Nomura Initiaties Gold

ANCHOR REPORT
EQUITY RESEARCH
A new era for gold producers
January 18, 2012 Research analysts European Metals & Mining Tyler Broda, CFA NIplc [email protected] +44 20 7102 4770 Jonathan Wright NIplc [email protected] +44 20 7102 7326 David Radclyffe NIplc [email protected] +44 20 7102 8434 Juho Lahdenpera, CFA NIplc [email protected] +44 20 7102 7450 Patrick Jones NIplc [email protected] +44 20 7102 5486 Neil Sampat NIplc [email protected] +44 20 7102 1871 Ashraf Khan [email protected] +91 22 3053 3231 Industry specialist
Initiating coverage of the European gold sector with a Bullish rating

In this Anchor Report, we undertake a detailed analysis of gold market supply/demand fundamentals. We conclude that the gold price should stay elevated with significant upside risks through 2015, translating into a new era for gold producers. A cash build in the producers should drive growth, spur M&A and push dividends higher. This improving outlook has yet to be priced into gold equities, which are trading at historical lows in terms of valuation, offering an attractive entry point given current market instability. We see light at the end of the tunnel for gold equity investors. We initiate coverage of six European gold equities. Our top picks are Randgold Resources, African Barrick Gold and Avocet Mining.
Key analysis in this report includes:

Proprietary scenario analysis on central bank demand for gold. A review of shifts in the aggregate global gold producer income statement and balance sheet. How this new era translates into stock-specific opportunities within the European gold sector.
Matthew Kates [email protected] +44 20 7103 1402
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
European Gold Sector Initiation

EUROPEAN METALS & MINING
EQUITY RESEARCH
ANCHOR REPORT: A new era for gold producers
January 18, 2012 Sector view Remains
Cash build to usher in a new era for gold equities

Gold prices to stay elevated for longer Gold prices have risen substantially over the past 10 years. Market expectations of future price movements are extremely varied at the moment as multiple uncertainties in the global financial system provide the potential for large swings in demand. Our analysis suggests that gold prices are well supported at current levels as paradigm shifts in central bank and investment demand alongside constrained supply are likely to provide elevated prices beyond 2014. High profitability to persist for gold equities Importantly for gold equities, high levels of profitability are likely to be sustained. The resultant cash build within the global gold equity balance sheet is likely to usher in a new era for the gold equities as increased dividends, higher valuations for growth potential and valuation tension from an expected pickup in M&A provide the basis for a rally in the gold mining sector. Gold equities look attractive in current equity market Gold equities have underperformed gold bullion over the past five years. Sector P/E and EV/EBITDA ratios are near 20-year lows. We believe this is about to change. Increasing market expectations of higher longer-term gold price forecasts, cash margins above USD 1,300/oz and a 15% average 2013 free cash flow yield for the companies analysed herein should increase investor interest in the sector. This new era of elevated profitability and cash flow should see gold equities outperform gold bullion once again. Top picks: Randgold Resources, African Barrick Gold & Avocet Mining Our recommendations are built around these emerging themes. The European gold equity sector consists of generally smaller companies and is an eclectic group from a global perspective; however, we believe there are some intriguing opportunities. Our top picks included in this report are:
Bullish
Research analysts European Metals & Mining Tyler Broda, CFA - NIplc [email protected] +44 20 7102 4770 Jonathan Wright - NIplc [email protected] +44 20 7102 7326 David Radclyffe - NIplc [email protected] +61 2 8062 8434 Juho Lahdenpera, CFA - NIplc [email protected] +44 20 7102 7450 Patrick Jones - NIplc [email protected] +44 20 7102 5486 Neil Sampat - NIplc [email protected] +44 20 7102 1808 Industry specialist Matthew Kates - NIplc [email protected] +44 20 7103 1402
Randgold Resources (RRS, Buy, 9,850p TP), in our view, offers the best
exposure to diversified growth and the purest exposure to the gold price of the companies included in this report. significant cash build continue, and we believe the shares possess an as-yet-unpriced strategic optionality within its strong balance sheet. growth profile and catalysts, and could benefit from increasing M&A activity in the sector.
African Barrick Gold (ABG, Buy, 750p TP) is likely to see its very
Avocet Mining (AVM, Buy, 310p TP) has a significant medium-term
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | European Gold Sector Initiation
January 18, 2012
Contents
3 5 8 11 12 17 25 30 34 44 52 64 72 82 92
Executive summary Company summaries A longer-term perspective on gold Forecast gold prices Supply Demand A new era for gold equities European sector review RRS Randgold Resources (Buy, 9,850p TP) AVM Avocet Mining (Buy, 310p TP) ABG African Barrick Gold (Buy, 750p TP) CEY Centamin (Neutral, 120p TP) POG Petropavlovsk (Reduce, 860p TP) POLY Polymetal International (Reduce, 1,400p TP) SA US Seabridge Gold (Buy, USD 31.80 TP)
Research analysts European Metals & Mining Tyler Broda, CFA - NIplc [email protected] +44 20 7102 4770 Jonathan Wright - NIplc [email protected] +44 20 7102 7326 David Radclyffe - NIplc [email protected] +61 2 8062 8434 Juho Lahdenpera, CFA - NIplc [email protected] +44 20 7102 7450 Patrick Jones - NIplc [email protected] +44 20 7102 5486 Neil Sampat - NIplc [email protected] +44 20 7102 1808 Industry specialist Matthew Kates - NIplc [email protected] +44 20 7103 1402
101 Appendix A-1
January 18, 2012
Executive summary
Our Bullish sector view is built on three key premises.
The current gold price is well supported and should continue to rise in the medium term
Secular Asian demand growth, low and/or negative real interest rates, increasing central bank demand and potential increases in investment sentiment indicate that demand levels will grow. On the supply side, a lack of flexibility in near-term mine supply and a levelling off of scrap gold supply is likely to continue to put upward pressure on the spot gold price. Our proprietary analysis suggests that central bank demand has the potential to grow from virtually nothing to nearly half of the level currently seen by jewellery (which accounts for 40% of the market). This, in conjunction with a potential wider shift in asset allocation to gold, could see gold prices de-anchoring from current levels. We have used relatively conservative gold demand forecasts in our overall estimates, leaving the gold price with significant upside risk, in our view. Our gold price forecasts remain near 2012 consensus at USD 1,788/oz, and slightly above 2013 consensus at USD 2,063/oz. Importantly for the gold equities, we expect the gold price to stay above 2010 levels through 2015 and expect long-term equilibrium prices of USD 1,200/oz.
We expect diversified demand drivers to support the gold price
The strong gold price will likely result in a period of rapid EBITDA growth and cash build for the miners
The aggregate industry EBITDA (based on the DS World Gold Mining Index) is set to reach USD 60bn by 2013 compared with the roughly USD 10bn generated in each of the years between 2006 and 2009. This should translate into increasing cash balances for producers. We expect dividends to grow, new expansion projects to progress and M&A activity to also increase sharply. Net debt levels are already low (only two of the seven companies in our coverage universe have net debt positions). Cash heavy balance sheets have important implications for the sector. As seen in the case of Eldorado Gold Corporations recent bid for European Goldfields, M&A activity, especially for growth ounces, is likely to increase, in our view. All of the companies in this report are in a position to benefit from this trend either as acquirers, acquirees or both.
We forecast gold producers to achieve record levels of EBITDA and net cash
Cash balances are likely to translate into greater M&A activity and higher dividends, increasing equity valuations
Gold equity valuations are at historical lows

Despite increased profitability and improved balance sheets, gold equities have underperformed gold bullion since 2006 and are trading near 20-year lows in terms of P/E and EV/EBITDA multiples. Even without recovery in sector multiples, the rapid EBITDA growth to c. USD 60bn a year by 2013E (2011: c. USD 30bn), would imply a significant increase in the enterprise value of gold equities over the next two years. The producers have failed to participate in the recent gold price rally, with gold increasing by 9% in 2011 as global gold equities fell by c.20%. The global gold P/Es have averaged 23x since 2000, whereas the stocks now trade below a 2012E P/E of 15x, providing space for valuation uplift. The current sector dividend yield is 1.0% and in recent years a number of companies have announced new dividend policies. Assuming yields remain at current levels, FY13E consensus dividends imply a global market capitalisation approaching USD 500bn or nearly 50% upside potential. On a P/NAV basis, all of our stocks, with the exception of Randgold, trade at below 1.0x (at spot gold prices). We calculate an average implied price of USD 1,488/oz. This implies that investors are not yet pricing in the full potential for gold prices to stay stronger for longer.
P/NAV multiples imply value at current spot prices Valuations remain low, despite the high gold price and the related earnings uplift
January 18, 2012
Fig. 1: Forecast gold price

Consensus gold expectations are varied
3,500 3,000
Gold price (USD/oz)
Nomura gold price forecasts are roughly in line with consensus in each of the next four years
2,500 2,000 1,500 1,000 500 2012e Nomura 2013e High Mean 2014e Low 2015e
Source: Bloomberg, Nomura research
Fig. 2: Historical and consensus EBITDA and net debt

Gold producers are set for a period of rising EBITDA and rising cash levels
70,000 60,000 50,000 40,000 30,000
Forecast gold prices would push global sector EBITDA to USD 60bn by FY13E, with a related build in net cash
$m
20,000 10,000 0 -10,000
Q1 2000
Q3 2000
Q1 2001
Q3 2001
Q1 2002
Q3 2002
Q1 2003
Q3 2003
Q1 2004
Q3 2004
Q1 2005
Q3 2005
Q1 2006
Q3 2006
Q1 2007
Q3 2007
Q1 2008
Q3 2008
Q1 2009
Q3 2009
Q1 2010
Q3 2010
Q1 2011
Q3 2011
Q1 2012
Q3 2012
Q1 2013
Net debt
EBITDA ($m)
Source: Datastream
Fig. 3: Price to NAV

On average, the equities are trading at 0.8x based on the spot gold price and all except Randgold trade below 1.0x
1.8x 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x 0.4x 0.2x 0.0x Centamin Af rican Barrick Gold Avocet Mining Petropavlovsk Polymetal Randgold Resources
Q3 2013
Even given the recent fall in the price of gold, the London-based producers (with the exception of Randgold) are still trading at a discount to NAV; given the potential upside to the current gold price, the miners provide excellent value, in our view
P/NAV
Source: Nomura estimates, using a 5% discount rate and spot gold prices of USD 1,640/oz
January 18, 2012
Company summaries
We see upside potential from current levels for all of the gold companies included in this report. In our view, the increasingly compelling macro outlook for gold should provide outperformance for gold equities as compared with the wider market. We see average upside potential of 42% in our universe. Nomura uses a relative rating system, therefore we have attempted to balance our ratings between those with higher upside potential and those with lower upside potential or higher risks. Our top European recommendations include Randgold Resources, African Barrick Gold and Avocet Mining.
Fig. 4: Company summary
Company Ticker Market cap Current price Rating Target price 2012e EBITDA Nomura estimate 2012e EBITDA Consensus median 2012e EBITDA Consensus high/low
Randgold Resources Polymetal P African Barrick Gold Petropavlovsk P Centamin C Avocet Mining Seabridge Gold
RRS OLY ABG OG EY AVM SA
9,988 6,448 2,904 1,952 1,498 654 817
7115p 1100p 462p 685p 89p 214p $19.23
Buy Reduce Buy Reduce Neutral Buy Buy
9850p 1400p 750p 860p 120p 310p $31.80
959 1,208 665 570 307 109 n/a
1019 1195 713 608 310 104 n/a
946 - 1344 933 - 1472 613 - 1,066 372 - 971 148 - 362 75 - 126 n/a
Current prices as at close of 16 January 2012. Source: Datastream, Nomura estimates
African Barrick Gold PLC (ABG LN, Buy, TP 750p) Spun out of parent Barrick Gold in 2010, African Barrick Gold is an intermediate gold producer with four gold mines in Tanzania. We estimate that the group produced 697,000oz of gold in 2011 at a cash cost of USD 692/oz. ABG trades at 0.6x our spot gold P/NAV estimates, a valuation which, in our view, is hampered by the continued production disappointments since its IPO. ABG has an exceptionally strong balance sheet and the groups strategic optionality does not appear to have been priced into the current share price. We see 2012 as a potentially transformational year for the group as high profitability and further cash generation (we expect a free cash flow yield (FCFY) of 24% for the group by 2013) should increase tension on a current slack market valuation. Nomura initiates on ABG with a Buy rating and a 750p target price, which is equivalent to a P/NAV of 0.8x based on our 2012 exit gold price forecast of USD 1,900/oz. Avocet Mining PLC (AVM LN, Buy, TP 310p) Now a pure-play West African junior producer, Avocet Mining is turning its full attention to growth both at its current Inata operations in Burkina Faso and its Guinean exploration asset. We expect 2012 to provide continued positive catalysts as the group better defines its growth potential, for which we believe there is significant upside potential. We forecast that Avocet produced 164,000oz of gold in 2011 at a cash cost of USD 706/oz. The shares underperformed the wider gold equity market in 2011. We believe that the market has yet to price in Avocets new exposure to the gold price (following its renegotiation of hedge deliveries) or the potential, as disclosed in the 2011 interim results, to expand Inata once again. Nomura initiates on AVM with a Buy rating and a 310p target price, which is equivalent to a P/NAV of 0.9x based on our 2012 exit gold price forecast of USD 1,900/oz. Centamin PLC (CEY LN, Neutral, TP 120p) Centamin is a growing junior-intermediate gold producer. It operates the 9.1moz Sukari open-pit and underground mine in southern Egypt. It produced 202,000oz of gold at a forecast cash cost of USD 572/oz in 2011 and our forecasts suggest higher production will result from further plant and mining expansions in 2012. Centamins shares fell by c.50% in 2011 both owing to missed production guidance and to the uncertainty generated by the Egyptian revolution. In addition, the company will begin to see half of the cash flows accrue to the Egyptian government as per the extraction licence, eroding forward EPS growth. The 35% upside potential to the target price reflects the fact that the shares appear to be underpriced and oversold. However, we believe that CEY will maintain higher-than-average risks through the Egyptian election period and as such Nomura initiates on CEY with a Neutral rating. Our 120p 12month target price is equivalent to 0.5x our 2012 exit gold price forecast of USD 1,900/oz.
In our view, ABGs valuation is overly hampered by previous production misses
Our analysis indicates that high profitability and significant strategic optionality is not being captured in the current valuation
AVM has an aggressive growth programme
Avocet shareholders have not as yet benefitted from strategic changes in 2011
CEYs main Sukari asset continues to expand
Egyptian risk and low EPS growth mitigate upside potential from attractive valuation
January 18, 2012
Petropavlovsk PLC (POG, Reduce, TP 860p) Petropavlovsk, a Russian intermediate gold producer, operates four open-pit hard rock gold mines in Russias Amur region supported by a promising growth profile. We forecast that POG produced 624,000oz of gold at a cash cost of USD 762/oz in 2011. The main production growth is likely to come from the POX Hub being built at Pokrovskiy. This hub will process refractory ore and should open up a further avenue of growth for POG. In our view, Petropavlovsk continues to have an attractive valuation and, although the company has made significant progress in rationalising its targets, there remain roadblocks in achieving a full re-rating in 2012, in our view. The relatively high net-debt position, persisting Russian risk discount, the non-precious metal IRC stake and general declining mined grades should continue to place pressure on the P/NAV multiples as the company moves toward commissioning of the POX hub in 2013. Nomura initiates on POG with a Reduce rating and an 860p target price, which is equivalent to 0.7x our 2012 exit gold price forecast of USD 1,900/oz. Polymetal International (POLY LN, Reduce, TP, 1,400p) New to the FTSE 100 Index, Polymetal is a leading Russian intermediate gold and silver producer. It operates six mining complexes in Russia using a hub approach to rationalise capital costs. Polymetal has one of the leading growth profiles of the London gold equities and provides an interesting split to investors in context of its roughly 50-50 gold/silver exposure. We forecast that it will produce 1,006,000oz of gold equivalent in 2012 at an average cost of USD 752/oz. Polymetal appears fully priced at the moment, in our view. It has outperformed the sector since its London IPO and now trades on our spot P/NAV estimate of 0.9x. Although there are many positives, including the attractive growth profile, there are many delivery risks that could put this premium rating under pressure in 2012. Nomura initiates on POLY with a Reduce rating and a 1,400p target price, which is equivalent to a P/NAV of 0.9x based on our 2012 exit gold price forecast of USD 1,900/oz. Randgold Resources (RRS LN, Buy, TP 9,850p) Randgold Resources African growth story continues as production at the Loulo/Gounkoto complex increases and the large Kibali open-pit and underground mine in the DRC is built. We forecast that this intermediate gold producer produced 686,000oz at a cash cost of USD 682/oz (excluding royalties) in 2011. Randgold shares remain the most expensive in the London sector, as the company rates highly on almost all categories including production growth, costs, diversification of risks (both political and operational) and potential, as yet unpriced, NAV growth. Although the shares are relatively expensive, Randgolds quality means that it is likely to give investors the cleanest exposure to positive sector trends and maintain its multiple. Nomura initiates on RRS with a Buy rating and a 9,850p target price, which is equivalent to 1.7x our 2012 exit gold price forecast of USD 1,900/oz. Seabridge Gold (SEA CN, Buy, TP USD 31.80) Included in this report is a transfer of coverage update for Seabridge Gold. We maintain the Buy rating and set a USD 31.80, 12-month target price (previously USD 51.00). Seabridge Gold owns and is progressing the massive KSM gold-silver-coppermolybdenum project and the Courageous Lake gold project in Canada. Seabridge Gold provides perhaps the greatest relative exposure to higher gold prices, in our view. The high expected capex levels for its main projects and its need for a partner to progress these projects see the shares trade on a significant discount to its underlying potential value. As gold prices increase, the probability of these assets being partnered, financed and progressed should increase, reducing the discount in the P/NAV multiple. We anticipate that KSM and Courageous Lake are unlikely to be in production until the end of the decade (at earliest), and there remains significant uncertainty around permitting, financing and development. A discount is, therefore, warranted. However, investors will be able to gain long-term exposure to our new era for gold equities theme as the Seabridge development story takes place. Our target is based on a 0.4x P/NAV target price using our long-term gold price estimates and we note our valuation is heavily risked for development and financing risks.
The POX hub at Pokrovskiy will account for the main growth from 2013
The attractive valuation will continue to face headwinds, in our view, in 2012
Polymetal is a solid company with strong growth prospects but, in our view, is fully priced
We expect Randgolds growth to continue
A top-quality company that provides the cleanest exposure for growth-oriented gold equity investors
Although not currently producing, we believe that Seabridge offers substantial upside potential under our forecast gold price
Nomura |
Fig. 5: Valuation summary
Nomura Precious Metals Valuation Summary

Analyst Rating Target Price Ticker Datastream P E P C RRS OLY RS:PYG GU ABG OG EY AVM Up(Dow n)side % 38% 27% NA NA 62% 25% 35% 45% MktCap (U$m) 9,988 6,448 6,295 2,161 2,904 1,952 1,498 653 P/NAV @ spot (x) 1.5 0.9 NA NA 0.6 0.8 0.4 0.8 EV/Prodn '11e, U$/oz 13,932 9,201 4,282 nm 3,137 3,966 6,704 3,467 EV/Reserve U$/oz 583 487 74 192 120 272 301 431 EV/Resource U$/oz 337 258 55 160 75 107 187 144 '12e EPS U$ 6.85 1.99 4.14 -0.12 0.13 1.47 0.20 0.33 '12e EBITDA U$ 959 1,208 1,214 22 665 570 307 109 2010 95.4 21.5 18.8 nm 13.3 96.6 28.0 43.8 P/E 2011E 2012E 2013E 26.9 16.6 10.1 nm 9.9 6.6 7.7 39.9 15.9 8.8 8.0 nm 8.0 7.2 6.7 10.0 12.9 4.8 nm nm 5.4 3.9 5.5 6.2 EV/EBITDA 2010 2011E 2012E 2013E 58.2 18.2 8.8 nm 5.2 10.3 16.1 6.6 16.6 11.5 5.9 nm 3.9 5.0 5.4 6.5 10.0 6.0 4.9 nm 3.3 5.0 4.0 5.2 8.1 3.5 nm nm 2.4 3.2 1.7 3.6
13/01/2012
Net Debt / EBITDA 2010 2011E 2012E 2013E -2.2 1.7 -0.4 1.8 -1.0 0.8 -1.9 0.3 -0.7 1.3 -0.3 2.5 -1.3 1.1 -0.6 -1.1 -0.8 0.4 -0.2 -2.6 -1.7 1.6 -0.9 -0.4 -1.3 -0.1 nm -0.7 -1.9 1.1 -0.9 -0.7
European Gold Sector Initiation
Gold
Europe Randgold Resources Polymetal Polyus Gold European Goldfields African Barrick Gold Petropavlovsk plc Centamin plc Avocet Mining TB TB Consensus Consensus TB TB TB TB Buy Reduce NR NR Buy Reduce Neutral Buy
(quote ccy) (quote ccy) 9850 1400 NA NA 750 860 120 310 7115 1100 1054 769 462 685 89 214
Global Barrick Gold GoldCorp New mont New crest Kinross Gold Yamana Gold Buenaventura Eldorado Iamgold Agnico-Eagle Mines New Gold Franco-Nevada Osisko Zijin mining Semafo Zhaojin Seabridge Gold South Africa Anglo Gold Ashanti Goldfields Harmony Gold Median Average Consensus Consensus Consensus NR NR NR NA NA NA 352 127 97 RR RR RR :ANGJ :GFIJ :HARJ NA NA NA 16,496 11,278 5,127 NA NA NA 3,940 3,552 4,016 6,472 7,323 246 164 109 301 322 80 46 28 172 204 5.84 2.42 1.38 4,507 3,640 1,198 23.2 28.7 43.7 25.2x 32.9x 12.0 11.4 12.1 15.3x 21.6x 7.4 6.4 8.6 9.9x 11.2x 7.3 6.6 10.7 9.6x 9.6x 12.4 7.5 4.4 10.3x 14.0x 9.2 7.7 6.9 8.0x 9.9x 7.2 5.5 4.5 5.8x 6.3x 6.9 4.8 3.9 5.3x 5.3x 0.6 0.7 0.4 0.1x 0.0x 0.4 0.6 0.1 0.1x 0.0x 0.2 0.4 0.1 0.2 0.4 0.1 Consensus Consensus Consensus DC Consensus Consensus Consensus Consensus Consensus Consensus Consensus Consensus Consensus Consensus Consensus Consensus TB NR NR NR Buy NR NR NR NR NR NR NR NR NR NR NR NR Buy NA NA NA 48.00 NA NA NA NA NA NA NA NA NA NA NA NA 3180 49.44 46.45 63.39 32.42 12.91 16.05 39.77 14.31 17.33 37.01 10.76 40.80 11.57 3.13 7.35 12.70 19.23 C$ C$ U$ A$ C$ C$ U$ C$ C$ U$ C$ C$ C$ K$ C$ K$ C$ C:ABX C:G U:NEM A:NCMX C:K C:YRI U:BVN C:ELD C:IMG U:AEM C:NGD C:FNV C:OSK K:FZM C:SMF K:ZHAO C:SEA NA NA NA 48% NA NA NA NA NA NA NA NA NA NA NA NA 69% 48,261 36,714 30,948 24,817 14,332 11,680 10,932 7,704 6,358 6,317 4,845 5,509 4,353 2,421 1,958 1,429 815 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA 0.2 6,537 14,587 6,026 9,714 5,045 10,382 7,185 11,625 6,407 6,354 11,809 n/a 14,772 not available 6,713 2,395 nm 307 396 322 555 207 387 715 225 371 297 490 n/a 400 not available 626 199 17 172 317 317 314 161 270 747 276 207 167 300 n/a 336 not available 184 101 12 5.81 2.90 3.14 2.16 1.28 1.22 4.11 0.95 1.43 2.61 0.67 1.50 1.22 0.05 0.63 0.13 -12.94 10,404 4,213 6,773 2,769 2,806 1,621 1,125 938 990 1,094 468 424 756 2,124 282 651 8 14.5 33.1 16.5 28.1 21.7 25.7 15.2 36.8 22.3 20.9 43.8 76.6 nm 11.5 18.9 25.2 nm 9.9 20.2 14.0 25.6 14.5 16.1 11.0 22.2 13.9 17.1 22.8 36.9 141.1 10.1 17.5 16.4 nm 8.3 15.6 10.6 15.0 9.8 12.8 9.7 14.7 11.8 11.8 15.7 26.5 9.3 8.1 11.4 12.6 nm 7.4 11.9 10.3 9.4 9.3 10.0 11.2 13.4 10.1 9.0 11.8 23.8 9.6 6.7 10.4 12.6 nm 8.6 23.3 6.2 17.3 9.7 12.7 20.3 17.8 9.8 11.3 21.1 27.6 nm 2.1 10.3 4.8 nm 5.7 11.4 6.0 12.4 6.2 8.8 12.5 11.8 6.6 8.3 14.0 15.5 44.5 1.7 9.1 3.3 nm 4.9 8.8 4.6 9.3 4.8 7.3 9.2 8.1 6.1 6.3 9.8 12.0 5.7 1.4 6.2 2.5 nm 4.7 7.3 4.4 5.9 4.7 6.1 10.1 7.7 5.3 5.4 7.5 11.3 5.5 1.3 5.8 2.4 nm 0.5 0.1 0.1 -0.2 -0.7 0.2 -1.2 -0.3 -0.4 0.9 -1.1 -2.2 2.1 0.4 -1.2 0.5 nm 0.3 0.1 0.1 0.3 -0.4 0.1 -0.7 -0.2 -0.3 0.7 -0.7 -1.3 -0.7 0.3 -1.1 0.4 nm 0.3 0.0 0.1 0.4 -0.3 0.1 -0.5 -0.2 -0.3 0.5 -0.5 -1.0 -0.1 0.2 -0.7 0.3 nm 0.3 0.0 0.1 -0.2 -0.3 0.1 -0.6 -0.2 -0.2 0.4 -0.4 -0.9 -0.1 0.2 -0.7 0.3 nm
-0.1x -0.2x -0.3x -0.2x
Note: TB = Tyler Broda; DC = David Cotterell. Source: Datastream, company data, Nomura estimates
January 18, 2012
January 18, 2012
A longer-term perspective on gold

Ineffective global governmental and central bank responses to the financial crisis of 2008 and the related sovereign debt crisis are causing investors to rethink some of the fundamental tenets of fiat currency systems. Associated with this, golds historical position of importance has the potential to re-emerge, with many important consequences for gold demand. Gold has occupied a significant, yet constantly evolving place in the history of financial markets. Gold coins were first minted in ancient times, beginning golds tradition as the ultimate store of value. The use of gold coins as a mainstream currency persisted until the 16th century when significant discoveries of silver in Latin America saw a dual system develop; with gold and silver competing for use in international and domestic trade. By the early 18th century gold had re-emerged as the de facto monetary standard when Britain set a gold/silver ratio that eventually relegated silver from significant use. By the end of the 19th century most industrial countries adhered to a gold standard. World War I and its associated pressures on government expenditures saw the gold standard end when major European countries halted the convertibility of their currencies into gold. The gold standard was generally restored in the post-war years; however, this return was short-lived, as leading economies once again suspended convertibility in order to devalue their currencies in response to the Great Depression. The US remained on a gold standard, although the 1934 Gold Reserve Act nationalised private gold holdings and devalued the gold dollar. The end of World War II saw the implementation of what came to be known as the Bretton Woods system, a two-tiered gold-exchange system where the US dollar was backed by gold and all other currencies were pegged to the dollar. This lasted until 1971 when a combination of short-term pressures alongside the rise of German and Japanese economic power caused US president Richard Nixon to end the gold standard.
Fig. 6: 40-year gold price chart nominal USD
A bull market rally that started almost 10 years ago
2,000
US M1 money supply (US$bn)
The end of the Bretton Wood system in 1971 saw gold-backed currency replaced with a full faith, fiat currency system
Fig. 7: US M1 money stock and rate of change

The current pace of monetary expansion in the US is near all-time highs
2,500 0.5% 0.4% 2,000 0.3% 1,500 0.2% 0.1% 0.0% 500 -0.1% 0 Jan-75 -0.2% Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10
1,800 1,600
Gold price (US$/oz)
1,400 1,200 1,000 800 600 400 200 0 Jan-71 Jan-76 Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06 Jan-11
1,000
Gold Bullion LBM U$/Troy Ounce
M1 Money Stock
52 wk rolling % weekly increase
Source: Datastream, Nomura research
Source: Federal Reserve Bank of St. Louis, Nomura research
It has only been since 1971 that the world has shifted to a sustained, full-faith, fiat currency system. Between 1980 and 2000 the gold price fell as economic prosperity and contained inflation expectations led private investors, institutional investors and central banks away from gold. The 2000s saw gold demand rebound as lower interest rates and strong growth from Asian economies started a bull market that is ongoing today. Nomuras Quantitative Research report, Why gold is cheap in Asia, dated 16 August 2011, on why Asian nominal income growth and not US CPI has been the driver of the gold bull market. It provides a crucial perspective shift in understanding that gold has become a global commodity with global demand drivers and has been heavily influenced by Asian economic growth.
The past 40 years have seen a fundamental shift in the nature and location of gold demand
January 18, 2012
Gold has moved in and out of vogue many times over the past 100 years. Figure 6 provides perspective to the drop in gold prices that occurred at the end of 2011. A price correction was arguably overdue, especially in the context of the cyclicality of certain demand segments and the above-trend price increases in mid-2011. That said, our analysis suggests that the forces that have pushed gold up by 480% in the past 10 years are still in force and could well be exacerbated over the medium term. Gold price appreciation has increased exponentially since the market stabilisation following the initial impact of the 2008 financial crisis. Concerns around the stability of fiat monetary systems in conjunction with exceedingly high sovereign debt levels are leading investors to review alternative stores of value, increasing gold investment demand. Gold certainly has a long and well-established pedigree when placed in the context of its historical role in financial markets. We expect this re-emergence of gold as an asset class to persist over the medium term even as the world emerges from the sovereign debt crisis and continued shifts in the global economic landscape will see further shifts in reserve currency systems. This is likely to have important implications for the gold producers. Figure 8 shows global P/E multiples for gold equities remain remarkably constrained despite the shift in gold prices seen over the past 10 years.
Fig. 8: Global P/E for gold equities
Gold equities have not followed the gold price in valuation terms
45 40 35 30 25 20 15 10 5 0 Jan-92
We expect that the increase in the gold price since 2008 will persist
Jul-93
Jan-95
Jul-96
Jan-98
Jul-99
Jan-01
Jul-02
Jan-04
Jul-05
Jan-07
Jul-08
Jan-10
Jul-11
12mth f orward PE
Source: Datastream
The practical constraints of re-implementing a gold standard system after the financial innovations of the past 40 years make a return to a Bretton Woods type system unrealistic, especially when we consider the gold standards lack of flexibility in implementing Keynesian or monetarist economic policies. However, it is important in the light of the current fragility of the worlds financial system and the ongoing paradigm shift with regard to the value of fiat currencies, to analyse gold from a broader historical perspective. This time might not be different. In addition to the paradigm shift questioning faith in fiat currencies and longer-term shifts in world reserve currency systems; from a fundamental perspective, various longer-term trends are supportive of the gold price including: secular demand growth from Asia, a lack of flexibility in medium-term mine supply growth potential; and a shift in emerging market central bank attitudes toward gold as part of reserves.
Although a return to the gold standard is unrealistic, fiat currencies are under greater scrutiny than ever before
January 18, 2012
Short-term volatility drivers The exogenous risks are likely to favour gold prices, as well, in the context of a limited response from near-term new mine supply. There are a number of factors that could cause gold to trade above our estimates in the short term. These include: the perceived threat from elevated inflation expectations from potential further quantitative easing, the potential for a lack of alternatives to the eurozone crisis, other than monetisation of debt European Rates Insight: A multiplicity of risk factors into 2012, and an increase in investor activity in an era with expected near-zero real interest rates. The speed of the changing fundamentals within various sub-segment demand categories will no doubt add volatility to the gold price. Current weakness in the Indian rupee has seen Indian gold imports fall sharply. Financial system deleveraging can place pressure on investment demand for gold, which tends to be a larger proportion of demand than for other commodities. Overall, our analysis suggests that the gold price remains well supported over the medium term, albeit with potentially high volatility from the demand perspective causing wide potential swings.
The gold price could see further, and more profound, spikes in the short term
10
January 18, 2012
Forecast gold prices

