Presented by, Mark Rachovides

1
Russia Macroeconomics, Mining, and the Medium
Term Outlook

• Presented by, Mark Rachovides
• Toronto, March 2007

2
A vast and attractive mining potential

• Colossal resources
• Undeveloped world class assets
• Key ingredients for success
• Cheap energy
• Qualified and cheap labour
• Extensive infrastructure (rail, air,
• power, gas, oil)

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But a mining sector affected by structural hurdles

• Hostile milieu
• Remote locations, harsh climate, seasonality
• Legal uncertainties
• Validity of ownership rights and licences
• Reliability of the judicial system
• Bureaucracy and state monopolies
• Multi-layered permitting system
• Inflexible infrastructure monopolies

4
Mining sector confronting uncertain circumstances

• Perceived lack of predictability
• Complex and contradictory regulation
• Risk of tax liabilities
• Legal vs. legitimate tax optimisation schemes?
• Yukos and other affairs-contrasting views
• National preference and consolidation
• Approvals and strategic resources
• Dominance of national champions

5
Gold Still undeveloped resources

• Enormous mineral potential, well documented.
• Growing gold production today.
• Few foreign investors have made substantial and
  successful direct investments
• Growth of Russian gold production stimulated by
• Liberalisation of Russias gold market,
• Low (if rising) cost of gold production
• increased investment by Russian banks.

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Gold Still undeveloped resources

• Favourable conditions on the global gold market
  and Russias stabilising macroeconomic
  environment will continue to be supportive
• The importance of Russian involvement has
  increased.
• Russia should be able to keep its position as one
  of the worlds five largest gold producers.

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The opportunity

• Synchronized global growth has led to a secular
  bull market for Resources
• Increased global demand can only be met by
  production from new projects
• New Europe has the resources and location to
  meet this demand
• The Region lacks local investors, project
  development skills, financial expertise and
  capital required to develop its Resource Sector
• In many ways a Quality Gap exists

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The opportunity

• Key Ingredients for Success
• Numerous undeveloped world class assets
• Cheap energy
• Qualified and cheap labour
• Extensive infrastructure
• Many identifiable Brownfield and new project
  investment opportunities
• Poor foreign expertise and knowledge about the
  Region
• Little private equity fund activity focused on
  resources

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EBRD one of the largest foreign investors

• Omolon Gold Mining Company USD 62.5m
• Buryatzoloto Loan/Equity USD 17.5m
• Alluvial pre-production facility 1999-2001.
• Equity stake in High River Gold Mines Ltd

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Conclusion Contrasted results

• Very wide interest from juniors and majors
• ...with many looking at concrete opportunities
• ...but few succeed to overcome the barriers

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THE OVERALL INVESTMENT CLIMATE IN RUSSIA
TODAY
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Investment climate Key challenges
Reduce resource dependency and diversify the
economy
Reform public institutions and actively engage in
confidence building and restoring trust
Encourage a more stable financial sector and more
diversification.

Strengthen competitiveness and integration into
the world economy
Improving efficiency in infrastructure
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FDI Potentially substantial contribution

• Transfer of technology and skills to raise
  productivity
• Setting high standards in management practices,
  corporate governance, business conduct etc.
• Promote diversification of the economy across
  sectors and into the regions

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Greater diversity and confidence of foreign
investors

• Greater share of reinvestment in Russia (in line
  with growing investor confidence)
• Greater diversity across sectors, in particular
  banking (Gazprom Bank, SG, Intesa)
• Still highly concentrated around regional
  clusters Moscow city oblast 38
• though growth of new regional centres in line
  with stronger consumer demand in the regions
• Continued return of flight capital (from
  off-shore centres)

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A very benign macroeconomic environment (for the
time being..)

• 2005 GDP growth at 6.4 surprised on the upside
• Domestic sources of demand drive growth
  (investment, consumer demand both 10)
• Sectors that have traditionally been the mainstay
  of growth, have decelerated markedly, in natural
  resources to only 1.7 growth in 2005.
• Reserves and stabilisation fund assets up despite
  major debt prepayments
• Inflation down to 9 (though persistent)
• Net private capital inflows positive for first
  time
• Three major credit ratings at investment grade

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Russia Recent progress

• Progress in banking sector reform better
  regulation and more lending to the real sector
  implementation of deposit insurance system
• Social sector reforms, despite flawed
  implementation, will have benefits for
  market-based development of infrastructure
  services
• Increased state intervention in the economy, and
  reassertion of state ownership/control over major
  companies in key sectors, has shaken business
  confidence

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A juxtaposition of buoyant sentiment and adverse
investment climate indicators

• Sentiment
• AT Kearney survey of 1000 senior executives
  Russia advances to no. 6 in terms of FDI
  attractiveness
• Diminished risk perceptions in Russian syndicated
  loan market record low yield spreads, and
  lengthening maturities

• Indicators
• WEF competitiveness ranking Russia ranked 74/117
  in terms of business competitiveness, and 109
  for government encouragement of FDI
• Questionable credit quality at sub-sovereign and
  private level

