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Aussie Mine 2012Staying the course

Aussie MineNovember 2012


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ii Staying the course


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Wayne Hu

Partner, Project Leader

Tim Goldsmith

Global Mining Leader

Foreword

Welcome to the 6th edition of Aussie Mine Staying theCourse. This report focuses on the annual results of thelargest 50 mining companies listed on the Australian StockExchange with a market capitalisation of less than $5 billion

at 30 June 2012 (the mid-tier 50).As we completed last years edition of Aussie Mine, some questions were being

asked around the macroeconomic environment in the Eurozone and the United

States. 2012 has not been easy for the mid-tier 50. They have been battered by

falling condence as concerns around growth in China arose. The subsequent

fall in commodity prices has devastated the market capitalisation of the group

almost one third of their value has been wiped out from its post Global Financial

Crisis (GFC) peak of March 2011.

The mid-tier 50 have posted solid results, with revenue, gross prots and

operating cash ows all up this year. However, ever rising costs continue to

hamper the industry. 2012 saw costs climb again, this time by more than 20%.

As we move forward it will be the companies who are able to arrest this trendwhich will not only survive but prosper, as macroeconomic conditions improve

around the globe.

We see the leadership transition in China as a key event that will set the scene for

the next phase of growth. Things will change as the Chinese economy continues

to mature, but we are in no doubt that the development and urbanisation of China

still has many years to run. This will continue to be the biggest determinant of the

prospects of the mid-tier 50.

With the majors battening down the hatches and deferring projects, opportunities

exist for the mid-tier 50 to capture their share of this growth. These companies are

not gun-shy and capital expenditure has continued. Projects that are on-line and

delivering through the next cycle will create value.

Against this backdrop, the mid-tier miner who remains agile and stays the course

will reap the rewards for its shareholders over the longer term.

Wayne Huf

Tim Goldsmith

Aussie Mine November 2012 iii


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iv Staying the course

Contents

Foreword i

Executive summary 1

1 Mid-tier industry in perspective 3

2 The way I see it Ken Brinsden (Atlas Iron) 10

3 Aggregated industry nancial statements 13

4 Are gold companies losing their lustre? 27

5 M&A the time to buy! 32

6 Movements in the mid-tier 50 36

7 Iron ore in focus 39

8 Changing attitudes to solve the skills shortage 43

9 Are you ready to dig? 45

10 This years mid-tier 50 48

11 Explanatory notes 51

Contacting PwC 52

Other mining publications 54


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Aussie Mine November 2012 1

Macroeconomic concerns around China,the United States and Europe have weighedon commodity prices. This sent the marketcapitalisation of the mid-tier 50 into asteep dive, down 26% from June last year.At $51.8 billion the total market value ofthe mid-tier 50 is at levels not seen sincethe Global Financial Crisis. Opportunitiescontinue to exist for miners and investors alikeif they can remain agile and stay the course.

In the face of pressure, the mid-tier 50 have posted

respectable results with growth in revenues of 21%

driven largely by growth in production volumes.

Cash ows from operations rose 36% to $5.2 billion as

new capacity came online and was ramped up. However,

net prot has taken a battering falling 44% to $1.6billion, primarily as a result of impairment charges of

$1.2 billion as falling commodity prices took their toll.

Supply side pressures are growing. Rising production

costs remain a common theme throughout the industry.

A strong Australian dollar, productivity challenges and

a tight labour market are major contributing factors.

Thinking outside the square to resolve the skills shortage

remains one of the keys to breaking the cycle of ever

increasing costs.

As a consequence of rising costs, the margins of the

mid-tier 50 producers have fallen from the prior year.

An added challenge is the propensity for government to

tap the mining industry for a larger share of tax revenues

which we have seen most recently with an increase in

coal royalties in Queensland.

We believe the demand for commodities will remain

relatively strong as China continues along its momentous

path of urbanisation and industrialisation. The mid-tier 50

is well placed to benet from the continued growth of China

and the other emerging economies, provided they are able

to navigate the multitude of risks on the supply side.

A buoyant gold price off the back of ongoing economic

uncertainty, and the race to feed Chinese demand for

crude steel, has resulted in the dominance of gold and

iron miners in the mid-tier 50. However, the divergence

between the market value of the gold miners and the

gold price has grown, and gold producers are ghting to

show investors that they have not lost their lustre. For the

iron ore miners, access to infrastructure continues as a

key determinate of success. Gaining this access provides a

competitive advantage and strategic exibility. Whether

the companies producing these commodities can address

these concerns and win over the investors remains to

be seen.

It was a slow year for mergers and acquisitions but

with equity prices at low levels it seems that now is the

time for those willing to put cash on the table to buy. In

recent months we have seen an increase in deal ow,

particularly from foreign investors. On the domesticfront, the gold sector is likely to generate increased deal

activity, as miners enter the race for scale and diversify

away from single project businesses.

The balance sheet of the mid tier 50 shows that an

additional $7.2 billion has been invested into project

assets. This is evidence of the fact that the mid tier miners

are in for the long haul. In an environment where costs

are rising and commodity prices have fallen signicantly,

project evaluation and risk management have never been

more important.

Despite the short term challenges facing the mid-tier

50, the future remains bright. The continued emergence

of developing nations and increasing wealth that

accompanies it will drive this industry for generations.

In the face of turbulent times, the mid-tier 50 need to

remain condent and stay the course.

Executive summary


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2 Staying the course


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The stronger for longer catch cry has beenreplaced by those calling the end of theboom. Many commentators predict that thiswill have dire consequences for the mid-tier

mining industry as prices retract.

We are not so pessimistic. We believe that there is

continued strength in the demand for commodities

driven by the industrialisation and development of the

bulk of the worlds population. This is a journey with

many miles still to be travelled which offers mid-tier

miners a bright future, provided they can navigate the

multitude of supply side risks. The Australian mid-tier

mining industry is Staying the Course.

In an era of rising commodity prices, getting volume

to the market was the primary concern of the miners.

Companies could put cost pressures at the back of their

minds. Lessons learnt in 2008 were perhaps set aside

when prices rebounded so quickly that many of the

cost reduction programs didnt have time to be fully

implemented. We have seen commodity prices fall

steadily in 2012 while costs continue to rise for both

operating and capital expenditure, particularly for

projects in Australia.

Cost control, mine optimisation, gaining or building

access to critical infrastructure, identifying and retaining

skilled employees are just a short list of challenges that

the mid-tier miners are faced with. Governments have

also added constantly changing scal regimes and the

occasional threat of resource nationalisation to the list.

This also assumes that funds are readily available.

Chinese demand fears hit the mid-tier

The aggregate market capitalisation of the mid-tier 50

at 30 June 2012 was $51.8 billion, falling from a peak

of $75.3 billion in March 2011. This represents a fall of

31% almost one third of the market capitalisation of

these companies.

Mid-tier industryin perspective

1

Mid-tier 50 market capitalisation (AUD million) June 2009 to 30 September 2012

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

80,000

Market Capitalisation in AUD $million

Jun09

Sep09

Dec09

Mar09

Jun09

Sep09

Dec09

Mar11

June11

Sep11

Dec11

Mar12

Jun12

Sep12

$75.3bn

$69.8bn

$51.8bn$52.8bn

Source: Capital IQ, PwC analysis


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0.60

0.80

1.00

1.20

1.40

Jun

-11

Ju

l-11

Aug

-11

Sep

-11

Oct-11

Nov-11

Australian dollar price by commodity June 2011 to August 2012

(6%) USD/AUD

(24%) Thermal Coal

(13%) Copper

11% Gold

(16%) Iron Ore

Dec

-11

Jan

-12

Fe

b-1

2

Mar-

12

Apr-

12

May

-12

Jun

-12

Ju

l-12

Aug

-12

Source: World Bank, PwC analysis

USD/AUD (1%)

Gold 8%

Thermal Coal (26%)

Iron ore (36%)

Copper (16%)

China remains the single biggest demand determinant for commodities, despite the emergence of other nations such

as India and Indonesia.

The Chinese economy has had a challenging year. What started as a tap on the growth brakes to rein in inationcaused by the massive 2008 stimulus package, has spread through shrinking exports to Europe and the United States.

