Global Resources Update 2015
Todd Warren, Portfolio Manager Agenda
1. Review of 2014
2. What drives resources from here?
3. Valuations
4. Summary & Outlook
5. Appendices a. One – Stock stories b. Two - Team c. Three – Investment process
2 Review of 2014 Energy & Mining sectors have underperformed dramatically
170 Performance of MSCI World Equities by sector since Jan 2013 (rebased to 100) 160
150
140
130
120
110
100
90
80
70
60 MSCI World Index MSCI World Energy Sector Index MSCI World Metals & Mining Index MSCI World Health Care Index 50 MSCI World Financials Index MSCI World Information Technology Index MSCI World Consumer Discretionary Index MSCI World Consumer Staples Index 40 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15
Source: Bloomberg, data to 31 December 2014 4 2014 – the good, the bad, and the ugly
General comments • Decent start to the year, before it gave way to macro headwinds – commodity weakness driving extreme negative sentiment late in the year • Energy particularly in the spotlight following OPEC decision in late November not to cut production • Iron ore continued to weaken throughout the year dragging down the mining sector, before a late seasonal rally
Contributors • Gold – despite mixed commodity performance, equities were supported (Franco, Osisko, Detour) • Diamonds – strong rough diamond prices along with stock specific outperformance (Petra, Dominion, Lucara) • Lundin Mining – start-up of Eagle mine, and major asset acquisition significantly increased production • Stillwater – operational improvements along with being beneficiary of Russian geo-political issues
Detractors • Diversified miners – weakening fundamentals for bulk commodities (Rio Tinto, BHP Billiton, Vale) • Upstream oil producers – collapsing oil prices dragged the entire sector down (Noble, Bankers, MEG, Sundance)
For internal use by authorised First State Investments’ distributors and staff only. Not for distribution to clients or any external parties. 5 First State Global Resources Fund Performance As at 31 December 2014
Since 2 yrs 3 yrs 5 yrs 7 yrs Performance 3 mths 6 mths 1 yr Launch (% p.a.) (% p.a.) (% p.a.) (% p.a.) (% p.a.)
Global Resources Fund -11.0 -18.3 -9.3 -9.4 -9.8 -7.9 -9.0 -0.2
Benchmark* -11.1 -18.1 -12.5 -12.1 -9.3 -7.4 -7.8 2.9
Relative performance 0.1 -0.2 3.2 2.7 -0.5 -0.5 -1.2 -3.1
Euromoney Global Mining Index** -10.9 -18.2 -14.0 -17.1 -12.9 -10.3 -9.7 1.0
MSCI AC World Energy Index** -12.0 -18.2 -8.6 3.9 1.6 1.1 -3.1 1.0
Source: Lipper, First State Investments. Single pricing basis with net income reinvested. *Benchmark Since launch to 01 Nov 07: Euromoney Global Mining Accumulation Index. From 01 November 2007 onwards: 75% Euromoney Global Mining Index / 25% MSCI AC World Energy Index. Since launch performance calculated from 5 September 2005. **Index returns are gross of tax. Returns from two years onwards are annualised. 6 What drives resources from here? The resources cycle
Phase 1 Demand rises, inventories decline Supply response lags = higher prices High prices encourage new projects Governments attempt to raise taxes
Phase 3 Phase 2 Supply is curtailed Supply response = demand Demand normalises Inventories rise = prices fall Producers benefit from recovery Capex & exploration reduced Productivity focus on operating costs
8 Intensity-of-use work suggests China has upside…
Energy Steel Copper Composite Energy Composite Crude Steel Composite Copper UsePer Capita per Intensity capita of Use UsePer Capita per Intensity capita of Use UsePer Capita per Intensity ofcapita Use 9,000 kgoe 1,600 kg kg Japan 25 Japan Sth Korea Sth Korea 8,000 1,400 India India 7,000 Brazil 20 Brazil 1,200 China China 6,000 United States 1,000 United States 15 5,000 Japan 800 4,000 Sth Korea 10 India 600 3,000 Brazil 400 2,000 China 5 United States 1,000 200
- - - - 10,000 20,000 30,000 40,000 50,000 - 10,000 20,000 30,000 40,000 50,000 - 10,000 20,000 30,000 40,000 50,000 China GDP (US$, constant 2000 prices) India GDP (US$, constant 2000 prices) GDP (US$, constant 2000 prices)
