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Rise Aussie Mine November 2010 and Shine

What would you like to grow? Foreword

Welcome to Aussie Mine Many have bemoaned the loss of the Australian mid-tier miners through consolidation and for 2010. This year’s analysis takeover during the boom years of the past presents an interesting decade. We are seeing the rise of a new group foundation for what is of companies, now positioned to take the mantle anticipated as a return to of leaders in this sector and drive the re-emergence of a vibrant and commodity form as Australian mid-tier diverse Australian mid-tier. miners Rise and Shine. Many Australia’s mining sector now has a strong mid-tier miners are currently and unprecedented opportunity at its doorstep. enjoying bullet proof balance Our proximity to the growth of the emerging Asian giants and our abundance of in-demand sheets, commodity price resources to fuel that growth will continue strength and a responsive to drive our economy, support employment and optimistic equity market, and drive infrastructure development over the perhaps tempered by a strong medium and long-term. As a nation it is up to us to support this development. Michael Happell Australian dollar (A$) and Energy and Resources Leader The mid-tier 50 are cashed up and poised for uncertainty around changes to growth. Executives and Boards have weathered the tax regime. Our analysis will the storm, successfully raised capital and provide further understanding re-financed debt and are now ready to take of these key factors. the next step. We will see the deployment of the significant cash resources held by these companies, both through organic project development and mergers & acquisition activity. While current market conditions suggest short-term volatility will persist, investors should be poised and ready to be taken on a ride as the mid-tier Australian mining sector is ready to rise and shine. We trust you will enjoy…

Tim Goldsmith Michael Happell Global Mining Leader

Tim Goldsmith

2 PwC Table of contents

1 Mid-tier 50 summary financial information 4

2 Executive summary 5

3 Mid-tier industry in perspective 6

3.1 Market capitalisation 6

3.2 Comparison of the mid-tier 50 to other performance measures 9

3.3 M&A - from necessity to opportunity 10

3.4 Movements in the mid-tier 50 14

4 The way I see it – Nicole Hollows 15

5 Aggregated industry income statement 18

5.1 Focus – Accounting changes: Rocky road ahead for mining sector 26

6 Aggregated industry balance sheet 28

6.1 Focus - A tax on iron ore and coal, but encouraging for exploration 30

7 Aggregated industry cash flow statement 32

7.1 Focus - Don’t let your capital project bite back 34

8 Looking ahead 36

9 Glossary 37

10 Mid-tier 50 companies analysed 38

11 Explanatory notes 40

12 Contacting PwC 41

13 Other Mining Publications 42

Aussie Mine November 2010 3 Mid-tier 50 summary 1 financial information

2010 2009 Change A$m A$m %

Profit and Loss

Revenue 11,317 8,561 32%

Operating expenses (8,639) (6,108) 41%

Adjusted EBITDA 2,355 2,512 (6%)

Gain / (loss) on sale of investment (354) 487 (173%)

Impairment (111) (1,738) (94%)

Net profit/(loss) (26) (622) 96%

Cash Flow

Proceeds from ordinary share issues 3,794 2,410 57%

Distributions to shareholders (1,023) (966) 6%

Net operating cash inflow 1,922 2,112 (9%)

Net financing cash inflow 3,246 2,857 14%

Net borrowing inflows/(outflows) (840) 677 (224%)

Balance Sheet

Cash 7,373 3,658 102%

Property, plant and equipment and capitalised exploration 20,175 18,435 9%

Total borrowings 5,475 6,602 (17%)

Net assets 28,402 24,034 18%

Market Capitalisation

Market capitalisation 63,942 47,202 35%

Market capitalisation to net assets ratio 2.25 1.96 15%

4 PwC Executive summary 2

Financial year 2010 saw strong growth for the mid-tier 50 as commodity prices continued to strengthen on the back of growing demand from Asia’s industrialising economies and a number of others in the developing world. It is time to shine for Australia’s mid-tier miners.

Revenue jumped by 32% largely underpinned From a cash flow perspective, a focus on debt by the strong performance of copper, gold financing continued to be a key theme, as and the unexpected star, platinum. The strong some companies in the mid-tier 50 rationalised performance in these commodities has been investments or looked to the market for funds driven by production growth as a result of the to reduce borrowings. By the end of 2010, the increase in the number of operating mines mid-tier 50 experienced ‘net zero’ gearing as both locally and offshore. The increase in cash exceeded total borrowings by $1.9 billion. revenue has also been compounded by the A significant challenge for the mid-tier 50 rise in the commodity prices for copper, over the next 12 months is to balance the gold and platinum. expectation of shareholders with the objectives Whilst there has been some uncertainty of the companies to ensure that they look to surrounding the political arena in Australia invest in projects that give them ‘bang for and the impact of the Minerals Resource Rent their buck’. Tax (MRRT) and its doomed precursor, the In our 2009 publication we asked each Resource Super Profits Tax (RSPT), the mid- company whether they are on the road to tier 50 remain strong and poised for growth, recovery. Now that the global financial crisis is with cash balances climbing to a remarkable behind us and the political arena in Australia is 19% of total assets during 2010, to be in stabilising, the boards of the mid-tier 50 should excess of $7 billion. have growth aspirations at front of mind, as it Equity markets have opened once again, with is time to Rise and Shine. 10% of the market capitalisation of the mid-tier 50 at June 2010 having been raised over the past two years. While investors were willing to put their hands in their pockets, the mid-tier 50 were reluctant to spend their fortunes with capital investment falling 70% during 2010. The outcome of the Australian Federal Election and the MRRT negotiations appeared to have played a role in cautious investment decision. On the deals front, Chinese investors continue to target Australian resource companies and projects, however the strengthening A$ no longer favours the foreign investor; as it is increasingly expensive for them to engage in M&A activity in Australia. We have noted a recent trend of Chinese entities seeking control of ASX listed vehicles with African assets, or the ability to spin African assets into these entities as Chinese companies look to leverage off in-country experience and relationships to African projects.

Aussie Mine November 2010 5 Mid-tier industry in perspective 3

3.1 We continue to see strong Chinese growth metrics and do not foresee a decrease in the China’s influence on Market capitalisation near term. The Chinese Communist Party the Australian mining Back to where we started (CCP) is starting to look at finalising the 12th Five-Year Plan, which will drive strategic industry and demand The market capitalisation of the mid-tier 50 priorities goals out to 2015. Commentary has increased by over 35% to $63.9 billion espousing a change in direction for China for our commodities in June 2010 compared to June 2009 levels, to a more inwardly focused growth story, delivering strong capital gains to any investors must be kept in context. China requires is not done yet. In fact, shrewd enough to have bought at the bottom mined commodities to bring its population of the market. from a largely rural society to an expanding it has probably When we look at the movements in market middle class with all the wants and needs only just begun. capitalisation over the past 24 months, the of consumers in developed nations. China’s rollercoaster ride investors have been on is influence on the Australian mining industry and evident. The market came off its lofty heights in demand for our commodities is not done yet. June 2008 to a nadir in late 2008/early 2009. In fact, it has probably only just begun. Putting the increase in market capitalisation 32% rise since June 2010 into context and stepping away from the headline of 35% increase – what we have seen In the first three months of the 2011 financial over the past 12 months is simply a return of year, the market capitalisation of the mid-tier the value that was lost in equity markets during 50 continued to exhibit accelerated growth, the global financial crisis (GFC) and fortunes increasing a further 32% from June 2010, the and results have improved. equivalent to the entire growth achieved in FY10, these companies are once again starting This market rally is framed against a weak to shine. Our performance appears to indicate outlook for the United States and Europe, some de-coupling from the United States and completion of stimulus packages by troubled European economies. government and uncertain debt and capital markets. If this subdued global outlook Whilst the mid-tier 50 have performed strongly was to turn to a more optimistic tone and a across the board gold, coal and copper have corresponding market sentiment achieved, been the standout performers, particularly in we may expect to see another upward push the period subsequent to 1 July 2010. Where in market capitalisation for these mid-tier 50 there has been a distinct elevation in the companies. growth line. The cut-off point for inclusion in the mid-tier 50 list has changed since our November 2009 publication. In this year’s analysis, the 50th company was Northern Iron Limited, Mid-tier 50 market Capitalisation in A$m a new entrant in 2010, with a market capitalisation of approximately $400 million. 90 This was significantly higher than the cut-off 80 of $227 million for 2009. This movement was 70 consistent with the positive movement in the 60 market for mining companies during the year. 50 43 of the mid-tier 50 companies increased their 40 market capitalisation during 2010. Notably, the market capitalisation of four coal companies, 30 Riversdale Mining Ltd, Macarthur Coal Ltd, 20 Whitehaven Coal Ltd and Aquila Resources 10 Ltd increased by more than $1 billion each for the period. 0 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10

Market Cap in AUD

Table 1: Mid-tier 50 market capitalisation – month end information June 2008 to October 2010 Source: Capital IQ

6 PwC Uranium no longer powering Mid-tier 50 market capitalisation at month ends index – by resource the market? 3.00 In the November 2009 publication, Extract 174% Gold Resources Ltd, Deep Yellow Ltd and Energy 2.50 Resources of Australia Ltd were three of only 98% Copper nine companies that experienced increases 2.00 93% Coal 67% Mid-tier in market capitalisation. In 2010, the market 66% Other 1.50 capitalisation of these companies and other 35% Platinum companies in the uranium sector, have 1.00 experienced a steady decline with the sector (21%) Uranium falling behind its peers and the market as 0.50 a whole. 0.00 Two of the largest ASX listed Uranium Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 companies, Energy Resources of Australia and Gold Coal Copper Platinum Other Uranium Mid-tier 50 Month End Market Cap Paladin Energy, experienced declines of 43% Table 2: Mid-tier 50 market capitalisation index by sector – Month end information June 2009 and 15% respectively between June 2009 and to September 2010 (30 June 2009 = 1) June 2010, this is despite revenue and profit Source: Capital IQ growth year on year. This is largely due to foreign exchange movements for a commodity sold in USD and modest performance outlooks due to production challenges for these companies in the near term.

Gold, stunning growth but are we A key contributing factor to the strength Although these prices are conservative when missing something? of gold companies is the bullish longer compared to current record (nominal) gold term gold forecasts, coupled with a strong prices of upwards of US$1300 per oz, they Gold continued to outperform and shine increase in the average US dollar (US$) gold do show a shift in global thinking around the brighter than other commodity groups, with spot price to record levels. The positive future of gold. We note from our work with a growth in market capitalisation of 98% in outlook for gold is supported by the latest gold companies that most consensus prices the 12 months to June 2010. In comparison, PwC gold price survey which found that used in models have trailed the actual US$ the market capitalisation of the other strong 71% of companies surveyed have adjusted gold price. performers (coal, copper and platinum) up their average gold price assumptions increased by an average 45%. used in ongoing reserve determinations and The gold companies, representing 11 of the asset carrying values as at 31 December mid-tier 50, experienced a further 76% growth 2009. The average price indicated by in market capitalisation in the quarter ended respondents was US$764 for reserves September 2010 – a phenomenal result. compared to US$734 in 2008 and US$825 By September 2010, gold was significantly for asset carrying values compared with outperforming the ASX 300 Metals and Mining 2008’s price of US$751. index, illustrating that gold has once again returned to favour as a commodity as noted in the performance of gold companies against other metals and mining companies on the ASX.

ASX 300 Metals and Mining vs ASX Gold Index

1.70

58% ASX 300 Gold 1.50

1.30

27% ASX 300 M&M 1.10

0.90

0.70 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10

27% ASX 300 M&M 27% ASX 300 M&M

Table 3: ASX300 Metals and Mining vs ASX 300 Gold July 2009 – September 2010 Source: Capital IQ

Aussie Mine November 2010 7 But A$ gold… Although the headline US$ gold price spot has Although the headline US$ gold price increased by around 50% as at September 2010 when compared to June 2009, its spot has increased by around 50% performance in appreciating currencies such as the A$ has been less impressive. as at September 2010 when compared In the three months following June 2010, to June 2009, its performance in the strengthening of the AUD:USD exchange rate has the potential to inhibit the growth appreciating currencies such as the in A$ gold revenues compared with US$ counterparts. For instance, although the US$ A$ has been less impressive. gold prices have increased by 50% from June 2009 to September 2010, the A$ against the US$ has also appreciated by 35% over that period resulting in only an 11% increase in the A$ gold price over the same period. Gold medal performers During financial year 2010, three companies increased their market capitalisation by over 300%, two of these top performers were from AUD and USD Gold price per oz and AUD to USD exchange rate the gold sector.

