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Resources equities –

Resources equities –. An attractive way to play the commodity super cycle. Sam Catalano Portfolio Manager, Global Resources Equities Gavin Marriott Product Manager, Global and International Equities. June 2011. For professional investors or advisers only. Investing to maximise returns.

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Resources equities –

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  1. Resources equities – An attractive way to play the commodity super cycle Sam Catalano Portfolio Manager, Global Resources Equities Gavin Marriott Product Manager, Global and International Equities June 2011 For professional investors or advisers only

  2. Investing to maximise returns Life in the New Normal What is the New Normal • Changes to the fundamental structure of the global economy • An era of shifting geo-political power and influence Implications for investors • An era of lower returns on stocks and bonds • Challenge to pre-conceived wisdom which will require investors to think differently

  3. The drivers of structural growth Demographics Super cycle Climate change Often referenced but rarely understood Structural growth drivers - The Facts • “New industrial revolution” • Scientific evidence now substantial and driving public policy • Emissions per unit GDP need to be 25% of current levels by 2050 to avert disaster • Will require $20,000bn investment in energy infrastructure by 2030 • Global population grows from 6 to 9 billion people in 2050 • 98% of the population growth comes from developing markets • Ageing:16% of population over 60 years old by 2050. Japan population half in 2100 • Increasing importance of Emerging Markets in global economy, with Emerging Markets now accounting for 1/3 of global GDP • Globally infrastructure needs until 2030 are estimated at $32 trillion for transport, energy, water and communications infrastructure 2

  4. Super cycle drives resource consumption Industrialization and urbanization see growth rise by 50% by 2030 Emerging countries account for more than half global growth1 Energy consumption in Developing Markets only set to rise2 Per capita oil consumption 1Source: IMF, Consensus Economics, Schroders, March 2011 2Source: Barclays Capital

  5. ICT Electricity Cooling Other Appliances Traditional / Vital Fuel/Energy Service Modern/Adavanced Electricity Refrigeration Water Pump Diesel Electricity Basic Appliances Refrigeration Electricity,Batteries Basic Appliances Transport Oil Transport Oil Cooking Cooking Cooking Gas, Electricity, LPG Biomass, Kero, LPG Biomass Heating Heating Heating Gas, Coal, Oil Biomass, Coal Candles, batteries Lighting Lighting Lighting Electricity Kero, batteries, elec Low Income High Demographics drives resources demand growth Industrialization and urbanization see growth rise by 50% by 2030 Demographics & rising wealth supports exponential energy growth in developing economies1 Motor vehicle ownership relative to population2 Levels of motor vehicle ownership relative to population – clear potential for growth in lead demand Illustrative Example of Household Fuel Transition Registered vehicles / 1,000 population 801 196 50 48 1Source: IEA; CEIC, US Federal Highway Administration, US Census Bureau, Macquarie Research, December 2010 2Source: Barclays Capital

  6. Climate change drives change in the ‘energy’ mix The energy complex in 2030 Forecast change in primary energy demand to 2030 (Reference Scenario)1 World primary energy demand by fuel in the 450 scenario2 Mtoe 1Source: OECD/IEA - 2009 2Source: IEA - World Energy Outlook 2008

  7. Demand is only one side of the equation Supply of resources are finite Depletion of reserves Quality of Resource Base Structural supply constraints Access Corporate responsibility

  8. Supply of resources remains tight An inability to increase production, despite rising commodity prices Global decline rates2 Post Peak decline rates by decade Copper supply growth averages 1% pa over the past 5 years1 1Source: Schroders, 31 December 2010 2Source: IEA WEO 2008, IHS, Deloitte, USGS, Schroders

  9. What this means in practice Resources are a key beneficiary of structural growth drivers Demand • Demand for resources continues to rise • Although cyclical in nature, structural drivers dominate Supply • Resources increasingly constrained • Limited capacity to deal with demand shocks Implications for investors • Resource prices set to rise in the long term • Demand/supply imbalance creates opportunities for investors • A source of visible growth underpinning a strategic allocation • An efficient hedge against inflation

  10. Resources Equities Equities Commodity Futures How do we exploit these opportunities Resources equities – the best of both worlds Exposure to the persistent inefficiencies in equity markets Correlated to equity returns Exposure to commodities that are not accessible directly via the futures market Correlated to underlying commodity returns Equity Market Commodity Market • 2 Sources of alpha • Appreciation in the underlying commodity/resource price • company specific catalysts including changes in the operational and financial performance of the company • No negative effect of roll yield typically experienced by commodity futures when markets are in contango • Can accommodate long term strategic positions A diversifying asset class with two sources of alpha 9