Concern has been expressed by many around the globe as to whether a more serious challenge now confronts the

Chinese economy. This sentiment, coupled with declining demand growth, has caused commodity prices to fall

through 2012. As a testament to the impact of this on equity prices, the market capitalisation cut off for this years

mid-tier 50 has fallen to $289 million, down from $463 million last year.

The prices for major commodities fell from 2011 with

gold being the sole exception. Iron ore and coal, the

commodities most linked to Chinas industrialisation,

suffered the greatest falls. Iron ore spot prices for 62%

nes reached a record $US190 per metric tonne in

February 2011 but plummeted sharply in August and

September 2012 to fall below US$90. Iron ore hasnt

traded at that level since the initial recovery from the

Global Financial Crisis (GFC) in 2009.

China is here for the long haul

The negativity that surrounds Chinese growth deeslogic. The World Bank is estimating that Chinese GDP

will rise 7.7% in 2012. This is a sensational rate of growth

for what is the worlds second biggest economy. As often

pointed out, but perhaps not always appreciated, the

growth in real dollar terms today is signicantly higher

than the impact of the greater than 10% p.a. growth

experienced in the 1990s. This is no hard landing.

Chinese construction will continue to be the

demand driver

The China doubters also point to its twelfth ve-year

plan (2011 to 2015), which has the stated goal of more

sustainable growth and the promotion of domestic

consumption. The doubters argue that Chinas efforts to

rebalance its economy and shift its focus from investment

to consumption will signicantly dampen construction

and reduce the number of mega infrastructure projects. It

is said that this will place signicant downward pressure

on demand for steel. The point that is lost is that even with

a shift towards more domestic consumption, the demandfor steel will continue. The driver behind this demand is

the unstoppable urbanisation. Chinas urban population

now sits at approximately 51%, compared with 82% for

the United States, 80% for the United Kingdom and 89%

for Australia. Forecasts put the Chinese urban population

at approximately 70% by 2035. By any measure that

represents an immense movement of people into cities.

The ve year plan estimates that twelve million people will

be moving into cities each year. These cities, greater than

Melbourne and Sydney combined, are yet to be constructed.


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Commodity intensity

0

25

50

75

100

0

Late cycle commodities eg platinum, nickel

Mid-cycle commodities eg copper, lead, zinc

Early cycle commodities eg steel, iron ore

GDP per capita (real, 2005)

India GDP:- $3.3k/capita

China GDP:- $7.3k/capita

US GDP:- $42k/capita

Source: Xstrata

5 10 15 20 25 30 35 40 45 50

Stimulus ready and able

Every 10 years the Chinese congress meets to transition their leadership, with the new leadership taking the helm over

the coming months. The incumbents have established their legacy and have more recently been focused on stabilisingproperty prices and controlling inationary pressures prior to handing over to the new team. The new leaders will

move to quickly gain the support of the Chinese people and meeting economic growth commitments will play a

key role in establishing their own legacy. With massive cash reserves at its disposal and space for monetary policy

stimulus, the Chinese government has the capacity to stimulate demand as required. We have already seen this with

the recent package approved to build signicant rail infrastructure.

As the Chinese economy becomes consumption driven -

demand for mid cycle commodities such as copper, lead

and zinc are set to increase. While growth in demand for

iron ore may be more subdued over the medium to long

term, those in the mid-tier 50 that are exposed to these

mid-cycle commodities will see the benets as China

shifts along the development path.

While there is short term pressure on demand for

commodities, the longer term picture should not be

ignored. Investors and commentators today appear

less focused on the long term view and more focused

on the analysis and reaction to the enormous volumesof economic data that are produced each week. Little

wonder then that the longer dated development story

of the majority of the worlds population is easily

overlooked. What is clear is that the Chinese certainly see

the world through this longer term lens.

Green shoots from the Western World?

China may be the key to demand for materials, but equity

markets continue to look to the West for leads, either

through lack of understanding or trust in the information

provided by emerging nations.

Green shoots have started to emerge from some of these

regions. An indecisive and divisive Europe coupled with

a sluggish US economic recovery proved to be limiting

factors in 2011/12. However more recently positive news

has emerged. A coordinated approach to resolving the

European Sovereign debt crisis has been announced by

the European Central Bank although implementation

challenges remain. The US Federal Reserve has promised

to provide liquidity until growth targets are met. The

latest data also shows that employment is slowly creeping

up. The whatever it takes attitude adopted by both

regions provides some comfort and assurance that a

recovery can be achieved.


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0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Gold Coal Iron ore Copper

Price index by resource AUD


Jul07

Oct07

Jan08

Apr08

Jul08

Oct08

Jan09

Apr09

Jul09

Oct09

Jan10

Apr10

Jul10

Oct10

Jan11

Apr11

Jul11

Oct11

Jan12

Apr12

Jul12

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Jul07

Oct07

Jan08

Apr08

Jul08

Oct08

Jan09

Apr09

Jul09

Oct09

Jan10

Apr10

Jul10

Oct10

Jan11

Apr11

Jul11

Oct11

Jan12

Apr12

Jul12

Gold Coal Iron ore Copper

Price index by resource USD


Supply challenges abound

Bringing in projects on time and on budget has

never been more important

Operating a mine in Australia is expensive. We are faced

with escalating capital costs and signicant infrastructure

requirements, exacerbated by the competition for scarce

resources (people and equipment) with a multitude of

mega projects around Australia in the oil and gas sector.

With the mining majors also completing their own large

projects, it has been challenging for the mid-tier 50 to

deliver projects on time and on budget.

Volatility in commodity prices and fears over a cloudy

demand forecast has led to a number of the larger miners

delaying major projects. The mid-tier 50 doesnt have thisluxury, with many of the companies on our list operating

or seeking to develop a single asset. The mid-tier miners

must stay the course the impact of reduced supply will

be felt in pricing.

Cost management and mine optimisation

Low levels of unemployment in Australia coupled with

skilled labour shortages have also resulted in sky-rocketing labour costs. In addition to high labour costs

the mid-tier 50 have reported increases to other key

inputs such as consumables and tyres and reported an

increase in the lead times for these critical inputs. All

this puts pressure on margins and returns on the funds

invested to build mines. We expect cost management to

play a much more prominent role going forward.

FX the break in historic negative correlation

Historically the AUD/USD rate has followed trends

in commodity prices, in both bull and bear markets.

However, with the US moving into QE3, the recent fallin commodity prices has not been matched with a fall

in the value of the Australian currency. Not only are the

mid-tier 50 facing higher capital and input costs, those

in Australia are experiencing an adverse exchange rate

which creates an additional drag on export earnings and

the bottom line.

A commodity price boom?


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The perception of super prots generated on the back of

high commodity prices and their own budget challenges

has led to governments and communities wanting to

claim a bigger share of the pie. The commodity price

movements since 2007 show that there was anything but

a price growth boom with commodity prices declining

for copper (down 23%) and iron ore (down 17%) while

staying at for coal (up 7%). Gold is the only commodity

with signicant increases in price. The peak pre-GFC

2007 commodity prices are nothing to be sneezed at,

however with rising input costs to also contend with the

mid-tier 50 miners have had to work hard to generate

their strong results.

The ever changing landscape

Australia is uniquely placed by having signicant

natural resources on the door step of the global growth

engines and a small population that does not need all

of the resources for its own consumption. Securing the

benets of this advantage for Australia over the long

term however requires stable and competitive tax and

legislative arrangements. Increasing state royalties, the

minerals resources rents tax, the carbon tax and other

changes to tax legislation all serve to make Australia a

comparatively less attractive place to do business.

State royalties are revenue based and directly impact

the bottom line, whilst federal taxes are generally prot

based. Unfortunately we have witnessed opportunistic

tax increases as a consequence of tension between state

and federal governments and challenging budgets.

These are impacting miners underlying protability.

The introduction of additional taxes and increases to

the royalty rates have come at a time when there has

also been downward pressure on price, coupled with

operating and capital costs remaining high. Mining is an

investment intensive industry and a long term game. In

order to support and foster the massive investment that is

required, stability is critical.

The Australian mid-tier mining industry operates globallyand changing scal regimes and resource nationalism

are a growing worldwide phenomenon. In an era of

perceived high commodity prices and government

balance sheets struggling under the weight of stimulus

programs, the prole of the industry has lifted and

governments are under pressure from local communities

and other key stakeholders to increase their share of the

returns of mining projects.

