Challenges For Future Zinc Supply – Why Selwyn Is Investing in ZincIZA, February 21, 2012

Zi M l M kZinc Metal Markets

February 2012

Zinc Market Outlook

Most analysts are now forecasting a very positive outlook for zinc Most analysts are now forecasting a very positive outlook for zinc prices commencing 2013 when zinc supply is expected to enter an extended period of zinc supply deficit.

A key question for the market is where will the new zinc concentrate supply come from and when?

Most analysts on zinc markets are economists and producers. In this presentation it is intended to look at the supply problem through the eyes of the junior exploration and development company.

This presentation will highlight that mine development financing is the major challenge for the zinc mining industry – a challenge that will be difficult to overcome given the lack of market interest in zinc companies

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difficult to overcome given the lack of market interest in zinc companies.

Zinc Fundamentals Usage and Consumption

First Usage ConsumptionFirst Usage Consumption

If you are building infrastructure you are consuming lots of zinc!

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Zinc Demand Forecast Remains Strong Forecast Zinc Demand Growth

2010 2011 2012 2013 2014

Global  15.2% 7.6% 5.0% 5.0% 4.6%

China 14 8% 11 7% 8 2% 8 2% 7 9%

Forecast Zinc Demand Growth

China  14.8% 11.7% 8.2% 8.2% 7.9%

Wood Mackenzie December 2011

Despite global economic slowdown, demand for zinc remains strong due to continuation of construction of infrastructure in developing countries.

Galvanized steel growth is the main driver of zinc demand. Demand is being driven by infrastructure investment and industrial construction in Demand is being driven by infrastructure investment and industrial construction in

China and other developing countries. Continued urbanization in China and other Asian tigers provides strong support for

continued infrastructure development.

Forecast demand growth requires the addition of approximately 550,000 tonnes of new mine supply annually over the next few years –a host of small projects or one or two big projects annually.

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p j g p j y

Global Zinc Demand- Credit Suisse

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Global Zinc Demand Growth - Nyrstar Global zinc demand forecast to grow with China contributing more than 50% of growth.

Growth rate of Non OECD countries will significantly exceed OECD annual growth.

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Nyrstar November 2011

Zinc - New Market Developments Zinc in Fertilizer

Zinc an important nutrient for increasing crop production and medical benefits in child development (“Zinc for Kids” initiative); estimated could add 550,000 tonnes of new zinc demand in China, Brazil, and India over the next few yearsfew years.

Galvanizing Improvements

Increased zinc in galvanized steel in Chinese cars to meet global standards.

Zinc coated rebar technology to reduce effects of salt corrosion in concrete infrastructureinfrastructure.

Improved die casting technology.

Colored zinc galvanized steel products.

More Efficient Zinc Battery Technology

Lighter and longer lasting zinc air-dry battery technology gaining

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acceptance.

Forecast Strong Annual Production Growth Rate

BRIC countries (Brazil Russia India and China) continue to enjoy strong industrial growthBRIC countries (Brazil, Russia, India and China) continue to enjoy strong industrial growth compared to modest growth in OECD countries and therefore support growth in zinc consumption.

Annual G

rrowth

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Nyrstar November 2011

Zinc Mine Supply Fundamentals More than 350 small to medium mines; Global Zinc Mine Supplyonly 7 large mines with more than 200,000 tpa production.

The seven large mines make up only 20% of global production

Global Zinc Mine Supply

20% of global production.

Approximately 75% of production is from underground mines and the balance is from a few large open pit mines.

Most of production is from sulphide deposits with no heap leach oxide zinc operations.

Very fragmented with no party owning more than 20% of world production.

Large participants include Xstrata, Glencore Nyrstar Hindustan Zinc ChinaGlencore, Nyrstar, Hindustan Zinc, China Minmetals, Teck and Votorantim.

Glencore-Xstrata-Nyrstar cross share ownership gives the group approximate

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40% ownership of global zinc production.

Supply Challenge - Large and Medium Mine Depletion

Scheduled Depletion of Several Large and Medium Mines Commencing 2012Scheduled Depletion of Several Large and Medium Mines Commencing 2012

Credit Suisse (January 12, 2010Research Note) projected the need

Mine K tonnes Depletion DateLennard Shelf 75 Shutdown for a 60% increase in mine

production by 2016 - this means more than 6,000,000 tonnes of new mine development.

X t t Zi (

Lennard Shelf 75 Shutdown

Galmoy, Ireland 80 Shutdown

Brunswick, Canada 265 2012

Perseverance, Canada 135 2012

Xstrata Zinc (October 2010 LME presentation) President stated we could loose 1.9M tonnes of mine supply by 2016 while only adding 800,000 tonnes; and expected

Golden Grove, Australia 140 2012

Lisheen, Ireland 175 2013

Mt. Garnet, Australia 55 2013

Rosh Pinah, Namibia 67 2014 , ; pthat we will need 7 million tonnes of new mine supply by 2020 and 14 million tonnes by 2025 to meet demand.

