Copper: Price volatility and its impacts on the industry

Presentation to 23rd Regular Meeting of the International Copper Study Group Lisbon, 1 October, 2007
Robin Bhar, Base Metals Strategist [email protected] +44 20 7567 7850

Presentation agenda

Why invest in commodities? Speculative activity in the copper market Structural issues supply/demand over the long-term Long-term prices Conclusions Q&A
1

Why invest in commodities?

A secular shift in demand strength Emerging Asia
GDP US$bn and 2006 GDP growth

The developing world growing

faster, driving a take-off in materials intensity

14000 12000 10000 8000 6000 4000 2000 O 1st W Next 1bn Taiwan Brazil China India Russia Japan Sth Korea EU-7 0

Increased globalisation of markets Greater competition for limited

resources

10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 US

2006 GDP US$bn LHS

2006 GDP growth RHS

Source: Datastream, EIU, UBS estimates

World copper intensity of use, 1950-2025E

World steel intensity of use, 1950-2025E

0.00065 0.00060 0.00055 0.00050 0.00045 0.00040 2000 2005 2020E 2010E 2015E 2025E 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 Cu int of use t/1000 US$

0.036 0.032 0.028 0.024 0.020

Steel int of use t/1000 US$

2000

2005

2020E

2010E

Int. of use (China & India)

Int. of use (China only)

Int. of use (China & India)

Int. of use (China only)

Source: AME, Brook Hunt, IISI, WBMS, UBS estimates

Source: AME, Brook Hunt, IISI, WBMS, UBS estimates

2015E

2025E

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

Why invest in commodities? (2)

Challenges in supply response
Global Mining discovery rates and exploration spend

Discovery rates have declined

in both energy and metals markets

Demand increasingly reliant

on older and lower quality resources

16 14 12 10 8 6 4 2 0

No. of discoveries

Too late?

US$m 2000 2002 2004 2006E 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

Major deposit discoveries (LHS)

World class deposit discoveries (LHS)

Source: MEG, UBS estimates

Exploration spend rising

time lag consideration between discovery and production

Exploration spend US$m (RHS)

Global OilCo reserve replacement and reserve life

160% 140% 120% 100% 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Reserve repl. (organic) Reserve repl. (Acqns)

Political risk remains a critical

aspect of supply dynamics

Environmental

12.2 12.0 11.8 11.6 11.4 11.2 11.0 10.8 10.6 10.4 10.2 Reserve life

drivers/considerations

Source: Company data, UBS estimates

Why invest in commodities? (3)

Long-term pricing reflects secular imbalances
Long-term pricing patterns: Real Brent oil price from 1900 (US$/bbl.)

Changes in global intensity of

use combined with delays in supply response contribute to periods of extended strength and weakness in commodities markets

100 80 60 40 20 1900 1920 1930 1940 1950 1960 1970 1980 1910 1990 2000

China, India and the next

Brent oil (real) US$/bbl.

UBS Forecast
Source: Bloomberg, UBS estimates

billion represent an unprecedented block of longterm demand as industrialisation/urbanisation trends build

Long-term pricing patterns: Real LME copper price from 1900 (USc/lb.)

500 400 300 200

Supply response hampered

by cost pressures, political risks and scarcity of quality resources

100 1900 1920 1930 1940 1950 1960 1970 1980 1910 1990 2000

Copper price (real) USc/lb.

UBS forecast
Source: Bloomberg, UBS estimates

Why invest in commodities? (4)

Asset allocation advantages are also important

Diversification advantages
Expected return

Expected returns over next 5 years

8% 7% With real estate 6% 5% 4% 3% Cash 2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Standard deviation of return Corp bonds Govt bonds Inflation-linked With inflation-linked With commodities Real estate Commodities Equities

for portfolios holding commodities diversified commodity exposure augments this benefit

Commodities seen as a

compelling inflation hedge

Currency implications US
dollar weakness is inflationary
0.8 0.6

Source: UBS estimates

Correlation of US asset class total returns and core inflation

Correlation coefficient

Commodities appear

0.4 0.2 0.0 -0.2 -0.4 Commodities US equities Monthly US REITs Quarterly US corp bonds Yearly US govt bonds US cash

attractive in a wider asset allocation context competes effectively for marginal investment dollar

