20 November 2007 Latam Metals & Mining Felipe Hirai, CFA +1 212 449 -2132 Research Analyst MLPF&S felipe_hirai@ml. com Exploring Opportunities in Latin America British & Colombian Chamber of Commerce Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 22 -24 Analyst Certification on page 21 10673729 Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 0
Presentation Overview 20 November 2007 1. Merrill Lynch Metals & Mining Research Team 2. Our view on the metals 3. Trends in Latin America 4. Opportunities 5. Challenges 6. Conclusion Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 1
20 November 2007 1. The ML Metals Team 24 Research Analysts 11 Countries Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 2
20 November 2007 2. The ML view on metals Extended metals cycle: higher prices for a longer period Tight S&D balance: China still supporting demand growth Demand potential from other emerging economies Global growth should remain solid, despite a US slowdown (decoupling) Preferred metals: bulks (iron ore/coal) and precious (gold/silver) RISKS: Product substitution Higher costs (equipment / energy) Political stability and environmental challenges Severe recession in the USA Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 3
2. The ML view on metals 20 November 2007 China: Feeding the dragon China’s World Consumption Share of Metals 1995 -2005 Source: WBMS, Merrill Lynch Research estimates Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 4
2. The ML view on metals 20 November 2007 China: Demand still growing US Historical Copper Consumption Pattern vs. China Source: Merrill Lynch Research estimates Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 5
2. The ML view on metals 20 November 2007 Urbanization driving demand for metals Urban Population as a Percentage of Total Source: UN, CEIC, Merrill Lynch Research estimates Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 6
20 November 2007 2. The ML view on metals Iron ore: stable and higher prices Key raw material for steel making Market undersupplied for 3 more years at least High concentration (75% of seaborne market in 3 players) Low value added product: logistics is the main bottleneck Spot prices at 50% premium to contract prices Source: CVRD, Merrill Lynch Research estimates China: growing production at lower grades Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 7
2. The ML view on metals Coal: China becoming a net importer 20 November 2007 China withdrawing from seaborne coal market (high domestic demand low level of inventories) Supply disruptions in Indonesia (weather) and Australia (ports) Hard Coking Coal Logistics bottlenecks unlikely to ease in the short term Thermal Coal High oil prices driving up demand for thermal coal Source: Merrill Lynch Research estimates Plants shutdown on environmental concerns Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 8
20 November 2007 2. The ML view on metals Gold: Positive in the medium term Higher gold prices in the medium term Tight supply x demand for the bullion market Mine output declining from 2011 onwards USD weakness on financial crisis and lower interest rates Inflationary pressures from higher energy prices Source: Merrill Lynch Research estimates High jewellery demand on global economic growth Marginal cost at US$550/oz Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 9
20 November 2007 2. The ML view on metals Nickel: Limited downside Nickel is mainly used in stainless steel production Sharp correction in 1 H 07 from producers de-stocking Stainless steel production signaling recovery in the 1 H 08 Start-up of new projects determinant to price (Ravensthorpe / Goro) Source: Merrill Lynch Research estimates Chinese nickel pig iron limits downside in the medium term (costs at US$10 -12/lb) Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 10
20 November 2007 2. The ML view on metals Copper: Downside risk to prices Downside risk to copper prices on market surplus and low marginal cost (US$1. 8/lb) Price performance in 1 H 07 driven by Chinese re-stocking, supply disruptions and speculative demand Highest exposure to US housing market (4 -5% of global consumption) Source: Merrill Lynch Research estimates Threats of product substitution (aluminum) Pricing power still in hands of concentrate producers Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 11
3. Trends in Latin America 20 November 2007 Latin America “Metal Surplus” CAGR: +9% 2001 -2007 Volume: +44% Prices: +203% CAGR: +23% Source: Merrill Lynch Research estimates Metal Surplus = US$ value of Production – Consumption for: iron ore, coal, aluminum, copper, lead and nickel Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 12
20 November 2007 4. Opportunities China and other emerging economies to sustain global economic growth (and higher metal prices) High quality of reserves and technology Position in the lower quartiles of cash cost in the industry Focus on exploration to create a sustainable growth platform Consolidation: creation of strong & global metals companies, with headquarters in Latin America Diversification: development of new metals (coal in Colombia) Access to capital: abundant liquidity in the market Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 13
20 November 2007 5. Challenges Political stability: support from Government Infra-structure still a bottleneck in the region Lack of qualified personnel Increase in costs and in lead time in the industry Stricter regulation from environmental agencies Currencies appreciating against the USD Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 14
20 November 2007 6. Conclusion Extended metals cycle: higher prices for a longer period Other emerging economies should increase demand for metals “Metal surplus” for Latin America should continue to grow Companies should focus in exploration, taking advantage of high quality of reserves and low cost operations Governments need to be pro-active towards the mining industry Logistics infra-structure and qualified personnel are the main bottlenecks in the industry Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 15
20 November 2007 Merrill Lynch Disclaimers Analyst Certification I, Felipe Hirai, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 16
20 November 2007 Merrill Lynch Disclaimers Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 17
20 November 2007 Merrill Lynch Disclaimers Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 18
20 November 2007 Analyst Certification I, Felipe Hirai, CFA, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 19
20 November 2007 Important Disclosures FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12 -month period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0 -10% for Low and Medium Volatility Risk securities - 0 -20% for High Volatility Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not considered to be secure); and 9 - pays no cash dividend. Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 20
20 November 2007 Important Disclosures The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch, including profits derived from investment banking revenues. Felipe Hirai – felipe_hirai@ml. com - +1 -212 - 21
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