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China Mining Report Q1 2008 Published quarterly by BUSINESS MONITOR INTERNATIONAL LTD Including 5-year industry forecasts © 2007/8 Business Monitor International. All rights reserved. All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd. All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content. Business Monitor International Mermaid House, 2 Puddle Dock London EC4V 3DS UK Tel: +44 (0)20 7248 0468 Fax: +44 (0)20 7248 0467 email: [email protected] web: http://www.businessmonitor.com ISSN: 1755-778X

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Page 1: China Mining Report Q1 2008

China MiningReport Q1 2008

Published quarterly by BUSINESS MONITOR INTERNATIONAL LTD

Including 5-year industry forecasts

© 2007/8 Business Monitor International. All rights reserved.All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd.

All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content.

Business Monitor InternationalMermaid House, 2 Puddle DockLondon EC4V 3DS UKTel: +44 (0)20 7248 0468Fax: +44 (0)20 7248 0467email: [email protected]: http://www.businessmonitor.com

ISSN: 1755-778X

Page 2: China Mining Report Q1 2008

Business Monitor InternationalMermaid House,2 Puddle Dock,London, EC4V 3DS,UKTel: +44 (0) 20 7248 0468Fax: +44 (0) 20 7248 0467Email: [email protected]: http://www.businessmonitor.com

© 2007/8 Business Monitor International.All rights reserved.

All information contained in this publication iscopyrighted in the name of Business MonitorInternational, and as such no part of this publicationmay be reproduced, repackaged, redistributed, resold inwhole or in any part, or used in any form or by anymeans graphic, electronic or mechanical, includingphotocopying, recording, taping, or by informationstorage or retrieval, or by any other means, without theexpress written consent of the publisher.

DISCLAIMERAll information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time ofpublishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business MonitorInternational accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of thepublication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kindas to the accuracy or completeness of any information hereto contained.

China Mining ReportQ1 2008Including 5-year industry forecasts by BMI

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication Date: November 2007

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CONTENTS

Executive Summary .........................................................................................................................................5

Industry Trends And Developments ..............................................................................................................6

Market Overview ................................................................................................................................................................................................... 6

Regulatory Structure.............................................................................................................................................................................................. 8

Project And Property Updates ......................................................................................................................11

Metals .................................................................................................................................................................................................................. 11

Minerals............................................................................................................................................................................................................... 16

Table: Mines In China ......................................................................................................................................................................................... 18

SWOT Analysis...............................................................................................................................................19

China Political SWOT ......................................................................................................................................................................................... 19

China Economic SWOT ....................................................................................................................................................................................... 19

China Business Environment SWOT.................................................................................................................................................................... 20

Business Environment ..................................................................................................................................21

Ratings Overview................................................................................................................................................................................................. 21

Table: Mining Business Environment Indicators ................................................................................................................................................. 22

Table: Weighting Of Components........................................................................................................................................................................ 23

Regional Overview – Asia Pacific........................................................................................................................................................................ 23

China – Business Environment Ranking .............................................................................................................................................................. 24

Table: Asia-Pacific Business Environment Ranking ............................................................................................................................................ 24

Limits Of Potential Returns ................................................................................................................................................................................. 24

Risks To Realisation Of Potential Returns ........................................................................................................................................................... 25

Legal Framework ................................................................................................................................................................................................ 25

Corruption/Red Tape ........................................................................................................................................................................................... 26

Labour Force....................................................................................................................................................................................................... 27

Table: China, Demographic Indicators ............................................................................................................................................................... 27

Table: China, Employment Indicators ................................................................................................................................................................. 28

Foreign Investment Policy ................................................................................................................................................................................... 29

Table: China, Annual FDI Inflows....................................................................................................................................................................... 30

Table: Asia, Annual FDI Inflows ......................................................................................................................................................................... 30

Political Environment ............................................................................................................................................................................................... 31

Industry Forecast Scenario...........................................................................................................................34

Metals Price Outlook ................................................................................................................................................................................................ 34

Table: BMI Prices Assumptions........................................................................................................................................................................... 34

Regional Analysis ..................................................................................................................................................................................................... 35

China – Mining Industry Forecast ............................................................................................................................................................................ 37

Table: China Mining Industry Forecast............................................................................................................................................................... 38

Table: China Mining Industry Forecast (continued)............................................................................................................................................ 39

Competitive Landscape .................................................................................................................................40

Table: China Mining – Key Players..................................................................................................................................................................... 40

Company Monitor...........................................................................................................................................41

Shandong Gold Mining Company........................................................................................................................................................................ 41

Zijin Mining Group.............................................................................................................................................................................................. 42

Datong Coal Industry Company .......................................................................................................................................................................... 43

Zhaojin Mining Industry Company ...................................................................................................................................................................... 44

Appendices .....................................................................................................................................................45

Appendix A: Global Outlook..................................................................................................................................................................................... 45

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United States........................................................................................................................................................................................................ 46

Europe ................................................................................................................................................................................................................. 47

Japan ................................................................................................................................................................................................................... 48

China ................................................................................................................................................................................................................... 49

Commodities ........................................................................................................................................................................................................ 50

Oil........................................................................................................................................................................................................................ 52

Table: Global Assumptions.................................................................................................................................................................................. 53

Appendix B: Regional Demographic Data................................................................................................................................................................ 54

Table: Manufacturing Wages, US$ (average per annum).................................................................................................................................... 54

Table: Population ................................................................................................................................................................................................ 55

Table: Household Spending Per Capita, US$...................................................................................................................................................... 56

Table: Private Consumption Per Capita, US$ PPP............................................................................................................................................. 57

Table: Market Size, GDP, US$bn ........................................................................................................................................................................ 58

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Executive Summary

The People’s Republic of China is a natural world leader in terms of both reserves as well as production

of several metals and minerals. It joined the WTO in 2001, and has since become an economic force to

reckon with – doubling its manufacturing output and in the process accumulating over US$1trn of foreign

exchange reserves. Endowed with abundant mineral wealth, the country leads in the production of copper,

coal and aluminium. Further, its 1200 gold mines position it a worldwide fourth in production of gold – a

metal of which it is also the world’s third-largest consumer.

The national government is taking active steps for making the mining industry more competitive.

Although it is a communist state, China introduced market reforms in the 1980s and today only about a

third of the economy is directly state controlled. The government is encouraging mergers and acquisitions

as a means of ensuring optimal use of mineral resources and barriers to foreign investment are gradually

being done away with. Further, by the end of 2008, the government also plans to put in place mining

reforms to restrict the exploitation of a mine’s resources by multiple companies to help pre-empt

accidents, pollution and inefficiencies that result from more than one company exploiting the same

mining area.

However, China’s mining industry possesses its share of downsides. Primary among these is the scourge

of illegal mining that has resulted in a high accident rate in the country. To tackle this issue, a

US$14.42mn project has been launched by the UN to educate and train coal miners in five Chinese

provinces, while the government is looking at revamping the country’s mining policies and regulations.

The country is also planning to reassess the value of its deposits of as many as 25 metals and minerals –

including uranium and coal. Mine safety is also high on the agenda of the authorities and it has been

reported that by mid-2008 the government plans to close down around 23,000 small coal mines, which

have proved to be extremely dangerous in the past.

Industry Forecast

BMI forecasts an average industry growth rate of around 4.75% over the 2007-2011 period. The value of

the Chinese mining industry is forecast to reach US$587.42bn in 2011, accounting for a large portion of

the total GDP.

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Industry Trends And Developments

Market Overview

China occupies the world’s number one position in many segments of the mining industry. It is the

world’s largest producer of coal, copper and aluminium. In 2006 China produced 7bn tonnes of mineral

ore, posting an aggregate output value of CNY1.48trn (US$190.76bn). Output of raw coal, coke, iron ore,

non-ferrous metals and phosphorite registered double-digit growth rates, with the iron ore growing by

37.7% in the first three quarters of 2006. But despite, the phenomenal rise in iron ore production, China

imported 247mn tonnes of iron ore during the same period and the country’s overseas trade volume of

minerals reached US$307.5bn, an estimated 21% of its total foreign trade.

China is also the world’s fourth-largest gold producer and the third-largest consumer of the commodity.

Proven gold reserves in China reached 4,634 tonnes in 2006, ranking it eighth worldwide in terms of gold

reserves. In the first half of 2007 the country produced 122.20 tonnes of gold registering a growth of

15.26% year-on-year (y-o-y). According to the National Development and Reform Commission

(NDRC), China has set a target of producing 260 tonnes of gold in 2007 while the exploration target for

new gold reserves is 700 tonnes.

In 2007 iron ore production in China is set to see a huge growth, indicated by the production in the four

months of the year to April 2007, which registered a 30% increase y-o-y. This trend is also illustrated by

the fact that in 2006 iron ore imports grew by only 18.6%, the lowest growth rate in the past four years.

Although past geological work has been characterised by detailed data collection, there has been a lack of

interpretation of larger deposits or the use of international modelling to explore new deposits. With vast

properties in central and western China yet to be prospected, and with exploration of most mines in the

eastern region being conducted at only 300-500ft (90-150m) below the ground level, the extent of total

mineral reserves on the mainland remains a grey area. To improve the situation, the Ministry of Land and

Resources plans to increase China’s identified reserves of iron ore by 5bn tonnes, copper ore by 20mn

tonnes and bauxite by 200mn tonnes by the end of 2010. For this purpose, it has outlined plans to start a

geological exploration fund worth US$260mn that both state-owned and private mining companies can

use to explore and finance new projects.

The Chinese government has encouraged mergers and acquisitions in the industry as a step towards

optimal use of mineral resources. The initiative includes opening up the mining industry to foreign

investment, which would result in an improved trade of mineral products and services and help with the

import of advanced technology. China is also keeping a close watch on environmental protection and

rational usage of resources, pumping in an estimated CNY753mn (US$97.1mn) in 2006 for the

environmental treatment of abandoned mines.

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Because of the constant price rises in mining products such as coal and iron, which provide opportunities

for high profits, illegal and unlicensed mining still exists in China and poses a serious concern. The

Ministry of Land and Resources reportedly shut down 8,000 illegal mines in the nine months ending

September 2006. Government regulations aimed at curbing the number of illegal mines in the country are

now showing some results, with the Ministry identifying 65,313 unlicensed mines, 4,509 unauthorised

excavations, 960 unauthorised prospecting sites and 1,365 illegal transfer issues of mining rights. By June

2006 the government had also revoked 1,647 exploration and mining licences. The mining regulations

issued in early 2006 directed mine developers to ensure the rational use of mineral resources, treat

damaged environment, and meet set safety standards of production. Mine developers also need to provide

to an ‘environment rehabilitation and treatment reserve’ in proportion to their sales revenue.

Illegal mines have been major contributors to China’s mining-related accident rate, which until recently

was among the highest in the world. Following the closure of illegal mines in 2006, the rate of accidents

is expected to fall, provided corruption levels among government officials are curbed. In 2006 the death

toll from coal mine accidents fell by 24% y-o-y, to 4,746. However, mine-related corruption can be

stemmed only if local officials are provided with alternative legal income to compensate for the loss due

to mine closure. This is of greater significance, as the performance of local officials is evaluated based on

their district’s economic growth, which in some regions is supported largely by coal mining.

The International Council of Mining and Metals was established in 2001 to address issues related to

sustainable development in the mining industry. The world’s 15 leading mining and metals companies

and 24 national mining and global commodity associations are members. However, no Chinese entity

currently belongs to this London-based mining body, which can be joined only by invitation.

As reported in March 2007, the UN launched a US$14.42mn project to provide coal miners in five

Chinese provinces with improved education and training, while mine policies and regulations in the

country are updated. The four-year project will concentrate on small-scale town and village mines, where

fatality rates are almost twice the national average. Training centres for over 1,000 miners and their

families will also be established in the Anhui, Guizhou, Henan, Liaoning and Shanxi provinces. The

higher coal production, required to fuel the country’s rapid economic growth, has been accompanied with

a rise in the number of deaths and accidents in Chinese mines.

In September 2006 the Chinese government announced plans to invest US$60bn in 2007-2011 on safety

improvement mechanisms. According to the State Administration of Work Safety (SAWS), investment

areas would include coal mine accident prevention, checking for potential accidents, technological

innovations, rescue efforts as well as enforcement of regulations and laws and personnel training. One

illustration of the safety enhancement drive is the installation of underground miner monitoring and

communication systems for mines in Shanxi, the largest coal-mining province in China. The regulation is

similar to the US Miner Act of 2006.

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Regulatory Structure

China will reassess the value of deposits of 25 minerals, including coal and uranium, as a part of a mining

industry restructuring that will run to 2009. The country is expected to consolidate its mining industry

into several national companies. This is mainly part of an effort to supply more of the natural resources

that China needs to fuel its growing economy. While the sector consolidates, provinces have stopped

issuing new minerals exploration licences to the end of 2007, and new coal licences to the end of 2008.

In China, a mining area is often exploited by more than one company, leading to intense competition and

production beyond capacity, the result of which is frequent accidents, inefficient use of resources and

pollution. As reported in January 2007, the Chinese government will complete the mining industry

reforms by the end of 2008 to ensure that only one company can exploit a mine’s resources to address

these issues. The reforms are expected to be in place for at least three types of mineral resources and in at

least five major mining areas before the end of 2007. The government also plans to shut down 23,000

small coal mines by mid-2008. Small coal mines, whose production is less than 300,000 tonnes per

annum (tpa), are known to be dangerous and have been the sites of over 3,000 mining deaths in 2006.The

SAWS also urged local governments to deny approvals for coal mines with an annual capacity of

300,000 tonnes or less in 2006-2010.

As reported in June 2007, the government also plans to establish a strategic coal reserve as a part of an

amended law that seeks to raise safety and environmental standards for the mining industry. The law on

the coal industry would include raising the threshold to qualify for a mining licence, and changes in rules

for coal product processing,

In 2006 the Ministry of Land and Resources reportedly introduced a new mechanism for granting

exploration and mining rights. For minerals like gold, silver and copper (Category 1), the exploration

right will be granted on a ‘first come, first served’ principle. In cases where, exploration activities have

already been carried out or further exploration is justified, rights will granted to explore these minerals by

bidding, quotation or auction. Exploration rights for minerals such as coal, iron and graphite (category 2)

will be granted only through bidding quotation and auction. For minerals such as limestone and

sandstone (Category 3), no exploration right will be granted.

Mining rights will be granted only through invitation to bid, auction or listing for the following

categories:

• Category 3 minerals;

• Category 1 and Category 2 minerals where exploration rights have expired but where exploration

work has reached the level required and the deposit area conforms to mining design requirements; or

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• Category 1 or Category 2 minerals where mining rights have expired or mining activities have been

carried out in the past and the mineral reserve in the deposit area has been verified as being able to be

mined or of economic value.

