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Patricia M. Mohr Vice-President, Economics & Commodity Market Specialist The Scotiabank Group, Toronto Seminar on Surviving the Global Financial Crisis.

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Presentation on theme: "Patricia M. Mohr Vice-President, Economics & Commodity Market Specialist The Scotiabank Group, Toronto Seminar on Surviving the Global Financial Crisis."— Presentation transcript:

1 Patricia M. Mohr Vice-President, Economics & Commodity Market Specialist The Scotiabank Group, Toronto Seminar on Surviving the Global Financial Crisis in the Mining Sector Mine Africa Radisson Admiral Harbourfront Toronto, Ontario January 13, 2009 The Outlook for Commodity Prices and the Global Mining Industry

2 Commodity Price Upswing This Decade On a Par With 1970s Expansion Scotiabank Commodity Price Index 1 Index: 1997=100 All Items October 2001 Bottom Scotiabank Commodity Price Index, % change yr/yr December 2002 December 2003 December 2004 December 2005 December 2006 December % 17.3% 19.0% 24.4% 5.4% 10.2% (November 2008, % change yr/yr) All Items-12.8 Oil & Gas-30.4 Metals & Minerals-5.0 Forest Products1.7 Agriculture-12.0 New record high in July 2008 at 226% above cyclical low Arab Oil Embargo A trade-weighted U.S. dollar-based index of principal Canadian exports. Shaded areas represent U.S. recession periods. *

3 The Bull-Run in commodities continued in 2008:H1 due to ongoing strength in Chinas GDP growth, under-investment in oil & gas and metals during the 1990s and delays in expanding capacity this decade. Interest by investment funds in commodities as a hedge against a declining U.S. dollar and a major rejuvenation in international grain & oilseed prices – linked to biofuel development and tight global supplies – also pushed up commodity prices. Fertilizer prices (especially potash) rose to record levels. However, after reaching a cyclical peak in July 2008, Scotiabanks Commodity Price Index plunged by a sharp 35.8% through November and dropped further in December alongside a faltering global economy – ushered in by a U.S. and European banking crisis, deleveraging by financial institutions and much tighter global credit conditions. Most G7 economies are now contracting. Commodity Prices Retreat From Record High in July 2008

4 While inter-bank lending has improved – following government guarantees on inter-bank lending in Europe, government capital injections into financial institutions to shore up their balance sheets and massive central bank liquidity injections – tighter credit will contribute to sharply paring global growth from 5% in 2006 and 2007 to about % in This will occur, even with relative strength in emerging markets such as China, where GDP growth should still advance by 7.0% in 2009 – though well below the estimated 9.5% of 2008 and 11.9% of The sudden and unusually sharp decline in commodity prices since the July peak reflects the exit of many hedge funds from long commodity futures positions and commodity index-linked investmentsforced by fund redemptions and tighter credit – as well as a shift to record short positions by funds and trading companies. Investment in commodity index-linked securities – such as the Dow Jones- AIG Commodity Index – fell from about US$200 bn at the end of June to no more than US$150 bn in September and plunged in October - November. Hedge Funds Exit Oil & Metal Positions

5 China Industrial Production: November % yr/yr G7 Industrial Production -5.1% (Oct) U.S. -5.5% (Nov) Japan -13.3% (Nov) Germany -3.9% (Oct) China -- Vital to Global Commodity Markets yr/yr % change China – Industrial Production* G7 Industrial Production Demand Growth in China (2007, % change) Crude Oil4.6Nickel 24.0 Copper16.0Aluminium38.8 Slab Zinc11.5Iron Ore10.3 *3 mth moving avg. China shifts policy in mid-September 2008 from preventing overheating to supporting fast and steady growth; monetary policy has been eased decisively, while a massive fiscal stimulus package (infrastructure spending) has been announced for 2008:Q

6 yr/yr % change F2009F2010F WORLD* CANADA UNITED STATES CHINA INDIA SOUTH KOREA GDP (% per annum) *Global GDP estimate based on purchasing power parity, as used by the IMF. Average : 3.4% p.a. prior to the economic take-off in China and India. Emerging Markets Should Provide Some Offset To G7 Contraction A seismic shift in global growth has occurred from the G7 to emerging markets this decade. Widening credit squeeze reduces growth prospects.

7 U.S. Housing Starts millions of units, quarterly, annualized U.S. housing starts at 625,000 units in November 2008 were the lowest in data back to Shaded areas represent U.S. recession periods. Total Single-Family Units 1978 – Strong Baby-Boom Demand U.S. Housing Start Outlook (million units) F F F0.85 Tighter U.S. lending standards, high home inventories and severe employment losses point to prolonged U.S. slowdown. The plunge in U.S. new single- family home sales since the peak in 2005:Q3 at – 72.2% has exceeded the drop in the early 1980s recession.