Source: Wood Mackenzie, CRU, Metalytics, 31 December 2013. 9 China – it is all about the base
Copper consumption Crude steel production
1,200 ('000 tonnes) 900 (mtpa) 1,000 800
800 700
600 600
400 500
200 400
0 300 Jan 05Jan 06Jan 07Jan 08Jan 09Jan 10Jan 11Jan 12Jan 13Jan 14 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Power generation YOY growth Iron ore imports
30% 60,000,000
25% 50,000,000 20% 40,000,000 15%
10% 30,000,000
5% 20,000,000 0% 10,000,000 -5%
-10% 0 Jan 05Jan 06Jan 07Jan 08Jan 09Jan 10Jan 11Jan 12Jan 13Jan 14 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14
Source: CLSA Tradebook June 2014. 10 Late in the boom: why invest in resources now?
Benefit from balance sheet reform • Management often replaced by conservative-minded ‘guardians’ • New mandate: cut expenditure/debt; boost shareholder appeal by paying back cash • Engage M&A cautiously
Miners’ returns typically improve after a sector correction
100% 80% 60%
40%
20% 0% -20% -40% MSCI Metals & Mining Returns -60% MSCI World Returns
-80%
1997 2002 2007 1995 1996 1998 1999 2000 2001 2003 2004 2005 2006 2008 2009 2010 2011 2012 2013 2014
Source: DataStream, total shareholder returns, assumes reinvesting dividends, First State Investments image. 11 Capital discipline = lower future supply
24 August 2011 18 February 2014 19 August 2014 “World class diversified project “Our high quality project pipeline” “Selective investment and strong pipeline” growth in free cash flow “
Source: BHP Billiton ; Preliminary results, 24 August 2011; Interim results, 18 February 2014; Preliminary results, 19 August 2014. 12 When the surplus ends, inventories decline and pricing tension returns
Global market surplus/deficit for base metals (expressed as % of demand) 50%
40% ) - 30% Tin
20% Lead 10% Zinc 0% Nickel -10%
Cumulative surplus(+)/deficit( Cumulative Copper -20% Aluminium
-30%
2013
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2014F 2015F 2016F 2017F 2018F 2019F
Source: IAI, ICSG, ILZSG, Wood Mackenzie, Macquarie Research, November 2014. 13 Inflection point - rising free cash flow = ?
UK Mining Companies* EVA and Economic Spread^ 40,000 20.0%
30,000 M&A Phase 15.0%
20,000 10.0%
10,000 Capex Phase 2014 Inflection 5.0% 0
0.0% -10,000
-5.0% -20,000
-30,000 -10.0%
EVA (US$m) - LHS Economic Spread pre abnormals (%)
* UK mining companies includes BHP Billiton, Rio Tinto, Anglo American, Glencore, Vedanta, Antofagasta, First Quantum and other smaller companies. ^ Economic spread is Return on Invested Capital (ROIC) minus WACC. Source: Citi Research, dataCentral, data to 31 December 2014. 14 Copper – low cost producers
• Cost curve is rising Grades declining, exploration disappointing. • Large cap seniors – Antofagasta, Southern Copper, Grupo Mexico • Leading intermediate producers First Quantum World class, low cost operations Brownfield and greenfield growth Strong track record - in house project delivery team Lundin Mining Diversified base metals producer 25% stake in World class Tenke mine with Freeport Acquired Eagle mine from Rio Tinto HudBay Low cost exposure to copper and zinc Significant growth in copper production imminent Longer term growth options via greenfield projects
Sources – BMO, First State Investments. Photos: First State Investments. 15 Gold exposure – quality seniors and catalyst rich juniors
• Goldcorp Low cost, long life, low political risk Accelerating cashflow and earnings Growing gold production, 4 mines in 4 years Strong balance sheet
• Franco Nevada – Royalties Little exposure to operating costs or capex Large cash position
• Catalyst driven juniors Detour – survived troubled ramp up in 2013 low gold price, re- rating underway Romarco – high return project in USA, permitting finally in place, funding now secured
Source: First State Investments. 16 Oil markets – keep it in perspective Oil markets – it’s noisy out there...
