The Outlook for Commodity Prices and the Global Mining Industry

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

Commodity Price Upswing This Decade On a Par With 1970’s Expansion

300 280 260 240 220 200 180

Scotiabank Commodity Price Index 1 Index: 1997=100 New record high in July 2008 at 226% above cyclical low

* 160 140 120 100

All Items

80 60 40 20

Arab Oil Embargo October 2001 Bottom

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 80 60 40 20 160 140 120 100 300 280 260 240 220 200 180 A trade-weighted U.S. dollar-based index of principal Canadian exports. Shaded areas represent U.S. recession periods.

Scotiabank Commodity Price Index, % change yr/yr

December 2002 December 2003 December 2004 December 2005 December 2006 December 2007 17.9% 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 Forest Products Agriculture -5.0

1.7

-12.0

Commodity Prices Retreat From Record High in July 2008

The ‘Bull-Run’ in commodities continued in 2008:H1 due to ongoing strength in China’s 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, Scotiabank’s 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.

Hedge Funds Exit Oil & Metal Positions

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 0.5-1.0% in 2009. 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 2007. 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 investments’—forced 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.

30 20

China -- Vital to Global Commodity Markets yr/yr % change China – Industrial

*3 mth moving avg.

Production*

10 0 0 30 20 10

China Industrial Production: November 2008 5.4% yr/yr G7 Industrial Production -5.1% (Oct) U.S.

Japan Germany -5.5% (Nov) -13.3% (Nov) -3.9% (Oct) G7 Industrial Production

-10 98 99 00 01 02 03 04 05 06 07 08 -10

Demand Growth in China (2007, % change) Crude Oil 4.6

Nickel 24.0

Copper Slab Zinc 16.0

11.5

Aluminium Iron Ore 38.8

10.3

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:Q4 -2010.

-1 -2 -3 1 0 4 3 2 13 12 11 10 9 8 7 6 5

‘Emerging Markets’ Should Provide Some Offset To G7 Contraction yr/yr % change 2007 2008F 2009F Widening credit squeeze reduces growth prospects.

WORLD* CANADA UNITED STATES CHINA INDIA GDP (% per annum) 2006

5.1

3.1

2.8

11.6

9.6

2007

5.0

2.7

2.0

11.9

9.0

2008F

3.5

0.7

1.2

9.5

7.0

2009F

0.5-1.0

-1.2

-2.1

7.0

5.5

2010F

2.5

1.9

1.7

8.5

6.5

World China United States Japan Euro Zone

A ‘seismic’ shift in global growth has occurred from the G7 to ‘emerging markets’ this decade.

SOUTH KOREA

5.0

5.0

4.2

-1.0

2.5

*Global GDP estimate based on “purchasing power parity,” as used by the IMF. Average 1988 1997: 3.4% p.a. prior to the “economic take off” in China and India.

2.75

2.50

2.25

U.S. Housing Starts millions of units, quarterly, annualized 1978 – Strong ‘Baby-Boom’ Demand

2.00

1.75

1.50

1.25

1.00

Total

0.75

0.50

Single-Family Units

0.75

0.50

0.25

76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 0.25

U.S. housing starts at 625,000 units in November 2008 were the lowest in data back to 1959. Shaded areas represent U.S. recession periods.

2.75

2.50

2.25

2.00

1.75

1.50

1.25

1.00

U.S. Housing Start Outlook (million units) 2006 1.80

2007 2008F 1.36

0.90

2009F 0.65

2010F 0.85

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 1980’s recession.

20

per cent

15

The Fed Takes Action to Stem Fallout from Sub-prime Mortgage Meltdown Federal Funds – Effective Rates “Real” Federal Funds Rate (Adjusted for Inflation)*

20 15

per cent January 2009 = -1.65% Average = 2.31%

15 10

Average

10 10 5 15 10 5 5 5 0 0 0 60 65 70 75 80 85 90 95 00 05 10 0 Federal Funds Target Rate is 0.25% in January 2009. Fed Funds expected to remain virtually flat through 2010:H1.

-5 60 65 70 75 80 85 90 95 00 05 10 -5 * Inflation-adjusted with the U.S. Personal Consumption Deflator (PCE) and the core PCE. Shaded areas represent U.S. recession periods.

Credit Conditions Tighten Globally In September & October 2008 USD Libor Shows Significant Improvement in Late October 8 8 % 6 6 4 3-month 4 2 2 Overnight + Inter-bank lending thaws 0 0 02 03 04 05 06 07 08 09

+ 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.

