PSQSectorReport_Commodities_Nov09

©Argus Research Company, Independent International Investment Research Plc and Pipal Research Group 2009. All rights reserved.

Commodities: Resurgence Explored

CommoditiesInitiation Report

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About PSQ AnalyticsPSQ Analytics is a ground-breaking research service for smaller and mid-cap companies on AIM and the Main Market, launched with support of the London Stock Exchange in March 2009.

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CONTENTS

1.� Executive summary .................................................................................................................................... 4�

2.� Key characteristics and trends.................................................................................................................. 7�

2.1.�Business cycles and commodity prices ........................................................................................................ 7�

2.2.�Historically, inflation adjusted commodity prices have declined .................................................................. 8�

2.3.�The commodities sector is highly capital intensive ..................................................................................... 11�

2.4.�The commodities super cycle...................................................................................................................... 12�

2.5.�The gold-oil-dollar relationship.................................................................................................................... 14�

3.� Key drivers................................................................................................................................................. 16�

3.1.�Strong demand from emerging markets ..................................................................................................... 16�

3.2.�Under-investment in the commodities sector.............................................................................................. 18�

3.3.�Huge disparity between per capita consumption amongst countries.......................................................... 19�

3.4.�Global infrastructure sector set to attract huge investment ........................................................................ 19�

4.� Key challenges .......................................................................................................................................... 20�

4.1.�Relationship between technological advances and commodity prices....................................................... 20�

4.2.�Political, social and environmental challenges............................................................................................ 22�

5.� Commodities sub-sectors ........................................................................................................................ 24

5.1.�Upstream oil and gas .................................................................................................................................. 24�

5.2.�Mid- and down-stream oil & gas.................................................................................................................. 30�

5.3.�Coal & consumable fuels ............................................................................................................................ 37�

5.4.�Ferrous & base metals ................................................................................................................................ 49�

5.5.�Gold & other precious metals & minerals.................................................................................................... 58�

6.� Case Study: Junior mining & exploration .............................................................................................. 65

Appendix – Profiles of commodities companies listed on the London Stock Exchange / AIM ............. 71

Disclaimer....................................................................................................................................................... 111


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1. Executive Summary Although there is significant debate concerning the precise point at which we stand in the commodities super cycle, most analysts would agree that the current cycle started around 2003. The global financial crisis in the latter half of 2008 brought the cycle to a temporary halt, with prices of most commodity classes, with the notable exception of gold, tumbling from historical highs. Since the nadir of the crisis in March 2009, the global macroeconomic environment has stabilised somewhat and commodity prices have partly recovered. Our outlook for commodities is robust over the long term as the global economy recovers and emerging economies continue to grow rapidly.

This report aims to provide a broad overview of the commodities sector, opening with a look at the key characteristics and trends of the sector as well as the key drivers and challenges. Following on from these broader themes we focus on the individual industries which make up the commodities sector. The commodities sector can be broadly classified into agricultural commodities and non-agricultural commodities. The scope of our research encompasses the energy commodities and the metals group, while excluding agricultural commodities and commodity chemicals. In this report we have classified the commodities sector into five major industries and explore each in terms of their framework, demand-supply dynamics, sector trends, demand drivers and recent transaction activities. The discussion on each sub-sector ends with our outlook. The five sub-sectors we focus on in this report are:

Upstream Oil & Gas sector – comprises oil and gas exploration and production companies Mid- & Down-stream Oil & Gas – covers the midstream businesses of oil and gas transportation and storage as well as

the downstream refining business Coal & Consumable Fuels – includes two of the most prominent primary fuels used in electricity generation - coal and

uranium Ferrous & Base Metals – the ferrous metals section covers the iron ore and steel industries, while the section on base

metals looks at the industry as a whole and also looks at the specific cases of copper and aluminium Gold & Other Precious Metals & Minerals – the industries covered include gold, silver, diamond and platinum group

metals (PGM)

The last section of the report is a case study on Junior Mining & Exploration. This section examines the investment trends and factors determining investment in the Junior Mining & Exploration sector and also the global transaction activities in the sector. To provide our readers with further insight into the smaller end of the commodities sector we have profiled 19 companies operating in this space which are listed on the London Stock Exchange and AIM. These can be found in the appendix of the report.

Key characteristics and trends

The commodities sector is extremely capital intensive in nature. Acquisition, exploration and development of reserves involve significant capital expenditure over a long period of time due to long project gestation periods, which explains the high leverage levels that characterize the industry. Although the supply of commodities is limited, technological progress has contributed towards reducing extraction costs, improving efficiencies and productivity in their production and usage, thus keeping a check on prices. Development of substitutes and change in consumption patterns has also been influential in keeping commodity prices under control.

A notable trend identified in this report is that commodities, as an asset class, have lagged behind inflation over the longer term. This may be of particular interest to investors who are currently using commodities as a hedge against inflation. There are, of course, short term deviations from this trend, especially during times of uncertainty such as these, and one particular commodity class, crude oil, is a exception to this norm reflecting cartelization of the industry and lack of economically viable substitutes.

There is a well established correlation between business cycles and commodity prices. In this report we look at the current commodity super cycle and analyse its main drivers. What is interesting now is whether the recent global recession will impact the commodities super cycle or whether the strength of the emerging markets will carry the sector through, resulting in a resumption of the super cycle. Although there are clearly challenges ahead, the current signs are good, with China expected to grow at 8.7% in 2010 according to the World Bank.

Key drivers:

-China and India are transitioning from being producers of primary commodities to net consumers. Consistent with this change, global commodity price dynamics have displayed a stronger correlation with the growth trajectory of these


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economies. The rapid economic growth in the BRIC countries, particularly China, is in turn associated with profound structural changes such as trade liberalization, economic reforms, industrialization, and urbanization. These structural changes are making these markets more energy and resource intensive than ever, fuelling their growing appetite for commodities.

-The historically low investment in commodity infrastructure could lead to the ushering in of another commodity boom in the medium to long term. With economies gradually emerging from the global downturn, demand for various commodities is expected to pick up.

-Due to chronic underinvestment in the past, supply may fail to keep pace with rising demand in the long term, thereby pushing commodity prices northward. We believe this indicates the tremendous need and scope for investments in mining, exploration, processing and refining activities, going forward.

-As an end market for commodities, the infrastructure sector, which is attracting huge investments as a result of the numerous global stimulus packages, will be a key driver of the demand and prices of commodities. Both the developing and the developed economies will play a crucial role in such investment mobilization, albeit towards different needs and avenues. Significant investment will be required to fuel infrastructural expansion in the case of emerging economies and towards maintenance and upgrade of existing infrastructure in the case of developed economies.

Key challenges:

-Political, social and environmental concerns are perhaps the biggest challenges facing companies operating in the commodities sector. Some of the most mineral rich countries around the world have historically suffered from chronic political instability and uncertainty. Furthermore, opposition from local communities, government opposition to foreign ownership of natural resources and legal and political uncertainties comprise other bottlenecks experienced by the commodities sector.

-Mining and exploration activities, despite their contribution to economic development, are inherently associated with various environmental concerns. Every effort to mine and extract mineral resources inevitably leads to bio-degradation in various forms and to varying degrees. Controlling and reducing environmental degradation is one of the biggest challenges for countries across the globe against the backdrop of a constant trade-off between economic growth and the protection of the global environment.

-Scientific development has played a significant role in shaping the commodities sector. New technologies have increased supply of many commodities to a level that exceeds relative demand due to enhanced productivity. Ongoing scientific progress, coupled with environmental concerns, is also encouraging the recycling of metals, adding to secondary sources of supplies.

Outlook:

-Oil & Gas

For upstream oil and gas, a stable pricing outlook for oil and gas points towards steady growth in exploration activities and investment. However, we anticipate the recovery of global demand for oil and natural gas to be gradual until the end of 2010 as most economies recover slowly from the global downturn. Beyond that, the emerging markets, particularly China and India, will contribute most to global oil and natural gas marginal demand increases over the long term. Increase in exploration activities will trigger the expansion of storage and refining capacities. This will, in turn, have a positive impact on the margins of mid- and downstream companies. We also expect these companies to benefit from deregulation of oil products retail prices in the long term.

-Coal & Consumable Fuels

Our outlook for coal remains strong as economies around the world recover from the recent economic downturn. With economic activity picking up, demand for thermal as well as coking coal is expected to witness healthy growth, primarily driven by emerging economies. The secondary inventory build up, in our opinion, is not significant enough to derail the recovery in the industry. With respect to uranium, while there is lack of visibility on the replacement of ageing reactors and delays encountered by many of the new units under construction, we believe robust growth in Chinese nuclear power generation and supply bottlenecks will be the key growth drivers in the near to medium term. In the longer term, uranium has the potential to perform well as countries around the world expand their nuclear power generation capabilities as a hedge against growing fossil fuel prices.


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-Ferrous & Base Metals

The large scale capacity build-up of steel and the fragmented nature of the industry has somewhat damaged the fundamentals of the steel industry. This, coupled with rising competition from substitutes like aluminium, plastics and other composites will exert pressure on steel prices over the long term. However, we believe the stimulus packages from governments worldwide will lend support to steel prices over the near to medium term. We expect the rise in steel consumption, due to such government support, coupled with the cartelized iron ore pricing, to lead to a surge in annual contracted iron ore prices over the near to medium term. Nevertheless the over-dependence on a single product, steel, for its entire consumption and the large differential between production cost and selling prices points towards a decline in iron ore prices over the long term. Growth in demand for base metals in the near term will trail the levels observed in the current super commodity cycle as key consuming industries are yet to recover from the impact of the economic downturn. Robust demand for metals from emerging economies will be offset by low consumption in developed countries. Hence, after more than doubling from the low levels in late 2008, we have a neutral outlook on base metal prices with a negative bias over the near to medium term. However, we expect rising consumption from emerging economies and gradual weeding out of high cost plants to tighten the demand-supply dynamics, to support a rise in base metal prices over the long term.

-Gold & Other Precious Metals & Minerals

Gold prices have risen over the last few years to record levels. Gold appears to have regained its position as a store of value during the recent economic turmoil. Countries such as China have diversified their reserves away from traditional assets such as US Treasuries and have accumulated physical gold leading to a huge spike in prices. As the current de-facto global currency, the US dollar, continues to depreciate, gold continues to rise in value. This trend will continue in the near term and thus we expect gold prices to stay strong in the near future. However, we believe that as the US economy displays sustainable improvement, the value of the US dollar against other major currencies will improve and thus will regain investor confidence as the de-facto global currency. When this happens, we believe gold prices will fall sharply from these lofty levels.

Case study:

After subdued investment activity in smaller mining companies over the past year, we expect junior mining companies to attract renewed investor interest and capital flow going forward. With demand for minerals set to rise yet again, fundamentally strong junior mining companies will attract acquisition interest from large mining companies, in their bid to prop up depleting reserves and generate better economies of scale. All major mining stock exchanges have witnessed increased trading activities in junior mining stocks over the recent past. However, the growth in the number of listings of mining companies has been much faster at the London Stock Exchange. An increasingly competitive environment and access to a wider set of investors are key factors contributing to the growing importance of the London Stock Exchange for this sector.


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2. Key Characteristics and Trends

2.1. Business cycles and commodity prices

The expansion and contraction phases of a business cycle can range from as short as 6 months to as long as 6 years. While cycles cannot be determined accurately in advance they can be influenced to an extent by appropriate monetary and fiscal policies. Empirical evidence demonstrates a high correlation between business cycles and the price of commodities.

Historical perspective

� A slump in commodity prices in the late 1970s to the mid-1980s can be attributed to a deceleration in real economic growth in developed countries as well as high capacity and production of metals. Real economic growth declined from 4.9% in 1976 to 2% in 1980 and further down to 1.1% in 1982.

� An acceleration in growth from 1983 to mid-1988 followed as economic activity picked up in developed countries.

� This short-lived recovery was followed by another slump in commodity prices from mid-1988 to 1992 mainly due to weakening demand from durable goods manufacturers in Japan and the US.

� From 1993 to mid-1997 there was a strong recovery in demand for commodities, driven by robust growth in emerging economies.

� The Asian financial crisis precipitated the next slump in commodity prices from 1997 onwards.

� A resurgence in commodity prices following a recovery in the Asian economies in 1999 was followed by a slump caused by the recession in the US during 2001.

� 2003 marked the beginning of a new cycle, with commodity prices reaching a peak in 2008. Major contributors to the bull market were the robust growth in demand from China and housing boom in the US. However, recession in the US and the subsequent global downturn during the year resulted in a decline in demand for commodities and a slump in prices.

Exhibit 1: Aluminium price growth / Global GDP growth

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

1975 1980 1985 1990 1995 2000 2005

Growth rate in aluminium prices Growth rate in world GDP

Source: Bloomberg, The US Geological Survey

Commodity prices peak during the late expansionary phase

Commodity prices peak during the late expansionary phase of a business cycle, characterized by strong profits and escalating stock prices, when strong demand for commodities has exhausted existing inventories and pressured supplies. Prices are weakest during the early stages of the business cycle when capacity utilization is weak and supplies exceed demand.


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However, in 2009 the recovery in commodity prices has taken place at a quicker pace than it did in the early 2000s recession, reflecting the robust demand from BRIC economies and inventory build up in China, helped by economic stimulus measures by governments, with low interest rates and surplus capital encouraging speculation.

In 2009, the US government announced a USD787 bn stimulus package, while the Chinese government announced a USD586 bn program, including spending on housing, infrastructure, agriculture, health care and social welfare. The World Bank approved a USD4.3 bn loan to India to support its infrastructure development and boost its economic stimulus program. These government and multilateral agency efforts have translated into positive economic indicators such as strengthening Chinese industrial production data (+16.1% y-o-y in October 2009 compared to +12.3% y-o-y in August 2009), an increase in the global manufacturing purchasing manager's index (PMI – JP Morgan) from 53.0 in September 2009 to 54.4 in October 2009, improving US industrial production data (+0.9% in July 2009 compared to decline in the previous months of 2009), and rising energy and base metals demand in China and other countries Source: Bloomberg.

These indicators suggest a recovery may be underway, with commodity and stock prices appreciating concurrently. Copper prices, considered to be a barometer of the global economy, have increased from last year's low of USD2,809 per tonne on 24 December 2008 to USD6,819.75 per tonne (+142.8%) on 20 November 2009. The oil price on the other hand has increased 144.3% from last year’s low of USD31.41 on 22 December 2008 to USD76.72 per barrel (bbl) on 20 November 2009.

Production cuts and capex pullbacks impede supply during recovery

During the 2008 recession, demand for commodities fell sharply as industrial activity declined. Demand for crude oil fell from 87.5 mn bbls per day (mmbpd) in 1Q 08 to 84.1 mmbpd in 2Q 09. The fall in demand saw crude oil prices trade in the range of USD30-USD50 per bbl between December 2008 and February 2009. As low realized prices prevailed, damaging bottom-line, many oil companies deferred expansion capex in 2009 to preserve capital and cash flow.

� Suncor Energy Inc, the second largest oilsands producer in Canada deferred construction of its CAD20.6 bn Voyager upgrader.

� Saudi Aramco delayed its USD8 bn capacity expansion plans for its Ras tanura refinery which would have raised capacity by 400,000 barrels per day (bpd).

� Qatar and Exxon Mobil delayed the development of the USD5 bn Barzan gas field joint venture.

However, demand for commodities has already improved. Crude oil demand was marginally above 2Q 09 at 84.6 mmbpd during 3Q 09. The International Energy Agency (IEA) expects consumption of oil to be 84.8 mmbpd in 2009 followed by growth to 86.2 mmbpd in 2010. Although capex cuts are a valid strategy in a depressed economic environment, deferral of production / capacity expansion could raise supply concerns in the future as there is a long gestation period before supplies come on-stream, which could potentially lead to another price spike.

2.2. Historically, inflation adjusted commodity prices have declined

Although supply of commodities is limited, technological progress has reduced extraction costs, improved efficiencies in production and use, and kept prices in check. The development of substitutes and change in consumption patterns has also kept commodity prices under control.

The impact of technological progress in reducing the average production cost has been most profound in aluminium. Until 1850 aluminium was more valuable than gold. However, following the introduction of electricity, the electrolysis process was developed, enabling extraction of aluminium from bauxite, which was available in abundance. With a sudden surge in supply, aluminium prices tumbled rapidly. With ready availability, aluminium was increasingly used to substitute other metals. As a result of this process, observed to differing levels in the history of the majority of commodities, inflation has outpaced commodity prices in the long term, although there have been short term deviations. Crude oil is a notable exception to this norm.

The US’s dominant position in the global economy has led to most commodity prices being quoted in US dollars. Reflecting the long term availability of data, we have considered the CRB metals sub-index and US CPI as benchmark indices for metals and inflation respectively. US CPI has soared 665% from 1957 to date, surpassing the 563% gain in the CRB metal index during the same period.


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Exhibit 2: Inflation/ metal prices

-100%

100%

300%

500%

700%19

57

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

CRB Metals Sub-index Consumer Price Index

Source: Commodity Research Bureau (CRB), US Bureau of Labor Statistics

Exceptional characteristics of gold and oil

Gold differs from other metals as its major uses (investment and jewellery) are discretionary. While gold finds limited use in the real world, its character as store of value makes it an attractive investment asset, acting as a hedge against extreme events.

Until the abandonment of the Bretton Woods System by the Nixon administration in 1971, the value of major global currencies was linked to gold, with the US dollar value pegged directly to the metal. The collapse of Bretton Woods led to a surge in gold prices from USD32 per ounce (oz) in 1971 to USD800 per oz in 1980. However, following the correction in price, the demand for gold subsided and the US dollar solidified its status as reserve currency. Although gold is trading at an all time high in nominal terms, inflation adjusted gold prices have declined from a peak of USD2,000 per oz in 1980. With approximately 98% of the gold ever mined still available for consumption, gold’s demand-supply dynamic is the worst of all commodities. While most other commodities perform well at the beginning of and during expansionary cycles, gold lags behind, with prices rising only after the cycle has overheated. Gold prices also exhibit an inverse relation to US dollar strength, as US dollar weakness drives investment away from US dollar denominated assets to 'safe haven' gold. Over the long term, but interrupted by short term deviations, gold prices are expected to trail inflation and other commodities.

Exhibit 3: Inflation/gold prices

-100%

-50%

0%

50%

100%

150%

200%

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

Gold Consumer Price Index

Source: World Gold Council, US Bureau of Labor Statistics

While gold accumulates, oil depletes. Oil demand and prices have exhibited a different trend from other commodities, beating inflation, as a result of the following factors:


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� Cartelization/OPEC: While 1910-1960 inflation adjusted oil prices averaged USD17.1 per bbl, the formation of OPEC cartelized the industry and restricted supply. Following OPEC formation, the average oil price in real term soared to USD37.6 per bbl from 1960-2009.

� Universal substitute: A more fundamental reason for this contrarian trend is a lack of economically viable substitutes. Alternative energy sources have not been popular amongst consumers either due to higher implied cost or operational difficulties faced in their usage. Moreover, several petroleum derivatives have emerged as substitutes for other commodities, while almost all substitutes for other commodities require additional energy, further boosting oil demand.

� Exhaustive - cannot be recycled: Metals can be recycled, adding to the potential future supply. Agricultural commodities are not recyclable but renewable. The global oil supply, however, will be exhausted with use.

Exhibit 4: Historical crude oil price (USD per bbl)

0

20

40

60

80

100

120

1862

1872

1882

1892

1902

1912

1922

1932

1942

1952

1962

1972

1982

1992

2002

Nominal Inflation Adjusted

Source: Bloomberg, US Bureau of Labor Statistics, US Department of Energy

Thus, while the US CPI has risen by over 665% since 1957, oil prices have risen 2,936% over the same period.

Exhibit 5: Inflation / crude oil price growth

-1,000%

000%

1,000%

2,000%

3,000%

4,000%

5,000%

6,000%

1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

Crude Oil Consumer Price Index

Source: Bloomberg, US Bureau of Labor Statistics


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2.3. The commodities sector is highly capital intensive

Acquisition, exploration and development of reserves in the metals and energy commodities industries are extremely capital intensive. Capital expenditure also needs to be sustained over a long period as gestation times for exploratory and developmental projects and activities are very long. This explains the high leverage levels that characterize the industry.

In the case of oil and gas, huge expenditure on exploration, extraction, refining and transportation is required. Costs depend on factors including location (onshore/offshore), size of the field, type and structure of the rock and information required. OPEC has the lowest average production costs in the oil industry, primarily due to the large and reasonably accessible oil reserves of many of the member countries. The oil price rise between 2003 and 2008 encouraged exploration of alternative sources for oil extraction, notably oil sands and shales. While these resources are plentiful, extraction remains a very cost intensive process. When the economic downturn set in, it was these companies that were hardest hit, as fixed costs exceeded the market price of oil.

In the case of metals such as steel, manufacturing involves smelting of raw materials, refining to remove impurities, casting into semi-finished goods, and eventually rolling into finished products. The eventual cost of a steel plant can run into billions of dollars.

� Reliance Industries (India) incurred expenditure of INR450 bn (approximately USD10 bn) to develop the gas fields at Krishna-Godavari basin during the period 2003-2008.

� Suncor Energy, the second largest oilsands company in Canada, is expected to incur capex of USD10.7 bn to build an upgrader with 245,000 bpd capacity.

� ArcelorMittal, the world’s largest steel maker, has plans to build two steel plants at a combined cost of USD20 bn in two Indian states, which will have a combined capacity of 24 mn tonnes (Mt) of steel.

� Posco, the South Korean steelmaker is expected to invest USD12 bn to build a steel plant in Orissa, India, which would have a capacity of 4 Mt per annum.

Given that the capex required in the industry is significant, there is also a major risk when prices and demand for commodities fall. In such instances, companies cut capex so as to protect cash flows. For example, Arcelor Mittal, which had an average 16% capex to revenue ratio over the period 2005-2006 cut its capex to 5% of revenues in 1H 09. Such cuts are vital to meet future capital requirements.

Long gestation periods

It usually takes years from the exploratory phase to discovery, testing, development and delivery of the final product. The mining, oil and gas sectors typically have to undertake surveys before and during the exploration, development and production phases. Geological surveys alone can take more than 3 years for an indication of metal/oil deposits on the site. Obtaining the licenses to conduct exploration and drilling is also time-consuming and bureaucratic. The exploratory drilling, which helps to identify the quality and quantity of deposits, often takes more than 4 years. If it is viable for the project to proceed, development of fields and setting up of platforms or rigs in the case of an offshore oil site, could require anything between 1 to 7 years. A company in this sector needs to have strong capital backup as it has to operate on zero revenue inflow for a number of years.

� One of Canada's largest producers of crude oil, Imperial Oil's Kearl project was initially projected to produce 100,000 bbls of bitumen per day in 2011 on completion of the initial phase of the project. The company has been working on this project since 2004. The project received necessary authorization to commence preliminary work on the site only in June 2008. To add to the delays, the economic crisis led to postponement of the project by 8 months. The company is not expected to begin production from the project until late 2012.

� In June 2005, Posco signed a memorandum of understanding with the Orissa government in India for a 12 Mt capacity steel plant to be built in three phases by 2016, with production scheduled to begin by the end of 2011 at the completion of the first phase. Construction, which was originally scheduled to begin in April 2008, has been delayed and is now expected to start only in 2010. The delay was due to protests by farmers in the region.


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Heavily leveraged

Commodities companies, with the exception of some of the largest players like Exxon Mobil and EnCana Corporation, tend to operate on high leverage, given the capital intensiveness of the business. During the recent downturn, smaller companies became desperate for capital. While the healthier among them, which were in a position to reduce operating costs and capex, survived, some were forced to file for bankruptcy. Catalyst Energy Group Inc. and Trident Resources Corp. were among the energy companies that didn’t survive the crisis in 2008.

The crisis did not spare large companies either. Reflecting easy liquidity available in the market, many mining companies had entered into acquisition deals over 2005 - 2008, including Arcelor Mittal, Tata Corus and Rio Alcan. However, with the deals made at the peak of the commodity cycle, valuations were significantly high. The credit crisis disrupted expected cash flows. Balance sheets were severely dented by the additional debt burden. Companies were forced to dilute equity at the trough of the cycle (Tata Steel, Rio Tinto), denting long term prospects for existing shareholders.

2.4. The commodities super cycle

We have seen that commodity prices move with business cycles and have been beaten by inflation over the long term. When plotted over a longer time horizon it can be seen that some cycles have extended over periods of several years, and consist of smaller cycles with multiple troughs and peaks. These super cycles are typically multi-decade phenomena and can extend up to 50-60 years. Super cycles are started or sustained by events that are more profound than the triggers that spur regular business cycles. These include large-scale wars, very large scale industrialization, major technological innovations, a major shift in demography or socioeconomic factors, especially in countries with large populations, and transition of major economies into higher stages of development in a more abrupt than gradual manner.

In the past, the world has witnessed 3 commodities super cycles:

1. The 1880 commodity super cycle involving industrialization and urbanization in the US, which lasted for 40 years, involving the industrialization and urbanization of 100 million people.

2. The 1960 Japanese industrialization super cycle, which lasted 20 years, involving 30 million people.

3. The current super cycle initiated in the year 2003, led by industrialization in China and India, which involves industrialization of 2.5 bn people.

Price rise illustrations:

� LME copper prices averaged USD2,690 per tonne in 1990 and maintained a range of USD1,521–2,955 per tonne until 2003. In 2004 prices averaged USD3,046 per tonne and then doubled in just two years to average USD6,684 per tonne in 2006. Copper prices reached an average high of USD8,693 per tonne in 2Q 08 and plunged thereafter.

� WTI crude prices traded in the range of USD15-31 per bbl between 1991 and 2003, and trebled over the period 2003-2008, increasing from USD31 per bbl in 2003 to USD97 per bbl in 2008.

� LME aluminium prices traded in the range of USD1,143-1,773 per tonne between 1991 and 2003 and increased to USD2,473 per tonne in 2008.


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Exhibit 6: Aluminium and copper prices (USD per tonne)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Yea

r

1992

1994

1996

1998

2000

2002

2004

2006

2008

Aluminium Copper

Source: Bloomberg

The Reuters Jefferies Commodity Price Index is a commodity price index compiling 19 commodities traded on the NYMEX, CBOT, LME, CME and COMEX exchanges. The commodities are weighted based on importance to global trade and are divided into 4 groups. Group 1 consist of oil based products with 33% weighting, Group 2 consists of highly liquid commodities with a weight of 42%, while Group 3 (liquid commodities) and Group 4 (commodities that may provide valuable diversification) are given weights of 20% and 5% respectively.

Exhibit 7: Reuters Jefferies Commodity Index

0

50

100

150

200

250

300

350

400

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

Source: Bloomberg

Factors behind the current commodity super cycle

Rising demand from India and China

Over the period 2004-2008, China and India reported average real GDP growth rates of 10.4% and 8.6%, compared with growth rates over the period 1997-2003 of 8.0% and 5.6% respectively. Increased outsourcing to these regions has been a key factor driving growth, with the wide availability of cheap labour and skilled workforce. According to data released by the Central Statistical Organisation, India's per capita income has increased from INR26,003 in the year ending 31 March 2006 (FY 2006) to INR37,490 in FY 2009. Economic growth led by this and other factors, requires heavy investment in infrastructure, consuming large quantities of commodities. Chinese steel imports increased from 70 Mt in 2000 to 444 Mt in 2008.


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Demographics

According to the Population Reference Bureau (World Population Data Sheet), the world's total population increased from 3 bn in 1959 to 6 bn in 1999 and is expected to reach 9 bn by 2043. Although the absolute rate of increase has remained more or less constant, the main differentiating factor in the period following 1999 has been the concentration of population growth in emerging Asia, where the infrastructure is far from adequate. China's population has grown by 4.3% over the period of 2001-2008 (CAGR of 0.6%), while India's population has grown by approximately 11.8% over the same period (CAGR of 1.6%). Although the total world population increased at a CAGR of 1.4% over the period 2000-2008, significantly exceeding China's growth, the high bases from which China and India have grown have led these two economies to grow to account for 37.3% of the total world population in 2008.

Another demographic factor driving the demand and prices for commodities in these countries is their relatively young population. The proportion of productive population (15-64 years) in China’s total population was 72.1% while for India it was 63.3% compared to 67% for the US and EU combined Source: CIA World Factbook, July 2009 est. While the proportion of productive population in India is currently relatively low, two factors place India on a high potential growth trajectory – (a) the huge size of the population presents a large pool of productive population in absolute terms; (b) the high youth proportion presents very strong future growth potential. Although India has a relatively high overall dependency ratio of 60% (compared to China’s 45%), the high youth dependency ratio of 52% and low old age dependency of 8% Source: US Census Bureau implies strong future growth potential.

Post economic crisis scenario

The current commodity super cycle has been interrupted by the 2008 economic crisis. As this cycle was initiated by the economic boom in China and India, a rebound and continuation will depend on the fundamentals of these economies. Over the near to medium term, a higher expected growth rate in these countries based on increased liquidity, is expected to support commodity demand. The Indian Prime Minister’s Economic Advisory Council forecasts the country's GDP to grow by 6.50%-6.75% for FY 2010, and 7.5% for FY 2011, while the World Bank forecasts China's GDP to grow by 8.4% in 2009 and 8.7% in 2010. Over the long term, we expect high growth in commodities demand from these countries based on population growth, increase in the middle class population and a high proportion of young people in India, indicating continuation of the commodity super cycle.

