CRU Group

Copper Market Outlook

Australian Copper Conference

Richard Schodde

Brisbane March 2011

Richard.schodde@crugroup.com31 Mount Pleasant, London

WC1X 0AD UK

Tel +44 20 7903 2000

www.crugroup.com

Key messages in a nutshell …

• Will the copper price in 2011 average more than that in

2010? Yes

• Is copper one of the favoured non-ferrous metal markets

for 2011 and beyond in price-terms? Yes

• Is the market still projected as attractive for new copper

project developers? Yes

2

In short the message is not much different to what we

said last year....

• Recovery from the Global Financial Crisis continues:

Commodity demand functions are back on track

• China still expected to provide further growth in 2011

Question: What is the likely impact of the Japanese

earthquake have on the copper sector ?

Answer: Disruptive, but overall impact on price is positive

3

When we were speaking in 2009, the world economy

was in free-fall

80

84

88

92

96

100

104

-6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50

index of OECD IP

Current

Mid-1970s

Early 1980sEarly 2000s

Early 1990s

months after cyclical peak

Current

Cycle

4

Then got worse;

But this time last year a recovery had set in

80

84

88

92

96

100

104

-6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50

index of OECD IP

Current

Mid-1970s

Early 1980sEarly 2000s

Early 1990s

months after cyclical peak

Current

Cycle

5

Now at Brisbane 2011;

the trend is back towards the boom

80

84

88

92

96

100

104

-6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50

index of OECD IP

Current

Mid-1970s

Early 1980sEarly 2000s

Early 1990s

months after cyclical peak

Current

Cycle

6

Asian market growth compensates for

the global market shrinkage seen in 2009

Data: CRU Analysis

y-o-y % change

7

Chinese industrial and construction activity

leads the world copper market

Data: CRU Analysis8

China now accounts for 39% of the world’s

refined copper market - up from 28% in 2008

Refined Copper Consumption in China (Mt Cu)

Data: CRU Analysis9

Forecast

Price

US$/tInvestment Factors $4,305Copper Fundamentals $5,325/t

Source: CRU Copper Price Perspective, March 2011.

Supply

Demand

Inventory

Short

term

Investors

Hedge

Funds

Index

Funds

Total

Price

Market

Shortage

China

Balance

EnergyCurrency

MARCH 2011

COPPER

EXAMPLE

Prices are driven by China and investment demand

Influenced

by Chinese

demand

10

CRU estimates that Japan’s earthquake knocked

0.6% off the annual GDP growth rate.

We expect reconstruction spend to kick-in H2

• The Tohoku earthquake and resulting

tsunami decimated local infrastructure in

Iwate & Miyagi Prefectures. Loss of

power supplies and transport has

national impact on industry

• Concerns over Japan‟s ability to pay for

reconstruction are overplayed. Public

debt might be 200% GDP. Has been

there before in the 1990s ...

• ...Don‟t forget that Japan is the 3rd

largest economy in the world with

substantial private sector surpluses

HISTORY REPEATS ?

Following the Kobe quake in Jan 1995,

reconstruction boosted growth in Japan

above earlier trend in 5 of 8 subsequent

quarters

Kobe

Quake

11

Most of Japan‟s metal production capacity is well away

from the earthquake/tsunami area. The main issue for

industry / customers is power

• Japan‟s relative importance to base

metals has declined in recent years.

But it is still a major consumer and

producer of refined metals and metal

products

• Some plants have announced

closures: due to damage during the

earthquake or due to the irregular

power supply subsequently

• It is likely that production at all

smelting and refining facilities north of

Tokyo have experienced unplanned

closures

`

TOKYO

Copper smelters/refineries

Refined copper wirerod plants

Aluminium Rolling Mills

Zinc Smelting Capacity

Lead Smelting Capacity

Nickel

Nuclear Power Facilities

Iwate Prefecture the

second largest but

lowest population

density

Miyagi Prefecture is involved

principally in agricultural and

light manufacturing - rice &

livestock, electronics,

appliances & food processing

Tohoku

Quake

The impact on global metal production

markets is likely to be small

12

PRICE FORECAST

13

20 year average

Real Copper Prices, 1908-2009 (2010 US ¢/lb)

Even though copper prices are well above historic trends…

14

… Most analysts see 2011 and 2012 copper prices

well above the 2010 average

Source: Reuters „January 2011 Base Metals Analysts‟

2010 Average Cash Price = $3.42/lb

2011 Forecast Average = $4.32/lb

2012 Forecast Average = $4.38/lb

US$/lb Cu50 Analysts price forecast for 2012

15

Substantial potential supply gap will start

opening up from 2020 onwards

Probable projects

Possible projects

World mine production, 2000-2035

(„000t contained copper in concentrates and SXEW cathode)

Existing mines

Data: CRU Analysis

Unknown projects

Firm projects

New technology

Prospects

Extra potential supply

requirement = 11.3Mt

pa Cu by 2035

Production needed

Growth = 2.5% pa

(2010 -2035)

16

Key messages in a nutshell …

• Will the copper price in 2011 average more than that in

2010? Yes

• Is copper one of the favoured non-ferrous metal markets

for 2011 and beyond in price-terms? Yes

• Is the market still projected as attractive for new copper

project developers? Yes

17

Copper price takes a breather in Q1 2011

LME 3-month contracts, % change between 31st

Dec 2010 and 21st

Mar 2011

Data: LME

Versus most other metals

Copper has underperformed in

the last quarter

18

“Torrid”

“Frigid”

“Warm Temperate”

* Relative forecast average 2014 prices versus full-year 2010 average price as a base level

Commodity Price ‘Climate Change’…. A Global Warming in Prices

CRU Commodity Price Climatic Zones – What’s hot* to 2014?