Oil Prices Tumble from Record High

150 140 130 120 110 100 90 30 20 10 0 80 70 60 50 40

US$ per barrel New Record High: July 11, 2008: US$147.90

OPEC announces output cuts of 4.2 mb/d in Sept/08 shore up prices. Arab Oil Embargo – Jan/09 to Iranian Revolution Gulf War

60 64 68 72 76 80 84 88 92

Source: Scotiabank Commodity Price Index.

Data to January 6, 2009.

96

Iraq War

00 04

*

08 150 140 130 120 110 100 90 30 20 10 0 80 70 60 50 40

After a Weak 2009, Oil Prices Will Likely Rebound Medium Term 1990-99 2006 2007 2008F US$19.69/bbl US$66.22

US$72.32

US$99.65

2009F US$55 2010F US$70 2011-13F US$95 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 2011-13.

U.S. Economy Contracts

5

Waning U.S. Industrial Activity yr/yr % change million units, quarterly

13.0

12.5

2.0

U.S. Employment Growth yr/yr % change

2.0

3 12.0

11.5

11.0

10.5

10.0

9.5

9.0

1.5

1.5

U.S. Motor Vehicle Assemblies Industrial Production

1 -1 -3 -5 1.0

U.S. Payrolls

0.5

0.0

-0.5

Latest Data: Declines in Payrolls Dec. 2008 -524,000

-1.0

Decline in Past Year -2,589,000

-1.5

1.0

0.5

0.0

-0.5

-1.0

8.5

-1.5

-7 06 07 08 09 10 8.0

-2.0

06 07 08 09 10 -2.0

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 2010. Assemblies averaged about 12 million from 1993-2007.

390 350 310 270 230 190

Scotiabank Metal and Mineral Price Index Retreats from Record Index: 1997=100

390 1800 350 1600 310

Metal and Mineral Price Index in July 2008 reached a new record high – 123.8% above the June 1988 peak.

270 1400 230 1200 190

U.S. Equity Markets Lift Off Bottom in January Index: 1941-43=10 S&P 500

1800 1600 1400 1200 150 110 70 30 72 76 80 84 88 92 96 00 04 08 12 150 110 70 30 1000 1000

Equity markets appear to be bottoming.

800 600 00

An Indicator of Financial Market Distress & Economic Sentiment

02 04 06

Nov20/08

08 800 10 600 Shaded areas represent U.S. recession periods. Latest data: December 2008.

Commodity prices recently trade down with weak equity markets in September rally in early January 2009.

– October 2008, but

4.50

4.00

Copper Prices Still at Profitable Level US$ per pound Record High: US$4.08 on July 3, 2008 *

3.50

+

3.00

2.50

2.00

1.50

Low During Credit Squeeze (Aug. 17, 2007)

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

1.00

0.50

0.00

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 LME cash settlement prices. * Latest data: early January 2009.

0.00

Re-weighting of Dow Jones AIG Commodity Price Index and S&P GSCI boosts base metals (at least temporarily) in early January.

Price Outlook 2007 US$3.23

2008 US$3.15

2009F US$1.30

2010F US$1.30-1.40

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 year’s marked deceleration in growth to only +0.6%. Global demand should pick up again modestly in 2010 (+1.5%).

China’s copper consumption will decelerate from last year’s 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 China’s massive infrastructure spending program (particularly on power generation & transmission and the railways) will boost demand. Japan’s auto sector is dominated by export demand and, with declining auto sales in the United States and Europe, Japan’s 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).

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 2009-10. In Central Africa, low prices, political uncertainty and the credit crunch will delay new development. Copper output from the DRC’s ‘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.

26 24 22

Nickel Prices Retreat

US$ per pound 26 24 22 20 18 16 14 12

May 16, 2007 New Record US$24.59

LME Nickel Prices Previous Record US$10.84 in March 1988

10 8 6 4 2 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 Latest data: early January 2009.

0 6 4 2 10 8 20 18 16 14 12

Stainless steel production slowdown in Asia and Europe pushes down prices in 2008. Mine closures and delays in ramping up new projects (possibly at Goro and On ça-Puma) together with stronger consumption point to a rebound in prices by 2010.

2007 2008 2009F 2010F LME Nickel Prices (US$ per pound) 16.88

9.57

4.20

4.80

6500 6000

U.S. Stainless Steel Prices US$ per tonne U.S. Midwest, spot prices

6500 6000 5500 5000 4500 4000 3500 3000 2500

Stainless Steel Prices - CR304*

5500 5000 4500 4000 3500 3000 2500 2000 1500 2000 1500 1000 98 00 02 04 06 08 Including alloy surcharges. Data to January 2009.