We continue to expect increasing gold prices into 2013 as the expected supply response to the higher prices of the past few years underwhelms as compared with the positive structural changes in demand. Nomuras gold price forecasts remain near the upper end of the 2012 and 2013 estimate ranges. However, as we have noted above, the supply side is relatively unprepared for future unexpected demand shocks, and this could push the price much further along trend and much higher than we are forecasting in our base-case estimates. In 2012, we expect the gold price to stabilise following the year-end 2011 sell off as gold continues to attract increased central bank demand, persisting demand growth from Asia (in value terms) and below trend scrap supply growth.
Fig. 9: Nomura long-term gold price forecasts
We expect prices above 2010 levels over the longer term
2,500
The current gold price is supported by Asian secular demand, a shift in central bank attitudes to holding gold and relatively inelastic supply
Fig. 10: Consensus gold price forecasts

There remain considerable upside risks to our forecast
3,500 3,000
Gold price (US$/oz)
2,000
Gold price (USD/oz)
2,500 2,000 1,500 1,000 500
1,500
1,000
500
2007
2008
2009
2010
2011
2012E 2013E 2014E 2015E 2016E 2017E
2012e
2013e
2014e
2015e
Historical
Nomura forecast
Nomura
High
Mean
Low
Source: Bloomberg, Nomura estimates
Source: Bloomberg, Nomura estimates
Fig. 11: Forecast supply and demand model

We expect the market to increase in size alongside the higher gold prices, but supply becomes constrained above forecast levels
2006 Supply Mine production Net central bank and IMF sales Scrap gold Hedging Implied disinvestment Total supply Demand Jewellery Industrial and other Net central bank and IMF demand Physical bar investment Hedging Implied investment Total Demand
Source: GFMS, Nomura estimates
2007 2,472 484 982 0 0 3,938
2008 2,408 235 1,316 0 58 4,017
2009 2,581 34 1,695 0 0 4,310
2010 2,688 0 1,651 0 0 4,339
2011E 2,794 0 1,679 32 0 4,505
2012E 2,988 0 1,949 0 0 4,937
2013E 3,005 0 2,105 0 0 5,111
2,481 365 1,133 0 0 3,979
2,300 657 0 237 434 351 3,979
2,423 679 0 244 440 152 3,938
2,304 718 0 645 350 0 4,017
1,814 697 0 531 236 1,032 4,310
2,035 767 77 859 180 421 4,339
1,969 809 336 1,065 0 326 4,505
2,049 817 750 953 25 343 4,937
2,037 811 800 823 0 639 5,111
11
January 18, 2012
Supply
Gold is different from most commodities in the sense that the metal is not normally consumed as it is used. Unlike a barrel of oil used in a vehicle or the wheat used to make a loaf of bread, the precious nature of gold, its durability and its store of value characteristics allow significant above ground stocks to exist. According to the World Gold Council, over 165,000 tonnes have been mined in recorded history. The vast majority of this gold is accounted for. This means that supply comes from not only from new mine production and scrap gold, but also from shifts in net demand within multiple categories of consumption. The nature of annual global gold supplies has changed over the past decade. Net investment (new investment demand vs. previous investment sold back onto the market), was persistently positive except for a brief period following the initial onset of the financial crisis. Gold exhibits positive tail risk protection as discussed in this note from Nomura FX research Why gold is cheap in Asia. In 2009, central banks became net buyers of gold for the first time in years, removing traditional sources of gold from the market. Central banks moving from supplying the market to buying gold is a main paradigm shift that is revisited in the demand section below. The end of the most recent IMF gold sales programme of 403 tonnes announced in 2009 has only solidified this trend. Our analysis suggests these trends will persist over the coming years. This leaves two main sources of gold supply in the current environment: new mine production and recycled scrap gold (gold that has been returned to the market from selling old jewellery and industrial products). Mine production has stayed consistent over this period, accounting for 62% of total supply in 2010 as compared with 67% in 2001. Higher prices have seen scrap golds contribution to supply increase from 19% of total supply in 2001 to 38% of total supply in 2010 (Fig. 12).
Fig. 12: Gold supply
Net central bank selling has stopped, leaving mine production and recycled scrap gold as main sources of supply
6,000
Because it is not normally consumed, the supply of gold comes from mining, recycling and changes in net demand
Central banks are now net buyers for the first time in years
5,000
4,000
Gold (t)
3,000
2,000
1,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E 2012E 2013E Hedging
Mine production
Scrap gold
Net central bank and IMF sales
Implied disinvestment
Source: GFMS, Nomura research
The ability for gold supply to meet a further demand shock appears limited. Mine production, after falling for most of the past decade, is increasing once again. However, a lack of new, large-scale mines and the time frame required to find and develop such projects are likely to place a cap on potential new mine supply in the medium term. Higher prices are likely to drive unanticipated extensions to mine lives and this will make certain currently uneconomic resources mineable, but this on the margin, will not shift mine supply substantially in the near term, in our view.
Although increasing, mining and recycling supply is unlikely to meet additional spikes in demand
12
January 18, 2012
Scrap gold supply has increased sharply on the back of the higher prices seen at the end of the last decade. However, scrap supply figures in 2010 and 2011 have been lower than expected, weakening a previously strong positive correlation between scrap supply and gold prices. This suggests a potential exhaustion of available stocks or a change in the relative utility of scrap gold from an investment perspective. Despite the contained nature of the main supply increases, we forecast record aggregate supply levels as higher prices elicit both higher levels of mine supply and scrap material. In our view, however, the supply side from these two main categories is stretched and a supply response would be limited were one of the various demand categories to exceed projections. Mine production Gold mine production fell steadily last decade. Excluding a late decade surge in production in 2009, production fell by an average of 1% per year during the 2000s. This lost decade was driven by the low prices at the end of the 1990s, which saw structural underinvestment in production capacity and exploration.
Fig. 13: Global new mine supply
Peak gold? Production is rising again, but for how long?
3,500
Gold mine production is increasing after falling for most of the past decade
Fig. 14: Expansion capital expenditure

Capital expenditure for expansions has not kept pace with the gold price
10.0 1,800 1,600 1,400 1,200 1,000 800 600 400 200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0
3,000
Global new mine capital expenditure
9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
New Gold mine supply (t)
Gold price USD/oz
2,500 2,000 1,500 1,000 500 0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012e
2013e
2014e
2015e
2016e
2017e
2018e
adj possible
adj probable
adj base case
adj operating mines
Capital expenditure
Gold price
Source: Brook Hunt, a Wood Mackenzie company, Nomura research
Source: Brook Hunt, a Wood Mackenzie company, Nomura research
The gold bull market starting in 2002, which has now seen prices increase by 480%, has shifted the underlying dynamics for new mine supply. The persisting higher gold prices have provided, what Brook Hunt expects to be, a new wave of production. We have modified the costed Brook Hunt global mine supply forecasts (Fig. 13) to reflect an estimate for global production to 2018. Fig. 13 shows production peaking in 2014 at our adjusted estimate of 3,159 tonnes. It should be noted that this includes all lower probability projects and could be viewed as a best-case estimate. Brook Hunt notes that capital expenditure for new gold mine production hit a peak of USD 8.5bn in 2008 and has since fallen (Fig. 14). We expect expansion capex to level off at USD 5bn, although we would expect this to increase in conjunction with the stronger balance sheets that are likely to build into 2012. The lack of recent near-term capex begins to feed through after 2014, when production is expected to decline back towards 2011 levels (Brook Hunt), suggesting that a structural medium-term shift in gold demand cannot be met by new gold supply alone. There is likely to be a response to the higher gold prices that is not captured in the above estimates, and this could be significant in the longer term. High gold prices are likely to increase the economics of previously discovered, but uneconomic deposits, and the expected high margins will make smaller and less scalable operations, like the heap or dump leaching of oxide material, more economic. The other expected outcome is likely to be longer mine lives as current infrastructure is used to process previously uneconomic near-mine deposits. These trends, in conjunction with a potential boom in exploration and higher industry capital expenditure rates could potentially fill future supply gaps. However, this would be a longer-term phenomenon and is dependent on gold prices maintaining or exceeding current prices.
Peak production is 13% higher than current levels
Capital expenditure for growth is falling despite higher gold prices
Longer-term production rates may be better than expected, but this will not alleviate expected medium-term tightness
13
January 18, 2012
Fig. 15: Global mine production by country, 2000

Africa and North America were leaders a decade ago
11% 1% 19% 12%
Fig. 16: Global mine production by country, 2010

Asia and Latin America have seen the most growth
12% 1% 12%
10%
20%
14%
20%
25%
18%
25%
Europe
North America
Latin America
Asia
Africa
Oceania
Former Soviet Union
Europe
North America
Latin America
Asia
Africa
Oceania
Former Soviet Union
Geographical distribution of global gold production has stayed relatively similar on a regional basis over the past decade (Fig. 15, 16), remaining one of the most diversified commodities by production on a geographic basis. Thematically, Asia, Latin America, Russia and Africa (ex-South Africa) have seen increasing production while South Africa, the US and Australia and other developed countries have seen decreasing production (Fig. 17). Should gold prices remain high, we would expect this trend to persist. Average cash margins for new projects are likely to provide a positive risk/reward outcome despite higher political risks. This is particularly important for the European equity market where African and CIS-based assets constitute a significant part of the assets of the Londonlisted gold companies.
Fig. 17: Key geographical shifts in gold production 2000-2010
Gold production is slowly shifting away from traditional producer countries.
600
The European gold mining equity market is skewed towards African and CIS-based assets
500
400
Gold production (t)
300
200
100
2000 2001 2002 Africa ex-South Africa United States Australia
2003
2004 2005 South Africa Russia
2006
2007
2008
2009 2010 China Latin America
Scrap gold Recycled gold (from consumer consumption, mainly jewellery) accounts for 39% of our 2012 supply expectations. Scrap gold supply has increased markedly since the onset of the 2008 crisis, and this has delivered scrap gold levels ahead of historical averages when compared with gold price changes. However, data from 2010 and 2011 has seen this relationship falter. Fig. 19 shows the relationship between annual gold price changes and aggregate levels of scrap supply. We expect these forecasts to remain below trend in the coming years.
14
January 18, 2012
Fig. 18: Scrap gold supply by country

Asia and the Middle East have become leading scrap providers
1,800 1,600 1,400
Fig. 19: Scrap gold and the gold price

A higher gold price has meant higher scrap supply, but we forecast below trend supplies in the coming years
2,500 2013E 2012E 2009 2010 1,500 2006 1,000 2008 2007 2011E
2,000
Scrap Gold supply (t)
1,000 800 600 400 200 0
Gold price (USD/oz)
1,200
500
y = 735.03e0.0005x R = 0.9045 0 500 1,000 1 ,500 2 Scrap supply (t) ,000 2, 500
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
Europe
North America
Latin America
Middle East
Indian Sub Continent
East Asia
Africa
Former Soviet Union
There has been a divergence between scrap supply levels in emerging markets and industrialised economies. The emerging economies, owing to their rapidly-increasing consumption of gold jewellery, have become more important in the scrap supply segment. India, the worlds largest jewellery consumer saw its scrap supply fall by 30% in 2010, and we expect similar subpar figures for 2011. This is counterintuitive as the stock of potential emerging market scrap stocks should be increasing with increasing gold jewellery consumption. Looking at this another way, the return of scrap gold to the market falls along the similar lines as the decision-making process for proactive gold investment; ie, not selling gold, has the same net effect as buying gold. A wider shift in investment demand may perhaps be weighing on historical scrap gold/gold price correlations a trend that could intensify if a solution to sovereign debt issues includes substantial increases in USD money supply. In the industrialised world, difficult economic conditions have returned more scrap than recent flow would have suggested, and this would be consistent with the deleveraging ongoing among western consumers since the 2008 crisis. The net result is that the future levels of available scrap supplies may perhaps be depleted to an extent, limiting scrap golds ability to meet new demand shocks.
Fig. 20: European jewellery demand vs. recycled scrap supply
The stock of jewellery available to return to the market has decreased as consumption falls
700.0 600.0 500.0
Although developed economies have seen increased scrapping, 2010 and 2011 have seen a decline in scrap supply from emerging economies
tonnes
400.0 300.0 200.0 100.0 -
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
European gold jewellery c onsumption
European s crap s upply
The risks to our forecast of moderate scrap supply response are partly dependent on no large shocks hitting the fast-growing BRIC economies. Economic hardship and growing unemployment rates can increase the propensity for potential gold scrap to return to the market in a fairly inelastic manner. This could reduce golds potential as a perceived safe-haven investment as this segment of the market does have highly cyclical characteristics.
Assuming BRIC economies continue to follow the same trend, available scrap supplies from other sources may be depleted
15
January 18, 2012
Producer hedging Gold mining was a relatively unprofitable endeavour in the 1980s and 1990s. Tight margins and a falling gold price left miners facing large capital expenditures with uncertain long-term cash flows when analysing expansions. Raising equity funds was difficult owing to these thin margins and as such, debt became a favoured financing tool. The banks, however, needed certainty on margins and this led to substantial hedge books being built. The gold market rally in the 2000s and the emergence of alternative capital sources, especially equity sources, reduced this reliance on hedging to build new capacity. Equity investors strongly prefer unhedged exposure to the gold price through equities and thematically over the past decade nearly all producer hedges have been delivered into or bought out. This meant that producers had increased the annual demand for gold by buying out hedges.
Fig. 21: Hedging annual impact on demand (supply) and total hedge book
A reduced global hedge book can no longer have a meaningful impact on demand, but we do not believe hedging is about to return
3,500
3,000
2,500
2,000
1,500
Gold (t)
1,000
500
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
-500 Annual im pact Total hedge book gold
With Anglogold Ashantis closing of its 106 tonne hedge position in 2010, the global hedge book is now fragmented and is less than 200 tonnes. Therefore, producer dehedging can no longer account for meaningful demand (as it has for the last 10 years). We forecast that hedging impact on supply will stay near zero through 2013 as the cash build in global producers provides the bulk of capital for expansions, via an internal industry reallocation of cash. We expect that M&A will eventually group growth assets with companies that have financial and technical resources to develop new projects. However, a longer-term moderation of investment demand could see a turnaround in gold price movements. In this scenario, we would expect hedging to return in some form (albeit starting in a fragmented manner from low-cost, smaller production).
We do not expect to see demand for producer hedging in the short to medium term
16
January 18, 2012
Demand
Gold demand has increased considerably over the past 10 years in value terms. The market has grown from USD 34bn in 2001 to an estimated USD 240bn in 2011. In total tonnes, however, this growth has been less pronounced; annual gold demand by volume had actually stayed flat until 2009. Our analysis suggests that demand in total volume terms will meet higher supply resulting from higher prices. Although we forecast there will be more material on the market, on balance, the main demand drivers and their exposure to further exogenous shocks, should leave the price well supported, in our view. Traditional sources of demand are jewellery, industrial demand (electronics, dental, among others), and physical bar investment. A key change to the market has been the emergence of net central bank buying. Emerging market central banks have been net purchasers of gold since 2008, and the lack of desire to further erode the capital base of central banks have seen sales through the CBGA agreement (Europe) come to an end for the time being. This, in conjunction with a stronger implied investment category, may well push the demand side out of balance with the supply side, resulting in higher prices.
Fig. 22: Segmental gold demand in volume terms
The aggregate level of gold demand has stayed constant, but has seen shifts towards investment demand
6,000 5,000
We believe that the current gold price is well supported by demand
Fig. 23: Segmental gold demand in value terms

A weaker USD has contributed to the value uplift
400 350 300 70 75 80 85 90 95 100 105 110 115 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 120
Gold demand (USD bn)
DXY (inverted)
4,000 3,000 2,000 1,000 0
250 200 150 100 50 0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010 2011E 2012E 2013E

Jewellery Physical bar investment Hedging Industrial and other Net central bank and IMF demand Implied investment
Jewellery Physical bar investment Hedging
Industrial and other Net central bank and IMF demand Implied investment
As gold is priced in US dollar terms, a weaker US dollar (as seen at the start of last the decade) helped to kick-start the gold rally. Since 2008, however, this relationship has broken down somewhat. Although there are insufficient data points for true statistical evidence, the charts below show that this relationship has directionally weakened as the R in the past 16 quarters is lower than the negative correlation between 2000 and 2008. Notably, in recent periods, only two quarters in the past 10 quarters in which the dollar has strengthened, has the gold price declined (this includes Q4 2011 when the gold price saw its most recent correction).
Fig. 24: Gold vs. DXY 1980-2011
30.0% 25.0% 20.0% 15.0%
Gold price chnage
Fig. 25: Gold vs. DXY 2000-2008

20.0% 15.0%
Gold price chnage
Fig. 26: Gold vs. DXY 2008-2011

14.0% 12.0% 10.0%
Gold price chnage
y = -0.6363x + 0.0106 R = 0.1848
y = -0.6852x + 0.0299 R = 0.227
y = -0.2227x + 0.0421 R = 0.0529
10.0% 5.0% -15.0% -10.0% 0.0% -5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% DXY (USD/oz) 5.0% 10.0% 15.0% 20.0%
10.0% 5.0% 0.0% 0.0% -5.0% -10.0% DXY (USD/oz)
8.0% 6.0% 4.0% 2.0% -5.0% 0.0% 0.0% -2.0% -4.0% -6.0% -8.0% DXY (USD/oz) 5.0% 10.0% 15.0%
-15.0%
-10.0%
-5.0%
5.0%
10.0%
-10.0%
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
17
January 18, 2012
Perhaps more importantly for gold demand (especially for gold demand for investment purposes), is that real interest rates are expected by Nomura to stay low over the next two years. Fig. 27 presents Nomuras main interest rate forecasts to 2014. A traditional drawback to gold as an investment is the lack of yield that it provides. In times of higher interest rates (but stabilised inflation expectations) gold performs poorly owing to its lack of yield. In the near term, the dovish monetary policy stance of most global central banks and below-trend growth expectations should allow the general investment climate for gold to stay relatively positive over the next two years.
Fig. 27: Real interest rates in major economies
With the exception of China, real interest rates are forecast by Nomura to stay negative through 2013
8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0%
Low real interest rates will likely support the attractiveness of gold as an investment
2006 US
2007 UK
2008 ECB
2009
2010 China
2011 India
2012E
2013E
Jewellery The gold jewellery market is perhaps the most sensitive demand subsector to higher gold prices. In volume terms, we expect demand from India and East Asia to stay relatively level over the next three years as higher prices erode total volume demand (Fig. 28). In dollar value terms, however, we expect both regions to continue along the path of structural growth (India has averaged 26% annual increases since 2003, China 31%), with the caveat that the uncertain economic environment may provide short-term volatility in the growth rates.
Fig. 28: Gold jewellery demand in total tonnage terms
Higher prices are reducing gold demand on a volume basis
700 600
Gold jewellery demand (t)
Gold jewellery demand is largely driven by India and China
Fig. 29: Gold jewellery demand in USD billion

Gold jewellery demand in dollar terms continues to be driven by India and China
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000
500 400 300 200 100 0
2001 Europe
2002
2003
2004
2005
2006
2007
2008 Middle East
2009
2010
2011E
2012E
2013E China
Jewellery demand (US$ bn)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E China
North America
Latin America
Europe
North America
Latin America
Middle East
Our gold jewellery forecasts are based on an extrapolation of demand trends over the past 10 years and then modified to account for Nomura estimates for individual country GDP growth rates. What this does not allow for, however, is for our model to capture significant shifts in sub-segment specific demand trends. Gold imports into China from Hong Kong in recent months have risen well past trend levels according to the Census and Statistics department of Hong Kong. Media reports suggest that this is attributable to a diversion of funds from the volatile property market or perhaps even PBOC buying. The jewellery purchase decision can be tilted towards investment in an emerging middle class and this could help to keep demand well supported if a wider positive shift in investment demand is to occur owing to other global factors.
18
January 18, 2012
Fig. 30: China imports of gold from Hong Kong

There has been a recent spike in the import of gold from Hong Kong into China
120 100 80 2000 1800 1600 1400 1200 1000 800
000 kg
60 40 20 0
May -10
May -11
Oct-09
Oct-10
Nov -09
Dec-09
Nov -10
Dec-10
Oct-11
Imports (000 kg)
Gold price ($/oz)
Source: Census and statistics department of Hong Kong, Nomura research
We do expect there to be volatility along this structural demand growth path. The Bombay Bullion Association has reported that Q4 2011 gold imports into India fell by 125 tonnes or 56% y-o-y. The strong Indian Rupee has caused record gold prices in local terms. The slowing Indian economy, falling inflation and the resultant increase in real interest rates is likely to have contributed to this shift in imports. These trends could continue into 2012 (and could perhaps extend through other emerging economies). However, the total of 878 tonnes of gold imported in 2011, although down 9% y-o-y, is still much higher than the 559 tonnes in 2009, especially when factoring in the 61% increase in average gold prices. It should also be noted that shifts in fundamental demand sub-categories, especially the cyclically exposed jewellery and industrial categories, can cause the various investment categories to experience volatility. This can cause near-term expectations on price to vary; however, in our view, despite the softer Q4 imports, the longer-term global wealth transfer towards emerging markets, like India, is likely to continue. Central bank buying Gold has traditionally held an important place within the balance sheets of central banks. In the late 1990s, however, as gold prices reached their lows, many of the industrialised worlds central banks were reducing their gold holdings. Following a group of unannounced sales by various central banks, and then the announcement by the UK that it would sell the majority of its gold reserves, The Washington Agreement on Gold was signed in 1999 between the US, the IMF, the eurozone, Switzerland and Sweden (CBGA).
Fig. 31: Top central bank gold holdings
The gold held in the central banks is mainly held by US and Europe
9,000 8,000 7,000 6,000
Nov -11
Jan-10
Jun-10
Jan-11
Jun-11
Jul-10
Mar-10
Mar-11
Feb-10
Feb-11
Apr-10
Sep-09
Aug-10
Sep-10
Apr-11
Jul-11
Aug-11
Sep-11
Central banks are now net buyers of gold for the first time in years
tonnes
5,000 4,000 3,000 2,000 1,000 0
Top 10 hold ers of gold
Source: World Gold Council
19
January 18, 2012
The CBGA was agreed to manage the sales of gold from central banks to mitigate the risk of large price impacts on remaining gold reserves, hence ensuring greater stability in the international financial system. The agreement set out the total tonnage that was allowed to be sold by signatories over a set period, initially 400 tonnes per year for five years. The agreement stated that gold will remain an important element of global monetary reserves. Notably, this took the form of a gentlemens agreement and is not subject to international treaties. Through the past 10 years, and via a second and now a third Washington agreement, a steady level of signatory selling occurred. The price impact on gold was generally limited as was borne out by increasing prices in the 2000s. Net central bank selling has now become net central bank buying. This shift is important and its impact on the overall market dynamic should not be overlooked, in our view. European sales under the CBGA 3 (mid-September 2009-2011) have amounted to 12 tonnes as the eurozone sovereign debt crisis has hamstrung central banks from eroding their balance sheets further. The end of the IMFs sale of 400 tonnes of gold in November 2010 has also removed a source of supply, further shifting the aggregate central banks category towards demand.
Fig. 32: Net central bank selling
Our forecasts suggest that central banks will become key buyers of gold in the coming years
800 600 400 200
Gold (t)
0 -200 -400 -600 -800
-1,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010 2011E 2012E 2013E
Net central bank selling
Source: World Gold Council, Nomura estimates
There is a general divergence between the levels of gold held by central banks in developed and emerging markets. Developed countries central banks tend to hold gold from an era where reserves were held both in US dollar and in gold (prior to the end of the gold standard). Emerging economies by contrast have largely generated their reserves over the past 40 years in the modern US dollar reserve currency system (and notably post gold standard). EM central banks have far lower gold holdings as a percentage of total US dollar reserves (c.5%). Recent data suggest that emerging market economies are increasing their asset allocation of reserves to gold. Fig. 33 provides the notable net changes in 2011 led by Mexico, Russia and Thailand.
Fig. 33: 2011 changes in gold holdings
Multiple emerging market central banks have been buying significant amounts of gold
120 100 80 60 40 20 0 -20 -40
Emerging market economies are increasingly looking to diversify their reserves by buying gold
Mexico
Russia
Boliv ia
Korea
Other
Tajikistan
Columbia
Sri Lanka
Thailand
Net purchases (tonnes)
Source: World Gold Council Nov. estimates
Philippines
20
January 18, 2012
The recent bilateral currency agreement between China and Japan, which will promote direct yuan-yen trade and will see Japan hold yuan in its foreign currency reserves for the first time highlights the emergence of potential alternatives to the US dollar in regards to its status as a global reserve currency. In our view, the longer-term uncertainty in regards to how this will develop as emerging markets continue to grow (according to The Economist, China is likely to eclipse US GDP by 2018), will see golds re-emergence as an international reserve persist. To illustrate the potential impact of this shift in sentiment on the gold market, we have run a scenario analysis that shows total demand for gold would be approximately 3,400 tonnes (total demand in FY11E is 4,505), if the 18 largest non-US/EU US dollar reserve holders moved their allocation of gold to 10% of total reserves (note this is ex-China).
Fig. 34: Scenario analysis to increase gold holdings to 10% allocation
Significant purchases could come from multiple buyers
900 800 700 600 500 400 300 200 100 0
Current holdings
Implied increase
Source: World Gold Council
Notably, we have not included China in this scenario analysis. China is relatively unlikely to shift from its current 1.7% gold allocation in a straightforward manner as this would signal a lack of faith in its remaining USD 3.3trn in US dollar reserves. Were China to merely maintain its 1.7% allocation in future years, based on the recent growth rates of its reserves, China would need to purchase approximately 160 tonnes of gold a year. Were China to increase its gold holdings to 10%, it would be required to purchase 5,146 tonnes of gold, or 113% of total global estimated annual demand. The non-China, 3,400 tonnes of gold to be purchased amounts to 75% of a years demand (based on 2011E demand levels). Should a potential shift in gold asset allocation levels occur in a rapid and unstructured manner, (ie, in the form of a shock to the US dollar as a reserve, for instance), the buying would likely come from multiple countries all looking to protect the value of its existing reserve position. In such a scenario, the gold price would respond considerably, in our view. This aspect enhances the tail risk protection of gold to counter potential US dollar stability concerns. We are including under 25% of the above demand estimates (ex-China) for our global net demand estimates for 2012 and 2013, and hence the risks to this demand category, in our view, remains to the upside. The timing or rapidity of these changes is unknowable at present, especially given the instability in the current market environment. Net investment demand The remaining gold demand consists of investment in physical bars and a range of alternative products, including exchange traded funds (ETFs), medals and imitation coins, and other financial products. In the 40 years since the dissolution of the Bretton Woods system and its fixed price, the geographical spread of gold demand has undergone a profound shift. In 1970, North America and Europe accounted for 47% of the overall market (rising to 68% in 1980), this has now fallen to 27%, with the Indian subcontinent and East Asia picking up the majority of the balance (58% in 2010 vs. 35% in 1970).
Gold demand has shifted east over the past 40 years and is now weighted towards the Indian subcontinent and East Asia
21
January 18, 2012
Fig. 35: Total gold demand is geographically diverse (2010)

Western investment demand is now below 50% of total
1,400.0 1,200.0 1,000.0 800.0 600.0 400.0
Fig. 36: Demand for physical investment in gold (2010)