1800 1.000 OceanaGold Corporation has three operating 35% appreciation AUD to USD 11% increase AUD Gold mines in New Zealand and has the potential 1600 to add value through the re-commissioning of 1400 its Didipio mine project in the Philippines which 1200 50% increase USD has been on care and maintenance since 2008. 1000 0.800 On the other hand, Perseus Mining Ltd is an 800 emerging gold producer, has had positive drill $/oz 600 results and boasts a resource of 2.1 million AUD to USD 400 ounces at its Central Ashanti gold project in West Africa which is targeting commencing production 200 in Q3, 2011. 0.00 0.600

Jul-09 Jul-10 It is also great, of course, that the best Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Aug-10 Sep-10 Oct-10 performance is from an explorer. The success USD Gold/oz AUD Gold/oz AUD/USD exchange rate to date of Sandfire is bound to spur many others on, and is frankly exactly what the Table 4: AUD and USD gold per oz and AUD:USD exchange rate – January 2009 to October 2010 mining industry is all about. Source: Capital IQ The A$ gold price has not experienced the same record highs of the US$ gold price. However, at current prices, companies are still The 10 mid-tier 50 companies with increase in market capitalisation seeing positive share price movements, and more marginal operations are being assessed for re-commissioning. Despite the A$ price Sandfire Resources (ASX:SFR) 362% being lower than in early 2009, the market capitalisation of gold companies is up 98% for OceanaGold Corporation (ASX:OGC) 349% the period June 2009 to September 2010. The question arises. Are we starting to see disconnect Perseus Mining Ltd. (ASX:PRU) 341% between movement in the market capitalisation of gold companies and the A$ gold price? Lynas Corp. Ltd. (ASX:LYC) 196% Perhaps as global sentiment is still subdued Anvil Mining Limited (TSX:AVM) 166% and there are continued questions about the health of the United States and European Grange Resources Limited (ASX:GRR) 156% economies, gold is continuing to be seen as the safe haven store of wealth. Thus investing Indophil Resources NL (ASX:IRN) 154% in companies with gold exposure, in the form of current or near term production Brockman Resources Limited (ASX:BRM) 151% is preferable. In the period that market capitalisation of gold miners has risen by White Energy Company Limited (ASX:WEC) 144% over 170%, the A$ gold price has kept in a very small band and has almost stood still. Citadel Resource Group Limited (ASX:CGG) 141% Does this mean market gold companies were undervalued in 2009, or is there really support Table 5: 10 largest increases in Market Capitalisation mid-tier 50 between 30 June 2009 and 30 June 2010 for the recent market capitalisation? Source: Capital IQ 8 PwC 3.2 One possible issue that may have had an With the growth in commodity prices and impact on the performance the Australian strong continued demand from Asia’s Comparison of the Market in 2010 has been the controversial industrialising economies we can expect to mid-tier 50 to other plan to impose a new tax regime on Australian see demand for investment in the mid-tier 50 mining operations. The media coverage the continue to rise. The Australian miners and performance measures RSPT generated was astounding. Indeed the market look set to benefit if a suitable In our November 2009 publication we the political landscape from the time it was resolution with respect to the MRRT can be investigated whether the significant announced has been fascinating. brokered, despite the challenge of a minority fluctuations in mid-tier 50 market government to effect change within this As already stated, the Australian mining capitalisations were anomalies specific parliamentary term. index has lagged behind that of Canada and to the Australian economy. We noted the UK over the past 18 months. This is not All of this points to the Australian mid-tier being that flailing market conditions and poor what Australian investors want to see. We undervalued against the global counterparts, commodity prices for base metals resulting also note that foreign investors view Australia indicating there is a long way further to rise from the global economic downturn as having blotted its copy book this year by and shine. impacted resource companies across the announcing the RSPT. Clearly investors do not world, with the three comparative indices like uncertainty and question marks over taxes, (ASX 300 Metals and Mining, FTSE 350 carbon prices and industrial relations policy Mining Index and TSX Global Mining may keep a lid on some of the ambitions of the Index) all virtually mirroring each other in a miners and their share price. downward trend, finishing approximately 20% below June 2008 levels. In 2010, this downward trend has been Comparison of key mining indices reversed, with all three key indexes 1.80 increasing by more than 15% as commodity 32% FTSE 350 27% TSX GMI prices have bounced back towards 15% ASX M&M 1.60 pre-global economic downturn levels and optimism has crept back into the mining 1.40 57% FTSE sector globally. The resilience of the Chinese 52% TSX GMI economy and continued potential of Brazil, 1.20 Russia, India and developing nations, has 28% ASX M&M maintained or increased demand for our 1.00 commodities to record levels, and this demand side influence has helped to pull the 0.80 mining markets out of the price depression Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 caused by the global economic downturn. S&P/ASX 300 Metals and Mining - Index Value FTSE 350 Mining Index S&P/TSX Global Mining Index - Index Value

Recent data reveals that the best performing Table 6: Comparison of key mining indices July 2009 – September 2010 (July 2009 =1) market over the 12 months to June 2010 Source: Capital IQ has been the FTSE 350 Mining index (FTSE 350), which has increased 32% compared to 27% and 15% for the TSX Global Mining Index (GMI) and ASX 300 Metals and Mining S&P/ASX 300 Metals and Mining – Index Value (ASX 300 M&M) respectively. 5500 In the three months post June 2010, these 2 weeks prior to RSPT announcement RSPT announcement markets have continued to rally with the 5000

FTSE 350 and GMI both increasing a MRRT announcement further 25%. This compares to only a 13% 4500 increase for the ASX300 M&M. Australian listed mining companies are lagging when 4000 compared to their global peers. The Australian election question is, ‘Why is this the case when we 3500 consider that headline commodity prices are 3000 strong and we are a commodity supplier’? Is it the strength of the A$? Or is it the fact that 2500 other markets have become more attractive Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 to investors given the lack of certainty S&P/ASX 300 Metals & Mining - Index Value around key issues in the Australian mining industry such as the resource tax and Table 7: S&P/ASX 300 Metals and Mining index July 2009 to September 2010 emissions reduction? Source: Capital IQ

Aussie Mine November 2010 9 3.3 Deals since June 2009 The second important factor is that M&A activity continued unabated post the M&A – from necessity Since June 2009, the mid-tier 50 companies announcement on 2 May 2010 of the to opportunity were named in 35 potential transactions, Resource Super Profits Tax (RSPT), now totalling $30.9 billion; of which approximately rebranded as the Mineral Resource Rent M&A activity in the mid-tier 50 shifted focus 30% have been completed. The average deal Tax (MRRT). Acquiring entities compensated from being a necessity in the latter part of 2008 value since June 2009 is $875 million, largely for the uncertainty surrounding changes to and the early half of 2009, to opportunity in consistent with our November 2009 publication the tax regime by reflecting the additional 2010. The necessity was driven by declining where the average was $890m. The more risk in the bid price; thereby reducing it. commodity prices and lack of access to debt notable difference is that the number of The most significant example of this was and equity markets forcing a number transactions have increased significantly from Peabody Energy’s bid for Macarthur Coal. of companies to transact to survive. M&A 10 in our November 2009 publication to 35 in Peabody Energy announced a $16 per share activity became an alternative means of the current year. This increase has been driven bid for Macarthur Coal in April 2010, which accessing cash in order to ensure survival by two significant shifts in the M&A activity. was rejected by the target. Following this during the GFC. The first is that there are more Australian based failed bid, a second attempt was launched Since then, commodity prices have companies entering into M&A transactions. at $15 per share in May 2010 on the claim rebounded, credit is more forthcoming as The M&A activity by mid-tier companies was that uncertainty surrounding the RSPT had optimism slowly returns to the market and not evident in our November 2009 publication impacted the bid price. This offer was rejected companies have sured up their balance sheets which is in stark contrast against the current by Macarthur’s board and major shareholders. through capital raisings totalling $29.7 billion. year where the deal value of M&A activity by The most significant completed acquisition The mid-tier 50 holds $7.3 billion of cash on Australian mid-tier companies, in their capacity of a mid-tier 50 company since June 2009 hand, indicating that there is an opportunity as bidders, and not targets, is $6.8 billion. was Yanzhou’s $3.4 billion acquisition of Felix for many companies to capitalise on This alone represents approximately 75% of all Resources in August 2009. investment opportunities as they arise both M&A activity (by value) across the mid-tier 50 in in transactions and through funding organic the previous year. growth. Mid-tier 50 must learn the lessons of the high impairment charges incurred last year in consideration of future opportunities. There is still strong demand from overseas investors, notably China, however there have been two pivotal changes to the M&A environment since early 2009. Firstly, the strengthening A$ has made Australian assets M&A activity continued unabated post more expensive. Secondly, there is now competition from within Australia. In late 2008 the announcement on 2 May 2010 of and early 2009, there was very limited M&A price tension from within the mid-tier 50 (as the Resource Super Profits Tax (RSPT), reported in our November 2009 publication). now rebranded as the Mineral Resource By contrast, in the current climate, with significant cash reserves and lower debt Rent Tax (MRRT). Acquiring entities levels that now characterise many mid-tier 50 companies, M&A activity is back on compensated for the uncertainty the agenda. surrounding changes to the tax regime by reflecting the additional risk in the bid price; thereby reducing it.

The most significant completed acquisition of a mid-tier 50 company since June 2009 was Yanzhou’s $3.4 billion acquisition of Felix Resources in August 2009.

10 PwC Completed M&A activity in the mid-tier 50, greater than A$15 million.

Target Acquirer Acquirer Ownership Approximate Announcement Status country interest deal value date of origin (A$m)

Yanzhou Coal Mining Felix Resources Limited China 100.0% 3,393 13/08/2009 Completed Co Ltd

Aquila Resources Limited Vale Belvedere Pty Ltd Brazil 24.5% 1,991 4/06/2010 Completed

Centennial Coal Banpu Minerals Thailand 100.0% 1,958 5/07/2010 Completed Company Limited (Singapore) Pte Ltd

Middlemount JV Gloucester Coal Limited Australia unknown interest 472 4/08/2010 Completed

Baoshan Iron & Aquila Resources Limited China 14.3% 289 28/08/2009 Completed Steel Company Ltd

Companhia Siderurgica Riversdale Mining Limited Brazil 16.3% 190 24/11/2009 Completed Nacional (CSN)

Fushan International Mt Gibson Iron Limited Hong Kong 14.3% 178 22/09/2009 Completed Energy Group Ltd

Aurox Resources Limited Atlas Iron Limited Australia Merger 143 10/03/2010 Completed

Mineral Resources Polaris Metals NL Australia 100.0% 136 20/08/2009 Completed Limited

Dioro Exploration NL Avoca Resources Australia 100.0% 115 29/12/2009 Completed

Sandfire Resources NL Oz Minerals Limited Australia 19.0% 100 2/07/2010 Completed

Warwick Resources Atlas Iron Limited Australia Merger 56 8/09/2009 Completed Limited

Medusa Mining Metalloinvest Holding Russia 10.0% 54 11/11/2009 Completed Limited

Indophil San Miguel Corp Philippines 10.0% 41 8/10/2010 Completed Resources NL

Barrick (PD) Ivanhoe Australia Osborne Copper Australia 17 25/05/2010 Completed Australia Ltd Limited Gold Asset

Total 9,133

Table 8: Completed M&A activity in the mid-tier 50 between June 2009 and October 2010 greater than A$15 million Source: mergermarkets

Aussie Mine November 2010 11 Pending or unsuccessful M&A activity in the mid-tier 50, greater than A$15 million.

Target Acquirer Acquirer Ownership Approximate Announcement Status country interest deal value date of origin (A$m)

Macarthur Coal New Hope Australia 100.0% 4,000 14/04/2010 Unsuccessful Limited Corporation

Macarthur Coal Peabody Energy US 100.0% 3,800 10/05/2010 Unsuccessful Limited

Andean Resources Goldcorp Inc Canada 100.0% 3,712 3/09/2010 Pending Limited

Andean Resources Eldorado Gold Canada 100.0% 3,564 2/09/2010 Withdrawn Limited Corporation

Citadel Resources Equinox Minerals Canada 100% 1,250 25/10/2010 Pending Group Limited Limited

Anatolia Miners Avoca Resources US Merger of Equals 1,058 8/09/2010 Pending Development Limited

CuDeco Limited Xiangguang Copper Co. China 15.0% 1,055 10/03/2010 Pending

Riversdale Mining Wuhan Iron and Steel 40% offtake China 1,004 23/06/2010 Pending Limited Corporation agreement

Gloucester Coal Limited Macarthur Coal Limited Australia n/a 596 22/12/2009 Withdrawn

Indophil Resources NL Zijin Mining Group Co Ltd Hong Kong 80.0% 399 1/12/2009 Withdrawn

Dominion Mining Kingsgate Consolidated Australia 100.0% 376 20/10/2010 Pending Limited Limited

MCG Coal Holdings Macarthur Coal Limited Australia 90% JV interest 330 24/08/2010 Pending Pty Ltd

Northern Energy New Hope Corporation Australia 100.0% 189 8/10/2010 Pending Corp Limited

Gloucester Coal Nobel Group Limited Hong Kong 12.3% 127 6/04/2010 Pending Limited

Citadel Resources Group Bariq Mining Limited Australia 30.0% 122 9/09/2010 Pending Limited

Sandfire Resources NL LS Nikko Copper Inc Korea 12.5% 95 23/07/2010 Unsuccessful

60% interest in CGA Mining Ratel Gold Limited Australia King-king copper 70 20/10/2010 Pending gold project

Northern Iron OM Holdings Limited Singapore 10.0% 41 21/01/2010 Pending Limited

Oromin Explorations Mineral Deposits Limited Australia 15.0% 22 26/08/2010 Pending Limited

NGM Resources Paladin Energy Limited Australia 100.0% 21 20/07/2010 Pending Limited

Total 21,830

Table 9: Pending or unsuccessful M&A activity in the mid-tier 50 between June 2009 and October 2010 greater than A$15 million. Source: mergermarkets

12 PwC

Completed: Yanzhou Coal Mining Co Ltd acquired Felix Resources Limited for A$3.4bn

Completed: Vale Belvedere Pty Ltd acquired 24% of Aquila Completed: Banpu Minerals Resources Limited for (Singapore) Pte Ltd acquired Centennial Coal Company Limited for A$2bn A$2bn Pending: Goldcorp Inc acquiring Andean Resources Limited for A$3.7bn Pending: Pending: Anatolia Miners Development Equinox Minerals Limited Limited merging with acquiring Citadel Resources Avoca Resources for Group Limited for A$1.1bn A$1.3bn Pending: Xiangguang Copper Co. Pending: acquiring CuDeco Limited for Wuhan Iron and Steel Corporation acquiring Riversdale Mining Limited for A$1.1bn A$1bn

Aussie Mine November 2010 13 3.4 Exits from the mid-tier are primarily driven by volatility in market capitalisations of Movements in the the smaller end of the list. However, three mid-tier 50 significant exits for other reasons are noteworthy. The takeover of Felix Resources Mixed bag of new entrants – by Yanzhou Coal and the takeover of Sino growth across the board Gold by Eldorado Gold Corp continues the theme of foreign interest which was noted The new entrants into this year’s analysis in last year’s publication. The third exit is by represent a diverse range of commodity Centamin Egypt who chose to de-list from groups including gold, copper, iron ore and the ASX and maintain LSE and TSX listing. coal. There has been strong growth across the sector and gold plays stand-out. Companies Despite market capitalisation for the mid-tier such as Perseus Mining Ltd, OceanaGold 50 increasing in aggregate by over 35% Corporation, Sandfire Resources and Resolute from June 2009 over the course of the 2010 Mining Ltd have all entered our list – as strong financial year none of the companies included growth in market cap has been delivered in last year’s publication have grown beyond following further exploration of deposits and our $5 billion ceiling for inclusion in the mid- a surge in underlying gold prices. All up there tier 50. There continues to be a pronounced were 11 new entrants in 2010. separation between the big end of town and the largest company by market capitalisation in our analysis, which is Alumina Ltd at $3.7 billion. BHP Billiton, Rio Tinto, Newcrest, Coal & Allied and Fortescue Metals continue to be excluded from the list on the basis that their market capitalisation exceeded the $5 billion threshold.