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Political stability coupled with uncertainty as
to the role of the state

• Stability
• Strong presidential mandate and authority
• Constitutional majority in the Duma
• presidential succession taking shape
• More clearly defined economic programme
  investment fund, Development Bank, Special
  Economic Zones

• Worrying Trends
• Increasing control over regions
• Re-assertion of control in certain industries,
  not all of which are strategic
• State intervention (administrative price
  controls)
• Slow progress on key elements of structural
  reform (civil service, judiciary)

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Summary Risk Assessment

• Upside
• Significantly improved fiscal balance, and net
  asset position of the general government and
  central bank should buffer any potential shocks.
• Growing confidence in the banking sector, and
  strong deposit growth further reduce inflation,
  despite rapid monetary expansion.
• Much improved access to all forms of private
  capital flows by a wide range of enterprises and
  banks.

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Summary Risk Assessment

• Downside
• Public finances, financial corporate sector
  remain exposed to commodity price shocks.
• Political risk ahead of 2008 presidential
  elections.
• Weak property rights regime and rising
  corruption.
• Increased state involvement in the economy,
  through the expansion of state ownership and
  control of industries in the so-called
  commanding heights and the creation of state
  champions creates uncertainty.

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Medium term risks Deteriorating macroeconomics ?

• Continued liquidity injections in context of
  sustained high commodity prices
• Price and wage pressures
• Administrative price controls?
• Hitting limits to easy growth as investment
  rate fails to rise
• Capacity constraints
• Further slowdown in industrial production (e.g.
  extractive industries)

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Financial sector instability ?

• Small capital bases. Institutions with large
  concentrations of assets either with single
  obligors, or within a single economic sector
• Capital adequacy ratios under pressure. Capital
  injections remain scarce growth in capital from
  retained earnings fails to keep up with assets
• ownership transparency remains poor, and related
  party lending erodes the true potential support
  from committed capital
• liquidity in the interbank market remains poor.

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Medium term risks Sustained high oil prices ?

• Greater cyclicality being built into the economy
• Real sector (diversification delayed)
• Fiscal (balanced budget and oil price)
• Financial sector (susceptible to liquidity
  shocks)
• Incentives effects
• No urgency for reforms / masks structural
  problems
• Dampened private sector risk perceptions
• Erodes fiscal prudence
• Growing rent-seeking behaviour

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Deteriorating institutional environment?

• Undiminished corruption, increased risks to
  property rights ineffective constraints on tax
  enforcement etc.
• Increasingly fuzzy delineation of sectors subject
  to state control. Can a vibrant private sector
  co-exist with a tightening of state control in
  others?
• Deterioration in corporate governance standards.

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Opportunities and challenges for the foreign
investor community

• Rapid growth, and spontaneous development of
  markets and products, likely to continue
• In a period of abundant liquidity
• lower margins/more demanding financing terms for
  foreign investors
• Difficult environment to maintain standards of
  corporate governance and business conduct
• Signal commitment to Russia and maintain high
  investor standards in relations to local
  authorities and communities

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DUNDEE RESOURCES NEW EUROPERESOURCE LP
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Dundee Resources New Europe Fund

• Private Equity Fund focused on Resources in
  Eastern Europe.
• A Cayman Island exempted Limited Partnership
• Self-liquidating fund with a five-year commitment
  period
• Ten year life from closing with up to three,
  one-year extensions

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Opportunity for Mining Investors

• Access to a hitherto undeveloped market
• With a partner capable of acting as catalyst or
  strategic investor
• At a time of structurally driven opportunities
• In a Region where there is a lack of local
  investors and experience in project development
• Where there is limited foreign competition and
  domestic capital available to develop the sector
• Targeting long term capital appreciation
• Above the returns seen from the Region to-date

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Investee benefits

• Strong, internationally recognized financial
  partner committed to regional development
• Financial partner with extensive knowledge
• Development and support of corporate strategy and
  long term prosperity of the Company
• Improved management, governance, sustainability
  practices
• Access to equity, debt and trade finance
• Enhanced credibility in international markets

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Strengths of the Fund

• Proven track record of Dundee group.
• Strong, internationally recognised financial
  partner in EBRD
• Longer term perspective than that of many
  investors in the region.
• Political leverage due to EBRDs unique mandate
  and shareholders structure
• A broad range of investment operations
• Catalytic impact on other investors

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Risk mitigation

• Prevention safety, fairness,
  sustainability
• Verification of overall deal fairness with
  government
• Support to develop local benefits
• Mitigation manage risks when they arise
• Willing to share risks,
• EBRDs Preferred Creditor Status,
• Experience in problem resolution with government

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New Europe
GDP of UK gt US 1 trillion
GDP of CIS and E Europe lt US 2 trillion
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Contact details
Mark Rachovides Vice-President, Europe Dundee
Resources Limited 14th Floor 1 Adelaide
Street Toronto, M5C 2V9 1 416 318-7567 44 777
552-3808 mrachovides_at_dundeeresources.com