MYTHS AND FACTS OF CHINESE DEMAND FOR PERUVIAN ORES

Penfold Limited XXVIII Convencion Minera Arequipa

September 12, 2007

PRESENTATION OVERVIEW
Penfold Story Chinas Zinc and Lead Outlook Peruvian Trade with China Basic Myths Basic Facts Thoughts for Perus Mining Industry

PENFOLDS STORY OUR BUSINESSES: Trading Investment Asset Management SUCCESSES TO DATE: China West Mining Chinas largest Zn/Pb miner FerrAus- Fe ore in Western Australia Raw Materials Supply LME Trading and Commodity Equities
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CHINA ZINC/LEAD OVERVIEW Mining and Smelting Consumption Trade Balance Regulatory Issues Effect on Peru Conclusions for Peru
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HUGE RISE IN ZINC/LEAD MINING PRODUCTION

3,500

Production 1996-2007 (kmt)

3,000
Zinc Mine Production

2,500 2,000

Lead Mine Production

Map.gif

1,500 1,000 500 0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f
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CHINA ZINC AND LEAD MINING

GROWING DOMESTIC SUPPLY
> Mines largely in remote, Western China > Government assisting with infrastructure > No direct foreign investment > Small mines are majority of production
Chengzhou Gacun Ganluo Lanping Dulong

Major China Zn/Pb Mines Greenfield & Expansions

Tumurtin-Obo Bayanuer Dongshengmiao

CHINAS ZINC MINING

CHINAS ZINC LEAD MINING

CHINAS ZINC LEAD MINING

CHINAS ZINC MINING INDUSTRY DOMINATED BY SMALLER MINERS

ANNUAL OUTPUT BY MINE SIZE

Source: CHR Metals Ltd 10

HUGE RISE IN ZINC/LEAD METAL PRODUCTION

4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f

Production 1996-2007 (kmt)

Zinc Metal Production Lead Metal Production

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DOMESTIC ZINC/LEAD CONCENTRATE PRICING

RISING PRICES LIFTING ALL BOATS, BUT SMELTER SHARE BETTER THAN INTERNATIONAL! Domestic mines getting higher percentage of metal prices for their concentrates. But higher prices mean smelters better off and very profitable!
China Domestic Zn/Pb Concentrate Price as % of Metal Price
85% 75% 65% 55% 45% 35% 2000

2001

2002

2003 Zinc

2004 Lead

2005

2006

2007

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ZINC SMELTING EXTREMELY PROFITABLE

High treatment charges encouraging expansion of smelting. Emergence of integrated producers. Mining moving to Western China, so smelting moving to Western China. Some stranded zinc smelters in eastern China may import more Peruvian concentrates.

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SMELTER EXPANSIONS IN WESTERN CHINA

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SMELTER EXPANSIONS IN WESTERN CHINA

Zinc Smelter: Western China Zinc Smelter: Eastern China Lead-Zinc Mining Area

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CHINAS BORDER REGION GROWING RAPIDLY

> Competition to Peruvian Mines > Hard to identify > Huge Freight Advantage > Funded by Government-toGovernment Deals

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PERUS COMPETITIVE POSITION AT RISK!

China Imports of Mineral Concentrates (2004-2007)

Source: Penfold basis China Customs Data

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CHINA: MACRO STORY INTACT

DEMAND LENDING

CONSTRUCTION

TRADE BALANCE

Source: UBS 18

CHINA GALVANIZING: GROWING QUICKLY WITH POTENTIAL TO GROW EVEN LARGER

China: Annual Galvanized Sheet Capacity/Production by Segment

Source: CHR Metals 19

CHINA ZINC METAL CONSUMPTION: BOOMING!

(Ktons, annual)

CAGR 9.8%

CAGR 16.2%

CAGR 12.8% CAGR 7.3%

Source: CHR Metals 20

CHINA ZINC METAL CONSUMPTION

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Source: AsianMetal, February 2007

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ENVIRONMENTAL ISSUES COMING TO BEAR

Stronger government enforcement on environmental protection policies such as Shaoguan Smelter shutdown for two months. More investment into environmental protection facilities at smelters are ongoing which are adding to higher costs. But still some small furnaces are operating in mountainous areas stimulated by high commodity prices. Government targeting polluting industries via VAT rebate reductions, restrictions on tolling, export taxes, and quotas.
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CONCLUSIONS: ZINC
Zinc is basically a domestic business with smelters relying on increasing domestic concentrate production to supply booming domestic demand. Chinas trade position of concentrates and metal driven by swings in the arbitrages between concentrates and metal. China can move from a net importer to a net exporter of metal, or vice versa, very easily. China to put ceiling on TCs and floor on zinc prices.
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CONCLUSIONS: LEAD

Increase in lead ingot production slowing due to tight raw material supply. Export will decrease mainly due to the removal of export tax rebate and export tax. Domestic concs production continues growing but at a slow pace.
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CONCLUSIONS: OVERALL

China mine production remains strong. Border Trade is threatening traditional concentrate imports. Domestic Chinese zinc and lead metal consumption is continuing very strong. Stricter macro/environmental policies are starting to change the industry.

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MYTHS AND FACTS OF CHINESE DEMAND FOR PERUVIAN ORES:

Peruvian Concentrates are Competitive, BUT: Freight rates, Voyage times, and Financing are hurting competitiveness moving forward. China is a Long Term Buyer of Peruvian Ores, BUT: Border Trade is starting to cut into Perus market share. Peru is well positioned to take advantage of Chinas boom in commodity demand, BUT: The vast majority of business is through the trade with no direct business and lack of product control. Chinese Strategic Investments are Targeting Peru, BUT: Competition is emerging from both China domestic and border regions.
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CHINAS EFFECT ON FLOW OF PERUVIAN METAL PRODUCTION

Source: GS JBWere Research (CRU International; IISI; TEX Report; EIA; BP Statistical Review) 28

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