The Ministry of Finance and the State Administration of Taxation have jointly decided to adjust taxable

standards of resource tax on lead, copper ore and tungsten ore with effect from August 2007 to ease the

contradiction between high prices of resource products and low resources tax. This move is seen

necessary to curb the excessive growth of these sectors and promote an equitable development for the

entire mining industry.

The Ministries of Finance and Land and Resources have released Interim Measures on Management of

the Central Geological Prospecting Fund. This initiative aims at increasing government investment in

exploration activity and encourages social funding in the industry. This would eventually lead to creation

of a ‘mineral resource exploration investment mechanism’. As per the guidelines, projects that have not

yet had their mining rights registered would receive the complete amount of investment. Co-operative

investment would apply for those that have had their mining rights registered.

In 2006 China collected CNY5.8bn (US$750mn) from mining enterprises as compensation for the use of

mineral resources. Statistics reveal that resource-rich provinces Heilongjiang, Shandong, Shanxi, Henan

and Xinjiang Uighur Autonomous Region paid a total of CNY3.4bn (US$440.05mn) in compensation

fees, accounting for 59% of the total. Initiated in 1994, the compensation system for using mineral

resources provides extra funds for exploration and protection of these resources. The compensation fee

levied on mining enterprises is collected in proportion to their sales revenue. While half of the fee goes to

local provincial governments, the remainder is handed in to the central government. The central

government takes 40% in the case of autonomous regions. There has been a steady increase in

compensation fees in recent years. China received compensation of CNY4.3bn (US$556.5mn) from

mining enterprises in 2005, compared to CNY1.75bn (US$226.49mn) in 2001.

Henan province has established new coal miner qualification standards. The regulation requires all miners

to possess mining credentials by the end of 2007. Such credentials can be obtained after undergoing

training and acquiring a certificate of qualification. Moreover, newly recruited mine workers would have

to be below the age of 30, and need to have finished middle school before entering the profession. Mine

managers would require senior high school certificates and have a minimum of two years of mining

experience. Currently, only 17.6% of the province’s 340,000 miners have professional credentials. The

initiative aims at improving safety and work efficiency, and companies violating the regulations would

have to pay penalties. Henan province, which accounts for 8% of China’s coal output, is the first province

in China to define professional standards for coal miners.

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China is also in the process of drafting new regulations with the hope of encouraging major overseas

mining players to co-operate with local gold miners in various projects. The laws would focus on sieving

out the small outfits that do not intend to make long-term investments. Experts believe foreign

technology, funds and management expertise would enable consolidation in the industry and enhance

efficiency levels. It is also hard to monitor and regulate a large number of small foreign mining

companies, especially when China is seeking sustained development of its gold industry. Currently, over

100 foreign firms have investment interests in Chinese gold, but most are small players that frequently

choose to leave after making profits.

Many European and North American mining investors continue to harbour doubts regarding Chinese

environmental regulations, which lag behind global standards. However, China has reportedly begun

adopting the industry best practices and combining these with the local laws to form stringent

environmental norms. Mining companies in China need to conduct an environmental impact assessment

(EIA) to obtain a mining licence. The EIA includes compliance with air, noise, water and solid waste

pollution limits, and evaluates the negative effects to the environment likely to arise from various

projects. The National Development and Reform Commission (NDRC) has used the EIA requirements as

a method of controlling unbridled development in many other industry segments. The EIA laws require

firms to work with qualified institutes to produce an appropriate conformance report.

China is also a member of over 30 international environmental protection treaties. Interestingly, 10% of

all Chinese laws enforced in the past 20 years related to environmental protection. Moreover, provincial

governments have the autonomy to set higher pollution standards than the national benchmark. But in

spite of all such initiatives, enforcement of the laws is still very weak. Disregard for environmental

regulations is especially rampant in the industrial minerals segment. Another cause for concern is the

‘grey areas’ in numerous regulatory investment laws, which allow local officials to interpret ambiguous

statements to their advantage when granting approvals.

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Project And Property Updates

China has discovered huge resources of vital minerals in the Tibetan plateau. The country has found over

600 potential sites for new mines. A survey published in February 2007 suggests the plateau has reserves

of 30-40mn tonnes of copper, 40mn tonnes of lead and zinc and several billion tonnes of iron ore. Once

the mines are developed, they are expected to relieve the strain on China’s existing resources. The survey

has not yet covered the entire plateau, and more than half its 2.6mn km2 still remains to be surveyed.

In February 2007 it was reported that China and South Africa had entered into an agreement to boost their

alliance in the mining resources field. The two will facilitate co-operation between mining companies

from both countries and help them build partnerships in different businesses. Chinese companies,

including Shenhua Group, China Minmetals Corporation and Jinchuan Group, expressed interest in

forming partnerships with their South African counterparts.

Metals

Gold

In September 2007, world’s third-largest gold company – South Africa based AngloGold Ashanti signed

an agreement with the Sichuan Provincial Bureau of Geology and Mining to invest CNY200mn

(US$26mn) in gold mine exploration in the Pingwu area of Sichuan Province over the next five years.

In September 2007, China’s National Development and Reform Commission (CNDRC) reported that

Hong Kong-listed Zijin Mining Group has received approval to begin expansion work at its Zijinshan

gold-copper mine. The company plans to increase its gold output by four times to 16tpa and gold

concentrating capacity to 37.5mn tpa from the current 14.85mn tpa. Also, copper output is planned to

increase to 16,000tpa from the current 6,800tpa while copper concentrate capacity will go up to 6.6mn tpa

from 3.56mn tpa currently. The company has not indicated any timeline for the CCNY1.52-bn

(US$201mn) expansion programme. Zijin Mining is among China's largest gold producers, and is slowly

increasing production of other base metals.

The Luoyang City Government announced September 2007 that construction had begun on Luoyang

Yongning Gold and Lead Melting Company's 150,000-tpa melting project. The company is funded by

local companies China Molybdenum Company, Henan Faende Mining Development Company and

Henan Luoning Huatai Mining Development Company. The project involves a total investment of

CNY490mn (US$65.30mn).

In July 2007, Jinshan Gold Mines and its partner, Brigade 217 of the Northwest Geological Bureau

announced that their joint venture had begun production at CSH 217 Gold Mine in Inner Mongolia,

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China. The mine is expected to produce an average of near 120,000oz of gold per year when full

production is achieved over the next few months. Total capital expenditure for the CSH 217 Mine

currently stands at US$31.2mn. Further, in addition to the commencement of gold production, a drilling

programme began at the mine earlier this year. An expansion study is also underway to determine the

potential to scale up the mine to approximately 180,000oz per year. This study is expected to be

completed by the end of 2007. The CSH 217 Gold Mine is owned and operated by Ningxia Pacific

Mining, a Sino-foreign joint venture company, in which Jinshan holds a 96.5% interest and Brigade 217,

the remaining 3.5%.

In July 2007 AIM-listed China Goldmines reported that according to an independent estimate, its

Guanzhuang gold project contains inferred resources of 1.83mn ounces. Earlier the same month, the

company had finalised and executed the transfer agreements for acquiring eight gold mines for the

project. The deal was settled in November 2007, with the company paying a total of CNY180mn

(US$23.7mn). The company hopes to raise production to 150,000 ounces a year from the current 25000

ounces a year within three years.

Production has started at Australia-based Sino Gold Mining’s Jinfeng gold mine in southern China. As

declared by the company in July 2007, a total of 9840 ounces of gold were produced at the facility during

the three months ending in June. Further drilling conducted at the mine during the quarter resulted in a

12% increase in reserve estimates and the company is now targeting an annual output of 70,000-80,000

ounces. In June the company reported having purchased the exploration rights of three mining areas in the

Shandong province. Spread over an area of 26km2, the mining areas cover the Jiaojia Gold Field, which

includes multiple deposits with estimated gold reserves of more than 1mn ounces. The company will

account for 70% of the total equity of the mining areas.

The discovery of a large gold mine at the Ding C Ma belt at Jinlong mountain, in Zhen’an, Shaanxi

province, was reported in July 2007 by the Zhen’an county government. The belt includes four mining

sections, namely Jinlong mountain and Yaoxian, Qiuling and Gulou mountain mining section. The mine’s

initial proven reserves are more than 50 tonnes. The NDRC’s industry department also announced the

discovery of a gold deposit with at least 162 tonnes in proven reserves in Yangshan, Gansu provine. Gold

deposits with 50 tonnes or more of reserves were also identified in Zhaishang, Gansu; Damoqujia in

Shandong; and Jinchang in Heilongjiang.

In June 2007 Zhaojin Mining Industry Company made public its plans to acquire three gold mining

companies in order to expand its exploration opportunities. The company will invest a total of

CNY159.2mn (US$21.02mn) in acquiring 51% of Xixia Zhaojin Mining Company, 90% of Tuoli

Zhaojin Beijiang Mining Company and 80% of Min Tianhao Gold Co from major shareholder

Chinese Shandong Zhaojin Group Company, which holds 37.3% of Zhaojin Mining, in addition to

shares held by independent parties in the companies. The three companies will become wholly owned

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units of Zhaojin Mining Industry Company.

As reported in May 2007 Toronto based Golden China Resources Corporation has managed to secure

the second exploration licence at its Beyinhar gold project in the Inner Mongolia fold belt region. The

additional exploration permit is expected to increase the potential and long-term drilling prospects of the

company’s resource base. Measured and indicated resources are expected to increase to more than 1mn

ounces from the current 475,000 ounces.

As reported in April 2006 Zhaojin Mining Industry Company plans to bid for the Yangshan gold mine in

Gansu province when the government opens the tendering process in H207. The company considers it a

good opportunity to expand outside its home province of Shandong and boost its gold reserves. While the

bidding or valuation for Yangshan has not yet been worked out, many bidders are expected. Yangshan

mine, the country’s biggest gold mine, has confirmed total gold reserves of 258 tonnes.

Zijin Mining Group Company will co-operate with several domestic companies to jointly acquire UK-

based Monterrico Metals. This will be the Zijin’s first overseas acquisition in the mining business.

Monterrico agreed in February 2007 to the acquisition, at GBP3.5 (US$6.94) per share.

In December 2006 Hubei Sanxin Gold Copper Company, a controlling company of Zhongjin Gold

Corporation, entered into an agreement to acquire all assets of the Taifu gold mine, in Mianyang,

Sichuan province. Zhongjin Gold is the listing arm of China Gold, and Taifu gold mine is owned by

Taifu Gold Mining and Development Company, headquartered in Guangxi province.

In November 2006 Hebei Gold Company, a wholly owned operation of China Gold, became the

controlling shareholder of Xinjiang Jintan Mining Company, located in Shanshan country, east

Xinjiang. The other shareholder is Xinjiang Kunyuan Mining Company, a spin-off of Shanshan Gold

Mine.

In November 2006 South Africa’s Gold Fields became the largest shareholder in Australia-based Sino

Gold by investing US$22.5mn in the company and forming a joint venture to look for more gold in

China. This is an important strategic step for Gold Fields as it raises its exposure to China, the largest

gold producer in the world after South Africa, the US and Australia. Gold Fields, the world’s fourth-

largest gold producer, first tied up with Sino Gold in 2002, when it set up an exploration venture with the

company.

Copper And Nickel

China’s largest aluminium producer Aluminum Corporation of China (Chinalco) reported in September

2007 that it is actively looking for opportunities to expand into other metals including copper and

titanium. The company has allocated CNY30bn (US$3.97bn) to fund its expansion into copper. As

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reported, it is in talks to develop mining projects in overseas locations such as Russia, Mongolia,

Indonesia and Fiji. Chinalco recently completed an US$860mn takeover of Peru Copper and is planning

to buy a 49% stake in domestic company Yunnan Copper Group. Currently copper accounts for less

than 10% of the company’s revenue.

As reported in September 2007, a large nickel deposit has been identified in the Hami Area of the

Xinjiang Uygur Autonomous Region. The reserves have been located in six places in the area, with

potential reserves estimated at over 16mn tonnes. In recent times several nickel mining and smelting

companies have entered the area, the largest among them being the Zhongxin Mining Company of the

Xinjiang Non-ferrous Metals Group.

As announced in July 2007, Jiangxi Copper has been granted mining rights in Dexing county, Jiangxi,

that entitle the company to mine copper ore in the Zhu Sha Hong mine. The company will pay

CNY41.88mn (US$5.54mn) to acquire the mine, which has estimated reserves of 377,900 tonnes.

As reported in July 2007, the first phase of Inner Mongolia-based Xingye Group’s mine development

project in Tanghe county, Henan province, is due for completion towards the end of 2008. The deposit is

estimated to contain 110,000 tonnes of copper and 325,000 tonnes of nickel reserves. The CNY980mn

(US$129.69mn) project is slated to handle 3mn tonnes of ore a year. The CNY1bn (US$132.33) second

phase will primarily involve the construction of copper and nickel smelting facilities.

As reported in April 2007, Hong Kong-listed logistics company Pearl Oriental Innovation signed a

memorandum of understanding (MoU) to buy a 100% stake in the Tuwu copper mine in Xinjiang. The

mine has proven reserves of about 600,000 tonnes of copper and 380,000 tonnes of silver. Pearl Oriental

plans to invest US$51.2mn in the mine.

Jilin Jien Nickel Industry, a nickel producer based in Panshi, Jilin province, announced its plans to start

construction of a new 5000 tpa electrolytic nickel production plant before the end of 2007. The plant will

raise the company’s total electrolytic nickel output capacity to 7000 tonnes and is expected to come

onstream in 2009. The company also reported plans to start construction of the Helong Changren copper

and nickel mine in Jilin province.

In May 2007 Hong Kong headquartered Regent Pacific Group announced the discovery of probable

copper and zinc ores of nearly 15.57mn tonnes at its Dapingzhang mine joint venture in Yunnan province.

Iron And Zinc

As reported in September 2007, Australian iron ore company Gindalbie Metals has entered into a joint-

venture agreement with China’s Anshan Iron & Steel Group, to develop the Karara magnetite project

and Mungada hematite projects in Western Australia. The announcement follows the positive feasibility

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studies for both iron ore projects. Combined investments in the projects would be to the tune of

US$1.49bn – primarily on new mining and processing facilities and related infrastructure both in

Australia and China.

As reported in May 2007, Wuhan Iron & Steel will be developing an iron ore project in Xuchang with

Xuji Group and Indonesian Salim Group’s unit Salim China. A structural agreement was signed for the

exploration of a 250mn tonne iron ore deposit, which contains ore with an estimated 30% average iron

content. The Xuji Group holds the mining rights for the deposit.