The new entrants into this year’s analysis represent a diverse range of commodity groups including gold, copper, iron ore and coal.

14 PwC The way I see it 4 Nicole Hollows – Chief Executive Officer and Managing Director of Macarthur Coal Limited

Aussie Mine (AM): AM: Macarthur’s 2010 earnings were Do you see the sale of Queensland better than expected, primarily due Rail impacting the current rail to additional tonnage from earlier landscape in the medium term? ship loading than planned, what is NH: Macarthur’s strategy for coping with There are two aspects that need to be infrastructure constraints going discussed in relation to this. Firstly, the forward and how do you see the potentially diverging interests between QR broader infrastructure challenges and industry in the medium term. In short, we expect that the sale of the integrated coal facing Australian miners business, train and tracks, will lead the new being resolved? owners to sweat the asset harder and for longer in order to maximise their investment Nicole Hollows (NH): The industry may MCC strategy is based on operational return, rather than investing to meet the excellence and sustainable growth with industry’s expansion requirements. As a result have done better to 9.2mtpa by 2014. Sustainable growth is we expect that in the short to medium term we own these assets if achievable at MCC as we have a strong will see the fallout of that approach – further pipeline for organic growth and expect to constraints on the coal chain from delayed the primary goal announce our fourth mine project by the end investment and potentially higher costs given of the year. the influence QR will have over above and of QR is to maximise below rail costs. Access to infrastructure is an ongoing return rather than issue in our industry which is why it is part The industry may have done better to own of our strategy at MCC to look at ways to these assets if the primary goal of QR is to invest in the diversify three key areas: port, product and to maximise return rather than to invest in geographical location. The time it takes to the industry’s expansion requirements. The industry’s expansion secure port and rail access is often longer than undesired impact of mining companies owning it takes to develop a mine, so we have taken infrastructure, however, is that it will prove requirements. a long term approach to securing access to to be a significant barrier to entry. This is particularly the case for the smaller companies support our current and future mine sites. as not many other investors would be willing to In order to resolve the infrastructure challenges take these significant risks so early on. faced by Australian miners, it will be necessary The second aspect is that, despite regulation, to secure investment in expansion of the the integration of trains and track is also of ports and rail networks to ensure they keep concern in how the daily operation is executed, pace with demand for Australia’s exports – given that there are now other rail operators. particularly coal. The impact of infrastructure From November this year, MCC will have constraints on the Australian coal industry is 100% of its above rail business with Pacific felt by the mining companies, their customers National, resulting in a disconnect between and shareholders. The industry is aware of the above rail operators and below rail operators. challenges ahead and hopes that the state On a positive side, the fact that QR will be and federal government can work towards a public will give rise to public scrutiny on their cohesive national infrastructure network. investments, just like us. We hope that such pressure will encourage QR to pursue growth investments at reasonable returns. The potential solution towards effective integration is to move towards a requirement to buy port and rail capacity together, rather than allow it to be done in isolation.

Aussie Mine November 2010 15 AM: stream for government and fund future AM: Talk of carbon tax has recently growth and jobs. The discussions around International demand for coal has returned to the political arena, the detail of the tax are showing some been particularly strong, are there inconsistencies around the point at which Keith De Lacy (Macarthur Chairman) the value of the product is determined any particular trends emerging or has recently expressed some concern compared to the point at which costs are shifts in demand that you see? eligible as deductions over reducing the competitiveness of NH: efficiently mined, high calorific 2. The additional administration burden. We continue to see growth in demand from the Australian coal compared with less This will particularly be felt by the smaller developing countries particularly China, Brazil efficient foreign sources, what is your companies who do not initially fall under the and India. Steel production is now at pre-GFC levels, with over half the increase in demand view of the best way forward MRRT but need to keep records in the event that their profits reach a level where they stemming from China to fuel their urbanisation on emissions? are required to pay. and infrastructure programs. Incidentally China has now become a net importer rather than NH: AM: exporter of metcoal, importing 40 mtpa First of all it should be noted that the industry, (whilst the whole seaborne metcoal trade is as a whole, is supportive of reducing emissions. There has been a large amount approximately 250 mtpa). The key issue has become how this should be of M&A activity impacting Macarthur Globally, steel industry customers are done. We believe that an approach towards an and your competitors this past year. effective emissions reduction scheme should be increasingly able to take PCI coal as a cost Do you expect this to continue and do effective means of reducing the amount of transitional, practical and internationally coking coal required for the blast furnaces and competitive. Companies should be incentivised, you see any change to the types of this will result in ongoing growth in the PCI coal by way of an offset, to invest in technologies buyers involved in these transactions? market. We expect ageing coke ovens and that reduce emissions because currently the blast furnace expansions to create stronger only method for reducing emissions is to reduce differential growth for LV PCI coal. output. Reducing output is not only unpractical and devastating to the Australian economy, but there is no evidence to indicate this method NH: If an emissions reduction scheme were would lessen emissions on a global scale. This is imposed and output in Australia were to be cut because Australia, in general, exports high quality coal which allows lower quantities to be used in a back, the developing countries would simply blast furnace to manufacture steel. If an emissions reduction scheme were imposed and output in source additional coal to fill the supply gap Australia were to be cut back, the developing countries would simply source additional coal to from other countries with a lower quality coal, fill the supply gap from other countries with a lower quality coal, thereby increasing the quantity thereby increasing the quantity required required to make the same amount of steel. to make the same amount of steel. This would ultimately increase the intensity of emissions on a global scale. NH: AM: AM: Our focus is on organic growth, but we will There has recently been a push by consider acquisitions where they align with the What do you see as the main business strategy and our focus on sustainable the Australian Institute of Company challenges and unresolved areas growth. MCC would now consider offshore Directors to boost female board of MRRT in its current form? investment if aligned to strategy. This decision representation. Do you think more has primarily been driven by the increased should be done in this area and how NH: regulation and approval process in Australia. do you think more balance may I think we can all agree that the MRRT is an There is nothing wrong with the regulation, the improvement from the previously disastrous issue becomes how it is rolled out from a cost be achieved? RSPT. Having said that, it is critical not to and time perspective. Currently in Australia, NH: underestimate the complexity of a resources the process to obtain a mining licence can I am an advocate of creating a pipeline for rent tax. The petroleum industry tax still has take between four to five years which is quite talent rather than relying on quotas at the end issues that require attention and they have had significant. There has also been a shift of point. At MCC we have 33% female executives twenty years to hammer out the detail. The costs in Australia, previously Australia was and over 40% female managers and that issues that we face with the MRRT can be split considered a low cost area, currently with the makes it easier to achieve diversity into two components: increasing infrastructure and labour costs, this at the senior levels of the organisation. 1. The lack of clarity. Importantly there is is no longer the case. Lifestyle choices have previously played a no clarity over the definition of a project, In terms of the buyers involved in the M&A significant part in the low levels of female including the ability to transfer profits transactions, we expect to see more users representations at the board level. In the age and costs, the taxation point or valuation and sovereign type investors. Examples of of high cost and inflexible childcare costs it methodologies. Furthermore there is no real these at MCC are POSCO and the CITIC was generally accepted for a parent, usually clarity as to whether this is a resource rent group respectively. The reasons behind the the female, to stay at home and care for their tax or a profits tax. We currently pay around increased interest are to secure supply and to children. This mindset, however, is slowly 42-43% effective tax and it is important gain better access to the Australian market. changing and the choice to stay at home is for the government to realise that we need Mining companies will also need size and now an economic decision; with the parent with to remain internationally competitive if the scale to marry up with the large infrastructure the best earning capacity continuing to work. industry is to continue to provide a revenue commitments required to get product from the mine to the market. 16 PwC Lastly, in order to address this lack of female AM: The key opportunity that faces this industry board representation, it is important for women What do you see as the main is the strong long term demand for Australian to learn to be less cautious in taking on new opportunities and challenges products. Furthermore, the investment in the opportunities. There is some evidence that infrastructure at Wiggins Island Port and the suggest women wait until they feel 100% facing the wider Australian rail development will ensure continued growth capable of stepping up rather than accepting mid-tier mining industry? in this industry. that some of the skills needed will be learnt NH: on the job. The main challenge facing this industry is the AM: cost and access to skilled labour. If all projects In your role as the President of are given the green light (the CSG projects in Gladstone, LNG projects in North Western the QRC what are the big issues Shelf and the Rio Tinto project in Pilbara) there on your radar - aside from would be a further and significant tightening infrastructure and MRRT? in skilled labour availability. The key here is to ensure appropriate education and training for NH: young Australians. This can be done through There are several national priorities currently various channels such as increased trade on our radar. Firstly, the national health and based education in schools in conjunction with The key opportunity safety harmonisation agenda is a key issue. practical industry training. Not only would this Locally, the challenge is that the Queensland assist to alleviate the skills shortage, but it also that faces this Government is determined to retain local means that the young Australians are better mine safety laws. There are clearly also local equipped for the workforce as a result of their industry is the concerns relating to the inadequacies of the education gained at school and their practical strong long term current industry input to governance of the experience gained from the industry. health and safety system. Secondly, energy and climate change policy has previously Other challenges in the industry relate to demand for been an issue on our radar. While possibly access to capital, securing infrastructure and on the backburner at present, it is an issue being able to make the financial commitments Australian products. that is expected to loom large on the national to secure long term access. Managing the agenda after the next federal election. Lastly, continuous increase in costs (as a result of Furthermore, the skills, education and training is a core issue. carbon taxes, MRRT, regulatory changes, investment in the The national context is the impending report labour costs, the list continues!). of the National Resource Sector infrastructure at Employment Taskforce. Wiggins Island Port and the rail development will We currently pay around ensure continued growth in 42-43% this industry. effective tax and it is important for the government to realise that we need to remain internationally competitive if the industry is to At MCC we have 33% continue to provide a revenue stream for government and female executives and over 40% fund future growth and jobs. female managers and that makes it easier to achieve diversity at the senior levels of the organisation.

Aussie Mine November 2010 17 Aggregated industry 5 income statement

2010 2009 Change

A$m A$m % Revenue from ordinary activities - Operating revenue 11,317 8,561 32% - Non-operating revenue 197 391 (50%) Total Revenue 11,513 8,952 29%

Less expenses from ordinary activities (8,639) (6,108) 41%

Exploration expenses (378) (456) (17%) Operating Expenses (9,018) (6,564) 37% Gross Profit 2,496 2,388 5%

Other income/ (expenses) (141) 124 (214%) Adjusted EBITDA 2,355 2,512 (6%)

Gain / (loss) on sale of investments (354) 487 (173%) Impairment (111) (1,738) (94%) EBITDA 1,890 1,262 50%

Depreciation and amortisation (1,134) (796) 43% EBIT 756 466 62% Net interest expense (359) (382) (6%) Profit from ordinary activities before tax 397 84 373% Income tax expense (423) (706) (40%) Net Profit / (Loss) (26) (622) 96%

Revenue Top five mid-tier companies by revenue:

2010 2009 Change Company Name A$m A$m % 1 Centennial Coal 808 895 (10%) 2 Energy Resources Australia 773 685 13% 3 New Hope 745 701 6% 4 Macarthur Coal 681 762 (11%) 5 OZ Minerals / Oxiana 609 01 100%

1) Nil revenue recognised in 2009 as a result of the sale of certain assets to Minmetals. The assets have been classified as discontinued operations and therefore not included in the revenue from continuing operations result. 2010 revenue is from Prominent Hill.

18 PwC Revenue for the top five Revenue for the top five companies accounted The mid-tier 50 has already started to see for 32% of the total revenue for the mid-tier considerable improvement in operating companies accounted for 32% 50, which is consistent with the previous year. revenue from the GFC in the previous year of the total revenue for the Three of these companies were in the top five increasing by an impressive 29%. The mid-tier 50, which is consistent by revenue in our November 2009 publication improvement has primarily been driven with the previous year. Three with Energy Resources Australia and New by copper, gold and an unexpected star Hope joining the list this year, replacing Felix performer in platinum, which have shown of these companies were in Resources and Iluka Resources from 2009. strength on the back of higher commodity prices and stronger production. the top five by revenue in our Not surprisingly coal companies are the key November 2009 publication contributors to revenue in the mid-tier 50. with Energy Resources Australia The key driver in coal revenue has been the demand from developing countries such as and New Hope joining the China and India for both thermal and coking list this year, replacing Felix coal. Export revenue growth has however been Resources and Iluka Resources slightly offset by the strengthening AUD:USD from 2009. exchange rate. From a price perspective perhaps the most important development of the year for the mid-tier 50 was the departure from annual benchmarked coal and iron ore prices announced in March 2010. However due to the timing of this change there is little visibility of the impact in our aggregated results.

Movement in revenue by commodity

June FY09 8,561

Coal (221)

Copper 1,514

Platinum 418

Uranium 357

Iron Ore 45

Gold 670

Nickel 313

Other (340)

June FY10 11,317

Table 10: Movement in revenue FY09 – FY10 by commodity (A$m) Source: Capital IQ

1) December is the financial year end orf the top three copper miners (by market capitalisation) in the mid-tier 50; therefore our analysis has been based on 12 months ended December 2009 and not the 12 months ended June 2010 as per our analysis on the other mid-tier 50 sectors. 2) Production information has been obtained from the ASX quarterly reports.