India and China constitute 52% of demand for physical investment in gold
35.0%
30.0%
25.0%
20.0%
15.0%
200.0 10.0%
5.0%
0.0%
Invest
Jewellery
Tech
India
Greater China
Other
Europe ex CIS
US
Middle East
Turkey
Vietnam
Russia
Thailand
Source: World Gold Council, Nomura research
Source: World Gold Council, Nomura research
Physical investment Rising income levels in emerging markets in particular in India and East Asia have fuelled growth in demand for physical investment in gold (jewellery, bars, coins and medals). In two of the fast-growing economies, India and China, gold is regarded as a sign of prosperity and an integral part of religious ceremony, weddings and other holidays (for example, the WGC has identified the Chinese New Year, the onset of Diwali in October and weddings as typical occasions for gold purchasing). In the charts below, we attempt to quantify this cultural affinity with gold in some developing markets, by showing how a number of these countries have exhibited much higher gold consumption than their GDP per capita would suggest. In 2009, for instance, demand for gold per capita in China and India was roughly comparable with much more prosperous nations, such as the UK. Despite rising gold prices, this trend has actually accentuated in recent years with Indian gold demand per capita rising from 0.49gm in 2009 to 0.82gm in 2010 to now account for 32% of the physical investment market (although this trend began to stall somewhat in Q4 11). And in Q3 11, with global physical investment demand in tonnes stalling (overall dollar demand continued to grow), two of the three markets that bucked this trend and continued to grow were developing markets: China and Russia.
Fig. 37: 2009: GDP per capita (USD) vs. demand per capita (mg)
Demand for gold per capita in China and India was roughly comparable with much more prosperous nations, such as the UK
50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 -0.10 0.10 0 Thailand China 30 0.40 0. 50 South Korea United Kingdom Italy US
Many of the countries with the fastest-growing economies have a strong cultural affinity with gold
Recent years have also seen a rise in the purchase of gold for investment purposes in these markets; in 2010, annual bar and coin demand increased by 60% in India and 72% in China
Fig. 38: 2010: GDP per capita (USD) vs. demand per capita (mg)
Indian demand per capita almost doubled in 2010. Demand in China and Russia also increased
50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Indonesia 0.10 0.20 0 .30 0. 40 Russia China Thailand India 0.50 0 .60 0. 70 0.80 0 .90 South Korea United Kingdom Italy US
Russia Indonesia .20 0. India 0.60 0. 70 0.80 0. 90 1. 00
Source: World Gold Council, World Bank
Source: World Gold Council, World Bank
Note: Demand includes all physical investment (including jewellery, but excluding the actions of central banks).
The regional dispersion of physical investment demand, its relative reweighting towards gold-friendly emerging markets and growth despite rising prices support our assumption that gold demand from physical investment will remain at or slightly below recent historical levels despite continuing price pressure. Ongoing demand from developing markets would constitute upside to this forecast; for instance, if Chinese consumption continued to trend upwards and increase to the 0.82gm seen in India, this would imply additional gold demand of 500 tonnes per annum.
We believe that physical investment demand will fall slightly from recent yearly highs. Ongoing demand from developing nations is a source of potential upside to this forecast
22
January 18, 2012
Alternative investment The vast majority of alternative investments relate to ETFs (c. 350 tonnes in 2010). Launched in 2003, the number of available funds and their holdings has increased rapidly as investors have sought exposure to fluctuations in the gold price through these equity vehicles.
Fig. 39: All known gold ETF holdings
Consistent retail buying of gold ETF products have helped support the gold price
90 80 70 60 50 40 30 20 10 0 Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
All known gold ETF holdings (moz)
At the end of 2011, gold ETFs held around 2,360 tonnes of gold, an increase of 171 tonnes in the year (343 tonnes over the same period in 2010). We expect that these funds and other alternative investments will remain net buyers of gold through 2013, although below the levels seen in 2009 and 2010 in tonnage terms owing to higher prices. Consensus gold price Consensus estimates have consistently underestimated the price of gold, but are now both more uniform and more bullish. Although commodity prices are notoriously difficult to predict, over the last four years, actual gold prices have consistently been at the high end of consensus forecasts. In addition, the chart shows that 2012 estimates are more tightly grouped than in previous years with the c. USD 500 low, which persisted until 2011, moving to USD 1,500. This shift in near-term gold price estimates may help to underpin gold equity earnings expectations from a volatility perspective.
Fig. 40: One-year forward gold price consensus estimates
Actual gold prices have consistently been at the high end of expectations
2,500
Having increased holdings profoundly in 2009 and 2010, we expect a cooling off of demand from ETFs in the next couple of years
Having repeatedly underestimated the price of gold, the consensus estimates are now more tightly grouped in the USD 1,500/oz to USD 2,000/oz range
2,000
Gold price (USD/oz)
1,500
1,000
500
2008
2009
2010
2011
2012
High
Mean
Low
Actual
23
January 18, 2012
Conclusion In summary, we foresee a limited near-term supply response to structural medium- and longer-term shifts in demand that lead us to believe that the gold price is well positioned as we progress through 2012. Golds recent price increases have left certain market commentators branding gold prices as a bubble. There is potential that a strong change in investment sentiment, in the context of gold having high levels of near-market supplies could see the price of gold fall below marginal cost. However, the charts below show that gold maintains a respectable position as compared with both the S&P 500 and the MSCI world index in the context of historical levels. In addition, the gold market remains moderate as compared with the global bond and equity markets in regards to absolute size. In our view, significant shocks to the global financial system including a change in the global reserve currency system, a significant geopolitical occurrence, a currency/trade war or material increases in global inflation expectations could trigger gold to move higher than its longer-term trend rate.
Fig. 41: Gold vs. S&P 500
Gold has persistently outperformed the S&P 500 and MSCI world index in the 40 years since the end of the gold standard
20 18 16 14 12 10 8 6 4 2 0
Fig. 42: Gold vs. MSCI world index

16 14 12 10 8 6 4 2 0
Gold v S&P 500
Gold v MSCI world
Fig. 43: Equity market vs. bond market vs. gold market
Despite rapid price increases gold remains only 5% of market assets (excluding property, etc)
120.0 99.6 91.0
100.0
93.9
80.0
60.0
US$ tn
45.4 40.0
52.0
54.1
20.0 5.8 0.0 2009 Bond MV Gold MV 2010
7.6
8.2
Jun-11
Equity MV
Source: Bank of International Settlements, World Gold Council, Bloomberg, Nomura research
24
January 18, 2012
A new era for gold equities

Nomuras analysis suggests that: gold will maintain current prices and push through recent highs; that equity valuations are low; and that the associated expected cash build in the gold equities will enhance valuations for gold producers. We forecast that the excess cash will be spent on a mix of new development, M&A and dividends, which should tighten the recent disconnect between gold prices and gold equities.
Summary
Fig. 44: Spot gold price and WORLD-DS Gold Mining index
Gold and gold equities have performed well despite stalling since 2009
3,000 2,500
3.0
Fig. 45: WORLD-DS Gold Mining index vs. spot gold price and the MSCI world index
Gold equities have been outperforming the market, but not gold
3.5
2,000 1,500 1,000 500
2.5 2.0 1.5 1.0 0.5
Jan-82
Jan-83
Jan-84
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Jan-82
Jan-83
Jan-84
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Jan-11
Gold Bullion LBM U $/Troy Ounc e
WORLD-DS Gold Mining - PRICE INDEX
WORLD DS Gold index t o Gold Bullion
World DS Gold I ndex to M SCI World I ndex
Source: Datastream
Source: Datastream
Since 2002, the Datastream World DS Gold Mining Index has increased by 354%, while the gold price has risen by 480%. In periods of rising gold prices, it would rationally be expected that the gold equities should provide a higher return as the effect of operational leverage is enhanced with increasing gold prices. Despite this, the index has still outperformed the MSCI World Index over the same period. (The World DS Gold Equity Index is a Datastream index that calculates an indexed return for 53 gold-related producers, developers and explorers, including many of the companies that are included in this note. The index is not a total return index.) The red line in Fig. 44 shows that, in general, gold equities outperformed the gold price in the 1980s and early 1990s. Gold equities then underperformed in the late 1990s before outperforming once more into the mid-2000s. Since 2006, gold equities have underperformed bullion prices. We note two major points from these charts: 1) the disconnect in relative price movements in the past five years between the gold producer share prices and the gold price; and 2) the historical relative valuation levels between the gold equities and the MSCI World Index.
Fig. 46: Gold bullion vs. world gold mining index (rebased 2011)
In 2011 gold equities did not match the performance of gold
140 130 120 110 100 90 80 70 60 Jan-11
Since 2006, gold equities have underperformed bullion prices
Feb-11 Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov -11
Dec-11
Gold Bullion Rebase
World DS Rebased
Source: Datastream
Jan-12
0.0
25
January 18, 2012
The recent pricing disconnect was amplified in 2011. The gold price, even when accounting for the end-of-year weakness, was up 9% y-o-y, while the gold producers traded down 20% (Fig. 45). Fig. 45 shows that the WORLD DS Gold index has outperformed the MSCI World Index since 2000. It is notable that, despite 10 years of outperformance (which perhaps reflects an element of catch-up after the weak relative performance in the late 1990s), that gold equities are still trading below historical highs when compared with general equities.
Fig. 47: Global gold equity P/E
P/E ratios are near 20-year lows
45 40 35 30
The pricing disconnect between gold bullion and gold equities has grown during 2011
Fig. 48: Global gold equity EV/EBITDA

EV/EBITDA ratios are at 20-year lows
25.0
20.0
EV/EBTIDA
Jul-93 Jan-95 Jul-96 Jan-98 Jul-99 Jan-01 Jul-02 Jan-04 Jul-05 Jan-07 Jul-08 Jan-10 Jul-11
25 20 15 10 5 0 Jan-92
15.0
10.0
5.0
0.0 Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
12mth f orward PE
Source: Datastream
Datastream
Looking at valuations from a P/E or an EV/EBITDA multiple basis, similar dynamics are at work. Although P/E ratios of 20x are unarguably high compared with average non-gold equity levels, gold equity P/E valuations are near 20-year lows. Gold equities tend to trade at a premium owing to the lower correlations that gold has traditionally had with economic cycles, a trend we expect will only be enhanced in the unstable market environment. EV/EBITDA valuation metrics reinforce this trend as well.
Fig. 49: Global gold equity EBITDA
The rising gold price is already significantly changing the cash flow and balance sheet of gold mining equities
70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
Gold equity P/E and EV/EBITDA ratios are near 20-year lows
Fig. 50: Global gold equity EBITDA and capex

The rapid increase in EBITDA has not been matched by capex. Companies are now generating free cash flows that are far in excess of anything see over the last 20 years
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
EBITDA ($m)
EBITDA ($m) Capex ($m)
Source: Datastream
Source: Datastream
Figure 49 provides the DS World Gold Mining Index aggregate EBITDA with forecasts based on consensus estimates out to 2013. These forecasts suggest that on an industrywide basis, close to USD 60bn in EBITDA will be generated in 2013E, up from ~USD 10bn in 2006-09. This noticeable increase in profitability is likely to have important implications for the sector. 1) Increasing balance sheet strength will, in our view, increase M&A activity. Recent transactions including the Eldorado Gold Corp bid for European Goldfields has provided an early example of potential activity. We see Avocet Mining, Randgold Resources and Seabridge Gold benefitting most from this trend. Additionally, in our view, African Barrick Gold is perhaps closest to making an acquisition and the net result of a changed investment proposition may also change sentiment surrounding the stock.
EBITDA is set to rise to USD 60bn by 2013E from around USD 10bn in 2006-09
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January 18, 2012
2)
Excess cash will see development projects progress and exploration increase, leading to a potential medium-term supply side response. In the near term, however, we believe this will favour companies with high potential growth characteristics. This would suggest that on a relative basis that the P/NAV multiple for companies such as Randgold, Avocet, Polymetal and Petropavlovsk would benefit the most. A significant portion of cash will be returned to shareholders, in our view. This should favour net cash positive companies with high free cash flow including Centamin, Randgold Resources and African Barrick Gold.
3)
Fig. 51: Global gold equity dividend yield

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
Dividend yield
Source: Datastream
Fig. 51 shows that the consensus 2011 sector dividend yield is running just below 1%. Consensus dividends for the WORLD DS index for FY13 are roughly USD 4.6bn. At a dividend yield of 0.9% (2011), this would imply a market capitalisation of USD 489.0bn or 47.2% upside to existing prices. Notably consensus average 2013 gold forecasts are at USD 1,937/oz. If gold prices increase, this would likely enhance potential sector upside regardless of increased capital spending. The disconnect between USD 60bn in EBITDA generation and the USD 4.6bn consensus forecast for dividends suggest dividends are likely to come in ahead of current consensus, in our view.
Fig. 52: Global gold net debt
With the exception of acquisitions by Newmont Mining and Barrick Gold, which added a combined USD 10.6bn of net debt in Q3 11, sector net debt has been falling since the start of 2009
15,000 10,000 5,000
Assuming dividend yield remains at c. 1.0%, FY13E consensus dividends implies 47% upside potential to existing prices
Fig. 53: Global gold net debt to EBITDA

The net debt to equity ratio is forecast to become negative in 2013
5.00 4.00 3.00 2.00
1.00
-5,000 -10,000 -15,000
0.00 -1.00
Net debt ($m)
Net debt to EBITDA
Source: Datastream
Source: Datastream
The remaining cash should strengthen balance sheets. The large spike in Fig. 52 in sector net debt in 2011 stemmed from the additions made by majors Barrick Gold Corporation and Newmont Mining to finance their respective acquisitions of Equinox Minerals and Fronteer Gold. Despite this, as would be expected at such high rates of profitability, we expect sector net debt to fall rapidly. The sector as a whole is likely to be in a firmly positive net cash position in 2013.
EBITDA growth will likely translate into considerable amounts of cash
27
January 18, 2012
Our analysis suggests that profitability ratios (Figs. 54 and 55), which are already high, will move higher, suggesting the sector is about to move into a period of super profit. Owing to the shifts we have noted above in gold demand dynamics, and the delayed time frame for which new gold projects can be discovered and built, in our view, this excess economic profit situation could persist for some time. This is likely to encourage investor interest as gold equity valuations retrace towards higher P/E and EV/EBITDA multiples.
Fig. 54: Global gold return on equity
Return on equity is at a 10-year high and trending upwards
14.0 12.0 10.0 8.0 6.0
Fig. 55: Global gold net profit margins

Net profit margins are also at a recent high and set to increase further
30.0 25.0
Net profit margin (%)

Jan-03 Return on Equity Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
20.0 15.0 10.0 5.0 -5.0 -10.0 -15.0 Jan-02
ROE (%)
4.0 2.0 -2.0 -4.0 -6.0 Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Net profit margin
Source: Datastream
Source: Datastream
The above analysis suggests that the increase in the gold price over the past 12 months and the underlying shift in fundamental economics for the gold producers have yet to be priced in. We expect that as gold prices persist at higher levels, investors will begin to recognise the persisting sector cash build and the implications that this has on industry structure. This will, in our view, have far reaching impact on valuations. P/NAV multiples have compressed in line with higher gold prices but steady equity prices. There remain valid reasons for this, in our view, including the emergence of ETFs as a liquid and easily accessible alternative to buying mining stocks that are affected by significant operational and political risks. In addition, longer-term forecasts for gold remain compressed as uncertainty surrounding the macro environment is hampering conviction in longer-term views. However, the disconnect has now grown too wide, in our view, and we expect both P/E and P/NAV multiples to begin to retrace closer to historical levels. Increasing M&A activity could act as a catalyst, in our view. The downside scenario Despite what we believe to be a very well-supported, medium-term supply/demand balance, since 2008, a higher proportion of gold consumption has been in the form of investment demand. On balance, we see the potential for investment demand to increase sharply depending on the progression of the many current macro uncertainties. Although this will come with higher prices, and will, in our view, accelerate the aboveanalysed valuation increases, the increasing proportion of gold held near-market means that the volatility surrounding net investment demand, and hence gold price volatility, is likely to increase.
We believe that EBITDA and net cash growth will lead to both P/E and P/NAV multiples moving closer to historical levels
The increasing proportion of gold held near-market means that the volatility of net investment demand will likely increase
28
January 18, 2012
Fig. 56: Gold investment demand as a percentage of total demand

Since the 2008 financial crisis, gold demand as an investment has increased
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E
Demand: Investment
Source: GFMS
In the longer term, this may become an issue for gold producers. As shifts in sentiment tend to happen rapidly, a substantial shift from net investment demand to net disinvestment (especially after the gold price has increased which raises the propensity for profit-taking), could have a considerable impact on the gold price. Because of the relative size of above-ground stocks, the price protection that normally comes from the marginal cost of production will not necessarily be as robust as that for iron ore and copper, for instance. In this scenario, rapidly-depleting profitability is likely to see producers hedge what remaining profitable production they have as production costs are rationalised (having grown well beyond historical levels). This hedging may exacerbate the pressure on profitability. Following this rationalisation, we would then expect prices to retrace toward marginal cost levels, currently at c. USD 1,200/oz. Further affecting this, and dependent on how long structurally higher investment is to persist, there may also be longer-term mine overcapacity (however, this scenario is likely 5-10 years away, at best). Thankfully, gold equity balance sheets are the strongest they have ever been, and are likely to increase in strength over the coming years helping provide insulation, in our view. It is difficult to judge whether this potential shift in investment sentiment will occur (if at all), in the context of the structural changes occurring in our financial system. In our view, the benefits to equity investors from near- and medium-term valuation increases outweigh potential downside scenarios (which are longer-term in their nature), although it is worth remaining cognisant of this potential should the sentiment towards investment demand change sharply. Figure 57 provides a cost curve for 2011 showing where production costs are globally.
Fig. 57: Cash cost curve
The six companies in our coverage universe are relatively grouped in terms of cash costs
2,000
1,500
1,000
500
-500 Cash cost curve Analysed companies
Source: Brent wood (Q4 2011 estimates), Nomura research (FY11E)
29
January 18, 2012
European sector review

The European gold producer sector is generally made up of smaller intermediate gold producers with greater exposure to political risk, in general, than the senior North American gold producers. With this greater risk can come greater reward. However we do favour West African exposure over the Russian companies for stock-specific reasons. In this report, we initiate on the six London-listed gold companies below. Our top picks are Randgold Resources, African Barrick Gold and Avocet Mining, which screen well against our emerging themes from our top-down analysis, being: growth, cash flow and potential to participate in a valuation uplift from increased M&A activity in the gold sector. We see significant value in all of our non-Buy rated stocks in absolute terms, although in relative terms we favour the higher upside potential in ABG and AVM and the lower risk profile of RRS over the long-term attractive but risky CEY and the lower relative upside potential from the Russian producers POLY and POG.
Fig. 58: European gold producers
Although we see value in all our stocks, in relative terms we favour the higher upside potential of ABG and AVM along with the lower risk offered by RRS
Company Ticker Market cap Spot multiple Target multiple Current price Target price Potential upside Rating
African Barrick Gold Avocet Mining Centamin C Petropavlovsk P Polymetal P Randgold Resources Seabridge Gold
Source: Nomura estimates
ABG AVM EY OG OLY RRS SA
2,904 654 1,498 1,952 6,448 9,988 817
0.6x 0.8x 0.4x 0.8x 0.9x 1.5x
0.8x 0.9x 0.5x 0.7x 0.9x 1.7x 0.4x
462p 214p 89p 685p 1100p 7115p $19.23
750p 310p 120p 860p 1400p 9850p $31.80
62% 45% 34% 25% 27% 38% 65%
Buy Buy Neutral Reduce Reduce Buy Buy
Fig. 59: Target price upside potential

We like the upside potential on African Barrick and Avocet and the lower risk offered by Randgold's diversification and size
70% 60% 50% 40% 30% 20% 10% 0% Seabridge Gold Af rican Barrick Gold Av ocet Mining Randgold Resources Centamin Poly metal Petropav lov sk 65.4% 62.2%
Fig. 60: Share price movements (indexed 03/2010)

300
250
200
44.9% 38.4% 34.5% 27.3%
150
100
25.5%
50
AVM LN Equity RRS LN Equity
ABG LN Equity GDM Index
CEY LN Equity GOLDS Comdty
POG LN Equity SXXP Index
POLY LN Equity SPX Index
Source: Nomura research
Source: Datastream
The gold equities generally continue to price in valuation levels lower than the spot price on an NAV basis (using a 5% discount rate), although the recent pullback in the gold price from highs of USD 1,900/oz to now USD 1,640/oz has left the mispricing gap marginally lower (suggesting that gold equity participants had in fact correctly anticipated that gold bullion was ahead of short-term trend levels). That said, the disconnect between spot P/NAV multiples and historical multiples of 1.0x or higher (as can also be seen by the P/E and EV/EBITDA sector de-rating in Figs 47 and 48) persists in most stocks except for the larger, and perceived higher growth, stocks of Randgold and Polymetal.
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January 18, 2012
Fig. 61: Valuation sensitivity to gold price

Generally attractive valuations at spot and our year-end prices
Company Ticker Current price Long term NAV @ 5% discount rate Spot $1,900/oz
African Barrick Gold Avocet Mining Centamin C Petropavlovsk P Polymetal P Randgold Resources Seabridge Gold
ABG AVM EY OG OLY RRS SA
462p 214p 89p 685p 1100p 7115p $19.23
512p 246p 154p 621p 967p 3660p
0.9x 0.9x 0.6x 1.1x 1.1x 1.9x
724p 285p 207p 858p 1192p 4623p
0.6x 0.8x 0.4x 0.8x 0.9x 1.5x
941p 348p 255p 1226p 1620p 5791p
0.5x 0.6x 0.3x 0.6x 0.7x 1.2x
Fig. 62: Implied spot price at 5% discount rate

With the exception of Randgold, all of the valuations of our coverage companies imply a gold price below the spot price
2,500
2,196
Implied spot price US$/
2,000 1,545 1,500 1,510 1,365
1,325 987
1,000
500
0 Randgold Resources
Polymetal
Petropavlovsk
Avocet Mining
African Barrick Gold
Centamin
The sector has de-rated as gold prices have increased and we expect that the cash build and impending M&A as noted above could help to provide a re-rating for all gold stocks. We note that global gold P/Es have averaged above 20x over the course of the bull market that started in 2000 and that the London stocks all trade below a 2012E P/E of 15x. Should the gold price stabilise at current levels (even disregarding the potential for higher prices), we would expect that the London gold companies may well see a sectoral lift in multiples in conjunction with the cash build and M&A that we expect will help to change the shape of the sector in the coming months. The London gold equities are not pricing in onerous valuations in a historical context, in our view.
Fig. 63: 2012E P/NAV vs. cash costs
Bubbles represent EBITDA size
2.0x 1.8x 1.6x 1.4x 1.2x 1.0x
1.0x
Fig. 64: 2013E P/NAV vs. cash costs

Centamin has seen its rating decline considerably despite its leading cost position
2.0x 1.8x 1.6x 1.4x 1.2x
0.8x
0.8x
0.6x
0.6x
0.4x 0.2x 0.0x $400
0.4x 0.2x
$500
$600
$700
$800
$900
$1,000
$1,100
0.0x $400
$500
$600
$700
$800
$900
$1,000
$1,100
2012 E cash costs (USD/oz)
2013 E cash costs (USD/oz)
Centamin
Randgold Resources
Avocet Mining
Polymetal
Petropavlovsk
Centamin
Randgold Resources
Avocet Mining
Polymetal
Petropavlovsk
The London-listed gold equities tend to group at the USD 700-800/oz cash cost level (exCentamin) vs. a global average cash cost of approximately USD 625/oz. This shows the European-listed stocks tend to have lower-quality assets than the average global companies (in cost terms) and this does affect potential P/NAV multiples. We do note that the general relationship between P/NAV and cash costs (lower cash costs should translate into higher P/NAV multiples), remains evident and is perhaps enhanced by the shifts in 2013 costs. As the gold price moves higher, the safety margin
31
January 18, 2012
or cash margin per ounce should expand and thereby reduce the impact from this trend (causing a general flattening of the line). We believe this will favour the relative P/NAV multiples for both African Barrick Gold and Avocet Mining as the companies with the most relative cost control (largely owing to structural deflation and moderations in strip ratios rather than a lack of inflation) in a rising gold price environment. This is one of the reasons why we see ABG and AVM benefiting the most from P/NAV multiple expansion over the coming year. Centamin plc should be pricing in a higher P/NAV multiple based solely on its strong cash cost position, although increased Egyptian political risks continue to weigh on the share price.
Fig. 65: Spot multiple vs. two-year forward EBITDA growth
Near-term growth appears to be deceptive based on our valuation analysis
2.0x 1.8x 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x 0.4x 0.2x 0.0x 100% African Barrick Gold
150% Centamin
200%
250% Avocet Mining
300% Randgold Resources
350%
2011-2013 EBITDA Growth Petropavlovsk Polymetal
Polymetal has the leading two-year EBITDA growth. Polymetals growth is also very heavily weighted to 2013 and is dependent on the successful commissioning of the Amursk refractory operation and Polymetals shares appear to be pricing in a large portion of this growth, in our view. In addition, our silver forecasts also enhance the relative 2013 EBITDA growth for Polymetal, which produces almost 50% of its revenues from silver. Randgold maintains its premium multiple, in our view, for the historical delivery and future potential for growth, which remains beyond the reach of the two-year EBITDA growth chart. African Barrick Gold is a notable laggard in near-term growth and with its strong balance sheet, we expect the company to move towards an acquisition while Avocet will see its new growth from Inata in 2014 and onwards. A key chart, in our view, for why the sector may see a re-rating in general is the changes in balance sheets towards strong net cash positions. Notably, only Petropavlovsk has a net debt position in 2015E. We also note that Polymetal maintains significant debt levels at the moment, and although its debt position is improving, it remains relatively more exposed in a downside gold price scenario.
Fig. 66: Net debt to EBITDA
Our forecasts suggest that all of the companies in our report will have negative net debt to EBITDA by 2013 (except Petropavlovsk)
2.0x
1.5x
1.0x
Net debt to EBITDA
0.5x
0.0x
2010
2011E
2012E
2013E
-0.5x
-1.0x
-1.5x
-2.0x
-2.5x AVERAGE African Barrick Gold Avocet Mining Centamin Petropavlovsk Randgold Resources Polymetal
Polymetal has the largest gold equivalent production as can been seen in Fig. 66. Petropavlovsk, which should it be able to achieve production on time at its new Pokrovskiy Hub, will move back in line with Randgold in production terms. Centamins
32
January 18, 2012
ramping underground production as well as the Stage IV expansion at Sukari makes this very attractive from a growth standpoint, although as we note below, the increasing government share of profits and the heightened perceived political risk mitigate the positives at present.
Fig. 67: Estimated production profiles to 2015E
Growth rates of production will slow into 2015
1,400,000
Production(gold equivalent oz)
1,200,000 1,000,000 800,000 600,000 400,000 200,000 0
2010 Af rican Barrick Gold Petropav lov sk
2011
2012 Av ocet Mining Poly metal
2013
2014 Centamin
2015
Randgold R esources
Fig. 68: Cash costs profile to 2015E

Rising production and larger operations and new mines should keep cost inflation in check - translating into higher cash flow from operations
1,200 1,000
Cash costs ($/oz)
800 600 400 200 0
2010 Af rican Barrick Gold Petropav lov sk
2011
2012 Av ocet Mining Poly metal
2013
2014 Centamin
2015
Randgold R esources
Cash cost inflation, in our view, is likely to stay relatively moderate as compared with the increases seen over the past few years, for various reasons, including the ramping up of operations and general producer currency weakness (ruble, CFA franc, South African rand). On our forecasts, the near USD 1,000/oz cash margin seen in 2011E will expand to average above USD 1,300/oz by 2013E. This profitability should see increasing production. Free cash flow yields (ex the next unannounced stage of projects) are elevated from 2013E as well.
Fig. 69: Cash margins
1,600 1,400 1,200 1,000 800 600
Fig. 70: Cash flow yield

40% 30% 20% 10% 0% -10% -20%
Cash margin USD/oz
400 200 0
-30% -40%
2010 Av ocet Mining 2011 Centamin Petropav lov sk 2012 Poly metal 2013 Randgold R esources
2010 Av ocet Mining
2011E Centamin
2012E Petropav lov sk Poly metal
2013E Randgold Resources
Af rican Barrick Gold
Af rican Barrick Gold
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January 18, 2012
RRS Randgold Resources (Buy, 9,850p TP)

Randgold Resources is one of Nomuras top picks in the London gold sector. The company is expensive compared with its London peers, but we believe its premium rating, which has persisted for years, is warranted. Buy Randgold for the cleanest, most liquid exposure to gold in the London market.
Relatively expensive, but high growth potential a premium asset in a new era
Randgold Resources, a West African pure-play gold producer, has been one of the more successful growth stories in the gold sector over the past 10 years. Nomura believes that Randgold is well placed to continue its longer-term outperformance of the wider gold equity universe, despite its current aggressive market rating. The shares, trading on our calculations at a P/NAV of 1.5x using the spot gold price, appear expensive as compared with other London gold producers, but less so when compared with larger global growth gold producers. In our view, Randgolds diversified production base (both on a geographical and asset basis) and high probability growth that has not yet been fully priced into our NAV calculations make RRS the premium London gold equity exposure. This is especially true in the context of the rest of the London listed gold companies, which tend to have concentrated risks. In addition, Randgold has a very strong balance sheet (net cash of USD 729m in 2012E), and has the second lowest long-term cash cost forecasts in our London universe. Owing to this best-in-class pedigree, Randgold is, in our view, best placed to participate in the general gold equity response to higher gold prices over the medium term. It is also likely to be one of the first movers to respond to this shift should equity markets stay in a risk off framework over the next six months. Although our calculated 12-month upside potential is lower than some of its peers (as this high quality has likely been priced into the market), the risk profile is more favourable, in our view. Randgold also screens well on our key forward themes. Its world-class exploration portfolio should see its growth potential remain high for years to come. Its already strong balance sheet suggests that substantial dividends or further as yet unvalued growth, may be on the horizon, even after the material production growth from Kibali.
Fig. 71: Attributable reserves (oz) per share
Randgold has created value in the past ...
0.25
16
Fig. 72: Project pipeline

... and the current portfolio looks poised to deliver in the future
Mines (x3) Development project (x1) Feasibility project (x1) Mining
0.20
Reserve definition 16 Indicated and measured resources 5

5
0.15
Certainty
0.10
Inferred resources 11 Advanced targets 12 Follow up targets 33 Identified targets 51 Regional exploration 148
Feasi projec resou reserv
0.05
13
11
Explo target
0.00
2005
2006
2007
2008
2009
2010
30
Attributable reserv es per share

30 60 43 4 11
Identif geolo anom
Senegal
Cote dIvoire
Mali
Burkina Faso
DRC
Source: Company data, Nomura research
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January 18, 2012
On the downside, Randgolds premium rating perhaps exposes the share price to further operational setbacks. Randgold reduced its 2011 production guidance in November to 690,000700,000oz of gold from 700,000750,000oz of gold (consolidated basis). However, the difficulties faced at Tongon and Gounkoto appear to be generally one-off in nature. When considering that the Yalea underground operation continues to take longer than initially expected to reach full steam, investors should take solace from the robust response from the share price, maintaining a relative premium to the other gold equities in spite of the downgrade and the gold price weakness at the end of 2011. We do note, however, that the company is poised to lose this protection if 2012 does not provide production successes as investors in the London market rightly remain wary of gold mining companies missing production guidance, in our view. We expect 2012, and the increasing grade profile from the Yalea underground as well as the full tie in of Gounkoto ore, will see group production improve markedly to 912,000oz of gold (up 33% on 2011 production). The higher production should also provide lower cash costs. We forecast cash costs of USD 614/oz (pre-royalty). This should translate into EBITDA generation of USD 959m in 2012. Many catalysts for future NPV additions remain Randgold has many catalysts for future NPV additions, which help to bring the current high P/NAV rating into context. Key among these include: Changing economic cut-off to USD 1,000/oz for open-pit reserves. Morila mine life extension and/or tailings processing. Tax holiday negotiation for Gounkoto. Ongoing deposit discoveries at Kibali and potential increase in size to 6mtpa. Gounkoto Underground to extend mine life at end of decade. Massawa exploration project to return to development pipeline. Advancement of prime Northern Ivory Coast exploration portfolio.
Valuation Nomuras sum-of-the-parts NAV estimate (using Nomuras year-end gold price forecast of USD 1,900/oz) provides a value of 5,791p/share. At the current spot gold price of USD 1,640/oz, Nomura calculates a NAV of 4,623p/per share implying a 1.5x P/NAV multiple. Nomura initiates on RRS with a Buy rating based on a one-year forward P/NAV multiple of 1.7x, which equates to 9,850p.
Fig. 73: Randgolds valuation is diversified among three major operations
Valuation (NPV @ 5%) Loulo / Gounkoto Morila Tongon Kibali Other Resources Corporate Net Cash (Debt) Total $M 3862.0 96.8 2046.7 1501.7 112.5 -229.5 402.6 7792.9 0Yr $42.35 $1.06 $25.22 $16.47 $1.23 -$2.52 $4.41 $88.22 +1 Yr $39.00 $0.38 $22.01 $20.78 $1.23 -$2.47 $8.83 $89.76 +2 Yr $34.82 $0.00 $19.42 $24.63 $1.23 -$2.42 $16.32 $94.00 +3 Yr $31.33 $0.00 $16.60 $27.62 $1.23 -$2.37 $22.79 $97.20
GBPUSD Total GBP Current share price (p) P/NAV Target multiple Target price Upside
1.55 5028 5791p 7115p 1.2x 1.7x 9850p 38%
Based on flat 2012 year end forward gold price est. of USD 1,900/oz
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January 18, 2012
Fig. 74: RRS Waterfall chart