Liquidity read-through

5-yearly
Source: UBS estimates

Traditional commodity indices - Background

Commodity Index Investment

Equity like returns Diversification benefits Inflation hedge Market event risk hedge Low correlation to equities and bonds (and perform best when others do worst)

Negative returns recently

The Investment Universe

There is an estimated $120bn

tracking commodity indices globally several years is partly attributable to equity underperformance and the desire to have well diversified portfolios

Huge growth in the industry over last

Investing challenges
CRB
7 5 19 89 19 8 19 8

GSCI
1 3 7 19 9 5 19 9 19 9 19 9

RICI, DJ-AIG
20 0 19 9 20 0 20 0 20 07 1 9 3 5

Purpose

RJ-CRB: Reuters-Jefferies CRB Index; GSCI: Goldman Sachs Commodity Index; RICI: Rogers International Commodity Index; DJAIGCISM: Dow Jones-AIG Commodity IndexSM

The indices are aimed to establish an investable benchmark for investors taking commodity exposure, by balancing market representation and liquidity

How?

The indices take long commodity positions, through futures contracts on the relevant commodities Size of the allocation to each commodity is usually set according to a weighting engine driven by a combination of global production/consumption and/or traded volume

Rolling front-month contracts

The front-month futures contracts are rolled into the next contract shortly before they expire

Why rolling front contracts?

A number of commodities historically have had limited liquidity beyond the front-month contracts Historic performance of rolling the front contracts was positive

Limited involvement of financial investors

The key players were consumers and producers with no material market impact from commodity index investments

Investing challenges
General roll process
1. Buy short-dated futures 2. Hold for 1 month 3. Roll back to the new short-dated
futures contract
Oil Price 60 59 58 57 56 55 54 53 52 51 50 1 6 12 18 24 30 Futures contracts months to Expiration 36 42 3 2 1

Two fundamental shortcomings with this process:

1.

Buying High/Selling Low: when curves are upward sloping like above

Current negative roll yield on GSCI ~ 1.50%/month (18% p.a.)

2.

Lack of Diversification: only invested on one point of curve

High Volatility Short-end of curve tends to exhibit the most negative roll yield

Deconstructing index returns - components

Contango Full carry curve and arbitrage potential

forward contract, pocket the yield

Contango: cost to the investor Physical availability Arbitrage: buy physical, sell the

Backwardation Full carry curve and quasi-arbitrage potential

Source: UBS

forward contract, pocket the yield

Backwardation: return to the investor Physical scarcity Arbitrage: sell physical, buy the

Source: UBS

Curve asymmetries
Forward curve, Brent Crude Oil
74 72 70 68 66 1 13 25 37 49 61 Brent Crude Oil (21 June 2007)
Source: Bloomberg Source: Bloomberg

Forward curve, Comex Gold

Negative convexity 800 750

Point b Point a

700 650 600 1 2 3 4 5 6 7 8 9 10 11 12 13

Comex gold (21 June 2007)

Changing slope along the curve (convexity) can create

differentiation in returns achieved

Creates opportunities for outperformance Lack of convexity generates a lower performance differentiation

10

Curve asymmetries the evidence

Brent Crude Oil avg. shape of the forward curve (from the one month to 12 month contract)
110 105 100 95 90 85 80 1 Greater curvature observed in contango market 2 3 4 5 6 7 8 9 10 11 12

Brent Crude Oil avg. vol and vol of vol (from the one month to 12 month contract)
35% 30% 25% 20% 15% 10% 5% 0% 1 2 3 4 5 6 7 8 9 10 11 12

Backwardation
Source: Bloomberg, UBS estimates

Contango

Average Vol
Source: Bloomberg, UBS estimates

Vol of Vol

Weekly data from 1994 using the first 12 months contracts Contango definition: 1m<2m<3m Backwardation definition: 1m>2m>3m R2 for best fit line; 75% in contango market, 90% in
backwardated markets

11

Curve asymmetries the evidence

LME copper avg. shape of the forward curve (from the one month to 12 month contract)
105 100 95 90 85 80 1 Greater curvature observed in contango market 2 3 4 5 6 7 8 9 10 11 12