As reported in April 2007, Chilean mining company Minera Santa Fe and Beijing Sinosteel Tiantie

Iron & Steel Trade Company (abbreviated as Beijing Tiantie; a joint venture of Sinosteel Corporation

and Tianjin Tiantie Metallurgical Group ) signed a long-term agreement to provide Chilean iron and

steel to the Chinese factories. According to the agreement, Santa Fe is expected to export 400,000 tonnes

of iron in 2007 and 1mn tonnes annually from March 2008 for the following 10 years.

As reported in March 2007, US-based Wits Basin Precious Minerals entered into an agreement to

purchase a 51% stake Chang Jiang Mining Company, which owns the exploration rights at the Lao

Wan Iron Deposit in Yuan’an county, Hubei province. The Lao Wan Iron Deposit covers about 17.78km2

in Yuan’an Ccounty. Earlier in March Wits Basin had entered into a letter of intent to purchase 100% of

Maanshan Mining, whose two operating iron mines – Xiao Nan Shan and Ma Tang – hold about 95mn

tonnes of iron ore.

In December 2006 UK-based Griffin Mining announced an investment of US$7.1mn to upgrade ore-

processing facilities at the Caijiaying zinc mine, Griffin’s principal asset is the mine at Caijiaying, Hebei

province. Under the plan, capacity will be increased from 200,000tpa to 500,000tpa in 2007, and to

750,000 tonnes in 2008. In September 2006 Griffin Mining reported an increase in ore output at

Caijiaying. The throughput at the project increased from 35 to 42 tonnes of ore per hour.

In September 2006 Yueda Minerals Company, a subsidiary of China-based Jiangsu Yueda Group

Company, announced an investment of CNY250mn (US$32.2mn) to purchase the Yunnan-based

Feisheng Group. Feisheng Group has the controlling right for metal ores of Tengchong Company,

which has been a supplier of iron and zinc concentrate ore products to the Group. The partnership

between Tengchong and Feisheng Group will continue after the purchase. Yueda Minerals will purchase

52% equity of three zinc ore and lead ore mining companies under the full control of the Feisheng Group.

Aluminium

In August 2007, Guangxi General Institute for Geological Prospecting announced that it had found a large

bauxite deposit in Chongzuo, in southwest China's Guangxi Zhuang Autonomous Region. Potential

bauxite reserves in the area are likely to be to the tune of 120mn tonnes. The deposit, about 50 km long

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and 20 km wide, comprises five ore bodies that are mostly uncovered and expectedly easy to exploit.

Currently, Guangxi has proven bauxite reserves of approximately 1bn tonnes. Of these, 220mn tonnes are

in the Pingguo mine and near 588mn tonnes in Jingxi-Debao, where two new alumina refineries are under

construction.

In July 2007 Aluminium Corporation of China Ltd (Chalco), a subsidiary of Chinalco, reported plans of

acquiring electrolytic aluminum producer Liancheng Aluminium from parent Chinalco. The acquisition

is expected to boost the company’s annual production capacity of primary aluminium including

electrolytic aluminium by approximately 10.8%. Earlier in July the company had announced the striking

of a deal for the purchase of Baotou Aluminium.

Also in July 2007, a new bauxite mine with estimated deposits of 120mn tonnes has been found at

Chongzuo, Guangxi. Most of the bauxite resources at the mine are exposed to the surface, making

extraction convenient. A total of 100mn tonnes of bauxite resources have been found in Guangxi so far.

Chalco started development of a new mine with an estimated bauxite capacity of 1.65mn tpa. The bauxite

mine is located close to Chongqing in south west China. The company is planning to build a new alumina

plant near Chongqing to process the bauxites from this deposit. Construction works are likely to begin in

2009. By 2010 the plant is expected to reach its design alumina output of 2mn tpa. Investment into this

project will amount to US$646.4mn.

Uranium

In August 2007, China Nuclear Energy Industry Corportation, a subsidiary of China National

Nuclear Corporation, signed a letter of intent with Hong-Kong based Century City International

Holdings for long-term co-operation in developing uranium resources in Mongolia and other countries.

China Nuclear Energy Industry will be in charge of providing exploration and exploitation technologies,

and for the sale of uranium. Century City International will provide the investment involved in the initial

stages of exploration. However, the total investment involved in the construction of coal mines and

related facilities will be borne by both companies as per their respective shares in the project.

Minerals

Coal

In September 2007, Chinese supplier of metallurgical coking coal Puda Coal announced entering into an

agreement to purchase the Jingle Muguashan Coal Mine for CNY460mn (US$60.7mn). The Jingle

Muguashan Coal mine, located in Jingle County, is about 100 km from Puda Coal's headquarters in

Taiyuan. The mine is estimated to have near 55.6mn tonnes of reserves of high grade thermal coal. It is

expected that the mine will begin operations in 2008 and turn profitable in 2009. The transaction is likely

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to be funded through external financing and Puda is currently negotiating with banks and funds in this

regard.

As reported in August 2007, US-based Asian American Coal’s (AACI) joint venture with local firms

Shanxi Lanhua Sci-tech Venture and Shanxi Coal Transportation & Sales (Jincheng Branch) –

Shanxi Asian American-Daning Energy – has received a production license from the Shanxi Coal

Industry Bureau to operate its Daning mine in northern Shanxi province. The mine has an estimated

annual capacity of 4mn tones. AACI owns a 56% stake in the venture. The company also owns 45% of

the Gaohe mine in Shanxi, which is expected to begin trial production in 2009. The company is

examining two more potential projects in Shanxi and another unnamed region, and expects an agreement

to be signed over the next six to 12 months. In all, AACI wants to have a share in Chinese coal mines to

the tune of 10mn tonnes of capacity within five years.

Huating Coal acquired the mining right of Zhengning South coal mine in Qingyang, Gansu province, for

CNY4.75bn (US$628.55mn) in an auction organised by Gansu Asset and Equity Exchange in June 2007.

As reported in June 2007, Pingdingshan Coal has obtained the prospecting rights for the Yangjiaping

coal mine in Shaanxi province. With estimated reserves of nearly 1bn tonnes the mine will raise the

company’s total reserves to 16bn tonnes

As reported in May 2007, Hong Kong based Everbest Energy has reached an agreement with Henan

Zhongzheng for the purchase of two coal mines for CNY140mn (US$18.52mn). The two mines, the

Dengfeng Municipal Shengfa Coal Mine and the Dengfeng Municipal Dazhizheng Liangguansuo Fourth

Coal Mine are spread over a total area of 1.11km2 and have estimated reserves of 5.32mn tonnes.

Construction work on Xinjiang’s biggest coal mine began in April. Developed by the Xinwen Mining

Group the mine is expected to cost CNY2.6bn (US$336mn) and take nearly three and a half years to

complete. It will be the first mine in the region to have an output capacity of 10mn tpa. Xinjiang contains

close to 40% of China’s total coal reserves.

As reported in April 2007, SK China Holding Company (a unit of South Korean refiner SK

Corporation) signed a preliminary agreement with Chinese authorities to jointly develop a coal mine in

China. According to the agreement, the company can participate in developing a new coal mine near

Baoji, Shaanxi province. SK Corp is leading South Korea’s efforts to secure overseas coal mines. It is

investing in mines and companies to help ensure steady supplies amid rising competition with China and

India.

The provincial government of Anhui reported in April 2007 that the province’s three coal industry groups

– Huaibei Coal Industry Group, Huainan Mine Industry and Wanbei Coal-Electricity Industry

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Group – plan to merge into a single entity. The combined entity is expected to have a production

capacity of over 100mn tonnes. However, the merger plan is still at an early stage.

Table: Mines In China

Mine name Owner Commodity County/district/province

Yinan Shandong Gold Group Gold Yinan, Shandong

Sanshandao Shandong Gold Group Gold Sanshandao, Jiaodong

Tashan Datong Coal Industry Co Coal Shanxi-Datong mining district

DongzhouyaoDatong Coal Industry Co/

Guangzhou Zhujiang Electric Power Fuel Co Coal Dongzhouyao, Shanxi

Taifu Taifu Gold Mining & Development Co Gold Mianyang City, Sichuan

Cangshang Shandong Gold Group Gold Cangshan county, Shandong

Wangershan Shandong Gold Group Gold Laizhou city, Shandong

Pinglidian Shandong Gold Group Gold Laizhou city, Shandong

Caijiaying Griffin Mining Ltd Zinc Zhangbei county, Hebei

Zijinshan Zijin Mining Group Gold/copper Fujian

Guizhou Shuiyindong Zijin Mining Group Gold Guizhou

Hunchun Zijin Mining Group Gold Hunchun, Jinlin

Source: BMI

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SWOT Analysis

China Political SWOT

Strengths The Chinese Communist Party, which has governed China for the past 55years, remains secure in its position as the sole political party in China.

As its economy expands, China’s regional political influence will continue togrow, and will soon be able to provide a challenge to US hegemony in theregion.

Weaknesses As with any other dictatorship, China’s political system is inherently unstableand unable to respond to the wider changes taking place in Chinese society.

China’s relationship with Taiwan remains problematic, with Beijing refusingto rule out the threat of force in the event of a declaration of independenceby Taiwan.

Opportunities Relations with the US are strong, as Washington needs China’s support tobring nuclear North Korea to the negotiating table.

President Hu Jintao has consolidated his position following the retirement ofex-president Jiang Zemin from his position as China’s military chief.

Threats Growing corruption, widening inequalities and increasing rural poverty haveled to an increase in social unrest in recent years.

China Economic SWOT

Strengths China’s economy grew by 10.1% in 2004, and by 9.9% in 2005, making itthe fastest-growing major economy in the world.

The country’s economic policy-makers have proved themselves hugelycapable, and will continue their methodical and highly professional approachto reforming the economy

Weaknesses China could be heading for a financial crisis unless it is able to reduce thelevel of non-performing loans (NPLs) in the state-owned banking sector.

Still rapid investment could lead to over-capacity in the future, which might inturn lead to the re-emergence of deflationary pressures.

Opportunities The latest data shows that economic growth is moving towards becomingmore broad based, with consumption and net-exports contributing more togrowth, although growth in fixed-asset investment remains rapid.

Threats There are fears that the current high growth rate is unsustainable, and asoft-landing for the economy is still not assured.

As China’s bilateral trade surplus with the US continues to increase, thecountry is coming under strong pressure from Washington for a furtherrevaluation of the exchange rate

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China Business Environment SWOT

Strengths China joined the World Trade Organisation (WTO) in December 2001, andhas been making steady progress in meeting its WTO commitments.

With its seemingly limitless supply of cheap labour, the country remains thetop destination for foreign direct investment (FDI) in the developing world.

Weaknesses Foreign companies continue to complain about the poor protection ofintellectual property in China.

China is classified by many of its major trading partners at the WTO as anon-market economy. This makes it more difficult for the country to defenditself against anti-dumping duties.

Opportunities China is set to benefit after the Multi Fibre Arrangement (MFA), the systemthat restricts imports on clothing and textiles, came to an end in January2005. The country could see its share of the global textile and clothingmarket double to 50%.

The Chinese government is giving more protection and encouragement tothe private sector, which is now the most dynamic in the economy andaccounts for most of the country’s job growth.

Threats There are concerns that China could be the target of WTO-approved'safeguard' measures should there be a surge of textiles from China nowthat the MFA has expired.

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Business Environment

BMI has revised the methodology of its Mining Business Environment Ratings. Our approach has been

threefold. Firstly, we have redefined the risks rated in order more accurately to capture the operational

dangers to companies operating in this industry globally. Secondly, we have attempted, where possible, to

identify objective indicators that may serve as proxies for indicators that were previously evaluated on a

subjective basis. Finally, we have used BMI’s proprietary Country Risk Ratings (CRR) in a more

nuanced manner in order to ensure that only the aspects most relevant to the industry have been included.

Overall, the new ratings system – which is now integrated with those of all 16 industries covered by BMI

– offers an industry-leading insight into the prospects and risks for companies across the globe.

Ratings Overview

Ratings System

Conceptually, the new ratings system is divided into two distinct areas:

Limits of potential returns: An evaluation of sector’s size and growth potential in each state, and also

broader industry/state characteristics that may inhibit its development.

Risks to realisation of those returns: An evaluation of industry-specific dangers and those emanating

from the state’s political and economic profile that call into question the likelihood of anticipated returns

being realised over the assessed time period.

Risk Rated

BMI’s Mining Business Environment Ratings evaluates the relative attractiveness of states to (primarily

new) large-scale investments in the industry. Thus, we focus not only on the relative attractiveness of the

industry, but also the key features of the state that will impose either additional costs, or introduce

additional risks to investment.

Indicators

The following indicators have been used. Overall, the rating uses two subjectively-measured indicators,

and over 40 separate indicators/datasets.

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Table: Mining Business Environment Indicators

Indicator Rationale

Limits to potential returns

Market structure

Mining output, US$bn Current sector size is used as a proxy for resource endowment

Sector value growth, % y-o-y Rapid growth is a proxy for attractive opportunities, and is given double weighting

Mining sector, % of GDP Used as a proxy for the extent the economy is already oriented towards the sector

Country structure

Labour market infrastructureRating from BMI’s CRR to denote cost/availability of labour. High costs will affect risk-returns calculations

Physical infrastructureRating from CRR. Poor power/water/transport infrastructure act as bottlenecks to sectordevelopment

Tax Rating from CRR. Punitive taxation regime limits opportunities

Scope of stateRating from CRR. Low state control markedly increases security risks, therebyincreasing costs in certain states

Risks to potential returns

Market risks

Metals prices, 5-yearforecast average

Expectations of price strength will increase investment opportunities and limit downsiderisks

Metals price forecast,average 5-year growth

The resultant score is weighted by the average score of the VIX index over thepreceding month to incorporate uncertainty arising from global market volatility, a keyrisk given high cost of new investment projects

Regulatory frameworkEvaluates risks arising from environmental/land issues and the transparency/consistency of industry oversight

Legal frameworkRating from CRR. It denotes the strength of legal institutions in each state and thereforethe predictability of the legal environment for investors

Country risk

Long-term external risk

Rating from CRR, to denote vulnerability to external shock – which is principal cause ofeconomic crises. While most output is exported, an economic shock would hit domesticvalue-added industry and may affect the predictability of economic/business policy-making

CorruptionRating from CRR, to denote risk of additional illegal costs/possibility of opacity intendering/business operations affecting companies’ ability to compete

Bureaucracy Rating from CRR to denote ease of conducting business in the state

Long-term policy continuitySubjective rating from CRR, to denote predictability of government policy acrosselectoral cycle/government change

Source: BMI

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Weighting

Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-

components equal weight. Consequently, the following weighting has been adopted.