Rosh Pinah, Namibia 67 2014

Century, Australia 600 2014

Iscaycruz, Peru 174 2017

Skorpion, Namibia 171 2019

* Data from Wood Mackenzie , June 2011 Zinc Report

Wood Mackenzie (August 2011) forecasts loss of 1.7M tonnes by 2015, and need to add 8.2 M tonnes of mine production by 2020

Total 1,937

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2020.

Zinc Market Mine Supply Outlook Mine depletions to result in supply shortfall in 2013 - new ‘probable’ mine supply and possible mine extensions to fill the gap from 2013 to 2017 ???

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Wood Mackenzie August 2011

China Zinc Mine Production China zinc mine production seen to peak in 2014/2015 and then decline.

A significant part of Chinese mine production is low grade and in the upper 90th percentile of the cost curve: few quality large development projects.

Growing Chinese consumption expected to be met by increased zinc concentrate imports.

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Nyrstar November 2011

Zinc Mine Expansions (1990-2010)Mine supply increases over last 20 years has largely been met by expansion of existing mines (these expansions represent 20% of current production); few expansions opportunities remain

Operation Country DepositType

Current Owner Expansionkt Zn

Comments

Rampura- India SEDEX HZL (Vedanta Resource 640 A multi-stage OP expansion over 15 years

(these expansions represent 20% of current production); few expansions opportunities remain.

Agucha 65%)

Red Dog USA SEDEX Teck 350 Expansion and optimisation of the OP from300kt/a to 550kt/a completed in 1998

Lanping China Other Jinding Zinc (Hongda Chemical 51%)

190 (OP and UG) and mill taking over from artisanal workings

Mount Isa Pb/Zn

Australia SEDEX Xstrata 150 Expansion George Fisher UG and BlackStar OP to feed 5Mt/a & new 8Mt/a mill

Huize Qilinchang

China MVT* Chihong Zinc and Germanium

120 One UG expansion

Zyryanovsk Kazakhstan VMS** Kazzink (Glencore 69%) 100 Modernisation and upgrades to mine (UG)y y ( ) pg ( )and mill

Vazante Brazil OXIDE Votorantim 100 Series of small expansions (UG)

Chungar Peru CRD*** Minera Volcan 80 Series of small expansions (UG)

El Porvenir Peru CRD Milpo (Votorantim 50%) 75 Series of small expansions (UG)

Iscaycruz Peru SKARN Minera Los Quenales (Glencore 97%)

60 Series of small expansions, new oresources and optimisation (UG and OP)

Uchal Russian Fed. VMS UGMK (28%) 60 Modernisation and upgrade (UG)

Garpenberg Sweden VMS Boliden 50 Optimisation and increased capacity (UG)

Subtotal 1 985

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Subtotal 1,985

History and Future Of Zinc Mine ProductionHistory: Mine Production Changes - In the period 1992 to 2011 (Wood Mackenzie August 2011):

Additions and Depletions Tonnes (1992‐2011)

New Mine Production  4.5M tonnes

Mine Expansions 4.5M tonnes

Mine Closures 2.5M tonnes

Reductions in mine output 0.7M tonnes

Mine Extensions could extend life of mines, but will need considerably higher zinc and lead prices.

Exploration: virtually no new major discoveries; some expansion of known deposits.

Future : Mine Expansions

Few brownfields mine expansion project opportunities remain.

Expansion of underground mines are constrained by high development costs.

Underground mines generally not feasible to convert to larger open pit operations.

New Mine Supply Conclusions – will largely come from new mines!

Need an increase in annual mine production of 1.7M tonnes by 2015 and 8.2 M tonnes by 2020

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(Wood Mackenzie August 2011).

Falling Zinc and Lead Mine Grades Falling zinc and lead mine grades will add to the problem of meeting zinc demand.

Addition of new high grade underground mines expected to maintain current grades over the short term, albeit at higher operating costs.

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Largest Undeveloped Zinc-Lead Deposits

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Wood Mackenzie Ranking Of Large Zinc Mine Projects Probable Projects - 1,525,000 tonnes with expected timelines of 2014 - 2017.

Possible Projects - 2,635,000M tonnes; but timelines for development uncertain.

Selwyn production should read 255,000 tpa

August 2011

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Note Selwyn forecast output at 255,000 tpa Zn and 65,000 tpa Pb.