LME copper avg. vol and vol of vol (from the one month to 12 month contract)
25% 20% 15% 10% 5% 0% 1 2 3 4 5 6 7 8 9 10 11 12

Backwardation

Contango

Average Vol
Source: Bloomberg, UBS estimates

Vol of Vol

Source: Bloomberg, UBS estimates Note: Weekly data from 1997

Weekly data from 1997 using the first 12 months contracts Contango definition: 1m<2m<3m Backwardation definition: 1m>2m>3m R2 for best fit line; 83% in contango market, 98% in
backwardated markets

12

Frequency of contango and backwardation

Over the last 10 years, most commodities have spent more time in
contango than in backwardation.
Contango B a c k w a r d a t io n

-1 0 0 .0 %

-8 0 .0 %

-6 0 .0 %

-4 0 .0 %

-2 0 .0 %

0 .0 %

2 0 .0 %

4 0 .0 %

6 0 .0 %

8 0 .0 %

1 0 0 .0 %

Source data: Bloomberg. Using weekly data between July-1997 to June-2007, the definition for contango and backwardation are defined on Slide 10. Unclear cases have been excluded.

13

Read-through to performance bias

Brent crude oil: average roll yields on different points of the fwd curve for both contango and backwardated markets
2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5%

LME copper: average roll yields on different points of the fwd curve for both contango and backwardated markets
1.5% 1.0% 0.5% 0.0%

Lower threat of underperformance with higher tenor 2 3 4 5 6 7 8 9 10 11 12

-0.5% -1.0% Lower threat of underperformance with higher tenor 2 3 4 5 6 7 8 9 10 11 12

Backwardation
Source: Bloomberg, UBS estimates

Contango

Backwardation
Source: Bloomberg, UBS estimates

Contango

The oil curve shows that a higher tenor will achieve better performance
in a contango market, but more importantly, only modest underperformance in a backwardated market

The copper curve shows that a higher tenor will achieve better

performance in a contango market and in fact outperformance as well in a backwardated market

14

Financial investors in Cu a new phenomenon?

Copper spot price trend (nominal) from 1900

8,000 7,000 6,000 US$/t 5,000 4,000 3,000 2,000 1,000 0 1900 1909 1918 1927 1936 1945 1954 1963

Increasing spec/fund activity

Little or no spec/fund activity

1972

1981

1990

1999

2008

Source: USGS, LME, UBS estimates

15

Speculators influence short-term prices

Copper daily LME 3m price trend (nominal) from 1990

8,000

Speculative/fund activity affects prices in short-term Supply/demand fundamentals determine prices in long-term

6,600

US$/t

5,200

3,800

2,400

1,000 02-Jan-90

02-Jan-94

02-Jan-98

02-Jan-02

02-Jan-06

Source: LME, UBS estimates

16

but no impact long-term

12000
Copper prices (real)

9000 US$/t (2005$) 1950-1960 + 6% pa

6000

3000 33 years - 3.5% pa 1915 1930 40 years + 3.7% pa 1945 1960 1975 29 years - 4.8% pa 1990 + 4.0% pa F 2005 2020E

0 1900

No escape from cyclical decline

Source: Brook Hunt, USGS, UBS estimates
17

Stronger for longer implied by far forward prices

LME 3m & 63m copper prices
8,400 7,400 6,400 5,400 $/t 4,400 3,400 2,400 1,400 02-Jan-04

Forward curve
02-Nov-04 02-Sep-05 LME 3m 02-Jul-06 LME 63m 02-May-07

8,800 7,800 6,800

$/t

5,800 4,800 3,800 2,800 1,800 Cash 5M 10M 15M 20M 25M 30M 35M 40M 45M 50M 55M 60M Current Sep-06 Feb-05

Source: LME, UBS

18

Why has copper been so strong?

Demand, demand, demand

Synchronized global economic growth

Strong growth in China allied with cyclical economic recovery in the OECD countries. Underpins robust copper consumption growth.

Demand surprises

Robust end-use demand. Strong Chinese demand growth has raised global demand growth far above expectations. The market deficits have become so large that demand destruction has been necessary to reduce actual consumption to below potential consumption.

