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Exploration and development companies on AIM

Outperforming or over-rated

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Exploration and development companies on AIMOutperforming or over-rated

It is tough being an investor

There are so many companies

So many metals and other commodities

And many stages in the development of a mining project

How can an institutional investor ensure investment in companies which achieve their stated ambitions

while outperforming other simpler benchmarks such as Indices

Commodities pricesCash at bank

How many make it through the development process and how long will it take

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Global economic outlook

• Global economic outlook

•US mortgage lenders pump $200 billion into market and now looking to create $1 trillion toxic sub-prime dump

• Impact of US slowdown / recession

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Currency impact

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Euro/US$

• We reckon that the US dollar will weaken as Sub-prime debt is effectively nationalised.

• This is a cheaper if not the only way in which to finance this debt burden without completely collapsing the US economic system as we know it.

• US dollar based costs are good in a weaker dollar environment

• Some regions will fare less well

eg Australian gold mines are struggling

• Some metals are more linked to the US dollar than others

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Gold US$/oz

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Commodity ‘winners’

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Jan-99 Jan-01 Jan-03 Jan-05 Jan-07

Gold US$/oz

Precious MetalsGold – to lead the way in terms of ‘safe haven’ investment demand

US dollar weakness likely to push gold higher

Platinum – ETF stocks, lower auto sales and lower US jewellery demand make this a tough market despite the long term supply/demand deficit.

Base metals Copper – strong investment demand, strong demand growth

Nickel – stainless steel growth

Steel related materialsChromite and manganese ores – demand remains

Bulk commoditiesCoal - Shortage due to demand and production constraints

Iron ore – strong price growth, is a big boys game, contracts up 65%+

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Copper US$/t

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Gold Supply Demand Balance

Source: Virtual Metals

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•Several years of deficit, strong demand and de-hedging•Slight surplus this year easily wiped out by a few production disruptions

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World Copper Supply Demand Balance

Source: Bloomsbury Minerals Economics

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•Several years of deficit have led to current environment•Slight surplus this year easily wiped out by a few production disruptions

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Major issues affecting miners

• CurrenciesEarnings cut by weaker US dollar in many regions

• Costs:Cost inflation is a major threat to smaller miners and to the industry as a whole.

It is now much harder for companies and financiers to plan finance for project evaluation and for eventual development and project finance.

Oil prices may fall but electrical power costs look likely to continue to rise word wide.

Examples are South Africa and China

• Capex:Capital costs have seen substantial increases e.g. Goro original capex of US$1.4bln now over US$3bln.

If we talk about a capital cost of $500m then the financiers assume it will double.

•US RecessionUS consumer slowdown to impact certain commodities e.g. diamonds and gold

• US / Canada Ready for a new mining boom, weaker economies could encourage governments to ease off on restrictions to allow mines to be developed

•Critical parts – long lead timesSo far project managers have coped surprising well with cost issues equipment but some managers have lost out heavily on LSTK contract.These issues are becoming increasingly difficult to cope with

• Reserves and ResourcesQuarterly reporting tends to focus investors on results which does not fit well with exploration and development businessesCompanies have been generally slow to advance reserves and resources while consultants have been slow to sign-off Higher metals prices enable better conversion of reserves from resources

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Regions – for mining investment

• Europe – Difficult for miners, high costs and legislative requirements

• Turkey -Seems impossible to obtain necessary permits

• Indonesia-Rough country but opportunities exist

• Philippines-Very good opportunities but political risk e.g. if church objects then local population cannot be convinced to oppose. Also high degree of corruption

• Africa -Chinese may push out Western miners-Botswana is great-South Africa has become mining friendly again-Congo carries high risks but mines are being built-Power shortages a growing issue

• Russia – Rising local costs but much is still determined in US dollars. Few foreign companies dare operate there and UK investors are simply not interested following well publicised problems.

• Central Asia – Some countries to avoid and it is hard to find good new projects, but good exploration and intuition can still generate substantial value. Opportunity for juniors is to find and take a significant project to BFS and allow a larger regional player to take over

• China – New territory for London listed miners. Some will succeed but risks are higher

• Latin America -Wonderful environment for mining, skilled labour, low costs well established legal frameworks, - Brazil and Chile are great. - Columbia, Bolivia, Peru, and Venezuela are challenging

- Argentina is almost impossible-Power shortages to become a growing problem, particularly in Chile

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Market Cap segment mining comparison UK listed stocks

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Jan-05 Jan-07£0-10m £0-100m £100-200m

£200-750m £750-2000 £2cn+Source: Bloomberg

• Mid-caps outperform as successful miners show strong growth.

• Smallest stocks lag as they take more time to create value.

• Funding become less certain for smaller companies.

• All sectors see erosion of value in bear market.

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Selected Market Cap segment mining comparison, UK listed stocks

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Jan-05 Jan-07

£0-10m £0-100m £100-200m £200-750mSource: Bloomberg

• If we expand the scale the falls look even worse for the small cap space.

• Investors are focussed on picking up the remains of banks as they recapitalise using deeply discounted equity issues.

• Even the mid-cap miners have come back as they are sold for their liquidity

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Relative performance

• Companies effectively rate against the relative performance of other companies within the sector=> If Rio Tinto gets cheaper then everything else is likely to get cheaper in proportion to the ratings of the leaders.

• Exploration and development companies should only outperform when they add substantially to ‘trade’ value or when a clear route to cash flow may be determined.