The funding challenge

Companies that already have funding for projects are in

a strong position. During the course of the year we haveseen the equity markets support the mid-tier miners

by providing additional capital, however the slump in

share prices makes equity raisings expensive and deeply

dilutive to existing shareholders - forcing them to give

away value in order to fund a project.

Debt funding has not been the traditional realm of

the mid-tier 50. 2012 has heralded a change to this

perception as we have seen debt raised by Arrium, Atlas

Iron, Lynas, Sandre and Discovery Metals to assist in

funding the development of their projects.

Across the world we have seen a ight to safety intogovernment bonds and cash deposits. As the ultra

conservative asset allocation unwinds there is likely

to be greater funds available. With interest rates at all

time lows in many parts of the world, particularly the

United States, companies are turning to the foreign debt

markets. Recently, for example, Atlas Iron and Arrium,

raised US$325 million and US$599 million respectively.

The cost of the debt is somewhat lower in the United

States than in Australia and may just provide another

avenue for the mid-tier miners in the future. With low

interest rates and debt funding available, this may just be

the right timing for those willing to access this alternative

source of capital.

The mid-tier 50 are also getting creative and looking

to alternative funding arrangements, such as off take

agreements, selling partial stakes in projects and

agreeing to joint ventures. Companies funding these

projects have often been downstream users of the

commodity who are willing to inject capital in return for

security of supply.

PEs time?

Private equity investment has yet to nd its way to the

mid-tier 50 in a signicant way. However, we haveseen PEs and sovereign wealth funds, such as the Qatar

governments Qatar Investment Authority investment

in Xstrata, take a more active role in the mining majors.

They have been dragged in by the startling investment

returns being generated by these companies. With share

prices of the mid-tier 50 in the doldrums and the future

potential bright, perhaps now is the time for PE to take a

serious step into the mid-tier mining sector....


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Where to next?

The investment boom in Australia continues and the

ow-on impact on production is just beginning. Themid-tier 50 have invested signicant capital in project

development during the course of the last few years and

the return from this investment is yet to fully emerge.

Falls in commodity prices, an Aussie dollar that remains

stubbornly high and high capital and operating costs,

have seen market sentiment toward Australian mining

companies fall dramatically. The market has savaged

many companies, as investors ed from perceived risk

associated with investing in projects that arent at the

bottom of the cost curve in a time of lower prices. Strong

underlying demand continues to provide the long term

platform for the mining industry and with 1/3 of the

value wiped off there is now signicantly more upside in

the mid-tier 50.

The mid-tier 50 has historically been dominated by gold

and coal companies which have consistently comprised

over 40% of the total market capitalisation. The

noticeable difference this year is coal, which has fallen

from 28% in 2011 to 18% in 2012.

The mid-tier 50 is less than one third of the size of

BHP Billiton and on the global Top 40 miners list, the

combined mid-tier 50 would appear 5th, similar in size to

Anglo American.

Gold the mover

The most signicant development has been the rise of

gold in the mid-tier 50. Gold now makes up 26% of the

value, the greatest representation that this sector has

seen since ourAussie Mine series commenced. With goldbeing the only commodity to see prices rise in 2012, it is

not surprising that the number of gold producers in the

mid-tier 50 has increased from 11 in 2011 to 19 in 2012.

Coal consolidation

Mergers and acquisitions have played their part in

reducing the number of coal companies represented

in the mid-tier 50. Of the eight coal producers that

have come off the list, three were eliminated due to

acquisitions. The others, at the smaller end, have

exited due to falls in their market capitalisation. Coal

remains a key component of the worlds energy supplyand the world will continue to rely heavily on coal red

generation for many years to come.

India, for all its coal reserves and efforts to improve

production remains unable to produce sufcient quantities

to supply its existing coal red power stations, leading to

load shedding across the nation. The August 2012 AME

Group Coal Commodity Outlook suggests that Indian

thermal coal imports will grow at 5.3% p.a. In addition,

restrictions have been imposed on Indonesian coal exports

as that country faces their own power shortages. Indonesia

is currently a major supplier of thermal coal to India. These

factors may provide the catalyst for a resurgence in the

Australian mid-tier coal sector.

Mid-tier iron ore miners emerge

In 2011 we reported a rapidly increasing demand

for construction material and the resultant capital

investment in the iron ore sector. In 2012 the iron ore

share of the total market capitalisation of the mid-tier

50 has increased from 6% in 2008 to 17%. This remains

the case even with the decrease in the iron ore price in

September 2012.

Mid-tier 50 market capitalisation by resource

(AUD million)*

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2007 2008 2009 2010 2011 2012

Coal Gold Iron ore

10,635

13,350

7,801

9,350

5,278

1,742

14,829

6,675

2,575

17,856

8,734

4,803

22,260

9,144

8,725

9,552

13,328

8,999

Uranium Copper Other

22,964

8,362

5,556

2.286

7,0189,401

4,432

14,285

7,681

9,572

15,297

4,726

9,984

12,449

3,795

6,325

9,832


* Based on the total market capitalisation published in the annualPwC Aussie Mine publications.


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Down, but not out

Uranium producers remain in decline. Extract Resources

was sold to China Guangdong Nuclear Power Corp,leaving only Energy Resources of Australia and Paladin

Energy in the mid-tier 50. Post Fukushima, the uranium

industry has certainly had its challenges. China is

continuing with its nuclear energy program and nuclear

remains central to Europes energy supply. Higher

forecast uranium prices are yet to materialise and

producers have been forced to continually reassess their

projects and take a longer term view.

The Australian governments recent attempts to broker

a deal to sell uranium to India may see a number of

uranium projects emerge in the future, with Queensland

responding by lifting its moratorium on uranium mining.

Mid-tier 50 vs. other performance measures

Mining industry struggled globally

The Australian mid-tier mining industry, represented by

the A&P ASX 300 Metals and Mining Index, has mirrored

the performance of that of the TSX Global Mining Index

and the FTSE 350 Mining index over the course of the

year. This shows that the mining industry has been

impacted primarily by global macroeconomic concerns

and the Australian mid-tier 50 was no different from its

global peers.

Throughout 2012 fear drove away investors, leading to

a drop in trading volumes across all bourses. Investors

seemed to react to economic data on an almost daily

basis, creating enormous volatility in the mining

indices over the past fteen months. We think that this

nervousness is here to stay. It will only abate once Europe

begins to stabilise and condence in the US economic

growth story improves.

At the start of September 2012, the European Central

Bank detailed its bond-buying plan. This, coupled

with the US Federal Reserves move to pump up to

US$40 billion into the US economy each month until it

witnesses a sustained upturn in the weak jobs market,

prompted investors to return to cyclical sectors such as

basic resources, metals and mining stocks. In the periodfrom 30 June 2012 to September 2012, all the mining

bourses rebounded to end in a better position, albeit still

signicantly down from 1 July 2011.

A Western view continues to drive equity markets,

however commodity demand (and therefore the mining

industry) is clearly driven by the emerging markets. As

such, a signicant disconnect exists. The development of

the emerging markets is, to some extent, linked to Western

economies through the demand for exports. However,

provided Europe avoids a deep recession and the United

States experiences some growth this provides a stable base

for the mining industry to grow on the back of emergingmarket demand.

Comparison of key mining indices July 2011 September 2012 (July 2011 = 1)

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

Source: Capital IQ

S&P/ASX 300 Metals & Mining Index FTSE 350 Mining Index S&P/TSX Global Mining Index

To 30

September 2012:

-31% FTSE 350

-29% ASX 300-24% TSX GMI

To 30 June 2012:-34% FTSE 350-32.4% ASX 300-31.8% TSX GMI

Jul11

Aug11

Sep11

Oct11

Nov11

Dec11

Jan12

Feb12

Mar12

Apr12

May12

Jun12

Jul12

Aug12

Sep12


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Aussie Mine sat down with AtlasIrons recently appointed CEOKen Brinsden, to talk aboutthe Atlas success story and thecompanys plans for the future.

Atlas started out with a single employee in 2004 andproduced its 10 millionth tonne of iron ore in 2012.What do you see as the most signicant factors that

have contributed to the Atlas success story?

There are three things that I think have laid the

foundation for Atlas Davids (David Flanagan,

Chairman) strategic vision, a collegial team

environment and the condence to work through

the markets ups and downs.

