South African Miningin a Global Future presentation by Peter Schwartz for the 2013 Mining Lekgotla. 27 August 2013

1. South African Mining
in a Global Future
Mining Lekgotla
August 27, 2013
Peter Schwartz
SVP, Global Government
Affairs & Strategic Planning
Salesforce.com

3. The true question:
How does South Africa remain an active &
relevant participant in a dynamic global mining
industry?

4. Ecological
Sustainability of ecosystems
Scenarios a balance at three levels
Economic
Realities of global competition
Human
Pursuit of prosperous
& secure livelihood

5. Outline
• Context / Drivers
• Global & SA economy
• Global mining industry environment & structure
• SA mining environment
• Structural fundamentals
• Investor sentiment
• Sustainability
• Uncertainties
• Scenarios
• Paralyzed
• Sustainable

6. Global growth
(4.0)
(2.0)
-
2.0
4.0
6.0
8.0
10.0
2001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
% GDP Growth
Emerging
World
Advanced
2011 Fcst
2013 Fcst
Source: IMF

7. SA Economy
(4.0)
(2.0)
-
2.0
4.0
6.0
8.0
10.0
2001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
% GDP Growth
Emerging
World
South Africa
2013 Fcst
Source: IMF, SA Embassy

8. SA Economy
• Unemployment rate of 25%+ (~2x for youth); Low labor
participation rate 42% vs 61% peers
• high inequality Gini coefficient of 0.6+; 30+% below
poverty line
0% 2% 4% 6% 8% 10% 12% 14% 16%
Nigeria
India
Japan
USA
Saudia
Arabia
Germany
China
SA Imports by Source (ZAR)
2012
2011
2010
0% 2% 4% 6% 8% 10% 12% 14%
Netherlands
UK
India
Germany
Japan
USA
China
SA Exports by Destination (ZAR)
2012
2011
2010
Source: SA DTI

9. • Recently downgraded by all 3 major ratings agencies to
2nd lowest investment grade
• cited deteriorating political, social and economic conditions and
uncertainty surrounding critical policy decisions
• first time that the country has been downgraded since the rating
process started in 1994
• Following initial downgrades foreign portfolio investment
flows shrank from R12.5B Q4-2012 to R1.4B in Q1-
2013; well below 4 yr quarterly avg of ~R20B
SA Economy
Source: SA Reserve Bank

10. SA Economy – Pressure on the Rand
• Current account deficit is expected to increase further:
• Exports lagging on slow global demand
• Necessitating higher imports
• Decreasing foreign investment
• Government infrastructure spending accelerates for shortfall
from export and foreign investment
• Good in the short-term for exports but structurally
detrimental to long-term economy
• Further dissuades foreign investment
• Makes imports expensive >>> stimulates greater demand for
domestic products >>> aggravates inflation >>> government
raises interest rates to control inflation >>> increasing interest
rates slows economic growth

11. Mining Industry Environment - Global
• Value maximization via solely increasing production has
shifted to managing productivity & improving
efficiencies
• Capital expenditures to meet long-term demand will be
rebalanced with profitability/returns
• capital spending expended to decrease 20+% in 2013
• projects scaled back, higher hurdle rates
Sources: PWC, E&Y

12. Mining Industry Environment - Global
• Gravity continuing to shift to emerging countries:
• 50%+ of largest mining companies have the bulk of their
operations in emerging countries
• Emerging marketswill account for 40% of mining capital
expenditures in 2013
• Long-term future demand healthy with China and
large developing economies such as Brazil, India and
Indonesia
• Global urbanization drives demand as well
• In the next 40 years another 3 billion people globally will
urbanize, primarily in emerging market economies
Sources: PWC, UN

13. Mining Industry Environment – China
• Estimated to consume ~40% of all mineral and metal
products
• Function of astronomical GDP growth; still projected at 7-9%
per year through 2020
• Also due to urbanization; currently only 50% vs 80-90% of US,
Canada and Australia
• Fueling own growth, 29% of global mining value
• Largest producer of coal & gold and 3rd largest of iron ore
• Mining capital expenditures have averaged 35% growth since
2005
• Becoming leading source of capital
• Invest directly in mining companies, as well as mine
development & construction, and supporting infrastructure
Source: PWC