Table: Weighting Of Components

Component Weighting

Limits of potential returns 70%

– Mining sector – 65%

– Country structure – 35%

Risks to realisation of potential returns 30%

– Market risk – 50%

– Country risk – 50%

Source: BMI

Regional Overview – Asia Pacific

With control over large chunks of worldwide mineral and metal reserves, the position of the Asia Pacific

region as the hub of global mining activity remains unchallenged. Currently accounting for about half of

the global demand for iron ore, gold, coal, nickel and zinc, fast expanding economic giants like India and

China have emerged as the demand drivers for the world at large – demand that will only strengthen in

the coming years. The Asian region also holds reserves of vital mineral commodities including bauxite,

copper, iron ore, lead, nickel and zinc to the extent of 10-20% of the worldwide capacity. Furthermore,

with large portions of Asia is still unexplored and this estimate is likely to grow as investments and

technologies continue to improve.

However, the region has also to deal with some perennial downsides if it is truly to unlock the value that

lies beneath its vast landmass. Weak governance and policy flip-flops have come to characterise the

polity of the region at large, and investments continue to suffer in the face of excessive regulations and

bizarre levels of taxation that hound both domestic and overseas players. Mining productivity in large

parts of mainland Asia is further hampered by a lack of adequate financial, physical and transport

infrastructure. Poor working conditions, rising mine site accidents and a general shortage of skilled labour

are some of the other shortcomings that plague the mining business environment in Asia.

On account of its developed structure and low perceived risks, Malaysia tops BMI’s Mining Business

Environment Rankings. The two most developed economies of the region – Australia and Japan – find

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themselves place second and seventh, respectively. Asia’s two biggest economies – China and India –

come in third and fourth. India suffers from a poor regulatory structure, lack of physical infrastructure and

an inefficient bureaucracy, while China needs to beef up its broad legal framework and tax regime.

Indonesia finds itself placed at a lower-mid table position above South Korea, with the Philippines

coming in last among all mining states in BMI’s Asia-Pacific grouping.

China – Business Environment Ranking

Table: Asia-Pacific Business Environment Ranking

Miningmarket

Countrystructure

Limits ofpotential returns

Marketrisks

Countryrisk

Risks to realisationof potential returns

Miningrating

Malaysia 60.0 81.0 67.5 66.0 73.0 69.4 68.0

Australia 55.0 75.5 62.2 76.2 83.8 80.0 67.5

China 68.0 67.0 67.4 61.0 62.0 61.7 66.0

India 75.0 53.0 67.4 55.0 54.0 54.4 64.0

Indonesia 68.0 48.0 60.8 52.0 42.0 47.0 57.0

South Korea 25.0 82.0 45.0 70.0 72.0 71.3 53.0

Japan 10.0 81.0 35.0 69.0 77.0 72.9 46.0

Philippines 23.0 52.0 32.9 52.0 48.0 50.0 38.0

All ratings out of 100 (100 = best). Source: BMI

In BMI’s Mining Business Environment Rankings matrix, China manages a score of 66. The components

of China’s score are:

Limits Of Potential Returns

Mining Market

China’s mining industry has expanded at a tremendous pace in recent times to meet the requirements of a

rapidly growing economy. Though the forecasted annual average growth for the 2007-2011 period is

comparatively lower at 4.75%, the industry is expected to generate a sizeable chunk of the national GDP

during this time, reaching a value of over US$587bn in 2011 – up from US$449.57bn in 2007.

Country Structure

Good existing, and otherwise, fast-developing physical infrastructure has boosted mine production in the

country in recent times. Further, the state has consistently succeeded in improving the safety of operations

and investments of its investors. However, poor working conditions and frequent accidents at mining sites

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have put China’s labour market infrastructure under scrutiny. The country’s corporate tax regime too

needs revision to match some of the other countries in the region.

Risks To Realisation Of Potential Returns

Market Risks

Although China has a large quantity of legislation, its legal framework has many problems. Plagued with

judicial corruption and political interference, the country’s legal system often seems inadequate and

ambiguous on many issues. The country’s mining regulatory framework, though rated better, is still

inadequate on environmental and miner safety issues.

Country Risk

As a communist state, policy continuity is a clear plus when it comes to China. Further, the ruling regime

has ensured a secure macro economy with no significant long-term economic risks perceived. However,

laced with rampant corruption and red tapism, the economic giant has a long way to go in tackling its

bureaucratic inefficiencies.

Legal Framework

The People’s Republic of China operates a civil law system that includes some common law elements,

although relatively less emphasis is placed on legal precedent. Two decades of reform have resulted in a

number of changes in institutions, laws, and practices. A formal legal system has resulted in a nationwide

court system comprising 3,000 basic courts and some 200,000 judges. The Chinese courts are divided into

Courts of General Jurisdiction, and the Courts of Special Jurisdiction.

In 1979 economic courts were established as part of China’s Supreme People’s Court and three levels of

provincial courts. The economic courts enjoy jurisdiction over:

Contract and commercial disputes between Chinese parties;

Trade, maritime, intellectual property and insurance;

Other business disputes involving foreign parties;

Various economic crimes including theft, bribery, and tax evasion;

There is also an administrative legal system, which adjudicates more minor criminal cases.

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Independence Of The Judiciary

Judges are often vulnerable to corruption, political control and the pressures of guanxi (connections based

on family or local ties). Their appointment, promotion and removal are at the discretion of local

government and Communist Party leaders rather than the Supreme People’s Court or provincial high

court. Both they and litigants who appear before them are subject to the influence of local protectionism.

Effectiveness Of The System

Legislation is frequently inadequate, with numerous conflicts between national and local norms, and a

proliferation of regulations, interpretations and other edicts often producing incoherence and

inconsistency. Laws and regulations in China tend to be far more general than in most OECD countries,

and therefore need more specific implementing rules and measures.

Even People’s Republic of China arbitration, to which many foreign businesses and Chinese turn in an

effort to avoid the vagaries of the courts, sometimes suffers from the same types of pressures that distort

judicial justice. Prosecutors, who are supposed to guard against such illegal conduct, are usually too weak

politically and China’s current legal and regulatory system can be opaque, inconsistent, and often

arbitrary. Implementation of the law is inconsistent.

Although China is a member of the International Centre for the Settlement of Investment Disputes

(ICSID) and has ratified the UN Convention on the Recognition and Enforcement of Foreign Arbitral

Award, it places strong emphasis on resolving disputes through informal conciliation and mediation.

Property Rights

Chinese law states that all land is owned by ‘the public’. Individuals are not permitted to own land.

However, both Chinese nationals and foreigners can hold long-term leases for land use. They can also

own buildings, apartments and other structures on land, as well as personal property.

Intellectual Property Rights

China lacks effective protection for intellectual property rights (IPR). In spite of some reforms under its

WTO commitments – China has committed to full compliance with the WTO agreement on trade-related

aspects of intellectual property rights (TRIPS) – enforcement is poor and penalties, in the rare cases they

are applied, are insufficient to act as proper deterrents. Trademark and copyright violations are

widespread. Lack of co-ordination among public bodies undermines attempts at enforcement. There is

also wide variation in the application of IPR protection.

Corruption/Red Tape

Corruption is prevalent and anti-corruption efforts are obstructed by weak or non-existent monitoring

mechanisms. Embezzlement and financial mismanagement have been identified by numerous audit

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reports. The use of guanxi is widespread in the upper echelons of business. Many of those who come

under investigation are able to deploy their connections to avoid prosecution.

Red tape is a major issue. Given that many laws are defined in very general terms, it is often left to the

bureaucracy to make decisions. With a lack of accountability, this process provides opportunities for

corruption, and numerous bureaucratic obstacles stymie the easy acquisition of licences. According to the

World Bank, 20 separate procedures are required to enforce a contract, taking an average of 180 days.

Labour Force

Size

The Chinese labour force is growing fast, estimated in 2005 at 791mn, which implies a participation rate

of more than 65%. The unemployment rate averages 5%. The government admits that the statistics ignore

many unemployed workers, including those laid off from state-owned companies.

Structure

Although China has a reputation for having a bottomless well of cheap labour, the economy has actually

experienced labour shortages in recent years. Minimum wages are rising as the economy responds to the

labour shortage, setting a new floor for employers. For example, textile factories in Bangladesh and India

are undercutting China on price. The affluent Pearl River cities are also drawing labour away from

traditional industrial sectors, with workers able to command higher wages. Education levels vary by

region. English-speaking graduates are prevalent in Beijing and Shanghai. However, companies warn that

technical skills or training in accounting and finance are scarce. Skilled managers are also in short supply.

Table: China, Demographic Indicators

2000 2005 2010f 2030f

Dependent population, % of total 32.42 29.96 28.73 33.54

Dependent population, total 409,311 391,830 387,543 495,033

Active population, % of total 67.58 70.04 71.27 66.46

Active population, total 853,337 915,971 961,311 980,878

Youth population, % of total 25.43 22.46 20.77 18.7

Youth population, total 321,110 293,685 280,142 276,064

Pensionable population, % of total 6.99 7.5 7.96 14.84

Pensionable population, total 88,201 98,145 107,401 218,969

f = forecast. Source: World Bank

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Table: China, Employment Indicators

1999 2000 2001 2002 2003 2004

Economically active population, ‘000 719,800 na 737,060 753,600 760,800 na

% change y-o-y 0.8 na na 2.0 1.0 na

% of total population active 62.30 na 63.80 65.23 65.85 na

Employment, ‘000 713,940 720,850 730,250 737,400 na na

% change y-o-y 1.07 0.97 1.30 0.98 na na

Total employment, % of labour force 99.19 na 99.00 98.00 na na

Unemployment, ‘000 5,750 5,950 6,810 7,700 8,000 8,270

Unemployment rate, % 3.1 3.1 4.0 4.0 4.0 4.0

na = not available. Source: ILO

Regulation

The labour market is heavily regulated. New labour rules state non-Chinese may be hired only where

there is a demonstrable need, and approval is needed from local labour authorities. The law provides for

collective and individual contracts specifying wage levels, working hours, conditions, insurance and

welfare. Since local Communist Party committees select union leaders, collective agreements are usually

not part of negotiations. The Labour Law makes it more difficult to fire staff than previous regulations,

which allowed foreign enterprises to dismiss staff as a result of technical and production changes. Only

imminent bankruptcy and major production problems justify redundancy. There is a minimum wage –

each province or municipality must set a minimum wage that must not be less than half the local average

wage. Furthermore, every month, foreign companies have to contribute 2% of total wages (including

those payable to expatriate employees) to the trade union fund. The contribution is from after-tax profits.

Industrial Unrest/Strikes

Foreign companies only rarely report strikes affecting their Chinese operations. Workers have the right to

organise and participate in trade unions, but the law does not allow for the creation of unions, which must

be organised ‘in accordance with law’. The only permitted unions are state affiliates of the All-China

Federation of Trade Unions (ACFTU). The ACFTU is more interested in maintaining relations between

the government and foreign companies than in promoting industrial strife. Although China does not allow

independent trade unions, it does tolerate some forms of activism.

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Foreign Investment Policy

Overview

As repeated surveys and actual foreign direct investment (FDI) flows bear out, China remains the top

destination for foreign investors. A survey by Ernst & Young published in 2005 found that more than

half of international investors named China as the most attractive country for international investment.

Low labour costs, and better competitive and productivity rates give China an edge in the manufacturing

and assembly sectors – the dominant areas for FDI inflows.

Since the early 1990s, China has substantially reformed its investment regime and foreign investors are

now able to manufacture and sell a wide variety of goods on the domestic market. In the mid-1990s,

China authorised the setting up of 100% foreign-owned enterprises – the preferred vehicle for FDI. This

precipitated the rampant FDI performances of recent years. However, there is concern that the

government’s concentration on luring investment to the manufacturing sector has led to saturation and

overcapacity. FDI inflows grew steadily, however, in 2005, to US$72.4bn from US$61bn in 2004.

FDI Regime

Wholly-owned foreign enterprises are now the most popular entry route for investors. Since the late

1990s, the authorities have attempted to direct FDI towards ‘encouraged’ industries and regions, bringing

in new incentive schemes for investments in high-tech industries and in the central and western parts of

the country. A revised list came into effect in April 2002, outlining areas and sectors where foreign

investment would be encouraged, restricted or prohibited. The raft of investment incentives developed

over the past two decades mainly centre on the special economic zones. The list is partly intended to

abide by the promised sectoral openings that were part of Beijing’s WTO accession agreements: opening

up banking, insurance, petroleum extraction and distribution. For example, the upper limit is 20% for a

single foreign investor in one Chinese bank and combined foreign shareholding must not exceed 25%.

Regulations issued in November 2002 have eased foreign investment intended for the acquisition of

stakes in Chinese companies. Non-Chinese investors can now purchase traded and non-traded (state-held)

shares of Chinese companies. However, foreign investors have been put off by the requirement to

undergo an extensive approvals process with trade unions.

China allows for full profit repatriation and, since the mid-1990s, foreign investors have broadly had free

access to foreign exchange. Since WTO accession an overhaul of regulations has been implemented to

improve intellectual property rights. It has committed to full compliance with TRIPS, as well as other

TRIPS-related commitments, but enforcement remains negligible with penalties frequently failing to be

imposed.

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Table: China, Annual FDI Inflows

2000 2001 2002 2003 2004 2005

Inward FDI, US$bn 41.00 46.88 53.00 54.00 61.00 72.41

% change y-o-y na 15.1 13.0 na 13.0 19.0

FDI as % of GDP 3.4 3.5 3.6 3.3 3.1 3.2

FDI per capita, US$ 32 37 41 41 46 55

na = not available. Source: UNCTAD, BMI

Table: Asia, Annual FDI Inflows

2004 2005

Total, US$bn Per capita, US$ Total, US$bn Per capita, US$

Australia 42.39 2,126.90 -35.00 -1,714.00

China 60.63 46.40 72.41 55.00

Hong Kong 34.00 4,862.00 36.00 5,128.00

India 5.47 5.10 6.60 6.00

Indonesia 1.90 8.60 5.00 24.00

Malaysia 5.00 186.00 4.00 157.00

Pakistan 1.12 7.50 2.00 14.00

Philippines 0.69 8.40 1.13 13.60

Singapore 14.82 3,470.80 20.08 4,638.00

South Korea 7.73 162.20 7.20 150.50

Sri Lanka 0.23 11.90 0.27 13.80

Taiwan 1.90 83.80 1.63 71.30

Thailand 1.41 22.20 3.69 57.40

Vietnam 1.61 19.40 2.02 24.00

Source: UNCTAD, BMI

Leading Sources And Sectors

Most FDI remains focused on the export-oriented manufacturing and assembly sectors. But services –

mainly tourism, telecoms and finance – form a growing proportion of the FDI stock in China. The top

sectors in terms of attracting FDI are chemicals, machinery and industrial goods, and information and

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communications technology, including software. The main sources of investment are Japan, the US and

Germany.