“The oil price is tumbling. Is that good or bad news for the world economy?” • The Economist, 18th October 2014
“Has Saudi Arabia lost control of the oil market?” • Financial Times, 16th October 2014
“Saudi Arabia tests US ties with oil price” • Financial Times, 16th October 2014
“Is the oil crash a secret US war on Russia?” th Source: The Economist. “Cheaper Oil, Both Symptom and balm”, October 18th, 2014 • BBC World News, 16 October 2014
“Painful though it is, this oil shock will eventually spur huge change...” • The Economist, 29th May 2008
“Goldman’s analysts speak, and the price of crude oil rises” • Financial Times, 22nd May 2008
“Crude is gushing from the ground...the world is awash with the stuff, and it is likely to remain so” • The Economist, 4th March 1999
Source: The Economist, “Recoil”, May 29th 2008. The Economist, “Drowning in Oil”, Mar 4th 1999. 18 Global supply > global demand
100 2.0
1.5
95
1.0
90 0.5
- 85 (0.5)
80 (1.0)
Global Supply/Demand, GlobalSupply/Demand, mnbpd Global supply is running ahead
of demand into seasonally (1.5) Stock Stock change Misc. & to Balance, mnbpd 75 weaker first half (2.0)
70 (2.5) 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
Stock Chg [rhs] Supply Demand
Source: IEA OMR, Bloomberg. 19 1986 price crash was supply driven too...
14 OPEC (read Saudi) refusal to cut 160 1986 saw prices fall 70% from the production to rebalance markets in $30/bbl level seen through the prior November has had a similar affect 140 12 two years as Saudi grew tired of on prices which are now down losing market share (emergence of ~60% versus prior Alaska, North Sea and Mexico) and 3-year average of $110/bbl OPEC quota cheating. 120
10
Saudi output reached a low of 2mnbpd in Aug-85. It had tripled 100 8 within twelve months
80
6
60 Brent Oil Price, USD/bbl 4 OPEC Spare Capacity, mnbpd 40
2 20
- - Jan 84 Jan 86 Jan 88 Jan 90 Jan 92 Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14
Saudi Other Oil Px [rhs]
Source: Bloomberg. 20 ...But spare capacity is dramatically lower
But the critical difference this time 14 around is spare capacity. 160 In the mid-80s spare capacity was running at ~10mnbpd or about 17% 140 12 of global demand
120 10 Today, (realistic) spare capacity is closer to 2mnbpd, or about 2.5% of 100 global demand 8
80
6
60 Brent OilPrice, USD/bbl 4 OPEC OPEC Spare Capacity, mnbpd 40
2 20
- -
Jan-88 Jan-08 Jan-84 Jan-85 Jan-86 Jan-87 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
Saudi Other Oil Px [rhs] Source: IEA OMR, Bloomberg. 21 North American shale revolution
4.0
3.0
2.0
1.0
-
(1.0) YoYGrowth, mnbpd After years of stagnation, the North (2.0) American shale revolution has taken Non-OPEC growth by storm. The US has been growing at an (3.0) annualised rate of ~1.5mnbpd
(4.0) 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
US Canada Other Demand
Source: IEA OMR, Bloomberg. 22 Shale scale – US unconventionals
Marcellus
DJ Basin
100% Bakken Permian 90% Basin 80% Yeso Vt Midland Basin Vt. Eagleford 70% Midland Basin Hz. 60% Eagle Ford 50% DJ Niobrara
• US unconventional shale oil and gas plays has transformed the global Liquids% 40% (Watt) energy landscape. 30% Bubble Size = 20% • Our funds have sought exposure to the best quality basins that also have 10tcfe scale e.g. Eagleford, DJ Basin, Marcellus and Permian; 10% • Our funds have focused on the highest quality management teams with 0% - 20 40 60 80 100 120 exposure to each of the key basins. Breakeven* Oil Px, USD/bbl Source: First State Investments estimates. ITG Research as at 20-Feb-2014. Logos reproduced with kind permission from each company. Company logos reflect fund positions as at C.O.B. 19-Mar-2014 and are subject to change. *Oil price required to yield a zero NPV using a 10% discount rate. Note that the Marcellus and Utica plays are predominantly gas plays and therefore not included in the accompanying bubble chart. Grey bubbles = Woodbine, Uinta Hz, Wolfbone Vt, DJ Niobrara, Uinta Vt, Midland Basin Hz, Central Basin Platform Vt, Delaware Basin Hz. 23 ...with the best basins outperforming