14. Global Industry Structure
• Past few years significant M&A activity driven by
opportunity of increased production volumes in a hot
commodity cycle
• Current focus towards achieving operational cost
improvements and delivering projects on budget
• Seniors look to divest non-key/non-core assets
• Intermediates/Juniors with strong cash positions and a track
record of successfully bringing projects on-line will be
opportunistic, and look for strategic ―tuck-in‖ acquisitions

15. • All levels looking to de-risk projects:
• Likely via joint venture partnerships
• Chinese investors interested partners as they look into increase
resource holdings and transfer of skills & knowledge
Global Industry Structure
• Continued consolidation & diversification expected:
• diversification in geography & minerals/metals for seniors
• consolidation in the middle &
lower tiers to remain competitive
• continued search for resources
by emerging economy players
• integration of downstream
operations for synergies 0%
10%
20%
30%
40%
50%
60%
Diversified Platinum Gold Other
SA Mining Market Capitalization by Commodity
2008
2009
2010
2011
2012
Source: PWC

16. Mining Industry - SA
• Represents 60% of export revenues
• Contributes nearly 20% of corporate tax receipts,
• 6-9% direct GDP; 13-18% including indirect GDP
• ~20% of Johannesburg SE ~8.5M
including
Dependents
~1.3M
including Indirect
Mining Industry
~500k
Direct
Mine workers
Sources: SA Embassy, PWC, The Guardian

17. Mining Industry - SA
• From 2008-2012, costs have risen at twice the pace of
inflation and productivity has decreased
• wages in the industry have risen by 12% a year since 2007
• Over the same period other commodity input costs have also
escalated sharply, led by a 237% increase in electricity prices
since 2009
• Labor cost percentages
vary from above 50%
for the deep-level
conventional mines to
below 20% for those
companies that mine
predominantly opencast
Source: PWC

18. Exploitation by “Micro-financing”
• Interest & fees on a short-term loan of more than
25% a month, or 300% if annualised!
• Pension cards, IDs, and bank cards held as ―security‖
with victims often unaware of their rights
• Vicious cycle as the debt increases and workers
demand higher pay to help them relieve them from
their debt
• Rustenburg alone has over 80+ formal micro credit
outlets, banks, micro financing companies, and
underground payday lenders
• Employer responsibilities:
• Monitor volume and magnitude of wage garnishments to repay
such debts
• Provide personal finance education, debt counseling, and
assist with repayment restructuring

19. Strikes / Industrial Action
• The strikes/industrial action of 2012 cost South Africa up to an estimated R15 billion in
lost revenue, and at least half a percentage point off the country’s economic growth
8
78
49
37
47
77
0 20 40 60 80 100
Exxaro Resources*
Gold Fields
Imapala Platinum
Anglogold Ashanti
Anglo-American Platinum
Kumba Iron Ore
Mentions of "strike/industrial action"in FY2012 integrated report
* Already experienced more strike/industrial action in 2013
Sources: Respective FY2012 Integrated Reports

20. Unions – Learn from experience abroad
• ―Unrealistic Unions Die‖ – Andrew Levy, SA Labour Analyst
• SA mining union demands of 60-100+% wage
increases are out of touch with economic realities
• United Mineworkers of America
• Failed to develop its member skills and adapt to a
changing industry
• Rampant unemployment caused with the increase in mechanisation in mining
from 40% in early 1930s to 80% by the end of the decade
• National Union of Mineworkers in the UK:
• At the start of the unprotected strike in 1985 there were 35 collieries in England
and England exported coal
• At the end of the strike in 1986 there were 2 collieries left and England still
imports all the coal it needs
• Both unions not only crippled themselves but also their industries
and communities
Source: Business Report

