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Metals and Mining Outlook 1970’s Repeat?

Metals and Mining Outlook 1970’s Repeat?. Victor Lazarovici Feb. 4, 2009 Presented to NY Section SME. 1970’s vs. 2000’s (But Which 70’s?). Why is this Important? Metals and Mining Stocks Outperformed Broader markets in the 70’s Similarities: Industrializing Major Economy - Japan / China

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Metals and Mining Outlook 1970’s Repeat?

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  1. Metals and Mining Outlook1970’s Repeat? Victor Lazarovici Feb. 4, 2009 Presented to NY Section SME Victor Lazarovici

  2. 1970’s vs. 2000’s(But Which 70’s?) • Why is this Important? Metals and Mining Stocks Outperformed Broader markets in the 70’s • Similarities: Industrializing Major Economy - Japan / China Supply Shortages Oil Shocks – 1973 & 1979 - $147/BBL Real Increases in Metal Prices Stagflation – 1970’s / ???? • Differences: Rising Interest Rates / Falling Interest Rates (For Now) Geopolitical - Restricted Access to Producing Areas / Globalization Large Inventories vs. JIT Victor Lazarovici

  3. 1970’s vs. 2000’s • Problems in the Comparison: Lack of Data or Comparability of Data: Opaque Metal Price Discovery : No consistent LME Market Data – Trading of Al and Ni started in 1979 Producer Pricing Dominates the 70’s in all but copper Industry Restructuring / Consolidation = Apples to Oranges Change in Index Components Electronic reporting of Market Data started in the 80’s Gold Peg Victor Lazarovici

  4. The Perils of Forecasting!Notable Long Term Forecasts: Notable Long Term Forecasts: • "The truth is more important than the facts." • - Frank Lloyd Wright (1868-1959) • "I think there is a world market for maybe five computers." • - Thomas Watson (1874-1956), Chairman of IBM, 1943 • "There is no reason anyone would want a computer in their home." • - Ken Olson, president, chairman and founder of Digital Equipment Corp., 1977 • "The concept is interesting and well-formed, but in order to earn better than a 'C', the idea must be feasible." • - A Yale University management professor in response to student Fred Smith's paper proposing reliable overnight delivery service (Smith went on to found Federal Express Corp.) Victor Lazarovici

  5. The Perils of Forecasting!Notable Recent Forecasts: Notable Long Term Forecasts: • "A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" — Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008 • At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8500. • AIG (AIG) "could have huge gains in the second quarter." — Bijan Moazami, analyst, Friedman, Billings, Ramsey (FBR), May 9, 2008 • AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat. • "I think Bob Steel's the one guy I trust to turn this bank around, which is why I've told you on weakness to buy Wachovia (WB)." — Jim Cramer, CNBC commentator, Sept. 15, 2008 • Two weeks later, Wachovia nearly failed as depositors fled. CEO Steel eventually agreed to a takeover by Wells Fargo (WFC). Wachovia shares lost half their value from Sept. 15 to Dec. 29. Source: Businessweek, Jan. 12, 2008 Victor Lazarovici

  6. The Perils of Forecasting!Notable Recent Forecasts (Continued): Notable Long Term Forecasts: • "Existing-Home Sales to Trend Up in 2008" — Headline of a National Association of Realtors press release, Dec. 9, 2007 • On Dec. 23, 2008, the group said November sales were down 11% from a year earlier in the worst housing slump since the Great Depression. • "I think you'll see $150 a barrel [of oil] by the end of the year." — T. Boone Pickens, June 20, 2008 • Oil was then around $135 a barrel. By late December it was around $40. • "I expect there will be some failures.... I don't anticipate any serious problems of that sort among the large internationally active banks." — Ben Bernanke, Federal Reserve Chairman, Feb. 28, 2008 • "In today's regulatory environment, it's virtually impossible to violate rules." — Bernard Madoff, money manager, Oct. 20, 2007 • On Dec. 11, Madoff was arrested for allegedly running a Ponzi scheme that may have cost investors $50 Billion Source: Businessweek, Jan. 12, 2008 Victor Lazarovici