Source: ITG IR, raw data provided by didesktop and state agencies as at 23 December 2014. 24 Energy market summary
• Long term structural support drivers – as living standards improve, so too does the demand for energy
• Short term will always be difficult to predict – geo-political factors, seasonality • Structural support for prices – increased costs mean oil prices must rise in order to generate sufficient returns • Global gas supply has been dramatic – unconventional and LNG development will serve to suppress prices
Source: Istock images. 25 Valuations Valuations and earnings momentum
Euromoney Global Mining/MSCI Energy EPS Forecast Next Twelve Months • Equity prices have followed earnings and cashflow downgrades • Most commodity prices have fallen to a level that is changing company behaviour
Euromoney Global Mining/MSCI Energy dividend yield relative to MSCI World next FY
• Dividend yields jumped again – something has to give • Focus on productivity and capital discipline • P/NPV, PE and EV/EVIBTDA support valuation
Source: Bloomberg, 1 January 2015, Rolling 12 month forecast. 27 Price to Earnings: below long-term average
BHP Billiton Ltd Rio Tinto plc
30.0x 30.0x
25.0x 25.0x +1 standard deviation
+1 standard deviation 20.0x 20.0x Average 15.0x 15.0x
Average
year forward year P/E ratio year year forward P/E ratio - 10.0x - 10.0x
-1 standard deviation One One -1 standard deviation
5.0x 5.0x
0.0x 0.0x
2014 1990 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Morgan Stanley Research, DataStream, Thompson Reuters. Data to 31 December 2014 28 Many commodity prices below marginal cost
• An important point for the support of commodity prices
*The cash costs of the 90th percentile producer on the 2013 supply curve. Cash costs calculation is based on the sum of direct cash costs and indirect costs excluding maintenance capex. Indirect costs include royalties, front end taxes and revenue based taxes (excluding income and profit-related taxes), research and exploration attributable to the operation, corporate and divisional overheads attributable to the operation. ^Spot prices as of 18 December 2014. Source: Morgan Stanley Research, Woodmac, DataStream, CRU. 29 Energy valuations have changed dramatically
9 North American E&P Valuations, 2008-2015ytd Valuations for North American E&Ps are above their long-term average. 8 However, FY15 multiples are predicated on $50/bbl oil
7
6
EV / DACF FY1* / DACF EV 5
4
3 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 +/- 1SD AVG SECTOR CURRENT
Source: Simmons International Equities Research. Bloomberg. First State Investments estimates. Pricing data as at 22nd Jan 2015. *Enterprise Value to 1-year forward debt-adjusted cash flow. Tickers include: APC, APA, AREX, ATHL, BBG, COG, CHK, XEC, CXO, CLR, DNR, DVN, FANG, EOG, GDP, GPOR, LPI, MRD, MPO, NFX, NBL, OAS, PE, PQ, PXD, QEP, RRC, ROSE, SN, SD, SM, SWN, SGY, TPLM, UPL, WLL, WPX. Note that valuations are calculated using NYMEX futures pricing as at 6th Jan 2015. 30 Summary & outlook Institutions globally remain underweight the sector
Bank of America Merrill Lynch Global Fund Manager Survey – Investor Positioning
Source: Bank of America Merrill Lynch, Investment Strategy, 20 January 2014. 32
And have been for some time . . .