21. Vital to all Stakeholders
―[I am] worried for South Africa, I’m worried for the industry and I’m worried
for the people. We have got to get the balance right… The period we are
in now is the most important period I’ve seen in my time here in the
industry…It is not just the mines – it’s everyone connected - it is so
critical for the future of the industry and the future of the country. ‖
"We welcome the fact that all stakeholders agree on the need to stabilise the
labour relations environment, especially in the mining sector. What we require from
social partners is the commitment to resolve labour disputes peacefully and
within the framework of the law, and in the interests of workers, employers
and the country as a whole.‖
Mark Cutifani
Chief Executive, Anglo American
President, Chamber of Mines of South Africa
Jacob Zuma
President, Republic of South Africa
―Many companies drift towards more automized and mechanized
operations as part of the strategy to modernize and improve
production...Our members must be ready to change with this
technological innovation. We must be equally ready to defend the
current jobs in the South African economy...Skills development
…must be used to empower workers...‖
Senzeni Zokwana
President, National Union of Mine Workers
Sources: Financial Times, Business Day, NUM address

22. SA Sustainability
• Water – increasingly scare resource in a growing world
• Globally water demand may outstrip supply by 40% by 2030; 1/3 of
the world’s population will live in basins where the water deficit is
above 50%
• Mining requires vast amounts of water while negatively impacting
the local communities’ ability to use it for sanitation,
consumption, and food security
• Byproducts of mining & extraction processes contaminate
water (e.g. acid mine drainage) and cause environmental
damage that comprises the health & safety of local
communities
• Water management needs to include:
• complying with legislation and the conditions of the water
use license
• measuring and monitoring use & quality
• cleaning up or recycling discharge
• building future water treatment costs into rehabilitation provisions
• engagement with local communities about use, quality & equitable access

23. Global economy:
• Will emerging economies, especially China, continue their significant
growth/demand? What are the next emerging economies (e.g. Indonesia)? Will
developed economies, especially the Euro Zone, return to growth/demand?
• Will China become increasingly self-sufficient in their mining needs?
• Will the volatility of inflation and exchange rates stabilize to provide a favorable
growth environment?
Technology:
• Can mechanization/automation and methodological innovation advance far
enough to deliver sufficient cost efficiencies and productivity gains?
• What becomes of the workers displaced by automation/mechanization? How
does technology lead to new jobs and new training opportunities?
Workforce:
• Do strikes/industrial action become the norm instead of the exception? Will
wage rates come inline with inflation?
• Will mines look to cheaper migrant laborers? How much strain will migrants put
on existing communities/services?
• Do sufficient upstream, side-stream, and downstream opportunities in the
mining industry emerge for displaced workers?
Uncertainties

24. Political landscape:
• Can a sustainable policy be developed with a long-term lens, not just for the
next election?
• What will be the dynamics be of stakeholder power (e.g. political parties, trade
unions, industry, local communities, etc) over the long run?
• How will issues of corruption, transparency, nationalization and sustainability
shape the landscape?
SA Infrastructure
• Will electricity be sufficient and at an affordable cost? Will transportation
become more accessible and efficient in its role in the supply chain?
• How will industry and government partner to meet the infrastructure needs?
• How costly will effective water management become as water becomes more
scarce?
Uncertainties

25. Uncertainties
Market Size
• Will growth in global market demand and cost efficient production enable
profitable SA industry growth for currently low production/high reserve minerals
(manganese, chromium, etc)? (i.e. horizontal industry expansion)
• Are the infrastructure and skills in place to make upstream (e.g. building
automation/mechanization equipment) and downstream (e.g. refining, inputs
into local manufacturing) beneficiation viable? (i.e. vertical industry expansion)
• How will minerals for which SA has significant reserves evolve in their industrial
usage (e.g. palladium in place of platinum)?

26. Scenario Matrix
Industry Innovation
GlobalEconomicGrowth
Low
High
High
Paralyzed
Propped
Up
Sustainable

28. Scenario: Paralyzed
• Slow adoption of mining technological and
methodological innovation keeps costs relatively high &
productivity low
• Wage concessions and declining commodity prices
exacerbate profitability problems; forces mining
companies to divest SA mines
• Unbundled mines as separate entities (see Sibayne Gold
unbundled from Gold Fields) will struggle to survive in their silo
• Beneficiation isn’t appropriately funded or tailored to
existing mining projects and struggles to get off the
ground

29. Scenario: Paralyzed
• 000,000s of workers are displaced with insufficient skills
to obtain meaningful employment elsewhere within SA
• Multiplier effect to millions without adequate financial support
• The now un-employed (primarily young men) and their
dependents produce significant civil unrest
• The unrest and work stoppages cripple regions of the
country and the SA economy
• With the exodus of seniors, SA industry structure shifts
towards smaller juniors and even nationalization, with
the latter intensifying government finance issues