2.5. The gold-oil-dollar relationship

The US dollar and commodity prices are inversely related to each other. The recent depreciation of the US dollar is a key factor in the recent appreciation of commodity prices.

Exhibit 8: Correlation between US dollar index and oil prices Exhibit 9: Movement of US dollar index and gold prices

-100%-50%0%50%100%150%200%250%300%

-40%

-20%

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60%

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1980

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2008

Cha

nge

in o

il pr

ices

Cha

nge

in U

S d

olla

r ind

ex

Dollar Index Crude Oil

-60%-40%-20%

0%20%40%60%80%

100%

1980

1984

1988

1992

1996

2000

2004

2008

Dollar Index Gold

Source: Bloomberg Source: Bloomberg

The credit crisis in the US and the subsequent flooding of US dollars into the economy in an effort to revive it, have raised doubts over the US dollar's continued position as the global reserve currency. Given that the US trade deficit is increasing, countries that export goods in large quantities to the US, like China, have been faced with a situation in which their reserves are rapidly losing value as the US dollar depreciates against other major currencies. Oil producing nations


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are also faced with the depreciation of the US dollar wiping away the value of their holdings. A few Arab nations and some of the world's largest consumers of oil are rumoured to be planning a long term severance from pricing oil trades in US dollars Source: The Independent. Recently Iran has made an announcement that it will no longer sell its oil in US dollars but in a basket of currencies including the Euro and the Japanese yen.

Exhibit 10: Surge in money supply in the US

-80%-60%-40%-20%

0%20%40%

Jan-

06

Jun-

06

Nov

-06

Apr

-07

Sep-

07

Feb

-08

Jul-0

8

Dec

-08

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-09

Money supply in the US economy

Source: Bloomberg

Early in 2009, China called for an end to the use of the US dollar as the reserve currency and a stronger role for the IMF’s special drawing rights. China has stated that it is diversifying its foreign exchange reserves, totalling USD2 trillion (the highest in the world), to other instruments including gold, Euros, Japanese yen and other currencies. In June 2009, China sold USD25.1 bn worth of US treasury bills to bring its holdings to USD776.4 bn, signalling its intent. This bearish development for the US dollar in turn indicates a positive development for commodities.

Although the price of gold and crude oil are positively correlated, their relationship is not linear. The reason for the fluctuation of the gold-oil ratio (the quantity of oil one can buy with an oz of gold) is the disproportionate relative movement of gold and oil prices to shared drivers and the varied factors affecting their prices. Over shorter time horizons the gold-oil ratio is impacted by global macroeconomic factors. Gold prices surge during recessionary phases or periods of uncertainty and fall during bullish phases; crude oil prices fall during economic downturns and increase with expansion in economic activity. Hence, the ratio rises in a recessionary global environment and declines during the expansion phase of economic cycles. A rise in oil prices also signals an inflationary trend, particularly in countries which are large consumers of crude oil such as the US. This in turn results in investors seeking diversification of dollar assets into other assets such as gold. However, while crude oil reserves are fast depleting, gold accumulates, adding to future potential supplies. Therefore, the secular trend is a gradual decline in the gold-oil ratio, with occasional short term volatility.

Exhibit 11: Trend in gold/oil ratio

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1985 1989 1993 1997 2001 2005 2009

Source: Bloomberg


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3. Key Drivers

3.1. Strong demand from emerging markets

The profile of emerging markets has transitioned from that of a producer to a consumer of primary commodities. Consistent with this change, global commodity price dynamics have displayed an increasingly stronger correlation with the growth trajectory of these markets. While the commodity price rise of the 1990s correlated with a period of rapid growth in ASEAN economies, Thailand, Malaysia, Indonesia, Singapore, and South Korea; the subsequent fall in commodity prices was triggered by the Asian financial crisis of the late 1990s. More recently, the resumption of growth in developing markets China and India has spurred global commodity prices again.

Increased money supply - a catalyst for investment

In 2001, the US Federal Bank (the Fed) started loosening its monetary policy in order to stimulate spending, reducing interest rates from 6.5% to 1% by 2003. This had a direct impact on the economies of the BRIC nations, with most of the increased money supply entering India and China. Increased money supply boosted demand for commodities in these markets, marking the beginning of the recent commodity super cycle. Prices of a number of commodities tripled over the period 2003-2008 led by a stark demand-supply mismatch and supported by market participant speculation. The recent economic crisis however, dried up investment, depressing commodity prices, particularly of metals and oil. In response, the Fed started to cut rates again, reducing the rate to 0%-0.25% currently. This, along with financial stimulus packages in various countries and the continuation of expansionary economic policies in China and India, is expected to support sustained demand for commodities from emerging markets.

Exhibit 12: China - Money supply (M2) growth

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Source: Bloomberg

China and India: the key consumers of commodities going forward

China: China's population increased by 4.3% over the period 2000-2007 to account for nearly 20% of the world's population. Population density also increased from 442 people per square km (ppsk) in 2000 to 2,104 ppsk in 2007. The country is experiencing rapid urbanization. In 2008, 46% of the Chinese population lived in urban areas compared to only 36% in 2001 Source: Bloomberg. The government has set a target for urban residents' per capita disposable income to reach RMB13,390 by 2010. Along with the government’s broader efforts to stimulate economic growth, these factors are expected to spur infrastructure and housing construction activities.

China has directed much of its recent stimulus towards infrastructure, with USD220 bn allocated for infrastructure development overall, including USD54 bn specifically for rural infrastructure projects. With plans to build 12 major routes across the country from north to south and east to west, China’s expressway network is expected to stretch to 53,000 miles by 2020, longer than the 47,000 miles of roadways in the US Source: The Wall Street Journal. The country's eleventh five-year plan had already set out a target to build 1.2 mn km of rural roads over the period 2006-2010. There are also plans to build six passenger railway lines, and expand ten of its main airports.


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China has also implemented a host of other initiatives to develop its infrastructure. The foreign ownership limit in the telecom sector (mobile voice and data services) was increased to 35% in 2002 and further to 49% in 2003. Housing construction, which is one of the largest consumers of commodities, was supported by the reduction of the minimum down payment requirement for home buyers from 35% to 20%, and the retention of a low tax rate for construction companies (7% for city areas, 5% for county and township areas and 1% for other areas) Source: Beijing Local Taxation Bureau. Reflecting the positive impact of these measures, residential property sales increased at a CAGR of 23.7% between 2002 and 2006 in China Source: National Bureau of Statistics.

The development of its infrastructure has already made China one of the most significant consumers of base metals and energy commodities in the world. Its share of global steel demand reached 30.7% in 2008 from only 17.3% in 1999, while its copper share rose from 13% in 2000 to 28.5% in 2008 Source: MEPS International and Dundee Wealth. Chinese iron ore imports registered a CAGR of 24.5% over the period 2003-2008 Source: Bloomberg. Going forward, China’s economic expansion and the resultant demand for commodities is set to continue (albeit at a slower rate), with China expected to consume 5% more steel in 2010 than in 2009 and 45.8% of expected total global steel Source: World Steel Association.

India: Meanwhile, India’s infrastructure investment had risen from 4.9% of GDP in FY 2003 to 5.8% in FY 2009, while the country's eleventh five-year plan (FY 2007-2012) envisaged an outlay of over USD500 bn, taking infrastructure investment to 9.34% of the country's GDP in 2011-2012. This projected investment in infrastructure would require extensive participation from private players, which is targeted to rise from 19.8% in 2002-2007 to 30.1% in 2012. A large proportion of the investment has been allocated to power and road development. Investment in the country's power sector is expected to rise from USD17.7 bn in FY 2008 to USD42.9 bn in FY 2012, while construction of roads and bridges is expected to attract investment of USD17.3 bn in FY 2012, up from USD11.2 bn in FY 2008. In 2008, Indian Railways drew up a plan to upgrade rail infrastructure and procure new rolling stock, with an estimated spend of USD8 bn. This should boost economic activity and growth in other core as well as ancillary sectors of the economy, and will lead to considerably higher steel consumption within the country.

To reach the country's investment goals, various measures have been adopted, including an increase in the FDI limit in the telecom sector (from 49% to 74%) to expand penetration, which currently stands at 37%. Other measures include benefits to infrastructure companies engaged in the maintenance of roads and highways in the form of exemptions from service tax, tax relief to housing companies (if ongoing projects are completed before 2012) and an enhanced interest subsidy for the purchase of houses valued at less than INR2 mn.

India's iron and steel imports increased from a value of USD476.26 mn in 2003 to USD2,264 mn in 2007, registering a CAGR of 47.7%, while its crude oil imports increased at a CAGR of 6.5% from 32,527 thousand tonnes in 2004 to 39,246 thousand tonnes in 2007 Source: Bloomberg. Although India's commodity consumption level remains miniscule compared to China, the continuation of economic growth and focus on infrastructure is expected to sustain an increase in its demand for commodities. The Joint Plant Committee, which monitors the iron and steel industry in India, has projected steel manufacturing capacity in the country to increase to 100 Mt by 2018, up from the current level of about 31 Mt.

Brazil and Russia – tapping production capabilities for domestic infrastructure needs

Brazil and Russia differ from India and China in that they are net exporters of key commodities. Russia is a major producer and exporter of copper, gold and natural gas, while Brazil is an important iron ore producer. Meanwhile, demand for commodities in these two countries has been rising steadily, reflecting a growing focus on domestic infrastructure development. Both Brazil and Russia have capped exports to ensure greater use of domestically produced commodities to meet domestic infrastructure needs.

The rapid economic growth experienced in the BRIC countries reflects profound structural changes including trade liberalization, economic reforms, industrialization, urbanization and massive investment in the power and infrastructure sectors. These structural changes are making markets more energy and resource intensive than ever, fuelling a growing appetite for commodities. Apart from driving commodity prices, the rapid transformation of the emerging markets into key consumers of commodities will intensify competition in trade and investment and will fundamentally reshape commodity market dynamics in the long term.


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3.2. Under-investment in the commodities sector

After commodity prices normalized, following the oil crises of the 1970s, there was a prolonged period of under-investment in exploration, mineral processing, refining and transport infrastructure. This reflected a lack of incentives to engage in such capital-intensive activities, given the depressed pricing conditions seen during the period (see chart below). However, this led to a widening of the demand-supply gap which, amid the economic upturn since 2003, produced a sharp spike in commodity prices. Recent years saw renewed interest in exploration and development activities, however the onset of the financial crisis in 2H 08 (with its widespread retreat of capital and tumbling commodity prices) has put many investment projects on hold once again.

Exhibit 13: Depressed commodity prices, 1980-2007

-200%

-100%

0%

100%

200%

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400%

500%

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

Aluminium (USD/tonne) Iron ore (USD/tonne)Copper (USD/tonne) Crude oil (USD/bbl)

Source: Bloomberg

Natural gas is a case in point. Over recent decades, it became increasingly clear that reserves were declining. Falling Reserve-to-Production (R/P) ratios, accelerating field decline rates and dwindling investment were obvious cues for fresh investment in exploration and refining initiatives on a global scale. Despite these signs, natural gas consumers did not appreciate the importance of securing the long term purchase arrangements that would have provided gas producers with the incentive to increase exploration. The conservative mood of the market led to the diversion of exploration investment to quick payback drilling programs that would accelerate cash flow at the expense of reserve life.

Similar imbalances arising from under-investment existed in the case of virtually every natural resource and base metal. In early 2008, the prices of most commodities rocketed, as consumption from all major economies increased rapidly, while supplies were limited as a consequence of the years of under-investment in mine development, processing plants, pipelines, railroads, and the other industrial infrastructure needed to produce and transport raw materials.

In the oil sector, low prices from 1980-2006 prevented sufficient exploration and development of existing fields. Although soaring commodity prices over 2007-2008 led to a huge increase in exploration investment, the trend was short-lived. The credit bubble ended with the collapse of global financial markets and a steep decline in commodity prices, reflecting anticipation of a deep recession. With the oil price collapsing to USD35 in December 2008, oil companies reduced their workforces and the number of rigs in service, and delayed or cancelled projects. A similar trend was experienced by other commodity players.

This prolonged phase of low investment in commodity infrastructure could lead to another commodity boom in the medium to long term. With economies gradually emerging from the global downturn, demand for various commodities is expected to pick up. If the increase in supply fails to keep pace, commodity prices will further rise. This also points to the tremendous scope for investment in the commodities sector going forward. The rapid growth of emerging markets is expected to lead to a flurry of economic activity which will spur demand for commodities, particularly for energy commodities and base metals. This should provide a strong incentive to commodity producers to considerably increase investment in mining, exploration, processing and refining activities.


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3.3. Huge disparity between per capita consumption amongst countries

Consumption of energy or commodities in any country primarily depends on economic growth and level of development. While developed economies comprise only one fifth of the world's population, consumption of commodities remains disproportionately high, at almost three fifths of the world's primary energy. The world’s total energy consumption is projected to increase by 44% from 2006 to 2030. Total energy demand in the non-OECD countries is expected to increase by 73%, compared with an increase of 15% in the OECD countries. China is expected to become the largest consumer of energy by 2030 Source: EIA, Annual Energy Outlook 2009.

Developing nations are expected to witness much higher growth in electricity consumption than developed nations. The EIA International Energy Outlook 2009 forecasts electricity consumption in non-OECD Asia to grow at a CAGR of 4.4%, compared to just 1.2% for OECD countries.

Exhibit 14: Per capita consumption in 2008

Commodity Unit US Europe India China Japan WorldSteel kg 320.2 369.7 45.8 321.4 598.3 178.6Oil bpd per 1,000 people 68.7 29.3 2.4 5.7 39.3 31.7Coal tonnes 3.6 N/A 0.3 1.0 1.2 1.2Natural Gas cubic meters 2,168 1,019 37 53 787 768

Source: World Steel Association, BP Statistical Review, Population Reference Bureau

Exhibit 15: Total consumption in 2008

Commodity Unit US Europe India China Japan WorldSteel Mt 98 182 53 426 76 1,197Oil mmbpd 19.4 N/A 2.9 8.0 4.8 84.4Coal Mt oil equivalent 565 N/A 231 1,406 129 3,304Natural Gas billion cubic meters 657 N/A 41 81 94 3,019

Source: World Steel Association, BP Statistical Review

Steel consumption is also closely linked to economic development, and richer countries remain the largest consumers of steel. The World Steel Association identifies that consumption of finished steel products ranges from approximately 370 kg per person in Europe, 320 kg in the US and 598 kg in Japan, compared to approximately 20 kg in Africa and 48 kg in India. However, while developed nations have the highest commodity consumption rates, they also have mature infrastructure networks.

Per capita consumption of commodities is climbing rapidly in Asia due to significant investment in industry, transport infrastructure, construction and overall improved standards of living, as well as the gradual transfer of the world’s labour intensive manufacturing activities. In the past decade, per capita consumption of steel has risen by approximately 470% in Malaysia, 240% in South Korea and 80% in China. India’s per capita steel consumption is one of the lowest in the world despite being the 5th largest steel producer. However, with a strong and growing economy, rising income levels and shifting consumer spending patterns, India’s appetite for steel is expected to grow to match the developed countries over the next 10 to 20 years.

Almost all major commodities show a similar relationship. There remains ample scope for the world’s commodity consumption rate to expand further, with most of this incremental demand expected to come from developing nations. Fast growth in Asia combined with commodity-intensive industrialization and urbanization will continue to fuel the demand for primary commodities from this region.

3.4. Global infrastructure sector set to attract huge investment

Globally, the infrastructure sector is expected to attract huge investment, supporting commodity demand and prices. Both developing and developed economies will play key roles in investment mobilization; however, whereas developing countries are expected to focus on infrastructure development and expansion, as discussed in detail above, developed countries are expected to channel investment on maintaining and upgrading existing infrastructure.


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Infrastructure maintenance and upgrade in developed countries

Unlike developing countries, the key driver for infrastructure investment in developed countries is the maintenance, upgrade and replacement of existing infrastructure. In these countries, much of the existing infrastructure for energy distribution and transport has been in service for many decades.

In the US, for example, while huge amounts of money have been spent on building power plants, the country's transmission grid uses dated technology and is in need of an upgrade. There has been no significant investment in high voltage grids for the past 20 years. In October 2009, President Obama announced a USD3.5 bn plan to upgrade the country’s ageing power grid, while private players have agreed to invest USD4.7 bn in this area.

US railways have also been neglected for the past 50 years, with increasing calls for the entire network to be rebuilt as, apart from California, none of the routes meet international standards for high-speed trains. The US has now started to invest in high-speed intercity networks. President Obama has approved an initial USD8 bn to be spent on railways. This is however, only a fraction of the cost of building a new network, with the total amount estimated to be more than USD100 bn.

Similarly, out of the 2.4 mn km network of gas pipelines in the US, approximately 1.6 mn km of it is over 30 years old. Replacing and modernizing this essential infrastructure is expected to continue to create demand for steel and other metals in the US. The following table outlines projected global demand for pipelines over the next five years:

Exhibit 16: Gas pipeline projects

Region No of Projects Total Length (km) In USD bnNorth america 183 69,953 17Latin america 52 33,934 8Europe 97 45,974 11Africa 47 17,368 4Middle east 107 43,655 11Asia 130 90,825 22Australia 60 15,899 4Total 676 317,608 77

Source: Simdex, May 2009

4. Key Challenges

4.1. Impact of technological advances on commodities

Scientific development has contributed enormously to the development of the commodities sector, with the impact felt from exploration to extraction to use. The emergence of new technologies can lead to rapid growth in demand for specific commodities, causing a temporary mismatch in demand-supply dynamics, which then prompts the development of new methods and tools to boost supplies. This, in turn, increases supply to a point that it exceeds relative demand. Ongoing scientific progress, coupled with environmental concerns, is also encouraging the recycling of metals, adding to secondary sources of supplies. More recently, concern over the depletion of commodity reserves has driven R&D in search of viable alternatives for fossil fuels and metals.

Scientific innovations and technological applications have enhanced our capabilities to explore and harness natural resources. The invention of electricity boosted the capacity of blast furnaces to produce more metals. Better drilling tools like pumpjack allowed extraction of oil from deep oil wells. Increased knowledge of geology and engineering allowed for the exploitation of fossil fuel reserves in the oceans through the construction of offshore drilling rigs and pipelines, enabled by the development of durable and stronger alloys to connect the energy supply and demand centres. Now, technologies like geographic information system (GIS) and satellite imagery help to uncover unexplored potential resource bases for commodities while keeping exploration costs under control.

The surge in coal demand triggered by the industrial revolution and subsequent inventions to increase coal production exemplify the relationship between technology and commodities. Initially, coal mined from near the surface was sufficient


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to meet industrial demand. Although coal reserves were available deeper beneath the earth's surface, the risk of flooding and poisonous gases restricted their exploitation. The development of new equipment enabled coal mining at greater depth, leading to a 25 fold increase in coal production in England during the 19th century.

Exhibit 17: Growth of Coal Production in England

Year Annual Coal Production in England (mn tonne) CAGR 1700 2.7 0.9%1750 4.7 1.1%1800 10 1.5%1850 50 3.3%1900 250 3.3%

Source: The Energy Journal, 1998

Later, improving shipping facilities and infrastructure projects like the Suez Canal, the Panama Canal and the Trans-Siberian railway improved accessibility and reduced transportation cost, facilitating exploitation of natural resources in remote regions and bridging the gap between resource rich and deficient centres.

Increase in efficiency and productivity

While major breakthroughs in technology enabled the exploitation of natural resources, efforts by industry players to cut costs and make products economically viable have improved efficiency and productivity across various product lines. As a result, cars can travel more miles per gallon of gasoline, less metal is consumed in the manufacture of machinery and appliances and computers are becoming smaller and increasingly power efficient. These enhancements have led to lower per unit consumption of commodities. Rising environmental concerns over the accumulation of metal waste necessitated the development and application of recycling, adding to the overall supply of metals. However, efforts to improve efficiency are concentrated during an upward trend in natural resources prices, while complacency sets in at times of low prices. While rising efficiency lowers consumption of metal and fossil fuels, exerting downward pressure on prices, resulting low prices in turn diminish the return from productivity improvement efforts.

The US decision to supply Israel during the Arab-Israeli conflict of 1973 caused the Arab members of OPEC to first increase oil prices by 70% to USD5.11 per barrel as retaliation and then implement an oil embargo, in which they continued to cut oil supplies by 5% per month. As the Middle East was the leading supplier of crude oil, contributing more than one third of global output, global crude oil prices surged by more than 250% to USD11.58 per barrel in 1974. The situation was aggravated further in the latter part of the decade by the Islamic revolution in Iran and in the 1980s by the Iran-Iraq conflict. Reeling under high oil prices, western economies hastened efforts to introduce energy efficient technologies to avert an impending energy crisis. To combat the threat, many governments enacted laws mandating improvement in fuel economy (more than half the oil was consumed in transportation), consumers opted for more fuel efficient appliances (particularly heating systems), investment was made in the exploration and development of new oil fields and private players boosted R&D to raise productivity. The efforts bore results in the early 1980s as an increased number of fuel efficient vehicles and appliances slowed growth in consumption, and production from new oil fields boosted supplies. The average car fuel economy in the US jumped from 13.5 miles per gallon (mpg) in 1975 to 24.1 mpg in 1988. Oil importing economies also focused on finding viable alternative sources of energy. While France shifted to nuclear energy for electricity generation, the UK and Scandinavian nations explored and developed natural gas fields in the North Sea. Oil supplies from the Middle East returned to normal levels by the mid 1980s; as a result, increased global supply and controlled growth in demand led to low oil prices for over a decade, leading in turn to diminishing economic returns on efforts to improve energy efficiency, which almost came to a halt (observed in the fuel economy plateau after 1988).


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Exhibit 18: Fuel efficiency / oil prices

0102030405060708090100

10

12

14

16

18

20

22

2419

75

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Nom

inal

Oil

Pric

e U

SD

/bbl

Fue

l Eco

nom

y m

pg

Fuel Economy Nominal Oil Price

Source: Bloomberg, US Department of Energy

On the back of underinvestment and rising demand from emerging economies, the oil demand-supply situation tightened once again after 2002. Consequently, oil prices experienced another surge after having remained depressed for over a decade, causing anxiety amongst consumers and policy makers. Taking note of the rising fuel prices, the US government revised its fuel economy mandate for cars and trucks to 39 mpg (27.5 mpg in 2009) and 35.5 mpg (23.4 mpg in 2009) respectively by 2016. The potential to improve fuel efficiency remains immense as auto companies attempt to develop 100 mpg hybrid cars. Renewed interest in improving fuel efficiency is likely to reduce oil consumption in developed economies, partially offsetting the anticipated surge in oil demand from emerging economies.

Substitutes

Commodities derive value from inherent properties rather than their crude form. Oil and fossil fuels are valued for the energy that they provide while metals are valuable due to their strength and durability. As a consequence, commodities often act as substitutes for each other, like natural gas for crude oil, aluminium for copper and steel.

In the energy sector, efforts have been made to replace fossil fuels with renewable energy sources for over a century. Although alternative energy sources including solar energy, wind energy and biofuels have been recognized for a long time, they haven’t replaced conventional fuels as the primary source of energy due to higher costs and technological difficulties. While nuclear, wind, solar and hydro energies have all been successfully harnessed to produce electricity, no sustainable alternative has been found to replace crude-based fuel in cars in any significant proportions. Biofuels, in which gasoline is blended with ethanol derived from agricultural sources like corn and sugarcane, are being experimented with and commercially used in developed economies, as well as predominantly agrarian emerging economies like Brazil. However, biofuels are currently only viable when oil prices are high, and the diversion of crops to non-dietary uses also causes inflation in food prices. Nevertheless, attempts across the globe to economize the already available alternatives and find new solutions to reduce dependence on the finite reserve of fossil fuels are ongoing.

Metals have faced much tougher competition from substitutes than fossil fuels. Plastics and glass have crowded out metals in various fields, especially packaging. Carbon composites are increasingly used to replace metals in aircraft, launch vehicles and spacecraft. Advancement in technology has also led to the replacement of traditional metals with other metals; the abundance of aluminium, for example, with its highly recyclable properties, conductivity and durability, as well as low cost and light weight, prompts researchers to explore new ways of using the metal to replace base metals. R&D activities in new fields such as nanotechnology have raised hopes of replacing metals with more durable and cost effective allotropes like fullerene in the auto and construction industries. These nano particles will be much lighter than metals, which will also make cars more fuel efficient.

4.2. Political, social and environmental challenges

In recent history, some of the world's most resource-rich countries have suffered from chronic political instability. Global reliance on such regions for the supply of commodities continues to increase as reserves deplete and production costs rise in developed economies (e.g. coal production in Japan has almost come to a halt since 2002) while environmental


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concerns restrict the development of reserves (e.g. offshore drilling was banned in the US Outer Continental Shelf from 1981 to 2008 due to the dangers of oil spill). The delicacy of the situation can be observed in the dependence of the US on crude oil from the Middle East or Europe’s reliance on Russian natural gas. Along with this traditional geopolitical aspect, rising opposition from local communities, increased awareness of environmental and economic concerns, government opposition to foreign ownership of natural resources and uncertain legal and political situations add to the already heavy political burden on the commodities sector.

In recent decades, commodity markets witnessed supply shortages due to political conflicts in sensitive areas, such as the impact of the twin oil crises experienced in the 1970s, as discussed above. More recently, Russian-Ukrainian disputes over debts and payments for natural gas have led to disruptions of supplies into the EU over the last 5 years. Similarly, the Indo-Iran natural gas pipeline project has been sidelined for more than 3 decades, due to Indian concerns over blockades by Pakistan. Ongoing political disruptions and armed conflict in resource rich African countries pose yet another threat to global energy supplies.

Even politically stable areas with long established traditions of democracy and political tolerance like Australia and India have experienced constant political infighting, thwarting investment in the commodities sector. In Australia, opposition has been raised to the transfer of ownership of its natural resources to foreign hands, visible in political opposition to the Aluminum Corporation of China acquiring a controlling stake in Rio Tinto. Meanwhile, India's commodities sector is heavily regulated and stifled by a lack of strategic consensus among political leaders.

Social and economic aspects of the development of mines, like the displacement of local communities, and contamination of soil and underground water sources, have further accentuated the problems in developing and exploiting natural resources. Posco’s USD12 bn integrated steel plant project in the Indian province of Orissa has faced protests from local communities, who will be forced to relocate, and certain political parties on the pretext that the company has been granted unfair concessions. Consuming industries often lobby against the export of natural resources to keep input costs under control (for example, Indian steel producers oppose exports of iron ore). Moreover, the sudden surge in profits of natural resource companies following commodity price increases tends to attract calls for higher taxes and royalties.

Political opposition often leads to delays in project development and increases investment requirements. Uncertainties associated with the impact of politics on the commodities sector raise the overall risk of developing natural resources and limit competition, largely restricting access only to well established long term players with deep pockets and political influence.

Environmental challenges

Environmental degradation and climate change are significant issues facing governments in relation to the commodities sector, particularly in terms of balancing a perceived trade-off between economic growth and environmental conservation. It is beyond the scope of this report to fully detail the links between the commodities sector and global climate change, which are complex and many. However, these are well documented in research published in scientific journals, as well as in multilateral publications, such as those released by the UN's Intergovernmental Panel on Climate Change (IPCC).

Governments and multilateral bodies have implemented a number of measures intended to arrest or reverse climate change, and to limit environmental degradation. These include:

� The Kyoto Protocol was adopted in December 1997 and implemented in February 2005, signed by 187 countries as of October 2009. The protocol focused on reducing carbon emissions, primarily by mining companies. According to the IPCC, the global steel industry emits 6%-7% of the total carbon dioxide released in the environment. The protocol set a target for 37 industrialised countries to reduce GHG emissions by an average of 5% from 1990 levels over the five-year period 2008-2012. The UN Climate Change Conference in Copenhagen in December 2009 is now expected to lay the groundwork for a successor treaty. 192 countries are expected to be involved, with the main objective of reducing GHG emissions.

� In October 2009, a climate change pact was signed by China and India, in which the two countries agreed to strengthen bilateral dialogue and practical cooperation on climate change through information sharing. The two governments have decided to work together on issues including scientific assessment of the impact of climate change, joint research and development activities and energy conservation and efficiency.


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� Clean energy sources: More and more governments are encouraging the use of clean energy sources generated from sunlight, wind, rain and tides. Wind power generation capacity increased from approximately 30 GW in 2002 to 59 GW in 2005 and annual investment in clean energy sources increased from approximately USD19 bn in 2001 to USD36 bn in 2005 Source: Renewable Global Status Report.

� Funding of USD1.5 bn by the Australian government to local coal mining companies for adoption of low emission coal technologies Source: official website of the Australian Labor party.

� There are government programs offering incentives and rebates to compensate for the cost of solar panels purchased by companies across a wide range of developed and emerging countries. In September 2009, the French government announced a plan to increase solar incentives offered to businesses and individuals to install photovoltaic (solar) technologies.