Bank of America Merrill Lynch Global Fund Manager Survey – Investor Positioning
Overweight
Underweight
Current allocations are at record underweights for Energy, and at lows not seen since December 2008 for Materials
Source: Bank of America Merrill Lynch, Investment Strategy, 20 January 2014. 33
Looking forward – the resources market
• Demand – remains healthy although growing at a slower rate. Inventory levels remain reasonable.
• Supply – many commodity prices are at or below historic cost support, but the cost curve is dropping with productivity measures, lower energy costs and producer currencies
• Valuations – Risk/reward is attractive relative to other sectors and to history
• Shareholder alignment improving – Companies cut costs and capex. Capital management initiatives possible.
• Investor positioning underweight - Global Managers remain underweight both mining and energy.
Source: Istock images. 34 Fund positioning and activity
• Diversified miners • Generally looking to shift away from early cycle commodities like the bulks • Rio Tinto favoured given best-in-class assets and possible capital management • Base metals • Copper is largest exposure (Lundin, Southern Copper, First Quantum, HudBay) • Precious metals • Stillwater – operational improvements to continue, geo-politically safe palladium producer • Gold – stick to high quality, catalyst-driven names – not making a call on the commodity • Diamonds – short term headwinds for rough diamond prices, buying opportunistically • Energy • Remain focused on upstream producers. Selectively taking advantage of short term volatility • Utilising safe haven of Exxon Mobil Focus on quality, robust margins, free cashflow, strong balance sheets Favour later cycle commodities in the medium to long term
35 Appendix 1 Stock stories Diamonds – a portfolio approach
• Strong diamond market jewellery demand growth anticipated Key drivers are China and India US remains a key market for diamond jewellery • Petra – investors since 2009 Established producer with six mines in Southern Africa Bought distressed assets from De Beers Transformed the mines with cost cutting and extending life Plans to double production to 5mcts by 2018, growing margins • Lucara – investors since 2009 Emerging producer with two mines in Southern Africa Started production in 2012, quality has exceeded Producing large, exceptional stones including 257 carat diamond Paying a dividend three years after construction commenced • Mountain Province – investors since 2011 Development company with project in northern Canada Joint venture with De Beers, the world’s largest diamond producer One of the most attractive undeveloped diamond project globally First production scheduled for 2016
Source: Lucara Diamonds, Rio Tinto, Petra Diamonds. 37 Bankers – teaching an old dog new tricks
Growth: Prodn >45% higher than prior peak… • 100% stake in the 5 billion barrel (original oil in place) Patos Marinza oil field onshore Albania. 20 Albpetrol AAP Bankers 18 BNK has increased • Applying proven technology across mature oil fields to increase production by 48% from production, generate exports and clean up the environment 16 prior peak in late-1950s 14 • Returns are attractive, breakeven oil price of USD55/bbl 12 • With a strong balance sheet and prudent capital management, the 10 company estimates 10-15%pa internally funded growth over the 8 next several years 6
4 Gross Production, kbopd Production, Gross 2
-
1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
Breakeven*: Highly Competitive Economics Returns**: Profitable Growth Driving Higher Returns
120 18 Patos Marinza wellhead 16 100 breakeven @ USD55/b 80 14
60 12 10 40 8 20 6 0