On the rst point, when Atlas started, Davids strategywas to tap into a niche market we were a junior with

projects relatively close to port. We aggregated our

projects and consolidated our position through

continued acquisitions within reach of the port. This

meant we could run an independent operation with other

peoples access to infrastructure and keep our costs low.

We were able to turn our attention to doing business,

rather than wasting time and energy working through

infrastructure hurdles.

Secondly, we have a very strong team culture.

Davids leadership through those years has been genuine

and effective there is no ego about him and that hascarried through our entire organisation. We all enjoy

working here and the team has always stood willing

to offer that extra discretionary effort. We have had to

expand the leadership team over time to deliver on our

growth commitments. More recently we have established

clearly dened senior management roles and looked both

internally and to the market to recruit the right people for

these positions. This will enable us to manage our growth

and to continue to expand.

Finally, the market has played a key role in how our

business has grown, both positive and negative. In 2008

the global nancial crisis hit just as we started production

at our rst mine. We were condent that our underlying

costs were competitive. We had a strong balance sheet and

we knew we had our shareholders on board. So we backed

ourselves to succeed. At the time of the global nancial

crisis we built our strongest relationships we started from

nothing to achieve the strong trade-ties we have today.

What is your view of the current iron ore price, andwhat do you see as other challenges facing the mid-tiermining industry at present?

We believe there is a genuine solid middle ground for WA

producers in the current environment.

While important, the hype around the iron ore price

is somewhat overplayed by the market. China will

remain a key buyer of our product. China still needs togrow and their domestic ore is lower grade and more

expensive to produce, therefore they are at a competitive

disadvantage. Demand from China for iron ore from

external sources will remain.

New production is also coming on all over the world,

including Africa. However the costs to mine are much

higher in these locations. Beneciation, stripping,

location of mines and shipping charges all contribute to

higher costs. If the price drops, this will clearly impact the

margins of these newer players to a much larger degree

than most WA producers. But the demand for iron ore is

certainly there over the longer term.

Infrastructure remains as the key barrier to entry for

many producers.

The way I see it Ken Brinsden (Atlas Iron)

2


15/64


We were able to turn our attention to doingbusiness, rather than wasting time and energy

working through infrastructure hurdles.

Rail infrastructure is obviously the key to Atlasexpansion plans. There appears to be a greatopportunity for some innovative thinking aroundinfrastructure in WA. What do you think are thebig opportunities for nancing and construction ofinfrastructure in WA?

Thats right. For us, truck haulage has its place but

ultimately its scale is limited, so rail makes sense at the

right time. Our agreement with QR National is one of the

ways we are trying to explore infrastructure solutions in

the Pilbara.

More broadly, lack of access to infrastructure is a

hurdle for many producers. Match the need for rail

infrastructure with the needs of strategic investors who

are seeking off-take arrangements, and you are likely to

inspire clever ways to solve the infrastructure problem.

The Government certainly has a role to play in building a

framework that paves the way for new infrastructure andencourages competition from the mid-tier producers.

How would you rate the performance of the Federal andWA governments in nurturing the resource industry?What are the big changes you would like to see fromthat perspective?

We have worked with both Labor and Liberal Governments

through the evolution of Atlas business to date.

The Department of Mines & Petroleum in WA has

made material changes to the way in which they deal

with mining projects in the Pilbara. There has been a

noticeable decrease in turn-around times for approvals,while appropriate levels of discipline have been applied

in important areas such as the environment, safety and

technology. We see this as a move in the right direction

it shows an increased understanding of the mining

industry and a willingness to work with us.

At the Federal level, the MRRT is a classic example

of the opposite. The MRRT impacts investment, its

implementation has triggered volatility in the nancial

performance of mining companies and it has created a

signicant administrative cost for companies like Atlas.

All this now seems likely to result in the collection of

very little revenue for the Commonwealth. Our offshore

investors are now continually questioning us on what is

going on in Australia and what is next.

What are the primary concerns of your shareholdersat present?

The ore price is clearly on the minds of shareholders.

The evolution of the iron ore indices has been a good

development for the industry, albeit a likely contributor

to price volatility. We see the market moving towards

shorter term pricing models.

Atlas challenge is to take advantage of good marketconditions and to be ready to respond to volatility.

Infrastructure is also a factor in shareholder value. To

grow, we will need more sophisticated infrastructure,

including rail. With a strong balance sheet and good

cash ows, we feel that we are well placed to take

this forward.


16/64


Atlas has gone through a strong period of M&Aactivity over the past few years, including the recentdivestment of some non-core assets. What are thepriorities for the company over the next three years?

We now have a critical mass of resource and good

position on port capacity to facilitate future growth.This doesnt mean we wont take up opportunities as and

when they arise. We have strength in our balance sheet

and in a volatile market opportunities will no

doubt arise. But right now we are more focused on

delivering on our existing growth prole. We would

only consider acquisitions that strongly complement our

current business.

You have mentioned balance sheet strength theAtlas balance sheet is relatively strong, but somefurther funding will be required to meet yourexpansion goals. In your view what are the mostattractive funding options for Atlas at present?

As a junior explorer, we were understandably conservativein our funding choices. Now, with a stable production

base, we have an opportunity to consider alternative

sources of funding. In October we secured a fully

underwritten commitment for a funding facility of US$325

million. Combined with cash on hand, we now have

funding exibility and condence to continue with our

development and expansion works while maintaining

a conservative nancial position. With the right level

of due diligence further debt or an appropriate joint

venture structure might also make sense. We will however

continue to maintain a relatively conservative approach

to our funding.


17/64


Aggregated industryfnancial statements

3

3.1 Income statement

Growth in underlying prots but impairment takes its toll

Operating revenues increased by 21% in 2012 on the back of strong production results. However, cost pressures came

to the fore with gross margins declining slightly. A 22% increase in operating expenses hindered the bottom lineimpact of revenue growth. Net prot fell signicantly to $1.6 billion in 2012 as commodity price pressures emerging

in the latter part of the year across the industry saw impairment charges reminiscent of 2008/9.

2012A$m

2011A$m

Change%

Revenue rom ordinary activities

- Operating revenue 21,484 17,704 21%

- Non-operating revenue 309 185 67%

Total revenue 21,793 17,889 22%

Less expenses rom ordinary activities (15,515) (12,710) 22%

Gross prot 6,278 5,179 21%

Exploration expenses (593) (493) 20%

Other income/(expenses) (364) (79) 362%

EBITDAI* 5,321 4,607 15%

Gain/(loss) on sale o investments 67 683 -90%

Impairment (1,176) 100 -1274%

EBITDA 4,212 5,391 -22%

Depreciation and amortisation (2,073) (1,560) 33%EBIT 2,139 3,831 -44%

Net interest income/(expense) (156) (192) -19%

Prot rom ordinary activities beore tax 1,983 3,639 -46%

Income tax expense (401) (803) -50%

Net prot/(loss) 1,582 2,834 -44%

Source: Company Financial Statements, PwC analysis

* EBITDAI = Earnings beore i nterest, tax, depreciation, amortisation, impairments and investments


18/64


The mid-tier 50 achieved a gross margin of 41%,

slightly down on the 42% recorded in 2011. Improved

gross margins in the gold sector stood out as the

only commodity group to improve year on year. Gold

companies achieved the growth in margin on the back ofincreasing commodity prices and an ability to increase

production. The biggest increases in gold production

came from Alacer Gold and Evolution Mining following

mergers. St Barbara Resources, Perseus Mining, Regis

Resources, Kingsgate Mining and Resolute Mining were

able to increase production through bringing mines on

line or ramping up production at existing mines.

The lowest gross margin product is the coal sector, down

to 10% in 2012. The coal miners have been hit with both

falling prices and higher operating costs whilst only

achieving steady production volumes on the previous year.

Despite price volatility in iron ore the average realised

price was consistent year on year, however iron ore

miners suffered a similar fate to their coal counterparts in

2012 with rising unit costs crimping their margins.

Note: Includes only producing companies in the mid-tier 50 and gross margin denedhere excludes non-operating revenues.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

- 500 1,000 1,500 2,000 2,500 3,000 3,500

Grossmargin(%)

Copper Coal Iron Ore Gold Other

4,000 4,500 5,000

Revenue (A$ millions)

Revenue and gross margin by commodity FY12

Source: Company financial statement, PwC analysis

*Adjusted to exclude Arrium and Mineral Resources non-mining component.