8 Federal Funds – Effective Rates per cent Federal Funds Target Rate is 0.25% in January Fed Funds expected to remain virtually flat through 2010:H1. The Fed Takes Action to Stem Fallout from Sub-prime Mortgage Meltdown Real Federal Funds Rate (Adjusted for Inflation)* per cent * Inflation-adjusted with the U.S. Personal Consumption Deflator (PCE) and the core PCE. Shaded areas represent U.S. recession periods.Average January 2009 = -1.65% Average = 2.31%

9 USD Libor Shows Significant Improvement in Late October Overnight 3-month % + following government guarantees on inter-bank lending and capital injections into banks and other financial institutions in the U.K. and Western Europe in October. However, general credit conditions remain tight. + Inter-bank lending thaws Credit Conditions Tighten Globally In September & October 2008

10 Oil Prices Tumble from Record High US$ per barrel Arab Oil Embargo Iranian Revolution Gulf War Iraq War New Record High: July 11, 2008: US$ After a Weak 2009, Oil Prices Will Likely Rebound Medium- Term US$19.69/bbl 2006 US$ US$ F US$ F US$ F US$ F US$95 * Source: Scotiabank Commodity Price Index. Data to January 6, OPEC announces output cuts of 4.2 mb/d in Sept/08 – Jan/09 to shore up prices. A likely capital spending slowdown on oil field development in 2009, due to tighter credit and the recent slide in oil prices, sets the stage for a strong rebound in oil prices in

11 Waning U.S. Industrial Activity yr/yr % change U.S. Employment Growth Industrial Production U.S. Motor Vehicle Assemblies U.S. Payrolls million units, quarterly Latest Data: Declines in Payrolls Dec ,000 Decline in Past Year -2,589,000 yr/yr % change U.S. Economy Contracts U.S. motor vehicle assemblies (including General Motors, Mitsubishi, Nissan…) expected to total 8.8 million units in 2008, and 7.9 million in 2009, before edging up to 8.2 million in Assemblies averaged about 12 million from

12 Scotiabank Metal and Mineral Price Index Retreats from Record Shaded areas represent U.S. recession periods. Latest data: December Metal and Mineral Price Index in July 2008 reached a new record high – 123.8% above the June 1988 peak. Index: 1997=100 U.S. Equity Markets Lift Off Bottom in January Commodity prices recently trade down with weak equity markets in September – October 2008, but rally in early January S&P 500 Index: =10 An Indicator of Financial Market Distress & Economic Sentiment Equity markets appear to be bottoming. Nov20/08

13 Copper Prices Still at Profitable Level US$ per pound Record High: US$4.08 on July 3, 2008 LME cash settlement prices. * Latest data: early January * Low During Credit Squeeze (Aug. 17, 2007) + Price Outlook 2007 US$ US$ F US$ F US$ Re-weighting of Dow Jones- AIG Commodity Price Index and S&P GSCI boosts base metals (at least temporarily) in early January.

14 Copper Prices Will Likely Outperform Other Base Metals LME copper prices at US$1.44 on January 12, 2009 are still at profitable levels, yielding a 16% margin over average world break-even costs including depreciation, interest expense & royalties. However, prices are well below the 90th centile of direct cash costs – triggering substantial production cuts and mine expansion deferrals. Copper prices could move down further in coming months, given prospects for a contraction in world consumption of about -0.5% in 2009, after last years marked deceleration in growth to only +0.6%. Global demand should pick up again modestly in 2010 (+1.5%). Chinas copper consumption will decelerate from last years 8% growth (16% in 2007) to only 5%, given lower exports to the G7 and substantial inventory liquidation in parts of the manufacturing sector (e.g. air conditioners) linked to a domestic housing correction and industry rationalization. However, reduced availability of imported copper scrap (due to lower prices) and Chinas massive infrastructure spending program (particularly on power generation & transmission and the railways) will boost demand. Japans auto sector is dominated by export demand and, with declining auto sales in the United States and Europe, Japans automakers are being forced to cut output (-7.4% yr/yr in October). Copper consumption is also quite weak in Western Europe (-4.2% expected in 2009).

15 Copper Inventories Will Only Build Modestly in 2009 Copper prices are, nevertheless, expected to outperform other base metals. While visible exchange stocks on the LME, COMEX and Shanghai Metal Exchange increased to 7.2 days of global consumption in late 2008 (the highest since April 2004), stocks remain well below previous peaks (May 2002 at 37 days and Oct 1993 at 23 days). Prior to the downturn, planned new mine development was only modest and will now be scaled back in In Central Africa, low prices, political uncertainty and the credit crunch will delay new development. Copper output from the DRCs informal sector will likely fall by 70,000 tonnes from its peak and the KOV project will be cancelled for technical reasons, though Lumwana start-up proceeds well in Zambia. Significant supply disruptions have been a feature of the copper market in the past five years, with a combination of labour issues, equipment failures/mining challenges and slow project ramp-up cutting planned production by 1.4 million tonnes in 2008.