4 Breakeven* Oil Px, USD/bbl Px, Oil Breakeven* Return on Equity on Return 2 0 (2) (4) 2008 2009 2010 2011 2012 2013E 2014E 2015E Source: Company data, First State Investments estimates. *Breakeven Oil Px represents the oil price required to yield a Net Present Value of zero utilising a discount rate of 10%, ITG Research. **Macquarie Equity Research as at 20th Feb 2014. Photos: First State Investments. 38 Rio Tinto – well positioned on the cost curve
• Iron ore industry leader • Investment cycle ending and free cash flow building • Focus on efficiency and cost reduction Returns to shareholders via dividends Ongoing growth from scaled down but higher return expansion • Low cost operations and volume growth • Strong management refocused on shareholder returns • Strong focus on corporate governance and safety • Compelling valuation
Source: SMM. Company data, Macquarie Research March 2014. Photos: First State Investments. 39 ESG example: Stillwater Mining vs Norilsk
• Palladium and platinum demand drivers well supported; legislated demand for auto catalysts • 75% of metal mined in Russia and South Africa; location in United States lower political risk • Stillwater produces palladium and platinum (3:1) from a world class orebody • Identified room for overhead cost reductions and productivity improvement • Exercised our voting rights in 2013 to restructure board and management Norilsk Russia Stillwater Montana
Photos: First State Investments, Stillwater Mining. Data source: Bloomberg, normalised prices in USD. 40 Appendix 2 Team The Global Resources Team
Dr Joanne Warner
Head of Global A strong blend of resources industry and finance Resources skills to exploit market inefficiencies
Skye Todd Tal Lomnitzer Renzo Macpherson Warren Portfolio Casarotto Portfolio Portfolio Manager Senior Manager Manager Portfolio
Manager
Rebecca Mark Hume Peter Mario Maia Peter O’Dwyer Senior Campbell Senior Mangano Senior Analyst Analyst Analyst Senior Analyst Analyst
Over 150 years of combined investment experience
*Combined years experience shown for the 10 members of the Global Resources team. Data as at 31 December 2014 42 Capabilities of the Global Resources Team
Specialists Experienced team, sector specialists maximises knowledge to identify global best practice, over 50 company visits per year
Quality Assets with competitive advantage, structural growth, companies with management alignment, board independence, sustainable culture
Disciplined Proprietary research, consistent valuation framework, comprehensive quality assessment, industry risk analysis
Active Direct contact with companies, industry bodies and regulators, strong conviction portfolios, identify mispricing opportunities
Aligned Strong sense of portfolio ownership, team members invested in fund, incentives on long-term fund performance
Resourced Global network of over 230 investment professionals, financial strength of the Commonwealth Bank of Australia
43 Appendix 3 Investment process What makes a good resource company?
• World class assets
• Low cost producers
• Organic EPS growth
• Strong financials
• Strong management
Quality companies + growth = superior returns with lower risk
Image source: iStockphoto. 45 Invest in the lower half of the cost curve
2014 Copper Total Cash Cost Curve
Source: Wood Mackenzie February 2014. 46 Kicking tyres is important
More than 1,400 mine and site visits to over 70 countries
Source: First State Investments as at 31 December 2014. 47 Selected site visits/due diligence in last 12 months*
Australia / New Zealand Asia / PNG • Garden Well/Moolart Well, WA • Anjaling, China • SKA/Higginsville, WA • Pingshou, China Countries as at 31 December 2014 • Cooper Basin, SA • Lihir, PNG • Peak Downs, Qld • PNGLNG, PNG • Hope Downs, WA • Yandicoogina, WA Africa • Ellendale, WA • Afren Energy, Kenya • Maules Creek, NSW • GALP Energia, Mozambique • Hera, Cobar, NSW • Jwaneng, Botswana • Yandi & Jimbelbar, WA • Cullinan, South Africa • Port Hedland, WA • Finsch, South Africa
• Kansanshi, Zambia Canada / USA • Tonkolili, Sierra Leone • Minto, Yukon, Canada