70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 Loulo / Gounkoto Morila Tongon Kibali Other Corporate Net Cash Resources (Debt)
Fig. 75: RRS valuation trend

65.00 60.00 55.00 50.00 45.00 40.00 35.00 56.92 57.91 62.71
60.64
0Yr
+1 Yr
+2 Yr
+3 Yr
Fig. 76: Map of operations

The company operates three mines in Mali and the Ivory Coast. The company is building the Kibali project in the DRC with partner Anglogold Ashanti
MALI Loulo/Gounkoto Morila IVORY COAST Tongon DRC Kibali
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January 18, 2012
Company summary
Randgold Resources is an intermediate gold producer listed on the LSE (RRS) and NASDAQ (GOLD). Randgold operates four mines/projects in sub-Saharan Africa including the Loulo/Gounkoto (80%) underground and open-pit gold complex in Mali, the later-life Morila (45%) mine in Mali, the Tongon (90%) open-pit gold mine in the Ivory Coast and the Kibali (45%) open-pit and underground development project in the DRC. Randgold also holds substantial exploration ground in West Africa in Mali, Ivory Coast, Burkina Faso, Senegal and the DRC.
Fig. 77: RRS production and cash costs forecast
Attributable production shows big gains in 2012E
1,000,000 900,000 800,000

gold production (oz)
800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00
600,000 500,000 400,000 300,000 200,000 100,000 0 2009 2010 2011E 2012E 2013E 2014E 2015E
Loulo / Gounkoto
Morila
Tongon
Kibali
Cash cost per ounce
Source: Company data, Nomura estimates
Asset Summary
Loulo-Gounkoto complex (80%) Mali Loulo The Loulo/Gounkoto mining complex, located on the border of Mali and Senegal, lies within the Kedougou-Kenieba inlier of Birimian geology, which is host to several major gold deposits. The complex is made up of three open-pit mines (Loulo 3, Yalea and Gara) and two underground operations (Yalea and Gara). Randgold owns 80% of the operations with the remaining 20% held by the State of Mali, whose stake is financed by way of a shareholder loan; this gives Randgold control over 100% of the cash flows until this loan is repaid (c. USD 350m outstanding as at the end of 2010). Loulo/Gounkoto is undergoing a phase of significant development and has failed to meet its initial production guidance in each of the past two years. The 2010 production level of 316,539oz (target: 400,000oz) was forecast to remain roughly flat in 2011, but has been affected by abnormal rainfall in August (a once-in-a-hundred-year event) and unexpected downtime associated with the tie-in of new tailings pipeline. On the upside, the Yalea underground development has now reached the higher grade purple patch, an area of c. 10g/t, which, along with the higher grades from Gounkoto, should provide a boost to output and help mitigate cash cost inflation. Having upgraded the secondary ore crushing circuit in 2010, Randgold is now upgrading the power plant and is building a new mill. By 2015, the mine has the potential to produce over 750,000oz of gold per year. Our forecasts are somewhat conservative owing to a flatter grade profile with production maxing out near 620,000oz (including Gounkoto). As per the 2010 resource update, reserves at the Loulo mine are 6.52moz (resources 11.37moz), implying a mine life of around nine years. However, given the continued underground development and exploration at Yalea and Gara, the potential to process open-pit resources from other nearby satellite deposits and the potential for Gounkoto, the complex is likely to stay active for far longer than this.
US$/oz cash costs
700,000
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January 18, 2012
Gounkoto Gounkoto is 22.5km south of the main Loulo complex. Initially expected to be developed as a standalone project, management opted to utilise the existing Loulo plant to process Gounkoto ore (crushing is done onsite). At the end of 2010, reserves of 2.8moz (all open pit) and resources of 5.5moz (2.0moz of which are underground), had been identified. Mining began in January with ore stockpiled until production started in June. By the end of Q3, the mine had produced 50,051oz of gold. Randgold eventually hopes to produce up to 300,000oz of gold per year from the open pit over an 11-year mine life. The inferred resource estimates from the underground mine would add a further 11 years to the operating life of the mine at current levels.
Fig. 78: Loulo/Gounkoto production
The Loulo/Gounkoto complex remains the engine for Randgold production
700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 900 800 700 600 500 400 300 200 100 0
2009
2010
2011
2012
2013
2014
2015
2016
Loulo -Gounkoto Complex
Cash cost (US$/oz)
For Loulo/Gounkoto as a whole, we forecast production (on a 100% basis) will increase next year to 546,000oz and this will see costs fall to near the USD 600/oz level. We expect the performance of the Loulo/Gounkoto complex may well be the main non-gold price driver for Randgold shares in 2012. Tongon (89%) Ivory Coast The Tongon open-pit mine is located in the north of the Ivory Coast, close to the border with Mali. The country has seen disruptions and violence (largely in the south) in the wake of the presidential elections at the end of 2010. Since May 2011, when Alassane Ouattara formally assumed the presidency, the country has, however, experienced a period of relative stability although some reports of violence near the capital of Abdijan continue. Having begun mining in April, Tongon produced 28,126oz in 2010 and a further 206,058oz in the first nine months of 2011. The second half of the year has, however, seen a number of difficulties at the mine, with delays associated with wet weather and the mining of transitional ore, exacerbated by union disputes, parts failure and ongoing difficulties connecting to the national grid. These problems are largely isolated and should be overcome by 2012. We expect gold production at Tongon of 282,000oz, higher than 2011, but mitigated by falling head grades (2.7g/t vs. 2.9g/t in 2011). The plant is designed to treat 3.6Mt pa of ore (2.4Mt were milled in the first nine months of 2011), and the latest declaration identified 2.9moz of reserves at an average grade of 2.5g/t and 4.2moz of resources at 2.9g/t. Reserves currently only include gold from the open pit and stockpiles, meaning that underground mineral resources could provide upside to our forecasts. Morila (40%) Mali (JV with Anglogold Ashanti) Morila has produced around 5.8moz of gold since it was commissioned in October 2000, but is now nearing the end of its life. In 2009, the mine transitioned from an open-pit operation to a stockpile retreatment operation, which will run until the end of 2013. Production in 2011 was around 240,000oz, but this will decrease as the stockpile is exhausted. We forecast 100% production of 209,000oz in 2012E at a cash cost of USD 882/oz.
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January 18, 2012
In 2010, management began investigating the feasibility of re-treating low grade Tailing Storage Facility material; a detailed schedule and financial model is planned to be communicated to the market in the coming weeks. Initial estimates suggest that this will extend the mine life by a further five years. The higher gold prices are also providing the potential for another pushback of the open pit. We have not included any upside potential from these projects in our current valuation, although Morila could be reasonably expected to last longer and provide additional cash flow at the current higher gold prices. Kibali (45%) DRC (JV with Anglogold Ashanti) Kibali is a very large development project located in the north-eastern corner of the Democratic Republic of Congo with reserves of 10.1moz and resources (including inferred) of 18.5moz. The project is 90% owned by a Randgold and Anglogold Ashanti joint venture, with the remaining 10% equity held by the government. The project is in the early stages, with the RAP (Relocation Action Plan) resettling 250 families and developing local infrastructure; the pit opening is planned for 2012 with production beginning in late 2013. Based on current resource estimates, Randgold expects that the completed mill will process 4Mtpa over a mine life of 19 years, split roughly equally between open-pit and underground ore (37mt). Owing to positive subsequent exploration results, and an already long life of mine, we expect Kibali will be built to process 6mtpa or more of ore. We have included the 6mtpa level in our forecasts, but a larger Kibali would provide yet another potential P/NAV catalyst. Total capital expenditure, including that already spent in 2010, is estimated at USD 1.4bn, for the 4mtpa plant, we expect that this is likely to be closer to USD 1.7bn for the larger project. This includes the capital covers for hydropower installations and the ongoing capital requirements to develop the underground. As such, Kibali and Randgolds 40% share of the capital cost, will be a significant drain on free cash flow in the next couple of years, but is then estimated to produce upwards of 500,000oz by 2016 with cash costs over the life of the mine estimated to be only around USD 380/oz. This world-class project encompasses an area of 1,834 sq km, with a number of prospective, but as-yet-unquantified gold deposits. Fig. 78 shows the new trend to the west of the main KCD deposit. We note that this region may contain far more ounces than the current resource and there could be the potential for a further project to be developed in the region in due course.
Fig. 79: Kibali region map
A new trend to the East of KCD could provide further regional resource upside at Kibali
Ikamva
Kulikongo Gambari Lulu North/South Hotel Dembu fold Zambula West
Kalimva
Abimva North East Oere Mofu Abimva
Rambi Kiasi
KCD
KCD
Zambula Target
Renzi
Aindi Watsa
Zambula
Ogagu Gold deposit Gold target
Source: Company data
10km
Au ppb
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January 18, 2012
One notable negative for Randgold is the political risk perceptions surrounding the DRC. We have included a 7.5% discount rate in valuing the cash flows from Kibali (as compared with our standard 5%). Using a 5% discount rate for Kibali would increase our NAV by nearly 800p per share, which would once again lower what appears to be an exceptionally high P/NAV multiple. However, we do believe that the history of western mining companies in the DRC has generally been of higher risk and we note a deterioration in the political situation in the DRC following the recent elections could affect negative sentiment even further. Strategically, and as Kibali becomes an increasing share of Randgolds production and cash flow, we believe that Randgolds board of directors may have increasing incentive to merge/sell the company to a larger entity in order to reshape the risk profile by diluting the cash-flow contribution coming from the DRC (we expect Kibali to contribute near 30% of EBITDA in 2017). However, as this shift in geographical contribution is longerterm in nature, Randgold should benefit from being able to ascertain exactly how large the Kibali development might be before making strategic changes to company structure.
Fig. 80: RRS reserves and resources
Total Reserves Deposit Nam e Loulo / Gounkoto Morila Tongon Kibali Massaw a Total Country Ow nership Mali 80% Mali 40% Ivory Coast 89% DRC 45% Senegal 83% Tonnes Mt 62.5 12.6 37.1 74.3 17.4 203.9 Gold (g/t) 4.64 1.39 2.46 4.21 3.36 3.78 Contained gold Attributable Moz Moz 9.3 7.5 0.6 0.2 2.9 2.6 10.1 4.5 1.9 1.6 24.8 16.4
Total Resources (Incl. Inferred) Deposit Nam e Loulo / Gounkoto Morila Tongon Kibali Massaw a Total Country Mali Mali Ivory Coast DRC Senegal Ow nership 80% 40% 89% 45% 83% Tonnes Mt 120.4 14.5 46.9 183.6 23.7 389.1 Gold (g/t) 4.37 1.31 2.85 3.13 3.96 3.46 Contained gold Attributable Moz Moz 16.9 13.5 0.6 0.2 4.3 3.8 18.5 8.3 3.0 2.5 43.3 28.4
Exploration In addition to its operating mines, Randgold has an extensive portfolio of prospective targets spread across five countries in West Africa. Of the 276 total targets, 130 are satellite targets to existing operations, while 146 are potential stand-alone mines. These targets are in various stages of development (see Fig. 72) with the key hurdle to viability being reserves of 3moz and an IRR of 20%. This leaves Randgold in an enviable position of being able to progress only higher-quality projects, reducing the likelihood that value is destroyed from the eventual spend from the expected cash build. Managements present focus is on the development of its existing operations and the evaluation of surrounding deposits coupled with completion of the Massawa (Senegal) feasibility study and exploration programme. Randgold is also looking to begin development of at least one new exploration footprint. With 16 projects at the reserve definition stage and a record of converting prospects, we expect that Randgolds exploration will provide a series of catalysts to NPV in the medium to long term. Risks As noted above, Randgold operates in West African countries and the political stability of the Ivory Coast, Mali and the DRC can all have material impact on its share price. The Yalea and Gara underground operations are still ramping up and meeting production targets can be more difficult in this development stage. The Kibali project is large and capex cost-overruns remain possible. Balance sheet Randgold possesses a very strong balance sheet, which will provide significant optionality for future growth when viewed in the context of its exploration portfolio. Currently in a net cash position (USD 410m in 2011E), we expect net cash of USD 1.5bn by 2013 generated through operations via increasing production and higher gold prices.
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January 18, 2012
Fig. 81: RRS EBITDA and capex profile

Already strong EBITDA is expected to increase
1,400 1,200 1,000 800 600 400 200 0 -200 -400 -600 2009 2010 2011 EBITDA ($M) Capex ($M) 2012e 2013e 2014e 2015e 2016e
Fig. 82: RRS debt profile and debt ratio

Even after Kibali capital spending we calculate a generous cash build
3,500 3,000 2,500 2,000 1,500 1,000 500 0 2009 2010 2011 2012e 2013e 2014e 2015e 2016e
Net Cash (Debt) ($M)
Fig. 83: RRS EPS and P/E forecasts @USD 1,900/oz flat gold
EPS is expected to increase keeping the P/E at below historical levels
1,000 900 800 700 600 500 400 300 200 100 0 2009 2010 2011 EPS P/E (x) 2012e 2013e 2014e 2015e 2016e 140 120 100 80 60 40 20 0
Fig. 84: RRS EPS and P/E forecasts @ long-term prices

P/E remains below 20x despite falling mid decade gold price
1,000 900 800 700 600 500 400 300 200 100 0 2009 2010 2011 EPS P/E (x) 2012e 2013e 2014e 2015e 2016e 140 120 100 80 60 40 20 0
Fig. 85: Price chart (GBp)

2011 was a year of two halves, the company outperformed in the second half following the end of conflict in the Ivory Coast
8000 7000 6000 5000 4000 3000 2000 1000 0
Fig. 86: Historical P/E

Randgold's shares have de-rated in line with the sector
45 40 35 30 25 20 15 10 5
Oct-10 Dec-09 Nov-10 Dec-10 Oct-11 Nov-11 May-10 May-11 Dec-11 Jan-10 Jun-10 Jan-11 Jun-11
Jul-10
Mar-10
Aug-10
Sep-10
Mar-11
Feb-10
Feb-11
Jul-11
Aug-11
Randgold
DS World gold m ining index
Forward P/E
Source: Datastream
Source: Datastream
DS World gold mining index, indexed to RRS at Jan. 2009
Management and significant shareholders Board/management Chairman Philippe Litard CEO Mark Bristow CFO Graham Shuttleworth Significant shareholders Blackrock 13.9% Fidelity 9.9%
Sep-11
Apr-10
Apr-11
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January 18, 2012
Randgold Resources Primary Analyst: Tyler Broda Rating B Target Price (GBp) Price (GBp) uy Bloomberg Ticker 9,850 RRS LN 7,115 DataStream Ticker RRS 91 9,967 -403 9,564 December FY10 1,225 7,540 20 FY11E 1,571 8,942 38 FY12E 1,788 8,816 42 FY13E Cash Flows (US$M) Gold (US$/oz) Copper (USc/lb) Silver (US$/oz) 2,063 7,934 49 Receipts Payments Net nterest I Taxes Other Operating Cash Flows Capex Disposals Exploration 0 Other Investing Cash Flows Change n orrowings i B Dividends Equity Issues Other Financing Cash Flows Net change in cash Production & Costs Gold Gold Production (koz) Cash c ost (US$/oz) By Product Silver roduction koz) P Copper Production (kt) FY10 FY11E FY12E FY13E Balance Sheet (US$M) 440.1 632.0 686.5 681.7 912.0 613.8 900.5 604.8 Cash Receivables Inventories Other Current Assets FY10 366 98 196 16 676 FY11E 410 197 152 8 767 FY12E 729 309 238 8 1,285 FY13E 1,480 303 233 8 2,025 FY10 145 28 9 -10 -40 108 -411 24 42 -345 -1 -15 31 0 14 -223 FY11E 488 88 -1 -30 17 464 -417 0 0 -417 0 -18 16 0 -3 44 FY12E 911 48 0 -137 0 647 -308 0 0 -308 0 -20 0 0 -20 319 FY13E 1,135 46 0 -171 0 1,010 -238 0 0 -238 0 -22 0 0 -22 750 P&L (US$M) Revenues Operating Costs Other EBITDA D&A EBIT Net Interest Taxes Minority Interest Non ecurring rnd thers a Net Profit EPS () DPS () FY10 507 -298 -45 164 -28 136 -4 -25 -17 13 104 114 20 FY11E 1,124 -495 -52 577 -88 489 -1 -60 -59 0 369 405 22 FY12E 1,640 -677 -4 959 -48 911 0 -137 -150 0 624 685 24 FY13E 1,856 -672 -4 1,181 -46 1,135 0 -171 -192 0 771 846 27
Shares (M) Mcap US$M) ( Net debt (US$M) EV (US$M) Year nd E
Assumptions
EURUSD GBPUSD
1.33 1.55
1.38 1.59
1.33 1.61
1.35 1.65
Key Ratios PE x) ( EV/EBITDA (x) EPS Growth (%) ROE (%) Net Debt to Equity (%) Net Debt to EBITDA (x) EBITDA argin(%) M FCF Yield (%)
FY10 95.7 58.2 33% 6% -20% -2.2 32% -3%
FY11E 26.9 16.6 255% 16% -18% -0.7 51% 0%
FY12E 15.9 10.0 69% 21% -24% -0.8 58% 3%
FY13E 12.9 8.1 24% 19% -37% -1.3 64% 8%
0.0 0.0
0.0 0.0
0.0 0.0
0.0 0.0
EBIT (US$M) Loulo Gounkoto / Morila Tongon Kibali
FY10 140.9 40.4 4.4 0.0
FY11E 233.3 67.7 279.0 0.0
FY12E 581.8 61.7 305.7 0.0
FY13E 768.9 52.9 348.9 0.0
Property, Plant and Equip Long-term tockpile s Other Non Current Assets Total Assets Borrowings Payables Provisions Other Current Liabilities Borrowings Provisions Other Non Current Liabilities Total Liabilities
1,308 9 2 1,319 1,994 0 95 8 0 104 0 32 13 45 148
1,623 4 3 1,631 2,398 0 69 20 0 89 0 33 13 45 134
1,884 4 3 1,891 3,176 0 92 20 0 112 0 33 13 45 158
2,076 4 3 2,084 4,108 0 83 20 0 103 0 33 13 45 149
NPV Loulo Gounkoto / Morila Tongon Kibali Other Resources Corporate Exploration Net Cash (Debt) Total US$
(US$M) 2,638 97 1,505 528 112 -229 0 403 5,053
Per Share 28.93 1.07 18.54 5.78 1.23 -2.52 0.00 4.41 57.45 18.66 0.69 11.96 3.73 0.80 -1.62 0.00 2.85 37.06
Total Equity
Source: Datastream, Company data, Nomura estimates
1,846
2,264
3,018
3,959
42
January 18, 2012
43
January 18, 2012
AVM Avocet Mining (Buy, 310p TP)

Avocet Mining plans to use its cash flow to once again expand the Inata gold mine. Although there are challenges at Inata, the resource potential from the wider Belahouro district will provide Avocet with a strong platform for growth, in our view.
Upside potential at Inata to drive West African growth story

Now a focused West African producer, we expect AVM to be a key beneficiary of our emerging gold sector themes Avocet Mining had a busy 2011. The company was transformed by the USD 200m sale of its former South-East Asian gold assets. The sale not only streamlined Avocet into a focused West African pure-play, but it also enabled the company to pay down debt and partially restructure its hedge book, enabling greater exposure to the gold price. This lower net debt position in conjunction with higher cash flows allows Avocet to focus on speeding up its growth profile via aggressive drilling and mine expansion in West Africa. AVM shareholders went unrewarded in 2011 as the share price fell by 22% alongside the difficult equity market. Sharply higher cash costs and the emergence of refractory ore at the main Inata operation also contributed to the sell-off. In our view, Avocet shares should outperform in 2012 as the company continues to delineate resources and provides plans on the further expansion at Inata. In addition, we expect that the rate of cost inflation will slow as the mine sees remedial actions taken in response to the pregrobbing issues that arose in 2012. Avocet fits well within our sector themes as increased M&A activity and a renewed focus on growth should increase the tension on sector P/NAV multiples, especially as Avocet is now a one-mine producer. Inata to keep growing The Inata gold mine (90%) in Burkina Faso is beginning to show its potential despite a disappointing 2011 drilling campaign. The drilling programme failed to achieve its targets owing to poor contractor performance and labour disruptions. This resulted in AVM reporting the drilling results for 2010/11 in two steps with the second tranche of drilling results now expected in Q1 2012. The company expects the drilling campaign in the Belahouro district (which hosts Inata) to delineate enough reserves/resources to expand the operation once again while maintaining a mine life above seven years. (In 2011, plant capacity and mining equipment were augmented to increase production capacity to approximately 165,000oz). AVM expects to complete a scoping study in Q1 2012 on a second expansion to 240,000oz of gold production capacity, with first production in 2013.
Fig. 87: Belahouro district hosts potential for significant resource growth
Drilling in 2012 to focus on regional targets
The sale of the South-East Asian assets has transformed the company
The strategic gains made in 2011 were not rewarded in share price performance
Q1 is expected to provide positive catalysts including an increase in reserves and the scoping study on another expansion
44
January 18, 2012
Guinea to provide blue sky beyond Inata Beyond Inata, Avocet continues to progress the Tri-K exploration asset in the Siguiri Basin in Guinea. Guinea hosts two large scale gold mines: AngloGold Ashantis 5.6moz Siguiri mine and Nord Golds 5.9moz LEFA mine. A total of USD 40.5m is budgeted group wide for the 2011/12 exploration season, and of this, USD 15m is likely to be spent in Guinea. Current resources of 2.2moz at Tri-K and the Guinean exploration programme could provide a meaningful catalyst for the shares in 2012. Expanded, de-hedged Inata not priced in Following Avocets decision to use USD 40m in proceeds from the South-East Asian asset sale to reduce the size of the hedge book, the Inata mine is now contracted to deliver 33,000oz per year at a price of USD 950/oz until 2018 vs. 100,000oz at USD 970/oz until 2014 previously. Although this increases the length of the hedge, the transaction has increased Inatas exposure to the gold price (which we now calculate to be 90% for 2012) and was incrementally positive to our NPV assumptions. An expansion of Inata is likely to only reduce the impact of the hedge further. We calculate a positive NPV of USD 465m for a USD 150m capital expansion (conservatively higher than management guidance of USD 120m). This could generate gold production capacity of 240,000oz by mid-2013. We have included this value (with a 20% completion risk) in our valuation. Following the recent difficulties at the operations, the market has thus far taken a wait-and-see approach, and we believe this provides an interesting entry point. Valuation Nomuras one-year forward sum-of-the-parts NAV estimate (using Nomuras year-end quarterly gold price forecast of USD 1,900/oz and a 5% discount rate) provides a value of 348p/share. At the current spot gold price of USD 1,640/oz Nomura calculates a NAV of 285p/per share implying a 0.8x P/NAV multiple. Nomura initiates on AVM with a Buy rating based on a one-year exit gold price of USD 1,900/oz and a P/NAV multiple of 0.9x, which equates to 310p.
Fig. 88: Inata accounts for the vast majority of our asset level valuation
Valuation (NPV @ 5%) Inata Other Resources Corporate Exploration Net Cash (Debt) Total $M 1006.6 124.1 -116.7 0.0 -85.4 928.6 0Yr $4.93 $0.62 -$0.58 $0.00 -$0.43 $4.54 +1 Yr $5.04 $0.62 -$0.57 $0.00 $0.30 $5.39 +2 Yr $4.83 $0.62 -$0.55 $0.00 $0.51 $5.41 +3 Yr $4.53 $0.62 -$0.53 $0.00 $1.36 $5.99
Siguiri Basin in Guinea provides upside potential for the company in Koulekoun and Koderian targets
The impact from the hedge has been reduced by the proceeds from the asset sale we calculate AVM will achieve 90% of spot in 2012
An Inata expansion, unrisked, would provide an incremental USD 252m in NAV
1.55 599 348p 214p 0.6x 0.9x 310p 45%
Source: Nomura estimates based on flat one-year forward gold price est. of USD 1,900/oz
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January 18, 2012
Fig. 89: NPV waterfall chart

Value driven by flagship Inata asset
400p 350p 300p 250p 200p 150p 100p 50p 0p -50p Inata Other Resources Corporate Exploration Net Cash (Debt) Total
Fig. 90: Valuation trend

Short mine life and near-term cost inflation keep valuation relatively flat
600p 500p 400p 300p 200p 100p 0p 0Yr +1 Yr +2 Yr +3 Yr 348p 293p 349p 386p

West African focused gold producer
Fig. 92: AVM production and cash cost forecasts

Cash costs to moderate following potential expansion
250,000 900.00 800.00 200,000 700.00
gold production (oz)
150,000
500.00 400.00 300.00
100,000
50,000
200.00 100.00
0 Inata
2009 2010 Cost per ounce
2011E
2012E
2013E
2014E
2015E
0.00
US$/oz cash costs
600.00
46
January 18, 2012
Company summary
Avocet Mining is an LSE- and Oslo-listed junior gold producer with operations in Burkina Faso and Guinea. Avocet divested its non-core Asian assets (the Penjom gold mine in Malaysia and the North Lanut gold mine in Indonesia) in 2011 for USD 200m in cash. The companys flagship asset is the Inata gold mine in Burkina Faso, responsible for 100% of group production. AVM also has exploration activities in Guinea and Mali.
Asset summary
Inata Gold Mine (90%) Burkina Faso The open-pit Inata gold mine is located in northern Burkina Faso near the border with Mali. The mine produced 137,700oz of gold in 2010 at a cash cost of USD 531/oz. We forecast production of 164,000oz of gold in 2011 at a cash cost of USD 706/oz. Avocet Mining acquired the Inata gold development project in 2009 by purchasing Wega Mining, a junior Norwegian mining company, for USD 109m. The sale was at a distressed price after cost overruns and the global financial crisis placed the development in doubt. Following the acquisition and a reset development plan, Avocet brought Inata into production, on time, and on budget, in Q2 2009. Total capex was USD 195m (of which USD 43m was paid by Avocet post acquisition). Since then, Inata has emerged as a leading gold mine in Burkina Faso, which itself is emerging as a significant West African producer. In 2010, Burkina Faso produced 25 tonnes of gold, up 85% on 2009. This ranks the country 5th in Africa behind South Africa, Ghana, Tanzania and Mali in total gold production. As of 30 June, Inata had 1.3moz of attributable gold reserves at an average grade of 1.9g/t and 2.1moz of attributable gold resource at an average grade of 1.7g/t. The level of reserves has been constrained by the disappointing 2010/11 drilling campaign (in West Africa, generally August and September are the wet season and exploration activities are halted). The company expects to increase its booked reserves in Q1 as follow-up drilling and the results from over 16,000 assays are announced to the market. The company has a target of 1.6moz of attributable gold reserves, which would imply a mine life of over 10 years based on current mining rates.
Fig. 93: Inata Gold Mine
Avocet's flagship asset
Inata was purchased by Avocet as part of the Wega Mining acquisition in 2009 Burkina Faso ranked 5th in African gold production in 2012
Source: Avocet Mining
Expansion potential In July 2011, Avocet announced that it undergoing a new scoping study to increase production at Inata, again. The former owners of the project were focussed on bringing Inata into production as soon as possible. This, in the context of successful post-acquisition drilling results, led to the mine being built with far too small a production capacity for the total potential resource base. Avocet has set out to change this.
47
January 18, 2012
The mine was expanded in 2010 from its original production capacity of 2.2m tonnes per annum of throughput to 2.7m tonnes via the expansion of the elusion circuit and the addition of mining equipment. Avocet is now looking to increase capacity further. Initial plans are for Avocet to announce the results of a scoping study analysing the potential to expand production to 4.0m tonnes of throughput which would allow for annual production of c. 240,000oz. Management expects capital expenditure to be in the region of USD 120m. We believe the announcement of the commissioning of this scoping study in advance of the release of the full drill results from the 2010/2011 season bodes well for the potential from the drill results in Q1. Fig. 87 shows that there remains significant regional potential on top of the near-pit reserve extensions seen in Fig. 94.
Fig. 94: Avocets understanding of the ore body has improved
Source: Avocet Mining
We have included an expansion in our base-case scenario; however, we have risked its value by 20% as the full value generated will be dependent on new, near-mine reserves being added at similar grades to the current reserve statement. In addition, we have included a 20% cost overrun on the capital expenditure to remain conservative in our estimates. Our analysis provides a positive (unrisked) NPV of USD 465m. Tri-K (85%) Guinea Tri-K is an exploration project in the north-east of Guinea consisting of three main licences: Koulkon, Kodiran and Kodiafaran. Per an update in December, drilling at these sites has identified a combined 2.2moz of inferred resource at Koulkoun and Kodiran and the former is now at the feasibility-study stage. The target is to continue to increase mineral resources to 2.5moz before commencing construction. Despite these mineral resources, Guinea even in the context of West Africa is a difficult country in which to operate (ranked 179 of 183 in the World Banks Ease of doing business index). The newly formed government of Guinea did, however, recently release a draft of a new Mining Code and the company expects to meet officials in Q1 2012. Avocets decision to move to the construction phase, potentially in 2012, will be dependent on both the outcome of these meetings and continued positive results from their exploratory drilling.
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January 18, 2012
Fig. 95: Reserves and resources

Total Reserves Deposit Inata Total Country Burkina Faso Ow nership 90% Tonnes Mt 23.6 23.6 Gold Contained gold (g/t) Moz 1.9 1.5 1.9 1.5 Attributable Moz 1.3 1.3
Total Resources (incl. inferred) Deposit Inata Souma Koulekoun Kodiran Total Ow nership 90% 90% 100% 100% Tonnes Mt 33.2 10.7 44.2 7.3 88.2 Gold Contained gold (g/t) Moz 1.7 1.8 1.7 0.6 1.3 1.8 1.8 0.4 1.5 4.2 Attributable Moz 1.6 0.5 1.8 0.4 3.9
Burkina Faso Burkina Faso Guinea Guinea
Cost inflation in 2011 Cash costs increased sharply in 2011 at Inata. Higher fuel prices, higher fuel costs for explosives and higher national salaries saw cash costs increase from USD 533/oz in Q1 2011 to USD 830/oz in Q3 2011. We expect cash costs to moderate in Q4 owing to higher production rates, bringing the 2011 average to USD 706/oz. We do expect the cost inflation to continue, however, and we calculate cash costs will approach USD 780/oz in 2013 before falling with the economies of scale that would come from a potential expansion to a longer-term target of USD 650/oz. Despite this, we continue to see the company increase its EBITDA margins owing to the increasing gold price. Risks In our view, the key risks to our investment thesis would be a lack of exploration success in 2012 in Burkina Faso and to a lesser extent in Guinea. The political situation of both Burkina Faso and Guinea, although generally stable at present, remain elevated. In addition, there has been a lawsuit filed by its former Indonesian partners. As the company has divested all of its Indonesian operations, we would expect impact from this USD 2.0bn lawsuit (total transaction of USD 200m) to be viewed as a non-event. Balance sheet and cash flow Avocets cash flows have been affected by a number of non-recurring items in 2011, including the disposal of the companys Asian assets, the buy-back of a number of forward contracts at a cost of USD 40m, and repayment of USD 43m debt. As a result, Avocet has a strong balance sheet, with around USD 120m of cash and only USD 35m of remaining debt. We forecast free cash flow to be negative in 2012, as a result of increased capital expenditure; although we expect that the business will then generate positive cash flows. Managements decision to announce a dividend policy commencing in 2012 reflects its confidence in the underlying financial position of the business.
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January 18, 2012
Fig. 96: EBITDA and capex profile