30. Scenario: Paralyzed
• Funding for government programs dries up with lost tax
receipts from lost production
• Difficult economic environment is ripe for political
disruption, putting politics up for grabs
• Extractive (vs inclusive) government policies to band-
aid short-term issues severely constrict development
• Unrest and threats of nationalization dissuade foreign
investment exacerbating trade deficit, credit
unworthiness, and economic woes

31. Scenario:
• Significant rise in global demand, namely from China &
other economies such as India, Brazil, Russia, &
Indonesia props up prices
• Coupled with increased cost and/or decreased
productivity in current cost leaders in North
America, Asia, and Australia
• SA mines able to temporarily squeak out profitability
despite little innovation/enhancements and remain
relatively cost competitive

32. Scenario:
• Due to the decades long life-cycle of mining, companies
look to diversify
• invest more in deposits outside of SA with more favorable long-
term structural socio-economic conditions
• SA mining industry contracts and expands with highly
unpredictable price of commodities
• Economic instability likely leads to social/political instability
• SA instability constrains long-term sustainable growth & equality
and abatement of unemployment & poverty
• The market volatility drives a volatile industry structure
with significant M&A activity during hot commodity
cycles and significant divestment during periods ofweak
commodity prices (i.e. a snapshot of the past several
years)

33. Scenario: Sustainable
• Shift towards mechanization/automation to increase
productivity & safety is required to remain viable
• Displaced workforce needs to develop new skills
• move up-stream and help produce/service machinery, parts, etc
• move down-stream beneficiation/value-addition
• n
• Greater realization of platinum reserves
• Greater market power with the ―platinum belt,‖ home to 80% of
the world's known reserves
• Requires similar improvements in cost effectiveness
• Further diversification in manganese, chrome, etc
Source: PWC

34. Scenario: Sustainable - Beneficiation
• In-country processing captures more of the value
chain—creating jobs, developing skills, and improving
local technology. Note it requires:
• Realistic requirements as to not throttle upstream mining
projects; tailor to upstream not vice versa
• Significant capital and financing for beneficiation plants
• Sufficient local & affordable power supply for energy intensive
processing technologies
• It needs to be competitive advantage of manufacturing
skills vs comparative advantage of resource possession
• Shining example: Catalytic converter industry in SA has
grown ~15% per year since early 1990s

35. Scenario: Sustainable - Innovation
• Reef boring & ultra high strength
backfill…transition away from significant
inefficiencies & dangers of drilling &
blasting
• Use of autonomous & remote operation
technologies in Australian mining
• Use of WiFi to improve safety &
efficiency in Canadian mining
• Oil & Gas industry
• continuously innovating for more efficient &
effective extraction
• IT and connected machines & workers
becoming increasingly important

36. Scenario: Sustainable - Innovation
• Many technologies and innovations that reduce the
mining effort require:
• A detailed understanding of data and processes critical to
capital efficiencies
• A workforce that is not only skilled in operations, but also
supportive of the implementation process
• Implement robust optimization planning tools across
their full production supply chain
• linkages call attention to the real bottlenecks that are ignored if
each area is optimized in isolation
• Infrastructure development is key for energy & transportation
efficiencies
• Inclusive and pluralistic policy decisions enable
innovation & prosperity

37. Scenario: Sustainable - Industry Structure
• Trend of consolidation to take advantage of economies of scale as,
despite technological & methodological advancement, the cost
base faces pressures:
• declining yields & resource depletion
• more difficult & costly exploration
• rising energy prices & labor wages
• Investor demand and skills specialization will make
expansion & diversification horizontal vs vertical
• Emerging economies take an active ownership position
in their resource procurement
• Govt partnerships & joint ventures key to avoid nationalization
and align on environmental sustainability
• Will look abroad to ensure sufficient & diverse supply sources
and be less vulnerable as purely a buyer

38. Conclusion
1. Paralyzed: A failure to change creates substantial risk
of losses for the entire country
Favorable market conditions mask
structural industry issues that will ultimately prevent
sustainable success
3. Sustainable: Long-term prosperity requires sustained
industry adaptation and innovation

40. Thank You