Mine When the Going Gets Tough

8/2/2019 Mine When the Going Gets Tough

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Energy, Utilities & Mining

MineWhen the going gets tough...Review o global trends in the mining industry2009


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MineWhen the going gets tough...

Contents

Executive Summary and fnancial highlights

01 Industry in perspective 1

02 A view rom the top 5

03 Financial review and reserves 7

04 Seven-year trends 2002-2008 21

05 A view rom around 26

06 Other inormation 38


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Executive summary and fnancial highlights

Last year we posed the question whether this is as goodas it gets? 2008 started where 2007 had let o, andthreatened to answer the question with a resounding No.Continuation o strong demand and record prices,epitomised by record-breaking iron ore prices negotiatedby BHP Billiton, Rio Tinto and Vale provided theoundation o another spectacular year or the industry;

Revenuesincreased23%year-on-year;

Netassetsincreased10%;

Cashowsfromoperationincreasedby25%andexceeded $100 billion or the frst time; and

RecordEBITDA1 o $141 billion

1 Excluding the impact o impairment charges

Despitethestrongnancialresults,2008wasdenitelyayear o two parts with the good times quickly turningbad as the global economic crisis took hold in the lastquarter and commodity prices went into reeall. Thespeed o the drop took many by surprise, and exposed anumber o issues;

Operatingcostscontinuedtoriseatagreaterratethanrevenue(27%),furthererodingmargins;

50%oftheTop40recordedimpairmentchargesintheyearthattotal$31billion(80%ofthischargerelates to two companies who completed dealsclosetothetopofthemarket)

Theimpactoftheaboveonnetprotwasadecreaseof14%-therstdecreasesincethestarto our analysis; and

Short-termdebtrepaymentsbecametoughto refnance

So where does this leave the industry? The short-termoutlook or the uture looks bleak, and withoutmanagement intervention margins will be quickly eroded.Market capitalisation o the Top 40 mining companiesdecreasedby62%comparedtotheS&P500whichdeclinedby38%overthesameperiod,asshareholderslost confdence and share prices plunged. However, the

overall level o market capitalisation is above that recordedin 2005 (which at the time was seen to be a spectacularyear).Thefulleffectofthedownturnisnotevidentinthe2008 fnancial inormation, however frst quarter releaseso a number o companies report signifcantly reducedprofts and in some cases operating losses.

There is no doubt that the industry is acing toughertimes, and steering a path through this downturn willrequire tough decisions rom the leaders o the Top 40.

InA view rom the top we explore the challenges acingthe leading CEOs. Our discussions highlighted that theconditions have created two kinds o companies; thehaves and the have nots, and actions will depend onwhich type o company the CEO is leading.

Indeed one o the keys to managing in the currentenvironment is having a motivated and experienced teamto support you. Shareholders impacted by the signifcantall in share prices and with the prospect o reduceddividends in the period ahead will be quick to criticise anyperceived excessive reward. How to reward and retain thebest in the industry in this environment will be high on the

agenda o most public company remuneration committees.

Flexibility will also be important. The boom encouragedthe industry to invest heavily in capital projects and growthe top line. In these more cautious times, the ability toturn the cost tap on and o quickly may be thedierence between success and ailure.

Finally during times o uncertainty the ability to betransparent and have open dialogue with stakeholderswill be crucial. Real time, clear guidance outlining thecompanys strategy will endear trust, and potentiallybring confdence back to the market.

Most indicators point toward a tough period or theindustry as the short-term issues dominate the agenda.Success in the long-term will depend on how the miningindustry reacts when the going gets tough

We trust you will fnd this years publication inormative,and encourage you to send us your eedback.

Tim GoldsmithGlobal Mining LeaderMine Project Co-LeaderPricewaterhouseCoopers

Jason BurkittUK Mining LeaderMine Project Co-LeaderPricewaterhouseCoopers

Welcome to PricewaterhouseCoopers sixth annual review o global trends in the mining industryMine.

These reviews provide a comprehensive analysis o the fnancial perormance and position o the global

mining industry as represented by the largest 40 mining companies by market capitalisation.


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Executive summary and fnancial highlights

Key nancials 2008

$ billion

2007

$ billion

%

Change

Revenue 349 284 23

Operating expenses 208 164 27

AdjustedEBITDA* 141 120 18

Net proft 57 66 (14)

Netoperatingcashinows 104 83 25

Capital expenditure 66 48 38

Net debt 115 106 8Distributionstoshareholders 29 37 (22)

*EBITDAadjustedtoexcludeimpairmentcharges.

Key ratios 2008 % 2007 %

AdjustedEBITDAmargin 40 42

Net proft margin 16 23

Eective tax rate 27 29

Return on capital employed 13 16

Return on equity 18 21

Gearing ratio 33 32


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Industry in perspective

4 PricewaterhouseCoopers

01

Industry in perspective


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MineWhen the going gets tough... 1

01 Industry in perspective

Market Cap Crash

2008 has seen the market capitalisation o the Top 40decreaseby62%from2007.Thisisprimarilyattributedto the all in commodity prices and the impact o theglobal economic crisis on shareholder confdence,which saw the industry experience sharp alls in marketvalue in the last quarter o the year. This represents aspectacular and rapid decline or the industry but onewhich is mirrored in many sectors.

In 2007 the cut-o or inclusion within the Top 40 wasa market capitalisation o greater than $9.0 billion in2008 this has dropped to $2.3 billion.

All that glitters

Gold companies have been the least impacted withtheirmarketcapitalisationdecreasingby20%basedon the perception that the commodity is a sae havenin a time o economic turmoil, and a protector owealth. 14 gold companies are included in the Top 40

Major Movement

While 2007 saw steep increases in the share prices othe diversifed majors, they have not been immunerom the all in 2008, with their market capitalisationalling below 2006 levels. Rio Tinto has allen romsecond to ourth place ollowing a challenging year orthe group, allowing Vale and China Shenhua to bothmove up one place each.

Overall there was signifcant movement in the Top 40ollowing the volatility experienced over the year, with15 changes in total. The companies that werereplaced were largely in the bottom quartile in 2007

and experienced market capitalisation declines inexcess o the Top 40 average.

in 2008, up rom ten in 2007 and gold companies nowcomprise26%ofthetotalmarketcapitalisation,morethan double the 2007 level, having taken the place obase metals, platinum and coal companies.

0

50

100

150

200

BHP Billiton Vale China Shenhua Rio Tinto

2004

2005

2006

2007

2008

Top 4 market capitalisation ($ billion) - 31 DecemberTop 4 market capitalisation ($ billion) - 31 December

0%

10%

20%

30%

40%

50%

60%

% of market capitalisation by commodity

2007

2008

Percentage o market capitalisation by commodity


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Over the last fve years gold companies have not

benefted to the same extent as others in the industryrom the meteoric rises in commodity prices, butsuered with the rest o the industry as theyexperienced sharp increases in costs o materials andlabour. However, 2007 and 2008 have seen robustgold prices and gold companies have again oundavour. The most signifcant movements are;

BarrickGoldhasmovedfromninthplace,replacing Anglo American as the fth largest despite its market capitalisation decreasing;

The debt distraction

O those companies with the high ratios o net debt tomarket capitalisation, the largest decrease in shareprice was experienced by Rio Tinto, who experienced adecreasedof79%andTeck,whosemarketcapitalisationdecreasedby85%.Bothcompaniesraiseddebttocomplete deals close to the top o the market.

Ater experiencing impressive growth over theprevious our years, 2008 has seen Xstratas market

capitalisationfallby87%to$9billionlessthanitsmarket capitalisation in 2004. Xstratas debt increasedby38%in2008andthecompanyhasfelttheimpacto declining base metals prices in the rising costenvironment. In January 2009 the companyannounced a 2:1 rights issue at a signifcant discountto its share price. The $6 billion raised was used torepay debt. Following the equity raising Xstratasgearingratioisapproximately30%,slightlybelowtheindustry average.

In contrast, Vale has moved up one place to second

on the listing, despite its speculated acquisition oXstrata not going ahead and its own marketcapitalisationdecreasingby59%.Valehasagearingratioof29%buthasacashbalanceinexcessof$10

FourgoldcompaniesarenowintheTop10,with

Goldcorp and Newmont up rom fteenth andseventeenth respectively; and

KinrossGoldsmarketcapitalisationhasremainedsteady over 2008, moving them rom 25th to tenthplace, making gold the most representedcommodity in the Top 10.

0

20

40

60

80

100

120

Top ten market capitalisation ($ billion) - 31 December 2008

A

nglo

American

Barrick

Gold

Top ten market capitalisation($billion)-31December2008

billion and only $8 billion net debt. By the end o thefrst quarter o 2009 its share price had increasedmorethan30%abovethe2008closingprice.