  11. Why resources equities The best of all worlds – 2 sources of alpha Copper Price compared to First Quantum Minerals Rebased to 100 For illustrative purposes only and not a recommendation to buy or sell shares Source: Datastream, USD, 14 April 2011

  12. The importance of the growth gap Forward growth – an indicator of share price performance Xstrata share price (£,x) (£/ps) Source: Macquarie Research, December 2010

  13. Identify growth gap The inefficiencies we look to exploit – Poor broker forecasts Broker commodity price forecasts – invariably wrong! • Market reacts slowly to the changing supply/demand dynamics in individual commodity markets • Broker commodity price forecasts (positive and negative) are frequently conservative and driven-off spot prices • This presents opportunities to identify companies that are positively exposed to rising resource prices ahead of market consensus Source: Schroders

  14. ♦ 2011 consensus forecasts for Hard Coking Coal ♦ Current Coking Coal Price (Jan 2011) Coking Coal Price in USD LHS Identify growth gap Poor broker forecasts – Stock example Walter Energy WLT • Adverse weather affecting a number of regions & starting to have significant effect on supply • Floods in Queensland have major impact on coking & thermal coal supplies. The state supplies two thirds of the world’s coking coal and 8% of the world’s thermal coal • Approximately 75% of Queensland mines are not operating because of flooding • In 2008, flooding reduced coal production by roughly 8-10 million tonnes. The recent flood appears to be worse. Market slow to recognise the impact of unseasonal weather & price forecasts for coking coal fail to keep pace with deteriorating supply outlook Market slow to anticipate supply constraints Rainfall Accumulation (mm) Rainfall Accumulation (mm) RHS ♦ ♦ ♦ ♦ For illustrative purposes only and not a recommendation to buy or sell shares Source: Datastream, USD, 31 December 2010, Australian Bureau of Meteorology (Comet Post Office Station)

  15. RESOURCES increasing “accessibility” RESERVES Feasibility of economic recovery Degree of geological certainty Identify growth gap The inefficiencies we look to exploit – Market’s failure to fully appraise the asset base • Market lacks insight into the bottom-up operational characteristics of different mining projects to value these projects appropriately • We believe that better insight about the geological certainty and feasibility of economic recovery allows us to ascribe a more accurate value to a company’s assets • Detailed cash flow forecasting at an individual asset level allows us to identify mis-priced securities Source : British Geological Survey, Natural Environment Research Council

  16. Identify growth gap Market’s failure to fully appraise the asset base – Stock example First Quantum – Share price performance in USD First Quantum FQM.L • Shares suffer from negative sentiment over the potential (now realised) loss of assets in DRC • Ascribing zero value to all of First Quantum’s DRC assets, shares appear attractive relative to peer group and on sum of the parts valuation • Market fails to recognise the value in Ravensthorpe and attach low probability of project being delivered successfully NPV Appraisal – market consensus just too low Negative sentiment over DRC -Ravensthorpe acquired by FQM in 2009 from BHP - BHP sold the project in light of rising capex and complex geology. BHP had spent c US$3bn - FQM secure the asset for US$340m with capex budget of US$190m - FQM believes it can deliver project with capex budget of US$190m due to its in-house engineering expertise, which is one of the key strengths of the company For illustrative purposes only and not a recommendation to buy or sell shares Source: Schroders, Nomura, Datastream, USD, 15 April 2011

  17. Global Resources – Near term outlook Short term positive – Waiting for the Chinese Rebound Demand • Underlying demand drivers remains robust. Data remains solid (i.e. PMI indices, IP) • Strong restock in China expected Q2 2011. Significant destocking seen through 2010 • Commodity prices have remained at historically elevated levels (and in some cases record levels), despite mass Chinese destocking during 2010 and with anaemic demand in the developed world • Western world (specifically US) recovery has been largely ex-construction based to date. Lead indicators suggest this might be turning Supply • Supply side will continue to disappoint. Supply disruption risk remains – there is limited flexibility in the supply chain Valuation • Sentiment has been very weak in recent months given caution over MENA activity and Chinese tightening activity • We stick to the fundamentals. When sentiment turns, significant upside for many resources equities. We are well positioned

  18. Chinese end-use in 2010 has been strong Record prices for Copper in 2010…what could a Chinese restock bring? Chinese Motor Vehicle Production Chinese AirconProduction Tonnes (million) Tonnes (million) Source: Macquarie Research, March 2011

  19. China Base Materials & Steel Demand Iron Ore, shorter cycles…but a Q2 restock expected… Average days of iron ore inventory at 50 small steel mills Days of iron ore inventory Source: Macquarie Research, March 2011