• Copper Mountain, BC, Canada • Athabasca Oil Sands, AB Canada • Continental Resources/Sanjel Corp, South & Latin America / Mexico Williston Basin,USA • Escobal, Guatemala • Mississippi Lime, Oklahoma, USA • Eldorado, Brazil • Sure Fire Pressure Pumping • Empresas, Chile Services, Texas • West Omai, Guyana • Rosemont, Arizona, USA • Matthews Ridge, Guyana • Detour Gold Mine, Ontario, Canada • Maipo Vineyards, Chile • Malartic, Quebec, Canada • Santa Rosa, Colombia • Cigar Lake, Saskatchewan, Canada • Rubiales Oil Field, Colombia • DJ Basin, Colorado, USA • MMX Sudeste Superport, Brazil • Stillwater, Montana, USA • Prodeco coal mine, Colombia • Buritica gold mine, Colombia Russia & Eastern Europe • Carajas, Brazil • Norilsk Nickel, Russa • Las Tres Palmas, Dominican Republic • Severstal, Russia • Penoles, Mexico • Antofagasta, Chile
Source: First State Investments as at 31 December 2014. Approx visits in 12 months = 54. Not all are listed.* 48 Specific stock selection guidelines
Cash costs of production in lower half of world operating costs Real EPS growth over 3 years greater than 5% pa Net debt to equity ratio less than 50% Interest cover greater than three times Improving price/operating cashflow ratio We need to tick 3 out of 5 for the stock to qualify for inclusion in the portfolio
49 Portfolio construction
Notional Universe: ~10,000 • Margin comparison Preliminary • Production/volume growth analysis • Balance sheet strength • Liquidity
Researchable companies: ~300 • Company visits/meetings Detailed • Resource/geological analysis analysis • Company reports • Industry analysis • Broker research Watch List ~200 • Diversification (sector/country/market cap) • Relative Valuation • Parameters/risk controls Segmental definitions - • Best team ideas • Notional Universe => BBG screen for Basic Materials, Oil and Gas and Gas Distribution Portfolio • Researchable companies = daily liquidity over $1m local, net debt/equity<50% and 73 Interest cover 3x • Watch List => asset, cost curve, management screening, resource upside
Source: First State Investments as at 31 December 2014. 50 Position size determination
Stock weightings driven by quality, earnings, liquidity and price
• Compelling valuation of highest quality resources companies 10% • World-class assets and management • High liquidity • Typically 45 - 60% of the portfolio
• Established companies with strong stock specific investment case 5% • Less-diversified asset base or more cyclical in nature • Long-term conviction, • Typically 25% - 35% of the portfolio
• Smaller companies with limited track record 2% • Single project, potentially in development • Competent, experienced management • Typically up to 15% of the portfolio • Exploration companies with little or no earnings 1% • Significant resource potential • Acorns of the portfolio: high risk, high return • Maximum of 10% of the portfolio
51 Our approach to Responsible Investment
CFSGAM is proud of its track record in the consideration of ESG issues and was one of the first global investment managers to become a signatory to the PRI in early 2007. CFSGAM was the first Australian domiciled investment manager to release a detailed annual report on its progress of PRI implementation. Our Commitment Our Responsible Investment Strategy
We will incorporate ESG issues Principle 1 into investment analysis and decision-making processes.
We will be active owners and Principle 2 incorporate ESG issues into our ownership policies and practices.
We will seek appropriate Principle 3 disclosure on ESG issues by the entities in which we invest.
We will promote acceptance and Principle 4 implementation of the Principles within the investment industry.
We will work together to enhance Principle 5 our effectiveness in implementing the Principles.
We will each report on our Principle 6 activities and progress towards implementing the Principles.
