Factors to Consider in Project Valuation

Leading / Thinking / Performing

Beijing, PRC

June 15, 2011

Alexander Lopatnikov

Factors to Consider in Project Valuation 2

Exposure to China and changing risk profile

Individual factors that influence project valuation

What can companies (not) do to improve valuations?

In This Presentation

Factors to Consider in Project Valuation 3

Exposure to China and changing

risk profile

Factors to Consider in Project Valuation 4

Exposure to China…

“The construction of Chinese infrastructure has

lifted the global intensity of steel use to levels

not seen since the post-War reconstruction of

Europe and Japan ended in the early 1970s.”

FT 0.0

5.0

10.0

15.0

20.0

2011 2016

GPD (PPP), US$ trillion (China - Red, USA – Blue)

Factors to Consider in Project Valuation 5

Market Value 2001 – 2011, US$ billion

Source: Thomson Reuters, Datastream, Vale

…Created Most Value in 2000s…

7.70%

18.90%

2002

China

Other Asia

ROW

33.10%

20.20%

2010

China

Other Asia

ROW

US$4.3bn

US$46.5bn

Vale’s Revenue

Factors to Consider in Project Valuation 6

…and Continues to Create It…

Factors to Consider in Project Valuation 7

…Too Much Money May Be a Problem

“…another major factor is the

financialization of commodity

markets. Its importance has

increased significantly since about

2004…

This phenomenon is a serious

concern, because the activities

of financial participants tend to

drive commodity prices away

from levels justified by market

fundamentals, with negative

effects both on producers and

consumers.”

UNCTAD, June 2011

Factors to Consider in Project Valuation 8

Individual factors that influence

project valuation

Factors to Consider in Project Valuation 9

Key Value Attributes

Resources /Reserves

Deposit characteristics

Mine Dilution and Mill Recovery

Metallurgical recovery

Metal credits and Contamination Charges

Mine and infrastructure costs

Costs to deliver to markets

Fuel, energy and labor costs

Environmental issues

Fiscal and political risks

Factors to Consider in Project Valuation 10

7%

8%

18% 18%

13%

10%

12%

7% 7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

< 60 60-65 65-70 70-80 80-90 90-100 100-130 130-150 >150

Fre

qu

en

cy,

Pri

ce %

Coal Price, US$/Tonne

Coal Price Distribution (FOB Europe) 2007-2010

Assuming current (end 2010)

production and transportation costs

thermal coal sales to the market

breakeven at US$100/tonne

Price Volatility

NPV > 0NPV < 0

Factors to Consider in Project Valuation 11

Real Dollars Costs

OverrunCost

Inflation

11%

14%

100% 125%

Feasiblity Study As-Built

Source: Jasper Bertisen & Graham A. Davis analysis of 63

worldwide mining and smelting projects completed between

1980 and 2001

Size of Project Number of ProjectsPercentage of

Feasibility Study estimate*

$0 - $50 Million 11 118%

$50 - $100 Million 4 102%

$100 - $1,000 Million 3 137% **Over $1,000 Million 3 110%

* - in real dollars

** - contains an outlier otherwise the difference is only 102%

Source: Pincock, Allen & Holt

Capital Costs

Cost inflation, currency and

commodity price volatility

complicate project valuation

Factors to Consider in Project Valuation 12

Non-Mining Costs

FOB Baltic Ports 110 $/t

FOB Vostochny 112 $/t

FOB Yuzhny 103 $/t

50 $/t

35 $/t

40 $/t

NB - 62 $/t

NB - 75 $/t

NB - 64 $/t

Factors to Consider in Project Valuation 13

What can companies (not)

do to improve valuations?

Factors to Consider in Project Valuation 14

Rising mining costs may trigger sector correction

(Reuters) - Consensus forecasts for miners' earnings are failing

to price in the full impact of rising costs, a gap that could trigger

a correction in the sector's shares after the summer results

season.

Uncertainty Is Still There

Factors to Consider in Project Valuation 15

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Incremental Value Over Tangible Assets Book Value

Gold

Iron Ore

Oil and Gas

Replacement

Cost

MRR Taxation and Return on Capital

0%

5%

10%

15%

20%

25%

Return on capital in mining

Factors to Consider in Project Valuation 16

Share Buybacks

BHP Billiton ~ $10 billion

Rio Tinto ~ $ 5 billion

Vale ~ $ 2 billion

Potash Corporation of Saskatchewan ~ $ 2 billion

Alternative Ways of Value Creation

Factors to Consider in Project Valuation 17

In Conclusion

Exposure to China remains both a major risk and source

of return

There are factors to consider other than commodity

prices

Investors need to avoid undertaking “subprime” mining

projects even assuming demand and prices will hold

Factors to Consider in Project Valuation 18

谢谢