Exploration and development companies on AIM Outperforming or over-rated

1. Exploration and development companies on AIM Outperforming or over-rated

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3. Exploration and development companies on AIMOutperforming or over-rated It is tough being an investor There are so many companies So many metals and other commodities And many stages in the development of a mining project How can an institutional investor ensure investment in companies which achieve their stated ambitions while outperforming other simpler benchmarks such as Indices Commodities prices Cash at bank How many make it through the development process and how long will it take

4. Global economic outlook • Global economic outlook • US mortgage lenders pump $200 billion into market and now looking to create $1 trillion toxic sub-prime dump • Impact of US slowdown / recession

5. Currency impact • We reckon that the US dollar will weaken as Sub-prime debt is effectively nationalised. • This is a cheaper if not the only way in which to finance this debt burden without completely collapsing the US economic system as we know it. • US dollar based costs are good in a weaker dollar environment • Some regions will fare less well • eg Australian gold mines are struggling • Some metals are more linked to the US dollar than others

6. Commodity ‘winners’ Precious Metals Gold – to lead the way in terms of ‘safe haven’ investment demand US dollar weakness likely to push gold higher Platinum – ETF stocks, lower auto sales and lower US jewellery demand make this a tough market despite the long term supply/demand deficit. Base metals Copper – strong investment demand, strong demand growth Nickel – stainless steel growth Steel related materials Chromite and manganese ores – demand remains Bulk commodities Coal - Shortage due to demand and production constraints Iron ore – strong price growth, is a big boys game, contracts up 65%+

7. Gold Supply Demand Balance • Several years of deficit, strong demand and de-hedging • Slight surplus this year easily wiped out by a few production disruptions Source: Virtual Metals

8. World Copper Supply Demand Balance • Several years of deficit have led to current environment • Slight surplus this year easily wiped out by a few production disruptions Source: Bloomsbury Minerals Economics

9. Major issues affecting miners • Currencies • Earnings cut by weaker US dollar in many regions • Costs: • Cost inflation is a major threat to smaller miners and to the industry as a whole. • It is now much harder for companies and financiers to plan finance for project evaluation and for eventual development and project finance. • Oil prices may fall but electrical power costs look likely to continue to rise word wide. • Examples are South Africa and China • Capex: • Capital costs have seen substantial increases e.g. Goro original capex of US$1.4bln now over US$3bln. • If we talk about a capital cost of $500m then the financiers assume it will double. • US Recession • US consumer slowdown to impact certain commodities e.g. diamonds and gold • US / Canada • Ready for a new mining boom, weaker economies could encourage governments to ease off on restrictions to allow mines to be developed • Critical parts – long lead times • So far project managers have coped surprising well with cost issues equipment but some managers have lost out heavily on LSTK contract. • These issues are becoming increasingly difficult to cope with • Reserves and Resources • Quarterly reporting tends to focus investors on results which does not fit well with exploration and development businesses • Companies have been generally slow to advance reserves and resources while consultants have been slow to sign-off • Higher metals prices enable better conversion of reserves from resources

10. Regions – for mining investment • Europe • – Difficult for miners, high costs and legislative requirements • Turkey • Seems impossible to obtain necessary permits • Indonesia • Rough country but opportunities exist • Philippines • Very good opportunities but political risk e.g. if church objects then local population cannot be convinced to oppose. Also high degree of corruption • Africa • Chinese may push out Western miners • Botswana is great • South Africa has become mining friendly again • Congo carries high risks but mines are being built • Power shortages a growing issue • Russia • – Rising local costs but much is still determined in US dollars. Few foreign companies dare operate there and UK investors are simply not interested following well publicised problems. • Central Asia • – Some countries to avoid and it is hard to find good new projects, but good exploration and intuition can still generate substantial value. Opportunity for juniors is to find and take a significant project to BFS and allow a larger regional player to take over • China • – New territory for London listed miners. Some will succeed but risks are higher • Latin America • Wonderful environment for mining, skilled labour, low costs well established legal frameworks, • Brazil and Chile are great. • Columbia, Bolivia, Peru, and Venezuela are challenging • - Argentina is almost impossible • Power shortages to become a growing problem, particularly in Chile

11. Market Cap segment mining comparison UK listed stocks • Mid-caps outperform as successful miners show strong growth. • Smallest stocks lag as they take more time to create value. • Funding become less certain for smaller companies. • All sectors see erosion of value in bear market. Source: Bloomberg

12. Selected Market Cap segment mining comparison, UK listed stocks • If we expand the scale the falls look even worse for the small cap space. • Investors are focussed on picking up the remains of banks as they recapitalise using deeply discounted equity issues. • Even the mid-cap miners have come back as they are sold for their liquidity Source: Bloomberg

13. Relative performance • Companies effectively rate against the relative performance of other companies within the sector • => If Rio Tinto gets cheaper then everything else is likely to get cheaper in proportion to the ratings of the leaders. • Exploration and development companies should only outperform when they add substantially to ‘trade’ value or when a clear route to cash flow may be determined. • It is all down to supply and demand. • Some steel producer want iron ore mines and coking coal • Some power companies are looking for coal • Nickel producers want nickel sulphide concentrates • The market is ‘normally’ surprisingly efficient in its rating and valuation of companies even at the smaller company end of the market. - note the the current market environment is an anomaly in this respect. • Some companies do over-rate due to their expectations of value but these normally fall away when reality sets in.

