managing director of merrill lynch investment managers
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October 2005
Evy Hambro
Managing Director of Merrill Lynch Investment Managers
Investment Manager of Global Mining Investments
2
Agenda
• MLIM Natural Resources Team
• Sector Summary
• The Cycle
• Strategy & Outlook
• GMI – The Rationale
• Fund Performance
3
Who are MLIM Natural Resources?
MLIM Natural Resources Team
• Started by Julian Baring in 1991 at former Mercury Asset Management
• Team has grown considerably since then with AUM of US$12bn* and a range of
products including mining, gold and energy funds as well as a hedge fund.
• Core of team has been working together for over 10 years
• Only Natural Resources Team rated “AAA” by Forsyth Partners and S&P Group
*As at 30 September 2005
4
Natural Resources Team Structure
Poppy BuxtonEnergy
New Energy Technologies
Robin BatchelorEnergy
New Energy Technologies
Richard DavisGold
ML Gold Metal Open FundML Gold Fund
ML Int. Gold Fund
Evy HambroGold
Diversified Mining
MLIIF World GoldMLIIF World Mining
Global Mining Investments
Catherine MayAnalyst
As at October 2005
Graham BirchChief Investment Officer
ML Gold & GeneralML World Mining Trust
Simon McClureAdministration
Sandy ChristieAnalyst
MiningEnergy
MLIIF World EnergyML New Energy Trust
MLIIF New Energy
Natural Resources Hedge Fund
Janakan ArulkumarasanAnalyst
Sector Summary
6
• 2004 saw a string of records broken by the mining majors.
• GMI’s top four holdings (CVRD, BHP Billiton, Rio Tinto and Xstrata) all reported record earnings, cash flows and paid record dividends in 2004
• Results for 1H 2005 are even better and 2005 set to be another blockbuster year
• Signs for 2006 are very encouraging
• Huge cash flows are triggering new trend of capital management:
– Since June 2004, majors* have returned over US$7bn to shareholders through dividends and sharebuybacks.
• In our view, there is more to come
High Metal Prices translate into Record Earnings
Source: Company Financial Results, Reuters
This is an industry enjoying the best market conditions for a generation
*Anglo American, BHP Billiton, Rio Tinto, Xstrata
7
Mining Shares vs Metal Prices
Source: Datastream. Data as at 10 October 2005
80
100
120
140
160
180
200
Sep-03
Dec-03
Mar-04
Jun-0
4
Sep-04
Dec-04
Mar-05
Jun-0
5
Sep-05
Inde
xed
to 1
00
HSBC Global Mining Index (US$) MG Base Metal Index (US$)
Short term market jitters
8
Commodity Prices
Base Metals
• Base Metal Prices have held onto strong performance
• Some metals, such as copper, have hit multi-decade highs
• On the whole most metal prices trading above long term average levels
• Demand growth in key consuming nations has been better than forecast
• Supply growth has been muted by delays, strikes and higher costs
Bulk Commodities
• Bulk commodities have been outstanding
• Record price increases in iron ore, thermal and coking coal
Precious Metals
• Gold price has broken out to new long term highs
• Platinum and sister metals have continued strong run
9
Base Metals – Index, Zinc, Nickel & Copper
Source: Datastream. Data as at 30 September 2005
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Tonnes
100
120
140
160
180
200
220
240US$
LME Base Metal InventoriesMG Base Metal Index (RHS)
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Tonnes
100
300
500
700
900
1100
1300
1500
1700
1900US$
LME Zinc InventoriesZinc Price (RHS)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Tonnes
100
2100
4100
6100
8100
10100
12100
14100
16100
18100US$
LME Nickel InventoriesNickel Price (RHS)
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Tonnes
100
600
1100
1600
2100
2600
3100
3600
4100
4600US$
LME Copper InventoriesCopper Price (RHS)
10
Iron ore price vs. market expectations
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2000 2001 2002 2003 2004 2005 2006
% c
hang
e in
con
tract
pric
e
Analyst forecast % change* Actual % change
• Market has underestimated price increases over last 3 years• Analysts are having to revise expectations for 2006 upwards• This has been key value and growth opportunity in the sector
Source: Internal. *Survey of three major mining houses. Next year forecasts taken as at date of current year’s price negotiations
11
Base metal prices vs. market expectations
• Analysts are still underestimating the strength of the market
• Upgrades to price estimates occurred as expected, but still remain below current spot prices for most metals
Source: Reuters 2005 Base Metals Poll (January & July 2005), DataStream. *Spot prices as at 30 September 2005
Earnings upgrades throughout 2005 as analysts revise their commodity price forecasts
59
701
43
158
84
YTD 05 Average
59
597
36
122
80
2006 forecasts
58
687
42
144
82
Est 2005(July ’05)
64
616
44
179
84
Spot Prices*
54Zinc
590Nickel
38Lead
124Copper
81Aluminium
Est 2005 (Jan ’05)USc/lb
12
Analysts upgrading forecasts
Source: UBS, ML & JP Morgan research notes (September 2005)
13
25000
30000
35000
40000
45000
50000
55000
1999 2000 2001 2002 2003 2004 2005
Japa
nese
Yen
Gold Bullion (Yen/Troy oz)
Gold Price
240260280300320340360380400420440460480500
1999 2000 2001 2002 2003 2004 2005
US
$
Gold Bullion (US$/Troy oz)
Source: Datastream. Data as at 7 October 2005
Gold price hits 18 year high...