  7. Broader Market Context End of the Liquidity Bubble?DJIA vs. 10 Yr. Treasury Rates – 5/62 to 12/08 Victor Lazarovici

  8. Notable Bubbles? • Nasdaq • Nikkei • 1930’s Dow • 2000’s Commodities Victor Lazarovici

  9. Nasdaq Composite2/71 to 1/09 Victor Lazarovici

  10. NIKKEI 2251/84 to 1/09 Victor Lazarovici

  11. The Great Depression25 Years to Recover Victor Lazarovici

  12. Metals Outlook • Historical Perspective: • It’s All About Industrialization Victor Lazarovici

  13. Global GDP Growth • LT Economic Growth Puts Pressure on Supply Average GDP growth 1900 – 1960 1.3% 1960 – 1980 3.5% 1980 – 2005 5.7% 2006 – 2015E 6.0% Victor Lazarovici Source: IMF, Angus Maddison, The world economy: historical statistics, OECD and CVRD.

  14. WW Copper & AluminumApparent Consumption Growth Rate1956 to 2010E Victor Lazarovici

  15. Long Term Consumption TrendsWW Consumption in 00’s constrained by Supply/Chinese growth Victor Lazarovici

  16. Long-Term Production GrowthSteel Example Crude Steel Production CAGR World Japan China1959-1974 3.4% 13.0% -1974-1999 1.8% - -1999-2004 6.0% - 11.4% Note: Japanese Steel Production Growth Slowed Sharply in 2nd. Half of 70’s Source: CVRD (IISI, Japan’s Ministry of Economy, and CEIC) Victor Lazarovici

  17. Will a Strong Recovery Follow the Global Recession?Western World Recession / Recovery Demand Patterns- Last 6 Cycles Victor Lazarovici

  18. Base Metals Recovery Cycles Victor Lazarovici

  19. Producers Lost Control of Production Costs • Near Term Focus will be on: • Cost Reduction • Reducing Excess Production • Repairing Balance Sheets Stressed by “Top of the Market” Acquisitions Early Curtailments Reduce Inventory Overhangs: Reductions to Estimated 2009 Production: Coking coal Copper Nickel Zinc 13% 9% 21% 9% Source: Brook Hunt, Xstrata Victor Lazarovici

  20. Producers Lost Control of Production Costs Copper Cash Cost Curves Source: Brook Hunt Victor Lazarovici

  21. Aluminum Recession/Recovery CycleLME Price vs. LME Inventory – June 89-June 2007 Victor Lazarovici

  22. Copper Recession/Recovery CycleLME Price vs. LME Inventory – June 91-June 2007 Victor Lazarovici

  23. Nickel Recession/Recovery CycleLME Price vs. LME Inventory – July 84-June 2007 Victor Lazarovici

  24. “The Big Picture”Global Population TrendsBillions Source: UN Population Division, World Urbanisation Prospects: The 2007 Revision Victor Lazarovici

  25. Global Population Trends Urbanization's Second Wave: A Difference of Scale First wave Europe and North America in the early 18th century Occurred over two centuries (1750-1950) Produced the new urban industrial societies that now dominate the world Involved a few hundred million people. Increase from 10 to 52 per cent urban and from 15 to 423 million Second Wave In the past half-century, the less developed regions have begun the same transition. Achieving in one or two decades what developed countries accomplished in one or two centuries Urbanites will go from 309 million in 1950 to 3.9 billion in 2030; from 18 per cent to 56 per cent Between 2000 and 2030, Asia’s (alone) urban population will increase from 1.36 billion to 2.64 = Approximately 42.7 Million/year = Build 3 NYC/Yr. for 30 Years! Source: UN Population Division, World Urbanisation Prospects: The 2007 Revision Victor Lazarovici

  26. Global Population Trends • Infrastructure Growth Must Continue! • “very few developing-country cities generate enough jobs to meet the demands of their growing populations • the shortage of urban jobs, are responsible for conditions that can outmatch the Dickensian squalor of the Industrial Revolution “ Source: UN Population Division, World Urbanisation Prospects: The 2007 Revision Victor Lazarovici

  27. If Chinese-Driven Growth Resumes, Where Will the Supply Come From? • Constraints to Supply: • Near Term Profitability Pressure and producer Responses • Lack of Financing/Stressed B/S Severely Reduces Project Pipelines • Resurgence of Nationalism = Increased Risk • Companies/Investors Less Risk Tolerant • Availability of Equipment & People will still be an issue Victor Lazarovici