� Out of China's recent USD586 bn stimulus package, 14.5% was allocated to the development of clean energy sources Source: Climate progress.

� In the US, the Clean Energy and Security Act of 2009 requires utility companies to supply an increasing proportion of energy through renewable sources (6% in 2012, 9.5% in 2014, 13% in 2016, 16.5% in 2018, and 20% in 2021-2039).

� A number of governments have set up - or are planning to set up - trading programs in air pollutants to control emissions of various GHGs. The main feature of these trading programs is the capping of the amount of a pollutant that can be emitted by any country or company. If they wish to exceed their given quotas, these entities must buy credits from other entities with surplus credits.

The main concerns for the commodities sector, going forward, will be whether and by how much governments further restrict Exploration and Production (E&P) operations, whether feasible and environmentally friendlier substitutes are developed, and whether the sector is able to adapt and address environmental concerns. For example, coal industry players are working on Carbon Capture and Storage technology, which has the potential to nearly eliminate carbon emissions into the atmosphere from coal mining.

5. Commodities Sub-sectors

5.1. Upstream oil & gas

Oil exploration represents the first stage of the long petroleum value chain. The E&P sector, or the upstream oil sector, is responsible for discovery, recovery and production of crude oil and natural gas.

The key participants in this business include oil and gas exploration companies, oilfield service companies such as seismic surveyors, drillers, vessel, engineering and service providers and also its consumers - the downstream sector - which refines raw crude products provided by the upstream sector.

Demand and supply of crude oil

After the severe price volatility of 2008, the global E&P industry has witnessed some stabilization in 2009. While the strong appreciation in hydrocarbon prices in early 2008 benefited the upstream companies’ bottom-lines, the subsequent decline in oil prices has had a sharp adverse impact due to their high fixed costs. The IEA's Oil Market Report forecasts global oil demand to decline 1.5% to an average of 84.8 mmbpd in 2009 followed by an increase of 1.3% to an average of 86.2 mmbpd in 2010. Global oil supply in October 2009 was 85.6 mmbpd.


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Exhibit 19: Oil demand, supply and price history

0

20

40

60

80

100

120

68

72

76

80

84

88

2001 2002 2003 2004 2005 2006 2007 2008

Oil

pric

es (

US

D p

er b

arre

l)

mn

barre

ls p

er d

ay

Oil Supply Oil Demand Oil Prices

Source: BP Statistical Review, June 2009, Bloomberg

Demand and supply of natural gas

While crude oil prices increased from USD31.41 per bbl on 22 December 2008 to USD76.72 on 20 November 2009, the natural gas price plummeted from USD5.37 per mmbtu to around USD3.11 per mmbtu over the same period. Global demand for natural gas remains low reflecting the global recession and a cool summer in the US this year. The impact of this on prices is exacerbated by the effect of technological advancements allowing extraction of previously unobtainable gas locked in shale rock. This has led to a significant increase in the US natural gas reserve, impacting gas prices globally.

Recently deployed technologies to improve extraction rates include horizontal drilling and hydraulic fracturing. Horizontal drilling enables a company to cover a larger portion of the resource bearing area. Hydraulic fracturing involves the injection of a mixture of water and sand at high pressure to create multiple fractures throughout the rock, liberating the trapped gas. Such developments in unconventional gas exploration led the Potential Gas Committee to announce in June 2009 that US natural gas reserves are 35% greater than believed two years ago. The committee estimates total natural gas resources in the US at 2,074 trillion cubic feet, an increase of 542 trillion cubic feet from its last report, including 238 trillion cubic feet of proven gas reserves.

As well as depressing gas prices, the supply glut has also led to a significant reduction in drilling activity. According to theEIA November 2009 release, the number of natural gas rigs operating in the US has declined by more than 54% since its peak at 1,600 in August 2008. The EIA expects total natural gas production in the US to decline by 3.8% y-o-y in 2010. However, with demand for gas picking up, gas prices are expected to increase from 2010. The US is expected to use more natural gas in the long term, given stricter climate regulations and its huge reserve base. The world’s total natural gas consumption is expected to increase by an average of 1.6% per year from 104 trillion cubic feet in 2006 to 153 trillion cubic feet in 2030 Source: EIA International Energy Outlook 2009.

OPEC actions

OPEC countries control around 68% of global oil reserves and contributed 36% of total oil production in 2008 Source: BP Statistical Review. As the key player in this industry, OPEC has the power to cut or expand global supply when oil prices fluctuate to protect the margins of its members. After a fall in oil prices to USD31.41 per bbl in 2008, the cartel reduced its output by 4.2 mmbpd. In response to concerns over OPEC's market power, governments around the world have encouraged oil E&P activities in non-OPEC regions through tax breaks, subsidies and deregulation. The following charts identify the world’s major exporters and importers of oil.


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Exhibit 20: Largest net oil importers in 2008 (thousands of bbls per day)

0

2,000

4,000

6,000

8,000

10,000

12,000

US

Japa

n

Chi

na

Ger

man

y

S K

orea

Indi

a

Fra

nce

Spa

in

Ital

y

Taiw

an

Net

herla

nds

Sin

gapo

re

Bel

gium

Turk

ey

Thai

land

Source: EIA

Exhibit 21: Largest net oil exporters in 2008 (thousands of bbls per day)

0

2,000

4,000

6,000

8,000

10,000

Sau

di A

rabi

a

Rus

sia

UA

E

Iran

Kuw

ait

Nor

way

Ang

ola

Vene

zuel

a

Nig

eria

Alg

eria

Iraq

Liby

a

Kaz

akhs

tan

Can

ada

Qat

ar

Source: EIA

The Middle East controls 59.9% of proven global oil reserves and 41.0% of global proven gas reserves Source: BP Statistical Review – World Energy 2009. Its R/P ratio is an impressive 78.6 years for crude oil and more than 100 years for natural gas, compared to international averages of 42 years and 60.4 years respectively.

Exhibit 22: Regional oil reserves and R/P ratios (2008)

RegionsProven reserves

(bn bbl) y-o-y growth % share R/P ratioTotal North America 70.94 (0.4%) 5.6% 14.80Total S. & Cent. America 123.17 (0.3%) 9.8% 50.30Total Europe & Eurasia 142.19 (1.7%) 11.3% 22.10Total Middle East 754.12 (0.1%) 59.9% 78.60Total Africa 125.56 0.2% 10.0% 33.40Total Asia Pacific 42.00 1.8% 3.3% 14.50Total World 1,257.98 (0.2%) 100.0% 42.00

Source: BP Statistical Review, June 2009


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Exhibit 23: Regional natural gas reserves and R/P ratios (2008)

RegionsProven reserves

(bn bbl) y-o-y growth % share R/P ratioTotal North America 8.87 (0.1%) 4.8% 10.90Total S. & Cent. America 7.31 0.6% 4.0% 46.00Total Europe & Eurasia 62.89 9.6% 34.0% 57.80Total Middle East 75.91 2.3% 41.0% <100 yearsTotal Africa 14.65 0.8% 7.9% 68.20Total Asia Pacific 15.39 4.0% 8.3% 37.40Total World 185.02 4.5% 100.0% 60.40


Geopolitical issues

Geopolitical issues in oil producing countries and regions (such as the Middle East, Nigeria and Venezuela) raise concerns over the security of global oil supplies. Most recently, Nigerian rebels have warned oil and gas industry players operating within the region to brace for new attacks as they want a bigger share of the country's oil wealth. In the three years up to October 2009, Nigeria's oil output is believed to have fallen from 2.6 mmbpd to 1.7 mmbpd Source: Mail&Guardian online.

Iraq boasts the world's third largest reserves of oil, behind Saudi Arabia and Iran. There has been limited exploration or development of fields in the country over the past three decades, due to wars and the international embargo imposed following the Gulf War. Recently, there has been heightened industry interest in the country's fields. On 02 November 2009, ENI finalized a contract to boost production in the Zubair field near Basra, which it estimates to have 6 bn bbls of reserves. Oil majors, including Royal Dutch Shell (Shell), Exxon Mobil and ConocoPhillips are also in talks with the government. Assistance from major E&P firms could help Iraq to boost its oil production significantly. However, the country may face opposition from OPEC, which is attempting to enforce tighter quotas during the current period of muted demand. Although Iraq is a member of OPEC, it is exempt from its quotas. Meanwhile, international E&P companies entering the Iraqi oil market are likely to face a raft of challenges, such as a shortage of skilled workers and inadequate infrastructure, including a lack of oil terminals and pipeline capacity. Investment in the country's ageing energy infrastructure has been hampered by the division of responsibility between the central government and Iraq's provinces.

Strategic importance

While the role of the state is declining in nearly every sector of world economic activity, in hydrocarbons the pattern is quite different. High energy prices have encouraged governments to concentrate authority in the hands of state firms. According to the EIA, national oil companies accounted for 52% of global oil production and 88% of proven oil reserves in 2007, as governments across the globe actively engaged in acquiring potential reserve bases to ensure energy security for their countries. Some of the largest national oil companies include Saudi Aramco, National Iranian Oil Company, Petroleo de Venezuela and Qatar General Petroleum Corporation. The largest national oil company in the world, Saudi Aramco, produced close to 8.9 mn barrels of oil per day in 2008 (or 10.3% of global production). Over the same period, the largest international oil company in the world, Exxon Mobil, produced almost 2.4 mn barrels of oil per day (2.8% of world production). In the Upstream Oil & Gas sub-industry, CNOOC is the largest company by market cap while Encana Corporation is the largest by revenues.


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Exhibit 24: Key industry players

All figures in USD mn, except ratios

Market Capitalization

Enterprise Value

TTM revenues

TTM EBITDA

EV/TTM revenues

EV/TTM EBITDA TTM P/E

CNOOC 70,664 66,157 14,144 7,551 4.7x 8.8x 16.5xOil and Natural Gas Corp Ltd 52,910 50,611 22,466 9,682 2.3x 5.2x 12.5xEnCana Corporation 42,826 55,448 25,578 12,926 2.1x 4.2x 7.4xCanadian Natural Resources Limited 35,552 46,724 10,030 9,670 4.7x 4.8x 7.5x

Apache Corp 33,238 36,890 7,959 2,321 4.6x 15.9x NAAnadarko Petroleum Corp. 31,865 41,424 8,306 3,318 5.0x 12.5x 73.7xWoodside Petroleum Ltd. 31,539 35,974 4,996 3,603 7.2x 10.0x 20.0xDevon Energy Corporation 30,217 36,926 10,790 8,377 3.4x 4.4x NAOGX Petroleo e Gas Participacoes S/A 28,396 23,823 N/A (157) N/A N/A 111.6x

XTO Energy Inc. 25,100 35,457 8,520 6,205 4.2x 5.7x 13.4xOil and Gas E&P Industry 894,823 1,049,504 484,666 199,510 3.5x 6.5x 155.4x

Source: Capital IQ

Regulatory and policy framework

Trading regulations

In reaction to the wide swings in oil prices during 2008, federal regulators in the US are currently considering regulations to place restrictions on hedge funds and other speculative traders in the market. They are also expected to consider fresh limits on the volume of energy futures contracts that pure investors would be allowed to hold. When these regulations will take effect is unclear.

Operational regulations

Oil subsidies are prevalent in developing countries, designed to reduce the price burden on the end customer. Under a levy introduced in March 2006 in China, upstream companies have to bear a windfall tax on revenue from crude oil sold for more than USD40 a barrel. Recently, a proposal submitted by China Petroleum and the Chemical Industry Association recommended raising the trigger level for the tax to help oil producers including PetroChina and China Petroleum and Chemical Corp. China is now expected to increase the threshold for the windfall tax on crude oil gains to USD60 per barrel. In India, state-run upstream companies are asked to discount crude sales to state refineries, which in turn sell oil products to the public at regulated prices. In FY 2009, ONGC's net profit dipped 3% to INR161.3 bn due to a huge subsidy discount of INR282.3 bn (+28% y-o-y).

Companies across the world are expected to pay royalties in the countries in which they operate. In the US, E&P companies are given the option to pay royalties in cash or in kind. However, the Government Accountability Office (the investigative agency of the US Congress) has identified that energy companies may have underpaid their oil and gas royalties during 2006 and 2007 by USD160 mn, as a result of inaccurate data supplied to the Department of the Interior. The US is now planning to scrap its royalty-in-kind program to make the system more transparent and accountable.

Industry transaction activity

In response to the financial crisis, investment in the Upstream Oil & Gas sub-industry has already been cut by more than USD90 bn this year (-19% from 2008). Recently, however, there has been a revival in activity and interest. For example, in October 2009 state-run Korea National Oil Corp. (KNOC) signed a contract to buy Canada's Harvest Energy Trust for CAD1.8 bn (USD1.7 bn), marking the largest acquisition of a foreign oil firm by a South Korean company. The acquisition is expected to boost KNOC's production from 70,000 to 123,400 barrels per day, taking the company one step closer to achieving its daily output goal of 300,000 barrels by 2012. The IEA, in its 2009 World Energy Outlook, forecasts oil demand to start recovering from 2010, reaching 88 mmbpd in 2015 and up to 105 mmbpd in 2030. In order to meet this demand, the sector requires considerable investment; under-investment could prove greatly detrimental to the development of the world economy. The following tables list the largest transaction activities in the Upstream Oil & Gas sub-industry over the past 12 months.


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Exhibit 25: Largest 10 upstream M&A deals of the last 12 months

Buyer/Investor Target companyTotal transaction value (USD mn)

BG Group plc Queensland Gas Co. Ltd. 8,882ONGC Videsh Limited Imperial Energy Corporation PLC 5,761Sistema JSFC Bashkir Oil and Energy Group 4,162Centrica Resources (UK) Ltd. Venture Production Plc 4,025Precision Drilling Trust Precision Drilling Oilfield Services Corporation 4,000Sinopec International Company Tanganyika Oil Company Limited 3,300Statoil ASA Anadarko Petroleum Corp., 2,500PetroChina Co. Ltd. CNPC Hong Kong Ltd. (SEHK:135) 2,317

GDF SuezNederlandse Aardolie Maatschappij, Offshore and Pipeline Assets 1,854

Atlas Energy, Inc. Atlas Energy Resources LLC 1,727

Source: Capital IQ

Exhibit 26: Largest 10 upstream public offerings of the last 12 months

Issuer Total transaction value (USD mn)Anadarko Petroleum Corp. 1,365Nabors Industries Inc. 1,125Halliburton Company 997Total Capital S.A. 996Noble Energy, Inc. 995Weatherford International Ltd. 995Halliburton Company 995Chesapeake Energy Corporation 951EOG Resources, Inc. 898Smith International Inc. 742

Source: Capital IQ

Exhibit 27: Largest 10 upstream private placements of the last 12 months

Issuer Total transaction value (USD mn)Aabar Investments PJSC 1,820Nabors Industries Inc. 1,125Oil Search Ltd. 823Forest Oil Corp. 571Tullow Oil plc 551Petrohawk Energy Corporation 548Pacific Rubiales Energy Corp. 446Petrobank Energy and Resources, Ltd. 400Enerplus Resources Fund 300Zhaikmunai LP 300

Source: Capital IQ


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Outlook

Our outlook for Upstream Oil & Gas is positive. Crude oil prices have more than doubled to trade well above USD70 per barrel. Prices are expected to average approximately USD90 per barrel for the next three years. A stable price outlook suggests steady growth in E&P investment. Global supplies of natural gas remain abundant and prices currently hover at low levels. However, as the cleanest of all fossil fuels, gas is likely to be the least affected by any legislation against GHGemissions. In the long term, natural gas-fired electricity generation is expected to grow at the fastest rate after renewables. While global demand for oil and natural gas is expected to increase from here on, the recovery is expected to remain depressed until the end of 2010 as most economies recover only gradually from their deepest recession in over half a century. China and India are expected to contribute the bulk of growth in demand for natural gas.

5.2. Mid- and down-stream oil & gas

Crude oil is consumed in various forms: gasoline/petrol, diesel, heating oil, jet fuel, residual fuel oil, and many other products. Crude oil extracted in its raw form is converted into end-use products by refining companies (downstream players). Crude oil used in the refining process is available in various forms based on characteristics including appearance and viscosity. These types are classified into two main categories, heavy and light crude oil. Heavy crude oil is more difficult to refine and transport and hence is priced at a discount to light crude oil. Total oil products consumption has increased from 61.6 mmbpd in 1980 to 85.8 mmbpd in 2008. To meet this demand, refinery throughput has increased by almost the same magnitude, from 59,243 kbopd in 1980 to 75,179 kbopd in 2008.

Exhibit 28: Last 10 years – Crude throughput and consumption data

World oil consumption (kbopd)1999 67,043 70,2012000 68,566 71,0252001 69,161 71,4212002 68,518 72,1112003 70,545 73,4462004 73,018 76,2162005 74,093 77,2362006 74,707 77,8812007 75,432 78,7882008 75,179 78,557

Year Refinery throughput (kbopd)

Source: Capital IQ

Key downstream industry players

Exhibit 29: Key downstream industry players (All figures are in USD mn except ratios)

Reliance Industries Ltd. 68,612 78,160 29,267 5,328 2.7x 14.7x 14.6xFormosa Petrochemical Corp. 23,115 28,068 17,907 N/A 1.6x N/A 226.9xIndian Oil Corp. Ltd. 16,179 22,776 61,075 2,994 0.4x 7.6x 29.2xValero Energy Corp. 9,758 15,503 68,937 2,304 0.2x 6.7x N/ASk Energy Co., Ltd. 8,715 15,277 45,032 2,315 0.3x 6.6x 11.5xRabigh Refining & Petrochemical Company 8,876 17,387 3,261 N/A 5.3x N/A N/A

Nippon Oil Corp. 6,881 22,794 63,720 (1,665) 0.4x N/A N/AS-Oil Corp. 5,580 5,947 19,778 1,347 0.3x 4.4x 15.1xTonenGeneral Sekiyu k.k. 5,156 6,155 28,327 1,592 0.2x 3.9x 6.9xNeste Oil Corp. 4,549 6,656 12,927 275 0.5x 24.2x NAIndustry Overall - Oil and Gas Refining and Marketing 213,311 338,926 1,180,679 (962) 0.4x 15.3x N/A

EVTTM

RevenuesTTM

EBITDAEV/TTM

RevenuesCompanyMarket

CapEV/TTM EBITDA TTM P/E

Source: Capital IQ


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Crude oil is transported primarily through two modes: pipelines and shipping. Oil pipeline and shipping companies constitute the midstream sub-industry. Other lesser used modes are trucks and railroad. The various types of tanker used in the industry are product tankers (capacity: 10-60 thousand dwt), Panamax (capacity: 60-80 thousand dwt), Aframax (capacity:80-120 thousand dwt), Suezmax (capacity: 120-200 thousand dwt), Very Large Crude Carrier or VLCC (capacity: 200-320 thousand dwt) and Ultra Large Crude Carrier or ULCC (capacity: 320-550 thousand dwt).

Pipeline transportation is carried out via Seamless Arc Welded (SAW) pipes. While this form of transport usually calls for a higher initial investment, ongoing costs are lower than for railway and road transportation. Indian manufacturers account for the largest share of world SAW pipe production capacity (30.4%), while North America and Western Europe have capacities of 17.8% and 13.6% respectively.

Exhibit 30: Global SAW pipe manufacturing capacity

Region HSAW - tpa LSAW - tpa ERW - tpa TotalNorth America 680,000 2,150,000 7,336,500 10,166,500Western Europe 1,430,000 3,285,000 3,050,000 7,765,000Eastern Europe 125,000 44,000 30,000 199,000CIS Countries 240,000 2,350,000 5,852,000 8,442,000India 3,191,000 3,762,000 10,390,000 17,343,000Middle East 845,000 980,000 1,120,400 2,945,400South Africa 150,000 470,000 1,974,000 2,594,000Africa 246,000 N/A 100,000 346,000Other world 3,212,000 1,900,000 2,121,000 7,233,000Total World 10,119,000 14,941,000 31,973,900 57,033,900

Source: Welspun Gujarat, Annual Report - 2009

Crude oil storage

The oil value chain, involving the process of crude oil extraction, refining and sale to end consumers requires massive storage capacity. Some of the leading oil storage companies include Koch Industries Inc, Southwest Gas Corporation, ITOCHU Corporation, Spectra Energy Corp., Enron Creditors Recovery Corp., EQT Corporation, DCP Midstream Partners and LP Enbridge Energy Partners. According to a report by Global Markets Direct, global oil storage capacity has increased from 379.77 mn cubic meters in 2000 to 470.62 mn cubic meters in 1H 09, and is expected to rise to 488.07 mn cubic meters by 2013, driven by growing demand for crude oil and petroleum products, particularly from the Asia Pacific region. China is expected to build 26.8 mn cubic meters of oil storage capacity as it stockpiles strategic oil reserves Source: Upstream Online.

The North American oil storage industry accounted for 29.5% of the total world capacity in 1H 09 and the Asia-Pacific region accounted for 18.4%. However, with the North American and European markets well established, the bulk of growth momentum is expected to come from the Asia-Pacific region, where deregulation is expected to inspire the entry of more private players into the market.

Natural gas storage

Natural gas can be stored for future consumption in depleted gas, aquifer and salt cavern reservoirs. In the depleted gas reservoir system, reservoir formations of natural gas fields are used following production of all economically recoverable gas. Salt caverns are created by drilling a conventional well to pump fresh water into a salt dome or bedded salt formation. The salt dissolves until the water is saturated, and the resulting salt water is returned to the surface. This process continues until a cavern of the desired volume and shape is created, which is then used for storage. Salt caverns are typically much smaller than depleted gas reservoirs and aquifers, usually taking up only one-hundredth of the acreage taken up by a depleted gas reservoir Source: EIA. The possibility of using salt caverns for this and other energy storage purposes also gives potential access to another source of revenues for salt and potash mining companies like Sirius Exploration. In the US there are about 120 entities operating the approximately 400 active underground natural gas storage facilities.


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Key midstream industry players

Exhibit 31: Key Midstream industry players (All figures are in USD mn except ratios)

TransCanada Corp. 20,398 38,339 8,492 3,774 4.5x 10.2x 15.9xKinder Morgan Energy Partners LP 15,912 27,048 7,384 2,431 3.7x 11.1x 49.7xEnbridge Inc. 15,046 27,051 13,956 2,163 1.9x 12.5x 11.4xEnterprise Products Partners LP 13,622 23,601 15,111 2,046 1.6x 11.5x 18.6xSpectra Energy Corp. 12,508 22,560 4,662 2,478 4.8x 9.1x 13.4xWilliams Companies, Inc. 11,412 19,203 8,259 2,746 2.3x 7.0x 23.1xEnergy Transfer Partners L.P. 7,676 13,458 6,783 1,390 2.0x 9.7x 14.0xEl Paso Corp. 6,942 21,117 4,781 958 4.4x 22.0x NAPlains All American Pipeline LP 6,662 11,139 21,391 1,072 0.5x 10.4x 11.6xEnergy Transfer Equity, L.P. 6,366 16,500 6,782 1,396 2.4x 11.8x 16.6xIndustry Overall - Oil and Gas Storage and Transportation 237,197 464,185 286,699 59,323 1.8x 10.8x 24.7x

EV/TTM Revenues

EV/TTM EBITDA

TTM P/E

TTM EBITDACompany

Market Cap EV

TTM Revenues

Source: Capital IQ

Midstream sector trends

Tanker rates and capacity

Freight rates are positively correlated with crude oil prices, with higher relative demand for crude oil translating into higher demand for transportation. The Baltic Dirty Tanker Index (BDTI) tracks the freight rates of crude tankers. As illustrated in the chart below, the slump in oil prices in late 2008 and 2009 from mid-2008 levels has led to a fall in demand for tanker capacity. This has been compounded by a 21.4% increase in tanker capacity during 2005-2008.

Exhibit 32: Baltic Dirty Tanker Index Exhibit 33: Tanker capacity/ freight rate

0

20

40

60

80

100

120

0200400600800

1,0001,2001,4001,6001,8002,000

2002 2003 2004 2005 2006 2007 2008 2009

Oil

Pric

es (U

SD

per

bar

rel)

BDTI Oil Prices

35,000

47,500

60,000

72,500

85,000

300

350

400

450

2005 2006 2007 2008

Fre

ight

rate

s (U

SD

per

day

)

Tank

er c

apac

ity (d

wt)

Tanker capacity (dwt) VLCC (USD per day)

Source: Bloomberg Source: Bloomberg

Investment activities in the midstream sector

With crude touching a low in December 2008, demand for midstream industry services has remained low in 2009. General Maritime, which is one of the leading crude oil transportation providers, saw high average freight rates in 1Q 09 (USD30,724 per day), falling to USD27,649 per day in 2Q 09 and USD23,136 per day in 3Q 09, before starting to recover in 4Q 09. Pipeline companies also saw a significant weakening in their order book position, which is a leading indicator of their business. However, despite the downturn, the midstream industry did witness some investment activity.

The following tables list the most significant investment transaction activities in the Midstream Oil & Gas sub-industry over the past 12 months. Transcanada Corporation, Canada's leading natural gas pipeline operator (59,000 km of gas pipelines and 370 bn cubic feet of storage capacity) closed one of the largest public offerings of the last 12 months on 24 June 2009, raising CAD1.6 bn. Other large investments are listed below.


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Exhibit 34: Largest 10 midstream M&A deals of the last 12 months

Magellan Midstream Holdings, L.P. 3,461 Magellan Midstream Partners LP70 Oil and Gas Storage Caverns 2,471 IVG Funds GmbHStoccaggi Gas Italia SpA 2,037 SNAM Rete Gas SpABrostrom AB 1,278 Maersk Tankers66% of Enterprise GC, L.P., 51% of both Enterprise Intrastate L.P. and Enterprise Texas Pipeline L.P

730 DEP Operating Partnership, L.P.

Transcanada Keystone Pipeline, LP 553 TransCanada PipeLines LimitedTarga Downstream LP and Targa LSNG GP LLC and Targa LSNG LP and Targa Downstream GP LLC

550 Targa Resources Partners LP

Arlington Tankers Ltd. 502 General Maritime Corp.Oleoducto Central S.A. 418 Ecopetrol SACaspian Pipeline Consortium 384 -

Transaction value (USD mn) Buyer/InvestorTarget Company

Source: Capital IQ

Exhibit 35: Largest 10 midstream public offerings of the last 12 months

Issuer Issue Size (USD mn)TransCanada Corp 1,415Kinder Morgan Energy Partners LP 698Energy Transfer Partners L.P. 650Williams Companies, Inc. 600Energy Transfer Partners L.P. 600Kinder Morgan Energy Partners LP 595Kinder Morgan Energy Partners LP 500Enbridge Energy Partners LP 500Plains All American Pipeline LP 499ONEOK Partners, L.P. 498

Source: Capital IQ

Exhibit 36: Largest 10 midstream private placements of the last 12 months

Issuer Transaction value (USD mn) Buyer/InvestorMidcontinent Express Pipeline LLC 799 N/AWilliams Companies, Inc. 595 N/AEnbridge Energy Partners LP 500 Enbridge Energy Company, Inc.Southeast Supply Header LLC 375 N/AFerrellgas L P 296 N/AInergy, L.P. 203 N/AEnterprise Products Partners LP 150 EPCO Holdings, Inc.Boardwalk Pipeline Partners, LP 147 Boardwalk Pipelines Holding Corp.Regency Energy Partners LP 80 Harvest Partners, LLCTC Pipelines LP 78.4 TransCan Northern Ltd.

Source: Capital IQ


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Downstream sector trends

Effect of rising crude oil prices on downstream oil companies

Crude oil prices have been highly volatile over the last 21 months, affecting the performance of downstream companies worldwide. As the major input for refining companies, high oil prices dent operating margins over the short term.

WTI crude prices touched a high of USD145.29 per bbl and a low of USD31.41 per bbl during this period. Oil products, which were in high demand in 1H 08, became oversupplied. WTI prices peaked in 2Q 08 and 3Q 08, cutting into downstream profits in 3Q 08 and 4Q 08 (downstream companies typically maintain inventory of three months). The following table illustrates the impact of rising crude prices on the margins of downstream (and downstream-heavy integrated firms) companies.

Exhibit 37: Oil majors' operating metrics (2008)

Quarter 1 98 13,228 871 9,977Quarter 2 124 17,306 2,201 14,596Quarter 3 118 13,641 170 9,826Quarter 4 59 (530) (2,416) (3,226)

British Petroleum - EBIT (USD mn)

Total S.A - EBIT (EUR mn)Year 2008

Average WTI prices (USD per bbl)

Royal Dutch Shell - EBIT (USD mn)

Source: Company Annual reports

Over a longer time horizon, refining margins tend to follow crude prices, with a positive correlation of 0.73 over the period 1999-2008. However, with crude prices highly volatile, sometimes trading in a wide range, refining margins can move in the opposite direction to crude prices, especially in periods reporting a sudden movement in crude oil price:

Exhibit 38: WTI refining margins and oil price correlation

0

20

40

60

80

100

120

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

US

D p

er b

arre

l

WTI refining margins (USD per bbl) Oil prices (USD per bbl)

Source: Bloomberg

Rising demand from emerging markets

Over the last ten years, India's refined oil products consumption increased at a CAGR of 3%, while China’s grew by 6% (in comparison to the world average of 1.1% over the same period). Conversely, US refined oil product consumption declined from 888.9 Mt in 1999 to 884.5 Mt in 2008. If China continues on its current growth trajectory, its oil consumption will match US levels in 15 years.