250 200 150 100 50 0 -50 -100 -150 -200 2010 2011e Capex ($M) 2012e Exploration 2013e 2014e 2015e 2016e
Fig. 97: Debt profile

From 2012, Avocet should begin to reap the rewards of its investment
600 500 400 300 200 100 0 -100 2010 2011e 2012e 2013e 2014e 2015e 2016e
EBITDA ($M)
Fig. 98: EPS and P/E forecasts @ USD 1,900/oz flat gold est
We estimate that capital allowances will be exhausted in 2016
100 80 60 40 20 0 50 40 30 20 10 0
Fig. 99: EPS and P/E forecasts at long-term forecasts

100 80 60 40 20 0 50 40 30 20 10 0
2010 EPS
2011e P/E (x)
2012e
2013e
2014e
2015e
2016e
2010 EPS
2011e P/E (x)
2012e
2013e
2014e
2015e
2016e

350 300 250 200

30 25 20 15
150
10
100 50 0
5 0
Nov -10
May-10
May-11
Nov -11
Feb-10
Mar-10
Feb-11
Jul-10
Mar-11
Oct-10
Jul-11
Dec-09
Aug-10
Sep-10
Dec-10
Aug-11
Sep-11
Oct-11
Apr-10
Apr-11
Av ocet mining
DS World gold mining index
Forward P/E
Source: Datastream
Source: Datastream
Management and significant shareholders Board/management Chairman Russell Edey CEO Brett Richards Finance director Mike Norris Significant shareholders Elliot Associates 18.0% Datum A.S 12.3% J.P. Morgan 6.5%
Dec-11
Jan-10
Jun-10
Jan-11
Jun-11
50
January 18, 2012
Avocet Mining Primary Analyst: Tyler Broda Rating Target Price (GBp) Price (GBp) Buy Bloomberg Ticker 310 AVM LN 214 Reuters DataStream Ticker AVM ( 200 653 -85 567 December P&L (US$M) Revenues Operating Costs Other EBITDA D&A EBIT Net Interest Taxes Other Minority interest Net Profit EPS () DPS ) FY10 255 -143 -25 86 -48 38 -7 -15 3 -4 15 7 0 FY11E 209 -113 -10 87 -36 51 -5 3 -31 -1 17 8 4 FY12E 252 -121 -22 109 -32 77 -1 0 0 -10 66 33 4 FY13E 307 -129 -22 156 -35 121 1 0 0 -14 107 53 4
Shares M)
Mcap (US$M) Net debt / (cash) (US$M) EV (US$M) Year nd E
Assumptions Gold (US$/oz) Silver (US$/oz) EURUSD GBPUSD
FY10 1,225 20.17 1.33 1.55
FY11E 1,571 38.00 1.38 1.59
FY12E 1,788 42.00 1.33 1.61
FY13E 2,063 49.00 1.35 1.65
Cash Flows (US$M) Profit after tax Tax expense Depreciation Working capital changes Net Interest Income Tax Paid/Refunded Other non-operating Operating Cash Flows Capex Disposals Exploration Other Investing Cash Flows Change in Borrowings Dividends Equity Issues Other Financing Cash Flows Net cash flow
FY10 18 15 48 -28 -5 1 14 63 -49 10 -13 4 -48 -12 0 0 0 -12 3
FY11E 18 -3 36 -29 -2 1 34 56 -48 177 -23 17 123 -49 -17 -5 -40 -111 68
FY12E 76 0 32 -3 0 0 0 105 -113 0 -20 0 -133 -24 -20 0 0 -44 -72
FY13E 122 0 35 -17 0 0 0 140 -43 0 -20 0 -63 -5 -20 0 0 -25 52
Key Ratios PE (x) EV/EBITDA (x) EPS Growth (%) ROE (%) Net Debt to Equity (%) Net Debt to EBITDA (x) Dividend Yield (%) FCF Yield (%)
FY10 43.8 6.6 na 5% 0.1 0.3 0% 0%
FY11E 39.9 6.5 10% 4% -0.2 -1.1 3% -2%
FY12E 10.0 5.2 299% 15% -0.1 -0.4 3% -4%
FY13E 6.2 3.6 62% 19% -0.2 -0.7 3% 12%
Production & Costs Gold Production (koz) Cash cost (US$/oz)
FY10 138 531.0
FY11E 164 705.9
FY12E 156 774.7
FY13E 167 781.2
Balance Sheet (US$M) EBIT (US$M) Inata FY10 38 FY11E 61 FY12E 99 FY13E 143 Cash Recievables Inventories Current Assets Properties, Equipments an Intangibles Other Non Current Assets Total Assets Borrowings Payables Current Liabilities Borrowings Provisions Other Non Current Liabilities Total Liabilities Total Equity
Source: Datastream, company data, Nomura estimates
FY10 50 16 20 86 240 11 22 273 359 24 28 52 54 10 4 67 120 319
FY11E 121 27 43 191 251 34 4 289 479 29 47 76 0 6 4 10 86 395
FY12E 51 27 43 120 333 54 4 390 510 5 44 49 0 6 4 10 59 451
FY13E 103 34 56 193 340 74 4 417 610 0 47 47 0 6 4 10 57 553
NPV Inata Other esources R Corporate Exploration Net Cash (Debt) Total
(US$M) 704.4275 124.10 -116.73 0.00 -85.37 626.42
Per Share $ $3.43 $221.50 $0.62 $40.12 -$0.58 -$37.74 $0.00 $0.00 -$0.43 -$27.60 $3.04 $196.28
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January 18, 2012
ABG African Barrick Gold (Buy, 750p TP)

African Barrick Golds London history has been less than impressive, although we believe that the cash build on the companys balance sheet cannot be ignored in the context of potential transformational changes. We also see a significant value gap.
From Tanzanian Barrick to being a truly African Barrick cash build to provide impetus for strategic change
Net cash of USD 1.7bn and a free cash flow yield of 24% by 2013 African Barrick Gold has already entered into a significant cash generation phase, generating near USD 600m in net cash in the past two years. Our forecasts show that this cash build will continue (subject to no new capex from as-yet-unconfirmed growth projects) and add an additional USD 1.0bn based on our higher forecast gold prices and a production level of 760,000oz in 2013E. Some of this excess cash is likely to be spent on the potential North Mara underground mine or on the construction of the Nyanzaga greenfields project, although we expect that the cash position of the company will remain extremely robust in the near term. This significantly increases flexibility at the corporate level. Of the six companies covered in this report, ABG ranks highest on a two-year forward FCF yield basis (Fig. 70). In our view, the two leading options following this cash build would be either a sizable dividend or the funds to make a meaningful acquisition. A dividend would see funds flow back up to parent Barrick Gold (74%) which will also be experiencing the positive impact from improved gold prices. As growth has always been a stated strategy for African Barrick since its IPO in March 2011, it may well look towards an acquisition, and perhaps sooner than its peers. If our forecast of a structural increase in M&A activity is correct, then we would expect the currently cheaper sector valuations to increase over time as the structural industry cash-build progresses. Therefore, companies that made an acquisition sooner rather than later would benefit. ABG has less organic growth opportunities relative to peers and the company has consistently included acquisitions as a key strategy for growth, priming the company for a near-term transaction. What a difference a year might make The current African Barrick Gold P/NAV multiple (which we calculate to be 0.6x P/NAV at a spot gold of USD 1,640/oz), in our view, suffers from, not only lowered market expectations (failure to meet guidance in first two years as a public company), but also from concentrated political risk. The declines in P/E multiples in Randgold and Centamin in 2011 owing to political change in the Cote DIvoire and Egypt, respectively, has understandably added to the sectors de-rating, in our view. Should ABG make a, say, USD 1bn acquisition, based on consensus African mid-cap and junior production multiples, this could add on average 250,000oz of production and 5.0moz of resource, or growth of c.35% and 20%, respectively.
Acting sooner rather than later could provide value in a competitive M&A landscape ABG has the highest 2013 free cash flow yield of the companies in our report
ABG will likely benefit from geographical diversification
52
January 18, 2012
Fig. 102: West African gold producers

3500
Fig. 103: African production and resource multiples

10,000 9,000 8,000 8,855.4
3000
2500
7,000 6,000 6,047.9 5,345.8
6,757.7 6,294.9
2000
5,000 4,000 3,358.9 3,445.7 3,712.2
1500
3,000 2,000
2,186.8
2,462.5
2,838.5
2,917.6
2,988.6
1000
1,000 0
149.1
530.0 143.4 112.4 80.6 99.2 146.3
195.0
177.0
253.4
183.2
71.6
372.4
500
AFRICAN BARRICK GOLD EV
SEMAFO
PERSEUS MINING
RESOLUTE MINING
NEVSUN RESOURCES
HIGH RIVER GOLD MINES
BANRO
AVION GOLD
AVOCET MINING TERANGA GOLD
MV
EV/oz production
EV/oz resource
Should a potential transaction be structured to include a share element, this could potentially lower the parent Barricks share and increase the public free float for ABG. Of course, buying ounces at market or above market prices is difficult to make financial sense of at the time of the transaction (especially following the sell-off at the end of 2011). However, Nomura believes that a transformation that could include: a) a new geography, b) an increased free float, and c) new development growth could see the shares re-rate substantially beyond this. We have included a re-rating to 0.8x from the current spot multiple of 0.6x in our target price multiple as current sentiment has fallen owing to the most recent downgrade and as investors (rightly so) are likely to proceed with caution. Much like in 2011, however, for African Barrick to achieve a re-rating, the company will need to see a solid year of production. That said, we do not believe that this value gap will be able to persist with the strategic options available to the company and a stronger gold price. Valuation Nomuras one-year forward sum-of-the-parts NAV estimate (which is run using Nomuras one-year forward gold price forecast of USD 1,900/oz flat) provides a value of 941p per share. At the current spot gold price of USD 1,640/oz, Nomura calculates a NAV of 724p per share, which implies ABG is trading at a spot P/NAV multiple of 0.6x. Nomura initiates on ABG with a Buy rating based on a one-year forward P/NAV target multiple of 0.8x, which equates to 750p share.
Fig. 104: ABG valuation
Bulyanhulu continues to drive the valuation
Valuation (NPV @ 5%) Bulyanhulu Buzw agi North Mara Tulaw aka Other Resources Corporate Exploration Hedging Investments Net Cash (Debt) Total $M 3717.5 1005.5 1303.3 63.1 79.6 -775.2 0.0 0.0 0.0 712.5 6,106 0Yr $9.06 $2.45 $3.18 $0.15 $0.19 -$1.89 $0.00 $0.00 $0.00 $1.74 $14.89 +1 Yr $8.81 $2.16 $2.24 $0.00 $0.19 -$1.77 $0.00 $0.00 $0.00 $2.95 $14.58 +2 Yr $8.52 $1.91 $2.35 $0.00 $0.19 -$1.66 $0.00 $0.00 $0.00 $4.22 $15.53 +3 Yr $8.22 $1.71 $1.90 $0.00 $0.19 -$1.54 $0.00 $0.00 $0.00 $5.40 $15.89
Transformative transaction could see a new geography, increased free float and new growth options
ABG shows value even at current levels
GBPUSD Total GBP NAV Current share price (p) P/NAV Target multiple Target price Upside
1.55 3,940 941p 462 0.5x 0.8x 750p 62%
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January 18, 2012
Fig. 105: NPV waterfall chart

Bulyanhulu maintains its top asset status as Buzwagi struggles
1000p 900p 800p 700p 600p 500p 400p 300p 200p 100p 0p
Fig. 106: Valuation trend

Lack of growth in current visibility keeps value curve relatively flat
NPV Curve 1,200 1,000 800 600 400 200 1002p 1025p
961p
941p
Bulyanhulu Buzwagi North Mara Tulawaka Net Cash (Debt)
Total
0Yr
+1 Yr
+2 Yr
+3 Yr
Source: Nomura research based on flat one-year forward gold price est. of USD 1,900/oz
Source: Nomura research based on flat one-year forward gold price est. of USD 1,900/oz

African Barrick Gold has four producing mines, all located in Tanzania
Fig. 108: ABG production and cash costs

Current production profile ready for a strategic step change
900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0
2009 Bulyanhulu
2010
2011E Buzwagi
2012E North Mara
2013E Tulawaka
2014E
2015E
Cash cost per ounce
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January 18, 2012
Company summary
African Barrick Gold is an LSE-listed gold producer with four producing gold mines located in Tanzania. The company was formed via a spin-out of the African assets of Barrick Gold in March 2010. African Barrick Gold operates the Bulyanhulu underground mine, the North Mara openpit gold mine, the Buzwagi open-pit gold mine, and the underground Tulawaka mine. ABG also has multiple exploration targets in Tanzania. Not without its risks African Barrick Gold has had a turbulent time as a publicly-listed gold company since it was spun out from Barrick Gold in March 2010. In its two years as a standalone company, ABG has twice missed production guidance. At Buzwagi, the company discovered an organised fuel theft ring in October 2010. The remedial response in conjunction with unstable power supplies caused production to be lower than expected. In May 2011, seven illegal miners were killed (by local police) at ABGs North Mara mine in a disturbance that highlighted the ongoing problems between the community and the mine. Although management is proactively addressing this issue, the risks surrounding a difficult operating location like remote Tanzania are likely to remain. Power problems caused the most recent production downgrade as the company notified the market in December 2011 that it would not reach its 2011 guidance of 700,000 ounces of gold. Cash costs and cost inflation in Tanzania are also likely to be a risk. The structural changes at Buzwagi, see below, and continued labour pressures could see average group cash costs move above USD 800/oz in 2015. This would place ABG significantly higher than current global average cash costs of ~USD 625 per ounce.
Fig. 109: A difficult first two years since going public
African Barrick Gold shares have yet to participate in gold's bull market
Buzwagi fuel t heft r ing discovered, pr oduction guidance r educed to 2009 l evel of 716 k oz of g old
African Barrick Gold operates in a jurisdiction with higher political and socio-economic risks than average
ABG IPO at 575p
Unrest at North Mara mine sees 7 killed European debt c risis
700 650 600 550 500 450 400 350 300
Power troubles see guidance dow n t o just short of 700koz
2010 g uidance reduced to 750-800koz of gold @ $500-$550/oz
Full year production announced at 700koz of g old
Press reports surrounding pot ential Tanzanian s uper profits tax
AFRICAN BARRICK GOLD

Source: Datastream
We think there are two main risks to our forecasts: 1) power-related problems, and 2) tax/royalty changes. The ongoing limited and variable grid power supply in Tanzania available through stateowned TANESCO has disrupted group production plans. Although the miss of 2011 guidance of 700,000 ounces is likely to be limited (we expect production of 697,000 ounces of gold in 2011), in terms of production, the group is now likely to see structurally higher costs from running back up power. There remain questions regarding power
Power problems will likely have limited impact on forward production, although costs could be affected
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January 18, 2012
availability for expansions. However, by the end of Q1 2012, all of ABGs operations will have diesel-generated backup power available to keep current operations unaffected by cuts. This should see ABG have a higher probability of meeting guidance. Second, as in other African (and global) jurisdictions, governments are increasingly looking at ways to increase their share of the high profits from basic materials sectors. The Tanzanian government is reviewing various aspects of the overall government share including fuel tax rebates and royalties. ABG, like other operating mining companies, has mining development agreements (MDAs) that were set at the time of the original granting of the licences. They provide for, among other things, a royalty rate of 3% and a corporate tax rate of 30%. African Barrick Gold has tax loss carry-forwards of over USD 1bn in Tanzania and therefore effectively at the moment the government is only receiving cash taxes as part of royalties. Negotiations between the mining companies and the government remain ongoing, although the Tanzanian government, via newspaper announcements, has increased the royalty rate to 4% gross vs. from 3% net. We have increased our royalty forecasts to 4% in future periods from 3%, although we also note that we are enabling the cash flows from ABGs Tanzanian assets to benefit from the full use of the tax-loss carryforwards.
Taxation changes in Tanzania provide a risk to our forecasts
Asset summary
Bulyanhulu gold mine underground (100%) The Bulyanhulu gold mine is located in north-western Tanzania, 150km southwest of Mwanza, near Lake Victoria. In 2010, the mine produced 260,000oz of gold at cash costs of USD 649/oz. Bulyanhulu also produces by-products of copper and silver. Nomura estimates gold will account for 92% of revenues in 2011 with the balance of revenues being mainly from copper. The mine hosts total reserves of 29.3m tonnes at a grade of 11.7g/t, making this a higher grade underground operation. This amounts to 11.0m ounces in reserve (with an additional 6.2moz of resources) and the company expects production to continue for over 25 years. The company is reviewing a series of improvements that could see production increase sequentially over the coming years. Current shaft capacity is for 1.1m tonnes per annum hauled and this is the main bottleneck to higher production.
Fig. 110: Bulyanhulu production estimates
Steadily improving production should see cash costs stay in check
350 300 Production (koz) 250 200 150 100 50 0 2009A 2010A 2011E 2012E 2013E 2014E 2015E 1,000 900 800 700 600 500 400 300 200 100 0 Cash cost per ounce (US$/oz) (not incl royalties)
Long-life Bulyanhulu remains ABGs main asset and should provide a solid base for the group as improvements increase production
Nomura forecasts 2011 production of 260,000oz of gold at a cash cost of USD 723/oz and 2012 production of 282,000oz at cash cost of USD 714/oz. The underground mining is transitioning to a conventional narrow-vein, long-hole open stoping method from an underground trackless system. Year-to-date reported 2011 production has improved 3% over 2010 and there is a focus on driving increased tonnes hoisted. This should bode well for the operations as we expect mined grade to revert closer to reserve grade once blockages in the paste fill lines are alleviated and the mine returns to higher grade levels.
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January 18, 2012
Despite being the flagship, steady-state, main cash flow generating asset for African Barrick Gold, there is potential for Bulyanhulu to add material upside to numbers. Scoping studies/preliminary assessments are being undertaken for: Bulyanhulu Upper East Zone (Q1 2012) located 2.5km east of the main shaft is the higher grade Upper East Zone scheduled to be mined at a later date in the mine plan. ABG is progressing a feasibility study in order to determine the best mining method, although infrastructure is already being increased. The company expects to provide an update in Q1 2012 (formal approval by the board is to follow in Q3 once stoping method tests are completed). We believe that this could bring forward an increase of grade, which could increase near-term production by c. 10%. Tailings (Q1 2012) ABG is progressing a feasibility study to expand the processing plant at Bulyanhulu to process tailings. The tailings hold an estimated 8m-10m tonnes of material at an average grade near 1.3g/t, which could provide an incremental 30koz of gold per annum. A small capital programme to increase the plant size (which could work well should unrelated near surface exploration be successful), in conjunction with the higher-grade ore from underground and the tailings could see production increase to closer to 400,000oz of gold per annum, significantly reducing unit costs. Surface exploration Above the Upper East Zone is the potential for open-pit mining of Reefs 1 and 2 from surface. Recent drilling shows results confirming near surface mineralisation including 5m @ 36.3g/t from 32m, 6m @ 4.5g/t from 77m and 24m @ 1.4g/t from 110m. There are further holes still pending and infill drilling is likely to develop resources into 2012. In conjunction with the tailings development, near surface material should be able to fill the excess capacity at the Bulyanhulu plant and incrementally increase ounces. North Mara open pit (100%) ABGs North Mara mine is located near the Kenyan Border approximately 100km east of Lake Victoria, the remotest of ABGs Tanzanian mines. In 2010, North Mara produced 213,000oz of gold at a cash cost USD 486/oz. Beginning production in 2002, North Mara was added to the group in 2006 in as part of Barrick Golds acquisition of Placer Dome. As of 31 December 2010, North Mara hosted 27.6m tonnes of ore at an average grade of 3.2g/t, containing 2.8moz of gold. The ore is mined from three open pits: Nyabirama, Gokona, Nyabienga and is processed using a conventional CIL process, which produces gold dor. Nomura forecasts the mine life will continue at least until 2020 should no further mineralisation be converted into reserve. There remains exploration upside potential in the region, especially in the Gokona Corridor (15km of unexplored ground between the Gokona and Nyanbenga open pits).
Fig. 111: North Mara production and cash cost estimates
350 300 Production (koz) 250 200 150 100 50 0 2009A 2010A 2011E 2012E 2013E 2014E 2015E 1,000 Cash cost per ounce (US$/oz) (not incl royalties) 900 800 700 600 500 400 300 200 100 0
Bringing forward the Upper East Zone, processing tailings and near surface potential could provide upside to the operations
Higher grades from North Mara following the focus on waste stripping in 2011 should provide a return to 2010 production
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Performance in 2011 has been heavily affected by an increase in waste stripping in order to access higher-grade materials for the coming years. A reliance on lower-grade stockpiles through this period of pre-stripping has caused production to be down sharply in 2011 and this had a commensurate effect on costs. We forecast production of 177,000oz of gold at a cash cost of USD 785/oz in 2011 growing to 214,500oz of gold at a moderated cash cost of USD 680/oz in 2012. We forecast further increases in production in 2013 driven largely by an increase in grades following the completion of the Gokona pit pushback. A key risk to our forecast production profile is the renewal of the mining licence at North Mara, which was expected to be completed in September. The current licence allows for North Mara to be mined until a determination on the licence renewal has been made. In addition, the company has yet to receive permitting approval for new waste dumps, for which thus far, through mine sequencing, it has been able to mitigate the impact. Underground at all three North Mara pits shows promise North Mara Underground provides perhaps the best option for organic growth, in our view. ABG has commissioned a feasibility study, the results of which we expect to be released in the coming weeks, which covers the potential for an underground development to be created below the Gokona and Nyabienga pits. Recent grades, especially from drilling below the Gokona pit (including multiple 2m-5m intersections over 10g/t), appear to provide the basis for potential high grade zones. In our view, this underground development could add to the production profile towards the end of the decade and would aid in addressing a general perception that African Barrick Gold is exgrowth.
Fig. 112: Gokona underground provides upside potential at North Mara
Although the final pit will be deeper at higher gold prices, there remains significant underground material
North Mara Underground is likely to provide a catalyst as the feasibility study is announced in 2012
Buzwagi gold mine open pit (100%) Commissioned in 2009, the Buzwagi open-pit operation is found 6km southeast from the town of Kahama in Northern Tanzania. In 2010, the mine produced 186,000oz of gold at a cash cost of USD 713/oz, below original guidance, following the discovery of an organised fuel theft ring that had integrated into the workforce at the mine. The remedial actions, including the dismissal of a significant portion of the mining staff, caused the mine scheduling to be delayed. This meant more time was spent mining the transitional ore zone, which caused problems with both throughput at the plant and recoveries.
Disappointing Buzwagi still to contribute USD 110m in EBITDA per annum at current gold price
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The response from parent Barrick Gold, and in general, the performance in FY11 (with the exception of the SAG mill motor outage in Q2), should not be overlooked in Nomuras view. Barrick seconded 20 operators and shifted management resources across the organisation to help African Barrick get Buzwagi back on track quicker than if there had been no external aid. This, in our view, provides a competitive advantage for ABG and its ability to manage multiple projects despite the various disappointments over the past two years. Buzwagi is a shear-hosted quartz veined deposit hosted in a porphyritic granite. As at 31 December 2010, the Buzwagi mine hosted 55.6mt of ore at an average grade of 1.6g/t containing 2.9moz of gold. The ore is mined via conventional open-pit methods and is processed in a standard gravity flotation leach plant. The mine produces both a gold/copper concentrate and gold dor bars. The capacity of the plant is 4.4m tonnes of throughput per annum.
Fig. 113: Buzwagi cash costs and estimates
Buzwagi cash costs are to be higher than expected at IPO, a return to reserve grade reduces production
350 300
Production (koz)
1,200
Cash cost per ounce (US$/oz) (not incl royalties)
1,000
250 200
800
600 150 100 50 0 400
200
2009A
2010A
2011E
2012E
2013E
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2015E
The outlook for Buzwagi, however, is not as positive as it is for the other mines in the portfolio. Following the decision to place the mine back on diesel generation owing to grid power being too unreliable, costs have structurally increased. In addition, lower grades and a higher strip ratio are likely to cause higher unit costs. Golden Ridge to provide potential upside ABG is developing a resource 55km north of from Buzwagi named Golden Ridge. The initial indicated open-pit resource of 527,000oz of gold at a grade of 2.9g/t is being investigated as a potential higher grade feed for the Buzwagi operation. The feasibility study results have been pushed back to mid-2012 as current indications are that the economics may perhaps be constrained by the transportation charges, which would be incurred should Golden Ridge be progressed as a satellite operation. The company is now exploring higher grade shoots at depth as well as attempting to convert some of the 152,000oz of inferred resource to reserve. We have not included any Golden Ridge ounces in our Buzwagi model (and have valued them on USD 45/oz of resource), although there remains potential for an increase in grade mid-decade at Buzwagi or for a potential standalone development to be explored. Tulawaka underground gold mine (70%) The end-of-life Tulawaka underground mine is the fourth and smallest producing asset in the group. The company originally expected to decommission the mine in 2011, but the higher gold prices are making it economically sensible for ABG to extend the mine life through further exploration drilling. The mining is done using a narrow-vein long hole stoping method in an orebody with a quartz vein system with both free and disseminated gold. In 2010, Tulawaka produced 42,000oz of gold at a cash cost of USD 769/oz (29,000oz of gold attributable). The plant, which is a conventional gravity and CIL process plant, has a throughput capacity of 480,000 tonnes per annum.
Golden Ridge potential could help Buzwagi, eventually
At current prices Tulawaka could keep operating until 2014 when tailings and waste dump constraints would force the mine to shut
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January 18, 2012
Higher mined grades have driven higher production thus far in 2011 and Nomura forecasts production of 57,000oz (39,700oz) at a cash cost of USD 651/oz. Nomura is forecasting production until the end of 2012, versus the current mine plan of mid-2012. Should current gold prices persist, we expect that further mineralisation between the 10 and 15 levels would provide two more years of production before tailings capacity was reduced (at approximately 50koz per annum). Although small, Tulawaka may provide incremental production upside potential into the middle of the decade at relatively low capital cost. Nyanzaga (Tusker) (100%) In April 2010, ABG purchased 100% of the Nyanzaga project by purchasing JV partner Tusker Gold Mines Limited. This asset, located 35km northeast of Bulyanhulu is the most advanced of the greenfields projects in the ABG portfolio. Nyanzaga hosts a resource of 1.0moz. Drilling is being undertaken in order to both increase the overall size of the resource by delineating strike and down-dip targets at both the Tusker and Kilimani mineralised zones.
Fig. 114: ABG reserves and resources
Total Reserves Deposit Nam e Bulyanhulu Buzw agi North Mara Tulaw aka Total Country Ow nership Tanzania 100% Tanzania 100% Tanzania 100% Tanzania 70% Tonnes Mt 29.3 55.6 27.6 0.3 112.9 Gold (g/t) 11.7 1.6 3.2 6.5 4.6 Contained gold Moz 11.0 2.9 2.8 0.1 16.8 By product Attributable Moz (gold equivalent) Moz 1.1 12.1 0.3 3.2 0.0 2.8 0.0 0.1 1.4 18.2
Total Resources (Incl. Inferred) Deposit Nam e Bulyanhulu Buzw agi North Mara Tulaw aka Nyanzaga Total Country Ow nership Tanzania 100% Tanzania 100% Tanzania 100% Tanzania 70% Tanzania 100% Tonnes Mt 49.2 79.9 48.1 0.9 10.5 188.7 Gold (g/t) 10.9 1.4 3.1 5.7 2.8 4.4 Contained gold Moz 17.2 3.7 4.8 0.2 1.0 26.9 By product Attributable Moz (gold equivalent) Moz 1.8 19.1 0.4 4.1 0.0 4.8 0.0 0.2 0.0 1.0 2.2 29.1
Catalysts African Barrick has less potential organic growth than some of its peers, although it still has a modest portfolio of projects and balance sheet flexibility to progress them without the usual financial constraints.
Fig. 115: African Barrick growth pipeline
More catalysts than the market perceives?
Scoping and Feasibility Gokona / Nyabigena UG Expected results date Q1 FY12 Description Feasibility completed and results expected to be announced after board review in Q1 12. Project aim to increase the ounce profile of the North Mara mine and to extend mine life. Aim to increase resource profile from 370koz to >1Moz. Expansion project of the Bulyanhulu underground mine. Infrastructure study completed, metallurgical and geotechnical study ongoing with expected completion in Q1 FY12. The group aims to build a test stope for mining method validation by Q3 FY12. Details surrounding the tailings operation are expected in Q1. Mine life extension project. The life of the mine has already been extended to FY12, further assessment ongoing. Ongoing drilling in FY12 will begin to target high grade extensions below the East Pit. Satellite operation exploration which is operationally challenging (50km hauling distance). Initial resource declared in March FY11 527koz @2.94g/t indicated and [email protected]/t inferred. Lake Victoria goldfields which ABG fully owns after its acquisition of Tusker Gold in FY10. Positive drilling results at Tusker and Kilimani results in Q3 11, resource update expected by y/e FY11. Scoping study ongoing relating to expansion of the North Mara pit mine underground. Infill and step-out drilling program ongoing.
Bulyanhuly Upper East Zone and Tailings
Q1 FY12
Tulawaka Deeps
Mid to late FY12
Golden Ridge
Detailed update expected by year end FY11 By FY11 end FY12
Nyanzaga: Tusker and Kilimani Nyabirama deeps
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Fig. 116: ABG EBITDA and capex profile

Organic growth has not as yet provided a home for sustained op. profits
$1,000 $800 $600 $400 $200 $0 -$200 -$400
Fig. 117: ABG debt profile and debt ratio

Strong net cash position to provide significant corporate optionality
$4,000 16.0 12.0 $2,000 8.0 4.0 $0 0.0 -4.0 -$2,000 -8.0
2009
2010
2011
2012
2013
2014
2015
2016
2009 2010 2011 EBITDA ($M) Capex ($M)
2012
2013
2014
2015
2016

Net Debt/EBITDA (x)
Fig. 118: EPS and P/E forecasts @1,900/oz flat gold

140 120 100 80 15 60 40 20 0 10 5 0 30 25 20
Fig. 119: EPS and P/E forecasts @ long-term prices

140 120 100 80 15 60 40 20 0 10 5 0 30 25 20
2009 EPS
2010
2011 P/E (x)
2012
2013
2014
2015
2009 EPS
2010 2011 P/E (x)
2012
2013
2014
2015