220
240
260
280
300
320
340
360
380
400
1999 2000 2001 2002 2003 2004 2005
Euro
Gold Bullion (Euro/Troy oz)
...hitting highs in other currencies too
300
350
400
450
500
550
600
650
700
1999 2000 2001 2002 2003 2004 2005
A$
Gold Bullion (HK$/Troy oz)
14
Gold Market Fundamentals: Strong Demand
• Total gold demand in H1 2005 increased by 21%
• Jewellery demand at record high: $38bn for year to June 2005, +17% in H1 2005:– India (~20% total demand) saw highest ever quarterly demand in Q2’05, increasing 42%
yoy in tonnage terms.
– China saw jewellery demand grow by 11% in Q2’05. Now 3% of global market – still a long way to go!!!
• Investment demand up 66% for H1 2005
Source: World Gold Council, GFMS, Bloomberg. All percentages show growth in tonnage terms
Jewellery demand 1980-2005, tonnes and US$ StreetTRACKS Gold Trust shares in the market
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05
No.
of s
hare
s (m
illio
n)
15
Gold Market Fundamentals
Limited Supply
• Production declined by 4% in 2004 - largest annual decline since the 1940s
• Central Bank sales down 19% in 2004
• Total supply down 13% in 2004
Strong market fundamentals supportive of a higher gold priceSource: AngloGold Ashanti, World Gold Council, MLIM
Resource Replacement
0
10
20
30
40
50
60
70
80
90
1995-1998 1999-2004
Mill
ion
Oun
ces
per a
nnum
Production rate Discovery rate
• Since 1998, exploration budgets of gold mining companies cut by 76%
• Discoveries at all-time low
• Less than 30% conversion of discovered ounces to production
The Cycle
17
The Commodity Cycle
Market wrestling with the question:
Is this the peak of a normal cycle or the early stages of a supercycle?
• The argument for a supercycle:
– DEMAND – the China effect (and don’t forget India)
– SUPPLY – lack of investment in the previous decade and long lead times limits supply-side reaction
– Consolidation of the industry
• To a greater or lesser extent the same patterns can be found in all commodities
18
Chinese economy remains buoyant
Chinese Quarterly GDP Growth yoy
6
6.5
7
7.5
8
8.5
9
9.5
10
10.5
11
Q1 97Q3 97Q1 98Q3 98Q1 99Q3 99Q1 00Q3 00Q1 01Q3 01Q1 02Q3 02Q1 03Q3 03Q1 04Q3 04Q1 05
%
• GDP growth in Q2 2005 of 9.5%
• Industrial production growth in August 2005 of 16.0%
• Fixed Asset Investment growth in August 2005 of 27.4%
Source: National Bureau of Statistics of China
19
Urbanisation of China fuels construction growth
• Market fears of slowdown appear unfounded
• Shakeout of “speculative” developers earlier this year lead to lower growth
• Return of high growth rates in construction activity and steel consumption
• Chinese stainless steel consumption thought to grow at an average of 9% pa for next decade
• Not just in China – 2005 first year in history that more people live in cities than rural area
Chinese Property Construction Index Chinese Steel Consumption
Source: BHP Billiton, UBS, September 2005
20
Demand
• Industrialisation and urbanisation of China is having a huge effect on the commodities markets
• China is fast becoming the largest consumer of raw materials in the world
China’s Share of Global Demand
Source: UBS, Chinese Customs, Datastream
1990 2005E
0%5%
10%15%20%25%30%35%40%
Oil Iron ore Gold Aluminium Steel Copper Nickel Zinc
21
Mining Sector Consolidation
• Company balance sheets strong, debt at all time low, cash flows at all time high
• Quality growth opportunities remain sparse
• Rising capex (machinery, labour, raw materials) deterring management from to building new operations
Conclusion:
Consolidation will continue as companies look to increase production growth cost effectively in this high commodity price environment
e.g.
