Victor Lazarovici

Metals and Mining Outlook1970’s Repeat?

Victor LazaroviciFeb. 4, 2009

Presented to NY Section SME

Victor Lazarovici

1970’s vs. 2000’s(But Which 70’s?)

Why is this Important?Metals and Mining Stocks Outperformed Broader markets in the 70’s

Similarities:Industrializing Major Economy - Japan / ChinaSupply Shortages Oil Shocks – 1973 & 1979 - $147/BBLReal Increases in Metal PricesStagflation – 1970’s / ????

Differences:Rising Interest Rates / Falling Interest Rates (For Now)Geopolitical - Restricted Access to Producing Areas / Globalization Large Inventories vs. JIT

Victor Lazarovici

1970’s vs. 2000’s

Problems in the Comparison:

Lack of Data or Comparability of Data:Opaque Metal Price Discovery :

No consistent LME Market Data – Trading of Al and Ni started in 1979

Producer Pricing Dominates the 70’s in all but copper

Industry Restructuring / Consolidation = Apples to Oranges

Change in Index Components

Electronic reporting of Market Data started in the 80’s

Gold Peg

Victor Lazarovici

Notable Long Term Forecasts:

"The truth is more important than the facts." - Frank Lloyd Wright (1868-1959)

"I think there is a world market for maybe five computers." - Thomas Watson (1874-1956), Chairman of IBM, 1943

"There is no reason anyone would want a computer in their home." - Ken Olson, president, chairman and founder of Digital Equipment Corp., 1977

"The concept is interesting and well-formed, but in order to earn better than a 'C', the idea must be feasible."

- A Yale University management professor in response to student Fred Smith's paper proposing reliable overnight delivery service (Smith went on to found Federal Express Corp.)

The Perils of Forecasting!Notable Long Term Forecasts:

Victor Lazarovici

Notable Long Term Forecasts:

"A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" — Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008

At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8500.

AIG (AIG) "could have huge gains in the second quarter." — Bijan Moazami, analyst, Friedman, Billings, Ramsey (FBR), May 9, 2008

AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.

"I think Bob Steel's the one guy I trust to turn this bank around, which is why I've told you on weakness to buy Wachovia (WB)." — Jim Cramer, CNBC commentator, Sept. 15, 2008

Two weeks later, Wachovia nearly failed as depositors fled. CEO Steel eventually agreed to a takeover by Wells Fargo (WFC). Wachovia shares lost half their value from Sept. 15 to Dec. 29.

The Perils of Forecasting!Notable Recent Forecasts:

Source: Businessweek, Jan. 12, 2008

Victor Lazarovici

Notable Long Term Forecasts:

"Existing-Home Sales to Trend Up in 2008" — Headline of a National Association of Realtors press release, Dec. 9, 2007

On Dec. 23, 2008, the group said November sales were down 11% from a year earlier in the worst housing slump since the Great Depression.

"I think you'll see $150 a barrel [of oil] by the end of the year." — T. Boone Pickens, June 20, 2008

Oil was then around $135 a barrel. By late December it was around $40.

"I expect there will be some failures.... I don't anticipate any serious problems of that sort among the large internationally active banks." — Ben Bernanke, Federal Reserve Chairman, Feb. 28, 2008

"In today's regulatory environment, it's virtually impossible to violate rules." — Bernard Madoff, money manager, Oct. 20, 2007

On Dec. 11, Madoff was arrested for allegedly running a Ponzi scheme that may have cost investors $50 Billion

The Perils of Forecasting!Notable Recent Forecasts (Continued):

Source: Businessweek, Jan. 12, 2008

Victor Lazarovici

Broader Market Context End of the Liquidity Bubble?

DJIA vs. 10 Yr. Treasury Rates – 5/62 to 12/08

DJIA vs. 10 Yr. Treasury Rates

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10 Yr Treas

Victor Lazarovici

Notable Bubbles?

Nasdaq

Nikkei

1930’s Dow

2000’s Commodities

Victor Lazarovici

Nasdaq Composite2/71 to 1/09

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Victor Lazarovici

NIKKEI 2251/84 to 1/09

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Victor Lazarovici

The Great Depression25 Years to Recover

DJIA Close1928-1954

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Victor Lazarovici

Metals Outlook

Historical Perspective:

It’s All About Industrialization

Victor Lazarovici

Global GDP Growth

LT Economic Growth Puts Pressure on SupplyAverage GDP growthAverage GDP growth

1900 – 1960 1.3%

1960 – 1980 3.5%

1980 – 2005 5.7%

2006 – 2015E 6.0%

1900 – 1960 1.3%

1960 – 1980 3.5%

1980 – 2005 5.7%

2006 – 2015E 6.0%

Source: IMF, Angus Maddison, The world economy: historical statistics, OECD and CVRD.Source: IMF, Angus Maddison, The world economy: historical statistics, OECD and CVRD.