Note: Bubble size reflects the number of producing mid-tier 50 companies in the sector in FY12.

Gross margin of mid-tier 50 producers

0

10%

20%

30%

40%

50%

60%

70%

Source: Company financial statements, PwC analysis

* Adjusted to exclude Arrium and Mineral Resources' non-mining component.

Coal Copper Iron Ore* Gold Other Total

2012 2011


19/64


Productivity

Aggregate production of mid-tier 50 by commodity

Commodity Unit 2012 2011 Change%

Coal 000 tonnes 16,415 16,004 3%

Copper 000 tonnes 168 180 -7%

Gold 000 ounces 2,769 1,709 62%

Iron Ore 000 tonnes 20,372 18,272 11%


Average cost per unit of production

Commodity Unit 2012$/unit

2011 $/unit

Change%

Coal tonne 94 86 9%

Copper tonne 4,601 3,564 29%

Gold ounce 794 808 -2%

Iron Ore tonne 76 67 13%


Unit costs in the gold sector held steady. The decrease in

gold unit costs was disappointingly small in light of the

massive increases in production. Generally, increases inproduction volumes without having to expend plant or

infrastructure, lead to a reduction in costs per unit due

to a reasonable expectation of cost being xed. However,

higher input cost pressures combined with some

companies still ramping up operations meant that

despite rising production the cost per unit remained

relatively stable.

All other major commodities have shown signicantly

rising unit costs of production. Copper and iron ore

stand out as the greatest concern for the mid-tier 50

based on the 2012 result. Whilst the reasons for the unit

cost increases were varied for each company there werecommon areas impacting unit costs for the industry as

a whole:

Labour shortages leading to high salary costs and

turnover

Higher input costs for logistics, explosives and fuel

Challenges in ramping up projects to nameplate

capacity

Reduction in grades

Declining productivity

The impact of explosives supply issues and bad weather

conditions impacted on production at Whitehaven Coal,

resulting in the under utilisation of assets. Coal of Africa

also reported problems with logistics and higher labour

costs. Whilst the average cost per unit of coal was only

marginally higher, prices for thermal and coking coal

have dropped to dangerous levels of approximately $85

and $150 per tonne, respectively, which is putting a

signicant amount of pressure on the mid-tier

coal miners.

Increases in unit costs were seen across the iron ore

sector, due largely to operational setbacks, such as the

wall slip at Grange Resources and the labour shortages

and turnover at Mt Gibson Iron. The start up of new

operations, which typically incur higher unit costs as theyramp up to full production, also played a part at

Mt Gibsons Koolan Island project.

The copper sector in the mid-tier 50 is largely represented

by Oz Minerals and PanAust, which experienced the

highest increase in unit costs in 2012. Both companies

reported higher input costs, particularly in fuel and

labour. Severe weather conditions also hampered

PanAusts Phu Kham operation in Laos, resulting in lower

production levels and increased unit costs. Oz Minerals

costs were impacted by declining gold by-product credits

due to falling gold grades in the concentrate sold.


20/64


Movements in aggregated mid-tier 50revenue by sector

Gold: leading the way

Gold lived up to its reputation as a safe haven in

2012, leading the mid-tier 50 in both price and volume

performance compared to 2011, with an increase of

$1.9 billion in revenue for the year.

The major contributing factor to the increase in revenue

for 2012 was a 61% increase in production, equating to

an additional 1 million ounces due largely to the ounces

produced by the newly formed Alacer Gold and Evolution

Mining. Production grew across the sector as the mid-tier

gold miners brought new projects online and expanded

existing operations.

The biggest increases were seen at the following companies:

Alacer Gold (up 404,000 ounces) the company

merged with Avoca Resources in the prior year.

Evolution Mining (up 193,000 ounces) primarily

due to the acquisition of the operating Mt Rawdon

and Pajingo mines and remaining interest in the

Cracow mine in 2012.

St Barbara (up 105,000 ounces) due to improved

grade at its existing Gwalia mine, as well as the

King of the Hills mine completing its rst full year of

production.

Perseus Mining (up 99,000 ounces) rst year of

production for the company, all production came from

its Edikan Gold Mine in Ghana.

Whilst the price of gold plateaued in the second half of

2012, it experienced strong growth in the rst half of

the year.

542

1,309 4,263

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2,412

FY11

Revenue

Price Production FY12

Revenue

A$millions

Price volume analysis gold



21/64


Iron ore: still growing...for now

With all the doom and gloom surrounding the recent

downturn in the iron ore market, some may nd itsurprising that 2012 delivered 16% growth ($391

million) in revenue in the iron ore sector. The mid-tier

iron ore miners achieved an 18% increase in production

in 2012. The average realised price of iron ore only

decreased marginally between 2011 and 2012, as the

worst of the price falls came subsequent to June 2012 and

thus did not impact the current year gures.

The biggest contributors to and detractors from the

increase in iron ore revenue were:

Grange Resources (up $217 million) due to a higher

realised price on higher quality pellets sold and an

increase in production volumes from the Savage River

operation.

Mineral Resources mining business (up $191

million) due to the Carina mine entering production

in November 2011.

Northern Iron (up $84 million) due to the

signicantly higher quality ore produced and sold in

2012 providing higher prices for saleable commodity

coupled with increase in production volumes

Atlas Iron (up $33 million) increase in production

volumes contributing an increase of $165 million

offset by a $132 million decrease in price for hematite

Direct Shipping Ore (DSO) shipped.

Arriums mining business (down $113 million)

due to a lower realised price on ore sold in 2012 on

hematite DSO.

Coal: the tough times are yet to come

There was little movement in the coal sector this year,

with revenue only increasing 9% or $149 million in2012, the majority of which was driven by New Hope

Corporation (up $117 million), as it rebounded from its

ood-affected state in 2011.

Whilst it is acknowledged that coal prices have

experienced a relatively steep decline since March 2012,

the 2012 average realised coal price still improvedslightly on the 2011 average, contributing $73 million to

the total increase in coal revenue. In particular, the two

largest thermal coal producers in the mid-tier 50, New

Hope Corporation and Whitehaven Coal, beneted from

approximately 10% higher realised prices in 2012, whilst

Coal of Africa suffered a 9% decline in their average

realised price due to the higher proportion of low quality

coal in the 2012 sales mix. However, the story may well

be different next year.

1,57873

75 1,727

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

FY11

Revenue


Revenue

A$millions

Price volume analysis coal

Source: Company Financial Statements, PwC analysis500

1,000

1,500

2,000

2,500

3,000

3,500

2,482

2,871

(97)

486

FY11

Revenue


Revenue

A$millions

Price volume analysis iron ore*

Source: Company Financial Statements, PwC analysis*Adjusted to exclude Arrium and Mineral Resources non-mining component.


22/64


Largest individual impairment expenses in the mid-tier 50

Company Year-end Category AU$ m Description

IndependenceGroup

June 30 Diversied(Copper,Nickel)

(372) Impairment o the Jaguar/Bentley operation due to weakening commodityprices and the strengthening AUD.

BrockmanResources

June 30 Diversied(Iron Ore,

Copper)

(314) $312 million o this relates to mine properties, driven primarily by areduction in iron ore prices, as well as project delays that occurred

during the year at the Marillana Iron Ore Project in Western Australia.

Paladin Energy June 30 Uranium (180) Consisted primarily o write downs to PPE and mine development at theKayelekera mine as a result o a deteriorating uranium price.

Whitehaven Coal June 30 Coal (120) Relates to goodwill rom acquisition o Boardwalk Resources.

Atlas Iron June 30 Iron Ore (67) Relates to the PPE and mine development at Balla Balla and Yerecoinprojects ater the company entered into agreements that indicated carryingvalues were in excess o air value.

It is evident that deteriorating commodity prices was a

common theme. As reected in the table above, virtually

all impairment losses have come from 30 June reporters,

which is not surprising given that the outlook for

commodities other than gold started deteriorating moresignicantly from around March 2012 and thus we wont

see the impact of this for 31 December reporters until their

2012 reporting. Any further deterioration in prices in the

next year may see companies having to revise long term

prices once again and take on further charges.

