The outlook for commodities and the impact on the junior mining industry Junior Indaba, Johannesburg June 2018

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2 PRESENTATION TODAY…

01 Are we really entering another commodity boom?

02 What are the wider themes surrounding commodities in 2018?

03 The future world: what commodities will the world need in the future?

04 What are the implications for the junior mining sector?

3 PRESENTATION TODAY…

01 Are we really entering another commodity boom?

02 What are the wider themes surrounding commodities in 2018?

03 The future world: what commodities will the world need in the future?

04 What are the implications for the junior mining sector?

4 FY2017 strongest year in a decade for mining and metals…

Turn-around in fortunes continues in mining and metals sector… Headline financial figures*, 2014-2017 (Fitch Ratings research) CFO (LHS) Capex (LHS) Dividends (LHS) FCF (LHS) FFO Gross Leverage (RHS) $bn %

80 6

5 40 4

0 3

2 -40 1

-80 0 2014A 2015A 2016A 2017F 2018F

CFO - cash flow from operating activities; FCF - free cash flow; FFO – funds from operations Source: CRU, Fitch Ratings, annual reports

● Remarkable turn-around in fortunes for metals & mining continues…

● Revenues up ~20%, profits up ~50%, dividends return in some fashion, leverage ratios down significantly

● Are we entering another commodities boom?

* Companies: BHP, Rio Tinto, Anglo American, Norilsk Nickel, Vale, Fortescue, Freeport, Codelco, First Quantum 5 Are we really entering another commodities boom?

CRU survey signals significant improvement in sentiment… y-axis: % of responses from CRU Survey ● If a boom is defined by bulls 90% significantly outnumbering bears then YES! 80% Spring '18 80,1%

70% ● CRU survey registers significant pick Spring '17 up in market optimism (bottom left)… 60% ● …reflecting stronger macro data, on- 50% going supply side reform (especially in 40% China) and positive industry sentiment

30% around new end-uses (and new energy vehicles in particular) 20%

10% 11,2% 7,4% 0% Very Negative Passive Optimistic Very Negative Optimistic

* Based on 200+ responses

6 Return to inflationary pressures another signal of cyclical upturn

Cost inflation returns in ’17, and to continue in ‘18… y-axis: y-y change (%) in cost (controllable red; non-controllable ● Cost inflation returned in 2017 (for the first blue), ’14-18 time since FY13), driven by higher prices 10% for fuel and consumables, royalties and, in some regions, FX appreciation (Russia, 5% Brazil, Australia, South Africa) 0% ● Inflationary pressures to continue in FY18 – -5% principally driven by higher fuel and -10% consumables costs, contractor rates and sustaining capex -15%

-20% ● Higher fuel prices and rising charter rates will particularly affect exporters, and some -25% more than others 2014 2015 2016 2017 2018

FX Fuel Consumables Royalties Sust. Capex Other y-y change

* Weighted average cost changes across coal, iron ore, , and nickel

7 A price “boom” perhaps, but a very different one to last the last one…

A “boom” in prices perhaps, but a very different one … y-axis: Price Index of all major mined commodities, 2017=1 ● Consumption of most Key driver: demand; Key drivers: policy (276 coal commodities effectively doubles consumption of most policy, sweeping supply side over 1995-2015; boom driven by commodities doubles, reform, protectionism etc) & primarily driven by China underinvestment rapid economic growth, 160% urbanisation and industrialisation 140% ● Today’s price boom is primarily 120% policy and supply side driven 100% ● Implications: 80% Initial 60% capex o Weak project pipeline 40% drops by 80%! o Capex will not return near 20% previous peak 0%

o Where does the mining sector

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

* Weighted average price of all major mined commodities (36 that CRU monitors and spend the profits? forecasts)

8 PRESENTATION TODAY…

01 Are we really entering another commodity boom?

02 What are the wider themes surrounding commodities in 2018?

03 The future world: what commodities will the world need in the future?

04 What are the implications for the junior mining sector?

9 Metals & Mining Industry Observer Key market themes: Rising concerns over trade policy and geopolitical risk…

What do you see as the top market themes in mining and metals over the next 12 months? ● Rising trade policy and Change geopolitical risks dominate Trade policy and geo-political risk survey results!

Growth expectations in NEVs* ● Perception appears that Chinese investment slowdown structural economic risks – arising from China deleveraging Supply side reform in China – are waning… Environment and climate change policy Divergent commodity price ● Expectations of transition to a performance low carbon mobility and energy Resource nationalism and social future continues to drive licence positive industry sentiment in Return to cost inflation Q1 2018… Fed rate hikes ● Remarkably, little concern for Other potential impact of Fed rate 0% 10% 20% 30% rises on value of dollar and cost Spring '18 Spring '17 of capital

* New Energy Vehicles

10 Metals & Mining Industry Observer Key corporate themes: Growth firmly re-established as key corporate priority…

What do you see as the top corporate themes in mining and metals over the next 12 months? ● Resurgent expectations of a return Change to both capex and inorganic Return to capex growth sources of growth

Increased acquisitions activity ● This replaces a previously mixed Technology innovation and outlook on financial and investment automation Portfolio restructuring and strategies. diversification Balance sheet consolidation ● Delivery of divestment plans and Productivity, skills and labour debt reduction targets appear to be relations complete Access to energy, water and infrastructure ● Focus on technology and Enhanced shareholder dividends automation remains firmly on the Delivery of divestment plans agenda of companies

Other

0% 10% 20% Spring '18 Spring '17

* Based on 200+ responses

11 WillMetals China’s & Mining Industry environmental Observer drive create a sudden, structural deficit across multiple commodities?

