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AFRICAN MINING CONGRESS Dirk Kotze Johannesburg, 17 July 2012 Director & General Manager Africa The Beijing Axis

The Beijing Axis 1

Agenda

Beijing Axis Beijing Axis Beijing Axis Beijing Axis Commodities Capital Procurement Strategy 1. Setting the stage: China’s voracious demand for resources • Commodity Marketing • Transaction Origination • Comprehensive • Strategy Formulation • Commodity Procurement • Corporate Finance Procurement Solutions • Strategy Implementation Advisory 2. China’s engagement of African resources, with specific reference to iron ore The Beijing Axis’ Knowledge & Network Synergies 3. A hard/soft landing for China, with reference to demand for iron ore  Founded in 2002; has successfully worked with many international and Chinese MNCs

 Operates in four synergistic cross-border China businesses

 Provides services across various sectors, with a core focus on the MINING, RESOURCES, INDUSTRIAL ENGINEERING and OTHER SERVICES sectors

 Provides solutions to international firms as they act in unfamiliar territory in China/Asia

 Provides solutions to Chinese/Asian firms as they venture out and ‘go global’

The Beijing Axis 2 TheThe Beijing Beijing Axis Axis 3

China has dramatically increased its share of world consumption of key metals The mineral sector plays a key role in the Asia-Pacific economies. While and minerals over the past two decades. The drivers of this trend remain intact China’s mining industry only accounts for 6% of its GDP, it is the world's largest in absolute terms

China’s Share of Global GDP and Consumption of Selected Commodities (% 1990, 2000, 2010) GDP and Mining Industry as a % of GDP of Top Mining Countries (USD bn, %, 2011) USD bn 15,065 6,988 4,000 25% GDP Primary Aluminium Steel Coal GDP (lhs) ROW China ROW China ROW China ROW China China has the world’s largest 100% 100% 100% 100% Mining as a % of GDP (rhs) mining sector with an overall 20% 3,000 mining industry value of USD Mining Industry Value (USD bn) 419 bn (2011) 50% 50% 50% 50% 47% Mineral sector contributes 15% 10% 41% 45% 7% 2% 4% 4% 17% 14% 18% 22% approx. 20% to Chile's GDP 0% 0% 0% 0% 2,000 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 10% 49 Refined Nickel Chrome Ore Refined Copper Refined Zinc ROW* China ROW China ROW China ROW China 29 1,000 100% 100% 100% 100% 92 20 13 5% 158 38 419 106 50% 50% 50% 50% 53 11 301 50 37 4 0 0% 32% 33% 38% 41% 4% 20% 4% 13% 13% 17% 12% 8% USA

0% 0% 0% 0% Peru China India Chile

1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 Brazil Canada Russia Vietnam Thailand Australia Indonesia S. Africa Kazakhstan

*Note: ROW stands for Rest of World Philippines Source: World Bank; CNBS; CEIC; The Beijing Axis Analysis The Beijing Axis 4 Source: Research and Markets; IMF; The Beijing Axis Analysis The Beijing Axis 5 Mining companies from Asia are progressively gaining global market share and catching up with their foreign counterparts

2005 2006 2007 2008 2009 2010 2011

Top 30 Mining Companies by Revenue (USD bn, 2000-2011) 2000 2011 BHP Billiton BHP Billiton Anglo American Alcan Vale SA Rio Tinto Anglo American Pechiney Noranda Inc China Shenhua Energy Jizhong Energy(2) Phelps Dodge Freeport-McMoRan Vale SA Jiangxi Copper Chinese Company Norilsk Nickel(2) Coal India IMC Global China Coal Energy MIM Holdings The Mosaic Company Inco Ltd. Newmont Mining Peabody Energy Coal India Potash… 35.1 Grupo Mexico S.A. Freeport McMoRan Potash Corp. Grupo Mexico S.A. Falconbridge Ltd. Yanzhou Coal Mining Cameco Corp. Codelco Newmont Mining Peabody Energy AngloGold Ltd. Industrias Penoles Placer Dome Inc. ENRC(2) Barrick Gold Corp. AngloGold Ashanti Cominco Ltd. Antofagasta Teck Corp Consol Energy Gold Fields Ltd Fortescue Metals USD1bn CAEMI* Gold Corp Xstrata Gold Fields Ltd. Ashanti Goldfields 0 5 10 15 20 0 1020304050607080 *Note: (1) CAEMI was acquired by Vale in 2006; Companies marked in red are BRICS-based companies (2) 2010 Revenue Source: Fortune 500; Various; The Beijing Axis Analysis The Beijing Axis 6