14. £0-100m Market Cap versus key commodities • Mining equities • versus commodities. • If you can get the commodity right then why not buy the ETF? Source: Bloomberg

15. £0-100m Market Cap versus key commodities • . • . Source: Bloomberg

16. Leveraging into project value • Companies have the opportunity to leverage the value of a project into a much longer term and sustainable value creating proposition • Valuation • Normally we base a valuation on the company/project NPV discounted appropriately to its country risk to its proximity to production and to the quality of management. • This works well in normal market conditions and at certain levels of discount • There is plenty of finance around for specific types of projects • But it will demand attractive valuations • “Fooling some of the people all of the time” – Steve Einhorn • Few mining promoters can achieve this even if some hedge fund managers do make the claim • Risk • Some investors will take more risk than others • Some investors will take more risk than most brokers • Some investors are being forced to close their funds with assets sold at fire-sale prices

17. Building value • Ultimately companies and investors need to build value • Sometimes the more entrepreneurial of investors sell out too early particularly if they see increasing risk, sometimes too late if at all • The real argument is over the hand-over of valuation from early stage investors to the next stage. • In an ideal world all exploration companies find meaningful assets, develop demonstrable and tradable value and then pass the investment on to later stage investors who are interested in the development and ultimate construction of mining projects. • In reality it takes time to find and secure good assets, then more time to deliniate them • We wish more companies would achieve this on a more regular basis. • Successful companies in London are: • Antofagasta, First Quantum Minerals, Peter Hambro Mining • The best valuations are achieved when companies are on a clear growth path and investors can see their way through to ‘certain’ cash flow or ‘value’ generation

18. Mining Indices Comparisons • AIM stocks look bad on this. • But the other indices all contain large cap companies so the comparisons are not valid. • at least AIM miners have outperformed the FTSE AIM allshare index Source: Bloomberg

19. AIM funds have financed substantial growth • AIM • Miners whinge about AIM – but it has been a good market for early stage investment for some years with a number of funds backing many early stage companies. These funds are still interested in backing the sector but are held back by the impact of the credit crisis which has soured some of their key investments. • Trading volumes have fallen as institutions have largely stopped investing in equities in order to preserve cash for redemptions and for better market opportunities. • If you can deposit funds for 6% or 8% why take the risk of investing in an early stage mining project. • Fortunately for us institutional investors are not paid to sit on their funds and we know many that are long cash and are actively looking to invest in lower risk opportunities.

20. Management – need to drive projects very hard • The market for is changing fast • Investors only want to hear about certain types of projects in the current environment • Popular areas are Iron Ore, coal, copper, platinum, nickel and manganese • Many other commodities are of less interest today but may become popular in the future • Managers • need to feed the market with results and regular updates to ensure investors that progress is being made • Explorers • Geologists are not normally mine builders, many manage the pre-feasibility study process • Mining engineers tend to better manage the full feasibility study and development stages • Developers • This is often seen as the best stage to buy a company in as it goes through the development process • Builders • Building a project is different from developing the feasibility study and signing the finance deals to pay for the build • Operators • Some teams develop, others rely on contract operators and then use this as a basis to develop their own knowledge and eventually buy up operator equipment and train own staff with contract operator assistance

21. Nickel price correlation Bid speculation Project de-risks as construction runs To plan and company gets into production Nickel price collapses, bid vanishes + slower than expected start up Mining licence approved for Munali BFS Listing on AIM and ASX raise £6.2m Increase in Munali to 97kt Ni Feasibility study started on Munali US$60m financing agreed A$13m raising Off-take agreement signed with Jinchuan US$35m equity raising For Munali development Further A$13m financing Albidon Nickel versus nickel price

22. £85m placing Power problems In South Africa Concerns over for expansion + bear market hitting liquid stocks Move to full list 2nd furnace enters production Start of production ahead of schedule Listing on AIM raising £80m Decision to build New furnaces Problems with furnace rings 30kt lost production Construction of plant & mine IFM versus ferrochrome price

23. Speculation that FQM is a bid target Adastra acquisition for Kolwezi Reacts to copper price movements and political Pressures in DRC and Zambia Frontier Mine Development plan Lonshi Mine Threat to DRC licences following as Fears over political risk in Zambia + bear market Development of Kansanshi Bwana Mkubwa Mine First Quantum versus Copper price

24. Conclusion • Management will need to do better to sell their stock to investors • Companies should remain private till they can add meaningful value to investor funding • Funding is now available for projects in certain areas • Private equity funding is more rigorous but has longer term horizons and is often well structured