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Exhibit 39: Oil Consumption (in Mt)

0

200

400

600

800

1,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

India China US

Source: EIA

Petroleum prices are tightly regulated in India and China, with retail rates capped in order to protect the end consumer from volatility in international crude oil prices. When crude prices peaked in 1H 08, these caps forced downstream firms in China to book significant losses by preventing them from recovering high input costs. In response, the Chinese government issued VAT rebates on fuel imports and provided some direct subsidies to refiners. Sinopec, one of the largest refiners in China, received a fuel subsidy of RMB50,342 mn in 2008. Downstream companies are also compensated by upstream companies in the form of discounts. In India's FY 2010 budget, INR300 bn has been allocated for subsidies of kerosene and LPG for downstream companies. At the same time, Indian consumers were also partially shielded, paying INR50.88 per litre (USD4.39 per gallon) for gasoline, compared to USD7.64 per gallon in the UK Source: Indian Oil Corp., EIA.

Historical refining capacity

The chart below identifies world crude oil refining capacity over the last ten years. Refining capacity moved steadily upwards until 2005, with a rise in demand. 2006 witnessed a huge jump in refining capacity, attributable to investment made in the period 2002-2004.

Exhibit 40: World crude oil refining capacity (kbopd)

78,000

80,000

82,000

84,000

86,000

88,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: EIA

Major downstream projects in the pipeline

The EIA forecasts global oil consumption to increase from 85.46 mmbpd in 2008 to 107 mmbpd in 2030, at a CAGR of 1%. This is based on a forecast global GDP growth rate of 3.5%, and is expected to be concentrated in China and India. Over the last five years, while total world oil consumption rose by 3.7%, China and India reported growth rates of 17.8% and 12.4%, respectively. Some of the largest downstream projects in the pipeline are identified below.


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Exhibit 41: Major upcoming downstream projects

SonaRefSociedade Nacional de Combustiveis

de Angola 200 2,012 Angola, Africa

Project Eider Rock Irving Oil Company 300 2,015 CanadaSATORP - Jubail Refinery

Saudi Aramco Total Refining and Petrochemical Co. 400 2,012

Saudi Arabia, Middle east

Refinery of the Pacific Refineria del Pacifico-CEM 300 2,013 El Aramo, EcuadorAl Zour Refinery Kuwait National Petroleum Corp 1,150 2,012 Al Zour, KuwaitHyperion Energy Center Hyperion Resources 400 2,014 North America

Date of completionDownstream projects Operating company

Capacity - kbopd Location

Source: Downstream today

Higher distillates demand forecast in the US

The EIA forecasts that US demand for crude based gasoline will decline from 8.41 mmbpd in 2008 to 7.70 mmbpd by 2023, while demand for crude based distillates will rise from 3.89 mmbpd to 4.32 mmbpd, as they will be required for electricity generation. In light of this, we expect higher investment in distillates refinery capacity in the region.

Gasoline futures trading

Of the products derived from crude oil refining, gasoline is the most used of all energy sources (17% of total US energy consumption Source: EIA). The main uses of gasoline are in heating and transport. Gasoline can be traded on the NYMEX and TOCOM. NYMEX gasoline futures prices are quoted in US dollars per gallon and are traded in lot sizes of 42,000 gallons (1,000 bbls), while TOCOM gasoline futures are traded in units of 50 kiloliters (13,210 gallons) and contract prices are quoted in yen per kiloliter. Gasoline futures trading can be used by producers/consumers to lock in future gasoline selling/buying prices and by speculators to pocket profits based on their price forecasts. Movement in gasoline prices is largely based on underlying volatility in international crude oil prices, and also to some extent on competition between various gasoline retailers in the market.


In 2009, the Downstream Oil & Gas industry saw one of its largest M&A deals, with Suncor Energy and Petro-Canada (both major downstream operators) merging in 3Q 09. Refining capacity of the joint entity stands at 433,000 bpd. Some of the most significant investment activities in the last 12 months are listed below.

Exhibit 42: Largest 10 downstream M&A deals of the last 12 months

Petro-Canada 19,478 Suncor Energy Inc. Petrobras Energía Participaciones S.A. 5,343 Petrobras Energía SACompania Espanola de Petroleos SA 4,469 International Petroleum Investment CompanyGazprom Neft 4,201 JSC GazpromERG Raffinerie Mediterranee Srl 2,087 LUKOIL Oil CompanyMol Magyar Olaj es Gazipari Rt. 1,803 Surgutneftegaz Reliance Petroleum Ltd. 1,673 Reliance Industries Ltd. Singapore Petroleum Co. Ltd. 1,461 PetroChina International (Singapore) Pte. Ltd.Singapore Petroleum Co. Ltd. 1,016 PetroChina International (Singapore) Pte. Ltd.Gibson Energy Limited 1,013 The Carlyle Group; Riverstone Holdings LLC

Target companyTransaction value

(USD mn) Buyer / investor

Source: Capital IQ


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Exhibit 43: Largest 10 downstream public offerings of the last 12 months

Issuer Issue size (USD mn)Shell International Finance B.V. 2,499Petrobras International Finance Co 2,477Enterprise Products Operating, LLC 2,000Petroleos Mexicanos 2,000Chevron Corp. 1,996Shell International Finance B.V. 1,993Ecopetrol SA 1,500Shell International Finance B.V. 1,500BP Capital Markets plc 1,500Chevron Corp. 1,500

Source: Capital IQ

Exhibit 44: Largest 10 private placements of the last 12 months

IssuerTransaction value

(USD mn) InvestorCenovus Energy Inc. 3,500 N/AGibson Energy Limited 545 N/ADCP Midstream LLC 450 N/AEast Resources, Inc. 350 Kohlberg Kravis Roberts & Co.DCP Midstream LLC 250 N/AConnacher Oil and Gas Ltd. 187 N/ABrasil Ecodiesel Industry 167 N/ATEAK Midstream LLC 100 NGP Energy Capital ManagementKeyera Facilities Income Fund 81 N/AInteroil Corp. 70 N/A

Source: Capital IQ

Outlook

With a tight demand-supply situation and an expected rise in oil demand going forward, we expect oil prices to stabilize with an upward bias. Demand for natural gas as a clean source of energy is expected to increase over the longer term. Therefore, considering the decline in drilling activity in 2009 and an expected reduction in the supply glut, we expect international gas prices to increase. Over a longer term horizon this should have a positive impact on downstream companies’ refining margins. With the expected deregulation of oil product retail prices in the long term, downstream companies in India and China should benefit. As demonstrated by Gasol's agreements with E.ON and EDF to develop and export gas in the Gulf of Guinea, the movement of large oil and gas refining companies to diversify their supplier base creates enhanced opportunities for junior companies. Ever increasing demand (particularly from emerging markets) requires expansion of refining capacity. The IEA expects 2010 world oil demand to be at 86.2 mn bpd (an increase of 140,000 from its October forecast) based on the recovery in global markets. In view of this, coupled with the low investment scenario during 2009, we believe oil product prices and oil tanker freight rates will increase over the short to medium term.

5.3. Coal & Consumable Fuels

COAL

The primary uses of coal are as an input for power generation and steel manufacturing, but it is also used in the production of cement and chemicals. Coal provides for 26.5% of global primary energy needs and supplies 41.5% of the world's electricity generation. Asia is the largest consumer, accounting for 54% of global coal demand, led by China. However, the top 5 individual coal producing countries are geographically diverse: China, the US, India, Australia and South Africa. Most coal is consumed domestically; only around 18% of global hard coal production is exported.


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The global coal market grew by 20.7% to USD338.6 bn in 2008 and is expected to reach USD610.2 bn by 2013 at a CAGR of 13%. In volume terms, the global coal market grew by 4.6% in 2008 to 6 bn tonnes and is expected to reach 8 bn tonnes by 2013 at a CAGR of 6% Source: Datamonitor.

Exhibit 45: Coal demand by sector (2002) Exhibit 46: Coal demand by sector (2030E)

69%

16%

12%3%

Power generation Industry Other Residential

79%

12%

1%8%

Power generation Industry Other Residential

Source: WCI, IEA

Driven by the Asian market, coal is expected to hold its share among fuels used for electricity generation. Steel production will be another key demand growth driver, led by the construction, infrastructure and auto sectors in Asian countries. While demand for steam coal is projected to grow by 1.5% per year during 2002-2030, demand for coking coal is expected to increase by 0.9% per year Source: World Coal Institute.

Key growth drivers

Worldsteel’s October forecast of an 8.6% decline in Apparent Steel Use (ASU) in 2009 is nevertheless an improvement from its April forecast of a 14.1% decline. Worldsteel forecasts 9.2% growth in ASU to 1,206 Mt in 2010, implying a recovery to 2008 levels. While the US, the Eurozone, India, Japan and South Korea are expected to see double digit growth, China’s ASU growth in 2010 is expected to slow to 5% due to a high base effect following growth of almost 19% in 2009, which was fuelled by the government stimulus program Source: Worldsteel.

With major world economies showing signs of a recovery and industrial production picking up, demand for thermal coal for electricity generation should see healthy growth in the near future. India in particular, as an electricity deficit countrywith a coal-oriented electricity infrastructure, will be a major driver of demand for thermal coal. Electricity generation in non-OECD Asia, where two-thirds of total electricity is generated from coal, is expected to increase from 4.4 tn kWh in 2006 to 7.3 tn kWh by 2015. Non-OECD Asian countries are expected to account for 90% of projected growth in world coal consumption during 2006-2030 Source: EIA.

Coal reserves

Recoverable coal reserves are found in over 70 countries, led by the US, Russia, China, India and Australia, which together account for more than 75% of the world’s total proven reserves as of 2006. Regionally, the Asia-Pacific (led by China, India and Australia), Eurasia (led by Russia, Ukraine and Kazakhstan) and the US have the largest share of world coal reserves. As of 2008, R/P ratios suggested that the world's coal reserves would last for 122 more years.


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Exhibit 47: World coal reserves 2008

Country / RegionProved reserves

(Mt) Share R/P ratioUS 238,308 28.9% 224North America 246,097 29.8% 216South & Central America 15,006 1.8% 172Russian Federation 157,010 19.0% 481Ukraine 33,873 4.1% 438Kazakhstan 31,300 3.8% 273Europe & Eurasia 272,246 33.0% 218South Africa 30,408 3.7% 121Africa & Middle East 33,399 4.0% 131China 114,500 13.9% 41India 58,600 7.1% 114Australia 76,200 9.2% 190Asia Pacific 259,253 31.4% 64World 826,001 100.0% 122


Coal and climate change

Due to its relatively low cost and worldwide abundance, coal is likely to remain the key fossil fuel for power generation for many years to come. As a result, there is a concerted effort to develop technologies to reduce or eliminate emissions of CO2 and other GHGs in coal-fired electricity generation plants. While the interest and investment in the development of clean coal technologies is a consequence of coal’s widespread availability and lower cost, further advancements in clean coal technologies also bode well for the coal industry and are likely to result in an increased interest in coal as the preferred fuel for electricity generation in the longer term.

Carbon Capture & Storage (CCS)

CCS has the potential to cut CO2 emissions by 80%-90%. CCS technology involves the capture of CO2 and indefinite storage in geological formations so that it is not released into the atmosphere. Using CCS technology, CO2 can be pumped into near depleted oil and gas fields for enhanced oil recovery (EOR), prolonging the life of oil and gas fields. CCS has been demonstrated successfully at a number of small-scale coal-fired electricity plants around the world. However, a fully integrated large-scale demonstration plant has yet to become operational, with 2020 being the target date for commercial readiness for fully-integrated coal CCS plants. ZeroGen, the first commercial-scale coal-fired Integrated Gasification Combined Cycle (IGCC)-CCS power plant, is expected to come on-stream in Queensland, Australia in 2015. Several other commercial-scale plants have been proposed for commissioning up to 2020, the majority of which are in the UK, Europe, Australia and the US.


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Exhibit 48: Some upcoming commercial-scale, integrated, coal-fired CCS projects

Project Location Generation capacity TechnologyZeroGen Australia 530 MW IGCC-CCSHydrogen Energy - BP and Rio Tinto Australia 500 MW CCSGreenGen China 250 MW IGCC-CCSDynamis - Hypogen Europe 250 MW CCSRWE Germany 400-450 MW IGCC-CCSVattenfall Germany 250 MW CCSProgressive Energy UK 800 MW IGCC-CCS, EORPowerfuel UK 900 MW IGCC-CCSE.ON UK 450 MW IGCC-CCSE.ON UK 2 X 800 MW CCSRWE nPower UK 1000 MW CCSCarson Project US 500 MW CCSFutureGen US 275 MW IGCC-CCS

Source: WCI, 2007; primary sources

Efficiency improvements

Increasing the efficiency of coal-fired electricity generation plant results in lower CO2 emissions, while making the plants more suitable for CCS retrofits. Considerable efforts are being put into this area, with the aim of replacing existing plants over a period of 10-20 years with high efficiency supercritical (SC) and ultra-supercritical (USC) plants. Each one percentage-point increase in the efficiency of a conventional pulverized coal-fired (PCF) plant can result in up to a 2%-3% reduction in CO2 emissions. While a conventional PCF plant can achieve an efficiency level of 39% at the higher end, a SC plant can achieve up to 46% efficiency and a USC can reach 50%-55% efficiency.

Integrated Gasification Combined Cycle (IGCC)

IGCC technology combines coal with oxygen and steam to produce syngas (a mixture of H2 and CO), which is then used in a gas turbine to produce electricity. Waste heat generated in the gas turbine can then be reused to produce steam to drive turbines, generating additional electricity. As of 2007, there were four commercial-scale, coal-based IGCC demonstration plants in operation around the world. IGCC can be integrated with CCS systems, and most proposed CCS projects include IGCC technology. The main challenge in commercializing IGCC is its significant cost premium (20%-25%) over conventional PCF plants. However, industry players expect this premium to decline to 10% upon deployment, through design and engineering cost savings, optimization of the integration technology, gains derived from operating experience, and the establishment of a supply chain with enhanced volume and standard components Source: GE Energy.

Exhibit 49: Commercial-scale, coal-based IGCC demonstration plants

Location Fuel Generation capacityCommencement of

operationBuggenum, Netherlands Coal / Biomass 250 MW 1994Polk, US Coal / Petcoke 250 MW 1996Puertollano, Spain Coal / Petcoke 335 MW 1997Wabash, US Coal / Petcoke 260 MW 1995

Source: WCI, 2007

Underground Coal Gasification (UCG)

In this in-situ gasification process, air or oxygen is injected into a coal seam, resulting in conversion of un-mined coal intoa combustible gas which can then be extracted for use in power generation or industrial heating. Although this technology has great potential, its use remains limited to a few relatively minor projects, as the process needs further improvement for larger scale implementation.


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Coal Mine Methane (CMM)

While 14% of global GHG emissions are accounted for by methane, coal mining’s share in global anthropogenic methane emissions stands at 9%. Methane trapped in coal mines can, however, be recovered and used commercially, either through transmission by pipelines or use as a power generation fuel at mine site power stations. While CMM or coal bed methane (CBM) is already an important source of energy in the US and Australia, other countries are also gradually recognizing its potential.

Key players

Some of the largest companies in the Coal & Consumable Fuels primary industry are listed in China, the US and Australia. China Shenhua Energy Co. is the largest company in the industry by market cap and revenues. Outside of the Coal & Consumable Fuels primary industry, other major coal producers include mining majors Rio Tinto, BHP Billiton and Vale.

Exhibit 50: Top 10 traded companies in the Coal & Consumable Fuels primary industry

CompanyMarket cap (USD mn)

EV (USD mn)

TTM revenues (USD mn)

TTM EBITDA

(USD mn)EV / TTM revenues

EV / TTM EBITDA

TTM P/E

China Shenhua Energy Co. Ltd. (SEHK:1088) 101,626 105,880 17,245 8,088 6.1x 13.1x 23.6x

China Coal Energy Company Limited (SEHK:1898) 23,505 20,513 7,081 1,566 2.9x 13.1x 25.5x

Shanxi Xishan Coal and Electricity Power Co. Ltd. (SZSE:000983)

14,538 14,893 1,840 651 8.1x 22.9x 36.2x

Cameco Corp. (TSX:CCO) 12,513 14,504 6,385 1,460 2.3x 9.9x 20.3xPeabody Energy Corp. (NYSE:BTU) 11,928 13,071 2,858 727 4.6x 18.0x 23.0xCONSOL Energy Inc. (NYSE:CNX) 9,773 8,323 3,056 736 2.7x 11.3x 23.5xShanxi Lu'an Environmental Energy Development Co., Ltd. (SHSE:601699)

8,955 10,043 4,602 1,317 2.2x 7.6x 15.8x

Yanzhou Coal Mining Co. Ltd. (SEHK:1171)

8,934 8,986 2,493 637 3.6x 14.1x 21.5x

Coal & Allied Industries Ltd. (ASX:CNA)

6,792 6,601 2,382 405 2.8x 16.3x 31.7x

Pingdingshan Tianan Coal Mining Co., Ltd. (SHSE:601666) 6,651 6,334 2,906 527 2.2x 12.0x 23.4x

Coal & Consumable Fuels industry 332,370 347,092 117,161 34,073 3.4x 12.0x 27.7x

Source: Capital IQ

International coal trade

Although most coal is consumed domestically, it is also one of the 5 main bulk commodities traded globally, and the number two seaborne dry bulk in terms of ton-miles after iron ore (3,750 bn ton-miles in comparison to 4,790 bn for iron ore in 2007). The share of coal in overall seaborne trade stood at 11%, while its share of total dry bulk seaborne trade stood at 18% in 2007. The primary destinations for both thermal and coking coal are the EU and Japan, which accounted for more than half of global coal imports in 2007. While Indonesia is the largest thermal coal exporter in the world (Indonesia and Australia together accounted for more than half of global thermal coal exports in 2007), Australia leads in coking coal exports Sources: UNCTAD, World Coal Institute.

Chinese demand for coking coal has rebounded strongly this year, with a fivefold increase in imports on a y-o-y basis to 26 Mt for the first nine months of 2009. Total coal imports by China more than doubled during the same period to 86 Mt. As a result, China is expected to become a net importer of coal this year, which should lead to a structural change in the international coal market. NYSE-listed coal major Peabody Energy, with assets in Australia, has already set up a trading hub in Singapore and a representative office in Jakarta in order to facilitate expanding trading opportunities for the company in the Asia-Pacific region. We expect continued growth in Chinese demand for thermal and coking coal with rising demand for electricity and increase in steel production leading to enhanced trading opportunities in coal.


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Exhibit 51: Largest coal exporters (2008)

0

50

100

150

200

250

Australia Indonesia Russia Colombia US South Africa

China

Mt

Coking coal Steam coal

Source: WCI

Exhibit 52: Largest coal importers (2008)

020406080

100120140160180200

Japan Korea Taiwan India Germany China UK

Mt

Coking coal Steam coal

Source: WCI


The Coal & Consumable Fuels primary industry has seen brisk activity in both M&A activities and fundraising from the public markets this year. While M&A activities in fact grew in 2008, there was a significant drop in the number of public offerings following the global economic downturn. This year, the industry has seen 38 public offerings (excluding the recent IPO of Rio Tinto’s US coal mining unit Cloud Peak Energy) so far, up from only 18 last year.

Exhibit 53: M&A deal value in the Coal & Consumable Fuels primary industry

5.0

7.0

9.0

11.0

13.0

15.0

2005 2006 2007 2008 2009-YTD

US

D b

n

Source: Capital IQ


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Exhibit 54: No. of public offerings in the Coal & Consumable Fuels primary industry

10

20

30

40

50

2005 2006 2007 2008 2009-YTD

Source: Capital IQ

In the first three quarters of 2009, Chinese companies completed 61 M&A deals (across sectors) with a value of USD21.2 bn. In 2010, Chinese M&A activity is expected to focus on the energy and metals & mining space as the world’s fastest-growing large economy seeks to enhance its energy and supply security. While China has the world's third-largest coal reserves, it is the world's biggest producer, which puts it in a precarious situation with regards to reserve depletion; China's R/P ratio of just 41 years is the lowest of the major coal producers (compared to 481 for Russia, 224 for the US and 190 for Australia). Therefore, we expect Chinese acquisitions of foreign coal assets to increase. Moreover, despite the rally in commodity prices in recent months, valuations remain cheap compared to the pre-crisis period, which Chinese players are likely to capitalize on over the near-to-medium term.

Yanzhou Coal Mining Co.’s (Yanzhou) USD2.9 bn acquisition bid for Felix Resources of Australia is the first big-ticket bid in the Coal & Consumable Fuels industry in 2009. If successful, it will also be China’s biggest acquisition in Australia.

Below, we compare the proposed Yanzhou-Felix deal with valuations for other industry firms listed on the ASX and the NYSE. Based on consensus June 2011 estimates, the Yanzhou-Felix deal does not look overly expensive; transaction multiples are below 3-year average multiples, which illustrates that valuations are still attractive compared to the pre-slowdown period.

Exhibit 55: Yanzhou-Felix transaction multiples

Multiple FY 2010E FY 2011EEV-to-Sales 6.08 3.86EV-to-EBITDA 17.15 9.61P/BV 4.93 4.20

Source: Capital IQ, Bloomberg, IIR Group

Exhibit 56: EV-to-Sales multiples

Company3 year range

3 year average

1 year range

1 year average Current

2 year forward

Coal & Allied Industries Ltd. 2.08 - 7.55 4.47 2.08 - 4.90 2.63 2.19 3.44Felix Resources Ltd. 1.48 - 17.21 5.36 1.48 - 4.00 2.98 3.75 3.58Yanzhou Coal Mining Co. Ltd. 1.12 - 7.88 3.80 1.14 - 4.20 2.40 4.20 3.40Peabody Energy Corp. 1.24 - 5.64 3.15 1.24 - 2.30 1.64 2.25 2.20Whitehaven Coal Ltd. 1.38 - 18.20 6.27 1.38 - 5.15 3.00 4.23 3.94CONSOL Energy Ltd. 1.05 - 6.16 2.55 1.05 - 2.30 1.63 2.16 1.99Peer group average N/A 4.27 N/A 2.38 3.13 3.09

Source: Bloomberg, IIR Group


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Exhibit 57: EV-to-EBITDA multiples

Company3 year range

3 year average

1 year range


2 year forward

Coal & Allied Industries Ltd. 4.50 - 55.51 21.99 4.50 - 18.86 6.62 4.73 10.90Felix Resources Ltd. 2.33 - 5.92 4.14 2.33 - 5.92 4.14 4.64 8.07Yanzhou Coal Mining Co. Ltd. 2.55 - 21.41 10.01 2.79 - 12.10 6.40 12.10 9.75Peabody Energy Corp. 4.58 - 31.05 14.77 4.58 - 9.66 6.20 9.47 9.53Whitehaven Coal Ltd. 46.93 - 52.39 0.00 - 0.00 N/A N/A 14.45CONSOL Energy Ltd. 4.82 - 43.42 14.23 4.82 - 9.43 7.08 8.46 7.04Peer group average N/A 19.59 N/A 6.09 7.88 9.96


Exhibit 58: P/BV multiples

Company3 year range

3 year average

1 year range


2 year forward

Coal & Allied Industries Ltd. 4.01 - 11.29 7.11 4.01 - 8.22 5.14 4.92 3.84Felix Resources Ltd. 1.61 - 8.86 3.47 1.61 - 4.70 3.38 4.67 3.97Yanzhou Coal Mining Co. Ltd. 0.52 - 4.10 2.06 0.58 - 2.47 1.38 2.43 1.99Peabody Energy Corp. 1.49 - 8.92 4.26 1.49 - 3.33 2.45 3.25 2.84Whitehaven Coal Ltd. 0.58 - 5.89 2.47 0.71 - 2.56 1.65 2.51 1.99CONSOL Energy Ltd. 2.35 - 17.39 6.76 2.35 - 5.14 3.81 4.79 3.41Peer group average N/A 4.36 N/A 2.97 3.76 3.01


Some of the largest M&A deals completed in the last 12 months include the merger of Foundation Coal Holdings with Alpha Natural Resources and the acquisition of Prodeco’s Colombian coal assets by the world’s largest exporter of thermal coal, Xstrata plc. The following tables list some of the largest transaction activities in the Coal & Consumable Fuels industry over the past 12 months.

Exhibit 59: Largest 10 M&A deals in the last 12 months

Target companyTransaction

value (USD mn) Buyer / investorFoundation Coal Holdings Inc. 2,062.3 Alpha Natural Resources, Inc. (NYSE:ANR)Prodeco 2,000.0 Xstrata plc (LSE:XTA)Rio Tinto Energy America, Inc., Jacobs Ranch Mine 764.0 Arch Coal Inc. (NYSE:ACI)

PT Bukit Makmur Mandiri Utama 550.0 PT Delta Dunia Petroindo Tbk (JKSE:DOID)Mitteldeutsche Braunkohlengesellschaft mbH 514.8

Severoceske Doly AS; J&T Finance Group, A.S.

Pangaea Group of Companies, Exploration Permit ATP 788P

468.4 Origin Energy Ltd. (ASX:ORG)

Bogatyr and Severny coal assets 345.0 JSC Samruk-Energo

Coal & Allied Industries Ltd. (ASX:CNA) 311.1 N/ACementos Argos, Export Coal and Logistic Assets 305.8 Vale S.A. (BOVESPA:VALE5)

Gloucester Coal Ltd. (ASX:GCL) 302.9 Noble Group Ltd. (SGX:N21)

Source: Capital IQ


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Exhibit 60: Largest 10 private placements in the last 12 months

IssuerTransaction

value (USD mn) InvestorSouthGobi Energy Resources Ltd. (TSXV:SGQ)

500 Fullbloom Investment Corporation

Murray Energy Corporation 494 N/A

Paladin Energy, Ltd. (ASX:PDN) 369 N/A

Straits Asia Resources Limited (SGX:AJ1)

300 Standard Chartered Bank Singapore

Drummond Company, Inc. 245 N/ANRP (Operating) LLC 200 N/AWhitehaven Coal Limited (ASX:WHC)

155 N/A

Denison Mines Corp. (TSX:DML)

82 Korea Electric Power Corp. (KOSE:A015760)

Solazyme, Inc. 57Harris & Harris Group, Inc. (NasdaqGM:TINY); VantagePoint Venture Partners; The Roda Group; Lightspeed Venture

Partners; Braemar Energy Ventures

Biomethanol Chemie Nederland B.V.

45 Waterland Private Equity Investments BV

Source: Capital IQ

Exhibit 61: Largest 10 public offerings in the last 12 months

Issuer Issue size (USD mn)Cameco Corp. (TSX:CCO) 321Arch Coal Inc. (NYSE:ACI) 298UK Coal plc (LSE:UKC) 169Lubelski Wegiel Bogdanka S.A. (WSE:LWB) 164Penn Virginia GP Holdings LP (NYSE:PVG) 107Patriot Coal Corporation (NYSE:PCX) 95China Qinfa Group Limited (SEHK:866) 81Denison Mines Corp. (TSX:DML) 72Mega Uranium Ltd. (TSX:MGA) 48Extract Resources Ltd. (ASX:EXT) 44

Source: Capital IQ

Outlook

Our outlook for coal is upbeat, with definite signs of recovery in the global economy expected to support demand for thermal coal in electricity generation. While most growth will be accounted for by emerging economies, particularly China and India, there will be support from the US, with 4,300 MW of new coal-fired generation capacity coming on-stream there by the end of 2010, and overall increase in US electricity generation as the economy recovers. Demand for coking coal will also continue to see strong growth in 2010, as we believe only a fraction of China’s incremental procurement of met coal this year has been stockpiled, with the ramping up of Chinese steel production and closing of small coal mines in the Shanxi province. The 42.4% y-o-y increase in Chinese steel production in October 2009 Source: Worldsteel indicates an expectation that Chinese steel demand is sustainable. We also believe the secondary inventory build up is not sufficient to stunt the recovery in the industry, as we continue to see growth in Chinese steel production through 2010, as well as an increase in utilization rates at steel plants in Japan, South Korea, the US and Europe. Prices are expected to remain firm with an upward bias, based on healthy demand expectations and a reduction in primary inventory, led by the early recovery in demand and production cuts in 2009.


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URANIUM

Nuclear energy’s share in the global Total Primary Energy Supply (TPES) was 6.3% in 2005, up from less than 1% in 1973, giving it the biggest jump (+5.4 ppts) in TPES share over the same period, ahead of natural gas (+4.7 ppts). Among OECD countries, nuclear energy's TPES share grew at an even stronger rate (+9.7 ppts to 11%). While the US leads the world in nuclear electricity generation (with 29% of world production), France is the country most heavily reliant on nuclear energy, with 79% of its domestic electricity supply coming from nuclear fuel in 2005 Source: IEA.