Decision time

The rapid all in market capitalisation and increaseddebt levels or some o the Top 40 has created twodistinct groups; the haves and the have nots. In thecurrent climate there is no more valuable an assetthan cash, and or cash rich companies, opportunitiesexist as asset values all. Options or this group ocompanies continue to include acquisition or organicgrowth. The timing o action could be a lead indicatoras to the industrys assessment o value and whenasset prices have declined sufciently to best utilisetheir cash resources and potentially bag a bargain.China has already taken its frst steps, with a numbero moves in play or assets, particularly in Australia,demonstrating their confdence in the long-termoutlook or the industry. Having said this, manycompanies are holding on to their crown jewels and

quality assets or sale are ew and ar between.For those companies with a heavy debt burden theopportunities are harder to grasp as management


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(10%)

0%

10%

20%

30%

40%

50%

Harmony Eldorado Randgold Kinross Gold Agnico-Eagle

Top five TSR performanceTop ve TSR perormance


time and eort is directed toward short-term fnancing

rather than the longer-term agenda. The action takenby these companies is more deensive in nature,epitomised by Rio Tintos proposed strategic alliancewith Chinalco, and contrasts with the more aggressiveaction o the boom years.

Who saw it coming?

Theindustrysinvestingcashowsillustratethatcompanies spent the majority o their ree cashdeveloping and acquiring assets.

Companies in 2009 are intently ocussed on reducing

capital and operating expenditure and managingproduction levels to ensure they operate at the lowestpossiblecost.Thecashowanalysisshowsthattheindustry did not commence these programs until late in2008 or early 2009 and, like many others, did not seethe rapid decline in both price and demand coming.

And the reaction?

While the industry may not have seen the declinecoming, the response has been rapid and decisive. InQ1 2009, 14 o the Top 40 announced mine closures,production cuts or moves to place mines on care andmaintenance. In addition $13 billion o capitalexpenditure has been deerred or cancelled.Combined, this has led to more than 40,000 plannedredundancies across the industry.

The coming year will be crucial to determine whetherthe actions taken are sufcient to combat the currentconditions acing the industry. Time will tell whether

the announced reductions are enough or whether

there has been an overreaction.O particular importance going orward is whichcompanies will best respond and adjust their operatingand corporate strategies to take advantage oopportunities over the short, medium and long-term.

Total Shareholder Return (TSR) holding your nerve

Investors in mining companies have ridden the boomover the past fve years, experiencing high levels oreturns, both through capital growth, dividends andshare buyback programmes.

Last year we observed that 14 o the Top 40 achievedaoneyearTSRofgreaterthan100%andonlyvecompanies had negative TSR. Four companiesreportedaTSRofgreaterthan400%.

This year the contrast could not be starker. Only threecompanies had positive TSR and the our lowest werea75%orgreaterdecline.ThetopveTSRsareallgold companies, as are nine o the top ten includingBarrick Gold, Newmont and Newcrest.

TSR is oten used as a perormance measure or

executive remuneration and the results will aectindividuals in the industry. Accordingly remunerationcommittees will be challenged to ensure that rewardstructures are designed to retain the industrys bestpeople despite the challenging market. This is urtherexplored inA view rom around and our discussion onrewarding in the downturn.


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A view rom the top


02

A view rom the top


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02 A view rom the top

In this section, PwC presents a summary o views

expressed by leading CEOs through interviews and

discussions conducted during the past year.

What a dierence 12 months can make - rom boomtimes to global economic bust. Compared to this timelast year, the mining industry aces a more uncertainuture, but one thing is certain: the CEOs agendalooks markedly dierent today than a year ago.Confdence in ambitious expansion strategies anddeals supported by the insatiable appetite o China toeed double digit growth is gone. Cash, a onceplentiul resource, now must be careully rationed andthe options it once created have vanished. These aretesting times indeed or those at the top.

While some saw the decline in commodity pricescoming, all were surprised by both the suddennessand depth o the correction. While the global economymay have hit pause, most CEOs still point to thelonger term undamentals and the case or strongercommodity prices remaining intact. Many also pointto the industrys rapid reaction to the crisis, withcapital expenditure programmes immediately cut andhigher cost mines put on care and maintenance,standing by, waiting or the next upturn in the cycle.However, lessons are learned rom every crisis andone that cannot be ignored rom this one is thatdespite the ocus on the Chinese economy, themonitoring tools used this time were not up to thetask o identiying and analysing the signals comingrom that market. This poses an interesting dilemmaor those watching or the frst signs o light while thedragon slumbers.

So what is on the minds o those in charge o steeringa path through the current difculties? That partlydepends on the exposure o the companies they lead,

with the two key dierentiators appearing to be frstlytheir commodity mix and secondly the degree towhich they completed deals close to the top o themarket. Those with robust balance sheets areocussed on reducing their operating costs to bestmanage margins savaged by diving commodity pricesand lower demand. Contrast this with the CEOs oheavily indebted companies which have these sameissues but also need to service or refnance that debtto ensure their businesses survive intact in the shorterterm. While short-term liquidity issues may be a newissue brought on by the global economic crisis, someo the old themes are still high on CEOs mindsalthough the problems have maniested themselves indierent ways.

Costhasbeenagrowingissueformanyyears.During

the boom years, provided enough product was minedand processed, the high prices achieved outweighedtheissueoframpantcostinationwiththeeectiveness o operations overriding efciencyconcerns. While prices or many mining services andconsumables have recently decreased, there is still alot o at let which needs to be trimmed and in someareas appears to be baked in. CEOs clearly have thison their agenda but in some cases are rustrated athow difcult it has been to remove costs, while at thesame time they are worried that they might cut too ar.

Managing capital expenditure programmes andensuring they were delivered on time and budget wastop o the agenda o many CEOs during 2007 and2008. Today the ocus is on re-examining theeasibility o some projects, making difcult decisionswhere necessary whilst ensuring where possible, thattheir company still invests or the uture.

Human capital issues remain but have become morespecic.Despitethenumberofredundancies,CEOsbelieve there is a shortage o management with theright skills and experience to manage in a downturn.Duringtheboomyears,experiencedseniormanagement cashed in their options and let theindustry, leaving less experienced managers to try torun what are now more complex businesses. In manycases these new managers have not been exposed toas many parts o the business and lack theexperience o a generation who spent a careerworking their way up in what were much leanerorganisations. Whilst the Young Guns exploited theopportunities o the boom years, experience could bethe most precious commodity during the downturn.

Even the ew CEOs sitting on signifcant cash surplusesace difcult decisions. With capital much less reelyavailable, those at the top are much less likely to rushinto major deals. Compared to recent history it mightseem there are bargains available but the ear ocatching a alling knie continues to weigh heavily.

The job o the mining company CEO has clearly notbecome any easier and in many cases confdence hastaken a blow. However it is reassuring to hear someCEOs talk o grasping the challenge presented today,building leaner and meaner organisations that willcreate value throughout the cycle, rather than trying to

ride out the downturn. The upturn, however, may betoo late or some organisations. While theopportunities are certainly there in the long term,the present is not short on challenges.


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Financial review


03

Financial review

and reserves


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03 Financial review and reserves


Income statement

2008$ billion

2007$ billion

Change%

Revenue 349 284 23

Operating expenses (208) (164) 27

Adjusted EBITDA* 141 120 18

Impairment charges (31) (2) 1,450

Depreciation&amortisation (26) (20) 30

PBIT 84 98 (14)

Net interest expense (6) (5) 20

Income tax expense (21) (27) (22)

Net prot 57 66 (14)

*EBITDAadjustedtoexcludeimpairmentcharges.

Margin squeeze

For the second year in a row, operating costsincreased more than revenues, impacting net proftmargins. Although the eects o decreases in

signifcant inputs, such as uel, energy and labour,

are anticipated in 2009, margins are still expectedto come under urther pressure as the gap betweenrevenues and costs continues to shrink.

Top 4 byrevenue

2008$ billion

2007$ billion

2008 AdjustedEBITDA margin %

2007 AdjustedEBITDA margin %

BHP Billiton 60 48 45 46

Rio Tinto 54 30 35 34

Vale 36 32 47 52

Xstrata 28 29 34 39

The companies analysed in the table above accountfor51%oftotalTop40revenue(comparedto49%in2007).Thisincreaseisprimarilyduetothefullyearimpact o the Alcan revenues within the Rio Tintoresult, and the companys margin has also beneftedrom gains on divestments. Higher iron ore and coalprices and robust production supported BHP Billitonand Vales perormance. Xstrata reported a decreasein revenue and margin primarily due to reducedproduction volumes.

Return on Equity and Return on Capital Employed

2008 (%) 2007 (%)

ROE 18 21

ROCE 13 16

Given the lower level o revenue growth and increasedcosts, return on equity and return on capital employeddecreased in 2008. The reduction was not specifc

to any one commodity or operating location and wasimpacted by the impairment charges booked.


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Commodity Prices

Metals prices remained buoyant throughout the frst three quarters o2008, but a sharp decline in commodity prices in Q4 contributed to lowerrelative growth compared to 2007. With the ull eect o these pricereductions to be elt in 2009, along with expected lower benchmark pricenegotiations or iron ore and coal, total revenues will come underpressure to remain stable, let alone achieve growth.