900 800 700 600 500 400 300 200 100 0

16 14 12 10 8 6 4 2 0
ABG
Forward P/E
Source: Datastream
Source: Datastream
Management and significant shareholders Board/management Chairman Aaron Regent CEO Greg Hawkins CFO Kevin Jennings Significant shareholders Barrick Gold Corporation 73.9%
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African Barrick Gold Primary Analyst: Tyler Broda Rating Target Price (GBp) Price (GBp) Buy 750 462 Bloomberg Ticker ABG LN DataStream Ticker ABG P&L (US$M) Revenues Operating Costs EBITDA D&A EBIT Share of Equity Profit Net Interest Taxes Adjustments Net Profit EPS () DPS () FY10 964 -545 419 -109 310 310 -1 -86 0 218 53 5 FY11E 1,232 -668 564 -126 438 438 -5 -129 0 293 71 10 FY12E 1,394 -730 665 -125 540 540 0 -162 0 364 89 13 FY13E 1,660 -764 896 -128 767 767 0 -230 0 537 131 20
Shares (M) Mcap (US$M) Net debt (US$M) EV (US$M) Year End Assumptions Gold (US$/oz) Copper (US$/t) Silver (US$/oz) EURUSD GBPUSD
410 2898 -713 2185 December FY10 1,225 7,540 20 1.33 1.55 FY11E 1,571 8,942 38 1.38 1.59 FY12E 1,788 8,816 42 1.33 1.61 FY13E 2,063 7,934 49 1.35 1.65
Cash Flows (US$M) EBITDA Working capital changes Net Interest Income Tax Paid/Refunded Other 1 Operating Cash Flows Capex Disposals Exploration Other Investing Cash Flows Change in Borrowings Dividends Equity Issues Other Financing Cash Flows
FY10 417 -84 1 0 2 345 -224 0 63 12 -276 -575 -260 865 231 262
FY11E 560 -15 -4 0 11 552 -228 0 0 3 -226 0 -41 0 27 -14
FY12E 665 -50 0 0 0 615 -132 0 0 0 -132 0 -55 0 0 -55
FY13E 896 -22 0 -78 0 796 -124 0 0 0 -124 0 -81 0 0 -81
Key Ratios PE (x) EV/EBITDA (x) EPS Growth (%) ROE (%) Net Debt to Equity (%) Net Debt to EBITDA (x) Dividend Yield (%) FCF Yield (%)
FY10 13.3 5.2 272% 9% -16% -1.0 1% 4%
FY11E 9.9 3.9 34% 10% -25% -1.3 1% 11%
FY12E 8.0 3.3 24% 11% -34% -1.7 2% 17%
FY13E 5.4 2.4 48% 14% -44% -1.9 3% 23%
Production & Costs Gold Gold Production (koz) Cash cost (US$/oz) By Product Copper Production (kt)
FY10
FY11E
FY12E
FY13E
Balance Sheet (US$M) Cash Recievables Inventories Other Current Assets Exploration Property, Plant and E quipme Intangibles Other Non Current Assets Total Assets Borrowings Payables Provisions Other Current Liabilities Borrowings Provisions Other Non Current Liabilities Total Liabilities Total Equity
FY10 401 59 228 70 759 259 1,615 69 104 2,047 2,927 0 120 4 6 130 0 109 9 118 384 2,543
FY11E 713 57 149 63 981 259 1,720 69 197 2,245 3,226 0 82 4 3 89 0 113 31 144 392 2,834
FY12E 1,141 73 193 63 1,470 259 1,727 69 197 2,252 3,722 0 92 4 3 100 0 113 31 144 402 3,320
FY13E 1,732 80 211 63 2,086 259 1,723 69 197 2,248 4,334 0 96 4 3 103 0 113 31 144 405 3,929
700.7 569
696.6 692
733.7 724
765.1 732
1.5
5.7
9.1
10.3
EBIT (US$M) Bulyanhulu Buzwagi North Mara Tulawaka Nyanzaga
FY10 149.6 67.3 124.8 28.4 0.0
FY11E 221.4 131.3 102.1 44.3 0.0
FY12E 280.9 107.1 186.5 47.0 0.0
FY13E 359.8 148.5 340.7 0.0 0.0
NPV Bulyanhulu Buzwagi North Mara Tulawaka Nyanzaga Other Net Cash Total US$
(US$M) 2,035 574 894 57 0 -733 713 3,541
Per Share $ $4.96 3.20 $1.40 0.90 $2.18 1.41 $0.14 0.09 $0.00 0.00 -$1.79 -1.15 $1.74 1.12 $8.63 5.57
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CEY Centamin (Neutral, 120p TP)

Centamin and its high-quality Sukari gold mine is, in our view, significantly underpriced in the longer term. However, near-term political risk concerns are likely to remain the focus of investors and leave Centamin at a relatively low valuation through 2012.
Egyptian risk to persist through 2012 elections

Centamin is a one-mine gold producer and as such its risks are concentrated on the Sukari asset located in southern Egypt near the Red Sea. Centamin was a market favourite with its high-quality growth and low cash cost position, although the revolution in Egypt, the resultant political uncertainty and production missing guidance have put pressure on the share price. Centamins shares fell by c. 50% in 2011. Egypts near-term stability remains a concern, in our view. Parliamentary elections held in recent months have seen nearly 70% of seats won by Islamist parties, which signals a potential shift in Egyptian geopolitical positioning. The ruling Military Council has announced that presidential elections will be held after the drafting of a new constitution prior to June. Although there is no direct link between Centamins current operations and the political changes, the sell-off in Centamins shares sparked by renewed violence in Cairo in November served as a reminder of the inherently unstable situation. Economically, Egypts position continues to deteriorate. Egypts major tourism industry fell by 30% in 2011 and the government will be seeking a record USD 28bn in bond issuance in Q1 2012 alongside a negotiation with the IMF for funds. The Egyptian government has recently removed a fuel subsidy for heavy industry. Although this is yet to affect Centamin, further deterioration in the governments fiscal position could see this potentially affect operations (removal of the subsidy could see an estimated increase of USD 50 to USD 100 per ounce in costs). Fiscal instability and political uncertainty in Egypt will continue to weigh on sentiment, in our view, in the coming months. We believe that as the current high levels of uncertainty stemming from political change in Egypt are removed in due course, that Centamin shares will see what could be a substantial rerating. That said, at this point, we do not believe that investor sentiment towards Egypt is likely to change substantially enough over our target price horizon, leaving Centamin less exposed to our positive macro gold outlook over the near term. In our view, the shares are likely oversold and are close to bottoming (on current available information) as the P/NAV begins to reach heavily-discounted territory. As such, we expect the P/NAV to settle out at slightly higher levels than what is currently implied by spot prices, at 0.5 P/NAV vs. 0.4 P/NAV. As such, we see upside potential from current levels, although in our relative rating framework, which provides further upside from other gold equities, we rate Centamin as Neutral with a 120p target price. Expanded cash flows should pay for the government stake As there is no mining code in Egypt (and prospects for a new code are unlikely in the context of political changes), the Sukari licence is modelled on a general oil and gas production and sharing agreement split 50-50 between Centamin and the Arab Republic of Egypt. Centamin has fully funded the capital expenditure at Sukari, but is entitled to recover these costs (to a maximum of 33% per annum). Although Centamin must pay a 3% net revenue royalty, there is no corporate tax paid on the profits from Sukari. Owing to the higher gold prices, the capital recovery balances are being depleted faster than originally forecast. This includes the capital being spent on the Stage 4 expansion at Sukari and the continued underground development. We calculate (based on our longterm gold price forecasts) that the government will receive 45% of the cash flows from Sukari starting in 2013. The governments share then increases to 50% in 2015.
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After the Stage 4 expansion is completed and the underground operations have matured, we forecast that Sukari will produce 530,000oz of gold in 2015 or a 160% increase on 2011E levels. Based on spot pricing (in order to remove the effect of gold price changes), Nomura forecasts that Centamins EBITDA will reflect this increasing production reaching over USD 600m in 2014. EPS, however, will actually decline on 2011 numbers as cost inflation and the increase to a 50% government take erode Centamins share.
Fig. 122: EBITDA and EPS: 201015E
Centamin's EPS will likely not increase in line with EBITDA as the government increases its share of the company's cash flows
700 600 500 400 300 200 100 0 80 70 60 50 40 30 20 10 0
Fig. 123: CEYs share price vs. EGX 30 (indexed at Jan. 11)
Centamin's exposure to country risk has been reflected in the way in which its shares have tracked the Egyptian stock market
120
100
80
60
40
20
2010
2011E
2012E
2013E
2014E
2015E
0 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov -11 Dec-11 Share price EGX 30
EBITDA (US$M) - LHS
EPS - RHS
Source: Datastream
World-class Sukari provides long-term value The Sukari gold mine remains one of the few top-tier assets in the world held outside of the major gold companies. We believe this makes Centamin a unique investment opportunity for longer-term investors, current country risks aside. Despite higher costs in 2011, we expect that cash costs will moderate to USD 500/oz as the underground operations reach full production and economies of scale begin to be generated from the Sukari expansion to 10m tonnes per annum. This 500,000oz plus of gold production and the associated cash flow generation potential should be exceptionally strong compared with peers. We calculate a FCF yield of 30% for Centamin in 2013E. In our view, this strong balance sheet, coupled with strong forward cash generation potential, should allow Centamin to look at expanding into a new geography (beyond its current Ethiopian exploration programme). However, owing to the size and quality of Sukari, there are limited assets that would diversify production in a meaningful way without giving up too much longer-term value at Sukari. This may see Centamin pay substantial dividends from 2013 onwards. We therefore believe that managements apparent strategy of focussing on longer-term potential (progressing with the Stage IV expansion in current political climate, progressing exploration assets), while waiting for the cash build to tighten valuations, is a prudent one in the current circumstances. We initiate on Centamin with a Neutral rating as on a risk-adjusted basis the downside risk from the potential consequences of the changing political system and this associated uncertainty mitigates upside opportunities for the time being.
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Valuation Nomuras one-year forward sum-of-the-parts NAV estimate (using Nomuras one-year forward quarterly gold price forecast of USD 1,900/oz) provides a value of 255p/share. At the current spot gold price of USD 1,600/oz, Nomura calculates a NAV of 207p/per share implying a P/NAV multiple of 0.4x. Nomura initiates on CEY with a Neutral rating based on a one-year forward P/NAV multiple of 0.5x, which equates to 120p.
Fig. 124: Sum-of-the-parts NAV
Valuation shows upside potential, assuming political risk perceptions stabilise following Egyptian elections
Valuation (NPV @ 5%) Sukari Other Resources Corporate Exploration Hedging Investments Net Cash (Debt) Total $M 4026.7 15.0 -80.0 0.0 0.0 0.0 160.3 4122.0 Current Per Share $3.67 $0.01 -$0.07 $0.00 $0.00 $0.00 $0.15 $3.76 +1 Yr $3.74 $0.01 -$0.07 $0.00 $0.00 $0.00 $0.27 $3.95 +2 Yr $3.63 $0.01 -$0.07 $0.00 $0.00 $0.00 $0.46 $4.04 +3 Yr $3.45 $0.01 -$0.06 $0.00 $0.00 $0.00 $0.79 $4.19
1.55 2659 255p 89 0.3x 0.5x 120p 34%
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January 18, 2012
Fig. 125: CEY NPV waterfall chart

Centamin's value is near 100% focused in Egypt
300p 250p 200p
Fig. 126: CEY valuation trend

Despite Egyptian risk there remains significant value in Centamin
300p 250p 200p 270.1
242.6
254.9
260.6
150p 100p 50p 0p
150p 100p 50p

Sukari Other Resources Corporate Net Cash (Debt) Total
0p
0Yr
+1 Yr
+2 Yr
+3 Yr

Centamin is focused on the Nubian shield of East Africa
Fig. 128: CEY production and cash cost forecasts

Cash costs should be contained once Stage IV and underground ramp up has expanded production
600,000 500,000 400,000 300,000 200,000 100,000 0 700.00 600.00 500.00 400.00 300.00 200.00 100.00 2009 2010 2011E Sukari 2012E 2013E 2014E 2015E 0.00
Cash cost per ounce
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Company summary
Centamin Egypt is an LSE- (CEY) and TSX- (CEE) listed junior gold producer operating the large Sukari deposit in southern Egypt. As well as regional exploration in and around its main asset, the company has exploration assets in northern Ethiopia that it expects to progress in 2012.
Asset summary
Sukari Gold Mine The Sukari open-pit and underground mine is located near the western edge of the Red Sea, approximately 600km south of Cairo. It is Egypts first (and only) modern gold mine. Centamin began exploring in the region in 1995 and was granted a 160 sq km exploitation lease for Sukari in 2005. Construction for the staged ramp-up began in 2007 and first gold production was in 2009. Underground operations began in late 2010. Preliminary production was reported as 202,000oz. We forecast a cash cost of USD 572/oz for 2011. Centamins results are scheduled for 30 January. The latest phase of development is the Stage IV plant expansion, which should increase throughput capacity to 10mtpa. The company expects the expansion to cost USD 255m and includes spending on a new power station, a second pipeline and increased capacity of the Tailings Storage Facility. From 2014, management is targeting ongoing annual production of around 500,000oz at a cash cost of between USD 450/oz and USD 500/oz.
Fig. 129: Sukari operations
Stage 2 pit - the scale of the operations and potential 70mtpa of total material moved make this a very large project
Source: Buchanan Communications
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The Sukari mine has had limited disruptions since the revolution that forced former president Hosni Mubarak to resign in February 2011. Through the height of the revolution, Centamin had difficulties in shipping blast materials from Alexandria, but the impact on Q1 production was relatively limited. Local blast inspectors, however, did cause Q2 blasting to fall behind schedule, which pushed back the mining schedule and caused a downgrade in 2011 production guidance to 200,000-210,000oz of gold at a higher cash cost of USD 550/oz. Q3 saw increased production rates and Q4 saw record production of 59,000oz. This trend should continue into 2012 and we expect stronger production of 260,000oz in 2012. Owing to the delays in the mine sequencing plan, and the shift from the Stage 2 pit to the Stage 3 pit pushback, we expect that the open-pit operations will have a higher strip ratio in 2012 and that this will keep costs relatively elevated at USD 532/oz. The mine is owned by the Egyptian government by means of a concession agreement, the details of which are: no taxes and duties for 15 years (and an option to extend for a further 15 years), but a 3% royalty rate; a 50% profit-sharing arrangement, once Centamin has recovered the cost of any capital expenditure (estimated by Nomura to be in Q4 2013); the details of this agreement are unchanged since they were signed in 1994.
Sukari had 4.5moz of attributable gold reserves at an average grade of 1.2g/t and 7.2moz of attributable gold resource at an average grade of 1.5g/t. Expansion potential The underground operations of the Sukari mine hold the greatest potential for expansion. In Q4 2011, we expect Centamin to announce an expansion of the underground reserve and in 2012 the company will undertake a new programme of resource drilling (USD 18m in capex), which will target deeper into the orebody. This secondary decline will take underground activity away from the current pit shell and allow the company to run two separate production sources. The average plant feed grade is also markedly higher underground (10-12g/t) than it is in the open pit (1.8g/t), although the company is increasingly encountering problems with recoveries that may reduce final output. Centamin is also exploring seven other prospects within the Sukari licence area and holds four exploration licences in Ethiopia that were acquired as part of the Sheba Exploration plc acquisition in 2011. Centamin plans on advancing the Una Deriam prospect in Ethiopia in 2012 as well as continuing exploration on the Quartz Ridge and V-Shear zones at Sukari. Centamin is scheduled to report a new resource and reserve statement on 30 January.
Total Reserves Deposit Nam e Sukari Total Total Resources (incl. Inferred) Deposit Nam e Sukari Total
Tonnes Gold Ow nership Mt (g/t) 245.4 50% 245.4
1.2 1.15
Contained gold Oz 9.1 9.1
Attributable Oz 4.5 4.5
Ow nership 50%
Tonnes Mt 304.6 304.6
Gold (g/t) 1.5 1.48
Contained gold Oz 14.5 14.5
Attributable Oz 7.2 7.2
Balance sheet With no debt, USD 160m of cash (Q3) and cash from operating activities set to accelerate from its current quarterly level of USD 62.5m, Centamin is, we believe, well positioned to fund its Sukari development strategy without recourse to further financing.
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Fig. 131: CEY EBITDA and capex profile

As Stage 4 completes, Centamin should begin to see EBITDA benefits
$700 $600 $500 $400 $300 $200 $100 $0 -$100 -$200 -$300 2010 2011E 2012E 2013E 2014E 2015E 2016E
Fig. 132: CEY net cash

Centamin's net cash position is forecast to increase to c. USD 1bn by 2015
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Fig. 133: CEY EPS and P/E @ USD 1,900/oz

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Fig. 134: CEY EPS and P/E @ Nomura long-term price estimates
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Despite the 2011 gold price rally, Centamin shares have been weighed down by the political unrest in Egypt
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Fig. 136: Historical 12-month forward P/E

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Management and significant shareholders Board/management Chairman Josef El-Raghy CFO Pierre Louw Significant shareholders Legal & General 5% Baring Asset Management 5%
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CENTAMIN EGYPT Primary Analyst: Tyler Broda Rating Target Price (p) Price (p) Neutral 120 89 Bloomberg ticker CEY LN CEE CN DataStream Ticker CEY P&L (US$M) Revenues Operating Costs Other EBITDA D&A EBIT Net Interest Taxes Minority Interests Net Profit EPS () DPS () Cash Flows (US$M) Assumptions Gold price (US$/oz) EUR/USD GBP/USD Discount rate Key Ratios PE (x) EV/EBITDA (x) EPS Growth ROE (%) Net Debt to Equity (%) Net Debt to EBITDA (x) Dividend Yield (%) FCF Yield (%) Production & Costs Gold production (koz) Cash costs ($/oz) 54 EBIT Sukari NPV Sukari Other resources Corporate Net cash Total US$ FY10 1,226.5 1.35 1.65 5% FY10 28.0 16.1 n/a 8% -25% -1.9 0% -4% FY10 154 9 FY10 21.9 (US$M) 2,415.6 15.0 -80.0 139.6 2,490.2 FY11E 1, 1,571.1 1.35 1.65 5% FY11E 7.7 5.4 2.6 24% -17% -0.6 0% -2% FY11E 202 572 FY11E 179.3 $/sh 2.20 0.01 (0.07) 0.13 2.27 FY12E 762.5 1.35 1.65 5% FY12E 6.7 4.0 0.1 21% -26% -0.9 0% 9% FY12E 258 532 FY12E 226.7 p/sh 142.19 0.88 (4.71) 8.22 146.58 FY13E 2,062.5 N 1.35 1.65 5% FY13E 5.5 1.7 0.2 21% -38% -0.9 0% 28% FY13E 396 542 FY13E 461.0 Balance Sheet (US$M) Cash Recievables Inventories Other Current Assets Exploration Property, Plant and Equipmen Intangibles Other Non Current Assets Total Assets Borrowings Payables Provisions Other Current Liabilities Borrowings Provisions Other Non Current Liabilities Total Liabilities Total Equity
Shares (M) Mcap (US$M) Net debt (US$M) EV (US$M) Year End
1,096 1,495 -139.6 1,355 December
FY10 124.5 -52.5 72.0 -32.8 39.1 39.1 4.9 FY10 123.8 -62.8 0.2 61.3 -100.0 36.5 7 0.5 -74.8 141.9 0.6 142.5
FY11E 362.1 -111.6 250.6 -58.6 192.0 0.2 192.2 17.7 FY11E 329.8 -136.8 0.2 -9.5 183.7 -169.5 -9.4 -27.2 -206.2 8.2 0.8 9.0
FY12E 462.1 -155.5 306.6 -83.9 222.7 2.0 -3.0 221.7 20.3 FY12E 462.1 -155.5 2.0 -22.2 286.5 -144.0 -4.0 0.0 -148.0 0.0 -3.0 -3.0
FY13E 821.3 -241.4 579.9 -123.0 457.0 3.6 -189.4 271.1 24.8 FY13E 821.3 -241.4 3.6 -130.0 453.5 -40.0 -4.0 0.0 -44.0 0.0 -189.4 -189.4
Receipts Payments et Interest Taxes Other Operating Cash Flows Capex Disposals Exploration -11. Other Investing Cash Flows Change in Borrowings Dividends Equity Minority interest / other Financing Cash Flows
FY10 154.3 0.0 36.3 0.5 191.1 167.9 280.0 447.9 639.0 15.2 0.7 0.4 16.3 2.6 2.6 19.0 620.0
FY11E 139.6 67.2 51.7 0.4 258.9 221.3 359.0 3.6 583.9 842.8 18.1 0.7 0.6 19.4 2.6 2.6 22.0 820.8
FY12E 275.1 81.6 62.8 0.4 419.9 225.3 419.1 3.6 647.9 1,067.8 21.5 0.7 0.6 22.8 2.6 2.6 25.4 1,042.4
FY13E 495.2 162.9 125.3 0.4 783.9 229.3 336.2 3.6 569.0 1,352.8 35.3 0.7 0.6 36.6 2.6 2.6 39.2 1,313.6
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POG Petropavlovsk (Reduce, 860p TP)

Petropavlovsk is undergoing a period of rapid growth as the company brings its vast Russian land packages and projects to account. Fundamental value is far higher than the current share price. However, we do not expect 2012 to provide a re-rating in advance of the commissioning of the technically-challenging POX hub, hence our relative Reduce rating.
Attractive, but risks outweigh significant upside potential until POX production begins
Petropavlovsk continues to rapidly progress its vast suite of mineral assets in Russias Far East Amur region. The recently commissioned Albyn mine became the fourth hard rock gold mine built by the group and the company is analysing yet another expansion at its Pioneer mine. We expect Petropavlovsks precious metals operations to increase production from 0.6moz of gold in 2011 to almost 1.0moz of gold in 2014. The majority of the current growth portfolio comes from the new POX Hub at Pokrovskiy. POX (pressure oxidization) is a processing method that allows refractory ore (sulphide material where gold extraction cannot be completed through traditional techniques), to be processed via high pressure oxidization in autoclaves. The hub, which will process ore from Pioneer and Malomir remains on time and on budget for a mid-2013 commissioning at USD 480m in total capital expenditure. The progress to date is encouraging. However, as the milled grades decline at the other mines, the POX Hub will account for 38% of our total gold production estimates by 2014. We believe that Petropavlovsk has a firm understanding of the challenges that will arise with this entry to POX processing, but we believe these risks will remain highlighted during a show-me year for Petropavlovsk, in context of the companys past production guidance misses.
Fig. 137: Petropavlovsk milled grades and refractory production
Petropavlovsk will likely be facing declining grades at its main operations while adding more challenging POX production
7.0 6.0 5.8 50% 45% 40% 35% 30% 25% 3.0 2.0 1.0 0.0 2.7 2.7 2.2 1.6 1.5 1.4 20% 15% 10% 5% 2009 2010 2011E 2012E 2013E 2014E 2015E 0%
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On a P/NAV basis, we calculate that Petropavlovsk is trading at 0.8x P/NAV as using spot gold prices. In our view, there are fundamental structural issues blocking the potential for a significant P/NAV re-rating over the next 12 months. 1) Petropavlovsk is likely to be heading deeper into a net-debt position (40% net debt to equity), owing to the high capex for the POX Hub at a time when the market generally prefers less leveraged balance sheets. Investor perceptions of Russian risks are unlikely to dissipate, especially following the unexpected public reaction to the Russian parliamentary elections. Petropavlovsks political risk exposure remains concentrated and therefore we believe there is less potential for Petropavlovsk to take part in M&A than its peers. The lower expected grades in the precious metals division should see increasing unit costs in future years, reducing the safety margin from an already relatively high cash cost position.
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4)
5)
The 65.6% stake in Hong Kong listed iron ore/titanomagnetite-producer IRC reduces the pure-play gold exposure and at the suppressed IRC equity prices, we do not expect the company to revisit this in the next 12 months. The potential for operational challenges to arise surrounding the POX operations are likely to reach their peak in the next 18 months.
Near-term upside potential? Despite the negatives mentioned above, Petropavlovsk is poised to announce an increased reserves and resources statement following an USD 80m exploration spend in 2011. This could have material positive impact on the companys shares in the near term. The Pioneer mine is running out of non-refractory gold. The current reserve supports not much more than 3 or 4 years of production, and the bulk of that is likely to come at a lower grades as the higher grade Andreevskaya pit runs out of reserve sooner. However the company plans to bring forward another grinding block to increase capacity. This, in our view, indicates that the February resource update, at Pioneer at least, is likely to add positive NAV to our valuation and this could have significant positive impact on near-term mine lives and cash flow. Three longer-term opportunities are likely to help Petropavlovsk management enhance shareholder value: 1) Petropavlovsk has rationalised its communications to the market and we believe that achieving 2011 production guidance will go a long way toward increasing investor perception of the investment opportunity. 2) If successful, the POX Hub, which is located on the Trans Siberian Railway and is scalable, could become a centre for processing refractory gold, of which Russia has many stranded deposits. 3) The IRC stake, and strategic optionality, over the long-run, could develop significant value for the group. In addition, the disparity between Petropavlovsk and Polymetals P/NAV multiples despite the relative similarities of the companies is also a potential positive for Petropavlovsk. We expect that if Petropavlovsk executes over the next two years, the disparity in the P/NAV multiples will decrease (and likely in POGs favour). Valuation Nomuras sum-of-the-parts NAV estimate (using Nomuras year-end gold price forecast of USD 1,900/oz and a 5% discount rate) provides a value of 1,226p/share. At the current spot gold price of USD 1,640/oz, Nomura calculates a NAV of 858p/per share implying a P/NAV multiple of 0.8x. Nomura initiates on POG with a Reduce rating based on a one-year forward P/NAV multiple of 0.7x, which equates to 860p.
Fig. 138: POG valuation
Petropavlovsk is highly dependent on the outcome of the POX Hub
Valuation (NPV @ 5%) Pioneer Pokrovskiy Malomir Albyn Pokrovskiy Hub Alluvials IRC (65.6%) Other Resources Corporate Net Cash (Debt) Total $M 513.3 393.3 230.0 694.5 2059.1 493.8 305.5 168.8 -532.8 -525.4 3800.0 Current Per Share $2.73 $2.09 $1.22 $3.70 $10.96 $2.63 $1.63 $0.90 -$2.84 -$2.80 $20.23 +1 Yr $1.88 $1.75 $0.78 $3.45 $13.41 $2.39 $1.63 $0.90 -$2.45 -$4.72 $19.01 +2 Yr $1.30 $1.38 $0.49 $2.55 $13.65 $2.14 $1.63 $0.90 -$2.15 -$5.06 $16.83 +3 Yr $1.12 $1.10 $0.25 $1.68 $12.56 $1.88 $1.63 $0.90 -$1.84 -$2.16 $17.11
1.55 2452 1226p 679 0.6x 0.7x 859p 27%
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Fig. 139: POG NPV waterfall chart

Pokrovskiy hub is the future for Petropavlovsk at higher gold prices
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Fig. 140: POG valuation trend