10 1000

Expected global capital spending slowdown in 2009 will pressure stainless steel prices.

However, capital spending should reaccelerate early in the next decade.

2.50

US$ per pound Zinc Prices Ease

2.00

1.50

Zinc producers announce pro-active output cuts to shore up market conditions

1.00

0.50

0.50

0.00

80 84 88 92 96 00 04 08 12 0.00

LME official cash settlement prices. Data to early January 2009.

2.50

2.00

1.50

1.00

2007 2008 2009F LME Zinc Prices (US$ per pound) 2010F 1.47

0.85

0.45

0.60

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 2006.

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 China’s 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.

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 2009. Zinc prices should start to rebound on a sustained basis by the second half of 2010.

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.

1,200

Gold – A Hedge Against Economic Uncertainty US$ per ounce

1,000 800

Jan. 21, 1980 peak US$850

1,200

New Record: March 17, 2008 US$1,032.70

*

1,000 800 600 600

Gold Prices London PM Fix

400 400

Price Outlook

2007

200 200 0 75 80 85 90 95 00 05 10 0 London PM Fix on Jan. 6, 2009: US$848.

Investor Interest in ETFs and retail interest in bars and coins remains strong.

US$697 2008 US$872 2009F US$850-900 2010F US$800

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$1,032.70 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$712.50 on October 24.

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 2009. Asian and Middle Eastern central banks and sovereign wealth funds may be less supportive of U.S. debt markets in the next 12-24 months, with gold coming into its own as a true ‘safe-haven’.

120 110 100

U.S. Dollar Trade Weighted vs. Euro March 1973=100 monthly averages US cents monthly averages

170 160 120

Canadian Dollar US cents monthly averages

110

euro

150 140 100 130 90 90 120 80 110 80

Commodity prices slip

100 70 60 98 00 02

U.S. Dollar Trade Weighted

04 *Data to January 6, 2009.

06 08 90 10 80 70 120 110 100 90 80 70 60 98 00 02 04 06 08 10 60 Canadian dollar reached parity with the U.S. dollar on Sept. 20th, 2007. Canadian Dollar: US$0.846 as of Jan. 6, 2009.

140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 72

Spot Uranium Prices Will Rally in Medium Term US$ per pound

76

Jan 5, 2009 Spot US$53.00

LT Contract US$70.00

US$43.40

Peak Three Mile Nuclear Disarmament

80 84

Island Arab Oil Embargo

88 92

Russian HEU Agreement Cancelled Options Low US$7.10 in Dec. 2000

96 00 04 08 Source: Scotiabank Commodity Price Index.

60 50 40 30 20 10 0 140 130 120 110 100 90 80 70

Spot Uranium Prices Will Rally in Medium-Term

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 2011-14). 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 2011-13; and 3) Higher capital and operating costs will lift the medium-term floor on prices.

200 175

Steam Coal Prices US$ per tonne, spot FOB Newcastle, Australia

150

Steam Coal Prices

125 100

China’s Electricity Shortage Boosts Steam Coal Prices Last Summer

75 50 July October January April July October 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.

350 300 250

Western Canadian Coking Coal Prices Poised to Drop From Record Levels US$ per tonne FOB port Western Canada to Japan

200 150

Premium-Grade Hard Coking Coal Contract Price *

100 50 0 03 04 05 06 07 08 09 10 Prices leapt to record US$300 in April 2008 from US$93.

*Forecast JFY 2009: US$192.

Source: Scotiabank Commodity Price Index.

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Investment Banking – Global Mining

•

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•

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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.

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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 Capital Mining Investment Banking Recent Equity Leads US$163,000,000

Common Shares Co-Bookrunner September 2008

C$22,001,200

TSX IPO - Common Shares Sole Bookrunner February 2008

C$34,256,035

Units Sole Bookrunner January 2008

C$50,025,000

Common Shares Sole Bookrunner November 2007

Recent Advisory Transactions C$65,520,000

Common Shares Sole Bookrunner November 2007 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 Pending has acquired for

US$1,200,000,000

Financial Advisor October 2008 has consolidated its interest in the Corani Silver Project by acquiring the remaining 30% interest from for

US$75,000,000

Financial Advisor July 2008

Strong Commitment to the Sector

has acquired 100% of the Life of Mine Silver Production from the Sabinas Mine of for

US$350,000,000

Financial Advisor May 2008

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.