Investor/speculative buying

Attractive returns Portfolio diversification

Further Industrialization & Urbanization of Asian countries

China and S.E. Asia as a whole, is likely to become a longer term global economic power that will lead to massive raw material and processed goods consumption. Developed world less important.

19

Why has copper been so strong? (2)

But where is the supply response?
Lack of Capital Investment

Last major investment cycle was in the 1970's. Incentive pricing continues to rise. Deterioration in the quality and quantity of available resources. Exploration spending has picked-up but discoveries are few. Long lead times to develop a mine.

Supply response much slower than expected

Supply delays/disappointments, opex/capex cost increases, equipment and spare parts shortages (trucks, tyres), more militant labour. Industry consolidation has led to better supply side discipline leading to preservation of higher prices for longer. Cash generation put to use in M&A rather than in the ground. It is not easy building or expanding new capacity. Analysts continue to over-forecast supply.

Inventories under pressure

Strong demand growth and very muted supply response has resulted in running down of inventories to historically low levels causing shortages (or risks of shortages). Most visible LME inventories being drawn down to within days of consumption but trends occurring also throughout industry.
20

Global economic readings showing breadth & resilience

China physical index and Big 3 GDP

17% 15% 13% 11% 9% 7% 5% 3% 1% -1% -3%

17% 15% 13% 11% China physical index % y/y 9% 7% 5% 3% 1% -1% US,EU, Japan Real GDP % y/y -3% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 US EU Japan China physical index
21

Source: Thomson Financial, CEIC, US DoC, UBS

US slowdown in context
OECD GDP growth and commodity prices
70 60 50 40 30 20 10 0 -10 -20 -30 Mar-68 Mar-71 Mar-74 Mar-77 Mar-80 Mar-83 Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 8 7 6 5 4 3 2 1 0 -1 -2

Strong historic correlation

between western world growth and commodity prices to get?!

How weak is global growth likely Asian dominance of materials

CRB all commodities index, % y/y (lhs)

OECD 25 GDP, % y/y (rhs)

UBS IP growth projections selected regions

2006 Advanced economies China India Russia Brazil Eastern Europe Global 4.0 16.6 11.0 3.9 2.8 6.6 6.5 2007E 2.5 17.0 9.7 6.0 4.5 7.3 5.7 2008E 2.7 15.1 11.0 7.0 4.5 7.2 5.6

consumption a key consideration; questioning of relevance of US slowdown markets appear strong

Global bulk materials, steel

Source: Haver, UBS estimates

22

Economic sensitivity of metals demand

Regional split - global base metals consumption
100% 80% 60% 40% 20% 0% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Magnitude of Asia vs. US the

gap is widening

Our assumptions include: a 24%

contraction in US housing starts and destocking

Euro

US

Jpn

Other Asia

China

Other world

Metals growth remains firm

Output from economic sensitivity model metals demand read-through

IP Growth f'cast (2007) Western Europe US Japan Asia ex-Jp/Ch China Other global Total global IP 2.3% 2.1% 2.4% 7.0% 17.0% 3.0% 5.8% Global weight 20.4% 16.0% 6.3% 16.4% 28.0% 12.9% 100.0% Sensitivity* 1.52 1.40 1.26 1.22 0.80 1.24 1.20 Calc'd cons growth 3.5% -2.4% 3.0% 8.5% 13.6% 3.7% 6.2% Global growth contribution 0.7% -0.4% 0.2% 1.4% 3.8% 0.5% 6.2% Growth with inventory change 1.4% -6.8% -3.0% 8.5% 14.2% 1.6% 4.6%

Source: Brook Hunt, UBS estimates

23

How important is the US?