Political Environment

China's new leadership, unveiled at the end of the Chinese Communist Party (CCP)'s Congress on

October 22, will most likely maintain continuity in policies over the next five years. The most noteworthy

development of the Congress was the selection of two younger 'fifth generation' officials, Xi Jinping and

Li Keqiang, to the Politburo Standing Committee, leaving them well placed to rule China after 2012.

Xi And Li: Rising Stars

The week-long Congress concluded by electing a 25-member CCP Politburo (expanding it from 24), of

whom eight are new officials. Drawing greater attention was the composition of the new Politburo

Standing Committee, China's highest decision-making body, at the apex of the CCP. Of the nine

members, four are new. Of those four, Shanghai party chief Xi Jinping, 54, and Liaoning (in northeast

China) party chief Li Keqiang, 52, are clearly the rising stars, and are at the forefront of the 'fifth

generation' of leaders.

BMI expects both men to assume new state posts when the National People's Congress (parliament)

meets next spring, thus putting them in line to succeed President Hu Jintao and Premier Wen Jiabao in

2012-13.

Xi is expected to succeed Hu as CCP General Secretary and Chairman of the Central Military

Commission (i.e. commander-in-chief) at the next CCP Congress in 2012, and may be appointed vice-

president in place of Zeng Qinghong, who was dropped from the Politburo Standing Committee in the

latest reshuffle. Zeng was widely considered a loyalist of former Chinese president Jiang Zemin, and his

departure will boost Hu's power. If Xi becomes vice-president, then he can also expect to become

president when Hu's second term expires in 2013. This would maintain the recent custom whereby

China's top leader simultaneously serves as President, CCP General Secretary, and Chairman of the

Central Military Commission.

Li Keqiang may soon be appointed a vice-premier, and is most probably the front-runner to succeed

Premier Wen Jiabao in 2013. Interestingly, Li has in recent years been considered Hu's favoured

successor, since he worked directly under Hu in the Communist Youth League (CYL) and reportedly

shares some of Hu's personality traits. Thus, Li's raking behind Xi may conceivably be interpreted as a

minor setback. This reflects Xi's rapid rise through the ranks, having become Shanghai party chief only in

March 2007 after the previous incumbent, Chen Liangyu, was ousted for corruption.

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Nonetheless, both Xi and Li are considered experienced politicians, having served as provincial leaders

during their careers. They are also considered business-friendly, with the former held in high regard by

US Treasury Secretary Henry Paulson.

The Supporting Cast

Aside from Xi and Li, He Guoqiang, head of the CCP's Organisation Department, and Zhou Yongkang,

Minister of Public Security, both aged 64, have joined the Standing Committee. The former has just been

named head of the CCP's anti-corruption commission, while the latter will continue to work to ensure

domestic stability. He's role will theoretically allow him to use the commission as a tool to oust

opponents of Hu in any future power struggle.

One area in which China's new leaders are likely to receive criticism (albeit muted) is the fact that several

high-profile officials are considered 'princelings'. The term refers to the sons (and sometimes daughters)

of former high-ranking officials, whose careers have been fast-tracked thanks to their family

backgrounds. Xi Jinping is a good example, although there are many others. The emergence of

princelings is not new, but their growing numbers could create the impression that the CCP's top

leadership consists of self-perpetuating dynastic cliques. If the princelings also become associated with

corruption, then the public could increasingly regard them as a self-enriching elite, thus generating

resentment. Over the longer term, ambitious CCP officials who do not have family ties, and who are

passed over for promotion by princelings, could also become angered, thus creating tensions within the

CCP itself.

Democracy Still Not On The Cards

Although the CCP has spoken in recent years of establishing 'inner party democracy' - by which is meant

more open elections within the party to choose senior leaders - Hu offered no timetable for such plans. In

addition, the key votes held were virtually unanimous, and held in secrecy. Consequently, with even

'inner party democracy' off the cards, there is certainly no likelihood of long-anticipated elections at town,

city, and province level, let alone at the national level.

Thus far this year, the boldest call for democracy has come from a long-retired former secretary of Mao

Zedong, the 90-year old Li Rui. Li made his call in the October edition of China Across The Ages

magazine, arguing that only political liberalisation could bring stability and root out corruption. However,

Li has virtually no influence in the CCP, and he has largely been ignored.

Expect Policy Continuity

For now, we expect broad policy continuity, which is not surprising, since Hu, Wen, and several other top

officials will remain in place. Essentially, the priorities of the government are unchanged: it will have to

carefully engineer a slowdown of the economy to a more sustainable pace without overplaying its hand

and triggering a sudden deceleration, while at the same time seeking to spread wealth beyond the eastern

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seaboard, and ensuring that the environment does not become too decayed in the process (see August 8

2005, Challenges And Threats To Domestic Stability). This policy now has a name: 'Scientific

Development'. The fact that it is being given a formal title reflects Hu's desire to make it his official

legacy.

Yet achieving this is a monumental challenge, and a failure to deliver would risk more unrest against the

regime.

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Industry Forecast Scenario

Metals Price Outlook

Fundamentals To Underpin Metal Prices

Commodity market movements over the past few months have further underpinned our bullish view.

Overall, we remain sanguine toward the industrial metal complex, projecting the Goldman Sachs

Industrial Metals index will finish 2007 at 430.00. Beyond 2007, we see the index moderating to 390.00

in 2008, before rising to 400.00 by end-2009 and 420.00 by the conclusion of 2010. In short, we believe

that there will be a period of market retrenchment, with few significant moves in either direction.

Table: BMI Prices Assumptions

2004 2005 2006e 2007e 2008f 2009f 2010f 2011f 2012f

Global economic growth, % 5.3 4.8 5.1 4.9 4.7 4.4 4.3 4.2 4.2

USA growth, % 4.2 3.5 3.3 2.0 2.1 2.7 2.9 2.7 2.7

China growth, % 10.1 10.4 11.1 11.5 10.4 9.7 9.0 9.0 9.0

GSCI metals 238.0 294.0 445.5 430.0 390.0 400.0 420.0 410.0 410.0

GSCI metals, % y-o-y 23.3 23.5 51.5 -3.5 -9.3 2.6 5.0 -2.4 0.0

e/f = BMI estimate/forecast. GSCI = Goldman Sachs Commodity Index. na = not available. Source: OEF globaleconometric model, Goldman Sachs

Underlying our long-term outlook is a fairly robust view of growth prospects in emerging markets.

Indeed, our Country Risk analysts believe that the economies of China and India will grow by an annual

average of 9.8% and 8.0%, respectively, between 2007 and 2012. To put this in perspective, these

economies will be worth an additional US$4.8trn over this period and, with expansion largely investment-

led, growth will drive strong infrastructure and fixed asset accumulation. A corollary of rising demand is

the spike in input costs and supply bottlenecks for key producers, squeezing the supply/demand profile.

Wage demands and higher energy costs are impacting miners, while the rocketing Baltic Dry index

illustrates the relative paucity of shipping capacity. Indeed, industrial action has hurt production in

Peruvian, Mexican and Chilean copper mines in recent months.

However, while the global – and especially emerging market – growth story suggests that the principal

risks to our forecasts are to the upside, there are significant downside dangers too. One concern is that the

rise in commodity prices in recent years has been driven by excessively loose global monetary policy,

which has led investors to chase non-yielding assets where prices have risen rapidly. Indeed, while there

are strong fundamental reasons for high commodity prices, there is a danger that should the recent

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deterioration of market liquidity continue – or risk aversion rise – metals prices could, at a minimum,

suffer from greater volatility.

A further downside risk arises from the ongoing US housing crisis. Not only do record high inventory

overhangs need to be worked through, while tighter lending conditions in the mortgage markets will limit

the emergence of fresh buyers, there is a danger that a contraction in house price wealth could result in a

slowdown – or recession – in US consumer spending, driving down US and, consequently, global growth.

This risk is particularly relevant to the copper outlook. In addition, the threat of more draconian economic

tightening in China lurks, particularly after key political meetings in October 2007 and April 2008 and the

Beijing Olympics conclude. That said, our core scenario foresees a continuation of strong growth through

2008. According to Barclays Capital, Chinese copper demand rose by 18.1% y-o-y in the first half of

2007, up from 13.6% in all of 2006. Meanwhile, US demand is forecast to contract for the second

consecutive year.

Regional Analysis

Over the past five years, the proportion of global exploration expenditure in Latin America and Australia

has declined as a result of increasing expenditure in Eurasia (including China and Russia). Moreover, the

recent unsettling political developments in certain Latin American countries sound a warning to all

governments seeking to attract mining investments as political stability remains an important investment

consideration.

The impact of the ‘awakening giants’ – Russia, China and India – on the global mining industry is

becoming more evident. Each of these countries presents significant investment opportunities for overseas

companies but there are undoubtedly major local challenges which must be overcome to achieve success.

The governments of these countries can imbibe evidence of how others such as Canada, with its flow-

through share schemes, and Ghana with its taxation incentives, have achieved growth in exploration

activities. The overall safety performance of the industry has continued to improve.

Africa

Africa produces more than 60 metal and mineral products and is a major producer of several of the

world’s most important minerals and metals, including gold, platinum group metals (PGM), diamonds,

uranium, manganese, chromium, nickel, bauxite and cobalt. It is interesting to note that Africa’s

contribution to the world’s major metals (copper, lead and zinc) is less than 7%. Africa’s silver

production is less than 3% of the world’s output due to the fact that most of the silver produced is a by-

product of lead, zinc and copper mining. Although under-explored, Africa hosts about 30% of the planet’s

mineral reserves, including 40% of gold, 60% cobalt and 90% of the world’s PGM reserves, making it a

truly strategic producer of these metals.

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Exploration and mine development in Africa has so far been primarily focused on gold and diamonds.

Undoubtedly, there is still great scope for these commodities, but riding on the back of improving base

metal prices, this segment is also poised to witness increasing activity. Mozambique, Nigeria and

Madagascar are but a few countries that have tremendous potential for base metal and industrial mineral

deposits.

South Africa, Ghana, Zimbabwe, Tanzania, Zambia and the Democratic Republic of Congo dominate the

African mining arena, while countries such as Angola, Sierra Leone, Namibia, Zambia and Botswana rely

heavily on the mining industry as a major foreign currency earner. Unfortunately, several African civil

wars are funded (and often catalysed) by some of these commodities, ‘conflict’ diamonds in particular.

Currently, major new mines opening in Africa or those under development are distributed among South

Africa, Namibia, Botswana, Tanzania and Gabon, producing gold, diamonds, niobium products, chrome

and base metals. Notable forays over the past year include several potentially diamondiferous kimberlites

in Mauritania as well as the potential diamond marine deposits in offshore southern Namibia.

Latin America

Latin America continues to be a significant region for exploration spending. But although the total

exploration expenditure in the region has continued to increase, its share in the worldwide exploration

budget has shrunk since 2001. Latin America is still perceived as a region in which it is considered risky

to do business, particularly Bolivia, Peru and Venezuela. The political climate in these countries has led

investors to question the stability of existing government policies, resulting in a loss of confidence in the

business environment and a reduction in the overall mining investment in the region.

Interestingly, it appears that Chile’s and Brazil’s shares of the exploration budget have suffered more than

Peru’s. Although Chile and Brazil are generally perceived to harbour lesser political risk, Peru is

considered as having great mineral potential.

Eurasia

In 2005, Eurasia, including Europe and continental Asia, has continued to see an increase in its share of

exploration budgets. Although, on an average, the region as a whole is considered less risky politically

than five years ago, China and Russia continue to be reflected in the Fraser Institute’s Policy Potential

Index as high-risk countries. But despite this, Russia and China have seen a dramatic increase in the

amount of exploration spending.

Russia is well endowed in terms of oil and gas and its mining industry would like to emulate this position.

The country has vast natural resources and could become a major mining commodity producer for many

decades. Mineral presence is high and the ability to convert known deposits into reserves has been

successful in the past, but due to the outdated mining methods and technology used by various small

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mining companies, a substantial amount of resources cannot be economically exploited. Additionally,

many of the deposits and prospective regions are located away from existing infrastructure, which adds to

the complexities. Russia is among the few global locations where major new mines are likely to be

developed. But to achieve this, significant investment in exploration and development is required.

China claims to be the world’s third-largest mining producer although most of its companies are small in

scale. There are approximately 150,000 mining players in China, of which only around 30 are publicly

traded. As a whole, the industry is infested with structural problems, lagging nationwide geological

exploration, low levels of productivity, poor resource recovery, alarming safety records alongside severe

environmental damage.

The Indian mining industry remains dominated by the state sector. While only 820 of the 3,000 operating

mines are government controlled, they account for 75% of mineral production by value. The production

share of government mines has slightly reduced in recent years and over 90% of new mining leases have

been awarded to the private sector, indicating that the situation is beginning to change. Government

policy continues to evolve and 100% foreign ownership is now permitted for all non-fuel and non-atomic

minerals.

Australia

Although it continues to hold on to the second spot in the list of exploration budgets by country,

Australia’s share of the worldwide exploration budgets and its score on the Fraser Institute study have

steadily declined in the last five years. Historically, over 50% of Australian exploration has been focused

on gold. The dramatic consolidation of the Australian gold industry has seen many committed explorers

disappear together with their exploration dollars. Add to this the fact that the Australian Stock Exchange

has not been as successful as the Toronto Stock Exchange and the Alternative Investment Market in

raising funds for the juniors, and it is easy to see why the Australian share of the global exploration pool

is falling. This downward trend has been recognised for a number of years and calls for a flow-through

share scheme similar to that in Canada. Efforts to kick-start grassroots exploration have been persistent,

but only moderately successful so far.

China – Mining Industry Forecast

Touching an estimated value of US$469.33bn in 2006, China’s mining industry has been growing at a

scorching rate. It was the world’s largest producer of coal, copper and aluminium in 2006. China is also

the world’s largest consumer of coal, having potential coal reserves of around 3.5trn tonnes. Coal plays a

dominant role in China’s energy consumption and caters to a major proportion of its rising energy needs.

Annual coal production in China is forecast at 2.67bn tonnes in 2011. On an average, the value of China’s

copper output is expected to grow 24% a year in 2007-2011. Driven by higher consumption as well as

rising global copper prices, the nation’s copper production is expected to be 4.87mn tonnes in 2011.

