CRU STRATEGIES a division of CRU International Limited

Approaches to outbound investment: Alternative strategies for securing access to resources

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Tel: +91 22 3953 7395 Fax: +91 22 3953 7200

CRU STRATEGIES

Preamble – the European issue!

• The context of outbound investment

• Learning from Japan’s experience

• China’s outbound investment challenge

• Are there alternative strategies?

• Summary (a reminder that Chinese OI represents opportunities)

2

Presentation outline

CRU STRATEGIES

3

Preamble.....

Europe – from CRU’s perspective.....

-6-4-202468

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Downside to GDP growth (% change)

Eurozone Eurozone peripheral contagion

World World peripheral contagion

CRU STRATEGIES

Preamble – the European issue!

• The context of outbound investment

• Learning from Japan’s experience

• China’s outbound investment challenge

• Are there alternative strategies?

• Summary (a reminder that Chinese OI represents opportunities)

4

Presentation outline

CRU STRATEGIES

5

What do these 4 ‘resources’ have in common?

1. Pepper 2. Gold

4. ..and Water

3. Coal

CRU STRATEGIES

• When primary consumption was food and firewood – most populations could support themselves

• Early civilizations outgrew their local resources and hence the emergence of trade (= outbound investment)

6

Planet Earth : Everything we need but not necessarily all in the right place!

CRU STRATEGIES

• Market-seeking

• Efficiency-seeking

• Resource-seeking

• Reduce trade gap

7

What are the drivers for outbound investment?

CRU STRATEGIES

8

China’s investment in Latin America is a great example...The bulk of Chinese investments in LA is to secure commodity supply(with thanks to SinoLatin Capital for permission to reproduce)

SinoLatin Capital Analysis with the Federicks Pardee Center

Efficiency SeekingUS$ 1.2 billion

Market SeekingUS$ 6.5 billion

Resource SeekingUS$ 41.1 billion

CHERY AUTOURUGUAY 2007

SINOTEXMEXICO 2008

FOTON MEXICOMEXICO 2010

HUAWEIBRAZIL 2011

HEBEI ZHONGXINMEXICO 2009

Investments from 2005 up to April 2012

SANY HEAVY INDUSTRYBRAZIL 2010

STATE CONSTRUCTION ENGINEERINGBAHAMAS 2009

ICBCBRAZIL 2011

LENOVOBRAZIL 2012

JAC BRAZIL 2012

WUHAN IRON AND STEELBRAZIL 2009

LENOVOMEXICO 2009

CHERY AUTOBRAZIL 2010

CHALCOPERU 2007

CNPC & SINOPECECUADOR 2005

MINMETALS JIANGXI COPPERPERU 2007

ECEBRAZIL 2010

SHOUGANG GROUPPERU 2009

SINOCHEM BRAZIL 2010

GOLDEN DRAGONMEXICO 2007

MINMETALSCHILE 2005

JINCHUAN GROUPMEXICO 2008

SINOPECCOLOMBIA 2006

CNPCVENEZUELA 2010

CHINALCO PERU 2008

ZUINPERU 2007

STATE GRIDCHILE 2009

CNOOCARGENTINA 2010

STATE GRIDBRAZIL 2010

MINMETALSCUBA 2005

CHONGQING GRAINARGENTINA 2012

SINOPECBRAZIL 2010

TAIYUN STEELBRAZIL 2011

CNOOCARGENTINA 2010

SHUNDE RIXINCHILE 2009

CHINA SCI‐TECH PERU 2010

CHONGQING COBRAZIL 2010

CRU STRATEGIES

Preamble – the European issue!

• The context of outbound investment

• Learning from Japan’s experience

• China’s outbound investment challenge

• Are there alternative strategies?

