Slide 1: Resource Nationalism: How to grow, not shrink, the pie
Resource Nationalism: How to grow, not shrink, the pie Nick Holland CEO Gold Fields GIBS, 15 August 2013
Slide 2: Resource Nationalism is entirely rational
Resource Nationalism is entirely rational… Definition: Countries’ efforts to extract maximum value and developmental impact for their people from their finite natural resources 2 Resource Nationalism - S ... al v25 <office>
Slide 3: Particularly as states are under fiscal pressure
…particularly as states are under fiscal pressure Central Government Debt ($T) Central Government Debt as % of GDP $30T 80% % of GDP 60 20 40 10 20 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Note: Includes the 41 countries who have continuous central g government debt data from 2003 to 2011 So
Slide 4: But Resource Nationalism is viewed badly
But Resource Nationalism is viewed badly “Resource nationalism a “Miners encounter the hard key threat to mining” rock of resource nationalism” BlackRock,, Oct 2011 Th T The Telegraph l h (UK), (UK) Nov N 2011 “Resource nationalism plagues “Resource nationalism is the oil market market” Wall Street
Slide 5: What is the disconnect?
What is the disconnect? 1 Too many fingers in the wrong pie 1. – Mining profits 2. Not growing the right pie – The Mining g Economy y to create jjobs,, fuel development and attract investment capital 5 Resource Nationalism - S ... al v25 <office>
Slide 6: Too many fingers in the wrong pie
Too many fingers in the wrong pie • At first glance glance, it might appear there’s a bigger slice to take Mining Net Profit - pre Tax and Royalties: Global 2012 = ~$280B Royalties 9% Net Profit post Dividend 25% Direct corporate tax 25% Dividends 42% Government Company N Note: t D Data t b based d
Slide 7: Why? Wrong cost metric
Why? Wrong cost metric • At first glance glance, it might appear there’s a bigger slice to take Gold example • Our O industry i d t hash made d this thi pie i 'Cash 'C h cost' t' hides hid Gold G ld miners i needd to t look more attractive than it is unprofitability of gold think differently about b
Slide 8: Mining industry is going through tough times
Mining industry is going through tough times • At first glance glance, it might appear Gold G ld industry i d t example: l Costs C t up; Returns R t down d there’s a bigger slice to take Costs rising at ~12% Yields down 5% Operating cost per tonne CAGR Average gold yield CAGR • Our industry has made
Slide 9: Margins in the gold sector are under pressure
Margins in the gold sector are under pressure… • At first fi t glance, l it might i ht appear Gold industry example: margins there’s a bigger slice to take in rapid decline Margins under greater • Our O industry i d t hash made d this thi piei pressure as gold ld price i has h since fallen as low as
Slide 10: As they are for the Top 40 global miners
… as they are for the Top 40 global miners • At first glance, glance it might appear there’s a Top 40 Mining Giants - financial distress bigger slice to take 35 • Our industry has made this pie look 30 more attractive tt ti than th it 25 2007 % is 20 2008 2009 15 • In I reality, lit margins i andd 2
Slide 11: Industry is not self-funding at present
Industry is not self-funding at present • At first fi t glance, l it might i ht appear there’s a bigger slice to take Top 40 2012 cash flow ($Bs) • Our O industry i d t hash made d this thi piei look more attractive than it is 150 $137B • In I reality, lit margins i and d returns t 100 from mining a
Slide 12: Investors are deserting the sector
Investors are deserting the sector • At first fi t glance, l it might i ht appear there’s a bigger slice to take Index performance • Our O industry i d t hash made d this thi piei 1.5 Dow Jones look more attractive than it is Industrial Index • In I reality, lit margins i and d returns t FTSE 100 In
Slide 13: Industry is halting new investments
Industry is halting new investments… • At first fi t glance, l it might i ht appear A harsh environment with new projects there’s a bigger slice to take increasingly being delayed and cancelled • Our O industry i d t hash made d this thi piei Copper-gold project (Xstrata) look more attractive than i
Slide 14: And cutting back on existing operations
… and cutting back on existing operations • At first fi t glance, l it might i ht appear Existing mines under pressure from price there’s a bigger slice to take decreases and cost increases; greater taxes will aggravate the problem • Our O industry i d t hash made d this thi piei look more attractiv
Slide 15: This is why mining earnings is the wrong pie
This is why mining earnings is the wrong pie • At first glance Royalties glance, it might appear 9% there’s a bigger slice to take Net Profit post Dividend 25% Direct corp. tax 25% Community • Our O industry i d t hash made d this thi piei look more attractive than it is Dividends 42% Global mining
Slide 16: This is the lose:lose pie
This is the lose:lose pie •The more everyone takes, the greater the risk the pie shrinks: - Rising costs of mining… - …combined combined with a greater fiscal take take… - … jeopardise further investment •The result: loss of jobs and long-term government revenues 16 Resource Nationalism - S ... al v
Slide 17: No Development without Growth
No Development without Growth • GDP growth is essential for Increased Increased governments targeting effective political stability/ certainty y investor d development l t and d economic i confidence transformation + + Development + Economic Capacity + Transformation Increased to deliver + invest- m
Slide 18: Growing the right pie: Mining GDP
Growing the right pie: Mining GDP • GDP growth is essential for governments targeting effective BRICS 7 other resource rich 2010 countries t transformation f ti 2010 • Mining GDP is the right pie, Direct mining share Direct mining share especially for resource resource-rich rich of GDP 2% ($200B) of
Slide 19: The Mining Economy has large multiplier effects
The Mining Economy has large multiplier effects • GDP growth is essential for GDP contribution of mining (indexed) governments targeting effective 3 t transformation f ti 0.9 2.6 • GDP is the right pie, especially for resource rich developing countries resource-rich Mining has boosted 2 RSA GDP by R