Year Copper$ / tonne

Gold$ / ounce

Nickel$ / tonne

Aluminium$ / tonne

2003(avg) 1,789 364 9,616 1,4312004(avg) 2,868 410 13,840 1,717

2005(avg) 3,684 445 14,747 1,900

2006(avg) 6,725 604 24,270 2,568

2007(avg) 7,124 697 37,225 2,638

2008(avg) 6,938 872 21,048 2,567

2008(close) 2,902 862 10,808 1,454

The peak in commodity prices or many minerals occurred during 2007,with notable exceptions or gold and bulk commodities. The decline innickel, zinc, copper and aluminium prices through 2008 and into 2009 hasbeen well documented, with nickel and aluminium prices returning to 2003levels. The reduction in price has placed continued pressure on margins orthose operations that remain in production.

Copper rallies

Despitethefallattheendoftheyear,therstquarterof2009hasseenthecopperpricerallyapproximately40%fromthe31Decemberclosingprice to above $4,000/tonne.

0.0

1.0

2.0

3.0

4.0

5.0

2003 2004 2005 2006 2007 2008 2008 close

Commodity prices rebased since 2003

Copper

Nickel

Gold

Aluminum

Commodity prices rebased since 2003


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$1,000 Gold

Whilethegoldpriceuctuatedthroughout2008,includingabriefperiodabove $1,000 per ounce, it closed the year only marginally higher than itopened. Some market analysts have orecast gold prices to once againexceed the psychological $1,000 per ounce threshold during 2009.

Bulk up

Iron ore and coal revenues were spared the ull impact o the economicdownturn due to the timing o price negotiations with customers. Themajors achieved large iron ore and coal price increases as part o the2008 annual negotiations, however getting Chinese customers to meetall o these contracts was a challenge. The 2009 contract process willcertainly lead to substantial price drops as already determined with someo the coal negotiations.

Ore wars

Iron ore has been the subject o a great deal o ocus over the last 18months, particularly around the benchmark setting process, with bothcustomers and producers attempting to determine the appropriate wayorward. The iron ore story is ar rom being fnally written. The signifcantownership by the customers o many projects cannot be a good long-term indicator or the industry, whilst immediately the major miners andthe steel mills bump heads to determine a pricing mechanism or theyear ahead. We consider the iron ore wars have many twists and turns

to play out in the next decade and recognise that the steel mills have theupper hand this year.

Black Gold

In 2008 coal has risen to the top o the revenue charts on the back o a4%increaseinproductionandlargecontractualpriceincreases

negotiatedbythemajors.DespitegoldcompaniesdominatingtheTop10in2008,goldremainsonly10%oftotalrevenue.

0%

5%

10%

15%

20%

25%

30%

%C

ontributonto

top40revenue

Commodity

Comparison of revenue by commodity

2007

2008

Comparison o revenue by commodity


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Revenue by location in 2008 was impacted by the ourth quarter, post-Olympic reduction in Chinese demand, although overall, the year wasdominated by increases in revenue rom China and the rest o Asia on thebackofhigherironoreandcoalprices.Despitethefocusofmanycommentators,reportedsalestoIndiarepresentonly1%ofthetotal.

As industrialisation and urbanisation continues in the developing world,we would expect Asian markets to continue to grow in the medium tolong term. Supporting this, the Chinese Government has announced a 4trillionyuan($586billion)stimuluspackagethatistobespentbytheendo 2010, signifcantly ocussed on inrastructure.

Almost hal o the commodities produced by the Top 40 are sold into

Europe and North America, both o whom are experiencing deep recessionand represent an exposure or the industry. Stimulus packages enacted bymany governments are aimed at creating demand and increasingeconomic activity. It will be interesting to see whether these packages or acontinuation o the downturn have a more pronounced impact on revenuein the next 12 18 months.

For several years copper has been the dominant commodity as a

proportion o the total revenue o the Top 40. Flat production volume and aalling price has signifcantly reduced coppers contribution to total revenuein 2008. Nickel was also aected by signifcant price decreases, along withzinc, although or a longer period o the year.

The ull eect o Rio Tintos acquisition o Alcan saw aluminium competewith gold in total contribution to Top 40 revenue, despite the decreasein price.

Share o total revenue by customer

0%

5%

10%

15%

20%

25%

2007

2008


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Production: making hay while the sun shines

2008

Commodity

(quantity)

Production change rom

prior year

Copper(Mt) 8 1%

Zinc(Mt) 3 2%

Gold(Moz) 37 (8%)

Platinum(Moz) 7 0%

Coal(Mt) 1,238 4%

Ironore(Mt) 694 7%

Nickel(Mt) 1 (1%)

Bauxite(Mt) 47 49%

Iron ore and coal production reached record levels ora number o the Top 40, as additional capacity arisingrom major capital investment over the boom yearscame on-line. For other commodities productionlevels remained broadly consistent with 2007,highlighting that the impact o the announced minesuspensions and closures had not yet had an eecton the 2008 volume data.

Goldproductiondecreasedby8%,withmanyofthemajors reporting production below 2007 levels. This



Rocky road ahead

Ananalysisofthepotentialeffectofpricereductions(assumingnodecreaseinproduction)paintsableakpictureor the industry in 2009:

Commodity Scenarios Impact on revenue $ billion

Iron ore 20%reductioninbenchmarkprices (8)

Coal 30%reductioninoverallcoalprices(boththermalandcoking) (15)

Copper Assumed average price $4,000 per tonne or 2009 (25)

Aluminium Assumed average price $1,500 per tonne or 2009 (14)

Total (62)

The$62billionpotentialdecreaseinrevenueunderthishypotheticalscenariorepresentsan18%reductionfrom2008 resultsand is more than the Top 40s net profts or the year. Whilst the adjusted total revenue levelremains greater than that reported in 2006, the industry aces the challenge o costs that are now signifcantlyhigher than in 2006.

In order to maintain 2008 gross proft margins, the industry will need to fnd cost savings o $41 billion

tooffsetthe18%declineinrevenues.Thisisahugechallengefacingmanagementsinceremovingalmost one in fve dollars spent will have signifcant short and long-term implications. Notwithstandingthis, any cut-back in production could have urther fnancial and non fnancial implications.

was due to a number o actors, including the impact

o power shortages in South Arica.Costs (out o) control

Operating costs continued to soar during 2008, rising27%,fourpercentagepointsgreaterthantheincreasein revenue during the period. This, along withimpairment charges, has resulted in declining netprotandEBITDAmarginsfor2008.OverallnetprotfortheTop40decreased14%from2007,andnetprotmargindecreasedby30%,continuingaworrying trend frst noted in 2007. The strengtheningoftheUSDollar(USD)helpedcontaincostsfor

thosecompaniesinnon-USDjurisdictions.Withoutthe oreign exchange movements the increase couldhave been much worse.

Duringtheboomyears,volumegrowthtookprecedentover cost management as the industry chased highcommodity prices, and companies across the costcurve were proftable.

The downturn will bring greater ocus on positioningin the cost curve. As already seen in 2009, aluminiumand nickel producers at the higher end o the costcurve have been either orced to close operations orseek other drastic alternatives.


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Return to undamentals

A clear ocus throughout 2009 will be to managemargins through a signifcant reduction in both fxedand variable operating and administrative costs.However, given the long-term nature o miningprojects and associated capital commitments, it maybe difcult or companies to drastically reduce costsin the short-term.

Other considerations when closing mines or deerringor cancelling planned capital expenditure include:

Stakeholdermanagementhowwillinvestors respond?

Financialreportingimplicationswhatdoesitmean or asset values?

Contractualimplicationsbreakorcancellationees may be incurred

Bankingimplicationsbankcovenantsor guarantees

Supplierimplicationscancellationofsuppliercontracts at avourable prices may berenegotiated later at higher prices

Taximplicationsminimaladditionstotaxpools

in respect o capital costs would result in lowertax deductions and possibly higher cash taxes

Employeeimplicationsinadditiontothecashcosts related to severance and restructuring,organisational knowledge and employee talentmay be lost and morale may be impacted

By the end o the frst quarter 2009, many o the Top40 announced moves to reduce headcount and scaleback or close some operations:

BHPBillitonannouncedproductioncutsinits

nickel, iron ore and manganese operations; RioTintoscaledbackaluminaoperationsinline

with its expectation o global demand;

Valecutproductionandjobsinthenickelandironore sectors; and

Xstrataisscalingbackcopper,coalandnickel operations.

Such announcements have been made acrossthe industry and will inevitably lead to a declinein production.

In addition to actions within managements control,

variable costs linked to commodity prices such as ueland power have had a positive impact on the industryscost base, however the speed and scale to whichthese costs impact the bottom line will be critical.

A question or the industry is whether production cutbacks will reduce supply enough to increase pricesdespite alling demand in the short term. Companiesshould ocus on how they will bridge the gap betweenthe downturn and the recovery.

Other income statement items which movedsignifcantly in the year include:

Prot/(loss) rom JVs and associates

Income rom joint ventures and associates hasincreased92%to$3billion.Thismayreecttheshiftrom sole ownership o projects to joint ventures andother shared ownership structures to reduce risk andcost commitments.

Gain/(loss) on sale o assets/businesses/investments

Netgainsincreased$4billion(186%)primarilyduetoRio Tintos divestments, which accounted or $3billion o the total.