Agenda

1. Setting the stage: China’s voracious demand for resources China’s imports of selected commodities from Africa (USD bn, 1995-2008) China’s imports from Africa as a % of total imports 100% 2. China’s engagement of African resources, with specific reference to iron ore - High growth rate Cobalt - High quantity 80% 3. A hard/soft landing for China, with reference to demand for iron ore

60% - High growth rate Manganese Crude Oil - Low quantity

40% Chromium Platinum Ferroalloys

20% Tobacco Diamonds Petroleum Gases

Wood Iron Ore Steel Nickel Cotton Copper Electronics 0% 0% 20% 40% 60% 80% 100% 120% 140%

CAGR 1995-2008

Note: Bubble size is based on the commodity’s share of China total commodity imports from Africa in 2008 TheThe Beijing Beijing Axis Axis 8 Source: UN Statistical Database; The Beijing Axis Analysis

W. Sahara

Share of all contract revenue in Africa (2009) Breakdown of China’s international contract Mijek & Sfariat revenue (2009)

South America 2.7% Middle East All Others 16.6% Guelb el Aouj 25% Laiwu I&S North America Off-take agreement China 0.4% 37% Asia 36.0% Askaf El Agareb MCC via Sin-Tang Mauritania 23.2% Financing & Off-take Turkey 5% Kedia d’Idjil 23.2% USA Lebtheinia 8% Africa Europe 41.1% Senegal France Italy 3.2% Tazadit Faleme 10% 15% Minmetals CMIEC Close to infrastructure that Mining license 1.5GW power plant exists or could be rehabilitated

Source: ENR; The Beijing Axis Analysis Source: RBC, Company Reports, Reuters, The Beijing Axis Analysis Far from infrastructure Tonkolili Kalia CCCC – EPCM Contractor CIF - Funding, 100% off-take SISG – Off-take CREC - Feasibility study CRM – Related infrastructure CCCC - Feasibility study Topa Simandou Mt Avima Chalco Guinea Possibly Baosteel Nkout CAR CRCC Related rail Cameroon Mbalam Belinga Simandou 1-2 & South Sichuan Hanlong Group CMEC Equity stake S. Leone Cote d’Ivoire Construction CHEC, CRCC-CAC Mt Nimba Guinea Marampa & off-take Rail feasibility study MCC, SISG Liberia Mt Nimba Liberia EXIM Bank Financing Nabeba Acquisition Mt Nimba Cote d’Ivoire Gabon Congo-B CHEC, CRCC-CAC Deepwater port, rail Kango & rolling stock Western Cluster Bong Close to infrastructure that Close to infrastructure that Shougang Steel Mt Ginka China Union Putu exists or could be rehabilitated Zanaga exists or could be rehabilitated CDB Mayoko Source: RBC, Company Reports, Reuters, The Beijing Axis Analysis Far from infrastructure Source: RBC, Company Reports, Reuters, The Beijing Axis Analysis Far from infrastructure

Agenda There is an on-going debate regarding China’s slowing growth – mainly fuelled by the knock-on effect of the ongoing European debt crisis as well as the potential property bubble burst

Representative quotes

1. Setting the stage: China’s voracious demand for resources “China is in a hard landing. Car sales are “China’s economy is headed for a ‘hard down, cement production is down, steel 2. China’s engagement of African resources, with specific reference to iron ore landing’ this year as weaker demand production is down, construction stocks are overseas chokes off exports.” - Gary down. It’s not a debate anymore, it’s a fact” - Shilling, Financial Analyst and commentator Adrian Mowat, JPMorgan Chase & Co.’s chief 3. A hard/soft landing for China, with reference to demand for iron ore for WSJ, Forbes, and The New York Times Asian and emerging-market strategist.