Victor Lazarovici

WW Copper & AluminumApparent Consumption Growth Rate

1956 to 2010E

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

AL CU

Victor Lazarovici

Long Term Consumption TrendsWW Consumption in 00’s constrained by Supply/Chinese growth

WW Consumption - Net EB Imports/Exports

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

50'S 60'S 70'S 80'S 90'S 00'S - To2007

00'S -Est'd

Av

e. A

n %

Ch

an

ge

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CU

PB

ZN

NI

Victor Lazarovici

Long-Term Production GrowthSteel Example

Crude Steel Production CAGR

World Japan China1959-1974 3.4% 13.0% -1974-1999 1.8% - -1999-2004 6.0% - 11.4%

Note: Japanese Steel Production Growth Slowed Sharply in 2nd. Half of 70’s

Source: CVRD (IISI, Japan’s Ministry of Economy, and CEIC)

Victor Lazarovici

Will a Strong Recovery Follow the Global Recession?Western World Recession / Recovery Demand Patterns- Last 6 Cycles

-5.6%

22.2%

0.1%

8.5%

-15.5%

15.5%

-1.6%

12.0%

0.0%

10.0%

-4.1%

2.4%

0.0%

4.6%

-1.6%

2.7%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

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57/5859/60 67 68 74/7576/77 82/8383/84 92/9394/95 2001 2002 2003 2004 2005 2006

Recession/Recovery PatternAverage Base Metals Demand

Victor Lazarovici

Base Metals Recovery Cycles

Base Metal Cycles - 1971 to PresentBase Month in Cycle = 1.00

-

1.00

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6.00

1 10 19 28 37 46 55 64 73 82 91 100 109 118 127 136 145 154Months from Cyclical Low

Inde

x

Feb71-Apr74Dec75-Feb80Dec82-Feb89Sept93-J an07

LME Cash Price: Unweighted Average of Al, Cu, Ni, Zn, Pb

Victor Lazarovici

Producers Lost Control of Production Costs

Source: Brook Hunt, Xstrata

Near Term Focus will be on:• Cost Reduction

• Reducing Excess Production

• Repairing Balance Sheets Stressed by “Top of the Market” Acquisitions

Early Curtailments Reduce Inventory Overhangs:Reductions to Estimated 2009 Production:

Coking coal Copper Nickel Zinc

13% 9% 21% 9%

Victor Lazarovici

Producers Lost Control of Production Costs Copper Cash Cost Curves

Source: Brook Hunt

Victor Lazarovici

Aluminum Recession/Recovery CycleLME Price vs. LME Inventory – June 89-June 2007

Aluminum Recovery Cycle

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Inventory

Victor Lazarovici

Copper Recession/Recovery CycleLME Price vs. LME Inventory – June 91-June 2007

Copper Recovery Cycle

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Victor Lazarovici

Nickel Recession/Recovery CycleLME Price vs. LME Inventory – July 84-June 2007

Nickel Recovery Cycle

1.00

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26.00

LME Price - $/lb Inventory -Tonnes

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Victor Lazarovici

“The Big Picture”Global Population Trends

Billions

Source: UN Population Division, World Urbanisation Prospects: The 2007 Revision

2.6

1.5

3.4

3.3

3.4

4.6

2.8

6.4

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1975 2007 2025 2050

Urbal

Rural

Victor Lazarovici

Global Population Trends

Source: UN Population Division, World Urbanisation Prospects: The 2007 Revision

Urbanization's Second Wave: A Difference of Scale First waveEurope and North America in the early 18th century Occurred over two centuries (1750-1950)Produced the new urban industrial societies that now dominate the worldInvolved a few hundred million people. Increase from 10 to 52 per cent urban and from 15 to 423 million Second WaveIn the past half-century, the less developed regions have begun the same transition. Achieving in one or two decades what developed countries accomplished in one or two centuriesUrbanites will go from 309 million in 1950 to 3.9 billion in 2030; from 18 per cent to 56 per centBetween 2000 and 2030, Asia’s (alone) urban population will increase from 1.36 billion to 2.64 = Approximately 42.7 Million/year = Build 3 NYC/Yr. for 30 Years!

Victor Lazarovici

Global Population Trends

Infrastructure Growth Must Continue!

“very few developing-country cities generate enough jobs to meet the demands of their growing populations

the shortage of urban jobs, are responsible for conditions that can outmatch the Dickensian squalor of the Industrial Revolution “

Source: UN Population Division, World Urbanisation Prospects: The 2007 Revision

Victor Lazarovici

If Chinese-Driven Growth Resumes, Where Will the Supply Come From?