• Summary (a reminder that Chinese OI represents opportunities)

9

Presentation outline

CRU STRATEGIES

• Japan post WWII 80’s

• Japan’s 1980’s Outbound Investment Boom

• Japanese Companies Around the World

10

Recent experiences

CRU STRATEGIES

Japan post WWII 1980’s

1945 1950’s 1960’s 1970’s 1980’s

Government guided model established collective goals

Textile and light industry development

Transition to development of more capital intensive sectors

Worldwide leading exporter across many sectors

Outbound Investment Boom

11

CRU STRATEGIES

-1%0%1%2%3%4%5%6%7%8%

01020304050607080

Japan’s Outbound Investment Outflows 1982 - 1995

Outflows Outflows as % of GDP

USD

$ B

n

12

Japan’s Outbound Investment boomed in the 1980s

Sources: Japan, Ministry of Finance and Economic Planning Agency, World Bank

Japan’s OI outflows for 1986-89 surpassed the country’s total OI for the entire postwar period up to 1986

CRU STRATEGIES

0

1

2

3

4

5

6

7

8

9

10

19881968

89'69'

90'70'

91'71'

92'72'

93'73'

94'74'

95'75'

96'76'

97'77'

98'78'

99'79'

00'80'

01'81'

02'82'

Japan (68'- 82')China (88'- 02')Japan Trend (68' - 82')China Trend (88' - 02')

13

Comparing China and Japan: before their OI boom…

Source: IMF, International Financial Statistics

Year

US

$ bi

llion

Total Outbound Investment Flows from China (88’-02’) and Japan (68’-82’)

CRU STRATEGIES

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...and during their boom (is China’s boom just beginning?)

0

20

40

60

80

100

120

140

20031983

04'84'

05'85'

06'86'

07'87'

08'88'

09'89'

10'90'

11'91'

12'92'

13'93'

14'94'

15'95'

Japan (83'- 95')China (03'- 15')Japan Trend (83' - 95')China Trend (03' - 15')

Total Outbound Investment Flows from China (03’-15’ projected) and Japan (83’-95’)

US

$ bi

llion

Source: IMF, International Financial Statistics

CRU STRATEGIES

Preamble – the European issue!

• The context of outbound investment

• Learning from Japan’s experience

• China’s outbound investment challenge

• Are there alternative strategies?

• Summary (a reminder that Chinese OI represents opportunities)

15

Presentation outline

CRU STRATEGIES

328.9

104.8684.11 76.01 68.81 56.26 51.7 38.58 31.9 19.23 14.63

050

100150200250300350

16

Outbound Investment Flows and Stock of Major Economies 2010

Source: 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment

BnU

SD$

4843.3

1689.3 1523 1421.3831.1

433.6 336.1 317.2 300 180.9 92.40

1000

2000

3000

4000

5000

6000

BnU

SD$

Stocks

Flows

China catching up on the world’s biggest economies…

CRU STRATEGIES

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Comparing China and JapanJapan’s Boom

(1986-92)Current Japan

China’s Boom (now!)

Future China?

Investment approach / strategy

Investment goals

Economy

OI Flows RankingOutbound Investment per Person IndexLevel of Urbanization

OI per Person Living in Urban Areas Index

Minority stakes in a

large number of companies

Larger stakes in companies, influencing but not controlling

More than 51% control / Beginning with JVs

Full control?

Growth Value preservationGrowth, securing resources, technology control, know-how

Value preservation?

Developing DevelopingDeveloped Developed?

Top 3

?

5th6th#1 in 1989

USD$355 USD$440 USD$51

USD$568

60-65%(74-80 mn)

USD$654

67%(86 mn)

51% (2011)(691 mn)

USD$107

58% (2025)

?

CRU STRATEGIES

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China’s Outbound Investment flows 2002-2015

Source: 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment

0102030405060708090

100110120

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Flows OI in Mining Trend

Bn

US

D$

48% on mining 40% 24% Growth in 2010 was

21.7%

Growth is likely to continue to be strong

$100Bn by 2014 (or even 2013?)

?