Depreciation

Depreciationandamortisationexpenseincreased30%onthebackoflargerisesindepreciableplantand equipment over the previous years romacquisition and project development.

Exploration expense

Explorationexpenseincreased46%,continuinganupward trend rom the previous year. There will be

pressure on exploration budgets in 2009 as companiesseek to reduce costs and discretionary expenditure.

Asset impairment

Impairments recorded by the Top 40 were in excess o$31billionin2008,and50%ofthecompaniesintheTop 40 recognised impairments compared to only25%in2007.


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Taxes and royalties

Royaltyexpenseincreased28%in2008followingtheincrease in revenue, while income tax expensedecreased22%.Theeffectivetaxratedecreasedfrom29%to27%,possiblyasaresultofdecreasingtaxratesin some jurisdictions and a change in revenue location.

Taxes and royalties combined comprise approximately7%ofoperatingrevenueforthe2008year.Althoughtaxes and royalties paid to governments are inthemselves a signifcant contribution, there are still alarge proportion o taxes and other contributions togovernment which are not separately disclosed in

the fnancial statements and, thereore, may gounrecognised by shareholders. This is exploredurther on page 32 o this publication.

80%oftheimpairmentrelatestotwocompanies:

Freeport-McMoRan and Rio Tinto, who recordedchargesagainsttheirinvestmentsinPhelps-Dodgeand Alcan respectively. Both acquisitions were madein 2007, close to the top o the market. In additionBHP Billiton reported a $4 billion impairment o itsAustralian nickel business in their hal-year results toDecember2008(notincludedwithinthe$31billionnotedabove).

Looking orward, the potential or urther impairmentsexists as adverse markets conditions continue.

The mystery o Foreign Exchange

2008sawtheUSDstrengthenagainstkeyminingcurrencies. As many o the Top 40 report or operateincurrenciesotherthanUSD,thismovementhadasignifcant impact on the fnancial results o the Top40, particularly when translating their closingbalance sheet and where costs are denominated in

non-USDcurrencies.

Shareholders are aware that they are exposed tocommoditypriceuctuationwhentheyinvestinmajor mining companies, particularly where thecompanies are unhedged. In act, many investorsbuy mining stock to gain this commodity priceexposure. However exposure to movements inoreign exchange rates is less clearly understood or

explained, with many investors not only exposed tocommodity prices, but also to exchange rates.

The ollowing table illustrates the margin impact othemovementsintheUSDandAustraliandollar(AUD)onagoldproducerwithoperationsinboththe USA and Australia. It assumes exchange rate

parityat1January,aconsistentUSD800goldprice,locally denominated costs o $500 or each mineandaclosingexchangerateofAUD1.312:USD1,equivalent to the movement over 2008.

United States mine Australian mine

1 Jan 08 31 Dec 08 1 Jan 08 31 Dec 08

Gold USD USD USD USD

Sale price per oz 800 800 800 800

Cost per oz 500 500 500 380

Gross Margin 300 300 300 420

GrossMargin(%) 38 38 38 53

The fnancial perormance o Australian goldproducerswithpredominantlyAUDoperatingcostsbenefts signifcantly rom the appreciation o theUSDagainsttheAUD.Similarresultswereexperienced by other companies in other locationsand commodities as a result o the exchange rateuctuations.Conversely,assumingnootherchange,American producers have moved higher in the costcurve as a result o exchange rates, a actor outsideo their control.

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

Jan Mar May Jul Sep Nov

Month

USD relative strength in 2008

AUD CAD Rand Real Chilean Peso

USD relative strength in 2008


20/52

Financial review03 Financial review and reserves

Cash fow

2008$ billion

2007$ billion

Change%

Cash fows related to operating activities

Cash generated rom operations 119 102 17%

Taxation paid (19) (20) (5%)

Other 4 1 300%

Net operating cash fows 104 83 25%

Cash fows related to investing activities

Purchase o property, plant and equipment (66) (48) 38%

Purchase o investments (38) (72) (47%)

Sale o investments 8 5 60%

Other (6) 1 (700%)

Net investing cash fows (102) (114) (11%)

Cash fows related to nancing activities

Issue o shares 23 29 (21%)

Share buy-backs (7) (16) (56%)

Increase in borrowings 67 105 (36%)

Repayment o borrowings (50) (65) (23%)

Distributionstoshareholders (22) (21) 5%

Other 3 2 50%

Net nancing cash fows 14 34 (59%)

Net increase in cash and cash equivalents 16 3 433%Cash and cash equivalents at beginning o period 41 38

Eect o oreign currency exchange rate changes (5) -

Cash and cash equivalents at end o period 52 41



21/52


Lead times: Shorter queues

The industry experienced widespread equipmentshortages and long lead times or new equipmentduring the boom years as manuacturers declinedto increase capacity during that time. Thoselengthy lead times or equipment and theassociated fnancial commitments may also hindera companys ability to quickly reduce costs whilemaintaining operational efciencies in reaction tothe downturn. Osetting this, the lead time hasreduced signifcantly rom 2007, which shouldallow projects to complete quicker.

As demand or equipment wanes, we expectlead times to continue to decrease. The actionso the industry and suppliers during this timemay be pivotal in determining whether a similarchallenge is experienced in the next upturn.


Operating cash fows

For the frst time, the Top 40 broke through the $100billionbarrier,reportingnetoperatingcashowsof$104billion.Thisrepresentsa25%increaseandisprimarilyattributable to higher iron ore and coal prices ollowingthe record-breaking benchmark price negotiations,supported by sustained levels o production.

The global economic crisis only began to impactoperatingcashowslatein2008ascompaniesbegan to actively manage their working capital.However, declines in customer demand and sellingprices or most materials, despite working capital

management initiatives, will make it difcult toachievethesamelevelofnetoperatingcashowsin 2009.

Investing cash fows

Netinvestingcashowsdecreased11%andwereonparwithoperatingcashows.Forthersttimesince2005,andabsentthelargedealsof2007,cashowsassociated with asset development were greater thanpurchases o investments, as companies continued toocus on organic growth.

The outlook or the industry suggests that investingcashowswillbedramaticallyreducedin2009.

Financing cash fows

Netnancingcashowsfelldramaticallyintheyear,driven mainly by the absence o debt undedacquisitions and the tightening o the credit markets inthe latter part o the year.

Proceeds rom borrowings in 2008 were principallyused to refnance existing debt, und dividenddistributions to shareholders, and fnancecapital expenditure.

Payments to shareholders decreased. Cessation oshare buy-back programmes contributed $9 billion o

the reduction, and dividends remained relativelystable year-on-year. We note that the pressure toconserve cash has placed increased strain on alldiscretionary expenditure, which has resulted in anumber o companies announcing the suspension otheir dividends in the frst quarter o 2009.


22/52

Financial review03 Financial review and reserves

Balance sheet

2008$ billion

2007$ billion

Change%

Current assets

Cash 52 41 27%

Inventories 39 35 11%

Accounts receivable 37 37 0%

Other 35 23 52%

Total current assets 163 136 20%

Non-current assetsProperty, plant and equipment 402 365 10%

Goodwill and intangibles 54 68 (21%)

Other 57 55 4%

Total non-current assets 513 488 5%

Total assets 676 624 8%

Current liabilities

Accounts payable 47 4018%

Borrowings 38 24 58%

Other 29 29 0%

Total current liabilities 114 93 23%

Non-current liabilities

Borrowings 129 123 5%

Other 96 101 (5%)

Total non-current liabilities 225 224 0%

Total equity 337 307 10%

Total equity and liabilities 676 624 8%

Ratios 2008 2007

Gearing(%) 33 32

Current(times) 1.43 1.46

Quick(times) 1.17 1.13

Netdebt($billion) 115 106



23/52



Net assets as a % o market capitalisation

2008 2007

BHP Billiton 35% 16%

Vale 75% 25%

China Shenhua 52% 17%

Rio Tinto 67% 16%

Barrick Gold 49% 36%

Anglo American 74% 32%

Goldcorp 66% 51%

Newmont Mining 42% 41%

NMDC 15% 3%

Kinross Gold 40% 37%

Availability o credit and sources o liquidity

The tight credit markets, combined with the Top 40re-investing cash generated by operations within theirbusinesses, have resulted in a small movement in thegearing ratio. Total borrowings have only increased by$20billion,or14%.However,short-termborrowingsincreased58%as2007long-termborrowingsbecamecurrent in the year, working capital requirementsincreased and difculties were encountered inrefnancing short-term debt on a longer-term basis.Repayment o this debt is already an area o ocus ormany companies, illustrated by the number o fnancingactivities undertaken in 2009 to date. Long-termborrowingsincreasedbyonly5%comparedtoanincreaseof61%intheprioryear,evidencingthelackofavailability o long-term fnancing or many o the Top 40at the end o the year.

Whilst in absolute terms debt levels grew modestlyduring 2008, debt as a percentage o market

capitalisation or the Top 40 increased dramatically.Net debt as a percentage o market capitalisation ortheTop40was21%in2008ascomparedtoonly8%in 2007. Teck aced the largest shortall ollowing a allin their share price and concerns over their ability torefnance bridging acilities, that were refnanced inApril 2009. The fve most leveraged companiescompared to their market capitalisation are shownin the overlea.