China trade balance (US$bn)
45% 40% 35% 30% 25% 20% 15% 10% 5% 1960

US share of global apparent consumption

1965 1970 1975 1980 1985 Steel Aluminium Copper

1990 1995 2000 Nickel Oil

2005

What if US consumption of Chinese products slows? China trade not very heavy 2001/2002 trade dip left materials relatively unaffected Urbanisation/industrialisation insulating materials consumption

Source: CEIC, IISI, US Census Bureau, USGS, UN, UBS estimates

24

US decline and China rise in materials consumption

US metals/oil consumption of world total % to 2007E
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1960 1965 1970 Steel

China metals/oil consumption of world total % to 2007E

45 % 40 % 35 % 30 % 25 % 20 % 15 % 10 % 5% 0% 1990

1975 1980 1985 1990 1995 2000 Copper Nickel Oil

2005

1993

1996 Steel

1999 Copper

2002 Nickel

2005 Crude oil

Aluminium

Aluminium

Source: IISI, US Census Bureau, USGS, United Nations, WBMS, CEIC, UBS estimates
25

Composition of global growth and materials demand

GDP US$bn and growth 2006
14000 12000 10000 8000 6000 4000 2000 0 O 1st W Brazil India China Sth Korea Next 1bn Taiwan Russia Japan EU-7 US
Source: Datastream, EIU
26

10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

2006 GDP US$bn lhs

2006 GDP growth rhs

Developing world growing faster with greater materials demand

elasticity

Aggregate Next 1 bn (Middle East, Mexico, Turkey, Indonesia, Poland,

South Africa, Thailand, Argentina, Venezuela, Malaysia, Chile, Czech, Philippines, Hungary, Egypt, Algeria) the surprise in 2006

Demand has been the biggest surprise, not only in China

Regional GDP in real and PPP terms
14,000 12,000 10,000 8,000 6 6,000 4,000 2,000 0 US EU-7 China Next Billion Japan Other 1st world India Brazil Russia South Korea Taiwan 4 GDP US$bn lhs GDP PPP US$bn lhs GDP real growth rate rhs 12

10

Source: IMF World Economic Outlook Database, 6 September, UBS

27

Next Billionthe hidden materials driver

Profile of the next billion, 2005
Pop. GDP/cap 2005 Consumption mt/y m US$ Cement Steel Ally
Mexico Turkey Saudi Arabia Poland Indonesia Sth Africa Iran Argentina Thailand Venezuela Malayasia Czech Chile Gulf States* Philippines Egypt Vietnam Total % of world
106 73 25 38 242 45 68 39 64 27 24 10 16 9 88 78 84 7183 5000 12593 7827 1233 4993 2895 4736 2563 5222 5110 11990 7074 25517 1111 1283 568 33 30 25 12 29 12 37 6 28 3 18 4 4 11 13 25 29 18 19 12 8 6 5 16 4 12 3 8 5 3 7 5 5 3 0.2 0.4 0.1 0.2 0.3 0.2 0.2 0.1 0.3 0.2 0.2 0.1 0.0 0.1 0.1 0.1 0.1

Cu IOU

Aluminium IOU
0.010 Aluminiumr consumption/capita 0.008 0.006 0.004 0.002 0.000 0 2,000 Japan 1952-72 Korea 1970-90 4,000 real GDP per capita US$ 6,000 8,000 10,000 China 1990-2007E PPP GDP Nex t billion 2000-2009E
2012E

1034
16%

3644

320
17%

137
13%

2.7
8%

Source: US Census, USGS, IISI, CEMBUREAU, UBS

28

Materials growth projections for +5, +15 years

Growth projections +5, +15 yrs
2002 Next Billion Steel Cement Copper Aluminium Crude oil Paper & board China Steel Cement Copper Aluminium Crude oil Paper & board India, Russia, Brazil Steel Cement Copper Aluminium Crude oil Paper & board Developed and other World Steel Cement Copper Aluminium Crude oil Paper & board World Steel Cement Copper Aluminium Crude oil Paper & board 882 1832 15.0 25.5 3537 331 1292 2292 18.5 36.2 3953 387 1612 2530 23.5 47.5 4258 441 2386 3084 30.1 67.0 4704 576 8% 5% 4% 7% 2% 3% 5% 2% 5% 6% 1% 3% 4% 2% 2% 3% 1% 3% 501 660 9 17 2420 235 586 659 10 20 2560 244 560 639 10 21 2632 256 501 601 9 19 2640 272 3% 0% 1% 3% 1% 1% -1% -1% 1% 1% 1% 1% -1% -1% -1% -1% 0% 1% 84 184 0.8 2.2 320 19 98 232 1.7 3.2 367 26 137 296 2.1 4.5 415 31 246 483 3.5 8.8 532 42 3% 5% 15% 8% 3% 6% 7% 5% 5% 7% 2% 4% 6% 5% 5% 7% 2% 3% 186 719 2.8 4.2 247 43 440 1115 4.6 9.8 371 68 647 1356 7.5 17.2 452 91 957 1823 11.6 30.7 607 163 19% 9% 10% 19% 8% 10% 8% 4% 10% 12% 4% 6% 4% 3% 4% 6% 3% 6% 111 269 2.0 2.0 550 47 2007E million tonnes 168 354 2.5 3.3 655 64 284 430 3.7 5.1 759 80 591 579 6.6 8.2 925 126 9% 6% 5% 11% 4% 6% 2012E 2022E 2002-2007E 2007E-2012E CAGR change in % 11% 4% 8% 9% 3% 5% 8% 3% 6% 5% 2% 5% 2012E-2022E