Aussie Mine November 2010 19 Copper – the bread winner Copper Production Profile for Equinox, OZ Minerals and PanAust The notable increase in copper revenue has been driven by a number of mines ramping up 100,000 Strong December to full production over the past two years. As result reported shown by the copper revenue profile, of the 90,000 three variables, increased production is the key driver to the result. 80,000 The year ended December 2009 was the first year of commercial production for two 70,000 of the three largest copper companies by Equinox's Lumwana market capitalisation within the mid-tier 50; 60,000 mine and OZ Equinox and OZ Minerals. Equinox’s Lumwana Prominent Hill mine operations (located in Zambia) and OZ Mineral’s commence operations Prominent Hill operations commenced 50,000 Tonnes production in the quarter ended March 2009 contributing approximately 110,000 and 40,000 96,000 tonnes, respectively, in the first year. The calendar year ended December 2009 30,000 also saw the first full year of production at PanAust’s Phu Kham operations (located 20,000 in Laos), with production increasing 117% PanAust's from the previous year. Phu Kham mine 10,000 The stabilisation of the copper prices in 2009 allowed the copper miners to catch their breath 0 after the copper prices plummeted in the last quarter of 2008. The strengthening of the Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 AUD:USD exchange rate has had a negligible impact on these operations, as two of the three Quarter End aforementioned miners have operations located Source: Capital IQ outside of Australia where the costs and revenues are primarily denominated in USD. 1) The sale of various assets in OZ Minerals to China Minmetals Non-ferrous Metals Co. Ltd. in 2009 has been classified as discontinued operations. Consistent with the OZ Minerals annual report for the year ended 31 December 2009 production up to 31 May 2009, from the discontinued operations, have been included in the production profile table above.

20 PwC Gold During the year, gold producers continued to be Gold Production – Local vs Offshore one of the stand out performers in the mid-tier 50; weathering the effects of the GFC and the 250,000 continually strengthening AUD:USD exchange rate. The increase in production, particularly for offshore gold producers, has been the driver in gold revenues. The improvement in the US$ gold price throughout the year indicates that it is once 200,000 again returning to favour as a relatively secure store of wealth. The increase in output resulted from the steady ramp-up of production in Australia and the 150,000 commencement of a number of operations offshore. Mid-tier 50 gold mining companies oz with operations in Australia have, in aggregate, increased output by 21% with notable increases 100,000 from Avoca Resources (73%). Avoca Resources increased production through a combination of organic growth (primarily through the Trident resource at Higginsville during the quarter ended June 2009) and through their acquisition of Dioro 50,000 Exploration NL in December 2009. The increase in output from Australian based operations, are however, marginally offset by the strengthening AUD:USD exchange rate. 0 Offshore gold operations continued to show strong growth throughout the year ended 2010; Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 primarily driven by start up operations at two Quarter End mine sites. Mine sites for CGA and Mineral Gold Produced offshore Gold Produced locally Deposits commenced offshore operations in Source: Capital IQ the Philippines and West Africa respectively 1) Production information has been obtained from the ASX quarterly reports. The movement in the annual reports taken from the ASX in the quarter ended June 2009. During their is marginally different to the movement as per the quarterly reports. first full year of production CGA produced approximately 150,000oz of gold whilst Mineral Deposits produced approximately 172,000oz of gold. Offshore operations have increased, in aggregate, by 62% from FY09 with OceanaGold Corporation contributing nearly 35% of offshore Gold Revenue Profile (A$m) production in FY10. The continuous upward trend in gold prices during the year has also contributed to the Jun-09 1,381 success of companies within this sector of the mid-tier 50. This increase in the USD price for Production 531 gold, as previously noted, has been offset by the strengthening AUD:USD exchange rate over the same period for companies that operate Price 256 within Australia.

FX (149)

Jun-10 2,020

Source: Capital IQ

1) Production information has been obtained from the ASX quarterly reports. The movement in the annual reports taken from the ASX is marginally different to the movement as per the quarterly reports.

Aussie Mine November 2010 21 The unexpected star performer Foreign exchange – saviour to villain In US$ terms we have witnessed increases in commodity prices during the quarter ended Platinum has been spurred on by the The weak A$ reduced the impact of declining September 2010 which has been sparked by consistently improving price, compounded by metals prices during the global economic a revival in prospects for the global economy the increase in production by the two largest downturn in the previous year. Post-GFC, and continued weakness in the US. This partly platinum producers in the mid-tier 50. Aquarius however, the continually strengthening reflects low interest rates, which have fuelled Platinum (operations located in South Africa AUD:USD exchange rate is starting to erode the appetite for risk, and speculation regarding and Zimbabwe) and Zimplats (operations the potential heights in the top line results of near-term supply. China has been the main located in Zimbabwe) both showed strong Australian based mining companies across driver of recent demand growth with a revenue growth, increasing 29% and 185% the board. seemingly insatiable appetite for commodities. respectively. The surge in revenue at Zimplats The relatively strong performance of The key question remains – if China’s demand saw it catapult to third position in the top five companies in the copper, gold and platinum growth slows, will growth in the rest of the mid-tier 50 performers based on net profit. sectors may be attributed to the fact that nine world be sufficient to prevent the market from Platinum production increased at Zimplats by of the twenty one companies have operations moving back into surplus? India may prove to 84% whilst the price of platinum increased located outside Australia (the largest proportion be the answer to this question, but perhaps 86% from FY09, contributing to its success across the sectors); therefore the revenues more likely this question will never actually get during the year. The revenues recognised from have not been adversely affected by the asked as China maintains its long-term goals the increased output and the improving US$ strengthening A$. and continues to grow. price was not affected by the strengthening A$ as both companies have operations One can only wonder at the returns that may outside Australia. have been generated by Australian based operators had they entered into hedge agreements when the A$ was at 67 cents to the US$ as it was during the quarter ended December 2008…

AUD vs USD price fluctuations

1.10 Average rate for quarter ended Average rate FY09 is 0.7473 September 2010 is 0.9046 1.00

0.90

0.80 AUD Average rate for FY10 is 0.8824 0.70

0.60

0.50

Jul-08 Jul-09 Jul-10 Aug-08Sep-08Oct-08Nov-08Dec-08Jan-09Feb-09Mar-09Apr-09May-09Jun-09 Aug-09Sep-09Oct-09Nov-09Dec-09Jan-10Feb-10Mar-10Apr-10May-10Jun-10 Aug-10Sep-10

Table 11: AUD vs USD exchange rate – July 2008 to October 2010 Source: Bloomberg

Commodity AUD average AUD average USD average USD average spot price spot price spot price spot price movement movement movement movement (July 2009 – (July 2010 – (July 2009 – (July 2010 – June 2010) Sept 2010) June 2010) Sept 2010)

Copper 17% 6% 35% 8%

Gold 4% 10% 25% 12%

Nickel 24% 7% 45% 9%

Table 12: Commodity price movements Source: Capital IQ

22 PwC Margin Squeeze Operating costs Consistent with the revenue analysis, the The increase in operating costs from the increase in costs from ordinary activities have previous year have been separated out into primarily been driven by the copper and gold the respective sectors below in order to sectors within the mid-tier 50. The rising highlight key movements. input and labour costs have placed additional pressure on the margins. It would, however, be unfair to draw a broad stroke across the entire mid-tier 50 and Extract from the income statement conclude that margins are decreasing in each FY10 FY09 sector. There are several sectors within the mid-tier 50 that, despite rising production, Operating Revenue 11,317 8,561 have managed to maintain and, in some instances, improve the margin from the Operating Costs (8,639) (6,108) previous year. Platinum and gold were the best Gross Profit 2,677 2,453 performers with 46% and 17% improvements in margin respectively from FY09, whilst Margin 24% 29% copper producers have seen a considerable squeeze on their margins. Table 13: Commodity price movements Source: Capital IQ Of the $1.5 billion increase in costs from FY09, $700 million relates to the commencement or ramp-up of production, whilst the remaining $843 million relates to financial instrument losses (approximately $730m) and foreign exchange losses (approximately $110 million). This sector has been significantly adversely affected by the revaluations in financial Movement in operating costs instruments, more so than any other mid-tier 50 sector (the coal sector had the second largest financial instrument impact with a June FY09 6,108 gain of $26 million). The financial instrument Bauxite 232 and foreign exchange impacts have been analysed in conjunction with copper operating Coal 154 costs below. If the impact of the derivative Copper 1,545 instruments are “normalised”, the margins in Platinum 10 the copper sector would improve considerably from 13% to 43%. Uranium 141 The gross margin across the coal sector Iron ore 124 reduced to 22% in FY10, down from 33% in Gold 258 FY09, attributable to both revenue and cost squeezes. Revenue was impacted as a result Nickel 123 of the lower export sales prices. Operating Other (55) costs increased as a result of increased rail June FY10 8,639 and haulage costs for transport of product coal to the ports. The best coal performers, based on gross margins, were New Hope, Macarthur Coal and Whitehaven Coal with margins of Table 14: Movement in operating costs FY09 – FY10 (A$m) Source: Capital IQ 33%, 24% and 24% respectively. The ability of these companies to maintain margins is as a result of a higher portion of domestic sales.

Aussie Mine November 2010 23 Copper – to hedge or not to hedge? The shining example The skilled labour challenge Of the total increase in operating costs of cost management Skilled labour remains in high demand in the from the previous year, $700 million relates The gold sector has the second highest mining industry. The cost of labour represents primarily to the commencement of production increase in operating costs; despite this, it one of the largest expenses in the income at two mines and a further one ramping up has been one of the best performing sectors statement, and yet is one of the most difficult production. This increase is expected given based on gross margin. This has primarily to control. During 2008/9, in a period of the higher costs of mining during the ramp- been due to the gold miners’ ability to control tightening margins for many miners, it is up phase. Equinox’s Lumwana operation cash costs over the last two year period interesting to note that labour costs have not commenced production in the quarter ended with average cash costs around US$530/ declined – the basic cost of a worker remains. March 2009 and ramped up to 20 mtpa in oz in FY10, down from US$550/oz in FY09. With optimism returning to the market and the second half of the 2010 financial year. Therefore the incremental costs of higher significant foreseeable demand for skilled OZ Minerals’ operation at Prominent Hill also production levels were minimised, affording workers costs associated with attracting commenced production in the quarter ended greater margins. and retaining skilled staff will continue to be March 2009 and achieved full production levels a challenge for the mid-tier 50 across the at the end of the 2009 calendar year. Lastly, Table (to the right) above highlights that board. The skill shortage will be compounded PanAust’s Phu Kham operations ramped up despite a 44% increase in production in the by mega-projects, such as several coal seam operations during FY10, with operating costs June 2009 quarter, cash costs decreased gas projects in Queensland, the planned LNG increasing from the prior year as the mine from $558/oz to $512/oz over the same investment in Western Australia, Rio Tinto’s continued to increase throughput. period. The increase in production during the quarter was due to two gold mines $3.2 billion combined with BHP Billion’s $5 The remaining $843 million increase in costs commencing operations and five of the billion committed to expansion of their Iron from the previous year relate to financial remaining six producing mines experiencing Ore interest in the Pilbara as well as another instrument and net foreign exchange losses. double-digit growth from the previous quarter. $5b earmarked in the near term for Olympic The financial instrument losses (approximately Avoca Resources and Kingsgate Consolidated Dam expansion plans. The critical mass of $730 million) were realised as a result of lead the way with double-digit growth of these projects is likely to add to inflationary movements in the mark-to-market valuations approximately 80% and 30% respectively. pressure on project resources and has of copper put options and forwards primarily The impressive result from Avoca was due to potential to result in cost blow outs if these in Equinox Minerals. Equinox Minerals realised commencing treatment of high grade stoping costs are not controlled adequately. hedge losses of approximately $415 million in ore at Higginsville (in the Trident resource). 2009 compared to the previous year where it The Kingsgate results were spurred as the recognised hedge gains of approximately $320 gold grade of the mill ore feed at their Chatree million. The loss in 2009 was due to revaluing mine site (located in Thailand) improved. the hedge book to the current market prices Operating costs remained relatively stable over and the strengthening copper price from the period as the miners were able to take US$1.38/lb at December 2008 to US$3.33/lb advantage of the improved grade ore and the at December 2009. The net foreign exchange economies of scale as they ramped up to full losses (approximate $110 million) related to capacity. An impressive performance by OZ Minerals. The majority of the losses were any measure. recorded on US$ denominated assets (cash and debtors) net of the US$ denominated liability for convertible bonds. Gold Production and Cash Costs

1,000 450,000

900 400,000

800 350,00

700 300,000

600 250,00

500 Production (oz)

200,000 400 USD/oz 150,000 300

100,000 200

100 50,000

Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10

Gold Produced (RHS) Cash costs (LHS) Cash Costs (normalised)

1) It is important to note that cash costs have been “normalised” in the first quarter to exclude cash costs relating to two mines. Both were excluded due to abnormally high cash costs during that period as a result of one-off events associated with start-up of operations.

24 PwC Gain / (loss) on sale of investments Adjusted EBITDA and NPAT During FY10 approximately 30% of companies 2010 2009 in the mid-tier 50 had some form of capital A$m A$m restructure by way of asset sale which resulted in a number of small losses. The prior year gain Adjusted EBITDA 2,355 2,512 on sale of investments is primarily driven by Gain/(loss) on sale of investments (354) 487 two significant transactions representing 95% of the total value of the asset sales during the Impairment (111) (1,738) year - New Hope Coal’s $2.4 billion pre-GFC sale of New Saraji to BHP Mitsubishi Alliance EBITDA 1,890 1,262 (BMA) and OZ Minerals’ $1.7 billion sale of Depreciation and amortisation (1,134) (796) selected assets to Minmetals. EBIT 756 466 Impairments Net interest expense (359) (382) With the improvement in commodity prices, there has been a marked reduction in Profit from ordinary activities before tax 397 84 impairment write-downs from the previous year. Many of the mid-tier 50 companies, Income tax expense (423) (706) unsurprisingly, booked impairments during Net Profit / (Loss) (26) (623) 2009 as a result of declining commodity prices which characterised the global economic downturn. Notably the impairment charges in FY10 have reduced by approximately 94% from the prior year, with OZ Minerals and Paladin Energy accounting for the majority Top five mid-tier companies by profit of the prior year write-down, which was not repeated. Company Name 2010 2009 Change A$m A$m % Depreciation and Amortisation 1 Energy Resources Australia 273 223 23% The effects of the increase in operations 2 New Hope 184 1,950 (91%) can also be noted in the depreciation and amortisation charges which have also 3 Zimplats 138 (33) 521% increased as mines continue to depreciate their assets on a units-of-production basis. 4 Mt Gibson Iron 132 42 212% Interest 5 Macarthur Coal 125 169 (26%) Interest expense has eased slightly from the previous year as a result of the debt Similar to the top five by revenue, three of the companies in the November 2009 publication repayments and improved gearing ratios, have retained their place in 2010. Zimplats and Mt Gibson Iron have joined the list this year with although the full impact of these debt Felix Resources and Whitehaven Coal being replaced. Divestments and take-overs have played repayments and stronger balance sheets is a part in the movement as Felix was taken over during the year by Yanzhou Coal Mining Company likely to be seen in the coming year. and Whitehaven Coal had a higher profit figure in the prior year following divestment of its 15% Income tax expense interest in Narrabri. Income tax expense and cash tax outflows have been skewed in 2009 by New Hope’s $2.4 billion, pre-GFC sale of New Saraj to BHP Mitsubishi Alliance (BMA). The capital gain was recorded in the 2009 accounts, but the tax payment did not fall due until the 2010 year, as reflected in the 2010 cash flow statement.