Depreciation and amortisation continuesits sharp rise

The mid-tier 50 incurred depreciation and amortisation

expenses 33% higher than in 2011. This was to beexpected given the signicant capital exploration and

development expenditure we saw in previous years has

now translated to depreciation as projects came online

during the year. Combined with this was the production

growth achieved for the major commodities in 2012,

increasing the rate at which these larger depreciable

balances were being amortised - case in point being the

gold sector, which contributed over half of the mid-

tier 50 increase on the back of its signicantly higher

production in 2012.

Impairment rears its ugly head

Whilst gross margins held up reasonably well for the mid-tier 50 in 2012, the same cannot be said for net prots,

which dropped 44%. The primary driver behind this change is impairment charges. After a stellar 2011 in which therewas a net impairment reversal of $100 million, the mid-tier 50 suffered impairment losses in excess of $1 billion in

2012. This is reective of the downward revision of forecast commodity prices.


23/64


3.2 Balance sheet2012

A$m

2011

A$m

Change %

CURRENT ASSETS

Cash and cash equivalents 8,324 7,884 6%

Inventories 3,683 3,153 17%

Receivables 2,342 2,348 0%

Other current assets 926 774 20%

Total Current Assets 15,275 14,159 8%

NON-CURRENT ASSETS

Investments in associates 3,920 4,108 -5%

Investment in joint ventures 1,315 742 77%

Property, plant and equipment 18,795 13,959 35%

Capitalised exploration expenditure 5,404 4,168 30%

Capitalised development expenditure 4,860 3,747 30%

Goodwill 2,549 2,505 2%

Other non-current assets 3,297 2,735 21%

Total Non-current Assets 40,140 31,964 26%

TOTAL ASSETS 55,415 46,123 20%

CURRENT LIABILITIES

Accounts payable & accrued liabilities 3,461 2,731 27%

Interest bearing liabilities (short term borrowings) 1,475 852 73%

Provisions 621 501 24%

Other current liabilities 518 463 12%

Total Current Liabilities 6,075 4,547 34%

NON-CURRENT LIABILITIES

Interest bearing liabilities (long term borrowings) 5,739 4,657 23%

Provisions 1,826 1,235 48%

Other non-current liabilities 2,272 2,171 5%

Total Non-Current Liabilities 9,837 8,063 22%

TOTAL LIABILITIES 15,912 12,611 26%

NET ASSETS 39,503 33,512 18%

SHARE CAPITAL & RESERVES

Share Capital and premium 33,557 29,825 13%

Reserves 1,135 1,403 -19%

Retained Earnings/(Accumulated loss) 4,610 1,894 143%

Other Equity 201 391 -34%

TOTAL EqUITY 39,503 33,512 18%

Source: Company nancials, PwC Analysis


24/64


Putting cash back to work

The mid-tier 50 continued to invest heavily in their

projects. Their decisions have been supported byshareholders that have contributed more capital or

accepted scrip for deals. This has allowed the mid-tier 50

to maintain a strong balance sheet with adequate cash

reserves. The strong cash position is impressive given the

signicant investment in projects made during the year.

Cash increased by $440 million and represents more than

15% of total assets on the balance sheet. The increase in

cash year-on-year highlights the liquid and stable position

the mid-tier 50 have adopted since the depths of the GFC.

Total assets have increased by more than $9 billion

or 20%. This growth in assets has been drivenpredominantly by increases in investment related

activities, which contributed $7.7 billion. Specically,

property plant and equipment and capitalised

exploration and development expenditure, have all

experienced individual growth rates of 30% or more from

2011 levels.

Property plant and equipment

Total PPE assets increased by almost $5 billion or 35%

from 2011 levels. A signicant portion of this rise can be

attributed to acquisitions made by both Whitehaven Coal

and Alacer Gold. Excluding these, the largest additions toPPE by the mid-tier 50 are shown in the table below:

Company Spend$m

Activity

1. Lynas 346 Rare earths projectdevelopment in Malaysia andWestern Australia

2. MineralResources

265 Iron ore project development Carina mine

3. Mt Gibson Iron 250 Koolan Island, Extension Hilland Geraldton Port capital

expenditure

4. Energy ResourcesAustralia

202 Completion o the our metreTailings Storage Facility

5. Zimplats 198 Ngezi phase 2 expansionproject

Capitalised exploration and development

Capitalised exploration and development expenditure

increased signicantly during 2012, adding more than$2.3 billion to the mid-tier 50 balance sheets. Gold

miners were the largest contributors as a result of

acquisitions as they raced to ramp-up production while

the gold price was still buoyant.

Share price volatility during the year did not appear to

dampen the mid-tier 50s appetite for new investment.

The mid-tier miners continue to be the project

development engine for the industry. Their fortitude

will be tested further in light of recent commodity price

declines. Will they have the courage to stay the course?

Debt no longer a dirty word

The aggregate debt to equity ratio of 18.3% has grown

from previous years, but remains at manageable levels.

A net debt to equity ratio of negative 2.76% reinforces the

balance sheet strength of the mid-tier 50.

Short and long term borrowing positions increased by

$624 million and $1.1 billion respectively. This renewed

appetite for debt stands in stark contrast to recent

years, when miners frantically extinguished debt. The

move to embrace debt appears to be driven by its cost

effectiveness when compared to tapping equity markets,

which remain close to post-GFC lows. Arrium, AtlasIron, Sandre Resources, Discovery Metals and Lynas all

raised debt to fund projects. It now appears that debt is

no longer a dirty word and the mid-tier 50 are embracing

leverage again to fund development activities.

Key Balance Sheet Ratios

2012 2011

Debt to Equity 18.31% 16.49%

Net Debt to Equity -2.76% -7.06%

Current Ratio 3.48 3.66

Quick Ratio 1.76 2.25

As a group, the mid-tier 50 experienced a slight

deterioration in both their current and quick ratios,

reecting an increase of $730 million or 27% in accounts

payable over the prior year. In fact, 32 of the mid-tier 50

recorded an increase in account payable balances during

the reporting period. However, with a substantial cash

position and both the current and quick ratios remaining

above one, short term liquidity does not appear to be

a concern.


25/64

Share swap support

Throughout 2012 several of the mid-tier 50 increased

share capital. The three largest increases in share capitalwere due to scrip based acquisitions. Investors were willing

to back the mid-tier 50 by accepting scrip for deals.

Company Amount($m)

Activity

WhitehavenCoal

2,525 Acquisition / merger with AstonResources

Alacer Gold 1,141 Acquisition o Avoca Resources

EvolutionMining

860 Merger o Catalpa Resources andConquest Mining and issue o scripto Newcrest or Mt. Rawdon and30% o the Cracow Mine

EnergyResourcesAustralia

492 Construction o Ranger 3 Deeps andwater management acilities

Atlas Iron 274 Primarily acquisition o FerAus



26/64


3.3 Cashfow

2012$m 2011$m Change%

CASH FLOWS GENERATED FROM OPERATIONS

Cash generated rom operations 5,358 3,996 34%

Net borrowing costs (31) (46) -31%

Other 291 138 111%

Income taxes (paid)/reunded (422) (275) 54%

Net operating cash fows 5,195 3,814 36%

CASH FLOWS RELATED TO INVESTING ACTIVITIES

Purchases o property, plant and equipment (3,289) (2,194) 50%

Exploration and development expenditure (1,807) (974) 86%

Purchases o investments and intangibles (1,879) (1,885) 0%

Other (911) (817) 12%

Proceeds rom sale o property, plant and equipment 528 289 82%

Proceeds rom sale o investments 1,085 715 52%

Net investing cash fows (6,274) (4,865) 29%

CASH FLOWS RELATED TO FINANCING ACTIVITIES

Proceeds rom ordinary share issues 2,322 1,785 30%

Net borrowings 1,543 1,019 51%

Distribution to shareholders (1,885) (762) 147%

Other (162) (113) 44%

Net nancing cash fows 1,818 1,929 -6%

Net increase/(decrease) in cash and cash euivalents 739 877 -16%

Source: Company nancials, PwC Analysis


27/64


Generate, invest and return

Against a backdrop of declining commodity prices and

rising costs of production the mid-tier 50 has managedto post an impressive 34% increase in cash ow from

operations to $5.2 billion from $3.8 billion in the last year.

The companies with more mature operations rewarded

shareholders by paying $1.8 billion, an increase of 147%,

through dividends and other distributions.

The mid-tier 50 as a group invests to build the mines of

the future. This year the group increased their investmentin PPE by approximately $1.2 billion and increased

exploration and development spending by $900 million,

which is a doubling of last years spending.

