Patricia M. Mohr

1
The Outlook for Commodity Prices and the Global
Mining Industry
Seminar on Surviving the Global Financial Crisis
in the Mining Sector Mine Africa Radisson
Admiral Harbourfront Toronto, Ontario January
13, 2009
Patricia M. Mohr Vice-President, Economics
Commodity Market Specialist The Scotiabank Group,
Toronto
2
Commodity Price Upswing This Decade On a Par
With 1970s Expansion
Scotiabank Commodity Price Index, change yr/yr Scotiabank Commodity Price Index, change yr/yr
December 2002 December 2003 December 2004 December 2005 December 2006 December 2007 17.9 17.3 19.0 24.4 5.4 10.2
(November 2008, change yr/yr) (November 2008, change yr/yr)
All Items -12.8
Oil Gas -30.4
Metals Minerals -5.0
Forest Products 1.7
Agriculture -12.0
Scotiabank Commodity Price Index1
Index 1997100
New record high in July 2008 at 226 above
cyclical low

All Items
October 2001 Bottom
Arab Oil Embargo
A trade-weighted U.S. dollar-based index of
principal Canadian exports. Shaded areas
represent U.S. recession periods.
3
Commodity Prices Retreat From Record High in July
2008
The Bull-Run in commodities continued in
2008H1 due to ongoing strength in Chinas GDP
growth, under-investment in oil gas and metals
during the 1990s and delays in expanding capacity
this decade. Interest by investment funds in
commodities as a hedge against a declining U.S.
dollar and a major rejuvenation in international
grain oilseed prices linked to biofuel
development and tight global supplies also
pushed up commodity prices. Fertilizer prices
(especially potash) rose to record levels.
However, after reaching a cyclical peak in July
2008, Scotiabanks Commodity Price Index plunged
by a sharp 35.8 through November and dropped
further in December alongside a faltering global
economy ushered in by a U.S. and European
banking crisis, deleveraging by financial
institutions and much tighter global credit
conditions. Most G7 economies are now
contracting.
4
Hedge Funds Exit Oil Metal Positions
While inter-bank lending has improved following
government guarantees on inter-bank lending in
Europe, government capital injections into
financial institutions to shore up their balance
sheets and massive central bank liquidity
injections tighter credit will contribute to
sharply paring global growth from 5 in 2006 and
2007 to about 0.5-1.0 in 2009. This will occur,
even with relative strength in emerging markets
such as China, where GDP growth should still
advance by 7.0 in 2009 though well below the
estimated 9.5 of 2008 and 11.9 of 2007. The
sudden and unusually sharp decline in commodity
prices since the July peak reflects the exit of
many hedge funds from long commodity futures
positions and commodity index-linked
investmentsforced by fund redemptions and
tighter credit as well as a shift to record
short positions by funds and trading companies.
Investment in commodity index-linked securities
such as the Dow Jones-AIG Commodity Index
fell from about US200 bn at the end of June to
no more than US150 bn in September and plunged
in October - November.
5
China -- Vital to Global Commodity Markets
China Industrial Production November 2008
5.4 yr/yr G7 Industrial
Production -5.1 (Oct) U.S.
-5.5 (Nov) Japan -13.3
(Nov) Germany -3.9 (Oct)
yr/yr change
3 mth moving avg.
China Industrial Production
China shifts policy in mid-September 2008 from
preventing overheating to supporting fast and
steady growth monetary policy has been eased
decisively, while a massive fiscal stimulus
package (infrastructure spending) has been
announced for 2008Q4 -2010.
G7 Industrial Production
Demand Growth in China (2007,
change)
Crude Oil 4.6 Nickel 24.0
Copper 16.0 Aluminium 38.8
Slab Zinc 11.5 Iron Ore 10.3
6
GDP ( per annum)
Emerging Markets Should Provide Some Offset To
G7 Contraction
2006 2007 2008F 2009F 2010F
WORLD 5.1 5.0 3.5 0.5-1.0 2.5
CANADA 3.1 2.7 0.7 -1.2 1.9
UNITED STATES 2.8 2.0 1.2 -2.1 1.7
CHINA 11.6 11.9 9.5 7.0 8.5
INDIA 9.6 9.0 7.0 5.5 6.5
SOUTH KOREA 5.0 5.0 4.2 -1.0 2.5
yr/yr change
Widening credit squeeze reduces growth prospects.
A seismic shift in global growth has occurred
from the G7 to emerging markets this decade.
Global GDP estimate based on purchasing power
parity, as used by the IMF. Average 1988-1997
3.4 p.a. prior to the economic take-off in
China and India.
7
U.S. Housing Starts
U.S. Housing Start Outlook (million units)
millions of units, quarterly, annualized
2006 1.80
2007 1.36
2008F 0.90
2009F 0.65
2010F 0.85
1978 Strong Baby-Boom Demand
Total
Tighter U.S. lending standards, high home
inventories and severe employment losses point to
prolonged U.S. slowdown.
Single-Family Units
The plunge in U.S. new single-family home sales
since the peak in 2005Q3 at 72.2 has exceeded
the drop in the early 1980s recession.
8
The Fed Takes Action to Stem Fallout from
Sub-prime Mortgage Meltdown
Federal Funds
Effective Rates
Real Federal Funds Rate (Adjusted for
Inflation)
per cent
per cent
January 2009 -1.65Average 2.31
Average
9
Credit Conditions Tighten Globally In September
October 2008
USD Libor Shows Significant Improvement in Late
October