The big picture

Whilst there was only a small amount o movement inthe key balance sheet ratios at the end o 2008, theTop 40 were already eeling the impact o the globaleconomic crisis and were beginning to implementmeasures to prepare or the difculties they would acein 2009. The initial indicators o the tough times aheadand the demands that would be placed on the industryand their balance sheets became clear late in 2008through the impairment charges recognised againstgoodwill and intangible assets, increase in current andtotal borrowings and strain on working capital.

A strong indicator o the slow-down experiencedin the last quarter is that accounts receivableremainedconsistentyear-on-year,despitea23%increase in revenue.

Overall,theincreaseinnetassetsof10%wasnotassignifcant as that achieved in 2007. The reduction inthe growth rates was principally due to the absence osignifcant acquisitions in 2008 and the weakening oprices impacting on receivables and asset values.

As expected, total mining-related assets o the Top40 continued to have a bias toward base metals.There were only minor changes in the asset mix withcoal increasing slightly, oset by correspondingdeclines in nickel and aluminium. These changes areconsistent with the relative changes in the prices othese respective commodities during 2008, anddespite the higher proportion o gold companies inthe Top 40, the relative size o their net assets remainssmall in comparison.

WhilstthenetassetsoftheTop40increased10%in 2008, their market capitalisation has suered,particularly or those who completed deals close tothe top o the cycle. The aggregate net assets o theTop 40 as a percentage o their market capitalisationincreasedfrom25%in2007to62%in2008.Thenetasset carrying value o the Top 10 as a percentage otheir market capitalisation or 2008 as compared to2007 is as ollows:


24/52



Despitethereducedactivitywithinthedebtmarketsduringthelastquarter o 2008, rom 1 January to 30 April 2009, seven companies in theTop 40 have secured debt fnancing. Proceeds rom these activitiestotalled$21billion,ofwhichonly$7billion,or33%,wasdesignatedforgeneral corporate purposes, whilst the remaining $14 billion was used torefnance previously existing debt acilities on a longer-term basis. MostnotablewereBHPBilliton,RioTinto,andTeck,whoaccountedfor80%o the debt raised in the our month period.

The continued tightness in the credit markets and the leverage positions

o the Top 40 will continue to make obtaining long-term fnancing difcultthroughout 2009. This may require companies to seek alternative sourceso non-bank fnance to support operations and uture expansion. Suchsources o unding include strategic partnerships, share or rights issues,sales o non-core assets and sales o royalty streams.

From 1 January to 30 April 2009, nine companies in the Top 40 raised$10 billion rom the equity markets. Most signifcant were Xstrata andNewmont, who raised $6 billion and $1 billion respectively. While theequity markets are proving to be a source o liquidity or some in the Top40, the size o the oerings have been less signifcant than the proceedsgenerated rom debt fnancings. For the same our month period, seven

companies in the Top 40 have announced asset divestments thatgenerated $7 billion in proceeds.

Working capital

Despiteminimalmovementinworkingcapitalyear-on-year,thereweresome early signs o the impact o the global economic crisis within thebalancesheet.Forexamplecurrentliabilitiesincreased23%,andaccountspayableincreased18%ascompaniesbegantoconservecash.Inaddition,cashincreased27%,ledbyVale,whoreportedacashposition$9 billion greater than in 2007. Inventories increased, signalling thatstockpiles are growing and are turning at a slower rate due to customers

deerring their purchases to manage their own working capital positions.Lastly, the increase in other assets is principally due to an overpayment otaxes throughout 2008 in anticipation o strong results similar to thosereported in 2007.

-100%

0%

100%

200%

300%

400%

500%

600%

VedantaFortescueRio TintoXstrataTeck

Ratio of net debt to market capitalisation

2008

2007

Ratio o net debt to market capitalisation


25/52

Financial review



The varying ortunes o each commodity over the yearhas impacted the reserves reported by the Top 40, ascut-offgradeshavebeenadjustedtoreectthemovementinpricesbothup(gold)anddown(basemetals).Theremaininglifeofreservesdisclosedabove does not take into account the extensiveresources available.

Gold

Gold reserves and mine lie have increased over theyear as higher gold price assumptions were built into

reserve determinations, making lower grade or harderto mine areas economically easible. 2008 is thesecond year in succession where companies havereported using higher gold prices in their calculations.

Copper / Zinc / Nickel

Reserves or the base metals have all declined over theperiod as the sharp all in prices has impacted priceassumptions used in reserve calculations. Companiesreduced exploration activities or these metals andaccordingly have not replaced production depletion.

Despitemanycompaniesannouncingsuspensionorclosure o operations, the total reserves have

decreasedbyonly4%forzincand5%forcopper,indicating that the closures are short-term measuresrather than permanent, the latter requiring the reservesto be removed rom the calculations.

Iron ore

Ironorereserveshaveincreasedbyalmost50%in2008 a remarkable result primarily driven by the majors.

Vale announced a doubling o their reserves ollowingcontinued drilling programs over the past three years.

BHP Billiton have also signifcantly increased theirreserves,reportinga24%increase,primarilyinthePilbara region, as attention has been ocused toextend mine lie whilst increasing production capacitythrough the Rapid Growth programme. Rio Tinto hassimilarlyincreasedtheirreservesby11%.

Bauxite

Bauxite reserves have increased by almost one third,despite the low aluminium prices currently beingexperienced and challenges market players are acing.Rio Tinto has contributed to the most signifcant

increase, primarily due to the completion o studies atWeipaleadingtoa42%increaseinreserves.

Reserves Gold(millionoz)

Platinum(millionoz)

Copper(milliontonnes)

Zinc(milliontonnes)

Coal(milliontonnes)

Iron ore(milliontonnes)

Nickel(milliontonnes)

Bauxite(milliontonnes)

Number o companies 17 3 16 9 15 10 6 4

2007 reserves 682 121 329 53 38,611 10,160 18 964

-Depletion (37) (7) (8) (3) (1,238) (694) (1) (47)

+ Other net additions/(reductions)

62 9 (7) 1 1,900 5,623 (1) 344

2008 reserves 707 123 314 51 39,273 15,089 16 1,261

%change 4% 2% (5%) (4%) 2% 49% (11%) 31%

Remaininglife(years) 19 18 39 17 32 22 24 27

Reserves reporting inconsistent analysis

DuringouranalysisoftheTop40companieswefacedchallenges in obtaining sufcient, consistentinormation on the mineral reserves disclosed by theindustry. A wide range o reporting standards continue,diering between jurisdictions including theAustralian JORC code, the US based SEC-IG7,Canadas CIM and South Aricas SAMREC and

disclosure levels continue to vary considerably. Theresult o this is that even the knowledgeable readermay struggle to compare and contrast reserveinormation between companies.

Consistency within global fnancial reporting hascontinued with more countries moving towards oradopting International Financial Reporting Standards(IFRS).Consistencywithinreservereportingwouldurther assist shareholders to understand and be ableto compare and contrast crucial inormation relating tothe uture o the industry.

Duetodataavailability,ouranalysisisbasedonthe

reserve inormation o only 36 o the Top 40 companies.


26/52

Six year trends 20022007


04

Seven-year trends

20022008


27/52

Six year trends 2002200704 Seven-year trends 2002-2008

2008$ billion

2007$ billion

2006$ billion

2005$ billion

2004$ billion

2003$ billion

2002$ billion

Aggregated Income Statement

Revenue 349 312 249 213 178 114 95

Operating expenses 208 176 141 134 125 85 75

AdjustedEBITDA 141 136 108 79 53 29 20

Amortisation, depreciation and impairment 57 19 12 15 14 10 9

PBIT 84 117 96 64 39 19 11

Net interest cost 6 5 3 4 3 3 5

PBT 78 112 93 60 36 16 6

Income tax expense 21 32 27 16 9 4 2

Net proft 57 80 66 44 27 12 4

Year on year increase in revenue 12% 25% 17% 20% 56% 20%

Cumulative increase in revenue 267% 228% 162% 124% 87% 20%

Yearonyearincrease/(decrease)innetprot (29%) 21% 50% 63% 125% 200%

Cumulative increase in net proft 1320% 1900% 1550% 1000% 575% 200% AdjustedEBITDAmargin 40% 44% 43% 37% 30% 25% 21%

Net proft margin 16% 26% 27% 21% 15% 11% 4%

Aggregated Cash Flow

Operating activities 104 95 77 58 43 22

Investing activities (102) (126) (67) (38) (27) (20)

Financing activities 14 36 4 (11) (9) 1

Aggregated Balance Sheet

Property, plant and equipment 402 371 262 214 187 140 117Other assets 273 284 192 141 116 85 73

Total assets 676 655 454 355 303 225 190

Total liabilities 339 329 217 170 144 114 102

Total equity 337 326 237 185 159 111 88

Return on equity 18% 29% 33% 25% 19% 12% 6%

The inormation included below diers rom our main analysis as it includes the aggregated results o the Top40 in each o the years disclosed. As such the 2007 fnancial inormation diers rom the amounts included inthe main Financial Review section in respect o 2007 as it relates to the 40 companies that were included in ourprevious Mine publications.