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China is implementing its 11th Five-Year Plan (2006-2010), which emphasises securing the economy’s

future metals and minerals resource needs. The focus is on further geological exploration of mineral

reserves and increasing the supply of mineral products to fuel China’s rapid economic expansion. BMI

forecasts that the mining industry in China is expected to grow close to 5.75 in 2007-2011, reaching

US$587.42bn by 2011.

Table: China Mining Industry Forecast

2005 2006e 2007e 2008f 2009f 2010f 2011f

Mining industry

Value, CNYbn 2,477.89 3,725.35 3,424.60 3,276.71 3,479.67 3,543.55 3,459.89

Value, US$bn 302.39 469.33 449.57 452.32 504.17 552.60 587.42

Real growth, % y-o-y 28.81 55.20 -4.21 0.61 11.46 9.61 6.30

% of GDP 13.51 17.82 14.19 11.80 11.40 11.20 10.66

Employment

Mining industryemployment, '000 12323.88 19127.22 18321.94 18434.10 20547.35 22521.05 23939.98

Mining industryemployment, % y-o-y 28.81 55.20 -4.21 0.61 11.46 9.61 6.30

Total workforce, '000 11706.42 11748.85 11791.45 11834.19 11877.09 11920.15 na

Mining industry employeesas % of employment 105.27 162.80 155.38 155.77 173.00 188.93 na

Mining industry, averagewage per year, CNY 6408.46 6504.59 6730.04 6915.08 7027.66 7170.55 7361.94

Mining industry, averagewage per year, US$ 782.06 819.46 883.49 954.56 1018.24 1118.21 1249.90

Exports (US$mn)

Base metals, ores 894.07 2102.65 1718.03 1592.08 1977.40 2278.49 2422.05

Aluminium 6236.27 14666.35 11983.54 11105.05 13792.75 15892.89 16894.21

Coal, lignite & peat 6067.18 14268.68 11658.62 10803.94 13418.77 15461.96 16436.14

Copper 2930.44 6891.75 5631.09 5218.28 6481.24 7468.10 7938.63

Iron ore and concentrates 0.56 1.31 1.07 0.99 1.23 1.42 1.51

Lead 674.59 1586.48 1296.28 1201.25 1491.98 1719.16 1827.47

Nickel 346.47 814.82 665.78 616.97 766.29 882.97 938.60

Non-ferrous base metals 2399.91 5644.07 4611.64 4273.57 5307.88 6116.07 6501.42

Precious metal ores 5.86 13.78 11.26 10.43 12.96 14.93 15.87

Tin 519.40 1221.52 998.08 924.91 1148.76 1323.68 1407.08

Zinc 479.72 1128.20 921.83 854.25 1061.00 1222.55 1299.58

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Table: China Mining Industry Forecast (continued)

2005 2006e 2007f 2008f 2009f 2010f 2011f

Output

Coal, '000 tonnes 2,150,786 2,330,000 2,394,751 2,461,301 2,529,700 2,600,000 2,672,254

Coal, US$mn 107,539.32 119,986.26 110,511.48 103,078.33 105,940.24 108,885.66 111,907.89

Gold, tonnes 224.06 240.08 248.00 257.35 224.99 241.08 266.70

Gold, US$mn 3,204.21 4,663.90 4,109.57 3,927.82 3,826.37 4,310.21 4,768.30

Copper, '000 tonnes 2,487.27 2,930.00 3,287.55 3,683.63 4,079.71 4,475.79 4,871.87

Copper, US$mn 9,150.35 19,695.85 22,973.17 30,245.70 38,486.98 47,696.99 57,875.75

Aluminium, '000 tonnes 7,800.00 9,400.00 11,700.00 12,282.55 13,301.09 14,319.64 15,338.18

Aluminium, US$mn 14,806.80 24,157.05 30,985.16 35,933.04 42,600.34 49,832.38 57,636.01

e/f = BMI estimate/forecast. na = not available. Source: ILO, UNCTAD, World Bank

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Competitive Landscape

China is the world’s fourth-largest gold producer. Gold production in China is estimated to have reached

240 tonnes in 2006, up from 224 tonnes in 2005, as companies increased production to take advantage of

high prices. Shandong province alone accounts for about 28% of the total gold production in China,

followed by the Henan province at 16%. China’s largest gold producer (by output) is Zijin Mining Group

followed by Shandong Gold Mining. China’s other major gold producers include China Gold Group,

Shandong Zhaojin Group and Henan Lingbao Gold Company. Zijin Mining Group produced 21.2

tonnes of gold in the six months H106, up 183% y-o-y.

China is the world’s largest producer and consumer of coal. Chinese coal output in 2006 was estimated at

2.33bn tonnes compared to a demand of 2.25bn tonnes. With thousands of small mining companies,

China’s coal mining industry is highly fragmented. The government has now planned to form between six

and eight large-scale mining conglomerates that are able to produce over than 100mn tonnes of coal a

year. The government plans to close all coal mines with capacity less than 30,000 tpa by the end of 2007.

Datong Coal Industry Company and China Shenhua Group are the nation’s main coal producers. By

2011, the China Shenhua Group is likely to invest US$4.6bn in coal mines in Xinjiang. The Jinchuan

Group, China’s largest and world’s fifth-largest nickel refiner, produced about 101,000 tonnes of nickel in

2006. Hunan Nonferrous Metals Corporation is the nation’s largest zinc producer.

Table: China Mining – Key Players

Company Sales (US$mn) Period No. of employees Year est.

Shandong Gold Mining 242.30Quarter endingMarch 31 2007 4,290 2000

Zijin Mining 888 H107 1,357 2000

Datong Coal 308.98 H107 19,076 2001

Zhaojin Mining Industry Company Ltd 150.24 FY2006 4,325 na

na = not available. Source: BMI

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Company Monitor

Shandong Gold Mining Company

Shandong Gold Mining is principally engaged in the exploration, mining

and processing of gold, sliver, precious metals and non-ferrous metals and

the manufacture and sale of jewellery.

Headquartered in Jinan, Shandong province, the company holds a 90%

interest in China-based Shandong Gold Xinyi Jewellery Company; 51%

interest in a local gold-mining company; and a 57.69% interest in a local

company producing and selling gold, silver and jewellery. The company

produces about 10 tonnes of gold a year.

In September 2006 Shandong Gold Mining formed a joint venture with a

Qingdao-based investment company to set up another Shandong-based

gold mining company. The new entity will have a registered capital of

CNY10mn (US$1.3mn), of which Shandong Gold Mining will invest

CNY5.1mn (US$0.66mn), representing a 51% stake.

In August 2006 the company announced that it would increase its gold

output by over 8.2tpa by acquiring gold mines from its parent company,

Shandong Gold Group. Shandong Gold Mining will take control of assets,

including Jincang Mining, Linglong Mining, the Sanshandao and Yinan

gold mines.

In June 2006 the Shandong Gold Group bought Laizhou Jincang Mining

Co from China Overseas Holdings in a CNY500-mn (US$64.4mn) deal.

For the quarter ending March 31 2007, the company reported revenues of

US$242.30mn and net income of US$5.6mn.

Address

16 Jiefang RoadGold BuildingJinan, 250014China

Tel: +86 531 8856 2810

Fax: +86 531 8856 2806

Web: www.sdhjgf.com

Key Statistics

Revenue(Q107):US$242.30mn

Net income(Q107) :US$5.6mn

No. of employees: 4,290

Year established: 2000

Key Personnel

Chairman: Shi Min

Vice-Chairman: Cui Lun

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Zijin Mining Group

Zijin Mining Group is a mining conglomerate primarily engaged in gold

production. It is also engaged in the exploration, mining, processing, refining of

gold and non-ferrous metals and other mineral resources as well as the sale of

mineral products. It possesses proven reserves of approximately 375 tonnes of

gold metal, 6,250,000 tonnes of copper metal, 214,800 tonnes of molybdenum,

660,000 tonnes of zinc metal, 100,200 tonnes of tin, 226mn tonnes of iron ore and

400mn tonnes of coal.

The company produced 49.28 tonnes of gold in 2006, and expects to produce 55

tonnes of gold in 2007, growing by 12% y-o-y. It also plans to invest about

CNY1.5bn (US$198mn) in the acquisition of resources and about CNY150mn

(US$19.8mn) into exploration in 2007.

In September 2007, the company received approval from the National

Development and Reform Commission (CNDRC) to begin expansion work at its

Zijinshan gold-copper mine.

In July 2007 Zijin outlined plans to buy Commonwealth & British Mineral in a

deal worth US$55mn. Commonwealth & British Mineral, a subsidiary of UK-

based Avocet Mining, holds the right to perform geological survey for gold

reserves in Tajikistan.

Zijin Mining, along with copper smelter Tongling Nonferrous and trading house

Xiamen C&D, agreed to buy Monterrico Metals for GBP92.1mn (US$178mn) in

2007.

In November 2006 the Group increased its stake by 24.405% in Sichuan

Jiuzhaigou County Zijin Mining Co for US$19.3mn. The shareholding of Zijin

Mining Group in Jiuzhaigou Zijin will increase from 60% to 84.4%.

For the first-half of 2007, the company reported a net profit of CNY1.2bn

(US$159.81mn) on revenues of CNY6.67bn (US$888.32mn).

Address

Zijin MasionZijin AvenueShanghangFujian, 364200China

Tel: +86 597 388 3151

Fax: +597 388 3997

Web: www.zjky.cn

Key Statistics

Revenue (H107):CNY6.67bn (US$888.32mn)

Net profit (H107): CNY1.2bn(US$159.81mn)

No. of employees: 1,357

Year established: 2000

Key Personnel

Chairman: Chen Jinghe

Vice Chairman: Lu Xiaochu

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Datong Coal Industry Company

Datong Coal Industry is primarily engaged in the mining, processing and sale of

coal products. Its major brands of coal products include Dayou, Damo and

Kouquan. Its products, including coal powder and bulk coal, are used in the

manufacture of coal water mixture, chemicals and building materials, as well as in

the generation of electricity.

The group accounts for 60% of the total steam coal shipments from Shanxi

province. Datong produced 8.93mn tonnes of raw coal in Q1-Q306. Q306 output

was 3.85mn tonnes, up by 1.31mn tonnes from the average of 2.54mn tonnes in

Q1-Q206, on the back of increased capacity at Tashan coal mine.

In May 2007 the company reported that it will jointly develop the Tongxin coal

mine with China Goudin. The total investment into the project, scheduled to be

completed by 2010, is about US$376.6mn.

The company also outlined plans to enter into a coal mine joint venture with its

parent Datong Coal Mine Group as well as with Chinese GD Power Development

in Shanxi. The deal will be worth CNY2.91bn (US$385.09mn).

In December 2006 Datong and a unit of China-based Guangzhou Development

Industry Company jointly invested in the Dongzhouyao coal mine with an annual

production capacity of 10mn tonnes. Both companies will together invest about

CNY2.1bn (US$0.27bn) in the mine and a processing plant in Shanxi province.

Datong will account for 60% of the investment, while its partner will account for

40%. The Dongzhouyao mine has recoverable coal reserves of 1.4bn tonnes, and

is one of the larger coal mines in the province. With annual designed capacity of

10mn tonnes, the mine will be operational for 97 years.

In June 2006 the company made its initial public offering of 280mn shares of

common stock at a par value of CNY1 (US$0.13) per share. The company’s shares

started trading in June 2006 on the Shanghai Stock Exchange under the symbol

‘601001’.

For the first-half of the year 2007, the company reported a net profit of

CNY244.36mn (US$32.54mn) over revenues of CNY2.32bn (US$308.98mn).

Address

XinpingwangKuangDatong, 037003China

Tel: +86 352 701 0167

Fax: +86 352 701 1070

Web: www.dtmy.com.cn

Key Statistics

Revenue (H107) :CNY2.32bn (US$308.98mn)

Net profit (H107):CNY244.36mn(US$32.54mn)

No. of employees: 19,076

Year established: 2001

Key Personnel

Chairman: Li Zemin

Vice-Chairman:Wang Baoyu

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Zhaojin Mining Industry Company

Zhaojin Mining Industry is an integrated gold enterprise involved in exploration,

mining, ore processing and smelting operations. It is China’s second-largest gold

miner in terms of reserves. The company is located in the Zhaoyuan, Shandong

province.

Zhaojin Mining operates five gold mines in the Zhaoyuan district and another two

in Hainan and Xinjiang. Its principal product is gold bullion, which accounted for

over 90% of its total revenue in 2005. The company also owns the largest gold

smelting plant in China.

It was reported in June 2007 that Zhaojin will buy three gold mining companies

for CNY159.2mn (US$21.20mn, to expand its exploration opportunities. Zhaojin

will buy a 51% stake in Xixia Zhaojin Mining, a 90% stake in Tuoli Zhaojin

Beijiang Mining, and an 80% stake in Min Tianhao Gold (all domestic companies)

from major shareholder Shandong Zhaojin Group, which holds 37.3% of Zhaojin

Mining Industry. Once the deal is through, these three gold mining companies will

become wholly owned units of Zhaojin.

Zhaojin Mining plans to bid for the Yangshan gold mine in Gansu province when

the government opens the tendering process in late 2007. Yangshan mine is

China’s biggest gold mine, with confirmed total gold reserves of 258 tonnes.

For 2006, the company reported sales of CNY1.16bn (US$150.24mn) and a net

profit of CNY351.19mn (US$45.48mn).

Address

2 Wenhua Road,Zhaoyuan,Shandong, 265400China

Tel: + 86 535 8266516

Fax: + 86 535 8256086

Web:http://www.zhaojin.com.cn/

Key Statistics

Sales (2006): CNY1.16bn(US$150.24mn)

No. of employees: 4,325

Key Personnel

General Manager:Wang Peifu

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Appendices

Appendix A: Global Outlook

A Test Of The Decoupling Theory

The global economic landscape has changed considerably since July 2007, with a global credit market

crisis coming to the fore and the US Federal Reserve stepping in by cutting its Federal funds rate by 50

basis points (bps) to 4.75% in September. While we have had cause to revisit some of our forecasts, our

core view remains more or less the same: the global economy is strong, and emerging markets are well-

positioned to weather a downturn in US economic growth. The story is structural, not cyclical, and while

some risks to the downside over the near term should not be understated, we remain very positive on the

prospects for the global economy over a long-term horizon.