“Cool Temperate”

Alumina, Lead, Nickel, Potash, Tin,

Tungsten, Uranium, Urea, Vanadium

Aluminium, Ammonia, Coking Coal,

Copper, Molybdenum, Phosphate,

Platinum

Gold, Iron Ore, Manganese, Met Coke,

Palladium, Sulphuric Acid

Cobalt, Silver, Sulphur, Zinc

20

Key messages in a nutshell …

• Is there room for further upside price outlook to a

US$7000/t – US$7500/t copper price?

Yes

• Is copper one of the favoured non-ferrous metal markets

for 2011 and beyond in price-terms? Yes

• Is the market still projected as attractive for new copper

project developers? Yes

21

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

The immediate future in Copper is a new generation of

large projects – after a quiet decade 2000-2010

10 years of

inactivity

pro

duction (

„000 t

conta

ined C

u)

Price ($/t, nominal)

Note: the size of the bubbles is proportional to the resource size in contained Cu at start-up

Data: CRU Analysis 22

Resolution

New production reliant on South America,

but growing trend towards other locations„000t contained copper-in-concentrates and recoverable EW cathode

Growing

importance of Asia

Data: CRU Analysis 23

Forecast changes in head grades

Post-2019 there are a

number of large scale, high

grade block caves planned

By-product credits are an

important contributor to project

High grade brownfield African

deposits come on stream

High prices + mediocre projects

encouraged mining low grade deposits

% Cu

Data: CRU Analysis 24

Mine lives for Major copper producers

Xstrata: 23 Yrs

Anglo American: 28 Yrs

BHP Billiton: 35 Yrs

Rio Tinto: 38 Yrs

Freeport: 41 Yrs

Codelco: 43 Yrs

Data: CRU Analysis and MinEx Consulting

Note: Bubble-size refers to equity metal production (ktpa)

Mine Life (Years)

Majors have 400 ktpa of capacity

closing down in next decade

Existing operations and

projects under construction

Weighted Average

Mine Life

25

Majors will need to develop new projects to

fill the pipeline

Xstrata: 23 Yrs

Anglo American: 28 Yrs

BHP Billiton: 35 Yrs

Rio Tinto: 38 Yrs

Freeport: 41 Yrs

Codelco: 43 Yrs

Mine Life (Years)

Existing operations and

projects under construction

Projects at

Feasibility StageOlympic Dam

Open Pit

Data: CRU Analysis and MinEx Consulting

Note: Bubble-size refers to equity metal production (ktpa)26

M&A activity increasingly focused on buying projects

Confirmed mergers and acquisitions involving copper assets at date

of announcement vs copper price

Data: Company announcements, media, LME 27

0

5

10

15

20

25

30

35

Other

Junior Explorer

Moderate Producer

Major Producer

State Owned Enterprise

Source: MinEx Consulting Aug 2010

Only 8% of Cu metal in Top 20

deposits is held by Juniors

However not many of the undeveloped giant projects

are left to buy

Ownership patterns for the 20 largest undeveloped

copper deposits in the world.

Projects at the exploration or feasibility study stage

Mt Cu

28

And many of the projects are in challenging locations

25 out of 31 (ie 81%) of all undeveloped

projects are in High Risk or Very High

Risk Countries

Note: Country Risk as defined by the relative PPI score from the

Fraser Institute 2009/10 survey

Undeveloped Copper projects > 5mt Cu

at the Exploration or Feasibility Study StageMt Cu

Source: MinEx Consulting Aug 2010 29

Conclusions

• The main driver of the short term forecast is demand growth outstripping

anaemic growth in supply, producing a deficit of >400kt in 2011.

Visible stocks will decline to below the levels last reached in 2008 by Q4.

• While the Tohoku Earthquake will affect Japan‟s economy in the short-

term, the stimulus associated with the reconstruction will boost

metal demand. The real challenge is in overcoming the power

shortages

• Investment money will continue to be drawn in ahead of even greater

market tightness in H1 2012, thus supporting the price.

• Consumption will be constrained in 2012, due to a lack of physical

availability, with brass mills the most vulnerable. End-use consumers

will face temporary interruptions to production plans from an inability to

secure metal. Two years of high prices and limited physical availability

will prompt an intensification of substitution pressure.

30

Conclusions … continued

• A surge in mine production is due to start in 2012, which will be

the first of three straight years of refined production growth of over

1Mtpy. This will produce surpluses in 2013 and 2014, but the stock

build will be modest. As a result, the price will be supported and

begin to rise again in 2015 ahead of tighter market conditions further

out.

• A large potential supply gap could open up from 2020 onwards –

this will stimulate additional new mines. Many of these will be in new

countries

• M&A activity is picking up – especially for undeveloped projects.

31

THANK YOU

Richard SchoddeMelbourne

Tel: +61 418 909 769

Email: richard.schodde@crugroup.com

Philip Sewell

Sydney

Tel: +61 418 290 342

Email: philip.sewell@crugroup.com

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