28/52


04 Seven-year trends 2002-2008

The 2008 fnancial results do not yet ully portray the

impact o the global economic crisis, as we note: Revenuein2008is3.7timesthatof2002;

TheTop40reportedrobustnetprotfor2008of$57 billion the frst decrease since the start oouranalysis.This28%reductionreturnsnetprotto the levels recorded in 2005/6. Net proftremains well above the 2002-2007 average o$42 billion;

Operatingcostscontinuetoriseatagreaterspeed than revenue, urther eroding margins.Costs continue the upward trend o the past sixyears with the current rise consistent with the19%annualaverage;and

AdjustedEBITDAincreasedtoarecord$141billion, seven times the result achieved in 2002.Higher costs eroded the percentage growth inEBITDAtothelowestlevelsexperienced.

As good as it gets?

Over the years in which PricewaterhouseCoopers hasproduced its Mine publication, we have witnessed theindustry reaping the rewards o the commodity boomas illustrated in the income statement metrics. Ourpublications have highlighted a number o the keymessages throughout this period. In 2009, what willhappen when the going gets tough?

Cash fow

In2008operatingcashowsbrokethe$100billion barrier and were almost fve times the 2002level. However, the industry continues to spend itsfundswithalmostalloperatingcashowsgenerated over the seven-year period matched byoutowsininvestingactivities;

Inaggregate$380billionhasbeenspentoninvesting activities by the Top 40 since 2002;

Despiteplantandequipmentbeingatitshighestlevel,theincreaseof8%intheyearisthelowestsince2002(averageof23%p.a.).Asignicantpart o this decrease results rom impairment and

reectsthehighlevelsofM&Aactivityoverthesixyears to 2007;

Totalassetsaremorethan3.5timesthosereported in 2002 uelled by acquisitions and

expansion capital spending during the boomtimes. Total liabilities have increased 3.3 times tound the growth; and

Shareholdersequityexperiencedonlyasmallincreasein20083%growthversusanaverage30%increaseovertheotherreportedyears.Shareissues and positive retained earnings were osetby signifcant negative air value and other reservemovement primarily relating to currencytranslations rom unctional to presentationcurrencies. Total equity in 2008 is 3.8 times largerthan total equity in 2002, representing a trend o

investment in the mining industry, particularly inlight o the number o share buy-back programmes.

0123456789

101112131415161718192021

2002 2003 2004 2005 2006 2007 2008

Indexed growth

Revenue Operatng e xpe nse s Inc ome tax e xpe nse Ne t profit

When the going gets tough...

As good as it gets?

Riding the wave

Let the good times roll

Enter the dragon

Inaugural Mine

Indexed growth and titles o Mine


29/52



Mix and match

There has been limited change rom 2007 in themarket capitalisation by geographic listing andcommodity, with the exception o gold companieswho saw smaller declines in their market capitalisation(20%versus62%industryaverage).

Decline in market capitalisation: impact onlong-term investors

There has been signifcant ocus on the impact o the marketdownturn on individual investors and their long-term savings.How have investors in large mining companies ared?

Based on a portolio o investing $1 in each o the Top 5mining companies in 2003, an individual investor would haveseen119%capitalgrowthintheirportfoliovalue(excluding

dividends)by31December2008-notnecessarilythecatastrophic view o the industry portrayed recently. Inaddition, shareholders have received regular dividends andshare buy-backs over the period, increasing their return.

However,thereturnislessthanthe307%thatwouldhave been achieved i the portolio had been disposedon31December2007.

0%

10%

20%

30%

40%

50%

60%

Market capitalisation by commodity 2003 compared to 2008

2003

2008

Market capitalisation by commodity 2003 compared to 2008

The overall increase in the market capitalisation othose companies included in the Top 40 in both 2003and2008hasbeen82%overthesevenyearperiod.O these 25 companies, only our have a 2008 year-endmarket capitalisation below that o their 2003 level.Interestingly, the same analysis using 2007 marketcapitalisationsshowsa327%growthsince2003.


30/52


Industry Perormance exacerbating the peaks and troughs

2008 has seen both the HSBC Global Mining Index and the wider marketindices all below levels experienced at 1 January 2006. Investors haveelt double the pain as not only have share prices slumped, but manycompanies have either reduced or cut their dividends entirely in an eortto conserve cash.

The HSBC Global Mining Index underperormed against the S&P 500 andtheDowJonesIndicesfrom1991until2003.From2004throughto2008the mining boom saw the mining index outperorm and indeed surgeahead in 2007.

Following the collapse o Lehman Brothers in September 2008, allindices have allen sharply. However, the HSBC Global Mining Index

has allen signifcantly bringing the overall return back in line with widerindustry benchmarks. It will be interesting to see which index reboundsfrst and when.


0

2

4

6

8

10

Global indices (January 1991 = 1)

S&P 500

DJIA

HSBC Global mining


0

0.5

1

1.5

2

2.5

3


S&P500

DJIA

HSBC Global mining



31/52

05

A view rom aroundIn the ollowing pages we throw a spotlight onsome o the issues acing the mining industryduring the downturn, along with someinnovative responses.

In addition, and whilst the ocus o Mine is thefnancial data reported by the Top 40 miningcompanies, the space in Annual Reportsdedicated to non fnancial data has increasedsignifcantly in recent years as companies seek

to explain their vision, perormance and theplethora o inormation that diversestakeholders now demand. Approaches vary, asdoes the degree o inormation provided,however, with a ew exceptions, we considercompanies could do more to explain theirstrategies, identiy the risks to its execution andhow they manage these risks, and the actorsrelevant to the sustainability o their operations.

The fnancial reporting world is getting smaller,

as IFRS is adopted by more countries. It issurprising that one o the biggest challengesaced by the PricewaterhouseCoopers Mineteam was collecting data on some o theinormation that we view are key to the miningindustry. In particular analyses o costs, reserveinormation, tax and contributions to localcommunities were hardest to source and mostinconsistently reported.

In the ollowing pages we also highlight an area

where mining companies could considerincreasing their disclosures, the potentiallong-term risk the industry aces as pressure toreduce costs impact the sustainabledevelopment agenda and one o the risks thatis inconsistently covered in annual reports.


32/52


complex; provide no line-o-sight; typically do not payoutor average perormance,creating a east or amineincentive; and employeessimply do not value sharespaid tomorrow as much ascash paid today.

In response, some companieshave graduated long termincentive plan payments over a

wider range o perormance sothat average perormancereceives some recognition andcompanies do not receivesuperior rewards just or beingvolatile (a perennial problem orminingcompanies).

We are also seeing companiesplace less emphasis on usingrelative Total ShareholderReturn and instead useabsolute operational andfnancial efciency metrics thatare relevant to the companyand within the executivescontrol, such as cost savings,production efciency, cashow,returnon capital employed andeconomic proft.

Forexecutivesbelowtheshareholder disclosure radar,there is a trend towardsgranting more modest shareawards, which are subject tocontinued employment only,

How are mining companiesresponding to the rewardchallenges acing them?

PwC has recently worked with anumber o global miningcompanies to address thesechallenges. Some o the companyresponses so ar have included:

Thebalancebetweenshort-term and long-term incentivesshould be re-examined. Annual

bonuses provide a line-o-sightto key business priorities, andare generally considered to bemore motivating than long termincentives. It is consideredeasier to set stretching, butreasonable annual targets thanlong-term targets, and theimmediacy o reward increasesthe value o the bonus inemployees eyes.

While an annual bonus may

provide more motivationalbang or buck thanparticipating in long-termincentives, it may be unpopularwith shareholders. A solutioncould be to deer part o theincreased bonus into sharesover the long term to ensureaccountability andsustainability o short-termperormance.

Equity-basedlong-termincentives may provide someshareholder alignment andretention but they tend to be

Shareholder backlash againstperceived excessive executiveremuneration and claims orewarding ailure has extendedacross all industries, includingthe mining sector. Followingthe collapse o global shareprices, boardrooms are nowocussed on the implicationsor executive pay and how toreward talent in a downturn.

Executives within the miningindustry have benefted romsignifcant increases in their totalcompensation during the boomyears; companies justifed suchpayouts as the competitive cost oretaining highly sought-ater skillsin difcult locations. In the currentenvironment, companies are makingmore realistic judgements about therisk o losing key people; however,

the retention o scarce mining skillscontinues to be a challenge.

There is also a strong expectationrom shareholders (and indeed thepublic)thatexecutivesshouldnowsee their realised compensationfalltoreectdeclinesinfutureprofts and share prices. But somecompanies argue that motivatingexecutives to deliver in a bearmarket is harder to do than in the

good times, and thereoreperormance (albeit results may belowerthanlastyear)stillwarrantsasimilar bonus.

Rewarding talentin the downturn Back to basics?


33/52


and dispensing with highly-leveraged plans that havecomplex and difcultperormance conditions. Underthis approach, the share awardis at least worth something,even i the share priceperormance is lower than theboom time, thereby enhancingthe retention value andshareholder alignment o theaward. In some cases, the size

o award granted has beenlinked to the individualsperormance rating and/ortalent assessment in the year.