Aussie Mine November 2010 25 5.1 • Subsequent measurement of the asset. • Contracts: related to finance liabilities The cost of the stripping activity should and other long-term arrangements that are Focus – Accounting changes: be carried at cost less depreciation or based on measurements relating to EBITDA Rocky road ahead for amortisation and impairment charges. It would need to be considered. should be depreciated or amortised in a • Credit levels: these could be impacted by mining sector rational and systematic manner over the changing debt levels. The mining sector, despite its status as a useful life of the ore body that becomes globally important industry, has received little accessible as a result of the stripping • Remuneration: short-term bonuses and attention over the years from the accounting activity. The units-of-production method other remuneration arrangements that are standard setters. Recent proposals from the should be applied unless another method impacted by the EBITDA, P&L or other International Accounting Standards Board is more appropriate. balance sheet KPIs will need to be revisited. (IASB) and its interpretations committee (IFRIC) are making up for lost time and entities Application date Application date operating in the sector can look forward (or The proposals are currently open for comment We anticipate the final standard to have an not) to being in the accounting limelight. until 30 November 2010. We expect the issue effective date no earlier than 2012. In this Focus we consider some of the financial date of the interpretation to be in early 2011 reporting developments that entities operating with application expected in 2012. New accounting for extractive activities in this sector should have on their radar. Leases proposals set to rock the What’s the issue? Shake up in accounting mining industry Last year the IASB released a discussion paper for stripping costs (DP) on accounting for extractive activities, What’s the issue? which addresses some of the key challenges What’s the issue? In September 2010 the IASB and US FASB affecting entities with upstream activities in the The IFRIC has issued a draft interpretation released an exposure draft (ED) on accounting mining and oil and gas industries. for leases as part of their commitment to (DI) that sets out guidance on the accounting What are the key proposals? for waste removal (stripping) costs during the converging IFRS and US GAAP. The proposals production phase of a mine. There is currently would overhaul the current requirements in 1. A single financial reporting framework diversity in accounting practice over the way AASB 117 Leases and dramatically change the should be available for all mining and oil and entities identify and allocate the benefits and way entities account for leases. gas activities. Currently there is divergence the costs of stripping activity across different If adopted, the ED will affect a number in practice in the accounting for exploration, reporting periods. of entities in the energy and resources development and production of minerals/oil & gas because the introduction to AASB What are the key proposals? sector, including those that have significant operating leases (such as mining or extraction 6 allowed entities adopting IFRS to continue • Creating an asset. The stripping activity equipment) and those that have finance lease to apply existing policies creates a benefit of improved access to the arrangements that are within the scope of the within their territory. ore to be mined by the entity. Under the DI, existing leasing standard (such as fleets 2. All reporters would use recognised the costs incurred on stripping will qualify as of trucks). definitions for ‘resources’ and ‘reserves’. an asset when: What are the key proposals? This would replace the various national a) the entity controls the benefit created by codes and definitions currently in place. Entities would be required to recognise an the stripping activity (eg, by owning the 3. Mineral and oil & gas assets should be asset and liability at the start of a lease. The land it is mining or owning the rights to recognised when a legal right to explore is distinction between operating and finance mine the land); acquired (due to the activities enhancing leases would be eliminated. b) a benefit arises as a result of the asset). This would improve consistency stripping activity If adopted, the proposals would have wide- of reporting across jurisdictions. ranging impacts on business. c) a future economic benefit will flow to the 4. Mineral and oil & gas assets should entity through improved access to the For example: continue to be measured at historical cost (as opposed to fair value), ore that is expected to be economically • Balance sheet: entities would be required recoverable in the future. Stripping supplemented by disclosure of the volume to recognise an asset and liability at the and current value of reserves. This would costs that are part of a stripping activity start of all leases. should be accounted for as an addition be resource-intensive to apply in practice. to, or enhancement of, an existing asset • Profit and loss metrics: all lease expenses 5. Significantly more detailed disclosures (stripping component). For example, with would have an amortisation component and should be required about a range of the section of ore that becomes more a financial cost component rather than an activities (eg, production revenues directly accessible as a result of the operating lease. This would directly impact by commodity). stripping activity. the EBITDA (earnings before interest, taxes, depreciation and amortisation) calculation Application date • Recognising the asset. The DI proposes and other P&L metrics. that the stripping cost should be recognised It is unknown when the discussion paper will as an asset as the stripping activity • Debt covenant measurements: proceed to exposure draft stage. We expect takes place. measurements based on interest cover and these proposals still have a lengthy course to gearing levels will incur the biggest impact run. Nevertheless, entities need to keep an eye • Initial measurement of the asset. as leasing expense moves from being an on developments as they unfold. The stripping activity should be measured operating cost to being classified as an initially at the direct cost to perform the additional amortisation and finance costs. stripping activity (eg, haulage, waste transportation, materials consumed, 26labour, PwC fuel etc). Accounting for joint arrangements New provisions rules on the horizon Application date What’s the issue? What’s the issue? The International Accounting Standards Board (IASB) has received extensive feedback from The IASB’s proposed changes to joint The IASB has proposed changing the rules respondents. On the basis of this feedback, the arrangements would significantly impact associated with measuring non financial release of a revised exposure draft (ED) could be entities in the resources sector. Joint liabilities (formerly known as provisions). some time away. The IASB expect arrangements are commonplace because they The proposals would affect the measurement to release a revised ED in late 2011. allow entities to share the risk and expense of of most provisions, including asset projects, facilitate access to new geographies, decommissioning, rehabilitation liabilities and ensure retention of tax benefits. and environmental restoration. What are the key proposals? What are the key proposals? Under the new rules we expect the accounting • Non financial liabilities would be measured focus to shift to the contractual rights and at the present value of the amount that an obligations agreed by parties. This would entity would rationally pay to take on the require different accounting treatments liability, as opposed to being measured at depending on the type of joint arrangement the management’s best estimate, which may entity holds (a joint operation or a joint venture). be the single most likely outcome. For example, a mining or oil & gas entity with • In the case of the cost of undertaking an interest in a joint operation would recognise decommissioning and rehabilitation on its balance sheet the assets they control activities, the provision would typically be (or their share of the assets jointly controlled), measured using the amounts that an entity and separately recognise the liabilities it has would pay a contractor to undertake the (or its share of the liabilities). In the income service on its behalf. statement, entities would recognise the • When estimating the expected value of expenses incurred (or its share of the expenses non-financial liabilities, entities would incurred) and the revenues it has earned (or its continue to consider likely future events share of revenues earned). (eg, advances in technology) that may In contrast, an entity that is party to a joint reduce site clean-up costs. venture does not have rights to individual • Estimating the value of nonfinancial assets or obligations for expenses of the liabilities would also require assessments joint venture. Instead the entity shares of risk that would need to be reflected in in the outcome (profit or loss) of the underlying cash flows or discount rates. activity undertaken by joint venture. These arrangements would be accounted for using The proposals are likely to result in an the equity method. immediate increase to the provisions recognised on balance sheets, together with Application date increases in non-current assets (where costs The standard is expected to have a can be included as an element of property, mandatory implementation date of plant and equipment under AASB 116). 2013. This seems like plenty of time, but Income statements would most likely see high management of mining entities should be borrowing costs as the provisions unwind. looking at their current joint arrangements today to see if structural changes are necessary and possible to maintain their preferred accounting.

For further information contact: Debbie Smith – Partner Tel: +61 (3) 8603 2249 Email: [email protected]

Aussie Mine November 2010 27 Aggregated industry 6 balance sheet

2010 2009 Change

A$m A$m %

Current Assets

Cash 7,373 3,658 102% Investments held to maturity 1,313 2,487 (47%) Debtors 1,816 1,447 26% Inventories 1,684 1,605 5% Other 1,243 3,354 (63%) Total Current Assets 13,429 12,551 7% Non Current Assets Investments in associates and joint ventures 4,336 4,418 (2%) Deferred taxation assets 309 479 (35%) Property, plant and equipment 13,912 12,364 13% Intangible assets 286 293 (2%) Other 1,269 1,683 (25%) Total Non Current Assets 26,375 25,308 4%

Total Assets 39,804 37,859 5%

Current Liabilities

Accounts payable & accrued liabilities 2,107 2,008 5%

Taxes payable 198 1,165 (83%)

Borrowings 936 2,210 (58%)

Other 716 1,118 (36%)

Total Current Liabilities 3,957 6,501 (39%)

Non Current Liabilities

Borrowings 4,538 4,392 3%

Deferred taxation liabilities 1,207 1,142 6%

Provision for environmental rehabilitation 519 606 (14%)

Other 1,181 1,184 (0%)

Total Non Current Liabilities 7,446 7,324 2%

Total Liabilities 11,403 13,825 (18%)

Net Assets 28,402 24,034 18%

28 PwC ‘Cash is King’ for the mid-tier 50 ‘Net Zero’ Gearing However, as at October 2010, gold players started to go to the market to raise capital. Having raised capital and not commenced Short-term borrowings within the mid-tier 50 The most significant equity raising investing activities, cash remained on the decreased by $1.3 billion during FY10 as OZ announcements post year end, included mid-tier 50’s balance sheet. Many took the Minerals Ltd, Alumina and PanAust refinanced OceanaGold’s announcement that it was opportunity to reduce gearing by repaying or repaid debt. This, coupled with a modest hoping to raise a further C$115.5 million short-term debts. increase in long-term borrowings, resulted in a ($152 million) in a Canadian bought deal to ‘net zero’ gearing position for the mid-tier 50, Cash climbed to a staggering 19% of total help fund the development of its Philippino as cash exceeded total borrowings at June assets during 2010, as the cash balances gold and copper mine and Andean Resources’ 2010 by $1.9 billion. A remarkable position for in the mid-tier 50 increased by 102% to $250 million share offering to fund the any sector to achieve. $7.4 billion, representing the highest dollar exploration and development of the Cerro Negro project in Argentina and for general value and percentage increase since our Equity raisings – No Gold in the Top 5 analysis began. This compares with the next working capital purposes. The mid-tier 50 continued to look to investors highest increases in cash reserves of $1.5 Property, plant and equipment and billion or 60% in June 2008 and $1.4 billion or as its preferred source of funding, with an 43% in May 2009 respectively. additional $3.8 billion in share capital raised capitalised exploration expenditure in 2010. Lynas Corp, PanAust, Aquilla Total property, plant and equipment (PPE), Consistent with global mining trends, equity Resources, Citadel and Whitehaven, raised including capitalised exploration and raisings, stronger operating cash flows and $1.6 billion in 2010, representing 42% of the development expenditure, for the mid-tier reduced investing activities contributed to total equity raised, as shown below: improve the cash positions during 2010. Many 50 increased by 9% to $20.2 billion in 2010. Interestingly given the strength of the gold miners have taken advantage of improved The increase in PP&E was driven by the move sector and success achieved by gold market conditions to raise capital despite an into production by Whitehaven’s Narrabri mine, companies elsewhere during FY10, they were unwillingness to ‘flick the switch’ on projects Northern Iron’s Sydvaranger Iron Ore project, under-represented in capital raised. We note and transactions. With large cash reserves Avoca Resources’ Higginsville Gold project that OceanaGold, which have a December and liquid balance sheets, the use of funds and Mirabella’s Santa Rita Nickel mine. will undoubtedly be a story to follow in the year end raised A$85 million in February 2010 coming years. to close out its hedge book. Capitalised development expenditure also increased during 2010, following the acquisition of the Ridge Group by Aquarius Platinum, Resolute’s Golden Pride mine and Citadel Resource Group’s Jabel Sayid Project transitioning to development. Given the time it takes to turn exploration Cash climbed to a staggering 19% of total success into production, the 25% decline in exploration expenditure by the mid-tier assets during 2010, as the cash balances 50 during 2010 to $884 million, will present in the mid-tier 50 increased by 102% to challenges for the mid-tier 50 in finding tomorrow’s production. This prompts the $7.4 billion... catch phrase ‘you’ve gotta spend money to make money’.

Key balance sheet ratios Total equity raisings in 2010 (A$m) Ratio 2010 2009 11% Lynas Debt-to-equity ratio 19.3% 27.5% 10% PanAust (P) Net debt to equity ratio (6.7%) 12.2% Aquila (P) Current ratio (times) 3.39 1.93 8% 58% Citadel Quick ratio (times) 2.97 1.68 7% Whitehaven (P) Net borrowings ($ billion) (1,898) 2,944 6% Other Cash as a percentage of total assets 19% 10%

Source: PwC analysis Net assets of the mid-tier 50 increased to $28 billion, an 18% increase from 2009, attributed largely to a significant increase in cash reserves following capital raising, a profitable year and the repayment of short-term debt.