CRU STRATEGIES

Asia65%

Africa3%

Europe10%

Latin America

15%

North America

4%

Oceania3%

Region

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2010 Chinese Outbound Investment flows distribution by Region and Industry in %

Source: 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment

Mining8%

Manufacturing7%

Transport, Storage and

Post8% Banking

13%Leasing and

Business Services

44%

Wholesale and Retail Trade

10%

Other10%

Industry

CRU STRATEGIES

01020304050607080

What

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Chinese investment in mining is extensive....Of 7963 projects in production, feasibility or reserves development, 194 involve Chinese companies (outside China):

Metal Economics Group

Where

Num

ber o

f pro

ject

s

CRU STRATEGIES

0%

50%

100%

Iron Ore Copper Zinc Nickel Uranium* Potash**

Import requirement (% of expected consumption)

201220152020

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...not difficult to understand the commodity choices:

CRU

* Strategic stockpiling ** 2010 Data

CRU STRATEGIES

• Increasing Chinese Outbound Investment

• 2011 5th Largest investor in the world

• End 2011 cumulative OI > US$380 billion

• Funds China – Africa Development Fund

China – ASEAN Fund

New Fund for Chinese investment in Latin America in 2012

• 2010 5.2% of worldwide OI flows and 1.6% of total worldwide stock

22

China is still a latecomer in Outbound Investment....

Source: Development Research Center of the State Council

CRU STRATEGIES

Preamble – the European issue!

• The context of outbound investment

• Learning from Japan’s experience

• China’s outbound investment challenge

• Are there alternative strategies?

• Summary (a reminder that Chinese OI represents opportunities)

23

Presentation outline

CRU STRATEGIES

24

What is the alternative to understanding the risks?

CRU Strategies

• CRU Strategies have completed a number of workshops looking at investment / diversification strategies

• Identifying the commodity is just one part of the strategy

• The focus is on identifying, and pricing risk....

Identify RISK

Avoid, eliminate

or mitigate RISK

ADD VALUE

CRU STRATEGIES

Supply Constraints is there a scramble

emerging?

Resource availability

Producer consolidation

Supply response

Demand Issues the market now and in the

future

Consumption growth

Substitution

Recyclability

The Ideal Commodity to Invest in – it’s not all about price!Understanding what the world will look like as the current boom dissipates is vital...

Regional issues – what are the risks?

Entry opportunities

Attitude to mining

Synergy issues

25

Developing a methodology to evaluate commodities for investment

CRU STRATEGIES

To simplify (?) here are 8 risks that impact mining projectsThese are assessed with reference to the criteria in the previous slide….

Category Sub-category Examples

Price risk Copper price, gold price, etc

Economic risk

Global financial Inflation, interest rates, WACC, etc

Input commodity Price of acid, explosives, chemicals, tires, etc

National economic Exchange rates, taxation, etc

Resource risk Geological Grades and tonnages

Geotechnical Ability to mine in practice, loss of reserves

Operational risk Mine-related Geotechnical events, performance of bottlenecks

Mill/plant-related Metallurgical (recovery), performance of bottlenecks

Management risk ManagementTeam Who is running the project? Have they done it before?

Cost risk General opex Primarily related to scale of operation and grade; and project location

Location risk Environment Air quality, water, tailings, etc

Infrastructure Power, transportation, etc

Project risk Delays and capital cost over-runs

CRU STRATEGIES

• Technology– Recycling

– Substitution

• Sub-sea mining

• Or, my favourite, the only TRULY outbound investment opportunity:

27

There are alternatives.....

Planetary Resources aims to mine asteroids for water, platinum and gold

CRU STRATEGIES

Preamble – the European issue!

• The context of outbound investment

• Learning from Japan’s experience

• China’s outbound investment challenge

• Are there alternative strategies?

• Summary (a reminder that Chinese OI represents opportunities)

28

Presentation outline

CRU STRATEGIES

Xiao Yaqing

29

“We (China) have long been providing products to other countries with our own natural resources. Now it's time to contribute to the world economy with world resources” Xiao Yaqing, Former President of Chinalco, 2008

China View

• China is deficient a number of important commodities

• Investment overseas is likely to accelerate

• This presents opportunities for mining companies around the world

• However – China is not more or less risk averse than any other investor...

• ...and the projects will still need to prove their worth!

CRU STRATEGIES

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China is still on a shopping spree (and will be for some years!)

CRU STRATEGIES a division of CRU International Limited

Thank-youPhil NewmanCEO CRU Strategiesphil.newman@crugroup.com

Annie LiBusiness Development, CRU Groupannie.li@crugroup.com