ‐ no mining royalties applied

Gold production increased by 250% since 2003

Grupo Mexico and Grupo Peñoles are main local players, but sector features many players of varying scale

37Mining sector snapshot ‐ Peru

Ranking WorldLatin

America

Gold 6th 1st

Silver2nd

2nd

Copper 2nd 2nd

Lead 4th 1st

Tin 3rd 1st

Zinc 2nd 1st

Features Outstanding geology

14% of total surface area classified for mining, but 12.95% still undeveloped

Strong government support for mining, but rising community opposition in remote areas

Most connected of all capital markets in the region

38Go there! You will not be alone . . . Aussies thrive in this environment

39Latin America must be on your radar! ‐ Pack your bags and remember . . .

Checklist of essential items

Have the required team: Requisite technical skills Cross‐cultural knowledge and experience Language fluency Connections at the right levels Willingness to listen and adapt

Manage the risk profile Select the right advisors – legal, tax, accounting, etc. Consider the value of strong local partner(s) Understand and engage local stakeholders from the outset

Neighbouring communities Provincial and national governments

Build relationships for the future from the outset Multiple banking sector touch points Local capital market and investor base

Undertake thorough ‘due diligence’ program

Humility The region has outstanding executive talent Respect will get you further than simple marketing Make the commitment to the long term and to a ‘win‐win’

Find or Acquire the right deposit Explore/discover – Acquire/merge

. . . . . be alert, not alarmed!

40Thank you

Jose BlancoSenior Partner

Level 1, 2 Barrack StreetSydney NSW 2000 I Australia

Direct Tel: +61 419 276 130

Email: [email protected]

www.alabc.com.au

Documents

1 2 Mining Activity & Investment in Latin America