Shorter mine lives with increased capital spending sees NPV drifting
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Petropavlovsk's operations are focused on the Amur region of Eastern Russia
Fig. 142: POG precious metals division production and cash cost forecasts
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Company summary
Petropavlovsk (formerly Peter Hambro Mining) is an intermediate gold producer listed on the LSE (POG). Petropavlovsk operates four mines hardrock open-pit gold mining projects in the Amur region of Russia, including Pioneer (98.6%), Pokrovskiy (98.6%), Malomir (100%) and Albyn (100%%). The company is building the POX Hub at Pokrovskiy to process the substantial refractory gold resources owned in the region, starting with Pioneer and Malomir. Petropavlovsk also operates seasonal alluvial gold mines. In addition to multiple exploration prospects, the company owns a 65.6% stake in its former wholly-owned Hong Kong-listed IRC Limited (1029 HK). IRC is developing the K+S and Kurynakh projects iron ore and titanomagnetite projects, also found in the Amur region.
Asset summary
Pioneer (98.6%) The Pioneer Gold mine is located in the Amur region of Russia, 40km from the Pokrovskiy mine, near the Chinese border. In 2010, Pioneer produced 230,000oz of gold at a cash cost of USD 565/oz. Nomura forecasts 2011 production to be 326,000oz at a cash cost of USD 645/oz. Pioneer consists of multiple steeply-dipping ore zones formed as a result of hydrothermal activity associated with the collision of the Eurasian and Amur plates. Andreevskaya, a higher grade pit, is found to the south-east of the main structure. The processing facilities include a 5.0mtpa RIP (resin in pulp) plant and a seasonal heap leaching facility that has an estimated capacity of 0.7mtpa. The company will report in January 2012 on a potential expansion to increase grinding capacity to 7.0mtpa. 2011 saw significant prestripping as the mine prepares to extract refractory ore. The ore at Pioneer is both refractory and non-refractory. As part of the POX Hub being built at Pokrovskiy, a series of three flotation circuits are being installed at Pioneer that will generate a refractory concentrate that will be processed at Pokrovskiy. Pioneer has 524 sq km of nearby exploration ground and we expect that positive exploration results could provide rationale for a further increase of the front-end of the plant that should see Pioneer continuing to process non-refractory material, past 2015, augmenting group production. The reserve consists of 67.3mt of ore at an average grade of 1.2g/t. It is unclear what proportion of ore is refractory and what proportion is non-refractory; making it difficult to forecast with accuracy how long the RIP operations at Pioneer can continue. Petropavlovsk is likely to update the market on this point shortly. Additionally, the recent mined grades have been substantially higher than the reserve grade, suggesting that higher costs are likely in the future as lower grade ore is mined and processed. Owing to the lower grades, we forecast 276,000oz of gold production at a cash cost of USD 789/oz in 2012. Positive exploration results that add new, higher grade, nonrefractory deposits could provide upside potential beyond our 2013 forecasts. Pokrovskiy (98.6%) and POX Hub Pokrovskiy is the initial hard rock mine developed by Petropavlovsk and is located 10km from the Trans Siberian railway, Pokrovskiy will be host to the new POX Hub and will process refractory ore from the region, beginning with material from Pioneer and Malomir. The non-refractory operations at Pokrovskiy produced 145,000oz of gold at USD 570/oz in 2010. We forecast production of 102,000oz of gold at a cash cost of USD 657/oz in 2011, down owing to lower expected grades. Current operations are likely to continue until 2014 (heap leach until 2017). After this, the 1.7mtpa RIP plant and spare milling capacity should provide extra flexibility for the POX Hub. The main source of ore in 2012 is likely to be from the Pokrovska 2 pit as the original pit has come towards the end of its mine life. The newly-discovered Zheltunak resource should also incrementally add ounces to production. Owing to decreasing grades (the reserve grade is 0.9g/t), we forecast 2012 production to fall to 88,000oz of gold at a cash cost of USD 767/oz.
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The future for Pokrovskiy and, in our view, for Petropavlovsk itself, will be determined by the success of the POX Hub. Petropavlovsk is budgeting USD 480m on developing a regional centre to process refractory gold ore. Two flotation plants will be built at Pioneer and Malomir, where gold concentrate will be shipped 40km and 670km by road, respectively, to Pokrovskiy. The POX hub will have a capacity of 600ktpa of concentrate per annum 330ktpa from Malomir and 240ktpa from Pioneer. The operation is larger than Polymetals Amursk Hub which is delivering a similar project along a similar timeframe.
Fig. 143: POX Hub regional diagram
The hub is located next to the Trans Siberian railway, 40km from Pioneer, 670km from Malomir
The Hub is being constructed at Pokrovskiy as the current mine has many favourable advantages including low-cost hydropower electricity, significant limestone and clay deposits, and existing nearby tailings facilities. There is already a skilled workforce in place. Production from the autoclaves is expected by the company to commence in mid-2013. Initially Petropavlovsk had expected to process concentrate via third-party copper smelters in advance of the construction of the autoclaves; however, the company might now stockpile material in order to avoid the punitive refining costs. This is likely to delay first production until 2013, when proper gold production from the autoclaves was scheduled in the first place (leaving the project on time).
Fig. 144: POX Hub production and cash cost estimates
Once construction has completed, POX Hub should account for a significant portion of POG production
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The risks surrounding the implementation of POX technology are greater than traditional processing techniques. That said, Petropavlovsk has taken a measured approach to this shift in group strategy via extensive design and testing. The group has hired experienced POX practitioners and thus far the project is on time and budget. Malomir (100%) The Malomir mine is located in the northeast corner of the Amur region in Russia. The RIP plant for processing non-refractory ore was commissioned in August 2010. The majority of the ore at Malomir is refractory. The mine produced 36,000oz in 2010 and we expect production to increase to 88,000oz in 2011 at a cash cost of USD 667/oz. The capacity of the plant was increased in 2011 with the addition of a second crushing and grinding line. The current operations are mining the higher grade Quartzitovitze pit, which has a reserve grade of 1.1g/t as compared with the current milled grade in 2011E of 3.7g/t. As such, we expect grades to fall next year, but the new capacity of 1.4mtpa should provide increased gold production. We expect Malomir to produce 97,000oz of gold in 2012 at a cash cost of USD 738/oz. Malomir is likely to be the biggest contributor to the POX hub. Malomir will send 330ktpa of refractory concentrate to Pokrovskiy from 6.0mtpa of ore mined. The company expects that the first flotation line will be commissioned in mid-2012. Albyn (100%) Albyn was commissioned in 2011 with an initial capacity of 1.8mtpa of throughput. The group is considering expanding the capacity with the addition of a second processing line, which should bring total production to 3.6mtpa. We forecast Albyn will produce (on a pre-expanded basis) 133,000oz of gold at a cash cost of USD 740/oz in 2012. We forecast production of 212,000oz of gold in 2013. The mine has a life of eight years, although there is potential for other regional resources to be added to the overall resource. Albyn has a reserve grade of 2.0g/t, well above the group reserve grade of 1.2g/t and this mine should provide higher operational flexibility for the group. On the downside, we expect the strip ratio to be 22:1, which will leave costs relatively exposed to mining cost inflation. IRC Limited (65.6%) IRC Limited is a subsidiary of Petropavlovsk listed on the Hong Kong stock exchange (1029 HK). IRC is an emerging iron ore and ilmenite producer with three development stage projects located in Russias Amur region near the Chinese border. The assets include Kuranakh, which produces an iron ore and a titanomagnetite concentrate, K+S a large magnetite deposit under development and Garinskoye, a longer-term magnetite development deposit. Kuranakh is ramping up production to a forecast 900ktpa of iron ore concentrate and 290ktpa of ilmenite concentrate. The larger K+S deposit is likely to begin production in 2013, reaching a total of 3.2mt Fe (a 65% concentrate) at full capacity. As Petropavlovsk consolidates its majority stake in IRC into the group figures, the capex spend in the near term (we calculate over USD 400m of capital expenditure over the next two years) is likely to weigh on the Petropavlovsk balance sheet. A total of USD 740m in debt and project financing has been arranged with ICBC and CNEEC and therefore the K+S project is financed to expected completion the company had a cash balance of USD 122m as at 30 June 2011. Our risked valuation for Petropavlovsks 65.6% stake in IRC is USD 317m, close to the pure equity read-through value of USD 331m. In our view, the IRC stake within Petropavlovsk has the potential to create unrecognised value once the ownership structure is streamlined and as development de-risking allows IRC to trade closer to its NAV. A further divestment will be difficult in the near term, however, as Petropavlovsk has guaranteed certain of the current IRC debt facilities. There are also significant crossover synergies from an operational perspective between the two companies. Therefore, the two companies may remained intertwined at the group level for a while longer.
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Other assets Petropavlovsk also owns multiple additional late-stage exploration/early-stage development projects including the Vysokoe Heap Leach operation (expected by the company to commence in FY2013), the 0.5moz Yamal project, the higher grade VerkhneAllinskoe underground development and the smaller Tokur tailings and openpit operation. We value Petropavlovsks other assets at a resource multiple derived USD 168.8m. By bringing forward these projects there is potential, as would be expected, for valuations to increase.
Total Reserves Deposit Nam e Pioneer Pokrovskiy Malomir Albyn Tokur Petropavlovskoye Total Total Resources (Incl. Inferred) Deposit Nam e Pioneer Pokrovskiy Malomir Albyn Tokur R Petropavlovskoye Visokoe (Krasnoyarsk Region) Olenka Verhne-Alilinskoe Total Country Ow nership Russia 99% Russia 99% Russia 100% Russia 100% ussia 100% Russia 100% Russia 100% Russia 100% Russia 100% Tonnes Mt 153.4 45.4 372.1 27.1 38.8 22.7 58.0 11.1 3.7 732.2 Gold ntained gold Attributable (g/t) Moz Moz 0.9 4.6 4.5 0.9 1.3 1.3 0.8 9.8 9.8 2.1 1.8 1.8 1.1 1.4 1.4 1.0 0.7 0.7 1.1 2.0 2.0 1.5 0.5 0.5 8.0 0.9 0.9 0.0 23.1 23.0 Country Ow nership Russia 99% Russia 99% Russia 100% Russia 100% Russia 100% Russia 100% Tonnes Mt 67.3 26.5 117.0 16.7 4.2 11.0 242.8 Gold ntained gold Attributable (g/t) Moz Moz 1.2 2.6 2.6 0.9 0.8 0.8 1.1 4.1 4.1 2.0 1.1 1.1 1.5 0.2 0.2 1.1 0.4 0.4 1.2 9.1 9.1
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Fig. 146: POG EBITDA and capex profile

$1,000 $800 $600 $400 $200 $0 -$200 -$400 -$600 -$800 2009 2010 2011 2012 2013 2014 2015 2016
Fig. 147: POG debt and debt ratio

$1,000 $800 $600 $400 $200 $0 -$200 -$400 -$600 -$800 -$1,000 -$1,200 2009 2010 2011 2012 2013 2014 2015 2016 2.0 1.6 1.2 0.8 0.4 0.0 -0.4 -0.8 -1.2 -1.6 -2.0 -2.4
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Fig. 148: POG EPS and P/E @ USD 1,900/oz
Fig. 149: POG EPS and P/E @ Nomura long-term price estimates
100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0
3.0 2.5 2.0 1.5 1.0 0.5 0.0
3.0 2.5 2.0 1.5 1.0 0.5 0.0
100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 2009 2010 EPS ($) 2011 P/E (x) 2012 2013 2014 2015 0.0
2009 2010 EPS ($)
2011 P/E (x)
2012
2013
2014
2015
Fig. 150: POG historical price chart

Petropavlovsk has not participated in the gold price rally of 2011
1600 1400 1200 1000 800 600 400 200 0 Jan-09
Fig. 151: Historical 12-month forward P/E ratio

25
20
15
10
May 2011
May 2008
May 2009
May 2010
Mar 2008
Mar 2009
Mar 2010
Mar 2011
Jul 2008
Jul 2009
Jul 2010
Jul 2011
0
Jan 2008
Sep 2011
Nov 2008
Nov 2009
Nov 2010
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Petropav lov sk
Fwd PE
Source: Datastream
Source: Datastream
Management and significant shareholders Board/management Chairman Peter Hambro CEO Sergey Ermolenko CFO Brian Egan Significant shareholders Blackrock 11.1% Pavel Maslovskiy 7.9% J P Morgan 6.2%
Nov 2011
Sep 2008
Sep 2009
Sep 2010
Jan 2009
Jan 2010
Jan 2011
79

Petropavlovsk PLC Prim ary Analyst: Tyler Broda Rating Target Price GBp Price (GBp) Reduce 860 685 Bloomberg Ticker POG LN DataStream Ticker POG P&L (US$M) Revenues Operating Costs Other EBITDA D&A EBIT Associate Net Interest Taxes Adjustments Net Profit EPS () DPS () FY11E 1,571 3.94 38.00 0 FY12E 1,788 4.11 42.00 250 FY13E Cash Flow s (US$M) Gold (US$/oz) Copper (USc/lb) Silver (US$/oz) Iron Ore (US/%Fe) 1,225 3.04 20.17 0 2,063 3.95 49.00 206 Cash generated from operations Working capital changes Net Interest Taxes Operating Cash Flow s Capex Disposals Exploration 0 Other 4 Investing Cash Flow s Change in Borrow ings Dividends Equity Other Financing Cash Flow s FY10 201 -121 -27 -15 38 -507 1 FY11E 525 -176 -35 -93 220 -562 0 0 -2 -564 190 -9 0 -2 179 FY12E 570 -90 -42 -107 331 -644 0 -63 0 -707 310 -10 0 0 300 FY10 612 -275 -132 205 -87 118 0 -23 46 -26 23 11 7 FY11E 1,233 -572 -165 495 -82 413 0 -39 -97 14 291 162 7 FY12E 1,512 -754 -188 570 -145 425 0 -42 -107 0 276 147 7
January 18, 2012
Shares Outstanding (M) Mcap (US$M) Net debt (US$M) EV (US$M) Year End Assum ptions
188 1948 526 2474 December FY10
FY13E 2,107 -995 -218 894 -145 749 0 -34 -200 0 514 274 14
FY13E 894 -332 -34 -200 328 -288 0 -63 0 -351 -70 -16 0 0 -86
GBP/USD AUD/USD
0.96 0.88
1.55 0.99
1.55 1.03
1.55 1.02
Key Ratios PE (x) EV/EBITDA (x) EPS Grow th (%) ROE (%) Net Debt to Equity (%) Net Debt to EBITDA (x) Dividend Yield (%) FCF Yield (%) Net debt / (cash)
FY10 96.6 10.3 -89% 1% 10% 0.84 2% -30.4% 171.1
FY11E 6.6 5.0 1370% 15% 27% 1.06 2% -17.3% 526.0
FY12E 7.2 5.0 -9% 12% 41% 1.60 2% -15.8% 912.1
FY13E 3.9 3.2 86% 18% 35% 1.06 3% 2.1% 951.3
-503 408 -28 336 -4 712
Balance Sheet (US$M) Cash Recievables Inventories Other Current Assets Recievables Investments Property, Plant and Equipment Intangibles Other Non Current Assets Total Assets Borrow ings Payables Provisions Other Current Liabilities Borrow ings Provisions Other Non Current Liabilities
FY10 321 219 210 2 751 29 12 1,320 369 7 1,737 2,488 93 143 10 0 246 399 134 11 544
FY11E 165 341 356 0 862 31 2 1,731 393 15 2,173 3,035 199 217 0 6 422 491 13 141 645
FY12E 89 444 378 0 910 31 2 2,230 425 47 2,735 3,645 199 252 0 6 458 801 13 141 955
FY13E -20 668 561 0 1,209 31 2 2,372 488 47 2,941 4,150 199 329 0 6 534 731 13 141 885
Production & Costs Gold Production (koz) Cash cost (US$/oz)
FY10 507 617.0
FY11E 624 762.3
FY12E 682 789.8
FY13E 884 963.3
EBIT (US$m ) Pioneer Prokrovskiy Malomir Albyn Prokrovskiy Hub Alluvials IRC
FY10 111 72 19 0 0 24 26
FY11E 324 81 72 2 0 95 -47
FY12E 268 78 91 148 -78 71 -4
FY13E 163 99 72 170 278 91 54
NPV Pioneer Prokrovskiy Malomir Albyn Prokrovskiy Hub Alluvials IRC Net Cash Total US$
(US$M) US$/sh 418 309 175 477 1,032 304 305 -526 $2.23 $1.64 $0.93 $2.54 $5.49 $1.62 $1.63 -$2.80 $11.34
GBp/sh 1.44 1.06 0.60 1.64 3.54 1.05 1.05 -1.81 7.32
Total Liabilities Total Equity
789 1,699
1,068 1,967
1,413 2,233
1,419 2,731
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January 18, 2012
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January 18, 2012
POLY Polymetal International (Reduce, 1,400p TP)

New to the London market, Polymetal offers investors a compelling split between silver and gold production. The second-largest precious metals producer in Russia, the company has ambitious growth targets, which if achieved will make Polymetal the leading precious metals producer among current London companies. However, there remain significant delivery risks and relative to peers we believe Polymetal is fully priced for the time being.
From Russia with growth

Polymetal joins the London market at an interesting stage of its development. This Russian gold and silver producer is one of the higher profile companies to have recently listed in London, joining the FTSE100 index in December 2011. Our analysis points to many positives for Polymetal. The company has the highest nearterm (three-year) growth rates as compared with its peers and we expect significant growth catalysts to continue to drive momentum in the shares. The new London listing provides a valuable currency for acquisitions, a space in which Polymetal has been aggressive in the past. We also expect that Polymetals balance sheet will move from a net debt to a net cash position over the next three years. In addition, based on 2012E revenues Polymetals revenues are split 52% and 48% between gold and silver, providing a unique equity exposure to precious metals. We do expect some headwinds for Polymetal in its first year as a London-listed company. Polymetal trades close to its spot NAV (0.9x P/NAV vs. the relatively comparable Petropavlovsk, which trades at 0.8x P/NAV). We expect 2012 to provide operational risks as well as benefits as the market analyses initial performance from the newly-commissioned Amursk POX operation. This potential delivery risk is likely to be amplified by expected declining grades at two of its operations, placing 2012 in a higher cost and lower growth category than trend. With the declining political stability in Russia, and an end to index buying, we have a difficult time in seeing what drives further outperformance in the next 12 months at this juncture. Similar to the other precious metals companies in this note, we see upside potential from current price levels. However, we expect that the relatively expensive P/NAV multiple may drift over 2012, as technological and logistical risks in the growth profile reach their peak, leaving Polymetal as a relative underperformer. We initiate coverage of Polymetal with a Reduce rating and a 1,400p target price (roughly 27% upside potential). An attractive pipeline of growth projects Polymetal has a clear pipeline of projects to increase its production towards its mediumterm target of 1.4moz gold equivalent production in FY14. We forecast the majority of its growth will come from the commissioning of the Amursk Hub for processing refractory ores (expected in Q1 2012) and the ongoing ramping up of Dukat and Omolon.
Fig. 152: Near-term catalysts
Polymetal will have a series of catalysts to help recent share price momentum but also has plenty to deliver on
Reporting segment Dukat Omolon Amursk Hub Omolon Khakanja Amursk hub Amursk hub Omolon Omolon Varvara Voro Dukat New Mine Lunnoye Kubaka plant Amursk Pox plant Birkachan heap leach Ozerny Mayskoye Albazino Oroch Dalniy Varvara Fevralskoye Goltsovoye New Study/announcement Underground mine feasibility in Lunnoye Zone-7 New process commissioning for high silver content ore First gold pour expected in Q1 12 Operating during summers only. Plan to commission a new year round facility Resource update and life of mine plan Mayskoye concentrator commissioning Resource estimate and feasibility of expanding concentrator capacity Preliminary study anticipates a four year mine life. A JORC compliant reserve is expected in Q412 Feasibility study in coming months and a JORC compliant reserve estimate in Q412 Mine expansion plan feasibility study Fevralskoye feasibility study Reserve update Establish feasibility of constructing two new stand-alone mines by 2013. Time line Q4 11 Q4 11 Q1 12 Q2 12 Q3 12 Q3 12 Q4 12 Q4 12 Q4 12 FY12 FY12 FY12 FY13
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January 18, 2012
We have generally based our production forecasts on current reserves and the competent persons report forecasts from the recent LSE prospectus making our forecasts generally lower than managements production targets. Therefore, should management execute on its growth plans, over time, there is potential NAV upside risk to our forecasts.
Fig. 153: Polymetals recent acquisition history
The company has been aggressive with growth in the past and new London listing will likely see this continue, but perhaps at a more moderate pace
Acquisition Goltsovoye Sopka Mayskoye Varvara Avlayakan and Kirankan Svetloye Kutyn 1 Total Resources 1.1 1.4 7.5 3.8 0.5 1.4 .2 16.9 EV US$m 47 95 166 258 65 9 67 707 US$/oz resource 45 67 22 68 142 7 56 42 Strategic rationale Bolt-on to Dukat Bolt-on to Omolon Strategic fit with Albazino Cash flow and entry to Kazakhstan Immediate cash flows, bolt-on to Khakanja Bolt-on to Khakanja Advanced exploration property in the strategic region
Polymetal International has been one of the more active acquirers in the past three years, acquiring over USD 700m of assets. We think this trend will continue as management has stated an ambition to expand the company inorganically, which it also stated in conjunction with its recent London listing. The new listing should ease the use of share capital as an M&A currency, but we note that the groups relatively high net debt balance and capex schedule is likely to restrict it from larger transactions in the near future. Valuation Nomuras sum-of-the-parts NAV estimate (using Nomuras year-end gold price forecast of USD 1,900/oz and a discount rate of 5%) provides a value of 1,620p/share. At the current spot gold price of USD 1,640/oz, Nomura calculates a NAV of 1,192p/per share implying a P/NAV multiple of 0.9x. Nomura initiates on POLY with a Reduce rating based on a one-year forward P/NAV multiple of 0.9x, which equates to 1,400p.
Fig. 154: Polymetal NPV
Valuation (NPV @ 5%) Dukat Hub Amursk POX Omolon Voro Khakanja Varvara Other Resources Corporate Exploration Hedging Investments Net Cash (Debt) Total $M 3971.6 2475.9 1810.5 382.7 637.7 818.1 302.1 -236.4 0.0 0.0 0.0 -836.0 9326.3 Current Per Share $10.38 $6.47 $4.73 $2.18 $1.67 $2.14 $0.79 -$0.62 $0.00 $0.00 $0.00 -$2.18 $25.55 +1 Yr $9.59 $7.27 $4.53 $1.82 $1.27 $1.78 $0.79 -$0.57 $0.00 $0.00 $0.00 -$1.37 $25.11 1400p GBPUSD Total GBP Current share price (p) P/NAV Target multiple Target price Upside
+2 Yr $8.67 $7.07 $4.27 $1.57 $1.03 $1.47 $0.79 -$0.49 $0.00 $0.00 $0.00 $0.71 $25.09 1399p
+3 Yr $7.60 $6.81 $3.91 $1.43 $0.79 $1.25 $0.79 -$0.45 $0.00 $0.00 $0.00 $3.45 $25.58 1426p
1.55 6017 1620p 1100 0.7x 0.9x 1400p 27%
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January 18, 2012
Fig. 155: POLY waterfall chart

2,000p 1,800p 1,600p 1,400p 1,200p 1,000p 800p 600p 400p 200p 0p Dukat Hub Amursk POX Omolon Voro Khakanja Varv ara Other Corporate Net Cash Resources (Debt) Total
Fig. 156: NPV curve

1,700 1,680 1,660 1,640 1,620 1,600 1,580 1,560 1,540 1,520 1,500 NPV curv e 0Yr +1 Yr +2 Yr +3 Yr 1648p 1620p 1619p 1650p

Polymetal has operations across Russia and Kazakhstan
Fig. 158: Polymetal production and cash cost forecasts

Like Petropavlovsk, Polymetal's growth comes from the refractory Amursk POX hub, but is more balanced with the emergence of Omolon
1,400,000 900.00 800.00 700.00 1,000,000 600.00 800,000 500.00 400.00 300.00 400,000 200.00 200,000 100.00 0.00
1,200,000
600,000
2009
2010 Amursk POX
2011E Omolon
2012E Voro
2013E Khakanja
2014E Varvara
2015E Cash costs
Dukat Hub
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January 18, 2012
Company summary
Polymetal International is an intermediate gold and silver producer listed on the LSE and is a member of the FTSE 100 index. The company has an ambitious target to increase production from current 790,000oz of gold equivalent in 2011 to 1.4moz of gold equivalent by 2014. Polymetal operates three hub operations with multiple mines/processing centres and three standalone mines. The hubs, all located in Far East Russia, consist of the largely silver producing Dukat operations, the nearby Omolon hub and the Amursk refractory POX hub. Amursk is due to be commissioned in Q1 2012. The standalone mines consist of the Voro and Khakanja gold and silver mines in Russia and the Varavara copper-gold mine in Kazakhstan. Based on our estimates, we expect the groups net debt to peak at about USD 840m in FY11 below declining to a small net cash balance by FY13E. From a relative standpoint, as we show above in our industry analysis, the groups net debt is higher than its peers, which we highlight as a risk factor. We also believe that the group is likely to start paying dividends owing to our forecast for an ongoing improvement in its profitability and free cash flow generation. Managements stated dividend policy is to pay total dividends of 20% if the net-debt-to-EBITDA ratio is less than 1.75x. We are cautiously forecasting dividend payout ratios of 20% for FY11 (DPSe: 20p) and 20% for FY12 (DPSe 39p), which is in line with management guidance.
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Asset summary
Dukat hub (100%) The Dukat mining hub includes the Omsukchan concentrator, Lunnoye processing plant and four separate mines. It is the largest of the groups operations and given our forecast for a steady production increase at Dukat (and low capex expectations) we expect it to remain the groups main cash generator in the coming years. The Dukat hub is located in the Magadan region in Russia and mining is done both using open-pit and underground methods. The reserves at Dukat are predominantly silver. The mine hosts 275.8moz of silver but there is also 700,000oz of gold. In 2011 production on a gold equivalent basis, 90% of production was silver. The Omsukchan concentrator has a capacity of 1.5Mtpa. The concentrate from the plant is either treated in Lunnoyes cyanide leaching circuit (capacity 300ktpa) or shipped to a third party for further processing. Based on the ore grades and processing volumes we expect the hubs production to grow from 275,000koz of gold in 2010 to 460,000oz by 2014E. On the basis of the latest reserves at Dukat, we expect the operations to continue until 2020, although we expect the Omsukchan concentrator is likely to operate below its capacity/below reserve grades during this period. We note that the group is mining some ore outside its established reserves which increases forecasting uncertainty. However we think this uncertainty should alleviate somewhat once the Goltsovoye reserve grades and Lunnoye underground mine feasibility study are released in 2012.
Fig. 159: Dukat hub
Located 8km from the Dukat mine. Reserves have not been established Resource estimate 1.2Mt of mineralised material grading 363g/t silver and 6.1gt gold.
Perevalny project
Mixes concentrate from Omsukchan with ore from Arylakh and Lunnoye mines. This is processed into zinc precipitate via agitated-tank cyanide leaching and the Merrill Crowe process and transported back to Omsukchan concentrator for drying, homogenisation, sampling and packing. The plant is operating at full capacity, processing 300ktpa to 30-50ktpa of concentrate with gold recovery of 92-94% and silver of 87-91%
Lunnoye Cyanide Leaching plant
22km
Full year access
Open pit expected to be depleted by FY13. Detailed delineation below pit limit and underground mine design is currently ongoing. Underground development expected to commence in Q1 13 and to operate for 3 years.
Arylakh Mine (FY06)
Management plan open pi mining to terminate in FY12 t and underground in FY21. Current capacity of 1000ktpa but mgmt plan to expand to 1320ktpa by FY14. Nachalny-2 mine : Located 4km North of the Dukat mine. The mine is opening in H2 11 terminating in FY13 .The group expects to mine a total of 292ktpa of ore by FY13 (=36.5ktp/quarter). Concentrates have low recoveries from cyanidation and are planned to be sold to offtakers.
Dukat Mine (FY01) (incl. Nachalny-2 FY11):
Full year access
172km
Zone 9 underground mine: Current capacity of 150ktpa. Further expansion to 300ktpa planned for FY17. Known reserves expected to be depleted by FY23 but mgmt believe extensions are likely. Zone 7: High gr ade narrow-quartz veins. In-fill drilling planned to start in Q412 to convert the zone from resource to a reserve. Mgmt expect the underground mining feasibility be established in Q411.
Lunnoye Mine (FY00):
42km
unpaved
71km from the Omsukchan concentrator and 6km from existing road. Resource estimate expected in FY12.
Krasin project TBD
In FY10 debottlenecking enhanced capacity to current 1500ktpa. Ore treatment: Uses conventional sulphide flotation, different cycles for different ore qualities. Nachalny -2 and Goltsovoye have more complex ores. Recoveries: 72-74% for silver, 73-75% for gold. Lunnoye feed treatment: Drying, homogenisation, sampling and packing. (before 07 smelting was done on site).
Omsukchan Concentrator
If mgmt deems that cyanidation is not effective for a batch, it is shipped to a third party off taker through the Port of Magadan
After the Lunnoye treatment loop the dry sampled precipitate is shipped to a third party refinery for toll-refining into dore and for sale.
Currently there are no reserve estimates but management plan to publish estimates in FY12 following a completion of a drilling program. Concentrates from this mine have low recoveries from cyanidation and are expected to be sold to off-takers. The group started underground development in Q309 and first ore was mined in Q410. Mining capacity of 120ktpa in FY11 is expected to reach 180ktpa in FY12
Goltsovoye mine (FY09):
80km
Full year access
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Omolon hub (100%) The Omolon hub is also located in the Magadan region in a remote area accessible by winter road. The Kubaka plant, acquired with alongside the Birkachan mine, in 2008, is the main processing centre. The plant processes ore from the Sopka and Birkachan mines and is also planned to process ore from planned future developments in Tsokol, Oroch and Dalniy. The Kubaka plant uses conventional CIP cyanidation technology and has a current capacity of 850ktpa. The plant processes mostly low grade Birkachan ore. A new section is being commissioned for high silver grade ore including an agitated leaching, countercurrent decantation and Merrill Crowe recovery. Management expect the plant to be commissioned in Q4 2011, which we see as a potential catalyst. In Q4 2012 management plan to complete feasibility studies to evaluate potential reserves at the Oroch and Dalniy sites. Based on managements plans we note the facilities are planned to be expanded to include a heap leaching operation at Birkachan which the company expects to start operations in 2012 and a heap leach at Sopka from 2014 onwards. We see Omolon production will contribute significantly to the groups production growth and forecast gold equivalent production to grow to 230,000oz in FY14E (10,000oz in FY10).
Fig. 160: Omolon hub
Property acquired in FY08. Following a bridge construction in Q211 the site is accessible all year around from Kubaka. The earlier owner processed only the highest grade material and stored lower grade on site . Polymetal management plan to send the high grade material to Kubaka and to heap leach low grade material going forward. According to the current mgmt plan, open pit operations are planned to last until FY17 followed by underground to FY23. Current mining capacity is 900ktp of rock /month.
Birkachan mine (FY08)
Property acquired in FY09 with Kubaka plant. Highly weathered near-surface vein deposit . No current reserves but resources are 1.3mt of ore grading 8.1g/t gold. Open pit mining expected to commence in Q312 reaching annual rate of 150ktpa in FY13. Ore will be processed in the Kubaka plant. Management expect open pit mining operations until FY17 and underground until FY19
Tsokol project (FY12e)
Full year access
3 km
Acquired in FY08 with four mining properties including Birkachan. In Q410 the group started construction of a new processing section to enable processing of ores with high silver content from the Sopka deposit. The upgraded plant is expected to be commissioned in Q411. Process uses conventional CIP cyanidation technology. The operating capacity of the plant is 850ktpa . Currently the plant processes mostly low grade Birkachan ore, with a recovery of92% gold.
Kubaka plant (FY08)
34 km
Full year access
Exploration site located 20 km from the Sopka mine road and 110km from Kubaka plant. Resources are expected to be published in Q412. According to latest plans mining is expected to start in FY18e but Polymetal management thinks this could be earlier.
Oroch project (FY18e)
Polymetal is trialling dump or heap leaching this material and a heap leaching facility is expected to start operations in FY12e with a full year operations. The leach will be heated to 14 degrees and distributed by buried drippers in the winter. A separate building is being built for processing through a CIC circuit.
Birkachan Heap leach (FY12e)
110km
Winter road
180km
Winter road
Property acquired in FY09 and open pit mining started in FY10. The capacity is of 250kt or rock per month from three pits which will merge into one pit later one. Only high grade ore (Au eq 5g/t) is transported to the Kubaka plant for processing. Current mine plan provides for open pit mining until FY16 with processing continuing until FY18. Transportation volumes to limited to 300ktpa owing to the road conditions as the road is only operational 4 months pa. Winter weather may further li mit th is capacity. recoveries are expected to be 94% for gold and 88% for silver.
Sopka mine (FY09)
18km
Winter road
Located 18km from the Sopka mine and accessible using a winter road. There are no resource or reserve estimates, for the project. Management expect reserve estimates by Q412. Management expect mining o commence in FY15e. Management anticipate Dalniy to have a five year mine live . High grade ore is transported to Kubaka and low grade ore heap leached on site jointly with material from Sopka.
Dalniy project (FY15e)
Low grade ore will be heap leached on-site after twostage crushing. Test work indicated recoveries of 6% for gold and 55% for silver are achievable over two-year leaching period. Processing expected by management to start in FY14e.
Sopka Heap leach (FY14e)
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January 18, 2012
Amursk POX Hub (100%) The Amursk Hub is located in the Khabarovsk territory in Russia and includes two operational mines, the Albazino mine in Khabarovsk territory and the Mayskoye mine located nearly 2,600km away in the Chukotka territory near the Arctic circle. It is one of the first facilities that will be able to process refractory ore in the region and leads the Petropavlovsk Pokrovskiy Hub by roughly 18 months. Although a significant growth opportunity, the Amursk operations are relatively challenging, both from a technological and logistical perspective. First, the pressure oxidisation process is highly complex and requires specific chemical and operating parameters, which can take time to achieve expected rates of production. Second, the mines that will be producing concentrate for the POX processing are in distant and remote areas (Albazino 755km, Mayskoye 4,200km by ship and road) with only seasonal transport windows. This in our view will mean that the production profile from Amursk is likely to be more volatile and more affected by inherent risks. Full capacity at Amursk is 225ktpa concentrate. The combined reserves of the two mines are 4.7moz of gold. We forecast Amursk to ramp up production in FY12 and to grow to 270,000oz of gold by 2014. Consequently it is a major component of the groups near term production growth, although we note that our estimates are below managements target of 430,000oz in FY13.
Fig. 161: Amursk POX Hub
Albazino has two open pit mines and capacity of 1.5mtpa Transport to Amursk is by barging which is restricted to 6 months of the year. Updated resource estimate is expected by mgmt in Q4 12 as well as an update on a possible expansion of the concentrator capacity. Mgmt have other targets identified on the property including Maslov, Katya-2 and the watershed. Current mine plan provides for open pit mining until FY20e but mgmt state extensions are likely owing to pit enlargements.
Albazino mine (FY09)
Property acquired from Highland Gold in FY09. Underground mine development had started in FY08. Polymetal decided to link this with the Amursk POX facility to reduce Capex. Mining at Mayskoye will be done both using open pit and underground methods Development is expected to start in Q112e. Underground development of 1,100m pm. The current life of mine plan expects the mine to operate until FY24e.
Mayskoye mine (FY09)
Shipped to a third party off taker before the opening of the Amursk POX facility. According to mgmt 20 tonnes sold in FY11.
The ore is refractory and not amenable to recovery by conventional cyanidation. Grinding capacity of 1,500ktpa achieved in Q311 running on full capacity since Aug 2011. Designed recovery using flotation of 87.5% and mass pull of 8%. Currently processes oxidized ores which results in a recovery of 65%. concentrate contains 45-55g/t of gold. Mgmt plan processing to continue until FY23e.
Albazino concentrator (FY11)
755km Shipping
and barging, summer only
Construction commenced in Q210 commissioning expected in Q3FY12. The concentrator has a capacity of 850ktpa which is planned to be achieved by Q412. Concentrate is expected to have 70-100g/t gold and RIL recovery is expected to be around 88%. Transport will be in 14 tonne bags to the port of Pevek, then by sea to Vanino and from there by rail to Amursk plant. The other legs are year around but sea shipment is restricted to the summer months. Oxidized ore will be processed by RIL cyanidation.
Mayskoye concentrator (FY12e)
Under construction in Q311. designed to accommodate the complementary Mayskoye and ablation concentrates. Designed capacity of 225ktpa of concentrate but only if sulphide sulphur oxidation is below 22ktpa. If there is more sulphur in the concentrate the capacity is lower. First gold pour expected for Q1 2. Average recovery of 92% of gold to dore was demonstrated, (combined recovery of 81%).
Central Pressure oxidation (POX) facility at Amursk (FY12e)
Voro (100%) The Voro open-pit mine is located in the Sverdlovsk region of Russia, 370km north of Ekaterinburg. Polymetal commenced mining at Voro in 1999 and heap leaching of oxidised ore in 2000. A CIP plant was commissioned in 2005 and later expanded to current capacity of 940ktpa. Reserves at Voro are 1.4moz of contained gold. The group has a satellite project at Fevralskoye for which a feasibility study is expected to be published in FY12. An earlier satellite open-pit project at Degtyarskoye is closing in FY11.
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January 18, 2012
Owing to the current mining speed and low oxidised ore reserves, the Voro heap leach is likely to operate at below operating capacity from FY12 onwards and to finish in 2017. We model that the CIP process will have enough material until 2024, although this is likely to be extended once the Fevraslkoye reserves are established in FY12. Our forecast for Voro reflects the maturity of the mine and declining reserves. We expect production to decline to 87,000koz of gold equivalent by 2014. (In 2010 the mine produced 186,000oz). We would see any increase in reserves at Fevralskoye or other finds nearby as positive as this could improve the capacity utilisation at Voro, providing expected benefits to cash cost and production volumes. Varvara (100%) The Varvara mine is located in Northern Kazakhstan and consists of an open-pit mine and a processing plant. We note that management believes that owing to its infrastructure and location, the Varvara mine has the potential to become a production hub for other mines in the region. The groups current reserves at Varvara amount to 0.8moz of gold and 0.1MT of contained copper. Based on the reserves we expect Varvara production to peak in FY11E at 140,000oz, but to decline from FY12E onwards initially owing to lower grades at the Varvara mine and then owing to lower planned mining volumes from FY14 onwards. Based on current reserves, we expect mining to continue at Varvara until FY16E but note as a potential catalyst the Varvara mine expansion feasibility study, which management aim to publish in FY12. Khakanja Mine (100%) The Khakanja mine is a combined gold and silver mine located in the Khabarovsk territory in eastern Russia. Mining activities there consist of two open pits and the Yurivskoye satellite project. Management plans to commence underground mining in Khakanja from FY12E onwards until FY18E. The Khakanja mine is a mature asset and we model production to (based on current reserves of 0.3Moz of Au and 18.2Moz of Ag) continue until FY2020. We note that management aims to update resources and the life of mine plan in Q3 2012E.
Total Reserves Deposit Nam e Dukat Hub Amursk POX Omolon Voro Khakanja Varvara Total Total Resources (Incl. inferred) Deposit Nam e Dukat Hub Amursk POX Omolon Voro Khakanja Varvara Total Ow nership 100% 100% 100% 100% 100% 100% Country RUS RUS RUS RUS RUS KAZ Tonnes Mt 28.9 55.5 24.1 17.1 11.2 70.3 207.0 Gold (g/t) 1.0 6.1 3.2 2.7 5.2 0.8 2.9 Gold Contained Attributable Oz Oz ( 0.9 10.9 2.5 1.5 1.9 1.9 19.6 0.9 10.9 2.5 1.5 1.9 1.9 19.6 Silver g/t) 479.0 0.0 47.6 3.9 66.6 0.0 73.8 Silver Contained Attrib. oz moz 430.1 0.0 36.0 2.1 29.0 0.0 497.1 430.1 0.0 36.0 2.1 29.0 0.0 497.1 Equiv Attrib Copper moz % 7.2 0.0 0.6 0.0 0.5 0.0 8.3 0.0 0.0 Copper Contained Attrib. t t 0.0 0.0 0.0 0.0 0.0 0.3 0.3 0.0 0.0 0.0 0.0 0.0 0.3 0.3 Equiv Attrib moz 0.0 0.0 0.0 0.0 0.0 0.3 0.3 Ow nership 100% 100% 100% 100% 100% 100% Country RUS RUS RUS RUS RUS KAZ Tonnes Mt 16.9 25.4 16.7 15.5 2.5 28.5 105.5 Gold (g/t) 1.3 5.8 2.9 2.8 3.5 0.9 2.8 Gold Contained Attributable Oz Oz ( 0.7 4.7 1.6 1.4 0.3 0.8 9.5 0.7 4.7 1.6 1.4 0.3 0.8 9.5 Silver g/t) 508.6 0.0 41.4 3.9 230.7 0.0 93.8 Silver Contained Attrib. oz moz 275.8 0.0 22.3 1.9 18.2 0.0 318.3 275.8 0.0 22.3 1.9 18.2 0.0 318.3 Equiv Attrib Copper moz % 4.6 0.0 0.4 0.0 0.3 0.0 5.3 0.0 0.0 Copper Contained Attrib. mt mt 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.1 0.1 Equiv Attrib moz 0.0 0.0 0.0 0.0 0.0 0.1 0.1
Balance sheet With FY11E net debt of USD 836m, Polymetals balance sheet is one of the most geared companies in our universe. We think that the relatively high net debt position is attributable to the groups high capex spending to ramp up its production as well as its active M&A record. Based on our estimates we think the net debt will peak in FY11 and improve to a moderate net cash position of USD 255m by 2013, owing to both a decline in capex and an increase in production.
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Fig. 163: POLY EBITDA and capex