From 1980 to 2007, nuclear electricity generation grew at a CAGR of 5.1%, peaking at 15.8% between 1980 and 1985 but falling to just 1.9% between 1989 and 2007 Source: EIA. This is attributable to a decline in the growth rate of electricity generation in Europe and North America during the period, low crude oil prices between 1986 and 1999 shifting the focus away from nuclear power, a focus on cleaner technologies and steady growth in thermal electricity generation. Furthermore, concerns regarding safety, technology transfer and supply of nuclear fuel, coupled with significant capex requirements, have limited the uptake of nuclear energy beyond the developed world and the former Soviet Union.

The world's major producers of uranium include Canada, Australia, the former Soviet states of Russia, Kazakhstan and Uzbekistan, and Africa's Namibia and Niger.

Exhibit 62: World uranium production in 2008

21%

20%

19%

10%

8%

7%

5%

3%

7%

Canada Kazakhstan Australia Namibia Russia Niger Uzbekistan US Rest of the world

Source: www.wise-uranium.org

Key growth drivers

According to the EIA’s projections, nuclear power generation will reach a CAGR of 1.5% during 2006-2030, hitting 3.8 tn KWh. Once again, non-OECD Asia is expected to lead this growth, with a CAGR of 7.8%, including 8.9% in China and 9.9% in India Source: EIA. This growth will be partially offset by easing in countries such as Germany and Belgium, where there are plans to phase out nuclear programs in favour of renewables.

Uranium resources

Uranium is relatively abundant in the earth’s crust, as common as tin and zinc. The 15% increase in known uranium resources in the two years to 2007 illustrates that there may be significantly more uranium resources than already known. As prices rise, the recoverable resource base will also grow, as extraction of certain resources becomes economically viable. Australia currently has the largest recoverable uranium resources in the world, followed by Kazakhstan and Russia. With a current usage rate of 65,000 tU per annum, the present known recoverable resource base would last 82 years more.


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Exhibit 63: Known recoverable uranium resource (as of 2007)

Country Resource (tU) ShareAustralia 1,243,000 23%Kazakhstan 817,000 15%Russia 546,000 10%South Africa 435,000 8%Canada 423,000 8%US 342,000 6%Brazil 278,000 5%Namibia 275,000 5%Niger 274,000 5%Ukraine 200,000 4%Jordan 112,000 2%Uzbekistan 111,000 2%India 73,000 1%China 68,000 1%Mongolia 62,000 1%Others 210,000 4%World 5,469,000 100%

Source: WNA

Uranium exploration

Historically, there have been only two uranium exploration cycles: the first took place between 1945 and 1958, driven by military needs; the second occurred during 1974 and 1983, reflecting civil nuclear power requirements. Global uranium exploration expenditure amounted to USD774 mn in 2006 and remained flat in 2007. According to the WNA, a third exploration cycle (2003-2009) will see spending of USD3.4 bn on exploration and deposit delineation across 600 projects. During this period, more than 400 junior mining companies were either formed or changed their orientation, raising over USD2 bn for exploration activities. Growth in exploration expenditure has led to a threefold increase in known uranium resources since 1975. However, at current price levels, we do not anticipate significant further investment in new mine exploration.

Key players

The supply of uranium is highly concentrated, with the world's top 10 uranium mining companies accounting for 87% of global production. The world’s top 10 uranium mines are owned by Cameco, Rio Tinto, BHP Billiton, ARMZ, AREVA and Uranium One. Cameco’s McArthur River mine in Canada is the world’s largest uranium mine in terms of production (15% of the world uranium production in 2008) and accounts for almost all of the company’s uranium output. Rio Tinto’s uranium production comes from its Ranger mine in Australia and Rössing mine in Namibia, the second and third largest mines in terms of production respectively. More than 60% of the world’s uranium production in 2008 came from the largest 10 mines.


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Exhibit 64: The world’s largest uranium producers (2008)

Company Production (tonnes) ShareRio Tinto 7,975 18%Cameco 6,659 15%AREVA 6,318 14%KazAtomProm 5,328 12%ARMZ 3,688 8%BHP Billiton 3,344 8%Navoi 2,338 5%Uranium One 1,107 3%Paladin 917 2%General Atomics 636 1%Top 10 38,310 87%World total 43,930 100%

Source: WNA

International uranium trade

The world’s major uranium exporting countries include Australia, Canada, Russia, Canada, Namibia and Niger, while major importers include France, Japan and the US. With the US and Europe together accounting for 66% of the world’s supply of nuclear electricity these two regions act as a key driver for international trade in uranium. Geographically the other two important demand drivers of uranium are Japan and South Korea. The EU imports uranium mainly from Canada, while Australia is the lead exporter of uranium to the US. The world’s leading two uranium exporters generate very little nuclear electricity between themselves. While Canada produces only 3% of the world’s total generation of nuclear electricity, Australia does not generate any nuclear electricity at all.

Whereas most production of coal goes towards domestic consumption, the world's major uranium consumers produce little of their uranium requirements domestically, relying instead on imports and exposing themselves to energy supply risks. The US, for example, is the world’s largest nuclear electricity generator (807 bn KWh or 31% of world production in 2007 according to the EIA), but it depends on uranium imports for 86% of its nuclear electricity generation.

Exhibit 65: Origin countries of supply of uranium to US nuclear plants in 2008

Country Supply (tonnes) ShareAustralia 4,907 24%Russia 4,646 23%Canada 3,766 18%US 2,969 14%Namibia 1,492 7%Kazakhstan 1,468 7%Others 1,272 6%Total 20,520 100%

Source: www.wise-uranium.org


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Exhibit 66: Origin countries of supply of uranium to EU nuclear plants in 2008

Country Supply (tonnes) ShareCanada 4,757 26%Russia* 3,272 18%Australia 2,992 16%Niger 1,862 10%Kazakhstan 1,072 6%Uzbekistan 1,070 6%Others 3,597 19%Total 18,622 100%

* "Highly unreliable" figure according to Euratom Supply AgencySource: www.wise-uranium.org

Outlook

While the world's nuclear electricity generation capacity is presently concentrated in the US and EU, future capacity growth is expected to be led by emerging economies in Asia and Eastern Europe. According to the IAEA, 52 new reactors were under construction as of 01 August 2009, with a cumulative capacity of 46 GW. 36 of these 52 new reactors are being built in China, India, Russia and South Korea. However, half of these projects have already run into construction delays. While the mean age of the 435 reactors in operation around the world is 25 years, the mean life of the 123 reactors which have already been shut down is 22 years. Although the average age of nuclear power plants in operation has steadily risen over the years, the long life of some of the 123 shut reactors (26 operated for 30+ years and 15 operated for 40+ years) cannot be replicated, especially in smaller reactors with very low burn-up fuel. Notwithstanding the lack of visibility on the replacement of ageing reactors and delays encountered by many of the new units under construction, the long term potential of nuclear electricity continues to be healthy, with most of the new demand expected to come from emerging markets. In the near-to-medium term we believe robust growth in Chinese nuclear power generation will act as the key growth driver for uranium while supply bottlenecks will keep the demand-supply situation tight. However, we do not anticipate significant growth in uranium exploration activity at current price levels. Prices should continue to receive support in the near term from the outage at BHP Billiton’s Olympic Dam mine in Australia (the world’s fourth largest uranium mine accounting for more than 7% of 2008 production). However, prices may see some softness in 2010 with the resumption of full-scale activity at Olympic Dam and the US DOE’s planned sale of uranium from its stockpile.

5.4. Ferrous & Base Metals

Chemically, all naturally occurring non-ferrous elements which react with diluted acid to form hydrogen, are known as base metals. Base metals are ductile and malleable, having high tensile strength and good conductivity for heat and electricity. Base metals are abundant in the earth's crust, relative to bullions, with aluminium comprising approximately one twelfth of the crust. Due to their inherent characteristics and widespread availability, base metals are used as key inputs in many areas including the automotive, construction, infrastructure and packaging industries. Aluminium and copper are the most economically significant base metals, while others like lead, nickel, tin and zinc have more specialized uses. The ferrous metals sector, which comprises iron and steel (which have similar properties to base metals) also plays a major role in secondary industries, and accounts for the greatest share of revenues in the metals and mining industry.

STEEL

The steel industry is the largest segment of the global metals and mining industry in terms of revenues. Global steel output grew at a CAGR of 4.9% from 1996 to 1,327 Mt in 2008. The global steel market is highly competitive and fragmented. In 2008, the top 10 global steel producers contributed only 27.9% of total steel output, led by Arcelor Mittal (7.7%), Nippon Steel (2.8%) and China’s Baosteel Group (2.7%). Geographically, China is the driving force behind growth in the steel industry, being the biggest producer and consumer of steel, contributing 37.7% of world steel production in 2008. Few steel players are integrated, with a small number of exceptions such as US Steel and Tata Steel, strengthening miners' market power in the supply chain. Over the longer term, steel is expected to face strong competition from aluminium, plastics and advanced carbon allotropes such as fullerene. Aluminium and plastics are already being used as steel substitutes in key consuming industries such as automotive, packaging and transportation, due to their low weight and high durability.


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Exhibit 67: Key market players in steel industry (All figures are in USD mn except ratios)

CompanyMarket

Cap EV TTM

Revenues TTM

EBITDAEV/TTM

RevenueEV/TTM EBITDA TTM P/E

Arcelor Mittal 55,607 81,461 68,557 702 1.2x 115.1x N/APOSCO 35,339 40,100 34,848 5,970 1.2x 6.7x 14.9xCompanhia Siderurgica Nacional 26,630 30,074 6,647 2,654 4.5x 11.3x 7.8xNippon Steel Corp. 23,661 44,328 41,629 3,672 1.1x 12.1x N/AGerdau S.A. 23,417 32,071 17,395 2,398 1.8x 13.4x 66.0xBaoshan Iron & Steel Co., Ltd. 18,924 27,097 21,548 1,797 1.3x 15.1x N/AJFE Holdings Inc. 17,828 34,822 34,628 4,211 1.0x 8.3x 106.8xThyssenKrupp AG 16,315 20,714 66,706 2,045 0.3x 10.1x N/AOJSC Novolipetsk Steel 15,403 16,092 8,401 2,348 1.9x 6.9x 30.5xSteel Authority of India Ltd. 15,456 13,123 9,499 1,639 1.4x 8.0x 11.5x

Source: Capital IQ

Exhibit 68: Geographic distribution of world steel production (2008)

China37.7%

India4.2%Japan

8.9%CIS8.6%

NAFTA9.3%

EU (27)14.9%

Other Asia7.2%

Others9.2%

Source: World Steel Association

Steel sector trends

Demand-supply scenario

World steel production and consumption grew at a CAGR of 6.5% and 6.2% respectively during 2003-2008, reflecting robust growth in infrastructure and construction activities in emerging economies, particularly China and India. However, amid the economic downturn beginning in 2H 08, this trend has been sharply reversed; full-year production and consumption growth figures dipped to -1.8% y-o-y (-3.5% y-o-y excluding China) and -0.9% y-o-y during 2008 Source: World Steel Association. This has prompted global steel producers to trim their production levels in order to maintain demand-supply equilibrium.


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Exhibit 69: Annual growth in steel production

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2002 2003 2004 2005 2006 2007 2008

World World excluding China China


The driving force: The Chinese steel industry

In the world's fastest-growing large economy, driven by aggressive infrastructure and development plans, Chinese steel output grew at a CAGR of 18.7% to 500.5 Mt during 2001-2008. However, after the onset of the economic downturn in 2H 08, demand-led growth in production fell from 15.7% in 2007 to 2.3% in 2008. This sharp drop in demand has prompted Chinese steel producers to seek hefty cuts in annual contract rates for raw materials in 2009.

Exhibit 70: Steel production and consumption trends

800

900

1,000

1,100

1,200

1,300

1,400

2003 2004 2005 2006 2007 2008

World steel production (Mt) World steel consumption (Mt)


Key developments

With the recent downturn in the global economy, developing country governments have unveiled a range of infrastructure- and development-related stimulus packages to support an economic recovery. This includes the RMB4 tn (USD586 bn) stimulus package in China, which led to the re-commissioning of idle steel mills and a new peak in Chinese steel production in August 2009. This depleted the country's iron ore stockpile, driving iron ore prices up from a low of


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USD59.1 per in March 2009 to USD86 per tonne as of October 2009. Meanwhile, hot-rolled coil prices have rebounded from a low of USD382 per tonne in June 2009 to USD551 per tonne as of October 2009.

IRON ORE

Iron ore is one of the main raw materials used in producing steel. World iron ore production grew at a CAGR of 7.9% during 1999-2008 to 1.7 bn tonnes, led by Vale (17.7%), Rio Tinto (9.0%) and BHP Billiton (6.5%). China remained the world's biggest iron ore producer in 2008 (21.5%), followed by Australia (20.6%).

Exhibit 71: Major iron ore producers (All figures are in USD mn except ratios)

CompanyMarket

Cap EV TTM

Revenues TTM

EBITDAEV/TTM


BHP Billiton plc* 167,527 173,835 50,535 20,167 3.4x 8.6x 28.6xVale S.A.* 128,437 140,373 31,547 13,218 4.4x 10.6x 21.7xRio Tinto plc* 105,203 146,174 45,918 14,066 3.2x 10.4x 126.4xNMDC Limited 39,450 33,265 1,498 1,146 22.21 29.02 45.8x

* Diversified mining company Source: Capital IQ

Iron ore sector trends


Approximately 98% of global iron ore production is in turn used to manufacture steel, with 1.6 tonnes of iron required to produce 1 tonne of steel. Iron ore prices remained muted and range-bound between 1982 and 2002, before breaking out in 2003 in response to sharp growth in the Chinese steel industry. However, the recent economic downturn caused a slump in prices from a peak of USD132 per tonne in 2008 to USD60-USD65 per tonne in 2009. However, spot rates recovered in 2Q 09, as a new, stimulus-driven peak in Chinese steel production exhausted the country's iron ore stockpile.

Exhibit 72: Contracted iron ore prices (USD per tonne)

0

20

40

60

80

100

120

140

1979

1984

1989

1994

1999

2004

2009

Source: Econstats


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Exhibit 73: Spot iron ore prices (USD per tonne)

0

50

100

150

200

25020

05

2006

2006

2007

2008

2008

2009

Source: Econstats

The price cartel

The top three iron ore producers - Vale, Rio Tinto and BHP Billiton - together account for around one-third of global iron ore output, and control two-thirds of global seaborne iron ore trade. This effective cartel has been strengthened by the recent joint venture between BHP Billiton and Rio Tinto, combining their iron ore operations, as well as Aluminum Corporation of China’s failed bid to take a major stake in Rio Tinto. While contract rates negotiated each year between the mining companies and the Chinese steel lobby (CISA) have previously acted as a benchmark for global iron ore prices, this mechanism has come under mounting pressure during 2009, with mining companies refusing to accommodate Chinese demands for cuts of up to 40% y-o-y. As a result, Chinese steel producers have had to resort to spot markets in order to secure their iron ore requirements.

Exhibit 74: Major players in global iron ore trade

32.8%

18.6%17.1%

31.5%

Vale Rio Tinto BHP Others

Source: Raw Materials Group


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Outlook

Large-scale capacity growth and the fragmented nature of the steel industry have weakened its fundamentals. Coupled with growing competition from substitutes, we are bearish long term on steel prices. However, over the near-to-medium term, we expect prices to be supported by government stimulus activity.

Cartelized pricing and surge in steel consumption due to government stimulus spending on infrastructure will lead to surge in iron ore prices over the near to medium term. In line with this, we anticipate a sharp rise in annual contract rates for iron ore during 2010. However, the iron ore sector also faces a significant concentration risk, with almost its entire output dependent upon the condition of the steel sector. Therefore, over the longer term, we are also bearish on iron ore, particularly when demand for steel normalizes in China.

Exhibit 75: Bloomberg price forecasts (USD/tonne)

Commodity Spot 1Q 10 2Q 10 3Q 10 2010 2011 2012 2013Hot Rolled Steel 535 529 544 556 553 N/A N/A N/AIron Ore Fines 105 N/A N/A N/A 107 110 96 N/ACopper 6,766 5,950 5,750 5,900 5,900 6,453 6,724 6,283Aluminium 1,997 1,828 1,866 1,900.00 1887.00 2226.00 2384 2,300

Source: Bloomberg

Industry transaction activity – Iron and Steel

Although it remains fragmented, the steel industry has witnessed significant consolidation over the last 5 years, including the creation of Arcelor Mittal, Tata Steel's acquisition of Corus plc, as well as the amalgamation of a number of smaller-scale Chinese producers with Baosteel. Meanwhile, the most significant activity in the iron ore sector has been the failed bid by Aluminum Corporation of China to take a major stake in Rio Tinto, and the subsequent formation of a joint venture between Rio Tinto and BHP Billiton. Meanwhile, Vedanta plc acquired India's Sesa Goa, and major steel producers such as Arcelor Mittal, Posco and Tata Steel have attempted to secure access to iron ore mines. The decline in commodity prices and drying up of capital following the financial crisis has dampened investment in the iron and steel sectors. Laden with a large and growing debt burden, iron and steel companies were forced to tap equity markets in order to service their debt. However, falling commodity prices depressed share prices, leading to dilution of equity at low price levels, further weakening prospects for long term investors. However, some signs of recovery have emerged, with iron and steel prices rebounding and Rio Tinto's successful USD15.2 bn public offering. Look for more steel companies to approach markets with offerings in future, as they attempt to de-leverage their balance sheets and fund their acquisition plans.

Exhibit 76: Major iron and steel transactions over the past 5 years

Date Target/Issuer Transaction Types

Total Transaction

Value (USD mn) Buyers/InvestorsJan-06 Arcelor SA Merger 45,963 Mittal Steel Oct-06 Corus Group Limited Acquisition 14,853 Tata Steel Limited

Feb-08 Rio Tinto plc Acquisition 14,140 Aluminum Corporation Of China Limited

Jun-09 Rio Tinto plc Public Offering 12,107 N/AMar-05 WMC Resources Ltd. Acquisition 7,976 BHP Billiton plc Mar-07 Boehler-Uddeholm AG Acquisition 5,100 Voestalpine AG

Jul-07 Chaparral Steel Company Acquisition 4,532 Gerdau Ameristeel Corp.

Dec-06 JSC Mikhaylovsky GOK Acquisition 3,600 Lebedinsky Mining and Dressing Plant JSC

May-05 Hylsamex SA de CV Acquisition 3,113 The Techint GroupOct-08 Nacional Minerios S.A. Private Placement 3,000 Nisshin Steel Co. Ltd. ; Kobe Steel Ltd.Source: Capital IQ


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COPPER

Copper is used as a thermal conductor, an electrical conductor, a building material, and a constituent of various metal alloys. Global copper production increased at a CAGR of 2.6% to 18.2 Mt during 1999-2008. Geographically, Chile and Peru are the biggest copper producers and exporters, with China being the largest consumer. In 2008, US miner Freeport-McMoRan Copper & Gold contributed 9.9% of total world copper production, followed by Chile’s state-owned Corporación Nacional del Cobre de Chile (Codelco, 8.5%).


Traditionally, copper has derived its value from its application as a conductor of electricity. However, the abundance and relatively low price of aluminium prompted rapid substitution. Copper demand remained depressed throughout the 1990s, but picked up from 2002, led by emerging markets, until the slump in commodity prices in 2H 08. Copper demand has recovered from its recent lows, with China beginning to rebuild inventories and Chinese copper mining companies recommissioning idle capacity.

ALUMINIUM

Aluminium is the world's most abundant metal, making up 8.3% of the earth's crust. Accordingly, it is widely used across a range of industries, including the automotive, construction and packaging sectors, which account for three-quarters of global aluminium demand. Due to its lightness and high tensile strength, it is rapidly displacing steel in the automotive industry, while it has already unseated copper as the preferred metal for conducting electricity. Aluminium production bases are spread across the globe, with China alone contributing more than one-third of global output. Worldwide production grew at a CAGR of 2.9% to 39.7 Mt during 1998-2008. Geographically, China is the largest aluminium producer (34% of world production in 2008), followed by Russia (11%) and Canada (8%).


Demand for aluminium is pro-cyclical, as major end-markets such as the automotive and construction industries are highly susceptible to macroeconomic conditions. However, we see immense growth potential in light of the outlook for the aforementioned end-markets in emerging economies. However, aluminium is facing competition from substitutes such as glass, paper and plastics in the packaging industry, and advanced composites in construction and aerospace transportation.

Supply conditions remain fundamentally weak due to the large resource base, high recycling rates, and large-scale capacity expansion over the last 5 years, especially in China.

Exhibit 77: Largest 10 industry transactions in the last 12 months

Date Target/Issuer Transaction TypesTotal Transaction Value (USD mn) Buyers/Investors

Jun-09 Rio Tinto plc Public Offering 12,107 N/AApr-09 Arcelor Mittal Public Offering 2,850 N/A

May-09 Siderurgica Del Orinoco, C.A. Merger/Acquisition 1,970 Corporacion Venezolana de Guayana

May-09 Bluescope Steel Ltd. Public Offering 1,131 N/ASep-09 Vale Overseas Limited Public Offering 992 N/A

Jan-09Usinas Siderúrgicas de Minas

Gerais S.A. Merger/Acquisition 776 Nippon Steel Corp.

Apr-09 United States Steel Corp. Public Offering 750 N/AFeb-09 Aricom plc Merger/Acquisition 517 Petropavlovsk PLC

Feb-09 Fortescue Metals Group Ltd. Private Placement 468 Hunan Valin Iron & Steel Group Co. Ltd.

Jun-09 V. S. Dempo & Company Pvt. Ltd. Merger/Acquisition 338 Sesa Goa Ltd. Source: Capital IQ


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Dependence on energy

The aluminium industry is among the most energy-intensive sectors in the world economy, accounting for approximately 3% of global electricity use. Typically, the smelting process releases 1.6 tonnes of CO2 per tonne of aluminium and another tonne of CO2 equivalents in fluorocarbon emissions. Therefore, rising energy costs are a significant concern for the industry, squeezing margins in recent years.

Base metal prices

LME spot prices serve as a benchmark for base metals. Low demand and abundant supply kept prices depressed from the mid-1980s until the turn of the century. However, resurgence in infrastructure and construction activity in emerging economies began to stimulate price growth in 2002. Demand for aluminium and copper surged in the electrical industry, as emerging economies expanded their electricity generation and transmission grids. Demand was sharply hit in 2H 08 with the onset of the economic downturn, with projects being cancelled due to a shortage of capital. In turn, this led to a pile-up of inventories and a slump in metal prices to multi-year lows. Demand has since rebounded, with prices broadly doubling since their recent lows.

Exhibit 79: LME copper price trend (USD per tonne)

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

LME Copper Spot Prices (USD per tonne)

Source: Bloomberg

Exhibit 78: Key players in the base metals sector (All figures are in USD mn except ratios)

CompanyMarket

Cap EV TTM

Revenues TTM

EBITDAEV/TTM


Rio Tinto plc* 105,203 146,174 45,918 14,066 3.2x 10.4x 126.4xFreeport-McMoRan Copper & Gold Inc.**

34,889 44,607 12,497 4,335 3.6x 10.2x N/A

Aluminum Corporation Of China Limited

15,427 24,195 9,226 (49) 2.6x N/A N/A

Alcoa, Inc. 12,998 25,042 18,694 212 1.3x 118.1x N/AVedanta Resources Plc 10,718 17,406 6,579 1,856 2.65 9.38 167.12Norsk Hydro ASA 8,509 8,302 12,859 187 0.6x 44.4x N/AChina Zhongwang Holdings 5,337 4,428 1,726 615 2.6x 7.2x 11.0xNational Aluminium Co. Ltd. 5,240 - 920 156 N/A N/A 41.3xHindalco Industries Ltd. 4,745 9,743 14,137 606 0.7x 16.1x 40.2xShandong Nanshan Aluminum Co. 2,447 2,537 982 131 2.6x 19.4x 50.7x

*Diversified mining company with significant aluminium business, **Copper mining company Source: Capital IQ


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Exhibit 80: LME aluminium price trend (USD per tonne)

0

500

1,000

1,500

2,000

2,500

3,000

3,50019

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

LME Aluminium spot prices (USD per tonne)

Source: Bloomberg

Outlook

We do not believe that demand fundamentals justify the sharp rise in base metal prices over recent months. Instead, we expect demand to trail levels observed during the previous commodity super-cycle, with the automotive, construction and electronics sectors still feeling the effects of the downturn; robust demand in emerging economies is expected to be offset by weakness in developed economies. Moreover, key players suffer from heavily-leveraged balance sheets, reducing their bargaining power; the fact that they must maintain cash flows at all times prevents them from lowering output, in effect making them price takers. Therefore, our near-to-medium term outlook is neutral with a negative bias. Over the longer term, however, we expect prices to climb robustly, led by higher demand from emerging markets and decommissioning of higher-cost plants, as well as growing substitution of aluminium for steel in the automotive and construction industries. Downside risks include the abundance of supply, high energy costs and high recycling rates.

Industry transaction activity – Base Metals

Over the last 5 years, the base metals sector has seen a number of consolidation deals, including Rio Tinto’s acquisition of Alcan, the merger of various Eurasian aluminium mining companies to form Rusal, the consolidation of smaller aluminium companies into Aluminum Corporation of China, the acquisition of Phelps Dodge Corporation by Freeport-McMoRan and the acquisition of Novelis by Hindalco. Most of these deals were financed by debt, meaning that the downturn in commodity prices in 2H 08 has left some base metal companies unable to service debt repayments. Moreover, poor demand-supply dynamics and high operating costs have given investors cold feet, with cash calls from firms such as Hindalco receiving lukewarm responses. Meanwhile, although Rio Tinto successfully raised USD15.2 bn from its equity offering in June 2009, our view is that investors were betting on its iron mining operations rather than its aluminium operations. Therefore, going forward, we believe that base metals firms will continue to find it difficult to attractinvestment, especially in relation to their ferrous metal counterparts.

Exhibit 81: Bloomberg price forecasts (USD/tonne)

Commodity Spot 1Q 10 2Q 10 3Q 10 2010 2011 2012 2013Hot Rolled Steel 535 529 544 556 553 N/A N/A N/AIron Ore Fines 105 N/A N/A N/A 107 110 96 N/ACopper 6,766 5,950 5,750 5,900 5,900 6,453 6,724 6,283Aluminium 1,997 1,828 1,866 1,900 1,887 2,226 2,384 2,300

Source: Bloomberg


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Exhibit 82: Major base metals deals over the last 5 years

Date Target/IssuerTransaction

TypesTotal Transaction Value (USD mn) Buyers/Investors

Jul-07 Alcan, Inc. Acquisition 43,561 Rio Tinto GroupMar-07 Phelps Dodge Corporation Acquisition 25,900 Freeport-McMoran Corp.Feb-07 Novelis Inc. Acquisition 6,033 Hindalco Industries Ltd.Sep-05 Sifa Acquisition 1,272 Pernod-Ricard SA Apr-09 China Zhongwang Holdings Ltd. Public Offering 1,265 N/ANov-03 Rio Tinto Alcan, Inc. Public Offering 1,240 N/AApr-07 Noranda Aluminum, Inc. Acquisition 1,150 Noranda Aluminum Hold Corp.Mar-06 Asia Aluminum Holdings Ltd. Acquisition 1,125 N/AMar-07 Aluminum Corporation Of China Ltd. Public Offering 1,057 N/A

Source: Capital IQ

5.5. Gold & Other Precious Metals & Minerals

GOLD

Precious metals differ from other commodities by virtue of their non-destructive nature and high recycling rate. While other commodities like base metals and fossil fuels are consumed and depleted over time, gold has little industrial use (around 85% of gold demand is accounted for by jewellery and investment).Therefore, of the 163,000 tonnes of gold ever mined, 98% is still available for use. Jewellery accounts for half of the world's above-ground gold stock, while investment and central bank holdings account for over one-third. The top 3 holders of gold are the US, Germany and the IMF.

Exhibit 83: Average gold supply flow (2004-2008) Exhibit 84: Average gold demand flow (2004-2008)

68%

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Jewellery Investment Industry

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Mined Production Sales Net Central Bank Sales

Recycled gold (scrap)

Source: World Gold Council Source: World Gold Council

Loosening of South Africa's grip and the rise of China

South Africa has been a hub of gold mining for over a century, contributing more than half of the world's current above-ground gold stocks. However, reserve depletion and rising safety standards have led to a slide in gold mining activity in South Africa. From over two-thirds in the early 1970s (around 1,000 tonnes per annum) South Africa’s share of world gold production has gradually fallen to 9.8% as of 2008 (232 tonnes), with mining companies shifting focus to other markets. China has now become the world's largest producer of gold, contributing 12.2% of global output in 2008 (288 tonnes).


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Counter-cyclical price movement

Gold derives most of its economic value from its use as a hedge against uncertainties, attracting investment during times of political or economic disruption. For example, events of the 1970s (stagflation, the Islamic revolution in Iran, the later stages of the Vietnam war, oil crises in 1973 and 1979) caused gold prices to soar beyond USD800 per oz (USD2,000 per oz, adjusted for inflation) in 1980. However, as economic and political conditions stabilized, gold prices slumped, only to recover at the turn of the century to coincide with the collapse of technology stocks in 2002. The 2008 financial crisis, which has been referred to as the most severe economic crisis since the Great Depression, provided renewed momentum. Considering gold's apparent tendency for counter-cyclical growth, there may be a slide from current levels once the global economic outlook brightens.