6,000

Major operation and investing activities cashflow components by commodites 2012 vs 2011

1,000

2,000

3,000

4,000

5,000

A$inmillions

1,4301,263

812592 594

166

1,844

765

471

351

589

290

753

316

777

468 3

15

244

244

352

329

227

246

960

991

675

242

180

146

128

417

202

213

213

111

Cash generated from operations Purchase of property, plant

and equipment

Exploration and development

20112012201120122012 2011

Nickel, Uranium and Diversified Copper Coal Other Gold Iron Ore

Source: Company financial statements, PwC analysis

0


28/64


Operating cashows: the dominance of gold

Cash generated from operations increased by an

impressive 34%, with gold producers accumulating cashat a faster rate than their peers in the mid-tier 50 on the

back of higher production and increased prices.

13 of the 19 gold miners in the mid-tier 50 experienced

an increase in operating cash ow. The increases are most

apparent in Alacer Gold ($286 million), Evolution Mining

($148 million), Resolute Gold ($142 million), Kingsgate

Gold ($136 million) and St Barbara ($121 million).

Investing cashows: moving forwardwith condence

Amongst the mid-tier 50, spending on exploration anddevelopment rose by 86% from $974 million to $1.8

billion, while spending on property, plant and equipment

(PP&E) rose 50% from $2.2 billion to $3.3 billion.

The boost to exploration and development is a positive

sign, despite the pessimism surrounding much of the

industry. Iron ore and gold producers have posted the

largest increase in exploration and mine development

spending. Spending in the iron ore sector increased by

$422 million as miners set out to rm up their reserves

and deliver key infrastructure. Atlas Iron spent $118

million on mine development (2011: $31 million), with

$48.5 million of this spent on the expansion of its existingWodgina mine (2010: nil), while Mineral Resources

increased its mine development to $70.2 million (2010:

$5 million) developing the Carina mine.

The gold sector posted a $300 million increase in 2012.

Evolution Mining increased its spending to $161 million

(2010: $28 million) whilst Kingsgate lifted its spending to

$75 million (2010:$12 million).

While larger players such as BHP Billiton and Fortescue

Metals announced decisions to defer major investments,

the mid-tier 50 have remained relatively condent in

growing their businesses. The willingness by mining

executives to invest in exploration, mine development

and PP&E should be applauded. Boards and management

are taking a longer strategic view when making

investment decisions and have proactively placed cash

into growth opportunities, ensuring they are in a position

to deliver for shareholders when the commodity price

cycle swings once again.

2,500

Major financing cashflow components

by commodites 2012 vs 2011

500

1,000

1,500

2,000

A$inmillions

708

192

47

715

488

95

94

227

102

51

193

282

76

276

336

131

241

379

505

82

132

927

464

9

Proceeds from

ordinary share

Distribution to

shareholders

201120122012 2011

Nickel, Uranium and DiversifiedCopper

CoalOtherGoldIron Ore

Source: Company financials, PwC analysis

0


29/64


Financing cashows: cash is king

During 2012, the proceeds from ordinary share issues

amongst the mid-tier 50 has risen by 30% from $1.8billion to $2.3 billion, primarily driven by $548 million

invested in the gold sector. Despite the difcult equity

market, the mid-tier 50 have successfully raised capital

from shareholders, with signicant equity raisings

undertaken by:

Energy Resources of Australia $488 million for the

construction of a concentrator as well as exploration

and development of its Ranger uranium project

Gindalbie Metals $209 million towards the

development of the Karara iron ore project in

Western Australia

Indophil Resources $183 million to fund the

Tampakan Copper-Gold project Gold One International a share placement of $156

million to a consortium of Chinese investors to fund

future development projects

Sphere Minerals $121 million to fund studies

and early work programmes at its iron-ore assets in

Mauritania

Independence Group $115 million to fund

construction and development at its part-owned

Tropicana gold project

Summary of Dividend Payments and Dividend Yield

Commodity Dividend Paid2012 (A$m)

Mark Cap at30 June 2012

(A$m)

Dividend Yield Dividend Paid2011 (A$m)

Mark Cap at30 June 2011

(A$m)

Dividend Yield

Iron Ore 276 8,999 3.1% 193 13,648 1.4%

Gold 42 13,328 0.3% 51 12,923 0.4%

Coal 488 9,552 5.1% 227 11,592 2.0%

Copper 227 6,325 3.6% 94 8,622 1.1%

Others 329 13,627 2.4% 197 23,007 0.9%

Total 1,363 51,831 2.6% 762 69,792 1.1%

(Notes: Dividend paid excludes share buy-backs o $489 million by Oz Minerals and $31 million by Resolute Mining)


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Distributions to shareholders have increased markedly

from $0.8 billion to $1.9 billion in 2012, a 138% increase.

Investors are demanding cash distributions and the

mid-tier 50 have responded, returning cash through

increased dividends and share buy-backs. Dividend yield

has more than doubled from 1.1% in 2011 to 2.6% across

all commodities. Interestingly despite having a difcult

year coal companies provided the best dividend return

with a solid yield of 5.1%. On the other hand the gold

companies that had beneted the most from price rises

contributed only a 0.3% yield. This is reective of the fact

that the coal companies are more mature with developed

operations where as the gold sector remains at the more

junior end of the spectrum with a number of single

asset operations and companies that are still looking to

develop mines. The top 5 dividends for 2012 were as

follows:

2012($m)

2011($m)

Whitehaven 272 30

Oz Minerals 227 94

New Hope Coal 216 197

Alumina 165 102

Iluka 117 0

Additionally, during 2012, Oz Minerals and Resolute

Mining returned $489 million and $31 million

respectively via a share buy-back.

Investment worthy?

Aggregate ratio analysis

2012 2011

Share price $1.68 $2.54

PE Ratio 32.31 24.87

EPS 5.21 cents 10.22 cents

DPS 3.80 cents 2.47 cents

Dividend yield 2.6% 1.1%

If the mid-tier 50 traded as a single entity, then based

on shares on issue and overall market capitalisation,

this conglomerate would have been valued at $2.54 per

share on 30 June 2011, but by 30 June 2012 the share

price would have fallen by 33.7% to $1.68 per share. This

decline exceeds the overall fall in market capitalisation of26%. The additional decline in the share price compared

to market capitalisation can be explained by additional

share capital issued during the year.

Mining companies around the world have heard the

call from shareholders to return cash. The mid-tier 50s

dividend yield of 2.6% is at unprecedented highs for this

sector. When you consider that this is the engine room

for early stage exploration and development projects,

the ability to return cash back to shareholders is no

small feat.

The price to earnings multiple of the mid-tier 50,although high by broader market standards, is consistent

with the view that this is a growth sector. With a

signicant representation of explorers and developers

with limited underlying earnings, the earnings multiple

for this group reects higher growth expectations.


31/64


Historically investors viewed a listed goldproducer as a proxy for direct exposure togold. However, since the Global FinancialCrisis (GFC) this appears to have changed.

Over the centuries, gold has been a symbol of wealthand power. In times of economic uncertainty, it has

been seen as a safe haven against ination or deation.

This is no different today, for example:

During recent economic turbulence investors and

central banks alike have used gold as an alternative to

investing in US dollars (USD). 1

The US Federal Reserves open-ended stimulus

program is set to push gold to record highs as infation

fears and currency devaluation drive investors to

safe-haven assets.2

Gold is a true store of wealth. Given it is priced in USD,gold is directly inuenced by the strength of the US

currency. The USD Index3 has fallen 11% since its 5 year

peak in March 2009. Increasing quantities of gold are

held in reserve as a hedge against the USD, ination

and general economic uncertainty. Central banks have

again become net gold buyers after being net sellers for

the past two decades. In 2011 central bank buying of

gold was at levels not seen since 1964.

The weakening USD and increased gold demand have

driven a 142% increase in the USD gold price over the

past 5 years. With a strong Australian dollar (AUD) this

has equated to an increase of 90% in AUD terms.

Are gold companieslosing their lustre?