Next Billion % world cons.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Cement Aluminium Steel Crude Oil Paper& Board Copper 2002 2007E 2012E 2022E

Next Billion + BRICs % world consumption

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Aluminium Cement Steel Crude Oil Paper& Board
29

2002

2007E

2012E

2022E

Source: IISI, USGS, Brook Hunt, BP statistical review, RISI, FAO, UN, IMF, UBS

Copper

Materials growth projections for +5, +15 years

Cu consumption estimates for the Next Billion constituents

Projected Cu consumption estimates of Next Billion and BRIC as % of world totals

Next Billion % of w orld total Copper Next Billion + BRICs % of w orld total Copper 2002 13% 2007E 14% 2012E 16% 2022E 21%

37%

47%

57%

70%
30

Source: IISI, USGS, Brook Hunt, BP statistical review, RISI, FAO, UN, IMF, UBS

Mining companies remain positive on demand

Cumulative consumption of copper to 2030
World refined copper consumption
40000 35000 30000

2007-2030 1900-2006 Total = 585 Mt Total = 620 Mt*

000 tonnes Cu

25000 20000 15000 10000 5000 0

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030
At a hypothetical world average growth rate of 3% p.a. Source of data: CRU, BHP Billiton

BHP Billiton at 3% growth rate in copper, the world to consume more

in the next 25 years as it did in the past 100 10%, and c9% until 2015E

Rio Tinto upgraded its Chinese GDP forecasts by 2% for 2007/08E UBS forecasts for Chinese GDP forecast - 8.9% and 9.4% in 2007E and
2008E; IP growth forecast 15.7% and 14.8% in 2007E and 2008E

31

Less exploration; fewer discoveries

14 12 10 8 4,000 6 4 2 0 1980 1984 1988 1992 1996 2000 2004 Major discoveries (LHS) World class discoveries no data on discoveries 2,000 6,000 No. of discoveries US$m 8,000

0 Exploration $m (RHS)

Source: MEG, UBS estimates

32

Paucity of new copper projects

Copper mine by discovery and production year

2010 year of production 2000 1990 1980

Antamina El Abra

Oyu Tolgoi Spence Alumbrera Batu Hijau Collahausi Los Pelambres

Olympic Dam

Escondida

Grasberg

1970 1970 1975 1980 1985 1990 1995 2000 2005 2010 year of discovery
Source: MEG, UBS estimates

33

Resource quality falling grades lower, mines deeper/remote

Grades for most mined materials are falling; copper, iron ore, gold Mines are becoming more geologically challenging; deeper, underground, etc. Future mines are likely to be located in remote, higher risk areas; Congo/Russia Quality issues will result in rising costs; marginal cost are likely to become an
increasingly important component in determining longer-term commodity prices
2.0 1.8 Head Grade Cu % 1.6 1.4 1.2 1.0 0.8
Initial production of world class copper mines; from key regions such as Chile/Indonesia/etc. Forecast Actual and hypothetical trend in head grade decline for the global copper mining industry Hypothetical trend

1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

Source: Brook Hunt, UBS estimates

34

2040

Resource quality falling grades lower, mines deeper/remote

Trend towards a decline in
global reserves over the past 30 years
70 60 50 40 30 20 10 0 As mines age, both the quantity and quality of reserve tends to deteriorate