Exhibit 85: Spot gold price trend

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Role of central banks

Production from new mines has only partially offset falling output from Africa and the US, leading to lower overall gold production. Approximately 2,400 tonnes of gold is being mined per annum at present, and we expect the current trend in production to continue over the near-to-medium term. However, secondary supplies from recycling and sales of gold by central banks have been on the rise since the early 1990s. Therefore, despite falling gold production, overall gold supplies have remained relatively flat.

Exhibit 86: Gold supply breakdown (Tonnes)

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Hedging Central bank sales Scrap recycling Mine Supply

Source: Bloomberg


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Key players

Generally, gold mining becomes viable at rates higher than 0.5 grams of gold per tonne of ore. Gold exploration typically involves long lead times, and depletion of existing mines has raised capital requirements for new exploration. Excluding exploration costs, the cost of mining gold varies from USD300 to USD600 per oz, depending upon ore quality and labor costs. At current prices (above USD1,000 per ounce) existing gold producers are enjoying EBITDA margins of approximately 50%. The top three gold mining companies, Barrick Gold Corporation, Newmont Mining Corporation and AngloGold Ashanti Limited, produced 239 tonnes, 162 tonnes and 155 tonnes respectively in 2008, amounting to 32.6% of global gold output, illustrating the strong concentration ratio in the gold mining industry.

Exhibit 87: Key gold industry players (All figures except ratios in USD mn)

CompanyMarket

Cap EVTTM

RevenuesTTM

EBITDA EV/TTM

RevenuesEV/TTM EBITDA TTM P/E

Barrick Gold Corporation 40,928 39,930 8,062 3,071 5.0x 13.0x N/AGoldcorp Inc. 30,224 30,113 2,415 1,077 12.5x 28.0x 22.7xNewmont Mining Corp. 24,038 27,664 6,587 2,628 4.2x 10.5x 30.3xZijin Mining Group Co. Ltd. 15,311 15,765 2,637 739 6.0x 21.3x 30.9xAngloGold Ashanti Ltd. 15,147 15,641 3,764 237 4.2x 65.9x N/ANewcrest Mining Ltd. 15,127 15,243 2,322 944 6.6x 16.1x 64.4xKinross Gold Corporation 12,983 13,315 2,198 975 6.1x 13.7x N/AGold Fields Ltd. 10,577 11,812 4,084 1,551 2.9x 7.6x 29.3xOJSC Polyus Gold 9,913 9,252 1,020 426 9.1x 21.7x 228.1xAgnico-Eagle Mines Ltd. 9,003 9,449 461 177 20.5x 53.5x 147.9x

Source: Capital IQ


Recently, gold mining companies have raised significant amounts of capital through public offerings and private placements of new shares. Barrick Gold raised USD3.5 bn in a public offering in order to square off its hedging positions on gold contracts, taking advantage of rising spot prices. Newmont, raised more than USD2 bn in order to acquire a majority interest in its joint venture mine with AngloGold. No major merger or acquisition activities have taken place in the gold mining industry of late, although there has been a high degree of restructuring.

Exhibit 88: Largest ten industry transactions in the past 12 months

Target/Issuer Transaction type Transaction

Value (USD mn) Buyer/Investor SellerBarrick Gold Corporation Public Offering 3,501 N/A N/A

AngloGold Ashanti Ltd. Merger/Acquisition 1,277Paulson & Co.

Inc.Anglo American

plc Newmont Mining Corp. Public Offering 1,110 N/A N/ANewmont Mining Corp. Public Offering 1,087 N/A N/A

Boddington Project, W. Australia Merger/Acquisition 990Newmont

Mining Corp. AngloGold Ashanti

Ltd.Goldcorp Inc. Private Placement 774 N/A N/ABarrick Gold Corporation Public Offering 739 N/A N/A

Moto Goldmines Limited Merger/Acquisition 565AngloGold Ashanti Ltd

Electrum Strategic Holdings

Newcrest Mining Ltd. Private Placement 513 N/A N/AKinross Gold Corporation Public Offering 361 N/A N/ALihir Gold Ltd. Private Placement 333 N/A N/AWestern Goldfields Inc. Merger/Acquisition 311 N/A N/A

Source: Capital IQ


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Investment trends

Weakening dollar and attempts to diversify forex reserves may support gold prices

The weakening of the US dollar and attempts by various governments to diversify their forex reserves could provide support to gold prices, even in the event of an economic recovery. While India has already purchased 200 tonnes of gold from the IMF, China has also shown an inclination to increase its gold reserves in order to diversify its USD2 trillion forex reserves. If China were to allocate 10% of its forex reserves to gold at current prices, it would need to purchase approximately 9,000 tonnes of gold, absorbing roughly 4 years of primary gold production and tightening the demand-supply balance.

Exhibit 89: Largest holders of gold as of 19 November 2009

Rank Country / Organisation Gold (tonnes) Gold as % of forex reserves1 United States 8,134 78.9%2 Germany 3,413 71.5%3 IMF 3,017 N/A4 France 2,487 72.6%5 Italy 2,452 66.5%6 China 1,054 0.9%7 Switzerland 1,040 41.1%8 Japan 765 2.2%9 Netherlands 613 61.7%10 India 558 6.0%

Source: World Gold Council, IMF

Improving economic outlook to diminish gold’s hedging value

Gold prices jumped in 2H 08 as prospects for the global economy deteriorated amid the financial crisis and investors sought a safe haven in safer assets such as Treasuries and gold. The high degree of uncertainty in markets at the time is reflected in the CBOE's Volatility Index (VIX), shown below. However, prompt action by key governments and central banks has helped to restore a measure of liquidity to markets.

Exhibit 90: VIX trend

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Today, with a general consensus forming that the world economy has bottomed out and that a recovery is emerging, capital is beginning to exhibit risk-seeking behaviour. Therefore, we anticipate a shift in portfolio allocation from gold to other asset classes, primarily equities, over the near-to-medium term. In our view, therefore, gold prices will peak in the near term and slide over the next few years.


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Exhibit 91: Bloomberg price forecasts

Investment Current 2010 2011Gold (USD/oz) 1,145 1,041 1,000Expected Return (9.1%) (12.7%)Silver (USD/oz) 18.53 16.00 15.30Expected Return (13.7%) (17.4%)S&P 500 1,095 1,139 1,103Expected Return 4.0% 0.7%NASDAQ Composite 2,157 2,220 2,198Return 2.9% 1.9%FTSE 100 5,267 5,620 5,588Expected Return 6.7% 6.1%Nikkei 225 9,549 10,739 11,127Expected Return 12.5% 16.5%

Source: Bloomberg

SILVER

Silver trails gold in the bullion market due to its relatively abundant resource base. Gold has traded at over 60 times silver over the last 10 years, while the global silver supply stood at 25,174 tonnes in 2008, compared to 3,770 tonnes for gold. Gold comprises 4 parts per mn (ppm) of the earth's crust, while silver accounts for 75 ppm. Industrial applications, primarily in electronics and photography, account for two-thirds of silver consumption, while the balance is used in discretionary applications such as jewellery, silverware and numismatics. Peru, Mexico and China account for around 60% of global silver production, while China, India and the US are the leading consumers (70% of industrial demand).

Supply has been relatively stable

As with most other commodities, silver mining's centre of gravity has been shifting towards China, away from other regions. While silver production from Mexican mines, previously the biggest contributor, is on the decline due to depletion of reserves, production from China and Australia has been increasing due to development of new projects. During 1999-2008, primary silver production from mining increased at a CAGR of 2.0% to 680.9 Moz. However, growth in silver mining has been offset by a fall in secondary supplies (government sales and scrap recycling) of 4.3% CAGR over the same period. As a result, silver supplies have remained relatively flat over the past decade.

Exhibit 92: Breakdown of silver supply (Moz)

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Recycling Government Sales Mine

Source: Silver Institute


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Demand scenario

Unlike gold, silver is widely used in industry, especially in electronics and photography, as well as seeing jewellery and investment demand. Silver compounds, such as silver bromide and silver halides, are used in development of colour films. However, with the advent of digital photography, silver usage in the photography sector has declined steadily, from 228 Moz in 1999 to 105 Moz in 2008.

Exhibit 93: Silver demand trend (Moz)

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Investment Jewellery, Silverware & Coins Photography Industrial Application


However, silver consumption in other industries has increased from 339 Moz in 1999 to 447 Moz in 2008, driven largely by electronic appliances. Because it has higher conductivity than base metals, silver is used as a conductor in a wide range of devices, from televisions to computers. It is also used in the coating of storage disks (CDs and DVDs). Silver consumption is also expected to be lifted by the growing popularity of silver batteries, at the expense of lithium batteries.

With the advent of new technologies such as Radio Frequency Identification (RFID) and consumer preference for mobile devices, we are optimistic about silver demand for use in the electronics industry. However, overall growth will be limited by falling consumption in the photographic sector (with the recent move away from photograph development to digital storage). Meanwhile, higher silver prices could dent discretionary silver demand for jewellery. Supplies are expected to rise in the future as a result of growth in production in China and a potential surge in secondary supplies, as investors book profits on silver bets and shift into other asset classes. Supply fundamentals are further weakened by the industry's fragmented nature and a lack of large specialist players. The top 5 silver mining companies together accounted for 23.1% (158 Moz) of global primary supply in 2008, while many of the large players in the industry, such as BHP Billiton, are diversified and derive a relatively low share of revenues from silver operations. With these players focusing their bargaining activity on commodities which generate greater shares of total income, bargaining power in the silver industry is weak and players tend to be price takers.

DIAMOND

Diamonds are carbon allotropes formed under high pressure, high temperature conditions over long periods. They are amongst the strongest and sharpest naturally occurring substances. The relatively small share of natural diamonds with specific colour and clarity (around 20%) tend to be used in jewellery, while less aesthetically pleasing diamonds are used in industry for cutting and grinding, because of their hardness, as well as for their electrical conductivity and thermal resistance. Supplies were monopolized by De Beers during the twentieth century, however the discovery of new diamond mines in varied locations such as Australia, Russia and Canada has wrested control from the diamond giant. The industry is now joined by a number of players such as BHP Billiton, De Beers, Rio Tinto and Russia's Alrosa, although De Beers still holds a market share of more than 40%.

Geographically, the world's major diamond mines are concentrated in southern Africa, which contributes roughly half of global supply. Australia, Canada and Russia have emerged as new supply centres with the discovery of new mines. Meanwhile, polishing and trading are concentrated in Antwerp, Belgium. However, Surat in western India, with its abundant cheap labour, is emerging as a rival hub for diamond processing.

The value of a diamond depends on its carat weight, colour, cut and clarity. Therefore, there is no reliable, comprehensive benchmark for diamond prices. However, average diamond prices are tracked and reported in industry


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journals such as the Rapport Diamond Report, Ajediam Antwerp Diamonds Monthly and The Gem Guide. Diamond demand and prices rose during 2003-2008 as growth in disposable income boosted discretionary spending on items such as jewellery. However, the onset of the economic downturn in 2H 08 has limited discretionary spending, with prices reacting accordingly (see chart below). We anticipate a rebound as the global economic recovery takes hold.

Exhibit 94: Average of all diamond indices

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Source: Polishedprices.com

PLATINUM GROUP METALS (PGM)

The PGM rubric refers to six metals: iridium, osmium, palladium, platinum, rhodium and ruthenium. They posses similar physical and chemical characteristics and generally occur together in small traces. They are rare, varying from 1 ppm to 5 ppm in concentration in the earth's crust, in comparison to 4 ppm for gold. They have specific uses in the electronics sector and as catalysts in the chemicals sector. Meanwhile, platinum and palladium are both used in the jewellery sector, as an alternative to gold.

Exhibit 95: Palladium (rhs) and platinum (lhs) spot price trend (USD/oz)

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Palladium Platinum


Outlook

Gold prices have risen over the last few years to record levels and the metal appears to have regained its position as a store of value during the recent economic turmoil. Countries with large forex reserves such as China and India have started diversifying their reserves away from traditional assets such as US Treasuries and have accumulated physical gold, leading to a huge spike in prices. As the US dollar continues to depreciate, gold continues to rise in value. We expect this trend to continue over the near to medium, supporting rise in gold prices. However, we believe that gold and silver have moved above their long term fundamentals, and expect prices to slide over the medium-to-long term after the


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halt in dollar decline and completion of Chinese diversification of its forex reserves. Meanwhile, we expect prices for PGM commodities to stagnate over the next few years.

Exhibit 96: Bloomberg price forecasts (USD/oz)

Commodity Current 2010 2011 2012 2013Gold 1,145 1,041 1,000 975 900Silver 18.5 16.0 15.3 14.0 13.0Platinum 1,443 1,362 1,450 1,375 1,350Palladium 367 273 325 375 435

Source: Bloomberg

6. Case Study: Junior Mining & Exploration

Prices of gold, silver, platinum and other precious metals soared after 2002, before being hit by the effects of the financial crisis. With recovery taking hold, prices have risen once again, driven by high demand and limited global mine supply. Junior exploration companies stand to benefit most from this trend.

Junior mining companies explore for new deposits of precious metals, base metals, coal and oil and gas, targeting properties that are believed to have significant potential. The typical business model of a junior mining company is to acquire land, explore and produce or sell its assets to a larger mining company. Junior exploration companies are an important source of future capacity, as they identify potentially mineral rich properties, prove the resources and facilitate the ramping-up of new production. Employing geologists, geophysicists and engineers, junior mining companies are able to measure the economic viability of a mining property. They play a critical role at the beginning of the E&P value chain, bridging the long gestation period between striking of new deposits and bringing them into production.

Junior mining companies depend almost entirely on capital markets and private sources for exploration financing, as their cash requirements are significant and they are unable to generate revenues until production begins, much later. Although they tend to be a risky investment for this reason, they also have the potential to deliver very high returns if they are able to locate rich new deposits.

The Joint Ore Reserves Committee (JORC) and National Instrument 43-101 (NI 43-101) play an important role in ensuring a flow of investment to junior mining companies. These instruments contain a set of rules and regulations for stating and making available information regarding mineral properties owned or explored by junior mining companies. Compliance with these instruments reassures investors and lenders regarding the viability of a company's mineral projects.

Key factors underlying investment rationale

For potential investors, it is important to examine the company’s portfolio of mining projects and understand the nature of each project in the pipeline. Several particularly important factors are discussed below.

Property/project location

Location is vital. Prospects located near currently or formerly operating mines are usually considered safer investments than purely greenfield projects, where deposits have never been found. Moreover, this kind of location will typically have ready access to road, rail, water and electricity infrastructure, further enhancing a project's viability. Weather is also a keyfactor; for example, the exploration season can be short in northern Canada due to severe winters, whereas mining may be carried out year-round in Mexico.

Quality of management

Junior mining companies generally have very small management teams; therefore, the calibre of the management team is of utmost importance. The team should comprise geological engineers with plenty of experience in the precious metals sector. Investor conviction rises where the management team has worked together in the past and has a proven track record of success. Junior mining being a very capital intensive proposition, proven management ability to negotiate deals and successfully raise capital is another crucial factor.


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Regulatory environment

Certain countries are more mining-friendly than others. Political pressures can force governments to impose populist restrictions and penalties. Therefore, junior companies possessing mineral-rich reserves in mining-friendly locations with lower regulatory burdens are to be preferred.

Supply/demand conditions and mineral prices

Share prices of junior mining companies can be volatile due to the inherent risks associated with their business model, as well as their links to commodity market supply/demand and pricing conditions. Diverse factors impact on precious metal prices; gold, for example, affected by macroeconomic expectations, inflation, the strength (or weakness) of the US dollar and holdings of physical gold by central banks.

Rising investor interest

Junior mining companies which meet the criteria listed above present highly attractive investment opportunities. Therefore, stock prices for such firms can increase rapidly on announcement of a new discovery or speculation of an acquisition. Junior mining companies are a significant component of the London Stock Exchange's AIM, and have attracted great interest, with trading volumes growing from GBP4.9 bn in 2001 to GBP75.0 bn in 2007, before falling to GBP49.2 bn in 2008. These trends mirror the overall commodities market, and helped the AIM index to rise from 600 in December 2002 to more than 1,200 by 2006.

Exhibit 97: Junior mining companies trading on AIM

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Source: The London Stock Exchange

Exhibit 98: The London Stock Exchange AIM Index movement

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Source: Bloomberg


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Here are a few examples of AIM-listed junior mining companies which have experienced rapid share price movement, and the potential risks involved:

� Oriel Resources PLC (AIM:ORI): the company’s share price leapt from GBp40.5 to GBp99.25 on 03 March 2008, driven by speculation that Russian mining giant Mechel was considering a bid. Mechel eventually placed a bid on 03 March 2008, at a 13.7% premium to the 29 February 2009 closing price.

� Minco Plc (AIM:MIO): the company's share price appreciated from GBp9 on 18 December 2003 to GBp35.25 on 09 February 2004 on receiving a licence for the La Laguna Silver Project. The resource was estimated to contain 55 Moz of silver and 130,000 Oz of gold.

� Toledo Mining Corp Plc (AIM:TMC): the share price jumped from Gbp126.5 on 21 November 2006 to Gbp475 on 07 June 2007 on speculation that the company would be taken over as nickel prices rallied.

� Highland Gold (AIM:HGM): this share appreciated from GBp175 on 04 December 2008 to GBp248 on 11 January 2008, after an announcement that Roman Abramovich was to take a 40% stake in the company.

Canada's TSX-Venture exchange shows similar trends. The chart below shows the TSX-Venture index nearly tripling since 2002, until the end of the commodity price boom.

Exhibit 99: TSX-Venture exchange movement since 2002

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During this period, many junior mining stocks on TSX-Venture saw rapid share price appreciation, with several examples given below:

� Aurelian Resource (TSX:ARU): this junior gold mining company's discovery in Fruta del Norte, Ecuador, in April 2006 led to a jump from CAD0.20 to CAD10 in just eight months. The company was eventually acquired by Kinross Gold Corporation in October 2008 for CAD1.2 bn (USD1.1 bn), which represented a 63% premium to Aurelian's 20 day volume-weighted average price on as of 24 July 2008.

� Afriore Limited (TSX:AFO): this stock traded at CAD0.29 in July 2004, rising to CAD8.72 by May 2007, driven by a platinum discovery in South Africa. AFO was bought out by Lonmin for CAD8.75 a share.

� Virginia Gold Mine (TSX:VIA): this share leapt from CAD1 to CAD13 during 2004-2006, driven by positive reaction to major discoveries in Eleonore, Quebec, in 2004. Goldcorp announced that it would acquire the Eleonore project for a 43% premium to VIA's 10-days share price as of 05 December 2005.

Other mining-heavy stock exchanges have exhibited similar trends, but Canada's TSX leads all exchanges in terms of the number of listed mining companies. However, growth in such listings has been led by AIM, due to its relative liquidity and depth, which is conducive for facilitating significant capital raisings, as well as a relatively lenient regulatory framework.


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Between 2002 and 2008, the junior mining sector witnessed significant investment, reflecting strong growth in demand for metals and high prices. However, following the onset of the economic crisis in 2H 08, many hedge funds and retail investors have pulled funds, forcing many to file for bankruptcy. Junior mining companies were hardest hit because of their exceptionally high capital requirements and long payback periods. Acquisitions of junior mining companies saw a similar trend, with transaction numbers rising strongly between 2002 and mid-2008, but easing since. In the case of gold, the number of below-USD250 mn acquisitions rose from 42 in 2002 to 195 in 2007, but tailed off thereafter.

Exhibit 100: Junior gold acquisitions (deals below USD250 mn)

Year 2001 2002 2003 2004 2005 2006 2007 2008 Oct-09No of transactions 42 43 72 80 126 187 195 176 136

Source: Capital IQ

However, we believe that the onset of an economic recovery will reignite investor interest and capital flows towards junior mining companies. The return of capital inflows should facilitate growth in exploration activity, leading to new discoveries. With demand for minerals set to rise yet again, fundamentally strong junior mining companies will attract interest from large mining companies, in a bid to prop up their depleting reserves, generate better economies of scale and enhance bargaining power.

Junior mining transaction activity on the London Stock Exchange Main Market and AIM

Private placements

Private placements are a common tool for junior mining companies, with more than 500 such deals below USD250 mn during 2003-2008. Private placement deals in junior mining companies on AIM and the Main Market have grown by 49.5% CAGR in value over the same period. Transaction values peaked in 2007, at an average of USD20 mn each, falling to an average of USD13.2 mn in 2008. Diversified metal ore juniors were the target of the greatest number of deals, representing 37 out of 112 deals to date in 2008, followed by oil and gas exploration juniors with 29 deals.

Exhibit 101: Private placement of junior mining & exploration companies on the London Stock Exchange Main market and AIM

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Source: Capital IQ


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Exhibit 102: Largest 10 junior mining & exploration company private placements below USD250 mn from 2003-Oct 2009

Target

Total Transaction

Value (USDmn) Buyers/Investors Industry ClassificationsArtumas Group Inc. (OB:AGI) 170 N/A Oil and Gas Exploration and ProductionPolo Resources Limited (AIM:PRL) 158 N/A GoldEuropean Nickel plc (AIM:ENK) 155 N/A Diversified Metal OresGriffin Mining Ltd. (AIM:GFM) 152 Citadel Limited Diversified Metal OresSerica Energy PLC (AIM:SQZ) 113 N/A Oil and Gas Exploration and ProductionNautilus Minerals Inc. (TSX:NUS) 99 N/A Diversified Metal OresLeed Petroleum Plc (AIM:LDP) 98 N/A Oil and Gas Exploration and ProductionFaroe Petroleum plc (AIM:FPM) 93 N/A Oil and Gas Exploration and ProductionPolo Resources Limited (AIM:PRL) 88 N/A GoldChariot Oil & Gas Limited (AIM:CHAR)

88 N/A Gold

Source: Capital IQ

Merger and acquisition deals

After a 78% y-o-y jump in M&A activity in 2007, and tepid transaction levels on AIM towards the end of 2008, interest from potential acquirers is gradually rising in the junior mining space. Some of the more recent transactions include the acquisition of Strategic Natural Resources by Atlantic Coal and of Roxi Petroleum by Roditie N.V. in August 2009. 7 transactions have already taken place as of October 2009 and 5 more have been announced so far this year.

Exhibit 103: Largest 10 junior mining & exploration company M&A deals below USD250 mn from 2003-Oct 2009

Target

Total Transaction

Value (USDmn) Buyers/Investors Industry ClassificationsGCM Resources Plc (AIM:GCM) 27 N/A Coal and Consumable FuelsFalkland Oil and Gas Ltd. (AIM:FOGL)

23 N/A Oil and Gas Exploration and Production

Toledo Mining Corp. (AIM:TMC) 23 European Nickel plc (AIM:ENK)

Diversified Metal Ores

Trans-Siberian Gold plc (AIM:TSG) 20 UFG Capital Partners

Gold

Aurelian Oil and Gas Plc (AIM:AUL) 13 Kulczyk Holding S.A.

Oil and Gas Exploration and Production

Xtract Energy plc (AIM:XTR) 12 Cambrian Mining plc

Gold

Brinkley Mining Plc (AIM:BRM) 12 N/A Coal and Consumable Fuels

Petmin Limited (JSE:PET) 9 Paladin Capital Limited (JSE:PLD)

Gold

Gasol Plc (AIM:GAS) 7

Gasol Plc Prior to Reverse Merger w ith African LNG

Holdings Ltd.

Oil and Gas Exploration and Production

Brinkley Mining Plc (AIM:BRM) 6 N/A Coal and Consumable Fuels

Source: Capital IQ


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Public offerings

Capital markets are another key source of funds for junior miners, but there were few public offerings in 2008 due to a lack of interest in risky junior ventures. In 2009, there has been renewed interest as close to seven public offerings have been completed, with three - Discovery Metals Ltd, Finders Resources Limited and Meridian Petroleum plc - announced. Junior mining companies tend to approach the equity market more than once to satisfy their cash requirements.

Exhibit 105: Largest 10 public offerings below USD250 mn during 2003-Oct 2009

TargetTotal Transaction

Value (USDmn) Industry ClassificationsNamakwa Diamonds Ltd (LSE:NAD) 184 Precious Metals and Minerals

Central Rand Gold Limited (LSE:CRND) 158 Gold

Ithaca Energy Inc. (TSXV:IAE) 102 Oil and Gas Exploration and Production


Antrim Energy Inc. (TSX:AEN) 49 Oil and Gas Exploration and Production




Artumas Group Inc. (OB:AGI) 31 Oil and Gas Exploration and Production

Xcite Energy Limited (AIM:XEL) 31 Oil and Gas Exploration and Production

Source: Capital IQ

Exhibit 104: Junior mining & exploration company M&A deals below USD250 mn announced in 2009

Target/Issuer

Total Transactio

n Value (USD mn) Buyers/Investors Industry Classifications

Beacon Hill Resources Plc (AIM:BHR)

N/A Tasmania Magnesite NL Diversified Metal Ores

Archipelago Resources PLC (AIM:AR)

28.65 PT Rajawali Corporation Gold

Island Oil & Gas plc (AIM:IOG) 20.90 San Leon Energy Plc (AIM:SLE) Oil and Gas E&P

Hidefield Gold plc. (AIM:HIF) 11.82 Minera IRL Limited (AIM:MIRL) GoldVatukoula Gold Mines plc (AIM:VGM)

3.71 Canadian Zinc Corp. (TSX:CZN) Precious Metals and Minerals

Source: Capital IQ

Straight plc (STT: AIM) Sector: General Industrials

25-11-2009

Appendix – Profiles of Commodities companies listed on London Stock Exchange/AIM


25-11-09

Page 72

Methodology of company selection

We have defined the Commodities sector to include the primary energy commodities and the metals group, and have excluded agricultural commodities and commodity chemicals for the purposes of the main report. We have adopted the following criteria to arrive at the list of companies profiled in this report:

� Our universe includes commodities companies traded on the London Stock Exchange/AIM in the Oil & Gas Producers, Oil Equipment, Services & Distribution, Mining, and Industrial Metals & Mining sectors.

� As exploration & development companies are a key focus area, we did not apply a revenue minimum in selecting the companies to be profiled, as many of these companies are at early stages of the exploration process and are yet to generate revenues.

� We then considered the following factors to arrive at the final shortlist: (a) Near-equal representation by the constituent industries within the selected groups. (b) Market cap range of GBP1 mn – GBP160 mn. (c) Ideally, a free float of at least 25% of total outstanding shares. (d) Limited current analyst coverage.

Consequently, we have covered the following 19 companies in our report. following comprehensive interaction with the majority of the companies' management.

Companies profiled in the report

Arian Silver Corporation Minco plc

Chaarat Gold Holdings Ltd.* Providence Resources plc

China Biodiesel International Holding Co., Ltd. Sirius Exploration plc

Emerging Metals Ltd.* Sovereign Oilfield Group plc*

Empyrean Energy plc* Strategic Natural Resources plc

Fortune Oil Plc Toledo Mining Corporation plc

Getech Group plc Uranium Resources plc*

Maple Energy plc Velosi Ltd.

Max Petroleum plc* Xtract Energy plc

Metals Exploration plc

* We did not receive input from company management on the published company profiles.

Arian Silver Corporation (AGQ: AIM) Sector: Mining

Sub-sector: Platinum & Precious Metals

25-11-09

Page 73

Company description Arian Silver Corporation (Arian Silver) is a junior exploration and development company, with silver, gold and base metal projects in Mexico. It focuses on “brownfield” projects, enabling access to considerable infrastructure and knowledge of probable additional resource areas. Arian Silver owns/has rights/options to purchase 39 mineral concessions and has 3 major projects: – San Jose project (66.7% ownership and 2% NSR):

Located in Zacatecas, the project is spread over 6,280 Ha and comprises 11 concessions. The company will gain 100% ownership on payment of its final instalment of USD0.5 mn, due Dec 09. It also has the right to purchase the Net Smelter Royalty (NSR) for USD1.5 mn, upto Dec 09. After an independent preliminary scoping study, Arian Silver identified three mining blocks expected to sustain an approximate 4yr lifespan using contract mining and milling to yield 125,000t per year. The company estimates 500,000t resource production at San Jose to yield about 2.15 Moz of silver, 1,800t of lead and 3,100t of zinc over the 4yr lifespan. As of June 2009, the company identified JORC/NI43-101 compliant Inferred resources of 11.2 Mt grading 93.8 g/t silver, 0.39% lead and 0.83% zinc and Indicated resources of 2.2 Mt grading 127.7 g/t silver, 0.51% lead and 0.88% zinc at the San Jose Property. The company identifies that these resources are contained within 10% of the known strike length of the San Jose Vein within the Property, and that it anticipates a probable significant upside for additional resources.