4

US Dollar weakens 11% over 5 years (USD Index)

Source: Dow Jones Factiva

11%decline

0

20

40

60

80

100

120

140

July 2001

121 points

March 2009

89 pointsSep 2012

80 points

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Gold price skyrockets (16% CAGR) during last

12 years ( USD/oz)

Source: Perth Mint

20

00

2001

2002

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

2011

2012

0

500

1,000

1,500

2,000

Sep 2009

12% CAGR

21% CAGR

Gold price skyrockets (16% CAGR) during last

12 years ( USD/oz)

20

00

2001

2002

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

2011

2012

Sep 2009

12% CAGR

21% CAGR

Central Banks and States become net gold buyers

from 2008 (Tonnes of world gold reserves)

100,000

105,000

110,000

115,000

120,000

125,000

Net sellers Net buyers

Source: World Gold Council

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011


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While a strong increase in the gold price has occurred,

the same cannot be said for the price of shares in listed

gold producers. This disconnect is most evident amidst

the larger multinational gold producers, with shares in

Newmont Mining, Newcrest Mining, Barrick Gold and

Gold Fields (Global Producers), increasing in market

value by only 11% on average, over a 5 year period.

Our basket of listed Australian mid-tier gold companies

has demonstrated greater elasticity by recovering

rapidly from the GFC, but has seen a decline in the value

of their stock over the last 24 months, resulting in a 60%

increase in value over the same 5 year period (in AUD

terms). There is now a signicant disconnect between

the value of shares in these smaller producers and

increasing gold prices.

USD Gold price Mid-tier 50 share price Global Producers share price

Australian major and mid cap gold companies underperform gold price over the past 5 years (Index, USD/oz)

Index is a compilation of mid-tier 50 companies during 2007-2012, weighted by volume traded on the ASX base dated at 11/9/2007.

Source: Dow Jones Factiva, PwC Analysis

0

Sep

07

Dec

07

Mar

08

Jun

08

Sep

08

Dec

08

Mar

09

Jun

09

Sep

09

Dec

09

Mar

10

Jun

10

Sep

10

Dec

10

Mar

11

Jun

11

Sep

11

Dec

11

Mar

12

Jun

12

Sep

12

0.50

1.00

1.50

2.00

2.50

3.00


33/64


What has driven the disconnect?

1. Shares in listed gold producers face growing

competition for the investor dollar

Over the past 5 years, the options available to investors

seeking to include gold in their portfolio have increased

beyond merely acquiring shares in a gold producer. More

alarmingly for gold companies, one of the alternative

investments for those seeking exposure to gold has

steadily increased its share of the market.

Since their creation in 2003, gold backed Exchange

Traded Funds (ETFs) have provided investors with

an alternate means to invest in gold, via a liquid and

tradable market as readily accessible as listed company

shares. Gold ETFs are directly linked to the price ofgold and provide investors with exposure to the price

of gold, without the challenges of holding the physical

asset. Investing in an ETF also liberates the investor from

the various risks typically faced by a producer

(e.g. exploration and project development risk,

geological risk, country risk, industrial relations, adverse

weather conditions, etc.).

Since 2007 the appetite for buying and holding physical

gold has also increased markedly. For example, the Perth

Mint saw 2012 demand reach levels some four times

higher than ve years ago.

These developments in the gold market may well have

caused a diversion of investor dollars away from gold

stocks toward ETFs and physical gold.

2. The emerging low cost base recycled gold market

With high gold prices and increasing economic

uncertainty, an ever-increasing quantity of gold, largely

in the form of jewellery, is entering the market after

being recycled. In 2011, recycled gold represented almost

40% of the global supply, having increased in volume by

74% from 2007. With 43% of the 2011 annual demand

for gold coming from jewellery, this is set to perpetuate

increased recycled gold production for some time.

What do these shifting market dynamicsmean for the gold companies?

With exposure to the physical gold price no longer

the primary draw card for investors, a focus by gold

producers on creating shareholder value through sound

company management to attract shareholder investment

is now more critical than ever. Gold producers have to

tackle a series of issues.

Escalating costs

While the gold price has increased, rapidly escalating

operating costs in the area of labour, commodity input

costs and infrastructure charges, have greatly tempered

margin growth. The Australian mid-tier gold miners have

demonstrated the most elasticity, capitalising upon arising price between 2008-2010. Recently though, they

have signicantly dropped behind the pace of growth in

the gold price.

Central banks

and State sales

Recycled gold Mine production

2031

2832

956

1665

484

2007 (tonnes) 2011 (tonnes)

+74% over

5 years

+39% over

5 years

15% CAGR

9% CAGR

Source: World Gold Council

Market supply from recycled gold has increased faster

than supply from mining activity

Gold price increases have not correlated or been

fully captured by operating margin, especially in

the last 24 months

Mid-tier 50 EBITDA margin

Global Producers EBITDA margin

Gold price (USD/oz)


0

500

1,000

1,500

2007 2008 2009 2010 20110

20%

40%

60%

80%

100%

US$/o

z

EBITDAM

ARGIN


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Average ore grade in reserves has declined

0

1.2

1.4

1.6

1.8

2

2.2

2007 2008 2009 2010 2011

(g/t)

Mid-tier 50 Global Producers


With exposure to thephysical gold price no

longer the primary drawcard for investors, afocus by gold producerson creating shareholdervalue through soundcompany managementto attract shareholder

investment is now morecritical than ever.

Decreasing ore grades

Quality gold reserves are harder to nd. Gold companies,

like many across the mining industry, often have to spendmore just to stand still.

A higher gold price encourages acquisition or

development at lower ore grades. This means a

commensurate increase in productivity is required to

remain economical when prices decline.

Potentially future lower gold prices will expose the worst

performers, rendering some operations marginal.

Changing geographical focus

Gold miners are continuing to expand their geographic

coverage in search of resources. The African continentis the dominant location for the Australian mid-tier

gold miners resources (33%), while Australia still holds

the highest noted reserves at 34% compared to Africa

(26%) and South East Asia (28%). Looking forward,

the Americas and South East Asia both see combined

resources being 4 times reported reserves, indicating two

regions where proportionally higher growth of new gold

projects may be likely to occur.

This search for gold deposits in countries with less

mature mining regimes introduces a variety of

risks including nationalisation, political instability,

infrastructure, and permitting. In turn, investors are

exposed to risks they may not be willing to accept.

Impact of a high Australian dollar

As gold is priced in USD, a stronger AUD makes

Australian gold production less competitive. However,our mid-tier gold producers have generally reduced their

exposure to Australian revenues in recent years.

Low use of bank capital

Gold companies have typically had low debt to equity

ratios (10-15%). Historically, they have used a high

level of equity funding and recycled free cashow back

into exploration and working capital to support growth

ambitions rather than paying out dividends. This strategy

results in a higher cost of capital than similar sized capital

intensive companies which have ratios of 25% plus. This

lower leveraging of balance sheets, and the low (if any)payment of dividends, requires shareholder returns to be

achieved through share price growth.

In an environment where share price is not keeping

pace with the gold price, this return to shareholders via

share price growth results in a lower return on equity

than shareholders may otherwise be seeking, making an

investment in a gold producer less attractive than other

avenues for investing in gold.


35/64


No longer can gold companies assume that they are seen as the most efcient and direct path for investors to gain exposure

to the gold price; ETFs, physical gold purchases and a readily available supply of recycled gold have taken at least a portion

of investor demand from them. Even with the incentive of quarterly, sometimes monthly dividends, gold companies are

recognising that they will be assessed on their performance as a manager of investments, the quality of their projects,

growth of revenue streams and capital growth. A concerted effort is needed to focus on productivity, setting and achieving

management targets to build shareholder condence, using debt to leverage higher returns, and prioritising capital

investment only in projects that provide robust returns and avoiding chasing reserve increases at any cost.

Investors are still looking at mid caps for exposure to gold due to their transparent and agile management

structure, and potential upside elasticity from gold price movements.

However, during a period of rapid price increases, losing sight of realistic project feasibilities, achievable and ongoingproductivity targets and saleable ore grades is a risk to even the most conservative miners. Companies who are able

to demonstrate solid company fundamentals, achieve high levels of productivity, and build up economically attractive

resource holdings and ore grades will set themselves up to be attractive investment targets for shareholders and gold

majors alike.

Where to from here?

For further information please contact:

Robert Hughes

Director

T: +61 7 3257 8022

E: [email protected]

Chris Sullivan

Senior Manager

T: +61 7 3257 8429

E: [email protected]

Enrique Reyna

Senior Consultant

T: +61 7 3257 8378

E:enriqu

pwc aussie mine nov12

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