• It is all down to supply and demand. Some steel producer want iron ore mines and coking coal Some power companies are looking for coalNickel producers want nickel sulphide concentrates

• The market is ‘normally’ surprisingly efficient in its rating and valuation of companies even at the smaller company end of the market. - note the the current market environment is an anomaly in this respect.

• Some companies do over-rate due to their expectations of value but these normally fall away when reality sets in.

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£0-100m Market Cap versus key commodities

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Jan-05 Jan-07

£0-100m Copper Gold

Coal API 4 Iron Ore spot Brent Crude

CRB

Source: Bloomberg

• Mining equities

versus commodities.

• If you can get the commodity right then why not buy the ETF?

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£0-100m Market Cap versus key commodities

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£0-100m Copper Gold Coal API 4 CRB

Source: Bloomberg

•.

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Leveraging into project value

•Companies have the opportunity to leverage the value of a project into a much longer term and sustainable value creating proposition

•ValuationNormally we base a valuation on the company/project NPV discounted appropriately to its country risk to its proximity to production and to the quality of management.This works well in normal market conditions and at certain levels of discount

•There is plenty of finance around for specific types of projectsBut it will demand attractive valuations

“Fooling some of the people all of the time” – Steve Einhorn Few mining promoters can achieve this even if some hedge fund managers do make the claim

•Risk Some investors will take more risk than others Some investors will take more risk than most brokers Some investors are being forced to close their funds with assets sold at fire-sale prices

17

Building value

Ultimately companies and investors need to build value

• Sometimes the more entrepreneurial of investors sell out too early particularly if they see increasing risk, sometimes too late if at all

• The real argument is over the hand-over of valuation from early stage investors to the next stage.

• In an ideal world all exploration companies find meaningful assets, develop demonstrable and tradable value and then pass the investment on to later stage investors who are interested in the development and ultimate construction of mining projects.

• In reality it takes time to find and secure good assets, then more time to deliniate them

• We wish more companies would achieve this on a more regular basis. Successful companies in London are: Antofagasta, First Quantum Minerals, Peter Hambro Mining

• The best valuations are achieved when companies are on a clear growth path and investors can see their way through to ‘certain’ cash flow or ‘value’ generation

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Mining Indices Comparisons

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AIM basic resources FTSE Allshare mining

FTSE AIM allshare TSX Equity Materials

ASX Materials

Source: Bloomberg

• AIM stocks look bad on this.

• But the other indices all contain large cap companies so the comparisons are not valid.

• at least AIM miners have outperformed the FTSE AIM allshare index

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AIM funds have financed substantial growth

AIM

• Miners whinge about AIM – but it has been a good market for early stage investment for some years with a number of funds backing many early stage companies. These funds are still interested in backing the sector but are held back by the impact of the credit crisis which has soured some of their key investments.

• Trading volumes have fallen as institutions have largely stopped investing in equities in order to preserve cash for redemptions and for better market opportunities.

• If you can deposit funds for 6% or 8% why take the risk of investing in an early stage mining project.

• Fortunately for us institutional investors are not paid to sit on their funds and we know many that are long cash and are actively looking to invest in lower risk opportunities.

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Management – need to drive projects very hard

• The market for is changing fast

Investors only want to hear about certain types of projects in the current environment

• Popular areas are Iron Ore, coal, copper, platinum, nickel and manganese

Many other commodities are of less interest today but may become popular in the future

• Managers need to feed the market with results and regular updates to ensure investors that progress is being made

• Explorers Geologists are not normally mine builders, many manage the pre-feasibility study process

Mining engineers tend to better manage the full feasibility study and development stages

• Developers This is often seen as the best stage to buy a company in as it goes through the development process

• Builders Building a project is different from developing the feasibility study and signing the finance deals to pay for the build

• Operators Some teams develop, others rely on contract operators and then use this as a basis to develop their own knowledge and eventually buy up

operator equipment and train own staff with contract operator assistance

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Albidon Nickel versus nickel price

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Albidon Nickel

Listing on AIM andASX raise £6.2mFeasibility study started

on Munali

A$13m raising

Increase in Munalito 97kt Ni

Mining licence approved forMunali

Further A$13m financing

US$35m equity raisingFor Munali development

BFS

Off-take agreementsigned with Jinchuan

US$60m financing agreed

Nickel price correlation

Project de-risks as construction runsTo plan and company gets into production

Bid speculation

Nickel price collapses,bid vanishes + slower than expected start up

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IFM versus ferrochrome price

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IFM Ferrochrome

Listing on AIMraising £80m

Construction of plant & mine

Start of productionahead of schedule

2nd furnace enters production

Move to full list

Problems withfurnace rings 30ktlost production

£85m placing

Decision to buildNew furnaces

Power problemsIn South Africa

Concerns overfor expansion +bear market hitting liquid stocks

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First Quantum versus Copper price

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Bwana Mkubwa Mine

Lonshi Mine

Development of Kansanshi

Frontier Mine Development plan

Adastra acquisition for Kolwezi

Reacts to copper price movements and political Pressures in DRC and Zambia

Speculation that FQMis a bid target

Threat to DRClicences following as Fears over political risk inZambia + bear market

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Conclusion

• Management will need to do better to sell their stock to investors

• Companies should remain private till they can add meaningful value to investor funding

• Funding is now available for projects in certain areas

• Private equity funding is more rigorous but has longer term horizons and is often well structured

•