Lessons Learned - Copper

Th k l t b l d b d t di th i t fThere are key lessons to be learned by understanding the impact of major Chinese copper imports in 2002 and subsequent supply problems.

Chinese imports lead to supply shortfall in 2002 and rapid drawdown of metal inventories.

Draw down of metal inventories resulted in a 4-fold increase in copper price over a three year periodthree year period.

Despite numerous very large quality copper projects in the development pipeline, mine supply has taken a long time to catch up to demand.

Supply additions have largely been met by expansions; however this has in part been Supply additions have largely been met by expansions; however, this has in part been offset by declining mine grades.

New mines have experienced many financing, technical and permitting delays.

10 years latter the copper market is still struggling to meet demand 10 years latter the copper market is still struggling to meet demand.

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New Mine and Development Financing

Availability of mine financing is the key to meeting supply demands.

Project / Mine Company Infrastructure Production Capex Financing

Zn/Pb tonnes

Start (millions)

Availability of mine financing is the key to meeting supply demands.

CanadaHalfmile Lake Trevali Xstrata mill 52k Q1 2012 C$30 Equity, Xstrata 100% concentrate off-take

Bracemac-McLeod Donner Metals

Xstrata mill 75k Q1 2013 C$164 65:35 JV with XstrataDonner-Sandstorm $25M equity & forward metal salesmetal sales

ScoZinc Selwyn Restart 30k/13k Q4 2012 C$30 Equity and private debt

Africa

Perkoa , Burkina Faso Blackthorn New 170k Q3 2012 US$180 39.9:50.1 JV Glencore; 10% Burkina Faso Glencore US$80M financing

Bisha, Eritrea Nevsun Au-Cu mine 98k 2015 Internal corporate

South America Santander, Peru Trevali New 2460k 2012 $80M Glencore finances all Capex for 100%

Concenrate off-take

Pachapaqui, Peru Korea Zinc Expansion 2448k 2012 Internal corporate

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New Mine and Development Financing

Project / Mine Company Infrastructure Production Capex Financing

Zn/Pb tonnes

Start (millions)

Asia & Europe

Dairi, Indonesia PT Bumi new 125k/65k 2013 80:20 JV with PT Anka Tamberg

Lombador, Spain Lundin Add Zn circuit 3090k 2014 Internal corporate

Olympias, Greece European Goldfields

Refurbish mill & new mine

21k/16k 2014 €286 Internal corporateGoldfields new mine

Al Masane, Saudi Arabia AMAK new 2345k 2012 US$170 $60M equity & loans from Saudi Industrial Development Fund

Altintopkan, Tajikistan 43k 2013

Khandiza, Uzbekistan MarakandMinerals

New mine 45k 2012

Australia

Rasp, Australia Toho Zinc Expansion 45k Mid A$110 Toho Zinc acquires CBH p, p2012

$ q

Dugald River MMG New 200k/25k 2014 A$800 Feas &Dev internal financing

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Development and Feasibility Stage ProjectsProject/Mine Company Resources/reserves Estimated

ProductionCapex Financing

Production

Tonne millions

Zn%

Pb%

Zn/Pbtonnes

Start (millions)

Canada Pine Point Tamerlane 7 8 6 16 3 01 50k/25k 2014 Equity and private debtPine Point Tamerlane 7.8 6.16 3.01 50k/25k 2014 Equity and private debt

Praire Creek Canadian Zinc 11.38 12.08 10.55

Selwyn Project Selwyn Resources

386.7 4.94 1.62 255k/65k 2015 C$1,000 50:50 JV with Yunnan Chihong

Tulsequah Chieftan 6.3 6.3 1.2 40k/4k 2016Metals

Citronen, Greenland

Ironbark 131 4.1 0.5 US$502 19% Nyrstar(35% off-take), $50M Convertible Debt and 35% Glencore off-take

AfricaTala Hamza, Algeria

Terramin 39.3 4.7 1.3 164k/36k Q3 2016 US$580 65:35 with Algeria gov’t75% debt from Algerian bank

Gamsberg, Nanibia Hindustan Zinc 150 7.1 0.5 305k

Asia & E. EEuropeOzernoe, USSR Metropol 126 6.6 1.3 300k 2016

Shalkiya, USSR Shalkiya Zinc 125 3.8 1.0 160k/44k 2014

Mehdiabad, Iran MehdiabadZinc

394 4.8 1.6 300k US$1,200 JV with Kommersant

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Zinc

New Zinc Mines – What Have We Learned?Recent new and committed mines have added approximately 1,150,000 pp y , ,tonnes of new mine supply of which approximately 550,000 tonnes is coming from 11 small mines (annual output of less than 100k tpa) and 600,000 tonnes from the 4 larger mines.