3-month
Overnight
Inter-bank lending thaws
following government guarantees on inter-bank
lending and capital injections into banks and
other financial institutions in the U.K. and
Western Europe in October. However, general
credit conditions remain tight.
10
After a Weak 2009, Oil Prices Will Likely Rebound
Medium-Term 1990-99 US19.69/bbl 2006
US66.22 2007 US72.32 2008F
US99.65 2009F US55 2010F
US70 2011-13F US95
Oil Prices Tumble from Record High

US per barrel
New Record High July 11, 2008 US147.90
OPEC announces output cuts of 4.2 mb/d in
Sept/08 Jan/09 to shore up prices.
Iraq War
Iranian Revolution
Gulf War
A likely capital spending slowdown on oil field
development in 2009, due to tighter credit and
the recent slide in oil prices, sets the stage
for a strong rebound in oil prices in 2011-13.
Arab Oil Embargo
Source Scotiabank Commodity Price Index. Data to
January 6, 2009.
11
U.S. Economy Contracts
Waning U.S. Industrial Activity
U.S. Employment Growth
yr/yr change
million units, quarterly
yr/yr change
Industrial Production
U.S. Payrolls
Latest DataDeclines in Payrolls Latest DataDeclines in Payrolls
Dec. 2008 -524,000
Decline in Past Year -2,589,000
U.S. Motor Vehicle Assemblies
U.S. motor vehicle assemblies (including General
Motors, Mitsubishi, Nissan) expected to total
8.8 million units in 2008, and 7.9 million in
2009, before edging up to 8.2 million in 2010.
Assemblies averaged about 12 million from
1993-2007.
12
Scotiabank Metal and Mineral Price Index Retreats
from Record
U.S. Equity Markets Lift Off Bottom in January
Index 1997100
Index 1941-4310
SP 500
Metal and Mineral Price Index in July 2008
reached a new record high 123.8 above the June
1988 peak.
Equity markets appear to be bottoming.
An Indicator of Financial Market Distress
Economic Sentiment
Nov20/08
13
Copper Prices Still at Profitable Level
Re-weighting of Dow Jones-AIG Commodity Price
Index and SP GSCI boosts base metals (at least
temporarily) in early January.
US per pound
Record High US4.08 on July 3, 2008


Low During Credit Squeeze (Aug. 17, 2007)