Indeed, our thesis that emerging markets would be able to ‘decouple’ from the economic cycles of the US

and other industrialised nations is being put to the test. We point to several factors to suggest that

emerging markets are in better shape than perhaps ever before. Firstly, there are very few concerns about

external sovereign solvency. It is very difficult to envisage a default scenario in the near future, and there

are few(er) concerns about inflation and currency devaluation. We cannot overlook those factors, as less

monetary uncertainty has increased investment confidence, particularly for long-term capital projects.

Secondly, free-market economic models are more firmly entrenched than ever before, and flexible

exchange rate regimes should provide a cushion for external shocks. Thirdly, even if emerging market

nations did not enjoy the previous two benefits, most are no longer dependent on foreign financing to

maintain external balances.

Coupled with our upbeat view of global growth is our belief that commodity prices will remain elevated

in 2008 and 2009. This should hold true for both hard and soft commodities, as we believe that the

sustained long-term expansion in emerging markets will continue to fuel demand for hydrocarbons,

minerals and agricultural goods beyond the short-term capacity of the market to meet demand. There are

certainly downside risks to this outlook, for example there is the issue of whether we are wrong about oil

prices (and, by tacit extension, commodity prices). But we maintain that the risks, if anything, lie to the

upside.

Another corollary to the strong growth outlook is that global inflation is likely to remain elevated,

particularly in emerging market countries where food and energy prices make up a relatively large

proportion of consumer price baskets. In many emerging market countries, we envisage a tightening bias

for most central banks. Herein lies another test of decoupling: with the US Federal Reserve having

embarked on an easing cycle, emerging market central banks are hiking. This would have been

unthinkable even a few years ago.

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Risks To Global Outlook

There are three major risks to our global outlook.

• The US housing collapse drags the US into a hard landing scenario. Deflation would be a real

possibility in this instance, although this would likely be only temporary.

• Chinese inflation runs rampant, and the authorities tighten monetary policy. Growth slows markedly,

and the chain reaction hurts emerging market commodity producers. Hand-in-hand with this is the

Chinese financial system story, as asymmetric risk and excess liquidity have encouraged speculation.

• The global credit crunch refuses to die down, and the velocity of money declines rapidly, effectively

reducing liquidity and hurting growth.

United States

US In 2008 And 2009

Our outlook for US GDP growth and the path of monetary policy are coloured by a very negative view on

the residential real estate sector. Hence, we see real GDP expanding by 2.1% in 2008 and 2.7% in 2009,

after projected growth of just 2.0% in 2007. Risks are to the downside. Indeed, the picture emerging from

Q207 GDP data is somewhat grim. Residential investment knocked 0.5pps off of headline growth, while

personal consumption expenditures contributed only 0.9pps to the headline figure of 3.4%. Export growth

is the driving force, reflecting a weak US dollar and robust overseas growth, underpinning our contention

that global ex-US fundamentals remain solid. The troubling housing sector and credit market turmoil

already led the Federal Reserve to ease the Fed Funds rate by 50bps on September 18 2007. We see a

further 25bps to the downside in 2007, taking the rate to 4.50%, while we forecast an end-year Fed Funds

rate of 4.25% and 4.75% in 2008 and 2009, respectively.

The primary risks to our outlook, and the Fed easing cycle, are a disorderly US dollar decline and

sustained elevated commodity prices. Core inflation readings are preferred by policymakers, but headline

readings will remain high, in our view, as energy and food shoot higher. Whether this will affect Fed

policy is debatable, but a scenario wherein the Fed eases aggressively amid a backdrop of higher prices at

the pump and the checkout counter could engender negative consequences.

Housing Horror Show

Our core view on the US housing market is that there is further room to run on the downside, which is

almost certain to prove detrimental to the US economy. There are three major dynamics at play: a glut of

homes, a drop in homebuyer purchasing power due to contracting credit markets and the deteriorating

ability of existing homeowners to refinance. These dynamics have formed a vicious cycle on the

downside for the housing market, which – it is now clear with the benefit of hindsight – peaked in late

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2005. The construction boom since 2002 has overshot the demand for new houses, and the housing

inventory has risen from a low of 3.6 months to a 15-year high of 8.8 months.

Furthermore, existing and new home sales have clearly come down from their peak, and in our view, are

unlikely to turn up anytime soon. If history and the recent credit market dynamics are any indication, the

level of inventory could have some room to run on the upside. The last shoe to drop in this cycle will be

prices, which are likely to remain sticky on the downside for now, as buyers are reluctant to sell at below-

purchase prices.

Will The Easing Help?

Our bearish view on the US housing market is not necessarily put in jeopardy by the Fed’s easing cycle.

Traditional US mortgages are more closely tied to long-end Treasuries than to short-term money market

rates. The 10-year Treasury yield provides a benchmark for typical, fixed-rate 30-year mortgages, and the

yields for the securities move in tandem. A weak US dollar and an increased chance of rising long-term

inflation – on the back of the rate cut – have already contributed to steepening post-Fed, and we expect

this trend to continue. On the flipside, if the Fed funds rate cut and the accompanying discount rate

reduction reduce pressures on the LIBOR market or 12-month Treasury averages, this could help

homeowners whose adjustable rate mortgages (ARMs) are pegged to these rates. This is of no small

concern, given that the peak of ARM resets is ahead, with estimated US$2trn of these mortgages

switching to the new rates by the end of 2008.

Europe

Solid, But Not Stellar, Growth

The eurozone economy will remain in solid shape through the forecast period, although growth is set to

moderate from the cyclical high of 2.7% set in 2006. After 2007’s 2.4% real GDP growth, we are

anticipating 2.3% in 2008 and then 2.0% to 2.1% through to the end of 2012. This is around long-term

trend levels. We anticipate that inflation will largely stay below 2% year-on-year (y-o-y) over the forecast

period, and within the European Central Bank (ECB)’s tolerance zone. That is not to say, however, that

there will not be the need for interest rates hikes. We had initially been expecting further rate hikes in

Q407, but following the US sub-prime mortgage crisis, these have been pushed back. We anticipate that

the ECB’s refinancing rate will stand at 4.50% by the end of 2008 – up a cumulative 50bps from Q407 –

and then decline back towards 4.00% by 2012. The corollary of this outlook is that we expect to see the

euro remaining strong against the US dollar, but not stellar. After a year-end 2007 estimate of

EUR1.46/US$, we forecast EUR1.38/US$ in 2008, and then EUR1.29/US$ through to 2012.

All of our forecasts are based upon the 13-member eurozone, but we do not foresee expansion of the bloc

making a significant difference. This is despite our belief that as many as nine more states could join the

eurozone by 2012: Cyprus and Malta in 2008, Slovakia in 2009, Bulgaria in 2010, as well as the Baltics,

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the Czech Republic and Poland in 2011 or 2012. Between them, their combined current price GDP in

Q207 amounted to just 10% of eurozone-13 GDP. As the accession dates – especially for the Czech

Republic and Poland – firm up, we will look to nuance our forecasts.

Threats To Outlook

Risks to the outlooks for the eurozone are currently mostly on the downside. The fall-out from the US

sub-prime mortgage debacle could still cause reverberations in the final 2007 numbers and the 2008

outturn. If liquidity and risk appetite do not start returning in significant volumes by Q108 then we

certainly be taking another look at our forecasts. Nevertheless, we do not envisage that further liquidity

problems will lead the world towards a hard landing. A slower return of liquidity would still result in

solid real GDP growth numbers towards the end of our forecast period. In the shorter term, the eurozone

economy should continue to perform solidly, regardless, due to the continuation of the export driven

growth to areas which have increasingly de-coupled from the US economic cycle. The risk remains,

though, that in eurozone economies (especially Italy) where lower value-added industries are still trying

to compete with Asian imports, a prolonged decline in US$/EUR could prompt even greater losses in

CNY/EUR and JPY/EUR, which would in turn place massive stresses on white good and textile

manufacturers.

Japan

Japan In 2008 And 2009

A weak Q207 GDP figure has prompted us to revise downwards our full-year 2007 Japan growth forecast

to 2.2% from 2.5% previously. However, we retain our 2.5% forecast for 2008, counting on a recovery of

the US economy and continued robust expansion in China, and project 2.3% growth in 2009.

Real GDP data for Q207 showed an annualised contraction of 1.2%, or -0.3% quarter-on-quarter (q-o-q)

from an initially calculated expansion of 0.5%, mainly reflecting weakness in corporate capital spending,

which has been one of the main drivers of Japanese economic growth in recent years. The Cabinet Office

also revised Q306 growth to an annualised contraction of 0.5% (-0.1% q-o-q), which marked the first

drop since Q404. Naturally, this negative growth is concerning, particularly since the US economy

expanded at an annualised rate of 4.0% over the same period. Given that US growth is likely to have

weakened in Q307 on the back of falling consumer confidence stemming from housing market woes,

there are tangible risks for Japan too. However, even taking into account Q207 contraction, Japan’s

economy still expanded at an annualised rate of 2.5% in H107, which is faster than trend growth of

around 2.0%.

Against this backdrop, we have dropped our call for a further 25bps hike in the overnight call rate to

0.75% in 2007. We now expect the Bank of Japan (BoJ) to remain on hold at 0.50% in 2007, before

hiking rates by 50bps in 2008 and by another 50bps in 2009, ultimately taking the call rate to 1.75% by

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teh end of the forecast period, in 2012. Earlier in 2007 we had predicted that the BoJ would raise rates

again in H207, after July’s Upper House elections. We became more cautious about this scenario

following the Liberal Democratic Party (LDP)’s massive electoral defeat and Prime Minister Shinzo

Abe’s subsequent resignation. Now, with the US preparing to cut rates to stimulate its economy, and with

US and Japanese growth under threat, we see no reason for the BoJ to hike rates. There is also the fact

that Japan remains in deflation. Core CPI came in at -0.1% y-o-y in August 2007, the seventh consecutive

month of negative y-o-y inflation.

Japan’s Medium-Term Prospects

The government’s Council on Economic and Fiscal Policy believes that real GDP can grow by more than

2.0% a year over the five fiscal years from 2007-2011 if deregulation and labour market reforms improve

competitiveness, and if new technology boosts productivity. Nonetheless, Japan’s outlook is clouded by

two main factors. One is the rising public debt-to-GDP ratio, which is now around 160%, the highest in

the developed world. The government aims to attain a primary surplus by FY11/12, or even before then,

but the higher consumption taxes and other levies necessary to achieve this could hurt growth. Moreover,

planned fiscal deficit reduction may fall victim to electoral exigencies. New LDP head Yasuo Fukuda will

come under pressure to revive his party’s fortunes through old-style pork barrel politicking, putting the

primary surplus target at risk.

China

China In 2008 And 2009

China’s juggernaut economy will continue to steam ahead throughout 2008 and 2009, as net exports and

fixed asset investment continue to power the economy forward. However, having seen real GDP expand

by 11.9% y-o-y in Q207 after growing by 11.1% in Q107, Chinese authorities have been forced to

increase efforts to cool the economy in order to prevent it from overheating. With this trend likely to

remain in place in 2008, growth momentum will moderate, and as such we are forecasting economic

growth to slow to 10.4% in 2008, and 9.7% in 2009.

While fixed asset investment (FAI) and net exports will continue to be the main drivers of economic

growth in China over the medium term, the emergence of private consumption as an increasingly

important driver is an encouraging trend. In 2001, private consumption contributed just 2.6pp to real GDP

growth, but this figure is estimated to have risen to as much as 4.6pp in 2007. As China’s middle-class

continues to grow, and incomes continue to rise as a result of economic growth, we expect this uptrend to

persist. However, we note that the switch away from FAI and net exports towards private consumption

will be gradual, and as such, we expect the combined forces of investment and exports to remain as the

twin engines of China’s growth momentum for some time yet.

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The unfortunate side effect of this is that the Chinese authorities will continue to encounter problems in

controlling the domestic economy. In September, the People’s Bank of China (PBoC) raised interest rates

for the fifth time in 2007, in response to the sharp spike in inflation witnessed in August of that year,

when consumer price inflation rose to an 11-year high of 6.5% y-o-y. While inflation is currently

concentrated in food (non-food prices rose just 0.9% y-o-y in August) as a result of a supply shortage of

pigs driving up pork prices, continued strong FAI growth and excess liquidity as a result of China’s

massive trade surplus have also contributed to inflationary pressures.

According to Bi Jingquan, vice chair of China’s National Development and Reform Commission

(NDRC), China expects to see a ‘fundamental improvement in hog supply’ in the second quarter of 2008,

as the country recovers from the outbreak of blue ear disease in 2007, which has severely affected the

supply of pork. This implies that inflation will remain elevated in the early part of 2008, before

normalising in the second half of the year. Consequently, while we recently revised up our 2007 average

inflation forecast to 4.5%, up from 3.5%, we are maintaining our 2008 and 2009 forecasts at 3.2% and

1.8%, respectively.

While we remain sanguine on the prospects of lower inflation, we nonetheless recognise that with China

growing at the pace it currently is, inflationary pressures will persist. Herein lies a key risk to our outlook.

Overzealous policy moves by the authorities, in an attempt to cool the economy, could trigger a sharp

economic downturn. However, we emphasise that this is not our core scenario given that the authorities

have always taken a cautious approach to policy, and stability will remain their primary concern.

Commodities

Strong Demand And Supply Constraints

Our commodity outlook is positive across the spectrum. The industrial metal, soft commodity and crude

oil pictures are all favourable, thanks in large part to sustained demand from emerging markets, helping to

offset the troubled US housing sector and production and transportation capacity constraints. Moreover,

we see medium-term dollar weakness, which will support the price of US dollar-denominated commodity

contracts.

Fundamentals To Underpin Metal Prices

We remain sanguine toward the industrial metal complex, projecting the Goldman Sachs Industrial

Metals index (GSIN) will finish the year at 430.00, from the 470.00 at the time of writing. Beyond 2007,

we see the index moderating to 390.00 in 2008, before rising gently to 400.00 by end-2009 and 420.00 by

the end of 2010. The long-term metals outlook is supported by robust growth prospects in key emerging

markets, which will drive strong infrastructure and fixed asset investment. A corollary of rising demand is

the spike in input costs and supply bottlenecks for key producers, squeezing the supply/demand profile.

Wage demands and higher energy costs are impacting miners, while the rocketing Baltic Dry index

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illustrates the relative paucity of shipping capacity. Indeed, sporadic industrial action has limited

production in Peruvian, Mexican and Chilean copper mines in recent months.

The ongoing US housing corrections pose the primary downside risk to the metals outlook for 2007 and

2008. Record high inventory overhangs need to be worked through, while tighter lending conditions in

the mortgage markets will limit the emergence of fresh buyers. We expect the housing correction will be

measured in years rather than months. This risk is particularly relevant to the copper outlook. In addition,

the threat of more draconian economic tightening in China lurks, particularly after key political meetings

in October 2007 and April 2008 and the Beijing Olympics end. That said, our core scenario foresees a

continuation of strong growth through 2008. According to Barclays Capital, Chinese copper demand

rose by 18.1% y-o-y in the first half of 2007, up from 13.6% in all of 2006, meanwhile US demand is

forecast to contract for a second consecutive year in 2007.