$2,500
Fig. 164: POLY net debt and debt ratio

$4,000 2.0 1.5
$2,000
$1,500
$2,000
$1,000
1.0 0.5
$500
$0
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-$2,000
2009
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-1.0
EBITDA ($M)
Capex ($M)
Net Debt/EBITDA (x)
Fig. 165: POLY EPS and P/E @ USD 1,900/oz

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2009 EPS 2010 2011e 2012e 2013e 2014e 2015e 0 10 20 25
Fig. 166: POLY EPS and P/E @ long term forecast

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2009 EPS 2010 2011e 2012e 2013e 2014e 2015e 0 10 20 25
15
15
P/E (x)
P/E (x)
Fig. 167: POLY share price since listing

1,250.0
Fig. 168: Historical 12-month forward P/E (consensus)

20 18
1,050.0
16 14
850.0
12 10
650.0
8 6
450.0
4 2
250.0
20/04/2007
20/06/2007
20/08/2007
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20/12/2007
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20/08/2011
50.0 Oct-11 Poly metal
Nov -11 DS World gold m ining index
Dec-11
POLYMETAL (~ )
POLYMETAL I NTERNATIONAL (~ )
Management and significant shareholders Board/management Chairman Ilya Yuzhanov CEO Vitaly Nesis CFO Sergey Cherkasin Significant shareholders Three main shareholders control about 47% of Polymetal shares, which puts the company above the minimum 50% free float required for FTSE 100 listing. The largest shareholder of the group is Czech Financier Petr Kellner who owns 20%. The groups CEO Mr Vitaly Nesiss brother, Alexander Nesis is the second largest holder with a 17% holding. The third largest holder is Alexander Mamut, with an approximate 10% shareholding.
20/10/2011
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Fig. 169: Forecast summary

Nomura Polymetal model Primary Analyst: Tyler Broda Rating R Target Price (GBp) Price (GBp) Shares (M) Mcap (US$M) EV (US$M) Year End Assumptions Gold (US$/oz) Silver (US$/oz) Copper (USc/lb) GBP/USD educe 1350 1,100 383 Price (US$) 6,434 Net debt (US$M) 7,270 December FY10 1,225 20.17 3.42 1.55 FY11 1,587 34.55 4.06 1.61 FY12E 1,788 36.88 4.00 1.61 FY13E Cash Flows (US$M) 2,063 48.25 3.60 1.65 PBT Working Capital Net Interest Taxes Other Operating Cash Flows Capex Disposals Exploration Other Investing Cash Flows Change in Borrowings Dividends Equity ssues I Other Financing Cash Flows FY10 306 -120 -17 -80 126 215 -404 0 0 -6 -410 182 0 0 -4 178 FY11E 536 -123 -62 -136 122 337 -380 0 0 -3 -382 72 0 0 -5 67 FY12E 1,011 -309 -87 -283 193 524 -153 0 0 0 -153 -299 -73 0 0 -372 FY13E 1,847 -463 -53 -517 210 1,024 -87 0 0 0 -87 -571 -146 0 0 -716 16.99 836 P&L (US$M) Revenues Operating Costs Other EBITDA D&A EBIT Share of Equity Profit Net Interest Taxes Net Profit EPS () DPS () FY10 925 -527 0 399 -70 328 328 -26 -67 242 67.00 0.0 FY11E 1,362 -729 0 633 -78 553 553 -22 -151 389 107.20 20.0 FY12E 1,993 -786 0 1,208 -106 1,098 1,098 -87 -283 728 199.44 39.9 FY13E 2,980 -919 0 2,061 -157 1,900 1,900 -53 -517 1,330 364.44 72.9
Key Ratios PE x) ( EV/EBITDA x) ( EPS Growth (%) ROE (%) Net Debt to Equity (%) Net Debt to EBITDA (x) Dividend Yield (%) FCF ield %) Y (
FY10 21.5 18.2 139% 18% 0.5 1.7 0% -4%
FY11E 16.6 11.5 60% 20% 0.4 1.3 1% -1%
FY12E 8.8 6.0 86% 28% 0.2 0.4 2% 6%
FY13E 4.8 3.5 83% 35% -0.1 -0.1 4% 15%
Production koz (Au Eq) Dukat Voro Khakanja Varvara Omolon Amursk Total
FY10 278 186 170 100 10 743
FY11E 321 157 114 140 59 790
FY12E 377 120 139 109 195 67 1,006
FY13E 446 126 109 124 197 256 1,258 Balance Sheet (US$M) Cash Recievables Inventories Other Current Assets FY10 11 167 369 4 551 FY11E 33 259 545 4 841 FY12E 33 379 758 4 1,174 FY13E 255 566 1,073 4 1,898
Cash costs (US$M) Dukat Voro Khakanja Varvara Omolon Amursk Total
FY10 612 458 462 629 981 0 546
FY11E 876 605 678 741 1,484 0 815
FY12E 752 565 522 1,027 511 1,815 752
FY13E 707 541 590 893 688 772 709
Exploration Property, Plant and E quipmen Intangibles Other Non Current Assets Total Assets Borrowings Payables Provisions Other Current Liabilities Borrowings Provisions Other Non Current Liabilities Total Liabilities Total Equity
0 1,643 115 111 1,869 2,420 91 90 0 22 203 595 69 191 856 1,059 1,361
0 2,110 125 146 2,381 3,222 217 169 0 42 427 652 58 124 835 1,262 1,960
0 2,157 125 146 2,427 3,601 217 192 0 42 450 354 58 124 536 987 2,615
0 2,087 125 146 2,357 4,255 0 232 0 42 273 0 58 124 183 456 3,799
EBIT (US$M) Dukat Voro Khakanja Varvara Omolon Amursk
FY10 131 108 105 31 -10 -15
FY11E 294 139 83 94 1 -19
FY12E 497 134 174 73 247 -14
FY13E 895 176 178 122 271 270
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January 18, 2012
SA US Seabridge Gold (Buy, USD 31.80 TP)

We are assuming coverage of Seabridge Gold with a Buy rating and a USD 31.80 target price. In our analysis, Seabridge Gold fits well into our top-down framework. This development and exploration company with large, longer-term assets should benefit directly from a structurally higher gold price.
A focused way to invest in a new era for gold equities

We believe Seabridge Gold provides a unique investment opportunity in our coverage universe. With no operating mines, the current asset portfolio has a long-term production profile that still faces significant hurdles including financing, construction and permitting. The company has stated that its preferred route for realising the value from KSM and Courageous Lake is through a partnership with a large gold producer. Therefore, the destiny of catalysing value from moving through development to construction relies on external factors. However, in our view, the shares form what amounts to an indirect call option on a potential new era for gold equities. The super-sized KSM project in Northern British Columbia Canada, its c. 750,000oz of gold equivalent production potential and its USD 4.7bn capital cost is likely to consume a vast amount of resources (financial and otherwise) from an eventual partner. The sheer scale of the project limits the universe of potential partners. As described in sections above, our analysis indicates that significant levels of cash is likely to build on the global gold equity balance sheet. In our view, this will increase the propensity of the company being able to negotiate a partnership that is long-term value enhancing for Seabridges shareholders. In terms of valuation, we see significant potential upside for risk-tolerant longer-term investors. Unrisked, and importantly unfinanced (and using the same 5% discount rate for our other coverage universe and a flat gold price at USD 1,900/oz), our calculations provide a value of USD 225.68/share. We note that achieving this valuation in the nearterm is unrealistic: a) a partnership is likely to see much of this upside given up; b) there is no discount for financing; and c) our long-term gold price forecast likely provides a more reasonable expectation (USD 90.76/share). However, should a large gold producer look to add material production from a desirable country (such as Canada) from a risk perspective, we believe that the KSM project would perhaps look more achievable in the coming years. A JV partnership for KSM or Courageous Lake with a major gold producer would be a significant catalyst for the shares, and would allow for a de-risking of the valuation. We note that Seabridge expects to announce an updated feasibility study for KSM in April 2012.
Fig. 170: Seabridge vs. volatility vs. gold vs. gold equities
Seabridge shares have generally outperformed the gold equity universe in a risk on environment
Source: Bloomberg
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January 18, 2012
Valuation We have taken a factor approach to valuing Seabridge Gold based on the multiple risk factors including financing risk, permitting risk, construction risk and gold price risk. Owing to the longer-term nature of the developments and lack of near-term production potential we are using our base-case, long-term prices for valuation (rather than a flat gold price of USD 1,900/oz).
Fig. 171: Valuation for Seabridge Gold
Valuation (NPV @ 10%) KSM Courageous Lake Other Resources Corporate Exploration Hedging Investments Net Cash (Debt) Total USD CAD USD/CAD Total USD Current share price (p) P/NAV Target multiple Target price Upside
$M 3131.2 496.1 65.4 -35.2 0.0 0.0 0.0 34.5 3692.0
Current Per Share $71.65 $11.35 $1.50 -$0.81 $0.00 $0.00 $0.00 $0.79 $84.49 $86.73 1.02655 3790 $90.76 $17.03 0.2x 0.4x $31.77 87%
+1 Yr $77.22 $12.57 $1.50 -$0.77 $0.00 $0.00 $0.00 $0.24 $90.76 $93.17
+2 Yr $81.36 $13.20 $1.50 -$0.72 $0.00 $0.00 $0.00 -$0.31 $95.03 $97.55
+3 Yr $85.71 $14.05 $1.50 -$0.68 $0.00 $0.00 $0.00 -$0.86 $99.72 $102.37
09/01/2012
Based on Nomuras one-year forward sum-of-the-parts NAV estimate (using our longterm gold price of USD 1200/oz and long-term estimates for copper, silver and molybdenum), we estimate a value of USD 90.76/share. Through a multifactor discount process to account for the risks above, we use a target 12-month P/NAV multiple of 0.4x, generating a value of USD 31.80/share. We highlight that Seabridge Gold, with no cash flows and no expectation of positive cash flows in the medium term, has much higher risks as an investment and there remain many operational and structural factors that could see variations in NAV estimates.
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January 18, 2012
Fig. 172: Seabridge Gold valuation chart

100 90 80 70 60 50 40 30 20 10 0
Fig. 173: Seabridge Gold valuation trend

NPV Curve 105
100
$99.72
95
$95.03
90
$90.76
85
$84.49
80
KSM
Courageous Other Lake Resources
Net Cash (Debt)
Corporate
Total USD
75
Current Per Share NPV Curve
+1 Yr
+2 Yr
+3 Yr
Fig. 174: Map of operations for Seabridge Gold
Canada Courageous Lake KSM
Asset summary
KSM (100%) The Kerr-Sulphurets-Mitchell (KSM) project is located in northern British Columbia, Canada and is the larger of the groups two main assets. The site consists of four separate deposits and has total reserves of 38.5moz of gold (average grade 0.55g/t); 214.5moz of Silver (average grade 3g/t); 4.6mt of Copper (0.21%) and 257mp of Molybdenum (53.2ppm).The asset is 100% owned by Seabridge Gold and based on our analysis ranks as one of the largest current gold mine development projects in the world. Management have published an updated preliminary feasibility study for KSM in June 2011, which increased the life of mine plan to 52 years with an average processing throughput of 120kt per day. Ore is planned to be mined using open-pit methods and processed in a flotation circuit to a combined copper/gold/silver concentrate, which is planned to be transferred to an offsite smelter. Additionally, separate on-site processes are also planned to produce Molybdenum concentrate and gold-silver dor.
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January 18, 2012
According to the feasibility study, the start-up capital costs for the project are estimated at USD 4.7bn, which we think is beyond the groups financial means. We think that mainly owing to the extensive financial resource requirements, management are openly looking to partner the development of the mine. Consequently we think that progression of the plan is highly dependent on finding a partner with sufficient financial resources and risk appetite. In our model we estimate a development phase of 6 years and production starting in FY19. Courageous Lake (100%) The Courageous Lake deposit is located in an isolated location in the North West territories in Canada and consists of a 50km long greenstone belt FAT deposit. Total resources amount to 11.3moz of gold at an average grade of 2.3g/t, reserves have not been established to date. Based on the preliminary economic assessment, which management released in June 2011 mining at Courageous Lake is planned to be done using open-pit mining methods with operating life at 17,500 tonnes per day, 365 operating days per year and a 92% plant availability. Annual throughput for the mill is estimated at 6.4m tonnes. With 101.1m tonnes of in-pit mineralised material above cut-off, Courageous Lake's mine life is estimated at approximately 16 years. Overall gold recovery is estimated at 89.9% resulting in 6.05m ounces of gold production over the project's life averaging 383,000 ounces per year. The project site is accessible only using a winter road and by air, and hence stand-alone power supply and large warehousing storage facilities are required. Overall the start-up capital costs for the project are estimated at USD 1.3bn. According to managements latest estimates we understand that development of the project is likely to take 6 years, and we forecast production to start in FY18. We note that owing to the high capital expenditure, we believe that Seabridge gold requires external financing (or a partner) to develop this project. Other resources (100%) The group also has a number of smaller gold assets in earlier stages of development. These include the Grassy Mountain deposit which has resources of 1moz of gold (grade: 1.5g/t); Quartz Mountain 4.6moz of gold (grade 1.4g/t); Red Mountain 0.6moz (grade: 5.5g/t) and the Castle/Black Rock deposit, which has 0.3moz of gold at an average grade of 0.5g/t.
Fig. 175: Seabridge reserves and resources
Total Reserves Deposit Nam e KSM Total Total Resources (Incl. inferred), excluding reserves Cut off grade Tonnes Mt Gold Contained Attributable Oz Oz ( 20.8 11.3 1.0 4.6 0.6 0.3 38.4 20.8 11.3 1.0 4.6 0.6 0.3 38.4 Silver Contained Attrib. Equiv Attrib Copper oz moz moz % 138.9 0.0 0.0 0.0 0.0 0.0 138.9 138.9 0.0 0.0 0.0 0.0 0.0 138.9 2.3 0.0 0.0 0.0 0.0 0.0 2.3 0.18% 0.00% 0.00% 0.00% 0.00% 0.00% 0.15% Copper Contained Attrib. t t 2.6 0.0 0.0 0.0 0.0 0.0 2.6 2.6 0.0 0.0 0.0 0.0 0.0 2.6 Molybdenum Contained Attrib. Equiv Attrib mp mp moz Total Au Eq 56.8 0 0 0 0 0 47.1 170.6 0 0 0 0 0 170.6 170.6 0 0 0 0 0 170.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 36.4 11.3 1.0 4.6 0.6 0.3 54.0 Ow nersh Country 100% CAN Tonnes Mt 2194.4 2194.4 Gold (g/t) 0.6 0.6 Gold Contained Attributable moz moz 38.5 38.5 38.5 38.5 Silver (g/t) 3.0 3.0 Silver Contained Attrib. Equiv Attrib Copper moz moz moz % 214.5 214.5 214.5 214.5 3.6 3.6 0.21% 0.21% Copper Contained Attrib. mt mt 4.6 4.6 4.6 4.6 Equiv Attrib moz 23.3 23.3 Moly ppm 53.2 53.2 Molybdenum Contained Attrib. Equiv Attrib mp mp moz Total Au Eq 257.3 257.3 257.3 257.3 0.0 0.0 65.4 65.4
Deposit Nam e
Ow nersh Country
Gold (g/t) 0.4 2.3 1.5 1.4 5.5 0.5 0.7
Silver g/t) 3.0 0.0 0.0 0.0 0.0 0.0 2.5
Equiv Attrib moz 13.2 0.0 0.0 0.0 0.0 0.0 13.2
Moly ppm
KSM Courageous Lake Grassy mountain Quartz Mountain Red Mountain Castle/ Black Rock Total
100% 100% 100% 100% 100% 100%
CAN CAN CAN CAN CAN CAN
0.5 0.83 0.55 0.34 1.00 0.25
1455.2 153.2 20.4 102.6 3.7 20.3 1755.4
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January 18, 2012
Fig. 176: Seabridge Gold EBITDA and capex profile

$0 -$100 -$200 -$300 -$400
Fig. 177: Seabridge Gold debt profile and debt ratio

$2,000 7.0
5.0 $1,000
3.0
1.0 $0
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EBITDA ($M)
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Fig. 178: EPS and P/E

0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 500 400 300 200 100 0 -100 -200 -300 -400 -500
Fig. 179: Seabridge gold share price vs. DS world gold mining index
40 35 30 25 20 15 10 5 0
2009 EPS ($)
2010
2011e P/E (x)
2012e
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Seabridge
Management and significant shareholders Board/management Chairman James S. Anthony CEO Rudi P. Fronk CFO Christopher J. Reynolds Significant shareholders Pan Atlantic 18.4% Royce and Associates 14.1%
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January 18, 2012
Fig. 180: Forecast summary

Seabridge Gold Primary Analyst: Tyler Broda Rating B Target Price USD Price (US$) NPV (US$) Shares (M) uy 31.80 19.23 90.76 44 Price (CAD) NPV(CAD) 815 Net debt (US$M) 780 December FY10 1,369 26 4 16 0.98 FY11 1,571 35 4 16 0.99 FY12E 1,788 37 4 22 0.96 FY13E 2,063 48 4 20 0.96 19.74 93.17 -34 P&L (US$M) Revenues Operating Costs Other EBITDA D&A EBIT Financial items Net Interest Taxes Adjustments Net Profit EPS () DPS () Cash Flows (US$M) Net income Working capital Depreciation Taxes Other Operating Cash Flows Capex Disposals Exploration Other 0 Investing Cash Flows Change in Borrowings Dividends Equity Issues Other Financing Cash Flows Balance Sheet (US$M) Cash Recievables Inventories Other Current Assets Exploration Property, Plant and E quipm Intangibles Other Non Current Assets Total Assets Borrowings Payables Provisions Other Current Liabilities Borrowings Provisions Other Non Current Liabilities Total Liabilities Total Equity
Mcap (US$M) EV (US$M) Year End Assumptions Gold (US$/oz) Silver (US$/oz) Copper (USc/lb) Moly (USc/lb) CAD/USD
FY10 0 -6 10 4 0 4 2 0 3 0 4 9.00 0.00 FY10 4 -2 0 0 -10 -9 -38 10 32 -59 0 0 69 0 69 FY10 1 3 0 32 36 132 0 0 12 144 180 0 4 0 0 4 0 2 1 3 6 174
FY11E 0 -17 0 -17 0 -17 -1 1 1 0 -16 -38.99 0.00 FY11E -16 0 0 -1 13 -4 -39 0 1 -38 0 0 33 0 33 FY11E -8 2 0 42 37 162 4 0 1 168 205 0 3 0 0 3 0 2 0 2 5 199
FY12E 0 -8 0 -8 0 -8 0 0 3 0 -5 -12.94 0.00 FY12E -5 0 0 -3 4 -4 -20 0 42 0 22 0 0 0 0 0 FY12E 10 2 0 0 13 162 24 0 4 190 203 0 3 0 0 3 0 2 0 2 5 198
FY13E 0 -8 0 -8 0 -8 0 0 3 0 -5 -12.94 0.00 FY13E -5 0 0 -3 4 -4 -20 0 0 0 -20 0 0 0 0 0 FY13E -14 2 0 0 -11 162 44 0 6 213 202 0 3 0 0 3 0 2 0 2 5 196
Key Ratios PE (x) EV/EBITDA (x) EPS Growth (%) ROE (%) Net Debt to Equity (%) Net Debt to EBITDA (x) Dividend Yield (%) FCF Yield (%) NPV KSM Courageous Lake Other Resource Corporate Other Net Cash Total
FY10 318.8 185.6 NM 0.0 -0.2 -7.8 0.0 0.0 3,131 496 65 -35 0 34 3,692
FY11E NA -45.1 NM -0.1 -0.2 2.0 0.0 0.0 $71.65 $11.35 $1.50 -$0.81 $0.00 $0.79 84.49
FY12E NA -97.6 NM 0.0 -0.1 1.3 0.0 0.0
FY13E NA -97.6 0% 0.0 0.1 -1.7 0.0 0.0
(USD$M) Per Share
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99
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Appendix A-1
Analyst Certification
I, Tyler Broda, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures

Mentioned companies
Issuer name African Barrick Gold Avocet Mining Centamin Egypt Petropavlovsk Polymetal International Randgold Resources Seabridge Gold Ticker ABG LN AVM LN CEY LN POG LN POLY LN RRS LN SA US Price 459p 214p 91p 681p 1091p 7215p USD 18.76 Price date 16-Jan-2012 16-Jan-2012 16-Jan-2012 16-Jan-2012 16-Jan-2012 16-Jan-2012 13-Jan-2012 Stock rating Buy Buy Neutral Reduce Reduce Buy Buy Sector rating Bullish Bullish Bullish Bullish Bullish Bullish Bullish Disclosures
123 123
Disclosures required in the U.S.

123 Market Maker - NSI Nomura Securities International Inc. makes a market in securities of the company.
Previous Rating
Issuer name African Barrick Gold Avocet Mining Centamin Egypt Petropavlovsk Polymetal International Randgold Resources Seabridge Gold Previous Rating Not rated Not rated Not rated Not rated Not rated Not rated Not Rated Date of change 18-Jan-2012 18-Jan-2012 18-Jan-2012 18-Jan-2012 18-Jan-2012 18-Jan-2012 10-May-2010
Rating and target price changes

Ticker Old stock rating New stock rating Old target price New target price
African Barrick Gold Avocet Mining Centamin Egypt Petropavlovsk POG Polymetal International Randgold Resources Seabridge Gold
ABG LN AVM LN CEY LN LN POLY LN RRS LN SA US
Not rated Not rated Not rated Not rated Not rated Not rated Buy
Buy Buy Neutral Reduce Reduce Buy Buy
N/A N/A N/A N/A N/A N/A USD 51.00
750p 310p 120p 860p 1400p 9850p USD 31.80
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January 18, 2012
Important Disclosures
Conflict-of-interest disclosures
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Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan
STOCKS
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Target Price
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Nomura Initiaties Gold

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ANCHOR REPORT

A new era for gold producers

Initiating coverage of the European gold sector with a Bullish rating

Key analysis in this report includes:

Matthew Kates [email protected] +44 20 7103 1402

European Gold Sector Initiation

ANCHOR REPORT: A new era for gold producers

January 18, 2012 Sector view Remains

Cash build to usher in a new era for gold equities

Avocet Mining (AVM, Buy, 310p TP) has a significant medium-term

Nomura | European Gold Sector Initiation

January 18, 2012

101 Appendix A-1

Nomura | European Gold Sector Initiation

January 18, 2012

Gold equity valuations are at historical lows

Nomura | European Gold Sector Initiation

January 18, 2012

Fig. 1: Forecast gold price

Source: Bloomberg, Nomura research

Fig. 2: Historical and consensus EBITDA and net debt

Fig. 3: Price to NAV

Nomura | European Gold Sector Initiation

January 18, 2012

RRS OLY ABG OG EY AVM SA

9,988 6,448 2,904 1,952 1,498 654 817

7115p 1100p 462p 685p 89p 214p $19.23

Buy Reduce Buy Reduce Neutral Buy Buy

9850p 1400p 750p 860p 120p 310p $31.80

959 1,208 665 570 307 109 n/a

1019 1195 713 608 310 104 n/a

Current prices as at close of 16 January 2012. Source: Datastream, Nomura estimates

In our view, ABGs valuation is overly hampered by previous production misses

AVM has an aggressive growth programme

CEYs main Sukari asset continues to expand

Nomura | European Gold Sector Initiation

January 18, 2012

We expect Randgolds growth to continue

Fig. 5: Valuation summary

Nomura Precious Metals Valuation Summary

European Gold Sector Initiation

-0.1x -0.2x -0.3x -0.2x

January 18, 2012

Nomura | European Gold Sector Initiation

January 18, 2012

A longer-term perspective on gold

Fig. 7: US M1 money stock and rate of change

Gold Bullion LBM U$/Troy Ounce

52 wk rolling % weekly increase

Source: Datastream, Nomura research

Source: Federal Reserve Bank of St. Louis, Nomura research

Nomura | European Gold Sector Initiation

January 18, 2012

Nomura | European Gold Sector Initiation

January 18, 2012

Nomura | European Gold Sector Initiation

January 18, 2012

Forecast gold prices

Fig. 10: Consensus gold price forecasts