16 May 16, 2007 New Record US$24.59 Nickel Prices Retreat US$ per pound LME Nickel Prices Previous Record US$10.84 in March 1988 Stainless steel production slowdown in Asia and Europe pushes down prices in Mine closures and delays in ramping up new projects (possibly at Goro and Onça-Puma) together with stronger consumption point to a rebound in prices by LME Nickel Prices (US$ per pound) F F4.80 Latest data: early January 2009.

17 U.S. Stainless Steel Prices US$ per tonne U.S. Midwest, spot prices Including alloy surcharges. Data to January Stainless Steel Prices - CR304* Expected global capital spending slowdown in 2009 will pressure stainless steel prices. However, capital spending should reaccelerate early in the next decade.

18 Zinc Prices Ease US$ per pound LME official cash settlement prices. Data to early January LME Zinc Prices (US$ per pound) F F0.60 Zinc producers announce pro-active output cuts to shore up market conditions

19 Collapse in Global Auto Production & Weak Residential Construction Takes Toll on Zinc The global supply/demand balance for zinc moved into a surplus in 2008, with traders continuing to short the market through most of the year – initially in anticipation of substantial new mine capability scheduled to come on stream and later with growing realization that much of the G7 had entered recession. Zinc prices fell to a low of US$0.47 per pound on December 12 – close to average world cash costs – amid a collapse in demand in the global auto and construction sectors. Prices peaked for the business cycle around US$2.09 in December However, zinc prices rallied back in late December and early January and are currently US$0.55. The market has responded favourably to substantial mine and smelter production cutbacks as well as the annual re-jigging of the Dow Jones- AIG Commodity Index, boosting the weighting of zinc, and news that Chinas State Reserves Bureau will buy about 200,000 tonnes of refined zinc from Chinese smelters for its strategic stockpile (intended to bolster hard-pressed domestic smelters as well as take advantage of bargain prices). Interestingly, Yunnan province may also buy reserves to shore up its beleaguered zinc smelting industry.

20 Zinc Smelters Take Unusual Steps To Bolster Market Conditions Twenty zinc smelters (including Zhuzhou in China -20%, Trail -20% to mid-2009, Kidd Creek -30% to mid-2009) have now announced deep production cuts – a very unusual step. Smelters often wait until mine concentrates dwindle before cutting output. While bolstering market conditions, it would not be surprising to see zinc prices retest previous lows in the first half of Zinc prices should start to rebound on a sustained basis by the second half of LME and COMEX inventories (at 10 days of global consumption in December 2008) could rise further, but should stay below the very high levels of 22 days in late 2004.

21 Gold – A Hedge Against Economic Uncertainty US$ per ounce Gold Prices London PM Fix Jan. 21, 1980 peak US$850 New Record: March 17, 2008 US$1, * London PM Fix on Jan. 6, 2009: US$848. Investor Interest in ETFs and retail interest in bars and coins remains strong. Price Outlook 2007 US$ US$ F US$ F US$800

22 Gold Should Shine as Safe-Haven in 2009 Gold prices (London PM Fix) – traditionally considered a store of value and a hedge against economic uncertainty – have held up better than base metal prices. However, a stronger trade-weighted U.S. dollar (especially against the euro) from mid-July 2008 through November 20th – linked to some improvement in the U.S. merchandise trade performance last summer, but more importantly to a counter-intuitive flight to the safe-haven of U.S. Treasury securities during the height of the banking credit crisis last Fall, prevented gold from climbing back to its previous March 2008 record high of US$1, and – in fact – pushed prices down. A largely deflationary economic environment, falling oil prices and the forced exit of many hedge funds from commodity market positions also contributed to a decline in gold prices to a low of US$ on October 24.

23 Gold Should Shine as Safe-Haven in 2009 Gold prices subsequently rallied back to US$880 in late December alongside renewed weakness in the U.S. dollar, given concerns over a massive U.S. economic stimulus package and a budgetary deficit in FY2009 (estimated at US$1.25 trillion). While gold prices edged down to US$827 on January 12 (with commodity index funds expected to cut their weightings in gold in early 2009, given its outperformance last year), the big picture outlook for gold remains bullish in Asian and Middle Eastern central banks and sovereign wealth funds may be less supportive of U.S. debt markets in the next months, with gold coming into its own as a true safe-haven.