– Inco and Falconbridge (October 2005): US$11bn
– BHP Billiton and WMC Resources (August 2005): US$7bn
– Goldcorp and Wheaton River (February 2005) US$2bn
• We believe there are still more to come...Anglo American amongst others?
22
Real Base Metal Prices since 1979
0
20
40
60
80
100
120
140
1979 1984 1989 1994 1999 2004
Inde
xed
to 1
00
Real Base Metal Prices
• Are we experiencing a structural change in prices?
• Better capital discipline, consolidation of the industry, lack of new supply and unprecedented demand event (China) have lead to a real price increase.
Source: Datastream.
Portfolio Strategy & Outlook
24
Strategy
• General Themes– Aggressive view on demand vs supply
- eg China vs lack of new projects
– Bias towards shareholder return focused management
– Limited “pure exploration” but selective holdings in high growth juniors
– Focus on value and commodity beta
– Increasing emphasis on emerging new producer nations eg China, Africa, Former Soviet Union and India
• Key is to balance mix of core holdings with smaller high growth opportunities and companies with significant commodity beta
• Aim to provide exposure to global mining sector rather than just Australian mining investments
25
Outlook
• Record earnings and cash flow yet again this year
• Deficits by and large intact whilst inventories remain stubbornly low
• Change in market structure could reverse real price decline trend
• Management determined to deliver returns to shareholders
• Valuations at attractive levels
• Gold price showing potential to have major break out above US$500oz
• Other precious metals enjoying high prices
GMI – The Rationale
27
GMI – The Rationale
Global Mining Investments Ltd• Rationale
– Australian resources sector has shrunk following takeovers by international companies during the last decade
– Australian investors unable to access the opportunities outside the country
– Not all of the best natural resources deposits are located in Australia
– Growth in sector coming from “new” countries eg Russia, China, Zambia, India
• Portfolio objective: to exceed the return of the HSBC Global Mining Index over the medium to long term. GMI invests globally in natural resource companies, predominantly metals and mining companies.
• Launched 6th April 2004 with AUM of A$75.2m
• Strong portfolio performance since inception; AUM now A$120m*, +60% since launch
*As at 30 September 2005
Fund Performance
29
Global Mining Investments
• At launch April 2004 AUM A$75.2m
• As at end Sept 2005 AUM of A$120m; +60% since inception
Source: Bell Potter. Data to 30 September
GMI v HSBC Global Mining Index $A to 30 September 2005
85.0
95.0
105.0
115.0
125.0
135.0
145.0
155.0
165.0
Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05
HSBC AUD
GMI AUD
30
Key Performance Drivers
• Large weighting in diversified companies key to majority of performance
• Selective exposure to individual base metals
– e.g. copper vs. aluminium
• Excellent performance from key growth stocks
– e.g. First Quantum (+125.3%), Eramet (76.6%), Grupo Mexico (+72.4%), ZijinMining (+71.3%), Oxiana (+61.5%), Aur Resources (+54.9%)*
• Corporate activity within sector
– BHP Billiton & Xstrata battle for WMC Resources
– Noranda bid for Falconbridge
– Xstrata & Inco battle for Falconbridge
*Share performance in A$, 30/06/04 to 30/09/05. Source: Datastream
31
Top 10 Holdings
Source: Internal as at end September 2005
Description % of Portfolio Geography Commodity
1 CVRD 10.6 Brazil Diversified2 BHP Limited 9.1 Global Diversified3 Rio Tinto Plc 8.3 Global Diversified4 Xstrata Plc 5.7 Global Diversified5 Impala Platinum Holdings Limited 5.3 South Africa Platinum6 Falconbridge Limited 4.8 Nth America Nickel7 Anglo American Inc 4.6 Global Diversified8 Minas Buenaventura 4.5 Peru Gold9 Alumina Limited 3.9 Australia Alumina
10 Teck Cominco Limited 2.9 Nth America DiversifiedTotal: 59.6
59.7
32
GMI Ltd - Asset Allocation
Source: Internal as at 30 September 2005
GMI v HSBC Global Mining Index Commodity Allocation September 2005
0%
10%
20%
30%
40%
50%
Div
ersi
fied
Gol
d
Alum
iniu
m
Cop
per
Plat
inum
Indu
stria
lM
iner
als
Zinc
Coa
l
Dia
mon
ds
Silv
er
Ura
nium
Nic
kel
Oth
er
Cas
h
Global Mining Investments
HSBC Global Mining Index
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