• Price Outlook
• US3.23
• 2008 US3.15
• 2009F US1.30
• 2010F US1.30-1.40

14
Copper Prices Will Likely Outperform Other Base
Metals
LME copper prices at US1.44 on January 12, 2009
are still at profitable levels, yielding a 16
margin over average world break-even costs
including depreciation, interest expense
royalties. However, prices are well below the
90th centile of direct cash costs triggering
substantial production cuts and mine expansion
deferrals. Copper prices could move down
further in coming months, given prospects for a
contraction in world consumption of about -0.5
in 2009, after last years marked deceleration in
growth to only 0.6. Global demand should pick
up again modestly in 2010 (1.5). Chinas
copper consumption will decelerate from last
years 8 growth (16 in 2007) to only 5, given
lower exports to the G7 and substantial inventory
liquidation in parts of the manufacturing sector
(e.g. air conditioners) linked to a domestic
housing correction and industry rationalization.
However, reduced availability of imported copper
scrap (due to lower prices) and Chinas massive
infrastructure spending program (particularly on
power generation transmission and the railways)
will boost demand. Japans auto sector is
dominated by export demand and, with declining
auto sales in the United States and Europe,
Japans automakers are being forced to cut output
(-7.4 yr/yr in October). Copper consumption is
also quite weak in Western Europe (-4.2 expected
in 2009).
15
Copper Inventories Will Only Build Modestly in
2009
Copper prices are, nevertheless, expected to
outperform other base metals. While visible
exchange stocks on the LME, COMEX and Shanghai
Metal Exchange increased to 7.2 days of global
consumption in late 2008 (the highest since April
2004), stocks remain well below previous peaks
(May 2002 at 37 days and Oct 1993 at 23 days).
Prior to the downturn, planned new mine
development was only modest and will now be
scaled back in 2009-10. In Central Africa, low
prices, political uncertainty and the credit
crunch will delay new development. Copper output
from the DRCs informal sector will likely fall
by 70,000 tonnes from its peak and the KOV
project will be cancelled for technical reasons,
though Lumwana start-up proceeds well in Zambia.
Significant supply disruptions have been a
feature of the copper market in the past five
years, with a combination of labour issues,
equipment failures/mining challenges and slow
project ramp-up cutting planned production by 1.4
million tonnes in 2008.
16
Stainless steel production slowdown in Asia and
Europe pushes down prices in 2008. Mine
closures and delays in ramping up new projects
(possibly at Goro and Onça-Puma) together with
stronger consumption point to a rebound in prices
by 2010.
Nickel Prices Retreat
US per pound
May 16, 2007 New Record US24.59
LME Nickel Prices
Previous Record US10.84 in March 1988
LME Nickel Prices(US per pound)
2007 16.88
2008 9.57
2009F 4.20
2010F 4.80
17
U.S. Stainless Steel Prices
Expected global capital spending slowdown in 2009
will pressure stainless steel prices. However,
capital spending should reaccelerate early in the
next decade.
US per tonne U.S. Midwest, spot prices
Stainless Steel Prices - CR304
18
Zinc Prices Ease
US per pound
LME Zinc Prices(US per pound)
2007 1.47
2008 0.85
2009F 0.45
2010F 0.60
Zinc producers announce pro-active output cuts to
shore up market conditions
LME official cash settlement prices. Data to
early January 2009.
19
Collapse in Global Auto Production Weak
Residential Construction Takes Toll on Zinc
The global supply/demand balance for zinc moved
into a surplus in 2008, with traders continuing
to short the market through most of the year
initially in anticipation of substantial new mine
capability scheduled to come on stream and later
with growing realization that much of the G7 had
entered recession. Zinc prices fell to a low
of US0.47 per pound on December 12 close to
average world cash costs amid a collapse in
demand in the global auto and construction
sectors. Prices peaked for the business cycle
around US2.09 in December 2006. However, zinc
prices rallied back in late December and early
January and are currently US0.55. The market
has responded favourably to substantial mine and
smelter production cutbacks as well as the annual
re-jigging of the Dow Jones-AIG Commodity Index,
boosting the weighting of zinc, and news that
Chinas State Reserves Bureau will buy about
200,000 tonnes of refined zinc from Chinese
smelters for its strategic stockpile (intended
to bolster hard-pressed domestic smelters as well
as take advantage of bargain prices).
Interestingly, Yunnan province may also buy
reserves to shore up its beleaguered zinc
smelting industry.
20
Zinc Smelters Take Unusual Steps To Bolster
Market Conditions
Twenty zinc smelters (including Zhuzhou in China
-20, Trail -20 to mid-2009, Kidd Creek -30 to
mid-2009) have now announced deep production cuts
a very unusual step. Smelters often wait until
mine concentrates dwindle before cutting output.
While bolstering market conditions, it would
not be surprising to see zinc prices retest
previous lows in the first half of 2009. Zinc
prices should start to rebound on a sustained
basis by the second half of 2010. LME and COMEX
inventories (at 10 days of global consumption in
December 2008) could rise further, but should
stay below the very high levels of 22 days in
late 2004.
21
Gold A Hedge Against Economic Uncertainty