Aussie Mine November 2010 29 6.1 • The effective rate for MRRT is 22.5% • What expenditure will be deductible (being a headline rate of 30% reduced by for MRRT purposes (eg. hedging gains Focus – A tax on iron ore and a 25% “extraction allowance”). The MRRT and losses, closing down / rehabilitation coal, but encouraging is calculated on the value of minerals at a expenditure, native title payments and “taxing point” which is intended to be set as private royalties)? for exploration close as possible to the extraction point for • How will merger and acquisition activity Tax has been propelled into the public spotlight the minerals. affect the calculation of the MRRT (and more than any other issue for the mining • All revenue and capital expenditure how will the MRRT affect investment industry in 2010. associated with development and structures)? A furious debate has entered everyday operation of the mine after 1 July 2012 will • What starting base will give existing Australia’s living rooms through television be immediately deductible in the MRRT projects a better MRRT outcome, and how advertising campaigns and strong political calculation. However, there are a range of will market value be calculated at 1 May lobbying. The mining tax ultimately was one other costs, including financing costs such 2010? Will losses attributable to the starting of the contributors to the closest Federal as interest, that will not be deductible in base be transferable? election in living memory. calculating the MRRT liability. • How will the $50m per annum threshold The Henry Review set off this chain of events • Existing projects are to be transitioned into apply, and will those excluded in a with its recommendation for a more efficient the MRRT, with taxpayers having the choice particular year still need to calculate their system for charging an economic rent for of using book or market value to determine MRRT profits to confirm their exclusion? the exploitation of Australia’s non-renewable their starting base at 1 May 2010 (which will resources. The Government’s initial response then be deductible over time). • What happens if States raise the royalty in May 2010 of a “Resource Super Profits Tax” rate and is this increment deductible for • Carried forward costs and losses are that was to impact all onshore non-renewable MRRT purposes? uplifted at the Government Long Term resources was scrapped in July and replaced Bond Rate plus 7%, and are transferrable with a relatively less controversial “Minerals At this stage there are as many questions between certain projects where certain Resource Rent Tax” (MRRT). Only iron ore and as answers, however, if the PTG and the conditions are met. coal miners are in the scope of the MRRT. Government stick to their deadlines, we should have growing clarity by the middle of next year. • State royalties will continue to be levied but As part of its announcement in July, the will be creditable against MRRT payable Government formed the “Policy Transition – royalties will not be cash refundable Group” (PTG) and charged it with the and royalty credits carried forward are not responsibility for recommending the technical transferable between projects. However design features of the proposed tax, as well credits carried forward will be uplifted at the determining “the best way to promote future allowance rate. exploration”. The PTG released its Issues Paper on 1 October 2010 as the starting • MRRT will be deductible for income basis for consultation. During the consultation tax purposes. process, the PTG is meeting with interested parties and taking written submissions, Some of the key uncertainties for the PTG to formulate its response which is due by to consider are: the end of 2010. The Government will then • What is the definition of a project and provide draft legislation in the second quarter what is the definition of an MRRT group? of calendar 2011. This is likely to dictate which projects are While many of the following aspects are held by the same group, and which project subject to consultation, the most important expenditure and losses can be transferred features of the MRRT as currently announced are: between entities. • It will apply to iron ore and coal projects in • Is it appropriate to tax the minerals on their Australia from 1 July 2012. value after primary crushing and grinding, and how do integrated projects calculate • A tax threshold of A$50m per annum of a price at the taxing point when there is no MRRT assessable profits is proposed. observable or comparable price?

30 PwC Exploration incentives Looking forward Finally, many in the industry are speculating about the seeming ease with which the MRRT After a number of years of lobbying from The level of uncertainty over taxation of the could be expanded to tax other commodities. industry, the Government continues to review Australian resources industry may continue If the Budget remains in deficit, it would options for encouraging exploration. The latest for some time. In the last year we have seen presumably be very tempting to simply approach is to refer the matter to the PTG for dramatically how tax uncertainty has impacted add gold, copper or uranium to the list. In more consultation. funding decisions, share prices, transactions September 2010, the International Monetary and the ability to simply move forward in the The PTG is considering the best way to Fund, whilst praising the MRRT, suggested resources industry. Whilst the details of the promote future exploration and has given the that it should be expanded to tax the broader MRRT will be thrashed out in the consultation following four main alternatives to consider: resources industry. Over time, once the process, there are a number of higher level taxation infrastructure is in place, it is likely 1. Exploration refundable tax offset – one of concerns that are still evolving. that pressure will build on other commodities. the proposals from the withdrawn RSPT, As this analysis is being written, the public this is basically a rebate of exploration In summary, the outlook remains uncertain, debate over the MRRT is flaring up again. expenditure to companies at the corporate challenging and very difficult to predict. There are reports in the media that the tax rate three mining companies that negotiated the 2. Exploration tax credit (ETC) – similar replacement of the RSPT could walk away to a franking credit, eligible exploration from the deal that was agreed with Prime expenditure will be distributed to investors Minister Gillard on the basis of proposed as an ETC, at the company’s discretion changes to that deal by the Government. One of the key concerns that may fracture 3. Flow through share (FTS) scheme – similar the MRRT deal is whether the Federal to the Canadian system, an investment in a Government will credit all state royalties FTS will attract a deduction to the investor or just those in place in July 2010. This is only either immediately or over time likely to prolong the uncertainty that leaves 4. Similar system to the R&D tax credit – many projects in an indefinite limbo. few details are provided but this would probably consist of eligible exploration expenditure being included in the definition of eligible R&D Each alternative has its benefits and costs which are currently being considered in detail. Broadly, an incentive that benefits the company, but more importantly the investor, is preferred by industry because it will help explorers raise equity. On this basis the ETC and FTS are more attractive, but as with For further information contact: any tax concession, provisions required to ensure integrity are likely to add to company’s Ben Lee Kong – Director compliance and administration burden. Tel: +61 (3) 8603 4484 Only one thing is certain, any incentive is better than no incentive. Email: [email protected]

What is the definition of a project and what is the definition of an MRRT group? This is likely to dictate which projects are held by the same group, and which project expenditure and losses can be transferred between entities.

Aussie Mine November 2010 31 Aggregated industry cash 7 flow statement

2010 2009 Change

A$m A$m %

Cash flows generated from operations

Cash generated from operations 3,243 2,520 29%

Net borrowing costs (279) (308) (9%)

Other 85 311 (73%)

Income taxes (paid)/refunded (1,126) (411) 174%

Net operating cash flows 1,922 2,112 (9%)

Cash flows related to investing activities

Purchases of property, plant and equipment (2,956) (4,677) (37%)

Exploration expenditure (884) (1,181) (25%)

Purchases of investments and intangibles (871) (2,003) (56%)

Other (163) (294) (45%)

Proceeds from sale of property, plant and equipment 1,764 2,506 (30%)

Proceeds from sale of investments 1,569 466 236%

Net investing cash flows (1,542) (5,183) (70%)

Cash flows related to financing activities

Proceeds from ordinary share issues 3,794 2,410 57%

Net borrowings (829) 677 (222%)

Distribution to shareholders (1,034) (966) 7%

Other 1,315 735 79%

Net financing cash flows 3,246 2,857 14%

Net increase/(decrease) in cash and cash equivalents 3,626 (214) (1796%)

Note: The reconciling item between the above cash flow statement and the balance sheet movement in cash is the effect of foreign exchange.

32 PwC Investing cash flows – management of cash costs. Of the mid-tier 50, of the total equity raised in 2010 (refer graph caution vs confidence coal companies also contributed to positive on page 29). The success of these issues operating cash flows as shown by both New illustrated increasing market confidence, Net investing cash flows by the mid-tier Hope and Macarthur forming part of the top 5 as shareholders took advantage of the 50 decreased by 70% in 2010. Although companies by operating profit. opportunity available. operating performance was strong, the mid- tier 50 have sat cautiously during 2010, waiting Looking forward, operating cash flows in the Overall payments to shareholders have for stability and more certainty to return to industry are threatened by the weak US dollar. increased by 7% in 2010 due to dividend commodity prices and markets. Whilst this The continual challenge of managing costs, payments amounting to $935 million. 11 of represents a significant decrease in capital particularly rising labour costs, will also place the mid-tier 50 paid dividends during 2010, of expenditure from 2009, there have been pressure on cash margins. However, prices which New Hope accounted for 73% of the a number of contributing factors including have returned to almost pre-financial downturn total. This was due to a special dividend of market uncertainty driven by international levels – a move which largely drops straight $602 million relating to the company’s asset economic volatility, commodity price through to the bottom line. sales. Excluding the special dividend, a 63% decrease in dividends paid compared to 2009 movements and the strengthening of the A$ Financing cash flows – show me making many projects more expensive. The was identified, supporting the mid-tier 50 proposed MRRT clearly also had an impact the money! efforts to retain cash and enter into survival mode over the year. Look for this to change during the year. Until a more sustainable Net financing cash flows of the mid-tier 50 in 2011. point is reached, it appears the mid-tier increased by 14% to $3.2 billion in 2010 as 50 companies have taken a conservative companies strengthen their financial position Energy stocks have been the best payers approach to spending and will carefully through share issues and the repaying of of dividends due to the status of projects consider future investment decisions. short-term debts. of these companies in the mining life cycle. Although gold companies have been high Of the increase in proceeds from the sale of Access to debt finance, and company appetite performers, it was noted that the majority have investments, $1,066 million reflects proceeds for gearing continued to push cash flows from paid minimal or no dividends in 2010. received by New Hope from its investments. The borrowings down in 2010. Equity remained the decrease in proceeds from the sale of property, key funding source tapped by the mid-tier 50. While shareholders benefited from gains in plant and equipment is also due to New Hope stock prices, aggregate distributions received Proceeds from share issues increased by who in 2009 sold the New Saraji Project to the decreased as a proportion of total investment. 57% on 2009 – a remarkable outcome given BHP Billiton Mitsubishi Alliance for $2,451 million. This decline was due to both a small number the uncertainty during the year. The largest In the current year $1,731 million was proceeds of large companies reducing or cancelling equity raisings during the year were called from the sale of the majority of its assets by OZ altogether their dividends as a result of on by Lynas, PanAust, Aquila, Citadel and Minerals to China Minmetals. declining profits and the marked increase in Whitehaven Coal, who accounted for 42% With the currently strong mid-tier 50 balance the denominator – market capitalisation. sheet and market conditions improving, the future outlook necessitates the need for increased capital and exploration expenditure Dividends paid in 2010 (A$m) investments to ensure growth is continually caught and utilised. New Hope 78 The growth in demand for minerals from the Energy Resources 65 developing world, led by China, is expected Macarthur 53 to ensure demand for commodities remains Whitehaven 42 strong over the long-term. Therefore we expect to see an increase in investment Kingsgate 25 outflows over the coming years. Panoramic 25 Operating cash flows – Centennial 22 climbing the ladder Aquarius 11 Independence 6 Cash generated from operations increased by 5 29% due to stronger commodity prices and Western Areas improved performances, particularly in the Iluka 2 copper and gold sectors. The unusually high Special dividend Dividend tax paid was by New Hope as a result of the sale of New Saraji during 2009. Excluding this Note: The graph has been adjusted to exclude the effect of the special dividend paid by New Hope amounting to $602 million. transaction, net operating cash flows were up by 30%. The increase in net operating cash flows is considered to be a relatively strong 2010 2009 performance compared to a number of other industries. Growth in copper and gold prices Dividends paid 333 894 significantly contributed to the increase Average market capitalisation 61,016 39,528 in operational performance in 2010. As noted earlier, copper production increased Dividend yield 0.55% 2.26% significantly during the period due to new projects coming on stream. Gold producers Note: New Hope’s special dividend has been excluded from the dividend yield calculation. also saw positive cash flows attributable to price improvements and the successful Aussie Mine November 2010 33 7.1 Senior management should already be 4. Systems must be capable of supporting engaged in a continual process to define and a capital project Focus – Don’t let your capital embed strategic objectives such as growth Too often project systems are considered at rates, targeted production run rates and project bite back the last gasp before project commencement the development of new resources. Capital or even worse during project implementation. Is your capital project spend projects should be appraised by the same Inevitably in these cases the system does fully protected? means, ultimately through the use of robust not meet project requirements and project valuation models and an approved internal As the mining industry moves steadily away personnel resort to manual work rounds and rate of return. Internal controls surrounding from the ramifications of the global economic laborious data manipulation. At best, this leads the approval of capital projects and a downturn a new wave of cautious optimism to inefficiency and at worse it leads to bad comprehensive set of policies and procedures is fuelling an increase in capital expenditure. project decisions from inaccurate or incomplete can help to strengthen and support There are now $157 billion of announced management information. this process. mining capital projects in Australia, $71 billion Ideally, project system requirements should in WA alone. These are vast sums of money 2. Each project is unique and therefore be drawn up after the project risks, structure in play. At the bigger end of town, the capex has a unique set of risks – you must and reporting requirements have been defined. focus is on the expansion of mature projects be all over them! This enables informed management decisions, as companies seek low risk strategies and Each capital project is unique and will take including whether it is worth configuring short-term gains. For the mid-tier it is more place in unique market conditions. A complete existing software or to implement bespoke commonly a mine upgrade after a prolonged and well structured risk assessment up front project software. It also enables a clear vision period of care and maintenance or the is therefore the only way to capture and act on of the management reporting that is required, development of a new ore body. As such the complexities of each project undertaken. including meaningful KPI’s upon which value there are a large range of capital projects on This process can often be disparate and based decisions can be made, and how the the go which vary significantly both in terms poorly communicated, with risks not being system can be used to support this. of spend and complexity. adequately assessed and not feeding into the 5. Contractors must be well chosen At this year’s Diggers & Dealers Conference project decision making process. and controlled in Kalgoorlie the excitement of significant The risk assessment will ultimately define development activities and emerging players Contracting risk is high on the agenda of any the project approach and should inform was abundant. This is great news for the capital project, the severity of which depends management’s go / no-go decision. It will industry, but also poses significant risk that on the contracting strategy that has been also set the control framework within which must be managed for these players to succeed. adopted. Contractors can be the root cause the project will be completed. Operational, Throw in the uncertainty around the Australian of project delays and overruns, which typically compliance and financial risks should be government’s proposed MRRT and carbon tax, do not become visible until the project is close considered and from this the mechanisms and you have mining project economics (such to completion. in place to mitigate these risks should be as NPV’s and life of mine models) changing assessed. Not every company is well versed every week. Prior to any contract being signed, the project in completing major capital projects and should have a well defined project contracting A look back at previously completed capital therefore at this point an honest appraisal of execution plan in place and have designed projects highlights the minefield of potential the existing skillset should be undertaken. mechanisms to manage key contractors. pitfalls and inherent risks that they present. Additional risk mitigation strategies and Appropriate change management procedures Every week we see press releases highlighting controls should be supplemented as required. are critical and suitable contractor reporting cost blow-outs on major capital projects. At a should be enforced so that there are no 3. The project structure must be time when the shadow of the global economic back-end surprises. meticulously planned and defined downturn still looms large, companies can ill 6. Project assurance activities should afford to make the same mistakes again and A significant proportion of capital projects fail be well integrated squander hard to find cash. Failure inevitably due to poor up-front planning and inadequate leads to a low return on investment, cashflow consideration of the structural changes that Often there can be a major disconnect issues and ultimately irretrievable falls in the might be required for such an undertaking. between projects and the assurance services share price. This often takes the lead from a poor risk within a company that are in place across assessment process. other operations. QA have a role to play, Six key lessons to support capital as do Internal Audit, but these roles can Critical decisions need to made at this project success become confused and poorly communicated stage, including the contracting strategy with the result being the project team do not 1. Projects can only succeed when they and whether the company will manage the buy-in or support the services to help the align with the company strategy project in–house. The team structure needs project succeed. to be fully defined, with key responsibilities, The strategic planning process is fundamental accountabilities and reporting lines to any mining business and is particularly Project assurance should be undertaken with established. Decisions over where project important to inform the capital expenditure an integrated approach from the project outset. control will reside and the governance decision making process. A major capital The most effective form of assurance / comfort structure that is adopted should be made, project implemented in a strategic vacuum to the Board is when Quality Assurance (QA), communicated and embedded into the is doomed to failure and is likely to have a Health Safety Environment and Community project. Central processing facilities, if they significantly adverse impact on the company’s (HSEC) and Internal Audit (IA) work in parallel exist, need to be appraised for project position in the marketplace. and harmony. This enables the best possible suitability. These are just a few examples, but risk based outcome without compromising on poor structural analysis and therefore decision technical know-how. making at this stage can lead to significant problems during later project phases.

