The New Industry Paradigm: Industry Specialist Private Equity Investors as Drivers in the Mining Sector

SME’s Third Annual Mining Finance ConferenceNew York City

Joel Schneyer – Managing DirectorApril 28, 2015

Difficult Investment Landscape for Miners

Source: Modified from NovaGold - Presentation at San Francisco Gold Conference, November 2013

South America1.Peru: Construction halted at largest mine due to gov’t review and social unrest.2.Ecuador: Political obstacles and windfall tax discourage foreign investment in mining.3.Venezuela: Five mining companies seeking compensation through World Bank’s arbitration court following nationalizations.4.Bolivia: Nationalization of various natural resources assets.5.Argentina: Miners required to repatriate revenues from foreign sales, limitations imposed on foreign exchange. Controls on imports of equipment/supplies have also been tightened

Africa•Ghana: Increase in tariffs on mines and introduced a windfall tax, halting project expansions.•Guinea: New law gives government a 35% stake; threat of nationalization.•Mali: Recent military coup creating political uncertainty•Kenya: Rising mineral royalties and drilling fees for mining.•Congo: Plans to revise mining code, raise taxes and increase stake in mining projects•Zimbabwe: Gov’t plans to seize control of foreign-owned mines.•South Africa: Ongoing dialogue to nationalize mining industry.

Russia, Asia & Australia13.Indonesia: Newly proposed legislation limits foreign ownership of mines to 49%.14.Philippines: New royalties and taxes being imposed on mining companies.15.Mongolia: Drafting investment law to restrict foreign ownership.16.Kyrgyzstan: Parliamentary motion calling for increased government stake in one of its largest mines

Heightened Geopolitical/Permitting Risk in North America

2

BC: Mt Polly tailings dam spill

Quebec: Innu First Nations launch $900M lawsuit against Rio Tinto

BC: First Nations Supreme Court Ruling

MEX: Torex kidnappings

Aust: BHP & Rio Tinto iron ore tax avoidance investigation

Greece: Revokes Skouries mine development license

Zambia: Planned royalty hike to 9%

Access To Public Capital Decreasing – Exploration Decreasing

3

Source:

Toronto Stock Exchange and TSX Venture Exchange Total Financing (C$ Billions)

Source:

Global Exploration Budget Trends ($ Millions)

Disconnect Between Gold Miner ETFs and Broader Market

4

Source: Yahoo Finance

Why Buy An Illiquid Share When You Can Buy An ETF?

5

Source: Yahoo Finance

Source: Headwaters Research

Industry Experiencing Mining Cost Inflation – N American Example

6

$/oz

$535/oz

Margins Under Pressure

7

Source: Metals Focus

8

Development Stage Gold Companies trade at an Enterprise Value of $12 per ounce of M, I, & I (NI 43-101) with average estimated project development costs of $91 per ounce

*EV = (share price x # shares) – current assets + total liabilities**4/18/2015 share prices Au=$1203.35/oz, Ag=$16.23/oz

The Development Stage Business Model Looks To Be Unsustainable

9

Once the Project enters the Development Investment Analysis Phase (PEA – Prefeasibility – Feasibility), companies see a long period of share price erosion as studies, permitting and de-risking drag on

Life Cycle of a Gold Mining Share

10

Actual Trading Market Multiples

Small Gold Producers $51/oz Resource

Intermediate Gold Producers $64/oz Resource

Large Gold Producers $117/oz Resource

So What Is the Problem?

Development Stage Gold Companies Trade on Average at $12/oz Resource

Costs to Complete Drilling, Feasibility & Permitting ~$10/oz Resource

Capital Development Costs $91/oz Resource

Owners Costs Not in Feasibility (25%) $23/oz Resource

Total $136/oz Resource

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The Institutional Money has lost confidence that…

costs can be controlled

capital discipline will occur

restructurings can deliver on promises

returns on capital employed will improve

the industry won’t pile back into too many new projects or expensive deals

when prices rebound

resource nationalism will not overwhelm the industry

commodity prices will not collapse

“stuckholders” have an exit

… and the markets reflect this loss of confidence

Institutional Money Is Not Buying Any More Lottery Tickets

PE Investment Criteria

Project in the lowest quartile of cost curve

Favorable technical review Board representation or control Permitting timeline Aligned financial interests Singular execution focus Exit strategy

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Company

Project

Retail

Sovereign Wealth

Inst

itut

iona

l Mon

ey

Private Equity

Streaming & Royalty

Strategics

Merchant Traders

Mutual Funds

Major Shift In How Institutional Money Invests In Sector

1. Commodity

2. Location

5. Technical & Legal Review

7. Execution and/or Completion Risk

Private Equity – Key Considerations

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8. Size of Investment

4. Control & Board Representation

3. Quality & Focus of Management Team

6. Project Competitiveness

9. Hold Period & Exit

+ 20% Annualized Returns6 to 10 year timeframe

SNL Mine Economics Cost Curve

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Source:

Iron Ore Cost Curve25% - $35/dmt50% - $39/dmt

Copper Cost Curve25% - $1.25/lb50% - $1.60/lb

Permitting Times Are Increasing – The Donlin Gold Example

Source: NovaGold 2nd Q & Project Update Presentation, July 2014

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1.5 Moz/yearFirst five full years 1

1.1 Moz/yearlife of mine 1

WE ARE HERE

Number of Mining Companies by Stage of Project Development - 2013

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Adapted from:

Increasing Private EquityInterest and activity

Prefeasibility Feasibility ProductionResource PEA

Exploration1149

Production188

AdvancedExploration866

The Headwaters Difference

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Global reach (30 countries, 50 offices)

Full product/service offering

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Deep pool of transaction experience (over $265 billion)

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