– Tepal project (100% ownership and 2.5% NSR): Located in Michoacan, Tepal is a polymetallic porphyry project with gold and copper as its main metals. It covers 13,843 Ha and comprises six individual concessions. The company has two payments of USD0.9 mn and USD2.3 mn due in Jun 2010 and Jun 2011 respectively. Failure to meet these may lead to the loss of the entire rights to the Property. As of June 2009, the company identified JORC/NI43-101 compliant Inferred resources at Tepal of 54.9 Mt grading 0.41 g/t gold and 0.22% copper and Indicated resources of 24.9 Mt grading 0.54 g/t gold and 0.27% copper.

– Calicanto project (100% ownership and 3% NSR): The Calicanto project located in Zacatecas covers 80 Ha and consists of seven individual and contiguous concessions. Management has not yet identified any JORC/NI43-101 compliant resources at the project but expects to yield more than 50 Moz of silver plus gold and base metals.

Exhibit 1: Key financials

All figures in USD '000, unless specified

FY 2007A

FY 2008A

FY 2007-08 (%change)

Revenues 0 0 N/AOperating income (4,955) (3,720) 24.9%Net income (4,893) (3,689) 24.6%Fully diluted EPS (USD) (0.05) (0.03) 40.0%Net cash 3,134 753 (76.0%)P/E N/A N/ASource: Company data, IIIR research estimates

108,815

1M 3M 12M (31.5) (25.0) 4.2

FTSE AIM ALL Share Index (3.0) 15.3 64.4

Name Capital42%4%

54%100%AGQ

Grant Thornton UK LLPHayw ood Securities (UK) Ltd

National Westminster Bank PlcPKF (UK) LLP

DOR:Source: Company data, Bloomberg

Broker:

Principal area of operations:

Somatish Banerji Analyst:Managing analyst:

Company w ebsite: http://w w w .ariansilver.comShazia Naik

Mexico

Auditors: Law yers: Charles Russell LLP

Grafton Resource Investment Ltd.ManagementOthersTotal shares

ISIN number: VGG0472G1063Nominated advisor:

Capitalization

Bankers:

Market capitalization

Major shareholders

AGQ

TIDM code:

12-month price volume performance

N/ANet debt / equityPrice performance (%)

GBP13.31 mn

Head Off ice location:

Company dataStock data as of 19-11-09Price GBp3.00

United Kingdom

Last-12-month average daily trading volume (AIM)

GBP7.74 mn

Dividend yield

Country of incorporation: British Virgin Islands

52-w eek rangeShares outstanding 258.1 million (mn)

GBp2.5- GBp4.88

Satish Betadpur, CFA

N/A

Enterprise value

02004006008001,0001,2001,400

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Arian Silver Corporation (AGQ: AIM) Sector: Mining

Sub-sector: Platinum & Precious Metals

25-11-09

Page 74

SWOT

Strengths Weaknesses

JORC/NI 43-101 compliant resources – Estimated Indicated and Inferred resources of 80 Moz silver-

equivalent at San Jose based on 43 Moz silver, 125 Mlbs of lead and 250 Mlbs of zinc; and Indicated and Inferred resources of 2.55 Moz gold-equivalent at Tepal, based on 1.2Moz gold and 413 Mlbs of copper.

Strong concession portfolio – The company owns/has rights/options to purchase 39 mineral

concessions spread over 21,691 hectares.

Experienced Management team – The company has a strong Management team, with the CEO

having more than 25 years of international mining and exploration experience and the Chairman with 30 years international mining industry experience.

Advantages offered by Brownfield projects – The strategy of using previously mined sites offers the

advantage of ready infrastructure and knowledge of probable resource locations.

Cash crunch faced by the company – As of Aug 09, the company had USD0.2 mn in cash and

concession related payments of USD1.0 mn due 2H 09. It also had a short term loan from investment partner Grafton of USD0.8 mn due Oct 09. The company also needs cash for its capex and working capital needs. Although one of the concession related payments of USD0.5 mn has been made and the Grafton loan repayment date renegotiated at no cost to 31 Dec 09, lack of funding remains a key issue.

No measured resources or proven reserves yet – The company has not yet identified any reserves or

measured resources, recognition of which is highly valued by the market.

Cash generation delayed – Lack of funds resulted in no meaningful work being carried

out in the half year ended Sept 09, in all projects including San Jose, where production in the three identified blocks was due to begin in 4Q 09, delaying prospective cash generation.

Opportunities Threats

Resources, the potential cash generators – Resources and reserves act as potential cash generators as

they attract investors. The company can also generate cash by selling the final product or respective concessions.

Tepal Transaction – Sale of the Tepal Property or JV formation will ease liquidity

conditions for the company.

Unravelling of Grafton Transaction – As part of a share swap in 1Q 09, Arian Silver exchanged its

shares with that of Grafton's with the agreement that Grafton would sell its shares on behalf of Arian Silver and raise money. However, this did not happen, resulting in a cash crunch for the company. Management is currently working on unravelling the Grafton transaction which if successful could generate approximately USD5.2 mn.

Current high silver prices may attract investors and ease the fund-raising process

Threat of bankruptcy/ concession sale – Failure to arrange funds may lead to the company being a

potential bankruptcy candidate or lead to the forced sale of lucrative concessions.

Failure of Tepal Property transaction – Failure of the transaction may result in less favourable terms

for Arian Silver if it is unable to meet payback deadlines.

Key recent news 05 November 2009: Confirmed an agreement with Geologix Exploration Inc. (Geologix) for the prospective sale of Tepal. If successful, this will lead to a total cash infusion of USD3.0 mn (inc. USD0.5 mn already paid) by February 2011. Failure may lead to repayment of the USD0.5 mn or formation of a JV with Geologix for the Tepal Property. In the event of a JV formation, Geologix will take a 51% stake in lieu of additional cash payment/shares and be the JV operator.

ManagementJim Williams, Chief Executive Officer: A professional geologist with more than 25 years international mining and exploration experience and a Fellow of UK IMMM (FIMMM), a CEng and a CGeol. He is also a Eur. Ing. and Eur. Geol.

Tony Williams, Chairman: He has 30 years experience in the international mining and investment banking industry and is the founder of the Dragon Group, a finance and project management organization.The company has reviewed a draft of this profile and factual amendments have been made

Chaarat Gold Holdings Ltd (CGH: AIM) Sector: Mining

Sub-sector: Gold Mining

25-11-09

Page 75

Company description Chaarat Gold Holdings (CGH) is engaged in the exploration and development of gold in the western part of the Krygyz Republic. The company explores and develops the Chaarat license area, 604 square miles located in the mountainous area of the Sandalash River valley, on the western border of Kygyzstan. The company has a 100% interest in the exploration license area. The company was listed on London’s Alternative Investment Market (AIM) on 8 November 2007.

– Three Project Areas: There are three known areas of gold occurrences or “clusters”. They are Chaarat, Minteke and Kashkasu. The Chaarat Gold Project is the only area in which extensive prospecting has been conducted. The Chaarat Project is located at the central part of the Sandalash License Area and sericiticaly altered sulphide-rich lodes occur in three mineralized zones: the Main Zone, the Contact Zone and the Tukkubash Zone.

– Exploration: The company is in its sixth exploration season for the Chaarat project. By the end of the 2008 season, a total of 221 diamond drill holes were completed for a total of 46,631 meters drilled; 8,505 meters of prospecting trenches were excavated. At the end of the 2008 season, the drilling delineated a JORC-compliant mineral resource of 3.34 Moz Au at an average grade of 4.30 g/t gold. A prefeasibility study, which should determine the costs and benefits of a potential mine, is now expected to be completed in the first half of 2010. CGH has not yet started exploration with the Minteke and Kashkasu projects.

– The License: Chaarat Gold has a two-year license with the State Agency of Geology and Mineral Resources (SGMR). The license gives The Chaarat Group exclusive rights to conduct geological prospecting and exploration for commodities including gold and other metals in the 605 square kilometre license area. This license was issued in December 2002 and most recently was renewed until December 2010. The company is then entitled to apply for a further license period of two years, or until 2012.


All figures in USD '000, unless specified FY 2007A FY 2008A


Revenues 0 0 N/AOperating income (6,925) (11,493) (66.0%)Net income (6,540) (11,912) (82.1%)Diluted income per share (USD) (0.1) (0.2) (47.8%)

Net cash 13,128 1,375 (89.5%)P/E N/A N/A

Source: Company data, Argus Research estimates

1M 3M 12M-3.6% 21.0% 12.4%

2.8% 11.4% 25.1%

Name CapitalManagement 29.2%China Nonferrous 19.9%Cazenove 10.1%Other 40.8%Total Shares

CGH

Canaccord Adams LimitedRoyal Bank of Scotland International

GRANT THORNTON LLP

Source: Company data, Bloomberg

Principal area of operations: Kyrgyz RepublicCompany w ebsite: http://w w w .chaarat.comAnalyst(s):DOR: James Kelleher, CFA

Erin Smith, CFA

Price performance (%)

CGH


Major shareholders

FTSE AIM ALL Share Index

Market capitalization GBP 29.1 mnEnterprise value GBP 26.2 mnNet debt / equity 0.0%

Capitalization

Company data

Price GBp 25.852-w eek range GBp 8.5 - 27.8Shares outstanding 112.9 million (mn)Dividend yield 0.0Last-12-month average daily trading volume (AIM)

99,604

Stock data as of 19-11-09

TIDM code:

Auditors: Watson, Farley & Williams

ISIN number:

100.0%

Head Office location:

Nominated advisor: Canaccord Adams LimitedVGG203461055

Country of incorporation: British Virgin Law yers:

Geneva,

Bankers: Broker:

02,0004,0006,0008,00010,00012,00014,000

0

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Chaarat Gold Holdings Ltd (CGH: AIM) Sector: Mining

Sub-sector: Gold Mining

25-11-09

Page 76

SWOT


License and geographic area – CGH’s exploration area is situated within the Tien Shan gold

belt, one of the most-prolific gold producing areas in the world. The company’s license grants exclusive rights for CGH to explore this underdeveloped area for gold and metals.

Independent study – A recent independent study by SRK of Johannesburg

confirmed there is considerable potential mining opportunity in certain regions of the Chaarat Project.

License expiration – The company has had a license from the State Agency of

Geology and Mineral Resources since 2002. The current license expires in December 2010, with an option to renew for only one more two-year period. After December 2012, Chaarat must apply for a mining license.

– There is risk related to the company’s ability to receive a mining license.

Income decline – Income will likely decline as anticipated revenue from

antimony is not likely to materialize.


The Chaarat Gold Project – This is the only project with extensive exploration activity.

CGH expects five million ounce resources by the end of 2010 and expects initial gold production of over 200,000 ounces p.a. by 2012.

The Minteke & Kashkasu projects – There are future exploration and mining opportunities from

these projects. Previous prospecting found pyrite, chalcopyrite and stibnite in the Minteke region and gold mineralization in the Kashkasu region.

Global economy & impact on funding – In 2009, due to the weak economy, one of CGH’s

shareholders was forced to sell -- and this pushed the share price down. CGH needed additional funds but was unable to secure the full amount via a secondary offering. The company subsequently found another investor, which diluted existing shareholders. This sequence could be repeated.

Weather– Exploration activity can be stalled by poor weather. Typically,

there is less exploration activity during the first months of the year due to weather.

Key recent news 29 October 2009: Appointment of Chinese Directors – The Board appointed Tao Lua and David Tang as Non-Executive Directors. CGH has an agreement with China Nonferrous Metals International Mining Co. Ltd., whereby CNMIM has the right to appoint two directors as long as their interest in CGH does not fall below 10%. Currently CNMIM has a 19.9% interest.

07 September 2009: Drill Results – CGH reported encouraging results from four drill holes in the Chaarat Project. The results demonstrated the continuity of thickness and grade of mineralization that should allow the company to establish a low-cost mining operation.

ManagementChristopher David Palmer-Tomkinson, Non-Executive Chairman: From 1963, he worked at Casenove, serving as Partner from 1972 until 2001 and as Managing Director of Corporate Finance until May 2002. He was a Director of Highland Gold Mining Limited from 2002-2008.

Dekel Golan, Chief Executive Officer: Previously, he served as President of Apex Asia LDC, a subsidiary of Apex Silver Mines Limited. He has extensive experience in promoting and developing businesses in both emerging economies as well as the developed world.

China Biodiesel International Holding Co., Ltd. (CBI: AIM)

Sector: Alternative Energy Sub-sector: Alternative Fuels

25-11-09

Page 77

Company description China Biodiesel International Holding Co., Ltd. (CBI), was incorporated in 2005 and listed on AIM in June 2006. In 2006, the company took over the entire share capital of Longyan Zhuoyue New Energy Development Co Ltd (ZYNE) which had started operations in 2001.

CBI is engaged in research and development, production, and marketing of biodiesel. CBI has developed some unique, production techniques, which are protected by patents. The company produces different types of biodiesel including B1, B2 and B3 which can be used in various applications. While B1 and B2 can substitute petrochemical products in manufacturing industries, B3 can substitute conventional fuel. The company is focusing on increasing the share of B1 and B2 in its total sales as the pricing cap set by the Chinese government on diesel is not applicable to these products. Also, B1 and B2 are priced higher and return higher margins in comparison with B3.

CBI primarily sells its products in China though it is gradually entering new markets such as Europe, East Asia and North America. It also provides consultation services in the bio-energy sector. The company primarily uses used cooking oil and plant acid oils as feedstock and sources them mainly from China. However, the company is diversifying its sources of feedstock supply and has started importing feedstock from Southeast Asian countries. CBI has two core production bases, at Longyan and Xiamen in Fujian Province in southern China.

– Longyan production base: The annual capacity at Longyan base was expanded to 50,000t in August 2007 from 20,000t previously and "Postdoctoral R&D Working Station" was set up in March 2009 to focus on further scientific progress.

– Xiamen production base: This is a relatively new base where operations started in June 2008 at one production line with an annual capacity of 50,000t. This base also acts as the main repository for exports.

In total, CBI currently has an annual capacity to produce 100,000t of biodiesel. It expects to start its second production line with a capacity of 50,000t at its Xiamen plant in the near future. Further, it has plans to install a new plant in a neighbouring province (like Guangdong Province). The company also has a technical centre located in Longyan focusing on converting waste animal and plant oil to biodiesel.


All figures in RMB '000, unless specified FY 2007A FY 2008A


Revenues 124,590 164,199 31.8% Operating income 17,031 5,891 (65.4%)Net income 16,554 4,104 (75.2%)Fully diluted EPS (RMB) 0.37 0.09 (75.1%)Net cash 3,846 (20,858) N/AP/E 9.71 3.83

Source: Company data, Bloomberg, Pipal Research

130,725

1M 3M 12M (28.1) (29.4) 52.0


Name Capital72%28%

100%CBI

Evolution Securities LimitedBroker: Evolution Securities LimitedBankers:

BDO McCabe Lo Limited

Law yers:


DOR:Source: Company data, Bloomberg, Pipal Research

VGG211791097Nominated advisor:

Country of incorporation:

Sonia BakshiAnalyst:Managing analyst:

Company w ebsite: http://w w w .chinabiodiesel.cn Puneet Bhasin

British Virgin

OthersTotal shares

ISIN number:


Enterprise value

Huodong Ye

Dividend yield

Capitalization

0.08Net debt / equityPrice performance (%)


N/A

GBP5.79 mn

Head Office location: China

Major shareholders

CBI

TIDM code:


N/AAuditors:

China

Reed Smith LLP, Richards Butler in association w ith Reed Smith LLP


GBp2.38- GBp19.00


GBP4.49 mn

Shubhashish Dubey

05001,0001,5002,0002,5003,0003,500

02468

1012141618


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China Biodiesel International Holding Co., Ltd. (CBI: AIM)

Sector: Alternative Energy Sub-sector: Alternative Fuels

25-11-09

Page 78

SWOT


Expanding production base – The company’s annual production capacity has increased five

times from 20,000t in 2006 to 100,000t in 2008, enabling it to cater to the fast growing biodiesel demand in China besides achieving economies of scale.

Proprietary technology – The company’s proprietary technology (protected by patents)

to produce biodiesel from a variety of feedstock, including lower grade waste oils, gives the company a competitive advantage. The company was a pioneer in China’s biodiesel industry and has received many awards and accreditations for its technical expertise.

Favorable change in sales product mix – The company has successfully increased the proportion of its

B1 and B2 products (which carry higher price and margin besides being free from government price cap) in its total sales over the last few years. From ~27% in 2005, thecombined share (by volume) of B1 and B2 in the company’s total sales has risen to 90% in 2008 and 97% in 1H 09.

Geographical concentration in China – Although the company is gradually entering new markets

including Europe, East Asia and North America, the majority of its revenues are derived from China, thereby exposing the company to the risk of any unfavourable change impacting the Chinese biodiesel sector.

Dependence on government grants and subsidies – CBI's profitability is significantly dependent on government

subsidies and grants. The company received RMB19.7 mn and RMB16.0 mn in 2008 and 1H 09, respectively, in the form of financial grants and subsidies from the government. These grants helped the company cover up its losses and register a net profit of RMB4.1 mn in 2008 and RMB6.0 mn in1H 09.


Rapidly-growing Chinese biodiesel market – China’s growing energy needs coupled with increasing focus

on clean sources of energy are providing thrust to the demand for biodiesel. China is expected to become the largest consumer of biodiesel in the world by 2020 (as per a Cleantech Group press release of 30 June 2007).

Government support – Preferential tax polices – In 2008, the Chinese government allowed biodiesel

companies using waste animal and vegetable oils as feedstock to avail refund of VAT. Both of CBI's plants are qualified for this concession which would strengthen the company’s bottom-line going forward.

– There are other incentives, such as 10% deduction in taxable income available to an entity using waste biomass oil or waste lubricant as 100% feedstock.

Volatility in feedstock prices and biodiesel demand– The prices of feedstock used by CBI closely track the

movement in oil prices and hence are quite volatile. As a result, the company’s profitability is significantly exposed to risk from volatility in feedstock prices.

– Further, the demand for biodiesel products is also closely related to oil prices, such that when oil price fell in 2H 08, the company’s biodiesel sales volumes also contracted.

Shortage of biodiesel feedstock in China – The biodiesel sector in China faces a shortage of supply

stock in general, which could impact the company’s future feedstock supply. To counter this probable issue, CBI is safeguarding its feedstock supply by expanding its procurement network to additional areas within China as well as identifying supply channels from outside China, primarily Southeast Asian countries.

Key recent news 21 September 2009: Announced interim financial results for 1H 09. While sales volumes increased 11.9% to 15,018t from 13,418t in 1H2008, revenues declined 33.9% to RMB59.2 mn owing to decline in product selling prices. Net margin in 1H 09 improved marginally to 10.1% from 9.3% in 1H 08 primarily owing to higher government grants.

ManagementHuodong Ye, Chairman: He is the founder of ZYNE Co. which was later acquired by CBI and is also a consultant for the Ministry of Science & Technology. He has received various rewards from the government including "An Honorable Citizen" and "An Outstanding Youthful Entrepreneur".

Jian Lu, Chief Operating Officer: He joined the group as chief operating officer in 2002. Prior to that, he worked as a senior manager at two state owned enterprises, Longyan Forestry Car Manufacture Plant Limited and Longyan Forestry Holding Company.

The company has reviewed a draft of this profile and factual amendments have been made

Emerging Metals Ltd (EML: AIM) Sector: Mining

Sub-sector: General Mining

25-11-09

Page 79

Company description EML Emerging Metals Limited (Emerging Metals) is focused on investing in metals and bulk commodities where there is an anticipated imbalance in supply and demand.

– Initial Investment: The company’s initial investment was the Tsumeb Slag Stockpiles Project in Namibia, where Emerging Metals is working to potentially extract germanium, zinc and gallium.

– Diversification: More recently, Emerging Metals diversified its exposure by acquiring an interest in a company focused on the development of the recently discovered Rossing South Uranium Project in Namibia.

– Acquisitions: The company plans to acquire strategic stakes in publicly traded companies that have a focus on investment metals in addition to pursuing its strategy of investing in minor metals and minor metal projects.

– Target Metals: The investment metals that the company plans to target include all metals other than base metals (such as copper and lead) and bulk commodities metals (such as iron, potassium and aluminium).

– Strategy: The company’s exposure to investment metals will be achieved by the purchasing of physical quantities of such commodities for the trading portfolio, the acquisition of additional complementary investment metals projects and the acquisition of strategic minority stakes in publicly traded companies with a focus on investment metals.

– Trading: The company may acquire, hold, store, market and trade physical quantities of investment metals. The Directors believe that current market conditions will provide good opportunities for a positive return from the Trading Portfolio. The Directors intend to undertake the initial assessments internally with additional independent technical advice as required from time to time and on a case-by-case basis. The acquisition and disposal of investment metals to and from the Trading Portfolio will be carried out through established metals traders engaged from time to time.


All figures in GBP '000, unless specified FY 2008A FY 2009A


Revenues 78.0 11,057.0 14,076% Operating income (1,673.0) 9,739.0 N/ANet income (1,498.6) 10,005.9 N/ADiluted income per share (GBP) (0.03) 0.03 N/A

Net cash 9,056.10 3,757.96 (58.5%)P/E N/A 245.61Source: Company data, Argus Research estimates

1M 3M 12M-17.3% -1.0% 54.0%-2.1% 17.6% 53.7%

Name CapitalVidacos Nominees Ltd. 31.22%Roy Nominees Ltd. 16.35%James Mellon 8.53%Other 43.90%Total Shares

EML

Blomfield Corporate Finance LtdFox-Davies Capital Ltd

KPMG AUDIT


Country of incorporation: British Virgin Law yers:

Isle of ManPrincipal area of operations: AfricaHead Off ice location:

Analyst(s):DOR: James Kelleher, CFA

John EadeCompany w ebsite: w w w .emergingmetals.com


EML


Major shareholders

TIDM code:

Bankers: Auditors:

Kerman & Co. LLP, Harney


Capitalization

Company data

Price GBp 7.152-w eek range GBp 2.5 - 9.5Shares outstanding 330.8 million (mn)Dividend yield 0.0Last-12-month average daily trading volume (AIM) 1,142,129



Conister Trust

ISIN number:

100.00%

VGG3032P1036Nominated advisor: Broker:

05,00010,00015,00020,00025,00030,000

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Emerging Metals Ltd (EML: AIM) Sector: Mining


25-11-09

Page 80

SWOTStrengths Weaknesses

Flexibility – The company has shown the ability to alter its strategy as

industry conditions change. In April, the Board amended its business strategy to allow for a broader range of investments. The company subsequently purchased stakes in Kalahari Minerals Plc and Extract Resources Ltd., with a focus on uranium.

Low operating costs – Management has been successful in keeping costs under

control. In FY 2009, operating expenses came in as budgeted at GBP973,230, down 42% from the previous year.

Change in the executive suite – Former Chief Executive Officer Mitch Alland stepped down

over the summer, and the position is currently filled by two directors. The current structure is not likely to be sustainable over the long term, and the company will eventually need to recruit and hire a new CEO.

Declining cash position – During FY 2009, the company’s cash position decreased from

GBP9 mn to GBP3.8 mn. In order to fully take advantage of attractive mineral company asset values, the company could benefit from a deeper war chest.


Growth in emerging markets – The BRIC nations – Brazil, Russia, India and China – are

expected to post GDP growth of 5.3% on average in 2010, well ahead of expected growth in the 2% range for industrialized nations. These emerging markets are expected to have substantial demand for metals.

Attractive asset prices – In 2008, the company was reviewing numerous possible

opportunities for investments in minor metals, but prudently held off as prices were high. Since the onset of the global recession in the fall of 2008, prices have come down sharply.

Outlook for precious metals – As the US dollar declines, hard asset prices – including metals

– are expected to rise. We think the price of gold can increase another 30% into 2010. However, if central banks start to increase short-term interest rates, the metals rally could be subverted.

Emerging market balance sheets – Historically, emerging market nations have maintained deep

current account and budget deficits, which have threatened currency levels and long-term economic stability.

Key recent news 14 July 2009: The company announced that Chief Executive Officer Mitch Alland has stepped down from his position to become a Non-Executive Director of the company. Stephen Dattels and James Mellon have taken on the roles of Executive Co-Chairmen.

08 July 2009: The company announced its final results for the year ended 31 March 2009. Highlights included a 93% increase in equity shareholder funds, the acquisition of 8.04% of Kalahari Minerals Plc, healthy cash reserves of GBP3,757,960 and net profit of GBP10,005,933.

ManagementStephen Roland Dattels, Executive Co-Chairman: Mr. Dattels has founded and/or financed a number of mining ventures over the past 20-plus years. He recently sold UraMin Inc. to Areva, the French government-owned uranium company. He also was an executive at Barrick Gold Corp., and completed financings for Apollo Gold Corp., Royal Standard Minerals Inc., Guyana Goldfields Inc., Red Dragon Resources, and others.

James Mellon, Executive Co-Chairman: Mr. Mellon has been a fund manager for 20 years. He is the principal shareholder of Burnbrae Ltd. and participates in a number of markets, including stock markets of emerging nations. He is currently co-chairman of Regent Pacific Group Ltd.

Denham Eke, Chief Financial Officer: Over the last 15 years, Mr. Eke has held directorships of a large number of companies, principally involved in equity investments, property ownership and management, where he has been tasked with rationalising and restructuring operations to enhance profitability.

Empyrean Energy Plc (EME: AIM) Sector: Oil and Gas Producers

Sub-sector: Exploration and Production

25-11-09

Page 81

Company description Empyrean Energy Plc (Empyrean) was established with the aim to identify, analyse and finance rewarding projects in the fields of exploration, development and production of energy resources around the world. It primarily focuses on traditional Oil & Gas sector exploration and production activities in geopolitically stable environments like the US and Germany. Empyrean currently generates revenues from oil and gas sales from two of its three prospects in Texas, US. The company was incorporated in the UK in March 2005 and was listed on the AIM in July 2005. The company’s main assets are as follows: – Sugarloaf Hosston Project (Texas, US): Wells are located

in Blocks A and B. Empyrean has a 6% pre-farm-out working interest across the entire Block B and a 7.5% working interest in Block A wells. Sugarloaf Block B has 3 existing horizontal wells Kennedy-1H, Kowalik-1H and Weston-1H, and a vertical well, Sugarloaf-1, which have been drilled. A total of five wells have been drilled on Block A of the Sugarloaf Hosston prospect: TCEI JV Block A-1, A-2, A-3, A-4, A-5. The latest production figures released by Texas Rail Road Commission for Block A show a total 15,621 barrels of oil and 113.693 mmcf of gas for the month of March 2009.

– Margarita Project (Gulf Coast, Texas, US): Empyrean has a 44% working interest in this prospect. Of the six wells drilled here, three have been commercially successful. Currently one well is producing gas while the other two have been suspended indefinitely. Since July 2007, Dona Carlotta has produced gas at approximately 100 mmcf per day with an estimated life of 3.363 years based on pressure drawdown measurements.

– Eagle Oil Pool Development Project (California, US): Empyrean has a 48.5% working interest in this project. Following suspension of the Eagle North-1 well, which had reported a successful drilling attempt, no new wells have been drilled. However, the company intends to have a new well drilled as soon as possible on the Eagle prospect.

– Glantal Gas Project (Germany): Empyrean holds a 40% working interest in this prospect. Following the unsuccessful drilling and consequent plugging and abandonment of the Glantal-1 well, no new drilling activity will be undertaken on the prospect until the risk of volcanic activity is minimized. Empyrean and its operating partner, Pannonian International Ltd, now plan to embark on the Lautertal prospect to the northeast of Glantal.




Revenues 525 724 37.9%Operating income (1,307) (1,548) (18.4%)Net income (1,153) (1,494) 29.6%Fully diluted EPS (GBp) (2.30) (2.53) (10.0%)Net cash 1,510 291 (80.7%)P/E N/A N/A N/A

Source: Company data

1,408,885

1M 3M 12M (3.2) 27.7 (11.8)

FTSE AIM ALL Share Index 0.2 (3.1) 64.7

Name Capital11.8%11.0%9.5%6.8%6.8%4.2%3.1%

Other 46.8%100%

EME

Astaire Securities PlcAstaire Securities Plc

N/AChapman Davis LLP


Thomas Kelly (Commercial Director)



Enterprise value GBP18.0 mn

Head Office location:


EME

TIDM code:

N/ANet debt / equity

Auditors: Law yers:

121.8 million (mn)

Major shareholders

TD Waterhouse Nominees Barclays Stockbrokers LimitedHalifax Share Dealing (Nominees)

Total shares

ISIN number:

Shares outstandingDividend yield N/A

GBp24.75 - GBp3.13


GBP18.3 mn Market capitalizationCapitalization

Company dataStock data as of 19-11-09Price GBp15

GB00B09G2351

Squaregain (Nominees)

Wills & Co StockbrokersWH Ireland

52-w eek range

Ritw ik BhattacharjeeAnalyst:Managing analyst:

Company w ebsite: w w w .empyreanenergy.comMeera Patil

England and Wales

Nominated advisor:



US, GermanyAustralia

Bankers:

Kerman & Co LLP

Broker:

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Empyrean Energy Plc (EME: AIM) Sector: Oil and Gas Producers


25-11-09

Page 82

SWOT


Near term volume visibility – Two of the three projects located in the US are successfully

producing oil and gas to market and the company expects volumes to increase in 2H 09 with the remaining drilled wells beginning to generate revenues or being reworked.