  20. Developed world construction activity has been absent Recovery coming? Architectural Billing Index Source: Macquarie Research, as at 30 November 2010

  21. Resources equity valuations attractive Upside is material Mining Sector Forward PE Multiples – a discounted sector Source: Datastream

  22. Future direction of energy prices Finely balanced Demand starting to roll over?1 Expected Supply response through to 20152 K b/d, YoY Million Barrels of Oil per Day (Cumulative) Note : Excludes non-OPEC processing gains, non-OECD Europe and non-OPEC Middle East 1Source : Merrill Lynch 2Source: IEA, Canaccord Genuity

  23. Energy supply Oil volumes fall; Gas just keeps on flowing OPEC & Non-OPEC production EIA Form-914 supply survey Lower 48 USA bcf/d, wet gas USA natural gas rigcount Baker Hughes weekly data %bcf/d rigs Source: Bloomberg, Schroders, EIA, Baker Hughes

  24. Energy supply Ample scope for supply-side disruption

  25. Energy equity valuations Cheaper to buy than drill Finding & Development F&D costs Super 6 Integrated Oil Companies2000-2008 Ultra Petroleum Quicksilver Resources $/bl EV / BOE $/bl EV / BOE $/bl Source: Company reports, Schroder estimates

  26. Schroder ISF Global Smallcap Energy Risked upside to target prices ~69% average (June 7th 2011) Current positions % Upside Source: Schroders Past performance is not a guide to future performance and may not be repeated. Investors may not get back the full amount invested, as price of shares and the income from them may fall as well as rise

  27. Why Schroders for Resources and Energy? Experienced team – distinctive approach Peer Group Ranking relative to Peer Group universe 5 year to 30 April 2011 • Schroders voted top 3 team in Europe in 2005, 2006 & 2007 Extel surveys • Schroders rated World Junior Oil & Gas Investor of the Year 2008 • Citywire A rating as at January 31st 2010 • 2010 Lipper awards Spain, Taiwan, Hong Kong and Gulf Region • “Best Equity Sector Natural Resources Fund over 3 Years” 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Schroder ISF Energy Fund Source: Morningstar Micropal, Offshore and International Funds, Sector Energy. Returns are in USD . As at 30 April 2011

  28. Performance credentials Building on Schroders’ proven capability in commodities & energy equities Global Resources Equities Periods to 31 May 2011 in USD Periods to 31 May 2011 in USD % Performance shown is past performance. Past performance is not a guide to future performance. The value of investment can go down as well as up and is not guaranteed. *Schroder ISF Global Resources Equity Fund. Acc C-class, Based on bid to bid prices, net income reinvested.** Inception 17 May 2010. ***MSCI AC World 35% Energy and 65% Materials. Fund is benchmark unconstrained and that the benchmark is shown for performance comparison.

  29. Performance credentials Building on Schroders’ proven capability in energy equities Global Energy Periods to 31 May 2011 in USD Global Small Cap Energy Periods to 31 May 2011 in USD Periods to 31 May 2011 in USD Periods to 31 May 2011 in USD % % Performance shown is past performance. Past performance is not a guide to future performance. The value of investment can go down as well as up and is not guaranteed. *Schroder ISF Global Energy Small Cap Fund. C-class, Based on bid to bid prices, net income reinvested. Inception 17 May 2010. Periods over 1 year are annualised. Performance shown is past performance. Past performance is not a guide to future performance. The value of investment can go down as well as up and is not guaranteed. *Schroder ISF Global Energy Fund. C-class, Based on bid to bid prices, net income reinvested. Inception 30 June 2006. Periods over 1 year are annualised.

  30. Investing to maximise returns Conclusion • Structural growth increases certainty of long term returns • Resources are key beneficiaries of structural growth drivers • Resource related equities are an attractive way to exploit the opportunities • Strong argument for making a strategic allocation

  31. Important information • Risk warning: Investments in equities are subject to market risk and, potentially, to currency exchange rate risk. This fund may use financial derivative instruments as a part of the investment process. This may increase the fund’s price volatility by amplifying market events. • Important Information: This presentation does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund (the “Company”). Nothing in this presentation should be construed as advice and is therefore not a recommendation to buy or sell shares. • Subscriptions for shares of the Company can only be made on the basis of its latest prospectus together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. • An investment in the Company entails risks, which are fully described in the prospectus. • Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. • Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or www.schroders.com contains additional disclaimers which apply to the third party data. • This presentation is issued by Schroder Investment Management Limited, 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Services Authority. For your security, all telephone calls are recorded.

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