Slide 20: Job and livelihood multiplier effect is significant
Job and livelihood multiplier effect is significant • GDP growth is essential for Number of jobs and livelihoods supported by each mining worker governments targeting effective 30 t transformation f ti 4 27 • GDP is the right pie, especially for 14 resource rich developing countries resource-rich 20
Slide 21: Benefits go beyond jobs
Benefits go beyond jobs • GDP growth is essential for Multiplier benefits go beyond jobs governments Capital p inflows Skills/ education Catalyst y for other industries t targeting ti effective ff ti transformation • GDP is the right pie, pie especially for resource rich countries Technology transfe
Slide 22: Growing mining activity has a dramatic impact
Growing mining activity has a dramatic impact Mining impact on GDP • GDP growth is essential for BRICS and 7 resource rich countries governments targeting effective t transformation f ti • GDP is the right pie, especially for 2.6x Full multiplier Direct impact resource rich developing countries reso
Slide 23: Growing this economy can have a dramatic impact
Growing this economy can have a dramatic impact Mining impact on GDP • GDP is the right pie, especially for BRICS and 7 resource rich countries resource-rich developing countries • GDP growth is essential for governments targeting effective 2.6x Full multiplier Direct impact transformation of mining
Slide 24: Growing GDP through mining is the win:win pie
Growing GDP through mining is the win:win pie • Growth … leads to more investment • The result: increased employment, development and national GDP growth • How do we get there? • It has been done before 24 Resource Nationalism - S ... al v25 <office>
Slide 25: Chile focused on the 'win:win' pie
Chile focused on the ‘win:win’ pie • Long term investment to establish market economy, strong institutions and GDP at PPP (indexed to 100) CAGR transparent and stable fiscal regime (80-12) 1,000 Chile - Chile has the best risk ratings in South Direct mining 7% America was 14% of GDP in 2010 800 600
Slide 26: Peru acted to continue growth
Peru acted to continue growth • The Humala government recently GDP at PPP (indexed to 100) CAGR enacted similar policies to continue (80-12) 800 growth: Direct mining was 9% of GDP - Proactively engaged with industry and in 2010 communities in a full review of all the options Peru 6% - Ended up with
Slide 27: Botswana partnered to grow the pie
Botswana partnered to grow the pie • Strong long term partnership to ensure mutual success GDP at PPP (Indexed to 100) CAGR - 40-year 40 year partnership to drive benefits for both 2,000 (80-12) Botswana and Debswana Botswana 10% Direct mining - Limited government involvement in was >33% of GDP in 2
Slide 28: Zambia has learned from the past
Zambia has learned from the past GDP at PPP USD (Indexed to 100) 1974-94: Prolonged Direct mining 4,000 depression; Income fell by was 24% off GDP 50%; Mining production cut in 2010 by 60%; lost $45B in mineral rents from 1970-2010 3 000 3,000 1969: Govt. nationalises two major By 1990, 95% of minin
Slide 29: Mining is at a crossroads
Mining is at a crossroads • Long L term t collaborative ll b ti partnerships (Miners, Mining Governments, Labour, Economy/ GDP Communities, Dev. Agencies)… impact • … leading to more investment • The result: increased employment, development and GDP growth • Rising costs of mining…. • … combined wit
Slide 30: Starting point: Ore bodies
Starting point: Ore bodies 1. They can’t be moved, changed or replaced 2. Development is expensive and i h tl risky inherently i k with ith long l l d times lead ti 3. Development has a major impact on communities and the environment 30 Resource Nationalism - S ... al v25 <office>
Slide 31: What can you do with them?
What can you do with them? You either have ore bodies or you don’t If you have them and they’re Determine full socio- economically viable, economic viability by taking environmentally sound and the potential economic socially acceptable, develop multiplier impact into account them However, However t
Slide 32: But how do investors feel about the sector today
But how do investors feel about the sector today • Equity investors have become frustrated as miners have spent their moneyy with little to show for it • Cash, not growth, is king: Miners are cancelling new projects and closing existing mines: returns just do not warrant the risk • This leaves ore b
Slide 33: How to align national interests with investors? The role of mining companies
How to align national interests with investors? The role of mining companies 1 Acknowledge the role mining companies have played 1. historically in exploiting resources and people 2 Recognise that both a mining licence and a “social 2. social licence” are required to operate 3. Develop practices tha
Slide 34: Making progress…but more needs to be done
Making progress…but more needs to be done Moving from philanthropy to systematic creation of shared value, recognising the impact of the GDP multiplier effect Direct Economic Mitigating the Small business contribution impact on the development Local supplier development Skills/ training Socio-econom
Slide 35: How to align national interests with investors: role of governments
How to align national interests with investors The Th role l off governments t 1. Seek collaborative partnerships with miners who are better able to operate and develop ore bodies and who are File #14710445 good social partners 2. Put in place stable, competitive tax systems that allow q y investors
Slide 36: Not easy to do, but the upside is vast
Not easy to do, but the upside is vast CHALLENGE MITIGATION •Partnership p •Working g and collaborative p partnerships p between miners, governments, labour and communities •Balance •Balance long-term growth strategies with short-term fiscal imperatives •Transparency •Total transparency in reporting
Slide 37: Conclusion: Winning nations will choose the high road
Conclusion: Winning nations will choose the high road • Engage to develop collaborative long term partnerships… • … increase investment … • … Drive GDP growth: every 1% increase is worth ~$8-9B $8 9B in just one year in just 12 developing countries • Fight for a share of declining profits… • …but b