“If China doesn’t change course, and in a big way, “Now the bubble is visibly bursting. How much the country will experience an economic crisis…. damage will it do to the Chinese economy — and China is running out of time to fix the problems of its the world?” – Paul Krugman, American Economist, economy” – Michael Schuman, Asia business op-ed columnist for The New York Times. correspondent for TIME Magazine

TheThe Beijing Beijing Axis Axis 1414 Source: Various; The Beijing Axis Analysis The Beijing Axis 15

China is still in its early stages of commodity intensity – mainly in steel, iron China’s steel consumption is poised for more moderate but sustained ore, copper, etc. growth and the base effect matters

Commodity Intensity by Cycle (2011) Steel Intensity Comparison of Top 30 Economies(1) and Other Selected Asian Economies (2010)

Steel Consumption Per Capita Bubble Size: GDP CAGR Consumption (USD, 2010) 1,200 (2000-2010) Intensity S. Korea Developed Economies 100% Developing economies 1,000 Steel consumption declines Emerging Economies except China consume less steel per after GDP per capita capita, but their relatively reaches USD 25,000 Mainland China large populations ensure China in 2000 800 75% years of steady demand With less infrastructure growth construction, developed economies have lower demand 600 Spain for finished steel Japan Malaysia Germany Austria 50% Turkey Italy Canada China Saudi Arabia 400 Russia Australia Iran Belgium US Poland France Netherlands China(2) Sweden 25% Early cycle commodities e.g. steel, iron ore 200 UK India Mexico Mid cycle commodities e.g. copper, lead, zinc Thailand Brazil Vietnam Argentina Late cycle commodities e.g. platinum, nickel Venezuela Philippines0 South Africa 0Indonesia 10,000 20,000 30,000 40,000 50,000 60,000 0%

0 5 GDP Per Capita (USD, 2010)

10 15 20 25 30 35 40 45 50 The trend line is indicative of the general pattern in steel consumption at different stages of industrialisation

GDP Per Capita (USD, 2010) *Note: (1)Switzerland, Norway and Sweden are not included for comparison purposes (2) China in the year 2000 Source: PWC; The Beijing Axis Analysis TheThe Beijing Beijing Axis Axis 1616 Source: IMF; World Steel Association; The Beijing Axis Analysis The Beijing Axis 17 The Chinese government has policy options Infrastructure spend may or may not be the best stimulus, but it is the option that will be chosen

 Chinese debt is manageable, especially with annual growth of more than 6%.  China is configured towards resource mobilisation Deleveraging is needed, and if not done could see growth start stalling by 2020  Bitter lessons were learnt from 2008 stimulus, but ‘when in doubt, build something’  Chinese ICOR is holding up  More focused construction projects  Opening banking sector and investments in various state-dominated sectors.  Land sales of local governments Quality growth rather than quantity?  High % of required deposits on residential property. 85% of Beijing residents priced out of the property market! Significant latent demand  Keeping the currency competitive  Inflation a concern, but Q1 figures were favourable

Source: The Beijing Axis Analysis The Beijing Axis 18 Source: The Beijing Axis Analysis The Beijing Axis 19

The upshot for iron ore

 More sustained and stable property growth, but still significant. Market between 2008 and 2012 was irrational. Real demand exists and it will follow rational options THANK YOU!  Chinese ICOR is likely to increase over the next decade  Social/political collapse below 7% a baseless article of faith.  Incremental growth is still high in physical terms Dirk Kotze  Favourable indicators: Director & General Manager Africa • More than 20% of population still in the agricultural sector E-mail: [email protected] • GDP/capita as a % of US figure still low • No major indicators suggest any ‘tipping point’ within China COPYRIGHT© The Beijing Axis Ltd. 2012. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of The Beijing Axis. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we can't offer any warranty that it contains no factual errors. We would like to be told of any such errors in order to correct them. www.thebeijingaxis.com Source: The Beijing Axis Analysis The Beijing Axis 20