Source: PRI Annual Report and Assessment survey 2012. 52 Stock contribution To 31 December 2014
3 Months - Top 5 stocks 3 Months - Bottom 5 stocks
Attribution Attribution Stock Name Sector Stock Name Sector (bps) (bps)
Exxon Mobil Corp Energy 22 BHP Billiton Diversified -175
China Shenhua Energy Energy 20 Vale SA-Sp Pref ADR Diversified -89
Enbridge Inc Energy 19 Freeport-McMoran Inc Metals -79
Dominion Diamonds Corp Gold & Precious Metals 19 Glencore Xstrata Diversified -73
Lundin Mining Corp Metals 19 Noble Energy Inc Energy -57
12 Months - Top 5 stocks 12 Months - Bottom 5 stocks
Attribution Attribution Stock Name Sector Stock Name Sector (bps) (bps) Franco-Nevada Corp Gold & Precious Metals 66 Vale SA-Sp Pref ADR Diversified -249
Petra Diamonds Ltd Gold & Precious Metals 52 BHP Billiton Diversified -247
Osisko Mining Corp Gold & Precious Metals 48 Rio Tinto Diversified -126
Lundin Mining Corp Metals 42 Freeport-McMoran Inc Metals -101
Stillwater Mining Corp Gold & Precious Metals 42 Fortescue Metals Group Metals -50
Source: First State Investments. Stock contribution for the First State Global Resources Fund (OEIC). 53 At all times the fund remains diversified
Sector diversification Historical sector diversification
Diversified 28.8% Energy 32.4% Gold & Precious Metals 15.3% Metals 15.2% Uranium 1.6% Others 4.1% Liquidity 2.5%
Country Diversification Fund diversification by market capitalisation
Canada 31.9% UK 19.2% USA 18.9% Australia 17% Brazil 3.8% China 1.7% South Africa 0.4% Others 4.3% Liquidity 2.5%
Source: First State Investments as at 31 December 2014. Data shown for the First State Global Resources Fund (OEIC). 54 Ten largest holdings : ~50% of total
Company % of Portfolio Country Sector
Rio Tinto 9.8% UK / Australia Diversified
BHP Billiton 9.4% UK / Australia Diversified
Exxon Mobil Corporation 8.6% USA Energy
Glencore Plc 5.4% UK Diversified
Vale SA-Sp Pref ADR 3.8% USA Diversified
Lundin Mining Corp 2.8% Canada Metals
Freeport-McMoran Inc 2.5% USA Metals
Southern Copper Corp 2.4% USA Metals
Franco-Nevada Corp 2.3% Canada Gold & Precious Metals
Antofagasta PLC 2.2% UK Metals
49.2%
Source: First State Investments as at 31 December 2014. Data shown for the First State Global Resources Fund (OEIC). 55 Disclaimer
This document is prepared by First State Investments (Singapore) (“FSI”) (Co. Reg No. 196900420D.) whose views and opinions expressed or implied in the document are subject to change without notice. FSI accepts no liability whatsoever for any loss, whether direct or indirect, arising from any use of or reliance on this document. This document is published for general information and general circulation only and does not have any regard to the specific investment objectives, financial situation and particular needs of any specific person who may receive this document. Investors may wish to seek advice from a financial adviser and should read the Prospectus, available from First State Investments (Singapore) or any of our Distributors before deciding to subscribe for the Fund. In the event that the investor chooses not to seek advice from a financial adviser, he should consider carefully whether the Fund in question is suitable for him. Past performance of the Fund or the Manager, and any economic and market trends or forecast, are not indicative of the future or likely performance of the Fund or the Manager. The value of units in the Fund, and any income accruing to the units from the Fund, may fall as well as rise. Investors should note that their investment is exposed to fluctuations in exchange rates if the base currency of the Fund and/or underlying investment is different from the currency of your investment. Units are not available to US persons. Applications for units of the Fund must be made on the application forms accompanying the prospectus. Investments in unit trusts are not obligations of, deposits in, or guaranteed or insured by First State Investments (Singapore), and are subject to risks, including the possible loss of the principal amount invested. Some of the funds mentioned herein are not authorised for offer/sale to the public in certain jurisdiction. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. In the event of discrepancies between the marketing materials and the Prospectus, the Prospectus shall prevail. First State Investments (registration number 53236800B) is a business division of First State Investments (Singapore).
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