1ABARE, Minerals and Energy, Major Development Projects October 2010 34 PwC What are the key takeaways? • Do not ignore the controls environment for major projects – this is likely to be the area of the most significant company spend • Use the resources that are already in place, but appraise these services for adequacy first • Spend to plan, not to crisis manage • Make the most of your systems, so you can spend more time on site • Continually re-evaluate the project control requirements as it progresses and the risk profile changes • Emb race all forms of risk evaluation and assurance- they are there to help you succeed • Understand the risks, controls and cashflow like it’s your business!

For further information contact: Justin Eve – Partner Tel: +61 (8) 9238 3554 Email: [email protected]

Aussie Mine November 2010 35 Looking ahead 8

Whilst there has been some Australian resource deals have recently been Chinese entities continue to target Australian across all sections of the industry, reflecting resource companies and projects. However uncertainty in the political the strong demand for these commodities. deal closure and integration are still an area of arena in Australia, particularly Offshore investors, particularly from China, have concern for many organisations. We have noted associated with the impact of emerged as a significant new force in Australian a recent trend of Chinese entities seeking control resources M&A activity as they strive to secure of an ASX listed vehicle with African assets, the MRRT, the mid-tier 50 supply of resources that are becoming scarce or the ability to spin African assets into them. remain strong and poised to rise and more costly to develop. We expect to see Chinese companies will hope to leverage off more Chinese and others taking strategic stakes in-country African experience to make African and shine with cash balances in producing or near production miners or projects work. arranging alternative funding, such as an off-take in excess of $7 billion. Traditionally Australian investors have turned agreement accompanied by large project based away from Australian companies with African debt funding package. Commodity prices continue to strengthen on assets. This is changing, with a more mature the back of strong demand from China, India Equity markets have opened once again and investment outlook, better understanding of the and the developing world, while the United strategic offshore investment remains strong. African mining environment and greater stability States and Europe continue to show a lack Debt is still tight, with a recent trend of Australian in many African nations. China, as well as the of real growth. Gold has pushed through the companies agreeing to strategic alliances with big miners, have recognised the riches available US$1,400 barrier and may continue this upward offshore companies with access to cheap in Africa and are leading the pack. We expect to trend. Other base metals and iron ore prices debt from the partners’ local banks rather than see more activity and investment into Africa by have strengthened and look set to firm sourcing more traditional forms of debt financing. Australia companies, following the lead forged as demand continues to grow. by the big players. These projects will require The global IPO market suffered significantly major investment, particularly in infrastructure to The fundamentals driving gold, including the during the global economic downturn. There get them off the ground. However West Africa is decline in US$ against a number of traded has been a recent return as market sentiment not the only new address. As resources become currencies and domestic weakness in the United has improved. Of particular note is the increase scarce companies are looking to non-traditional States and European economies, point to gold in IPO activity as companies spin off non-core mining locations for the next world class mines. investment as a safe haven and store of wealth. assets into new entities and the move by Hong Interest in Mongolia has been particularly strong. Therefore while this uncertainty and currency Kong to position itself as the major mining weakness remains, gold may continue to glitter exchange of the future. Now that the global economic downturn is over at least the short to medium-term. behind us, the boards of the mid-tier 50 should With significant free cash currently sitting on have growth aspirations at front of mind. A key concern for Australian exporters is the the balance sheets, the mid-tier 50 need to Investment strategies should be re-visited and AUD:USD exchange rate. In mid October 2010, be careful to fully assess future potential M&A viable and researched opportunities should the A$ reached parity with the Greenback. While activity. Empirical evidence collated by PwC be capitalised on to secure the long-term holiday makers are enjoying “Parity Parties”, suggests that 50% of deals erode shareholder sustainability of their organisations. the strength of the A$ takes away much of the value, 33% provide marginal return and only US$ commodity price upside that has been 17% provide substantial return to shareholders. experienced over the past 3 – 6 months. Notwithstanding the number of value-destroying/ A key theme from this year’s publication is the failed mergers that have been well documented, significant increase in cash reserves generated they are inevitable and will continue, in the rush through equity raisings and operational cash to obtain future projects. flows over the past two years. The equity raisings over the past two years represent 10% of the market capitalisation of the mid-tier 50 at June 2010. These companies are clearly geared for growth, and are waiting for the next big project to continue their story. Traditionally Australian investors have turned away from Australian companies with African assets. This is changing...

36 PwC Glossary 9

$x/oz Gross margin Dollars per ounce Gross profit divided by revenue

$x/lb Market capitalisation Dollars per pound The market value of the equity of the company, calculated as the share price multiplied by the ABARE number of shares outstanding The Australian Bureau of Agricultural and Resource Economics MRRT Mineral Resource Rent Tax AIFRS Australian equivalent to International Financial Net borrowings Reporting Standards Total borrowings less cash and cash equivalents

Adjusted EBITDA Net debt to equity EBITDA excluding impairment charges and gain Net borrowings divided by Net borrowings plus / (loss) on sale of investments shareholders equity

Current ratio Quick ratio Current assets divided by Current liabilities Current assets less inventories divided by Current liabilities EBITDA Earnings before interest, tax, depreciation Return on equity and amortisation Net profit divided by total closing equity

Debt to equity RSPT Borrowings divided by Borrowings plus Resource Super Profits Tax shareholders equity

Gross profit Revenue minus expenses from ordinary activities and exploration

Aussie Mine November 2010 37 Mid-tier 50 companies analysed 10

Symbol Entity Name Year end Market Rank by Producer (P)/ Capitalisation Market Non-Producer as at 30/06/2010 Capitalisation (N) A$m

AWC Alumina Ltd 31-Dec-09 3,721 1 N

AND Andean Resources Ltd 30-Jun-10 1,588 15 N

AVM Anvil Mining Limited 31-Dec-09 421 48 P

AQP Aquarius Platinum 30-Jun-10 2,737 6 P

AQA Aquila Resources Ltd 30-Jun-10 2,533 9 P

AGO Atlas Iron Limited 30-Jun-10 999 20 P

AVO Avoca Resources Ltd 30-Jun-10 795 26 P

BRM Brockman Resources Limited 30-Jun-10 422 46 N

CEY Centennial Coal Co. Ltd 30-Jun-10 1,766 13 P

CGX CGA Mining Limited 30-Jun-10 739 30 P

CGG Citadel Resource Group Limited 30-Jun-10 617 37 N

CDU CuDeco Ltd 30-Jun-10 640 36 N

ERA Energy Resources of Australia Ltd 31-Dec-09 2,537 8 P

EQN Equinox Minerals Ltd 31-Dec-09 3,015 4 P

EXT Extract Resources Ltd 30-Jun-10 1,580 16 N

GBG Gindalbie Metals Ltd 30-Jun-10 733 32 N

GCL Gloucester Coal Ltd 30-Jun-10 1,018 19 P

GRR Grange Resources Limited 30-Jun-10 576 39 P

GNM Gujarat NRE Coking Coal Limited 31-Mar-10 578 38 P

ILU Iluka Resources Ltd 31-Dec-09 1,938 12 P

IGO Independence Gold NL 30-Jun-10 537 42 P

IRN Indophil Resources NL 31-Dec-09 464 43 N

IVA Ivanhoe Australia Limited 31-Dec-09 883 24 N

KCN Kingsgate Consolidated Limited 30-Jun-10 947 22 P

LYC Lynas Corp. Ltd 30-Jun-10 902 23 N

38 PwC Symbol Entity Name Year end Market Rank by Producer (P)/ Capitalisation Market Non-Producer as at 30/06/2010 Capitalisation (N) A$m

MCC MacArthur Coal Ltd 30-Jun-10 3,083 3 P

MRU Mantra Resources Limited 30-Jun-10 538 41 N

MML Medusa Mining Limited 30-Jun-10 732 33 P

MRE Minara Resources Ltd 31-Dec-09 771 28 P

MDL Mineral Deposits Ltd 30-Jun-10 546 40 P

MBN Mirabela Nickel Ltd 30-Jun-10 749 29 P

MGX Mount Gibson Iron Ltd 30-Jun-10 1,673 14 P

MMX Murchison Metals Limited 30-Jun-10 875 25 N

NHC New Hope Corp. Ltd 31-Jul-10 3,659 2 P

NFE Northern Iron Limited 31-Dec-09 400 50 P

OGC OceanaGold Corporation 31-Dec-09 794 27 P

OZL OZ Minerals Limited 31-Dec-09 2,996 5 P

PDN Paladin Energy, Ltd 30-Jun-10 2,575 7 P

PNA PanAust Limited 31-Dec-09 1,462 17 P

PAN Panoramic Resources Ltd 30-Jun-10 447 45 P

PRU Perseus Mining Ltd 30-Jun-10 960 21 N

RSG Resolute Mining Ltd 30-Jun-10 414 49 P

RIV Riversdale Mining Ltd 30-Jun-10 2,111 11 P

SFR Sandfire Resources 30-Jun-10 421 47 N

SBM ST Barbara Ltd 30-Jun-10 683 34 P

SMM Summit Resources Ltd 30-Jun-10 451 44 N

WSA Western Areas NL 30-Jun-10 679 35 P

WEC White Energy Company Limited 30-Jun-10 739 31 N

WHC Whitehaven Coal Limited 30-Jun-10 2,370 10 P

ZIM Zimplats 30-Jun-10 1,130 18 P

Source: Capital IQ

Aussie Mine November 2010 39 Explanatory notes 11

We have analysed the largest 50 mining companies listed on the ASX with a market capitalisation of less than $5 billion at 30 June 2010. The results aggregated in this report have been sourced from publicly available information, primarily annual reports and financial reports available to shareholders. Companies have different year-ends and report under different accounting regimes. Information has been aggregated for the financial years of individual companies and no adjustments have been made to take into account different reporting requirements and year-ends. As such, the financial information shown for 2010 covers periods between and 1 January 2009 and 30 June 2010, with each company’s results included for the 12-month financial reporting period that falls into this timeframe. All figures in this publication are reported in A$, except where specifically stated. The results of companies that report in currencies other than the A$ have been translated at the average A$ exchange rate for the financial year, with balance sheet items translated at the closing A$ exchange rate. Some diversified companies undertake part of their activities outside of the mining industry. No attempt has been made to exclude such non-mining activities from the aggregated financial information.

40 PwC Contacting PwC 12

PwC provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries work collaboratively using connected thinking to develop fresh perspectives and practical advice. PwC is a leading advisor to the mining industry, working with more explorers, producers and related service providers than any other professional services firm to ensure we meet the challenges of the global mining industry in the future. Our strength in serving the mining industry comes from our skills, experience and seamless network of dedicated professionals who focus their time on understanding the industry and working on solutions to mining industry issues. For more information on this publication or how PwC can assist you in managing value and reporting, please speak to your current PwC contact or telephone/e-mail the individuals below who will put you in contact with the right person.

Australia Global

Energy and Resources Industry Leader Global Mining Leader Michael Happell, Melbourne Tim Goldsmith, Melbourne Telephone: +61 3 8603 6016 Telephone: +61 3 8603 2016 Email: [email protected] Email: [email protected]

Australian Mining Leader Global Knowledge Manager Tim Goldsmith, Melbourne Ben Gargett, Melbourne Telephone: +61 3 8603 2016 Telephone: +61 3 8603 2539 Email: [email protected] Email: [email protected]

New South Wales Brazil Russia and Central and Marc Upcroft, Sydney Ronaldo Valino, Rio de Janeiro Eastern Europe Telephone: +61 2 8266 6133 Telephone: +55 (21) 3232-6015 John Campbell, Moscow Email: [email protected] Email: [email protected] Telephone: +7 (405) 967 6279 Email: [email protected] Queensland Canada Brian Gillespie, Brisbane John Gravelle, Toronto South Africa Telephone: +61 7 325 75656 Telephone: +1 (416) 869 8727 Hein Boegman, Johannesburg Email: [email protected] Email: [email protected] Telephone: +27 11 797 4335 Email: [email protected] South Australia Chile Andrew Forman, Adelaide Colin Becker, Santiago United Kingdom Telephone: +61 8 8218 7401 Telephone: +56 (2) 940 0016 Jason Burkitt, London Email: [email protected] Email: [email protected] Telephone: +44 (20) 7213 2515 Email: [email protected] Victoria China Tim Goldsmith, Melbourne Ken Su, Beijing United States Telephone: +61 3 8603 2016 Telephone: +86 (10) 6533 7290 Steve Ralbovsky, Phoenix Email: [email protected] Email: [email protected] Telephone: +1 (602) 364 8193 Email: [email protected] Western Australia India Doug Craig, Perth Kameswara Rao, Hyderabad Telephone: +61 8 9238 3262 Telephone: +91 40 6624 6688 Email: [email protected] Email: [email protected]

Aussie Mine November 2010 41 Other Mining Publications 13

Our commitment to the industry goes beyond our services. As industry leaders, we are nationally as well as globally recognised for our broad knowledge of the mining industry and the laws that govern it. Set out on this page are examples of recent mining thought leadership publications.