Both quality and quantity of

supply being impacted

1930

1935

1950

1955

1960

1965

1970

1975

1982

1984

1990

1995

1998

2002

2003

Years of global copper reserves

Cash production cost $/uni

Marginal costs rise vigorously as the future resource base is inferior to the current base. Older assets remain highly competitive as this quality dilution occurs

Potentially very significant

longer-term impact on resource industries

Future cash-cost curve

Old cash-cost curve Cumulative tonnage/volume Growth in market size

Dilution of quality impacts

marginal cost; supports longerterm increase in pricing

Source: USGS, Brook Hunt, UBS estimates

35

2005

Long-term prices: Structural pricing

Forecasting the structural price environment 2010 - 2016

07E Aluminium Copper Nickel Zinc Lead Iron ore Coking coal Platinum Thermal coal Uranium USc/lb. USc/lb. USc/lb. USc/lb. USc/lb. USc/ltu US$/t US$/oz US$/t US$/lb. 128 324 1765 159 102 80 95 1250 56 127 08E 140 300 1150 150 100 101 115 1350 70 196 09E 105 190 900 100 65 111 100 1250 75 150 Structural* 145 225 700 80 60 51 68 1200 45 50 Long-term 90 130 700 60 27 45 60 800 40 27 Structural vs. LT 61% 73% 0% 33% 122% 13% 13% 50% 13% 85%

Acceptance that industrialisation/urbanisation trends are long-lived Parallels with previous structural cycles

36

Long-term prices: Structural pricing (2)

Global intensity of use in base metals and price patterns in real terms (from 1930)
8% 6% 4% 2% 0% 2010E 2020E 1955 1995 2015E -2% -4% -6% Change in Intensity of use (global) LHS
Source: UN, UBS estimates

1955-75: Western world industrialisation / urbanisation impact

1980-2001: Western economies shifting to services based economy

2002-16E: Es'd Asian urbanisation / industrialisation impact

110 100 90 80 70

2025E

1930

1935

1940

1945

1950

1960

1965

1970

1975

1980

1985

1990

2000

2005

60 50 40 30

Real metal prices indexed to 1930 RHS

UBS now looking for a 15-year heightened price environment Strong pricing follows a 20-year period of real declines

37

Long-term pricing - quantification

Calculations for incentive pricing

Commodity Aluminium Copper Nickel Zinc Gold Platinum Iron ore Thermal coal Coking coal Units US$/t US$/t US$/t US$/t US$/oz US$/oz US$/t US$/t US$/t Capital cost 3,750 5,145 35,222 1,870 814 1,352 65 70 58 Required return 450 772 5,283 281 122 264 10 11 9 Depreciati on 188 343 1,761 125 54 90 3 5 4 Cash cost 1,316 1,676 7,937 882 265 443 15 25 45

Calc'd incentive price 1,953 2,790 14,981 1,287 441 797 28 40 58

Old long-term price 1,500 (USc68/lb.) 2,100 (USc94/lb.) 9,900 (USc450/lb.) 1,150 (USc52/lb.) 340 490 21 40 60

New long-term price 2,000 (USc90/lb.) 2,900 (USc130/lb.) 15,500 (USc700/lb.) 1,300 (USc60/lb.) 440 800 28 40 60

Source: Brook Hunt, AME, UBS estimates

Upside risks still exist for many commodities on long-term pricing Is incentive the appropriate methodology or is marginal cost superior?

38

Conclusions

Commodities are an attractive source of return and portfolio diversifier Long/short strategies reflect the shape of the forward curve Structural supply/demand issues in copper market contributing to price volatility which is being exacerbated by financial investors Financial investors affect short-term price cycles but have no impact on long-term prices Price volatility to remain a marked feature demands more risk management products (hedging) Long-term price assumptions have been raised with structural pricing used for 2010 - 2016
39

Disclaimer
This report was produced by: UBS Limited, an affiliate of UBS AG (UBS). Head Office: UBS Limited, 1 Finsbury Avenue, London, EC2M 2PP, UK Phone: +44-20-7567 8000

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