  28. US Earth Sciences Graduates Source: U.S. Department of Education, National Center for Education Statistics Victor Lazarovici

  29. Metals OutlookConclusions • Near Term: • Recession / Demand Uncertainty Continues • Commodity Prices Could Decline Further • Demand/Price Cycle Bottoms • Early Curtailments Should Result in Quick Rebound • Renewed Demand Growth Absorbs Inventory and Idled Capacity • Longer Term: • Sustained Demand Growth • Depleted Project Pipeline • Availability of Risk Capital Could be an Issue • Shortage of Technical Personnel and Supplier/Equipment Capacity Victor Lazarovici

  30. 1970’s vs. 2000’s Conclusion • On Balance – More Similarities Than Differences • Stagflation Likely • Commodity Supply/Demand Tightness • Strong Demand for Industry Professionals, Equipment & Supplies • Prices Above LT Historical Levels • Superior Industry Profitability • But Slower Growth Victor Lazarovici

  31. 1970’s vs. 2000’sConclusion • “If something can’t go on forever, it will end.” Anon Victor Lazarovici

  32. Additional Slides Victor Lazarovici

  33. Victor Lazarovici • Brief Biography • Victor Lazarovici has over 35 years of experience in a broad range of management, financial and analytical roles. Most recently, he worked as a highly ranked and successful global metals and mining analyst for the past twenty years. Prior to entering the financial sector as an analyst, he spent over 14 years in the corporate sector in engineering, financial management and corporate development roles. He currently serves as a director of Abacus Mining and Exploration and Minera Andes Ltd. Most recently Mr. Lazarovici was the Managing Director and Senior Base Metals and Minerals Analyst for BMO Capital Markets in New York. There, he led a team of analysts covering the base metals sector that was consistently ranked amongst the top tier in all of the major Canadian polls of institutional investors. Mr. Lazarovici has also served as a Managing Director and Senior Metals and Mining Analyst for Smith Barney, where he was consistently ranked in the top tier of Wall Street mining and metals analysts in all of the major US polls of institutional investors. He is the only analyst to receive the top honour in both the Canadian and US Greenwich Associates surveys. He also worked at UBS, HSBC, and Scotia Capital. As an analyst, Mr. Lazarovici expertise includes extensive first hand knowledge and coverage of the global base and precious metal producers' operations, having toured most major mineral camps and mines around the world. He also has an in-depth understanding of the macro-economic factors as they impact the industry and has extensive experience in short and long term forecasting of metal prices. He maintains an excellent relationship with his peers and is a past President of the Metals Analyst Group of New York, and is highly regarded for his knowledge of the North American and Latin marketplace. Mr Lazarovici holds an MBA from York University in Downsview, Ontario and a B.Eng. from Sir George Williams in Montreal, Quebec. Victor Lazarovici

  34. The Perils of Forecasting!Notable Recent Forecasts: • “Peter writes: ‘Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?’ No! No! No! Bear Stearns is fine!Do not take your money out. … Bear Stearns is not in trouble. I mean, if anything they’re more likely to be taken over. Don’t move your money from Bear! That’s just being silly! Don’t be silly!” —Jim Cramer, responding to a viewer’s e-mail on CNBC’s Mad Money, March 11, 2008 • “The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.”—Arjun Murti, Goldman Sachs oil analyst, in a May 5, 2008, report • Murti was dubbed the “oracle of oil” in by the New York Times. Oil prices peaked in July at about $147 a barrel before beginning a long decline. Thanks to a decrease in demand because of the global recession, prices are now nearing the $40 mark, and some experts even see $25 as a possibility next year. Victor Lazarovici

  35. Equity Markets Trends Victor Lazarovici (212)702-1226Victor Lazarovici

  36. Equity Markets Trends Victor Lazarovici

  37. LT Trend in Copper Costs & Grades Source: Phelps Dodge Victor Lazarovici

  38. Copper Outlook - Fundamentals U.S. COPPER CONSUMPTION - AUTO & HOUSING Victor Lazarovici

  39. Copper - LME Inventory vs Price Victor Lazarovici

  40. Nickel - LME Inventory vs Price Victor Lazarovici

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