Some,butnotmany,companies have lowered thelong-term incentiveperormance targets or uture(andinafewcases,past)awards. There has also beensome evidence o the use oone-o retention plans to plugthe gap let by long-termincentives that are unlikely tovest. However, these actionsmay simply add to shareholder

concerns about the tenuouslink between pay andperormance.

Executive compensation hasbecome increasingly complex over

the last fve years, primarily inresponse to corporate governancedemands or stretching targets,incentives only paying or out-perormance, no opportunity toretest perormance, and a distrusto discretion. These satisy therules but have resulted in growingcomplexity as companies seekworkaroundsto the governance constraints.Simpler and more eective

compensation packages exist andone positive consequence o thedownturn could be that it willencourage mining companies togo back to basics on theircompensation design.


34/52

Many economists and industry participants agreethat investing in resources during a downturn hasthe potential to generate signicant value as assetprices will be lower relative to commodity prices.Nonetheless, ew companies and investors applythis rationale as investing during a downturnrequires a dierent investment mindset. Mostinvestments in capital intensive industries willrequire a positive economic environment, which

is why investment is heavily cut back where badnews is the norm.

Asset prices during the present downturn have againpresented greater volatility relative to commodities

prices.Asshownbelow,theDowJonesMining&MetalsIndex(aproxyforassetprices)hascomedown64%sinceitspeakinQ2lastyear,whiletheS&PGoldmanSachsCommodityIndexisdown50%fromits peak in July last year. The fnancial crisis has madeunding options very scarce or expensive or those thatwould dare to acquire assets at bargain prices.

Balancing a benign long-term outlook with anextremely uncertain short term

Most industry observers still believe that theindustrialisation and urbanisation processes in China,India and other emerging countries are the key to theunderlying long-term demand or commodities.

Investing in the downturnbest placed regardless o the shape o the recession


35/52

Many o the rauds that emerged in 2009 will have

begun some years earlier with the economic

downturn acting as a catalyst in the detection o

wrongdoing. The exaggerated peaks and troughs

o the mining sector leaves the industry open to

potentially signifcant rauds which may come to

light as the boom time tide recedes.

A perect storm o incentive, opportunity and

ability o individuals to rationalise raudulent

behaviors exists in a downturn and leaves the

industry potentially exposed.

Given the circumstances management should

question whether they have the controls,

inormation, training, and systems to not only

detect but also to prevent raud occuring.

Fraud in a downturn

Risky Business

Indeed,Chinastilltargets8%GDPgrowthin2009.No one is expecting China to halt its economicdevelopment. This theory is easily sustained by thevery low per capita consumption levels o energy,steelandcopperofthesecountries.DespiteChinassize and role in consumption growth in recent years, itis worth noting that demand in nominal terms is stilldominated by North America, Europe and Japan,whose economies will bounce back at some point.

Despitethelong-termfundamentalsremainingstrong,the short to medium-term outlook is much moreuncertain. Economists will point out that there are twodierent scenarios or this recession: an unlikely rapid

recovery with no more than three quarters o negativeoutput(Vshape)andamorelikelydelayedrecovery(Ushape)indeedsomeevenmentionthepossibilityalongdepression(Lshape).

However, in the context o mining, the sheer scale osupply side response (cuts in production and projectdelays),combinedwithadecisiverecoverypackagein major economies, means that the chance o a asterthan expected recovery remains a possibility.


36/52


Flexibility in a downturn Short term capex control versus long term growth

Despitethecollapseincommodity prices, weconsider that in the longerterm the key demand and

supply drivers thatunderpinned the last boomremain intact. However, romthe perspective o miningexecutives managing multi-billion dollar capitalexpenditure programmes, thisinconsistency between longterm outlook and short termuncertainty creates a

particularly difcult challengegiventheinherentinexibilityassociated with capitaldeployment. From the time aproject is fnally approved tothe time the frst tonne omaterial reaches the market asignifcant period o time mayhave elapsed.

The recent spate o major capex

reductions and deerralsannounced by companies as theyseek to manage the short-term inthe downturn may actually leavethese companies exposed to

output shortages and limited growth options as conditions improve in themedium term. In addition, the requirement or Western companies toreport quarterly inormation to the market exacerbates the pressure todeliver short-term solutions which could be at odds to the long-termnature o the industry. Accordingly, the industry must balance the risk oshort-term reductions in capital expenditures against the potentialfnancial and operational distress that could occur due to theconsiderable investment required to und the capital pipelines that will berequired when prices rebound.

The way orward: inserting greater fexibility in capital project strategy

Although many mining executives may not have the luxury to plan or thelong term as the pressure on short term cash generation and conservationbecomes greater, there are still opportunities to maintain and securevalue in a downturn.


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pportunities

The frst potential area or improvement is to step back rom the day-to-day crisis management and balance strategic decisions, such as capitalexpenditure, with an understanding o the long term options beingimpacted. This means looking beyond the short term volatility andbeing able to isolate the market noise. In this regard, it is imperativecompanies strengthen and enhance the scope and requency o capexreviews, stress testing such plans under dierent industry scenarios.

The second area o weakness or many companies during this downturnhas been their inability to capitalise on the lower prices o energy-relatedcostsandmaterialstoreversecapitalinationtrendsinthelastfewyears. There is a great opportunity to review and renegotiate contractsbut,moreimportantly,toinsertexiblebudgetingstructuresthatlimitincreases, but absorb price reductions quickly.

Lastly, there is an opportunity or mining companies to keep high valuecapitalprojectsalivebyinsertingasmuchexibilityaspossible.While

theindustrysenvironmentmakescapitalprojectsveryinexibleoncethego-aheadhasbeengiven,thereareopportunitiestoinsertexibilitybeyondtheprefeasibilitystage(wheredevelopmentoptionsarestillopen).One o the greatest challenges in this process is moving rom an engineeringapproachthatnarrowsoptionsasprogressismade(industryspractice),to a ully multidisciplinary approach where optionality is maintainedalong the later stages o development and during theconstruction stage. Examples o how companies cancreateexibilityinclude:

Modularityandscalability:exploringfurtherdifferentscalelevelsandmodular development options;

Multipleprojectpaths:designinganddevelopingmultipledevelopmentplans, so the project team is ready to increase speed or slow down theproject in line with market developments; and

Flexiblecontractswithcontractorsandsupplierssoprices,tariffs,volumes and scope o services are changeable within known rulesandcosts(althoughthatexibilitymayworkagainstthecompanyifsupplycostsgobackup).

The speed and severity o the current downturn took most in the world bysurprise. While speculation is natural, it is unlikely many companies willbe able to pinpoint precisely when conditions will improve. In such ascenario the beneft o being able to quickly respond to market signals bykeepingoptionsexiblethroughthecyclecouldbeakeydifferentiatorinlong term value creation.


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PwC have carried out a study o a number o the largestlisted mining companies worldwide using the PwC TTCFramework. TTC provides a standardised methodologyor companies to measure and communicate all thetaxes and contributions that they pay. 14 o the largestlisted mining companies provided data on their largestcountriesofoperationsintheyearended31December2007 or equivalent period. The anonymous and collatedresults have now been published and are generating agreat deal o interest worldwide.

The results o the study show that these companies

make a very large economic contribution in the countrieswhere they have operations. The average totalcontribution to government in a single country reportedin the study is US$743m. Considering that many o thesemining companies operate in a number o territories, thiscontribution can add up to a considerable amount.

Mining companies pay many other taxes andcontributions in addition to corporate income tax. Ourstudy shows that on average in any country, corporateincometaxislessthanhalf(48%)ofalltaxesandcontributionsthatminingcompaniesbear.Ofthe52%ofnon-incometaxesborne,29%ofthetotal,onaverage,are additional taxes and contributions that are specifc tothe mining sector and eectively represent payment orextracting natural indigenous resources. Thesepercentages dier widely by country and provideinteresting insights and comparisons o the taxenvironments in the major mining countries. In additionsome o these taxes are not linked to proftability,accordingly in a period o depressed prices and increasedcosts the percentages could increase signifcantly.

When comparing the results with the cross industry TTCstudies that we have done in a number o countries,

miningcompaniespayahigherpercentage(12.5%)intaxes and other contributions borne to government inrelation to the size o their turnover.

Total Tax

ContributionLastyearweintroducedtheconceptofPwCsTotalTaxContribution(TTC)and how it can be used to provide a more complete understanding o acompanys real tax contribution to governments. Mining companies areparticularly in the spotlight in terms o how much they put back into the localcommunity and their approach to the corporate social responsibility agenda.TTC is a good way o broadening the debate, considering all the taxes andpayments companies make, as a airer way o measuring their economiccontribution. TTC also provides companies with a ull picture o the impact oall taxes on business operations which, particularly in times o economiccrisis, must be essential management inormation.


