Presented by, Mark Rachovides

Toronto, March 2007

Russia: Macroeconomics, Mining, and the Medium Term Outlook

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)

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

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

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 Russia’s gold market,– Low (if rising) cost of gold production – increased investment by Russian banks.

Gold: Still undeveloped resources

• Favourable conditions on the global gold market and Russia’s 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 world’s five largest gold producers.

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

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

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

Conclusion: Contrasted results

Very wide interest from juniors and majors

...with many looking at concrete opportunities

...but few succeed to overcome the barriers

THE OVERALL INVESTMENT CLIMATE IN RUSSIA TODAY

Reduce resource dependency Reduce resource dependency and diversify the economyand diversify the economy

Reform public Reform public institutions and institutions and actively engage in actively engage in confidence confidence building and building and restoring trust restoring trust

Improving efficiency Improving efficiency in infrastructurein infrastructure

Encourage a more Encourage a more stable financial stable financial

sector and more sector and more diversification.diversification.

Strengthen Strengthen competitiveness competitiveness

and integration into and integration into the world economythe world economy

Investment climate: Key challenges

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

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)

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

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

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

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)

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.

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.

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)

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.

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

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.

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

DUNDEE RESOURCES NEW EUROPE

RESOURCE LP

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

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

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

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 EBRD’s unique mandate and shareholders’ structure

• A broad range of investment operations• Catalytic impact on other investors

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, – EBRD’s Preferred Creditor Status,– Experience in problem resolution with

government

New Europe

GDP of CIS and E Europe < US$ 2 trillion

GDP of UK > US$ 1 trillion

Contact details

Mark RachovidesVice-President, Europe

Dundee Resources Limited14th Floor1 Adelaide StreetToronto, M5C 2V9+ 1 416 318-7567+ 44 777 552-3808mrachovides@dundeeresources.com