24 U.S. Dollar Trade Weighted vs. Euro March 1973=100 monthly averages *Data to January 6, Canadian dollar reached parity with the U.S. dollar on Sept. 20th, Canadian Dollar: US$0.846 as of Jan. 6, Canadian Dollar US cents monthly averages Commodity prices slip US cents monthly averages euro U.S. Dollar Trade Weighted

25 Spot Uranium Prices Will Rally in Medium Term US$ per pound Russian HEU Agreement Cancelled Options US$43.40 Peak Three Mile Island Arab Oil Embargo Low US$7.10 in Dec Nuclear Disarmament Jan 5, 2009 Spot US$53.00 LT Contract US$70.00 Source: Scotiabank Commodity Price Index.

26 The forced liquidation of commodity market investments by funds and individual investors also affected the uranium market last October, when spot prices declined to a low of US$44 per pound (an oversold position). Prices rallied back to US$55 in late November -- as Asian utilities, commodity brokers and producers took advantage of bargain prices – though bids have dropped back to the US$53 level as of early January. Spot prices are expected to strengthen medium-term (to around US$70 from ). Term-contract prices remain lucrative. Uncovered U3O8 requirements by North American utilities will be low in 2009, given the re-stocking and term contracting of recent years. However, three developments point to firmer prices in the medium-term: 1) India will return as an importer of uranium concentrates in 2009 after more than a 30-year absence, given approval by the World Nuclear Suppliers Group, and has now signed bilateral nuclear cooperation agreements with the United States, France and Russia (from whom it may import concentrates and equipment). Canada requires a similar agreement. India has been operating its nuclear reactors at 50% of capability, given inadequate domestic uranium supplies, and has huge nuclear power expansion plans. 2) Delays in commissioning the Cigar Lake project and in Olympic Dam expansion will dramatically tighten world supplies around ; and 3) Higher capital and operating costs will lift the medium-term floor on prices. Spot Uranium Prices Will Rally in Medium-Term

27 US$ per tonne, spot FOB Newcastle, Australia Steam Coal Prices Chinas Electricity Shortage Boosts Steam Coal Prices Last Summer China imposes export tax of 10% on steam coal and raises export tax on coking coal from 5% to 10% on August 20, 2008 to conserve supplies for domestic power generation. Contract price: Australia/Japan. FY2008 US$125:FY2009 US$95 forecast. US$ per tonne FOB port Western Canadian Coking Coal Prices Poised to Drop From Record Levels Western Canada to Japan Premium-Grade Hard Coking Coal Contract Price Prices leapt to record US$300 in April 2008 from US$93. *Forecast JFY 2009: US$192. Source: Scotiabank Commodity Price Index. *

28 Investment Banking – Global Mining Dedicated team of 14 professionals focused exclusively on mining In-house technical expertise with a senior mining engineer and a geologist Supported by Scotia Capitals 18-person M&A advisory group Corporate Banking – Global Mining Among top 3 lenders to the North American mining sector (#1 in Canada) International presence with coverage from Toronto of Canada, the United States, Mexico, South America and Europe. Major International Banking Presence In Mexico via Grupo Financiero Scotiabank Inverlat, S.A. de C.V., in Chile via Scotiabank Sudamericano and in Peru via Scotiabank Perú – the third largest bank in Peru. Precious Metals Trading ScotiaMocatta ranks second in global precious metals trading and first in physical trading and is a member of the Shanghai Gold Exchange. Scotia Capital offers tailor-made solutions for Base Metal risk management strategies in London and Toronto. Scotia Capitals Global Mining Group

29 Recent Equity Leads C$22,001,200 TSX IPO - Common Shares Sole Bookrunner February 2008 C$34,256,035 Units Sole Bookrunner January 2008 Strong Commitment to the Sector Recent Advisory Transactions C$65,520,000 Common Shares Sole Bookrunner November 2007 C$50,025,000 Common Shares Sole Bookrunner November 2007 Financial Advisor May 2008 has acquired 100% of the Life of Mine Silver Production from the Sabinas Mine of for US$350,000,000 Scotia Capital Mining Investment Banking Financial Advisor July 2008 has consolidated its interest in the Corani Silver Project by acquiring the remaining 30% interest from for US$75,000,000 Financial Advisor Pending Evaluating an unsolicited tender offer and identifying potential alternatives to enhance shareholder value Financial Advisor Pending Is merging with to create a company with a combined market capitalization of C$550,000,000 Financial Advisor October 2008 has acquired for US$1,200,000,000 US$163,000,000 Common Shares Co-Bookrunner September 2008

30 This Report is prepared by Scotia Economics as a resource for the clients of Scotiabank and Scotia Capital. While the information is from sources believed reliable, neither the information nor the forecast shall be taken as a representation for which The Bank of Nova Scotia or Scotia Capital Inc. or any of their employees incur responsibility.

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