Digging into IFRS 5 October 2010 Mining Industry Leases proposals set to rock the mining industry What’s the issue? Last month the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) released an Exposure Draft (ED) on Leases as part of their commitment to converging US IFRS and US GAAP. The Global Mine* Bulletin proposals would overhaul the current requirements in AASB 117 Leases and dramatically change the way entities account for leases. Digging into IFRS September 2010 Global Mine Bulletin Who is affected? If adopted, almost all entities will be affected because leases are abundant in the resources sector. It will affect entities that: • have acquired significant operating leases (such as mining or extraction equipment); Proposed Back to the Boom! Short-term volatility will give way to long- • have finance lease arrangements that are within the scope of the existing leasing standard (such as fleets of trucks); Resource Rent tax term growth • are planning on entering into new leasing arrangements; and Regime for Australia • have operating leases which are likely to extend beyond 2012, which is when we expect the new standard to be issued. My role as global mining leader for PricewaterhouseCoopers sees me travelling extensively across the globe. In the past six months I have visited Africa, Central Asia, Russia and China. The common theme Note: Leases relating to the exploration or extraction of natural resources, including minerals, oil and gas have been Mine* 2010 across these regions was both the intensity of mass-scale developments and the need for it to happen excluded from the proposals. Entities that use long-term contract mining services (including fleet equipment) will need to A monthly Australian newsletter that This occasional bulletin highlights a number of quickly. For example, the speed and magnitude of growth in China has continued on an unprecedented consider the principles in AASB Interpretation 4 Determining whether an arrangement contains a lease. The interpretation A region in focus: scale. By the end of 2011 China is expected to overtake North America as the world's largest consumer of requires certain dedicated services to be classified as lease arrangements and the principles have been incorporated in the Metals and Mining mineral commodities - the first time since the Industrial Revolution. proposed new standard. in Russia and the The ongoing industrialisation of the world's key emerging economies will dramatically increase future CIS How would current practice change? demand for mineral commodities. Many nations that supply minerals view this demand as a tremendous opportunity to increase the footprint of their mining industry. There are substantial benefits for countries The current standard requires entities to evaluate lease arrangements at the beginning of a lease and determine if they are a focuses on topical accounting Total Tax that are prepared to seize this opportunity by developing a whole-of-industry mining strategy. mining industry topics and a number of reports finance lease or an operating lease. However, the proposals adopt the ‘right of use’ concept to replace the existing ‘risks and Contribution – A rewards’ concept. Entities would be required to recognise an asset and liability at the start of the lease and the distinction study of the As the majors have released their June quarter results over recent weeks, there has been a common between operating leases and finance leases will be eliminated. economic theme of including warnings of short-term volatility in metals prices and demand, followed by strong conviction in the long-term fundamental strength of the industry. This confidence in the future is supported It’s important to note that lessees will be required to reassess the lease term, contingent rentals and residual value contribution mining by the industrialisation highlighted above, but also a pending shortage in the supply of minerals to meet obligations at each reporting date. This differs to current obligations, where entities must include and estimate contingent companies make to public finances this growing demand. rentals and residual value guarantees at the start of the lease. issues relevant to the energy and and surveys recently issued by the PwC global The Global Financial Crisis, and subsequent step away from the industry by the banking sector at large, What are the broader impacts of the ED on lessees? PI Corner: has only served to heighten the supply challenges. Miners have already had to shift focus to new frontiers, If adopted, the proposals would have wide-ranging impacts on business. For example: Managing credit such as Russia and the CIS states we have featured in this edition, to find the next world scale mines. risk for global Restrictions in funding and capital expenditure over the past two years as cash has been tight will serve to • Balance sheet: entities would be required to recognise a right of use (asset) and an obligation to pay (liability) at the start of commodity further delay future discoveries. all leases. producers On top of the supply challenge comes the rise of mining as a political issue. This has been demonstrated • Profit and loss metrics: lease expenses would have an amortisation component and a financial cost component. This resources industry. most clearly in Australia, with the announcement of a “Resources Super Profits Tax”, subsequent mining team. Contacting PwC would directly impact the EBITDA (earnings before interest, taxes, depreciation and amortisation) calculation and other backlash from the industry, the removal of an incumbent Prime Minster by his own party, fundamental P&L metrics. adjustment to the tax workings, and an election which, at this stage, remains in the balance – all of which • Debt covenant measurements: measurements based on interest cover and gearing levels will incur the biggest impact. had taxation of the mining industry as a key element in the mix. Our flagship publication Mine 2010, Back to the Boom!, emphasises the need for CEOs of the industry to increasingly have significant diplomatic This is because the obligation to pay liability will be recognised at the start of the lease and the leasing expense moves from skills to address this focus as well as looking in detail at the performance of the industry in 2009. being an operating cost to being classified as additional amortisation and a finance cost. • Contracts: related to finance facilities and other long-term arrangements that are based on measures relating to EBITDA. As always, I trust you will find this informative and useful. I welcome any feedback on comments on areas covered or on which you would like to focus in the future. • Credit ratings: these could be impacted by changing debt levels. • Remuneration: short-term bonuses and other remuneration arrangements (such as employee shared options) that are impacted by EBITDA, P&L or balance sheet KPIs will need to be revisited. Contact: Contact: Future balance sheet could be hard for entities to manage. Insight from an industry expert. Tim Goldsmith “The leases proposals are significant for the many sectors (including resources) and I know that a number of businesses are Global Mining Leader

Accounting issues affecting the energyconcerned and resources sector about how the final standard might affect them. From my experience at PwC and in the world of business, PricewaterhouseCoopers knowledge is power and I encourage entities to consider the implications of the proposals now if they haven’t already done so. Based on a recent PwC benchmarking survey, entities (across sectors) can expect: • an average increase in interest-bearing debt of around 30%; Debbie Smith, Melbourne Tim Goldsmith, Melbourne • an average increase in EBITDA of around 10%; and • an average increase in debt generally, which will vary from entity to entity. With such a significant standard on the horizon, it’s important to prepare for the change as early as possible.” Debbie Smith, partner, PwC. What are the next steps? T: +61 (3) 8603 2249 *connectedthinking T: +61 (3) 8603 2016 Entities will have until 15 December 2010 to comment on the ED. The IASB and US FASB have indicated they expect to issue the final standard in 2011. An effective date could be as early as 2014, which means an entity with a 30 June 2014 year-end would need to apply the standard to all leases in place from 1 July 2012. For more information, please talk to your usual PwC representative or one of the industry experts listed overleaf. E: [email protected] E: [email protected]

Jason Burkitt, London Ben Gargett, Melbourne T: +44 (20) 7213 2515 T: +61 (3) 8603 2539 E: [email protected] E: [email protected]

pwc.com.au Our Resources Experience – Optimising extended mining Resources Experience Consulting operations through value driver

Consulting November 2010 In this document PwC Australia outlines modeling its Consulting experience with such November 2010 organisations as BHP Billiton, Rio Tinto, This paper seeks to demonstrate that Xstrata, Vale, Santos, Anglo American and robust modelling of operational cost and BG. We have also worked closely with value drivers across the extended life of small and mid-tier operators to provide mining operation is a key requirement business solutions and to help to deliver for maximising value, regardless of the on growth aspirations. economic cycle. Contact: Contact: Michael Happell, Melbourne Brian Gillespie, Brisbane T: +61 (3) 8603 6016 T: +61 (7) 3257 5656 E: [email protected] E: [email protected] Brian Gillespie, Brisbane T: +61 (7) 3257 5656 E: [email protected]

pwc.com/mining

Junior Mine: Trends in the Mining Mining Deals – No Stone Unturned Deals TSX-V2010 No Stone September 2010 October 2010 Unturned Prepared in conjunction The global mining sector is awash in M&A with the 14th annual PwC America’s School of Mines announcements, with 1,324 deals worth an PricewaterhouseCoopers Canada’s 2010 Mid-year update review of trends in the TSX-V mining September 2010 aggregate $104 billion announced globally year industry includes a snapshot of 20 to date. At this pace, the year is set to close mining companies on the TSX Venture at, or near 2007 peak levels. PwC experts Exchange with market capitalisations of comment on the key trends that are set to $500-700 million. dominate the global mining sector for the remainder of this year. Contact: John Gravelle, Toronto Contact: T: +1 (416) 869 8727 Tim Goldsmith, Melbourne E: [email protected] T: +61 (3) 8603 2016 E: [email protected]

John Gravelle, Toronto T: +1 (416) 869 8727 E: [email protected]

42 PwC Industries Energy, Utilities & Mining Capability statement Responding to climate change Mine: Back to the Boom… Responding to climate change August 2010 May 2010 Challenges and solutions on the road ahead Challenges and solutions on the road ahead Our seventh annual survey of the Top 40 This publication shows how PwC can assist mining companies by market capitalisation, EU&M companies in the areas of Strategy, provides a comprehensive analysis of the Risk, Regulation and Reporting to optimise financial performance and position of the global operations and deliver leading practice. Our mining industry and also discusses current goal is to help companies deliver on their trends in the global mining industry. climate change ambitions in a way that brings Contact: maximum value and competitive advantage. Tim Goldsmith, Melbourne Contact: T: +61 (3) 8603 2016 Liza Moimone E: [email protected] T: +61 (3) 8603 4150 E: [email protected] Ben Gargett, Melbourne T: +61 (3) 8603 2539 E: [email protected]

Metals and Mining Review of trends in the metals and mining industry – 2010

Metals and Mining in Russia and Managing credit risk for Managing credit risk for global global commodity producers Brian Gillespie, John Hackwood and Chris Mihos Metals and Mining CIS March 2010 commodity producers in Russia and the CIS April 2010 March 2010 This inaugural edition of Metals & Mining in This paper describes the credit risk issues Russia and CIS focuses on the state of the faced by global commodity producers and mining sector in this region and the major highlights examples of best practice in the trends in its development. It analyses the areas of the assessment and management of financial results of 20 major mining companies credit risk. in Russia, Ukraine and Kazakhstan. Contact: Contact: Brian Gillespie, Brisbane John Campbell, Moscow T: +61 (7) 3257 5656 T +7 (495) 967 6279 E: [email protected] E: [email protected]

Energy, Utilities & Mining Mining

South Africa Mine Gold Medal Performance Gold Medal Performance - 2009 SA Mine 2009 Global Gold Price Survey Report Review of trends in the South African mining December 2009 Global Gold Price Survey Report industry December 2009 December 2009 This inaugural edition of SA Mine focuses December 2009 on the state of the mining sector in South This survey covers 45 gold mining and Africa. It aggregates the financial results of development companies with global mining companies with a primary listing on operations, which together reported expected the Johannesburg Stock Exchange (JSE) and production of 33,343,385 ounces in 2009. mining companies with a secondary listing on the JSE whose main operations are in Africa. Contact: John Gravelle, Toronto Contact: T: +1 (416) 869 8727 Hein Boegman, Johannesburg E: [email protected] T: +27 11 797 4335 E: [email protected]

Energy, Utilities & Mining

Financial reporting in Financial reporting in the Finding cost effi ciencies in mining operations Finding cost efficiencies in mining through effective value driver modelling the mining industry* Aaron Carter, Brian Gillespie and Chris Gilbert Performance Improvement Group, Brisbane International Financial Reporting Standards mining industry February 2009 operations through effective value June 2007 2007 (new release February 2011) driver modelling This provides a comprehensive analysis February 2009 of financial reporting in the global mining This paper highlights Australian mining best industry. It sets out the major accounting practice in both operations cost management practices adopted by the mining industry and production value maximisation through under IFRS in respect of issues of particular robust modelling of operational value drivers. relevance to the mining sector. We are currently updating this publication to address Contact: all recent changes and developments in IFRS Brian Gillespie, Brisbane and industry practice. T: +61 (7) 3257 5656 E: [email protected] Contact: Debbie Smith, Melbourne T: +61 (3) 8603 2249 E: [email protected]

Jason Burkitt, London T: +44 (20) 7213 2515 E: [email protected] Aussie Mine November 2010 43 pwc.com.au

Key Contributors

Key contributors For copies of this to this report report, contact: Ben Gargett Jacqui Thurlow Director Tel: +61 (3) 8603 3267 Email: [email protected] Malcolm Reid Associate Director

Michael Johns Manager

David Ray Senior Accountant

Brett Wright Senior Consultant

Tamara Measor Senior Accountant

Charlie Li Accountant

Printed on ecoStar, a recycled, environmentally responsible paper manufactured from 100% post-consumer waste. It is Forest Stewardship Council (FSC) chain of custody (CoC)certified and bleached process chlorine free. The mill’s certified environmental management scheme ISO14001 ensures continuous improvement across all manufacturing areas to reduce their effect on the environment. © 2010 PricewaterhouseCoopers. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is provided by PwC as general guidance only and does not constitute the provision of accounting, legal advice, tax services, investment advice, or professional consulting of any kind. The information is provided “as is” with no assurance or guarantee of completeness, accuracy or timeliness of the information and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will PwC or its professionals be liable in any way to you or to anyone else for any decision made or action taken in reliance on the information or for any direct, indirect, consequential, special or other damages related to you or your use of information, even if advised of the possibility of such damages. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all the pertinent facts relevant to your particular situation.

44 PwC

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