Constraints to Supply:

• Near Term Profitability Pressure and producer Responses

• Lack of Financing/Stressed B/S Severely Reduces Project Pipelines

• Resurgence of Nationalism = Increased Risk

• Companies/Investors Less Risk Tolerant

• Availability of Equipment & People will still be an issue

Victor Lazarovici

US Earth Sciences Graduates

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

PhD

Master's

Bachelor's

Source: U.S. Department of Education, National Center for Education Statistics

Victor Lazarovici

Metals OutlookConclusions

Near Term:

• Recession / Demand Uncertainty Continues• Commodity Prices Could Decline Further• Demand/Price Cycle Bottoms• Early Curtailments Should Result in Quick Rebound• Renewed Demand Growth Absorbs Inventory and Idled Capacity

Longer Term:

• Sustained Demand Growth

• Depleted Project Pipeline• Availability of Risk Capital Could be an Issue• Shortage of Technical Personnel and Supplier/Equipment Capacity

Victor Lazarovici

1970’s vs. 2000’s Conclusion

On Balance – More Similarities Than Differences

• Stagflation Likely

• Commodity Supply/Demand Tightness

• Strong Demand for Industry Professionals, Equipment & Supplies

• Prices Above LT Historical Levels

• Superior Industry Profitability

• But Slower Growth

Victor Lazarovici

1970’s vs. 2000’sConclusion

“If something can’t go on forever, it will end.”

Anon

Victor Lazarovici

Additional Slides

Victor Lazarovici

Victor Lazarovici

Brief Biography

Victor Lazarovici has over 35 years of experience in a broad range of management, financial and analytical roles. Most recently, he worked as a highly ranked and successful global metals and mining analyst for the past twenty years. Prior to entering the financial sector as an analyst, he spent over 14 years in the corporate sector in engineering, financial management and corporate development roles. He currently serves as a director of Abacus Mining and Exploration and Minera Andes Ltd. Most recently Mr. Lazarovici was the Managing Director and Senior Base Metals and Minerals Analyst for BMO Capital Markets in New York. There, he led a team of analysts covering the base metals sector that was consistently ranked amongst the top tier in all of the major Canadian polls of institutional investors. Mr. Lazarovici has also served as a Managing Director and Senior Metals and Mining Analyst for Smith Barney, where he was consistently ranked in the top tier of Wall Street mining and metals analysts in all of the major US polls of institutional investors. He is the only analyst to receive the top honour in both the Canadian and US Greenwich Associates surveys. He also worked at UBS, HSBC, and Scotia Capital. As an analyst, Mr. Lazarovici expertise includes extensive first hand knowledge and coverage of the global base and precious metal producers' operations, having toured most major mineral camps and mines around the world. He also has an in-depth understanding of the macro-economic factors as they impact the industry and has extensive experience in short and long term forecasting of metal prices. He maintains an excellent relationship with his peers and is a past President of the Metals Analyst Group of New York, and is highly regarded for his knowledge of the North American and Latin marketplace. Mr Lazarovici holds an MBA from York University in Downsview, Ontario and a B.Eng. from Sir George Williams in Montreal, Quebec.

Victor Lazarovici

The Perils of Forecasting!Notable Recent Forecasts:

“Peter writes: ‘Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?’ No! No! No! Bear Stearns is fine! Do not take your money out. … Bear Stearns is not in trouble. I mean, if anything they’re more likely to be taken over. Don’t move your money from Bear! That’s just being silly! Don’t be silly!” —Jim Cramer, responding to a viewer’s e-mail on CNBC’s Mad Money, March 11, 2008

“The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.” —Arjun Murti, Goldman Sachs oil analyst, in a May 5, 2008, report

Murti was dubbed the “oracle of oil” in by the New York Times. Oil prices peaked in July at about $147 a barrel before beginning a long decline. Thanks to a decrease in demand because of the global recession, prices are now nearing the $40 mark, and some experts even see $25 as a possibility next year.

Victor Lazarovici (212)702-1226Victor Lazarovici

Equity Markets Trends

Victor Lazarovici

Equity Markets Trends

0%

5%

10%

15%

20%

25%

30%

35%

40%

1984 1986 1988 1990 1992 1994 1996 1998

-$50

$0

$50

$100

$150

$200

$250

$Billion Percentage of Total Agressive Growth Total

Victor Lazarovici

LT Trend in Copper Costs & Grades

Source: Phelps Dodge

Victor Lazarovici

Copper Outlook - Fundamentals

0.185

0.190

0.195

0.200

0.205

0.210

1970's 1980's 1990's

20

25

30

35

40

45

50

55

60

65

70Average lbs. per New Automobile

Ave. lbs/ sq. f t.

lbs ./sq. ft.

lbs ./car

Source: C opper Dev elopment Institute.

U.S. COPPER CONSUMPTION - AUTO & HOUSING

Victor Lazarovici

Copper - LME Inventory vs Price

Monthly Averages Jan 1986 to Nov 2005

Jan 05

Jan 04

Jan 03

Nov 05

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$0.80

$1.00

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/lb

Victor Lazarovici

Nickel - LME Inventory vs Price