Many of the new mines are small, with low capital requirements due to existing infrastructure/custom milling arrangement – not many of these left in the development i lipipeline.

The larger capital projects are generally owned by large mining companies; those involving a junior company have a joint venture with a major industry player.

J nior Compan joint ent re project participants incl de Xstrata Glencore Toho Junior Company joint venture project participants include: Xstrata, Glencore, Toho Zinc and Yunnan Chihong.

Generally no senior project debt financing from the large global “project” banks.

Project financing tied to concentrate off take arrangements is common for the junior Project financing tied to concentrate off-take arrangements is common for the junior company developer.

Equity investments in the junior development companies is commonly a stepping stone for company takeover eg. Farallon, CBH, whose next?

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Mine Financing Dilemma – No Bank AccessProblem: Many of the development projects are being advanced by junior y p p j g y j

companies with uncertain access to capital markets. The juniors that have very limited financing capability and are therefore unable to advance projects in a timely manner. A development lag effect is probable as juniors wait for higher zinc prices and financingzinc prices and financing.

Traditional project debt financing from the European and North American project lending banks is not available.

Lack of syndication of project loans is a problem for projects with capex of greater than $200M.

Excessive hedging requirements by big banks impedes junior’s ability to raise project equity capital - little value upside for investors due to metal price cap due to the hedges.

Equity investor interest in zinc is low compared to other metals.

Debt capital for juniors is very expensive: dilutive convertible debentures or short term high yield debt; killing investment return for the equity investor.

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Common Challenges for New Zinc Mine ProjectsProject Financing

Junior mining companies have restricted access to capital; for the larger projects the junior company must now find strategic partners to provide debt capital from the “new project banks” in China, Indonesia, India and Brazil, and link concentrate sales to loan arrangements from major industry participants.

Project Economics

Rapidly increasing capital and operating costs and weakening of the US dollar are Rapidly increasing capital and operating costs, and weakening of the US dollar, are negatively impacting project economics for many projects.

InfrastructureInfrastructure

Many of the undeveloped deposits are remote or have other infrastructure requirements that are impeding development.

Environmental and Permitting Delays

Permitting of new mines are being delayed by complexity of permitting regimes and environmental challenges by various special interest groups

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environmental challenges by various special interest groups.

The X- Factor Xstrata has proposed $2.9B in investments to offset the closing of Brunswick, P d d ti f t t t th i (485kt Z /115kt l d)Perseverance and reductions of output at other mines (485kt Zn/115kt lead).

These new projects are key to future zinc supply; but it also creates additional uncertainty as to the timing of these new projects is in the hands of one producer.

Project  Production Mine Life(yrs)

Status

Start   Zn/Pb (tonnes)

Bracemac Mcleod 2012 90kt  4  Construction

Mt Isa ‐ Black Star deeps 120k/65k 4 Expansion

Mt Isa – Handlebar Hill 2012 40k/10k 2 Expansion

Mt Isa‐George Fisher exp. 2013 64k/30k Expansion

L d L 126k/40 10 iLady Loretta 126k/40 >10 new mine

McArthur DMS expansion 2014 40k/8k <10 Feasibility

McArthur Expansion (260k/55k) Feasibility – Albion plant

Mt Isa super pit (400k/300k) Pre‐feasibilityMt Isa super pit (400k/300k) Pre‐feasibility

Hackett River, Canada (250k/30k) Feasibility 

Errington, Canada (46k/7k) Feasibility 2012

Pallas Green, Ireland (177k/20k) Pre‐feasibilty 2012 

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, ( ) y

Total  1613k/565kWood Mackenzie Dec 2011

Those Who Make It Will Enjoy the ‘New Zinc Market’Metal Price:

High zinc prices sustained by long period of chronic supply problem.

Smelters:

Smelter treatment and refining terms will move lower in favor of the miner rather than the Smelter treatment and refining terms will move lower in favor of the miner rather than the smelter; a positive for the miner.

Smelters are moving upstream to secure mine supply; purchasing mines and providing project financing for concentrate off-take rights, infusing capital into new developments.

Shutdown of high cost zinc smelters with give way to bigger more power-efficient smelters.

Chinese smelters likely to face under-utilization and will need to increase concentrate imports.

Industry Consolidation:

Further consolidation of the zinc industry likely with three groups dominating: Glencore-Nyrstar-Xstrata; Vedanta and Chinese SOE’s.

Junior companies will continue to provide development projects; but with increased strategic alliances with one or more of the above groups.

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The Challenge of Mine Supply Has Begun

Century Mine AustraliaCentury Mine, Australia

(600,000 tpa)

Second largest zinc mine in the World – Here Today Gone Tomorrow!Gone Tomorrow!

Selwyn Project –big! But a ll t f th l tismall part of the solution.

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