• Price Outlook
• US697
• 2008 US872
• 2009F US850-900
• 2010F US800

US per ounce

New Record March 17, 2008 US1,032.70
Jan. 21, 1980 peak US850
Gold Prices London PM Fix
London PM Fix on Jan. 6, 2009 US848. Investor
Interest in ETFs and retail interest in bars and
coins remains strong.
22
Gold Should Shine as Safe-Haven in 2009
Gold prices (London PM Fix) traditionally
considered a store of value and a hedge against
economic uncertainty have held up better than
base metal prices. However, a stronger
trade-weighted U.S. dollar (especially against
the euro) from mid-July 2008 through November
20th linked to some improvement in the U.S.
merchandise trade performance last summer, but
more importantly to a counter-intuitive flight to
the safe-haven of U.S. Treasury securities
during the height of the banking credit crisis
last Fall, prevented gold from climbing back to
its previous March 2008 record high of
US1,032.70 and in fact pushed prices down.
A largely deflationary economic environment,
falling oil prices and the forced exit of many
hedge funds from commodity market positions also
contributed to a decline in gold prices to a low
of US712.50 on October 24.
23
Gold Should Shine as Safe-Haven in 2009
Gold prices subsequently rallied back to US880
in late December alongside renewed weakness in
the U.S. dollar, given concerns over a massive
U.S. economic stimulus package and a budgetary
deficit in FY2009 (estimated at US1.25
trillion). While gold prices edged down to
US827 on January 12 (with commodity index funds
expected to cut their weightings in gold in early
2009, given its outperformance last year), the
big picture outlook for gold remains bullish in
2009. Asian and Middle Eastern central banks
and sovereign wealth funds may be less supportive
of U.S. debt markets in the next 12-24 months,
with gold coming into its own as a true
safe-haven.
24
Canadian Dollar
U.S. Dollar Trade Weighted vs. Euro
US centsmonthly averages
US centsmonthly averages
March 1973100monthly averages
euro
Commodity prices slip
U.S. Dollar Trade Weighted
Canadian dollar reached parity with the U.S.
dollar on Sept. 20th, 2007. Canadian Dollar
US0.846 as of Jan. 6, 2009.
25
Spot Uranium Prices Will Rally in Medium Term
US per pound
Jan 5, 2009 Spot US53.00 LT
Contract US70.00
Russian HEU Agreement Cancelled Options
Three Mile Island
US43.40 Peak
Arab Oil Embargo
Low US7.10 in Dec. 2000
Nuclear Disarmament
Source Scotiabank Commodity Price Index.
26
Spot Uranium Prices Will Rally in Medium-Term
The forced liquidation of commodity market
investments by funds and individual investors
also affected the uranium market last October,
when spot prices declined to a low of US44 per
pound (an oversold position). Prices rallied
back to US55 in late November -- as Asian
utilities, commodity brokers and producers took
advantage of bargain prices though bids have
dropped back to the US53 level as of early
January. Spot prices are expected to strengthen
medium-term (to around US70 from 2011-14).
Term-contract prices remain lucrative.
Uncovered U3O8 requirements by North American
utilities will be low in 2009, given the
re-stocking and term contracting of recent years.
However, three developments point to firmer
prices in the medium-term 1) India will return
as an importer of uranium concentrates in 2009
after more than a 30-year absence, given approval
by the World Nuclear Suppliers Group, and has now
signed bilateral nuclear cooperation agreements
with the United States, France and Russia (from
whom it may import concentrates and equipment).
Canada requires a similar agreement. India has
been operating its nuclear reactors at 50 of
capability, given inadequate domestic uranium
supplies, and has huge nuclear power expansion
plans. 2) Delays in commissioning the Cigar Lake
project and in Olympic Dam expansion will
dramatically tighten world supplies around
2011-13 and 3) Higher capital and operating
costs will lift the medium-term floor on prices.

27
Western Canadian Coking Coal Prices Poised to
Drop From Record Levels
Steam Coal Prices
US per tonne, spot FOB Newcastle, Australia
US per tonne FOB port
Western Canada to Japan
Steam Coal Prices
Premium-Grade Hard Coking Coal Contract Price

Chinas Electricity Shortage Boosts Steam Coal
Prices Last Summer
China imposes export tax of 10 on steam coal and
raises export tax on coking coal from 5 to 10
on August 20, 2008 to conserve supplies for
domestic power generation. Contract price
Australia/Japan. FY2008 US125FY2009 US95
forecast.
Prices leapt to record US300 in April 2008 from
US93. Forecast JFY 2009 US192. Source
Scotiabank Commodity Price Index.
28
Scotia Capitals Global Mining Group

• Investment Banking Global Mining
• Dedicated team of 14 professionals focused
  exclusively on mining
• In-house technical expertise with a senior
  mining engineer and a geologist
• Supported by Scotia Capitals 18-person MA
  advisory group
• Corporate Banking Global Mining
• Among top 3 lenders to the North American mining
  sector (1 in Canada)
• International presence with coverage from
  Toronto of Canada, the United States, Mexico,
  South America and Europe.
• Major International Banking Presence
• In Mexico via Grupo Financiero Scotiabank
  Inverlat, S.A. de C.V., in Chile via
  Scotiabank Sudamericano and in Peru via
  Scotiabank Perú the third largest bank in
  Peru.
• Precious Metals Trading
• ScotiaMocatta ranks second in global precious
  metals trading and first in physical trading
  and is a member of the Shanghai Gold Exchange.

29
Scotia Capital Mining Investment Banking
Recent Equity Leads
US163,000,000 Common Shares
Co-Bookrunner September 2008
Recent Advisory Transactions
has acquired 100 of the Life of Mine Silver
Production from the Sabinas Mine of
for
US350,000,000
Financial Advisor May 2008
Strong Commitment to the Sector
30
This Report is prepared by Scotia Economics as a
resource for the clients of Scotiabank and Scotia
Capital. While the information is from sources
believed reliable, neither the information nor
the forecast shall be taken as a representation
for which The Bank of Nova Scotia or Scotia
Capital Inc. or any of their employees incur
responsibility.