Recent Chinese supply side reforms most effective to date… y-axis: change in margin (%); x-axis: estimated closures in last ● Recent Chinese supply side reform have 12-18 months (% of total); bubble size: sector revenues been the most effective attempt to date at 40% addressing overcapacity

35% ● Permanent cuts and consolidation drove Coal utilisation rates higher, leading to improved 30% (and sustainable) margins in steel, , coal, ferroalloys, zinc etc. during 25% Steel Aluminium 2017/18 20% Stainless steel ● President Xi Jinping has delivered blue Ferroalloys 15% sky’s to the middle classes and that is not easy to take away - Chinese environmental 10% curtailments the start of a new normal?

5% ● Focus on productivity and emissions also driving quality premiums (e.g. in iron ore) 0% 0% 5% 10% 15% 20%

Steel Aluminium Coal Stainless steel Zinc Ferroalloys

12 PRESENTATION TODAY…

01 Are we really entering another commodity boom?

02 What are the wider themes surrounding commodities in 2018?

03 The future world: what commodities will the world need in the future?

04 What are the implications for the junior mining sector?

13 NewMetals energy& Mining Industry vehicles Observer present a major longer term market opportunity across a range of commodities

NEVs will have profound implications for a range of metals y-axis: forecast growth of metals used in auto production (%) ● Transition to low carbon mobility and CAGR CAGR cleaner energy futures to have profound implications for a range of metals and Lithium 23% 9% energy markets (not just lithium and )

Cobalt 27% 9% ● Today we observe perhaps a little bit of hype in the marketplace that is driving Graphite 24% 8% prices a little bit higher than they should be

Nickel 10% 7% a little bit earlier than they should do… ● …but in general analysts are revising up

Manganese 11% 8%

2030 2016 2045 their expectations every few months and Chrome 3% 1% the industry is still trying to catch up with new expectations. Copper 5% 4% ● Rapidly evolving policy and technological Aluminium 4% 1% conditions require close monitoring of market evolution and investment in Steel 1% 1% developing and tracking key forward indicators

14 Metals & Mining Industry Observer Economy & macro: Robust outlook for metal demand out to 2020 & beyond

Metals and energy demand outlook to 2020 robust y-axis: forecast CAGR change (%) in demand by commodity, ● Stronger than expected economic data 2017-20 FY17. Robust (though slightly weaker) outlook for commodity indicators in FY18: Lithium Cobalt o Battery materials (Li, Co) observe Gold another strong year (~8% y-y) Stainless steel o Stainless and aluminium growth robust Potash across diversified end-uses (~4-5% y-y) Aluminium o Carbon steel and copper demand in line Copper with historic long term growth trends (~2- Steel 3% y-y), increasingly driven by ex. China Phosphates Steam coal o Coal demand stable, with losses in EU & US offset by gains in India & SE Asia -2% 0% 2% 4% 6% 8% 10% o Diverging outlook for N, P and K due to Construction Transport Consumer goods changing crop ratios & Chinese Capital goods Infrastructure Energy agricultural subsidy reform Agriculture Other

15 PRESENTATION TODAY…

01 Are we really entering another commodity boom?

02 What are the wider themes surrounding commodities in 2018?

03 The future world: what commodities will the world need in the future?

04 What are the implications for the junior mining sector?

16 Metals & Mining Industry Observer Juniors are crucial to the next phase of investment in mining & metals

● The bad times of late-15/early-16 are still fresh in the mind of investors and boards. They are still defensive-minded to a significant extent though this is starting to change.

● This brings both challenges and opportunities for the junior segment: o a residual reticence and higher hurdle rates o relatively weak project pipeline and emerging supply deficits in some key markets o juniors should be a bit fleeter of foot (relative to the majors), and focussed on smaller more flexible project which are relatively advantaged in this financing climate (“small is beautiful”)

● Big producers will turn to growth strategy by increasing in capital investment, M&A and exploration, probably in that order

● Valuation of junior miners to increase and capital raising will increase with primary share issues to continue to develop projects towards pre-feasibility and full / bankable feasibility

● Few new “world class” deposits have been found and there is a lack of existing ones to develop, junior miners will again be the discoverers of the next Oyu Tolgoi

● Partnering for project development, either with private equity or Chinese investors who may have more risk appetite is looking a likely option over the next 2 years

17 What’s hot and what’s not?

Return to incentive pricing for copper / zinc? y-axis: forecast supply gap in 2026/27*; x-axis: Q1 ‘18 price as % of ● Prices for most commodities (27 of LRMC 36 covered by CRU) appreciated in Near term investment incentive the last 12 months (on average by 50% Lithium ~10-30%)

40% ● Bulks prices elevated but primarily Chrome policy driven and not structural. 30% Copper ● Copper & zinc prices have moved Q1‘ 18 Zinc near or above long run marginal 20% Q1‘ 17 costs for the first time in years, Nickel indicating visibility on future 10%

Iron ore shortages and a return to incentive More projects required projects More Platinum pricing 0% Met. coal Thermal coal ● Nickel should follow, chrome remains -10% bullish 60% 80% 100% 120% 140% ● Lithium and platinum at opposite Size of bubble denotes forecast new project development capex over the 2017-2021 period ends of the specturum * Gap (in %) between forecast demand and committed production (i.e. operating & construction)

18 CONCLUDING REMARKS…

Are we really entering another commodity boom? • A price “boom” perhaps, but a very different boom to last the last one…

What are the wider themes surrounding commodities in 2018? • Protectionism, geopolitical tension & supply reform will continue to create volatility

• Growth firmly re-established as key corporate priority - more strategic M&A in FY18

The future world: what commodities will the world need in the future? • Many – the future world will be more metal intensive! (especially for “minor” metals)

What are the implications for the junior mining sector? • Will be crucial to the next phase of investment – how can SA position itself?

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