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royalty rates applicable to the mining sector toencourageinwardinvestment(orcontinuedinvestment)into their countries. To protect its key copper miningindustry rom low prices, the government o Zambia, orexample,recentlyapprovedtheabolitionoftheir25%

windall tax, cut customs duties or heavy uel oils rom30%to15%andremovedcustomsdutiesoncopperpowder,copperakesandcopperblisters.ZambiasFinance Minister said the actions were to saeguard thecountrys economic lieblood at a time when commodityprices had allen. Zambia depends on copper and cobaltformorethan63%ofgovernmentrevenues.

We hope to repeat the study and collect data or theperiodending31December2008.Inthemeantime,ifyouwould like any urther inormation on the results o thestudy or on how you might use TTC please contact us.

Another signifcant part o the contribution o miningcompanies is in the large workorce that they employ.The study results show that on average, per employee,mining companies pay US$14,875 in employment taxes.It is also worth noting that many mining companies relyheavily on subcontractors, this study did not collect anydata on these wider impacts but it could be a veryinteresting addition to our work in the uture.

As ar as we are aware, this study is the frst o its kind to

provide in-depth insights rom a global perspective intothe contributions o mining companies. Each companyparticipating in the study has received a report on theirtotal contribution to government, country by country. InPwCs view every company needs to have access to thisinormation on a regular basis or all its operating markets.It is essential management inormation and can help toinorm governments and other key stakeholders. AngloAmerican and Kazakhmys are examples o companiesthat are already using TTC to communicate theircontributions through their corporate sustainability reportsand annual accounts. Total Tax Contribution data can alsobe particularly relevant to governments looking to reviewmining concessions and or mining companies which arelooking to explore and invest in any particular country.

In times such as these, especially where governmentsare heavily reliant on revenues rom the mining sector,there is even more o a need or a greater understandingo the contributions o these companies. As proftsdecrease, corporate income tax is set to decrease, butmany o these other taxes and payments to governmentare not linked to proftability and, thereore, becomeincreasingly important. Governments may respond to thecurrent economic climate by adjusting mining tax and/or

Sustainable Developmenta long-term investment in a world with short-term expectations

Duringarisingcommoditycycle maintaining investmentin and ocus on sustainabledevelopment(SD)objectiveswas relatively easy. In thecurrent downturn, investmentinalong-termSDstrategythatdoes not obviously providea short-term, bottom lineimpact is more o a challenge.Companies who are tempted torationaliseinvestmentinSDaspart o a wider cost reductionprogramme could exposethemselves to greater risk.

Maintaining the health ohealth, saety and environmentmanagement systems

Reductions in headcount across theindustry will, in many cases, meanmanagement will be required to domore with less. The ocus on short-term fnancial perormance may alsoincrease the risk o operations takinggreater health, saety and environmentrisks to achieve fnancial targets.

Maintaining robust policiesand procedures and investingin management systems thatmonitor compliance in a changingenvironment will be challenging withewer resources.

Managing SD risks through thesupply chain

Opportunities to reduce operatingcosts will no doubt extend to thesupply chain. Similarly, suppliers andcontractors increasingly desperate tosurvive in a shrinking economy maythemselves take on greater risk whentendering or new contracts atlower prices.

A contractor, or example may be

tempted to deer maintenance onmachinery in order to keep costs downand retain a contract with a majorcustomer. This could increase therisk o equipment ailure and resultingenvironmental or social incidents.


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Managing the impact on communities

Reductions in expenditure will invariably have animpact on the communities in which a mining companyoperates. Oten, a reduction in investment may beaccompanied by a backlash within the aectedcommunities and a questioning o the authenticity oprevious commitments actually, or perceived to havebeen, made by the company.

The extent to which the long-term uture o the assetis impacted by such a backlash will depend in parton the history that the company has in engaging withand contributing to the community as well as how itresponds to their grievances.

Achieving public targets and commitments

Commitments and public targets set by mining

companies prior to the downturn would have, in manyinstances, been made on a base set o businessassumptions including but not limited to easy access tocapital where required.

StresstestingSDtargetstodifferenteconomicandbusiness assumptions is rarely perormed in the sameway that it is perormed or fnancial targets and capitalstructures. As a consequence the impact o the globaleconomic crisis on achievement o these targets may notbe readily apparent.

The impact on mining companies could result in the

need to publically recalibrate their existing targets (eitherupwardsordownwards).Forthosecompaniesthatchoose to adopt this option, it will provide stakeholderswith an interesting insight into the relative priorityascribedbythecompanytoSD.

Actions that Boards should consider taking to mitigatethe risks include the ollowing:

Understand the appetite or risk

Is there a common understanding within the organisationaround how much, and the nature o, the risk that isacceptableinrelationtoachievingSDobjectives?

For example, a company may have a stated targetofreducingfreshwateruseby10%over5yearsbutthe short and long-term implications o not achievingthe target may not be considered signifcant or thecompany. As such it will be willing to allocate ewerresources towards the achievement o the target andaccept greater risk that it is not ultimately achieved.

On the other-hand, the company may be operating in awater scarce area where its ability to reduce its reshwateruse is a undamental issue to the local community. Higher

levels o reshwater use may thereore put at risk itslicense to operate in the community and as such there is alower appetite or not achieving the target.

Ensuring that there is a common understanding othecompanysappetiteforriskinrelationtokeySDobjectives between the Board and Management will

prove vital in ensuring that resource allocation decisionsbalance short-term needs and long-term drivers oshareholder value.

Consider the impact on SD goals when selectingcost reduction options

A company may choose to make cost reductiondecisionsthatresultinadverseSDoutcomesintheshortor medium term (where the companys going concernisatrisk);howeveritshouldensurethatanydecisionisbased on a ull appreciation o the dierent options andtheir implications.

Stakeholder trust is more oten gained by the actionstaken during tough times rather than good times.

When companies have to make tough decisions, theabilitytoengage(andbeseentobeengaged)withstakeholders is crucial.

In particular, when a company is unable to fnd acompromise with stakeholders, the ability to betransparent regarding the rationale or decisions and tomake this message believable is a critical element olong-term success.

Whilst time will tell how much patience stakeholdershave with the industry during these tough times, what isclear is that the symbiotic relationship between long-termsuccessandarobustSDstrategyremains.Theextenttowhich a short-term pressure undermines this relationship,and the way this pressure is publically managed will nodoubt add to managements already busy agenda.

Sustainable Development (contd)


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Forwhomthebelltolls:TotalTaxContribution(TTC)


According to theInternational Monetary

Fund, more than half

of the worlds available

freshwater is already

in use and, by some

estimates; it could

increase to as muchas 90% by 2025.1

Water is essential to mining andmetals production and enablesenergy production. Mining andmetals activities can requiresignifcant volumes o water orprocessing and cooling. Withoutaccess to high volumes o reshwater, neither o these processes,critical to production, can take place.In addition, the by-product o manymining processes is water. whichraise water quality issues or thesurrounding environment. The waterin the energy supply chain, requiredor cooling water or hydro-electricpower, should not be underestimatedas a potential threat to production.

Accordingly, the industry aces threesignifcant types o risk with regardto water: physical, regulatory andreputational.

Physicalrisks:reducedwater supply could interruptproduction due to insufcientprocess water. Equally, a ailureto meet discharge requirementsor wastewater or any majorincident (e.g. dam ailure,leachingintogroundwater)could

also close a plant; Regulatoryrisks:potentialfor

higher prices or water or ewerabstraction licenses; and

Reputationalrisks:conictwithlocal communities over accessto water and concerns raisedby shareholders. For example,gold mining operations havebeen subject to campaignsover extraction o glacial watersin Chile and rom aquiers

in water-stressed Nevada2,demonstrating it is not just anissue in the developing world.

Despitetherisks,thistrendalsopresents signifcant opportunities.Companies that develop efcientsolutions and commodities orproducts with a low water ootprintwill be increasingly in demand. Butto do so, water needs to be treated inits own unique way.

Is water another carbon?Despitewaterbeginningtobeseenas signifcant an issue as carbonby some companies, it cannot betreated in the same way. Whereascarbon can be traded in certainmarkets, water cannot readily betranserred between basins andthereore solutions must be soughtwithin the region.

Some companies are consideringconcepts such as water neutralityand water trading, but remainat the concept stage. Apart romwater being more o a local issuethan carbon, it is also potentially amore serious issue. Loss o watersupply is a show-stopper or miningoperations, which is difcult toovercome at short notice.3

Wheres the catch?

Local actors make it difcult tomanage water at a global level. An

operation may be able to happilyco-exist in a catchment area withplentiul resources and limited otherwater consumers; yet the sameoperation would have signifcantenvironmental and social impactsin another more sensitive location.Traditionally, water shortages havebeen tackled with an engineeringsolution to increase supply orimprove efciency, however atechnological approach may not

be the most cost eective orsustainable solution.

Thirstywork


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The private sector is now looking at improvingcatchment management, through working with localarmers or landowners to maintain water levels andintroduce more efcient agricultural practices. This canwork out more economical than a major capitalinvestment in upgrading acilities.

A corporate or a local issue?

While solutions or water access problems may not bedelivered at a corporate level, a global approach to riskassessments should be adopted across operations,with key questions being raised beore investments areapproved. Companies should consider the ollowing atsit

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Mine When the Going Gets Tough