Agriculture Still A Fresh Play

BMI maintains a bullish bias toward the agricultural complex, a view predicated heavily on our upbeat

outlook on the state of the emerging markets engine. While purely speculative interest in the market has

surged, potentially reinforcing price impulses, the underlying physical demand and supply dynamics point

to robust support ahead. Also, notably, it is not implausible to expect agricultural commodities to acquire

a partial ‘safe haven’ status, as the relatively recent global credit-turmoil has damaged the appeal of more

opaque asset classes. Output-wise, unfavourable weather has underpinned the stellar rally of wheat this

year and we should see an attendant supply response next season; i.e. farmers altering their relative

acreages in favour of wheat. This shift could serve to buoy alternative grains such as corn and soybeans.

Needless to say, this outlook means that concerns over continued global ‘agflationary’ pressures are

unlikely to taper off any time soon.

For one thing, speedy wealth creation in emerging giants China and India will keep demand – across the

breadth of the complex – on an upward incline over the foreseeable future. This will remain the case

despite a potential economic slackening in the erstwhile linchpin of the global economy, the US. For

another, fears of global warming and more volatile weather conditions – although there is still some

audible, albeit diminishing, scientific discord – could throw up genuine challenges to farmers down the

line (if it has not already). Moreover as a consequence of conflicting priorities, on the back of heightened

oil prices, we expect the food versus fuel debate to stay alive and kicking ahead. Production and demand

for petrol substitutes such as ethanol, with US farmers having planted record amounts of corn for the

2007-2008 season, will affect the price action of many agricultural commodities.

We forecast the Goldman Sachs Agricultural Index (GSAG), to end 2007 around 280, and only envisage

a mild dip in 2008, to 270. Although wheat – the heavyweight in the index – could ease from its current

altitudes due to the aforesaid probable supply-response, this should help buttress its siblings, corn and

soybeans. For now, however, the ongoing tightness of the wheat market – the US Department of

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Agriculture forecast stocks to reach their lowest level in 30 years in 2007-2008 – will likely keep it in

elevated territory. That said, we expect the global supply glut in key producers Brazil and India to

continue to weigh on sugar, and see potential for cocoa to ease slightly on the back of better weather

conditions in West Africa (after the 2006 drought). Coffee should remain well cushioned, although there

is some uncertainty over the direction of fundamentals, and we expect the broader uptrend to remain

intact over the coming years.

Oil

Prices To Stay High Over The Medium Term

While we have long held the view that oil prices will remain in elevated territory, we have become more

bullish for 2008, upping our average price forecast for Brent crude to US$72.00/bbl. This compares to an

average price forecast of US$67.00/bbl for 2007. Any short-term retracements should meet with good

support in the US$70.00/bbl area, with multi-year trendline support existing at US$60.00/bbl on a more

protracted correction.

Our more bullish stance on oil stems largely from our optimistic view of the global economy, and of

emerging markets in particular. Despite current tightening measures in China and India, we are still

forecasting 2008 economic growth in the two major emerging market powerhouses of over 10.0% and

8.0%, respectively. This will serve to underpin oil prices, and commodities in general. Interestingly,

emerging market economies have stayed robust despite the downturn in the US in 2007. This has ensured

that demand for raw materials has continued unabated, a factor that kept commodity prices high mid-year

while other asset markets were in US subprime-related turmoil.

This is not to say that a more significant downturn in the US economy would not weigh heavily on oil

prices. However, with a Federal Reserve in cutting mode, we may see our long-held view of a soft

economic landing play out. In any case, the slower US economy will maintain downside pressure on the

dollar, which in turn will keep US dollar-denominated commodity prices elevated.

In light of our view of emerging market decoupling, and the movements in global asset prices of the past

few months, the key risk to our positive view of oil prices comes from a slowdown in the Chinese

economy. If inflation continues to rise, the authorities may be forced to tighten more aggressively than

desired, in turn leading to yet more pressure for currency appreciation. Any over-tightening in this respect

would be harmful to growth, and therefore oil prices. However, at this stage, we expect the current

process of tightening measures to slow real GDP growth from 11.5% this year to a still high 10.4% in

2008, while CPI should ease to 3.2% y-o-y from 4.5% in 2007.

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Table: Global Assumptions

2003 2004 2005 2006 2007e 2008f 2009f 2010f 2011f 2012f

Real GDP growth, %

US 2.7 4.2 3.5 3.3 2.0 2.1 2.7 2.9 2.7 2.7

Eurozone 0.8 2.0 1.4 2.7 2.4 2.3 2.1 2.0 2.1 2.1

Japan 1.8 2.3 2.7 2.2 2.2 2.5 2.3 2.1 2.1 2.1

China 10 10.1 10.4 11.1 11.5 10.4 9.7 9.0 9.0 9.0

World 4.0 5.3 4.8 5.1 4.9 4.7 4.4 4.3 4.2 4.2

Consumer inflation, %,year-end

US 2.3 2.7 3.4 2.2 2.3 2.4 2.2 2.1 2.1 2.1

Eurozone 2.1 2.1 2.2 1.6 2.0 1.8 1.9 1.8 2.0 2.0

Japan -0.3 0.0 -0.3 0.1 0.1 0.5 0.7 0.9 0.9 0.9

Interest rates, year-end

Fed funds rate 1.00 2.25 4.25 5.25 4.50 4.25 4.75 4.50 4.50 4.50

ECB refinancing rate 2.00 2.00 2.25 3.50 4.00 4.50 4.50 4.25 4.00 4.00

Japan overnight call rate 0.00 0.00 0.00 0.25 0.50 1.00 1.50 1.75 1.75 1.75

Exchange rates, year-end

US$/EUR 1.26 1.36 1.18 1.32 1.46 1.38 1.29 1.28 1.28 1.28

EUR/US$ 0.79 0.74 0.85 0.76 0.68 0.72 0.78 0.78 0.78 0.78

JPY/US$ 107 102 117 119 112 118 118 115 112 112

Goldman SachsCommodity Index

Metals (GSIN) 193 238 294 445 430 390 400 420 410 410

Agriculture (GSAG) 209 180 210 272 280 270 305 285 270 270

Brent crude, US$/bbl 28.83 38.20 54.70 66.80 67.00 72.00 62.00 58.00 58.00 58.00

Calendar-year basis, year-end inflation is average of Q4 compared with average of same period a year earlier. e/f =estimate/forecast. Source: BMI

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Appendix B: Regional Demographic Data

Table: Manufacturing Wages, US$ (average per annum)

1995 2000 2005 2006e 2007e 2010f

Australia na 21,908 37,337 37,875 38,147 41,791

China 619 1,057 1,841 2,328 2,918 5,369

Hong Kong 9,344 11,180 13,222 14,376 16,792 25,006

India 463 355 389 429 459 642

Indonesia 909 605 na na na na

Japan 35,551 32,620 33,510 35,422 40,120 47,507

Malaysia 4,801 4,383 5,646 6,208 6,735 8,256

Pakistan 1,158 691 1,084 1,195 1,258 1,564

South Korea 17,491 16,999 28,662 33,177 36,063 41,790

Sri Lanka 670 671 834 894 960 1,203

Taiwan 14,746 14,916 15,699 16,298 17,271 20,251

Thailand 2,404 1,742 na na na na

Global comparison

US 25,667 29,786 35,540 37,639 39,490 45,240

Germany na 53,374 41,336 42,626 46,903 50,006

Brazil 8,251 5,004 5,575 6,447 6,723 6,926

e/f = BMI estimate/forecast. na = not available. Source: BMI calculation based on ILO data. Data extracted from BMI’sinteractive database of macroeconomic, demographic and industry data

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Table: Population

Population growth Urban population, ‘000

1995-1997 2005-2007 1995 2005 2030f

Australia 0.83 0.70 15,751 18,679 24,222

Bangladesh 1.16 0.87 25,028 35,437 80,737

Cambodia 3.72 2.37 1,609 2,778 7,870

China 0.00 0.00 382,309 533,377 875,162

DPRK 0.41 0.27 12,367 13,882 17,750

Hong Kong 1.76 0.66 6,187 7,041 8,610

India 1.25 0.99 248,834 317,131 599,498

Indonesia 0.93 1.25 36 106,668 183,297

Japan 0.18 0.06 81,086 84,116 89,614

Malaysia 1.74 1.17 11,325 16,494 26,959

Pakistan 1.66 1.48 40,117 54,960 122,750

Philippines 1.44 1.14 36,949 51,973 86,832

Singapore 2.16 0.83 3,478 4,326 5,265

South Korea 0.58 0.23 35,213 38,623 42,361

Sri Lanka 0.79 0.78 4,003 4,362 7,078

Taiwan 0.44 0.77 na na na

Thailand 0.74 0.37 17,662 20,869 34,670

Vietnam 1.07 2.37 16,247 22,509 46,757

Global comparison

US 0.80 0.61 208,282 240,831 313,429

Germany 0.16 0.04 70,633 73,158 74,908

Brazil 0.93 0.94 125,554 157,041 214,940

Russia -0.11 -0.27 108,701 104,938 98,131

f = World Bank forecast. Source: National statistics agencies, IMF. Data extracted from BMI’s interactive database ofmacroeconomic, demographic and industry data

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Table: Household Spending Per Capita, US$

1995 2000 2005 2006e 2007e 2010f

Australia 12,697 11,951 19,945 20,180 20,246 22,096

Bangladesh 271 272 na na na na

Cambodia 254 255 na na na na

China 411 449 762 889 1,056 1,721

Hong Kong 14,864 14,789 16,828 17,896 20,485 29,358

India 305 311 427 475 512 741

Indonesia 501 486 837 935 1,088 1,345

Japan 19,896 20,876 20,461 21,537 24,381 29,032

Malaysia 1,464 1,663 2,201 2,464 2,726 3,540

Pakistan 358 400 581 na na na

Philippines 744 696 826 960 1,057 1,290

Singapore 8,606 9,418 11,324 12,252 13,320 15,681

South Korea 4,976 5,905 8,666 9,901 10,826 12,226

Sri Lanka 588 608 na na na na

Taiwan 8,092 8,767 9,308 9,579 10,213 12,263

Thailand 1,126 1,118 1,611 1,861 2,139 2,708

Vietnam 254 263 364 366 371 na

Global comparison

US 22,515 23,888 29,596 31,114 32,386 36,495

Germany 15,261 13,650 20,052 20,559 22,182 23,589

Brazil 1,991 2,154 2,332 2,758 2,945 3,223

Russia 713 818 2,524 3,138 3,997 5,953

e/f = BMI estimate/forecast. na = not available. Source: BMI calculation, based on IMF data. Data extracted fromBMI’s interactive database of macroeconomic, demographic and industry data

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Table: Private Consumption Per Capita, US$ PPP

1995 2000 2004 2005 2006e 2007e

Australia 12,160 15,129 18,032 18,377 19,179 19,949

Bangladesh 994 1,231 na na na na

Cambodia 1,351 1,599 1,746 na na na

China 1,274 2,032 2,928 3,278 3,745 4,264

Hong Kong 13,550 15,293 18,714 19,709 21,169 22,546

India 1,207 1,592 1,956 2,072 2,208 2,351

Indonesia 1,773 2,066 2,800 3,013 2,934 3,112

Japan 12,929 15,023 17,040 17,821 18,525 19,152

Malaysia 3,623 3,892 4,693 4,983 5,365 5,838

Pakistan 1,048 1,470 1,671 2,002 na na

Philippines 2,547 2,803 3,327 3,562 3,739 3,904

Singapore 7,725 9,839 11,984 12,174 12,481 13,020

South Korea 6,258 8,362 10,237 11,057 11,889 12,859

Sri Lanka 1,883 2,409 3,154 na na na

Taiwan 9,506 13,597 16,207 17,246 18,171 19,165

Thailand 3,211 3,573 4,637 5,187 5,585 5,684

Vietnam 1,079 1,355 1,818 1,828 1,851 1,855

Global comparison

US 18,686 23,888 28,054 29,596 31,114 32,386

Germany na 15,822 17,769 18,394 19,206 19,684

Brazil 3,950 4,547 4,585 4,837 5,107 5,317

Russia 3,198 3,369 4,935 5,265 5,827 6,562

PPP = Purchasing Power Parity which eliminates price differences between countries. e = BMI estimate. na = notavailable. Source: BMI calculation based on IMF, World Bank data. Data extracted from BMI’s interactive database ofmacroeconomic, demographic and industry data

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Table: Market Size, GDP, US$bn

1990 1995 2000 2005 2006e 2010f

Australia 306.77 358.79 377.19 655.34 668.16 769.92

Bangladesh 30.13 37.94 47.18 66.78 71.42 na

Cambodia na 3.56 3.69 5.33 5.76 na

China 355.18 727.95 1,198.47 1,903.45 2,148.29 3,449.93

DPRK na 22.30 16.80 0.23 0.22 na

Hong Kong na 144.39 169.46 177.44 191.02 256.01

India 262.50 292.05 413.48 633.85 724.25 1,121.02

Indonesia 126.44 223.36 165.02 281.30 334.29 533.57

Japan 3,039.15 5,280.37 4,743.56 4,569.45 4,804.96 6,177.30

Malaysia 44.03 88.87 90.32 130.79 149.87 227.16

Pakistan na 60.64 73.32 109.66 126.04 203.42

Philippines 45.35 74.13 75.78 98.46 115.79 163.39

Singapore 36.94 84.33 92.69 116.74 130.53 171.72

South Korea 264.69 517.69 511.56 786.88 892.72 1,136.18

Sri Lanka 8.00 12.35 15.23 23.37 25.29 37.22

Taiwan 166.13 273.86 321.46 346.45 364.62 491.93

Thailand 85.31 167.95 122.60 176.49 206.32 303.73

Vietnam 5.16 20.74 31.17 50.55 54.97 89.97

Global comparison

US 5,803.08 7,397.65 9,816.97 12,487.20 13,286.10 16,659.80

Germany na na 1,904.71 2,658.33 2,693.80 2,864.72

Brazil 0.00 703.91 601.78 796.52 926.08 1,128.49

Russia 390.59 313.32 259.72 768.26 917.75 1,669.02

e/f = BMI estimate/forecast. na = not available. Source: National statistics agencies, IMF. Data extracted from BMI’sinteractive database of macroeconomic, demographic and industry data