Credible reputation with above average success rate – Empyrean has achieved commercial production from 11 of

the 18 exploratory wells drilled in the last four years. This translates into a success rate of 61%, which the company expects to increase to 72% soon. Empyrean has identified that it has achieved a 'wildcat' well success rate of 22% while the industry average is 8.3%.

Unsuccessful development activities have hurt bottom-line – Unsuccessful exploration, development and production

attempts have resulted in bottom-line taking a significant hit. As a junior exploration company more such failed attempts could result in erosion of shareholder value.

– Watering out of the Dos Dedos well on the Margarita prospect and plugging and abandonment of the Bondi Prospect resulted in an impairment loss of GBP168,000, while suspension of the Milagro and Agavero wells led to an impairment charge of GBP300,000 in FY 2009.

Limited cash resources – Limited cash resources make every delay or abandonment of

exploration and development activity critical for the company’s prospects, mitigating progress to larger operational businesses. As of 31 March 2009, Empyrean’s cash and cash equivalents stood at GBP291,000 compared to GBP1.51 mn a year ago.


Industry holds significant growth potential – The EIA predicts global energy demand to rise by 33% over

2010 - 2030 with oil and gas accounting for nearly one-third and one-fourth of the world energy supply respectively.

Presence in heavy energy consumers US and Germany – Empyrean’s operational activities are centered in the US and

Germany, two of the largest consumers of energy. As of 2007, the US stood 1st while Germany stood 7th in terms of world oil consumption (source: CIA World Factbooks).

Riverbend Project in Texas could begin to contribute to revenues soon – Multiple and significant gas flares were recently encountered

during the drilling of Quinn 3H well. As the well is already connected to a pipeline, if the horizontal drill and flow tests are completed successfully, it will begin to contribute to the company’s top-line.

Volatile commodity demand and price environment could pose a challenge to capital raising – Empyrean’s future investments are dependent on sufficient

funding to undertake exploration and development activity. Raising funds, either through debt financing or equity, is highly sensitive to oil prices. Reduced demand and a volatile price environment, as witnessed in the 2008-2009 period of global financial crisis, greatly affect the company's ability to raise capital.

Sector threat from growing demand for renewables – The EIA estimates that by 2030, global renewable energy

consumption will increase by 63% and form 11% of global energy supplies, with wind and solar power growing the fastest. With depleting traditional energy resources and rising fuel prices, rapid growth in demand for renewable energy could adversely impact demand and prices of traditional oil resources.

Key recent news 10 November 2009: Empyrean announced the encounter of multiple gas fractures and flares as high up as over 100 ft and one over 200 ft during the drilling process at the Quinn 3H well being drilled at its Riverbend project in Texas, US. The number of fractures and flares has exceeded the expectations of Krescent Energy Co LLC, the operator.

ManagementPatrick Cross, Non Executive Chairman: With over 33 years of experience in corporate finance, organization structures, marketing and JV operations, he has held major positions at BP, Cable & Wireless-Japan and BBC World Ltd.

Frank Brophy – Technical Director: A petroleum geologist with over 44 years experience in exploration, development and production for companies including Maurel & Prom, Ampolex Ltd, Elf Aquitaine Australia and Peko Oil Ltd. His work has crossed regions including Australia, Asia, Europe, the US and the Middle East.

Fortune Oil Plc (FTO: LSE) Sector: Oil & Gas Producers

Sub-sector: Exploration & Production

25-11-09

Page 83

Company description Fortune Oil Plc (Fortune Oil) operates in oil and gas supply and related infrastructure projects in China. The company also has contractor rights for coal bed methane (CBM) block in Shanxi Province in China. The CBM project is part of the company’s strategy to grow into an independent integrated gas company with presence across the value chain. The company listed on the Main Market of the London Stock Exchange in 1993.Fortune Oil’s gas business is grouped under Fortune Gas Investment Holdings Limited (Fortune Gas). In 2008, Wilmar International Limited, one of the largest companies listed on the Singapore Stock Exchange, acquired a 15% stake in Fortune Gas. The gas business includes the following: – Natural gas distribution: This comprises retail and

wholesale natural gas supply infrastructure including city gas companies, four spur pipeline companies, one compressed natural gas (CNG) wholesale station (among the largest CNG stations around Beijing), two liquefied natural gas (LNG) production plants, CNG retail stations and a fleet of CNG trucks.

– CBM: Fortune Liulin Gas Co. Ltd. (FLG) has a production sharing contract (PSC) with the government-owned China United Coalbed Methane Corporation (CUCBM) for Liulin CBM block. CUCBM has recently made an application for reserves certification of the northern section of the block, defining FLG as an exploration company.

The company’s operations in oil business include: – West Zhuhai Products Terminal: Located at the western

entrance of the Pearl River Delta, the terminal distributes refined products and has a capacity to handle 80,000 deadweight tonnes (dwt) ocean-going tankers. The terminal has 240,000 cubic metres of storage capacity for gasoline and diesel. Fortune Oil holds a 37% stake in the terminal.

– Maoming Single Point Mooring (SPM): Maoming SPM, in which the company has a 56% stake, supplies crude oil to Sinopec's Maoming refinery (southern China’s largest refinery) through a 15km sub-sea pipeline. Maoming SPM can handle tankers up to 300,000 dwt.

– Trading: It includes trading of unregulated petroleum products (like fuel oil and lube base oil), two gasoline stations in Beijing and a storage facility in Shantou.

– South China Bluesky Aviation Oil Company: This is a joint venture between Fortune Oil, BP (each holding a 24.5% stake) and China National Aviation Fuel Company (51% stake) supplying jet fuel to 15 airports in central and southern China. It had a 13% share in China’s jet fuel market in 2008.




Revenues 72,688 132,136 81.8%Operating income 9,700 17,649 81.9%Net income 8,202 14,175 72.8%Fully diluted EPS (GBp) 0.25 0.49 96.0%Net cash (5,925) 5,597 N/AP/E 28.71 12.72


930,813

1M 3M 12M (5.3) 15.1 16.8


Name Capital37%8%

55%100%

FTO

Oriel Securities LimitedBroker Oriel Securities LimitedBankers:

Oversea-Chinese Banking Corporation Limited,Standard Chartered Bank (Hong Kong) Limited

Deloitte LLP

Law yers:



Sonia BakshiAnalyst:Managing analyst:

Company w ebsite: http://w w w .fortune-oil.comPuneet Bhasin


Enterprise value

Dividend yield 1936.2 million (mn)

N/A

GBP201.50 mn

United Kingdom

OthersTotal shares

ISIN number: GB0001022960Nominated advisor:


X. J. Wang & Co. Solicitors, Reed Smith LLP,Clif ford Chance

Vitol Energy (Bermuda) Ltd

Capitalization

N/ANet debt / equity1



Major shareholders

FTO

TIDM code:


Industrial and Commercial Bank of China

Auditors:

First Level Holdings Ltd

China

52-w eek rangeShares outstanding

GBp3.80- GBp9.70


GBP161.28 mn

Shubhashish Dubey

Head Office location: United Kingdom

02,0004,0006,0008,00010,00012,00014,000

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Fortune Oil Plc (FTO: LSE) Sector: Oil & Gas Producers


25-11-09

Page 84

SWOT


First mover advantage – The company’s more than 16 years of experience in China and

as it is amongst the first few foreign and private players to enter China’s oil and gas sector will aid the company to accelerate its expansion in China’s oil and gas sector.

Potential upside from Liulin CBM project – The company’s Liulin CBM project was declared a State Pilot

Project in February 2009 owing to the quality of its CBM resource and the favourable location of Liulin as a logistics centre. This will expedite exploration and development in the block.

Geographic concentration – All the company’s operations are located in China. This

exposes the company to any unfavourable change in the regulated (although liberalising) oil and gas sector in China.


Surging energy demand in China – As the fastest growing economy, the demand for energy

resources, including transportation fuel and natural gas, will continue to grow in China. This growing demand will provide Fortune Oil with new opportunities in coming years.

Expanding natural gas supply opportunities – Natural gas, being cheaper and cleaner than other

conventional fuels, is fast gaining popularity. Considering the large natural gas reserves in China and its current low penetration (only 3% of China's energy demand is met by natural gas compared with 25% in Europe), the natural gas market in China is expected to grow significantly. In addition, only ~20% of the connectable urban population in China has been connected to the city gas network, reflecting the vast growth potential in retail gas sales.

Huge untapped coal seam gas reserves – China has huge undeveloped reserves of coal seam gas (over

30 trillion cubic meters as per government estimates) which can be extracted as CBM. This provides significant opportunities for Fortune Oil’s gas production activities.

Volatility in oil prices – The company takes title to jet fuel in case of Bluesky

project. Consequently, inventory at Bluesky project is exposed to pricing risk owing to fact that prices for major transportation fuels like gasoline, jet fuel and diesel are regulated by the government agency National Development and Reform Commission (NDRC).

– In December 2008, NDRC decreased oil prices significantly, including a 32% reduction in jet fuel prices, following the trend in global oil prices. This resulted in significant inventory losses in Bluesky joint venture owing to which the division contributed negatively (negative GBP3.0 mn) to the company’s net results in 2008.

Increasing competition– The city gas distribution sector, in which Fortune Oil

operates, is facing increasing competition from government-controlled oil & gas companies.

Key recent news 16 November 2009: Announced the acquisition of 26.1% interest of Molopo Energy Limited in Liulin CBM block for USD6 mn. This increases Fortune Gas’ share of the foreign contractor rights in the block to 100%. Earlier, on 14 October 2009, the company announced new gas reserves estimates at Liulin CBM block which put the possible gas reserves at 84.8 billion standard cubic feet compared with 29.7 billion standard cubic feet announced in March 2008.

ManagementQian Benyuan, Non-executive Chairman: Qian has been the company’s chairman since 1997. Prior to joining Fortune Oil, he was the president and CEO of China National Electronics Import and Export Corporation.

Daniel Chiu, Executive Vice-Chairman: Daniel has been a director of the company since August 1993 and was appointed as executive vice-chairman in October 1994. Previously, he was the company’s chief executive officer.

LI Ching, Chief Executive Officer: Ll has been the company’s CEO since April 2001. She was the company’s non-executive director from August 1993 to June 1998.

John Pexton, Deputy Chief Executive: John joined Fortune Oil in 2004. Prior to that, he was a director and head of Asia Project Finance for Deutsche Bank in Hong Kong. He worked for 10 years as a chartered chemical engineer in the downstream oil industry. 1The company has net cash position The company has reviewed a draft of this profile and factual amendments have been made

Getech Group plc (GTC: AIM) Sector: Oil Equipment, Services & Distribution

Sub-sector: Oil Equipment & Services

25-11-09

Page 85

Company description GETECH Group plc (GTC) is a leading petroleum and minerals consultancy. It provides Services, Data and Studies to assist its clients in making informed and efficient exploration decisions. It is able to provide integrated solutions across a broad range of disciplines, involving both geological and geophysical contributions.

– Services: GTC’s services include the following: Gravity and Magnetic Data Processing and Interpretation; Data Compilation and Management; Training; GIS Services; R&D; Multi-Disciplinary Geology Studies; Airborne Gravity and Magnetic QC/QA; and Remote Sensing.

– Data Licenses: Oil, gas and mining companies license GTC’s data and studies when they are evaluating new exploration areas and/or when they wish to expand their current exploration activities into neighbouring regions. GTC believes it has acquired the largest commercially available library of global gravity and magnetic data – it currently has data from almost every country in the world.

– Petroleum Systems: In 2004, GTC established the Petroleum Systems Group, which has now grown to include a very broad range of geological skills, including, structural geology, geochemistry, petroleum geology, palaeodrainage, palaeogeography, sedimentoloy and stratigraphy. Helped by the synergies with the original geophysics side, this has now grown to become the major part of the business. The existing geophysics capabilities combined with the unparalleled datasets enable it to provide very comprehensive integrated studies to its clients.

– Competition: While there are competitors that provide similar service projects and products as GTC, they do not provide them in the same way. GTC believes its wide range of geosciences skills, combined with its global gravity and magnetic data, provide it with an integral advantage. The company also believes its comprehensive, integrated product offering incorporates more skills and proprietary data than do competitive offerings.




Revenues 4,126 3,306 (19.9%)Operating income 822 (646) N/ANet income 602 (372) N/ADiluted income per share (GBp) 2.17 (1.30) N/A

Net cash 1,688 580 (65.6%)P/E N/ASource: Company data, Argus Research estimates

1M 3M 12M-2.7% -10.0% -36.7%-3.8% 6.4% -28.2%

Name CapitalProfessor J D Fairhead 30.42%IP Group plc 21.42%Invesco Perpetual 9.50%Other 38.67%Total Shares

GTC

WH Ireland Group plcNational Westminster Bank plc

GRANT THORNTON LLP


Country of incorporation: UKLaw yers:

Leeds, UKPrincipal area of operations: GlobalHead Office location:

Company w ebsite: http://w w w .getech.com/Analyst(s):DOR: James Kelleher, CFA

Philip H. Weiss, CFA, CPA


GTC


Major shareholders



Capitalization

Company data

Price GBp 17.552-w eek range GBp 15.5 - 28.0Shares outstanding 29.2 million (mn)Dividend yield 3.4%Last-12-month average daily trading volume (AIM)

4,663


TIDM code:

Bankers: Auditors:

Walker Morris

ISIN number:

100.00%

Nominated advisor: WH Ireland Group plcGB00B0HZVP95

Broker:

020406080100120140160

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25-11-09

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SWOT


Gravity and magnetic imaging database – GTC believes its database is the largest commercially

available, providing an informational competitive advantage.

Petroleum geology studies – GTC has a wide range of highly skilled people who can

produce integrated studies reflecting considerable perspectives and inputs.

Client base – GTC’s client base largely consists of very strong, established

oil companies, and major integrated oil companies.

Client size – GTC’s business is not well-established among smaller

independent exploration and production companies.

Dependence on the petroleum market – GTC’s business is largely dependent on the petroleum market

(~95%). Major legislation restricting oil and natural gas use could limit future prospects.

Sensitivity to oil price volatility – In 2009, GTC’s customers have limited capital spending,

causing a drop-off in the company’s business. Should significantly lower oil prices return, its business could once again be negatively impacted.


Extend business scope/scale – GTC can provide more-focused studies, which will expand

the range of services beyond what is currently offered and could be attractive to a wider range of oil and gas company clients. Its historic focus is on large-scale projects, which have been of most interest to larger clients.

Increased involvement in data acquisition – Historically, GTC has not gathered data itself.

US domestic market – GTC could expand its involvement in the US oil and gas

market, particularly onshore.

Legislation or technology impact on oil demand – GTC’s business would be negatively impacted if there were a

corresponding decline in exploration activity.

Technological advancement – A disruptive technology could damage GTC’s business.

Retention of key personnel – GTC relies on a team of highly skilled people and will have to

manage carefully to retain them.

Key recent news 27 October 2009: Released preliminary financial results for the 12-monh period ended 31 July 2009.

10 September 2009: A loan facility of GBP1 mn was made available to the company; it is secured by a fixed and floating charge over all the company’s assets.

ManagementPeter Stephens, Non-Executive Chairman: He is a founding shareholder of Desire Petroleum plc and is a Non-Executive Director of Tristel plc.

Dr. Derek Fairhead, President: He is the Founder of GTC and has been Manager and Managing Director of GTC for over 14 years. He is also the Professor of Applied Geophysics at Leeds University.

Raymond Wolfson, Chief Executive Officer: He has created and been a Director of various spin-out companies from the University of Leeds, a significant number of which have raised funding and/or been sold. Most recently, he has been responsible for managing the intellectual property created at the university.


Maple Energy Plc (MPLE: AIM)Sector: Oil & Gas Producers

Sub-sector: Integrated Oil & Gas

25-11-09

Page 87

Company description Maple Energy Plc (Maple) was founded in 1986 and listed on AIM in July 2007. Maple is an integrated oil & gas company operating in Peru, engaged in E&P of crude oil, natural gas, and natural gas liquids; refining, marketing and distribution of hydrocarbon products; and development of an ethanol project. Maple’s principal operations include the following:

– Crude oil production and development: Maple operates and has a 100% working interest in crude-oil producing properties including Blocks 31-B (Maquia), 31-D (Agua Caliente) and 31-E (Pacaya). Moreover, Maple intends to develop additional wells in Blocks 31-B and 31-D.

– Oil and gas exploration: Maple’s principal exploration interest lies in Block 31-E, which comprises 3 oil prospects, and Block 31-C, which has a potential gas prospect.

– Refining, marketing and distribution operations: Maple’s main source of revenues is its refining and marketing operations. It operates the Pucallpa Refinery and Sales Plant which has the capacity to process either (a)3,400 bpd of crude oil producing a Residual 5 fuel oil, (b)3,000 bpd of crude oil producing a Residual 6 fuel oil or (c)4,100 bpd of natural gasoline. Its main products include gasoline, diesel, kerosene, solvents, aviation fuel, naphtha, and residual fuel oil which are marketed in the Central Peruvian jungle and highlands, and the Lima area.

– Ethanol Project: Maple is developing one of the first ethanol projects in Peru which will use sugarcane as feedstock. The project, currently under construction, is located in the Piura Region on the northwest coast of Peru and has an estimated development cost of USD222 mn (ex. VAT). Maple has acquired 10,000 ha of contiguous land with sufficient water resources for this project. Most of has not been planted previously and does not compete with food crops. The project, expected to employ over 600 people, enjoys a favourable climate and market access and is backed by an experienced management team.

– Aguaytia Energy: This is an integrated natural gas and electric power generation and transmission project in Peru. In June 2009, Maple completed the sale of all of its interests in Aguaytia Energy in order to focus on its exploration, oilfield development and ethanol initiatives.

Maple continues to make significant progress in its core areas of operations. In 2008, it re-activated its Pacaya oilfield, started its 22 well development drilling programme in the Maquia and Agua Caliente oilfields and also worked on the assembly of a 2,000 horsepower heli-transportable drilling rig.




Revenues 80,717 95,290 18.1%Operating income (970) (5,330) (449.5%)Net income (1,990) (7,078) (255.7%)Fully diluted EPS (cents) (3) (8) (133.7%)Net cash 28,435 (1,916) N/AP/E N/A N/A


21,240

1M 3M 12M (23.6) (43.7) (47.2)

(3.2) 16.9 58.6

Name Capital10.6%9.2%7.7%7.2%

65.3%100.0%

MPLE

Jefferies International Limited

Broker:

Bankers: Ernst & Young

Law yers:


Ireland

IE00B1FRPX03Nominated advisor:



Auditors:

Nipun Jain

Peru

Managing analyst:

Rex CanonAFP IntegraOthersTotal shares

PeruHead Off ice location:


Enterprise value

ISIN number:

GBP67.8 mn

Interline Enterprise S.L.U.

Capitalization

GBP76.9 mn

Major shareholders

VELO

TIDM code:

Net debt / equity Price performance (%)


0.05


Shares outstanding 89.2 million (mn) GBp330.00- GB75.00



Dividend yield N/A

52-w eek range

Sonia BakshiAnalyst:Company w ebsite: http://w w w .maple-energy.com

Tony Hines

Mirabaud Securities Limited and Jefferies International Limited

Vinson & Elkins R.L.L.P., Muñiz, Ramírez, Pérez-Taiman and Matheson Ormsby Prentice

Shubhashish Dubey

Banco de Crédito del Perú and Scotiabank

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Maple Energy Plc (MPLE: AIM)Sector: Oil & Gas Producers

Sub-sector: Integrated Oil & Gas

25-11-09

Page 88

SWOT


Operational efficiency through vertical integration and ownership of rigs – Vertically integrated operations provide favourable feedstock

costs for refining and in turn better margins for Maple.

– Maple maintains a fleet of 3 work-over rigs and 2 well-service rigs which enable Maple to reduce its third-party contractor supply cost and avoid time constraints in the execution of its shallow drilling and work-over programmes.

Favourable location – Maple’s crude oil production sites are close to its refining

assets which are well connected to surrounding markets thus providing Maple with logistical advantages.

Concentration of operations in Peru – All of the company’s operations are located in Peru. This

exposes the company to any unfavourable changes in the oil and gas sector of Peru.


Rapidly growing ethanol market in Peru – As per Peru’s Ministry of Agriculture, the country’s ethanol

mandate requires 7.8% ethanol content in gasoline by Jan 2010. The demand for ethanol in Peru is expected to reach 20 to 25 mn gallons per year. Further, Peru has one of the world’s highest yields per ha for sugarcane (one of the best feedstocks for ethanol), creating a favourable environment for Maple's ethanol project.

Growing spending and production in oil and gas sector – Peru’s oil & gas sector offers great growth opportunities for

Maple. The government agency that hands out licenses for hydrocarbon exploration and development in Peru plans to offer 17 new lots in 2010. Oil production in the country is expected to nearly triple to 400,000bpd by 2015 reflecting the country’s surging oil demand.

– Although Maple currently faces stiff competition in oil production (from larger players such as Pluspetrol controlling around 69% of the country’s crude oil production) as well as in refining (from state entities) growing oil demand in the country holds immense opportunities to expand its business.

Exploration and development risk – The company is exposed to the general exploration and

development risks including estimates of potential reserves, and unexpected operating problems that could make projects economically unviable, resulting in loss of investment.

Oil price volatility – Oil price volatility is a big threat for companies like Maple as it

brings margins under pressure. Besides, it could render certain exploration activities commercially unviable.

– Maple’s sales of goods declined 43.9% y-o-y in 1H 09 primarily due to the decline in average sales price in line with lower international oil prices.

Political risk – Peru has emerged from a long period of civil disturbance and

guerrilla-led violence which dominated the 1980’s and early 1990’s. Criminal gangs still operate in the country, funded largely by the proceeds of cocaine production. This poses a general threat to the company’s operations.

Key recent news 05 November 2009: Announced that it has entered an agreement with YA Global Master SPV Ltd, an affiliate of Yorkville Advisors LLC, which has agreed to provide Maple with USD30 mn against the company’s ordinary shares. Maple can draw down the funds at its discretion over the next 30 months.

18 August 2009: Announced financial results for 1H 09 recording a 43.9% decline in sales of goods to USD25.8 mn compared with USD46.1 mn in 1H 08. Net loss (before the extraordinary charge related to the sale of the interest in Aguaytia Energy) was USD5.2 mn compared with a net profit of USD1.2 mn in 1H 08.

ManagementJack W. Hanks, Chairman and Executive Director: He founded Maple in 1986 in the US and has since held the post of president or chairman in the company. Prior to founding Maple, he served as a partner in the Washington office of the law firm Akin Gump Strauss.

Rex W. Canon, Chief Executive Officer, President and Executive Director: He has been with Maple since 1987 and has worked in several positions before being promoted to president and chief executive officer in 1997. Prior to 1987, he served as controller and later as vice president of finance for an investment and venture capital firm. The company has reviewed a draft of this profile and factual amendments have been made

Max Petroleum plc (MXP: AIM) Sector: Oil Equipment, Services & Distribution


25-11-09

Page 89

Company description Max Petroleum (MXP) is an independent oil & gas exploration and production company operating in the Pre-Caspian Basin in Western Kazakhstan. As of 31 March 2009, it owned a 100% interest in the Blocks A&E and Astrakhanskiy oil and gas license areas, covering 13,500 km².

– Strategy: MXP’s strategy is to apply new, exploratory 3D seismic technology to the proven, highly prolific Pre-Caspian Basin to develop a high-quality portfolio of drillable pre-salt and post-salt exploration prospects. Productive reservoirs are found in the shallow, “post-salt” section and deeper, “pre-salt” strata. Max Petroleum’s first discovery, the Zhana Makat Field, on its Blocks A&E license, produces from the post-salt section.

– Licenses: MXP’s two large licenses contain numerous prospects for both the deeper, pre-salt and shallow, post-salt play types. The Group is applying cutting-edge technology as well as extensive analysis of historical exploration activity on a regional scale to help understand and unlock the potential of its exploration acreage.

– Acreage: The onshore acreage position contains significant resource potential in both post-salt and pre-salt structures. MXP currently has one discovery on Block E -- the Zhana Makat Field, which commenced production in August 2007. As of 31 March 2009, the field had estimated proved and probable reserves of 5.8 mn barrels of oil.

– Drilling Plans: Max Petroleum expects to resume drilling in autumn 2009 with two shallow development wells in the Zhana Makat Field, after which it will immediately begin drilling an exploration portfolio of 10 to 15 post-salt prospects on its Blocks A&E license. This exploration drilling program will extend throughout 2010. The Group willretain a 100% working interest in its post-salt portfolio, which is expected to be highly accretive -- with strong economic returns on invested capital, if successful, due to the low drilling cost of shallow and intermediate wells. The deeper and higher risk pre-salt portfolio is being offered for farm-out to larger companies seeking high-risk, high-return prospects.



Fy 2008-09 (%change)

Revenues 27,470 39,195 42.7% Operating income (35,777) (4,842) 86.5%Net income (36,984) (9,862) 73.3% Diluted income per share (USD) (0.11) (0.04) 67.3%

Net cash (77,169) (102,139) (32.4%)P/E N/A N/ASource: Company data, Argus Research estimates

1M 3M 12M-11.1% 28.0% 48.4%-3.8% 6.4% -28.2%

Name CapitalG Kachshapov 12.43%Lynchw ood Nominees Limit 6.90%

4.58%Other 76.09%Total Shares

MXP

JPMorgan Cazenove LtdN/A

PRICEWATERHOUSE COOPERS


UKLaw yers:

LondonPrincipal area of operations: KazakhstanHead Off ice location:

Akin Gump Strauss Hauer


Philip H. Weiss, CFA,CPACompany w ebsite: http://w w w .maxpetroleum.com


MXP


Major shareholders


TIDM code:

Bankers: Auditors:



Capitalization

Company data

Price GBp 15.052-w eek range GBp 1.7 - 31.8Shares outstanding 410.6 million (mn)Dividend yield 0.0Last-12-month average daily trading volume (AIM)

4,691,516


The Bank of New York (Nominees) Ltd

Broker:

ISIN number:

100.00%

Nominated broker/advisor: WH Ireland GB00B0H1P667

05,00010,00015,00020,00025,00030,00035,00040,000

05

101520253035

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Max Petroleum plc (MXP: AIM) Sector: Oil Equipment, Services & Distribution


25-11-09

Page 90

SWOT


Experienced Management team – MXP’s Management team has considerable experience in the

oil & gas exploration industry.

Proven, prolific hydrocarbon basin – MXP’s licenses are in a basin whose deeper pre-salt

discoveries include some of the largest oil and gas fields found in the last 35 years.

Post-salt portfolio – The probability of exploration success in these wells is

relatively high; the portfolio is expected to provide strong economic returns on invested capital.

Financial position – MXP has a relatively weak balance sheet; it had to restructure

its debt in order to survive the recent sharp downturn in commodity prices.

Geopolitical risk – MXP’s licenses are in Kazakhstan. The local government has

a history of changing the tax regime, which could negatively impact cash flow.

Volatility of prices for oil and gas – The supply, demand and prices for oil and gas are volatile and

are influenced by factors beyond MXP’s control.


Pre-salt portfolio – Consists of at least two different play types, with a range of

expected mean recoverable reserve potential of 100 mn -500 mn boe each.

Potential farm-out could reduce risk – The deeper and higher risk pre-salt portfolio is being offered

for farm-out to larger companies.

Ability to export oil – MXP can realize higher prices by exporting oil outside

Kazakhstan.

Legislative action – The passage of meaningful legislation limiting hydrocarbon

emissions could negatively impact MXP.

Volatility of prices for oil and gas – Supply, demand and prices for oil and gas are volatile and are

influenced by factors beyond MXP’s control.

Exploration risk – Exploration for, and development of, hydrocarbons is

speculative and involves a high degree of risk. Sufficient resources to exploit its properties may not be found.

Key recent news 31 October 2009: Drilling commenced on the ZMA-AN2 development well in the Zhana Makat Field on its Blocks A&E licence area. After completion of the ZMA-AN2 well, the rig will drill a second development well in the Zhana Makat Field before moving on to drill the Borkyldakty exploration well.

21 October 2009: Reported results of its final 2009 prospect review based on its interpretation of proprietary 3D seismic data. To date, the Group has matured 12 drillable post-salt prospects, ranging in estimated size from 9 mn to 48 mn bbl of oil, with an estimated range of geological chance of success between 25% and 60%. The Group’s pre-salt portfolio now includes 15 mapped leads and prospects consisting of two distinct play types.

ManagementMichael B. Young, President and CFO: Mr. Young has served as Max Petroleum’s Chief Financial Officer since September 2006, and was additionally appointed President in February 2009. He has over 17 years experience in various financial roles in the oil and gas industry.

James A. Jeffs, Executive Co-Chairman: Mr. Jeffs is a senior executive with extensive experience as a director of oil & gas exploration and production companies, an investment banker, and multi-billion dollar trust fund management.

Lee O. Kraus, Non-executive Director: Mr. Kraus is the Founder and President of Composite Capital, LLC, a financial advisory firm focused on clients in the oil and gas, mining, and chemicals sectors.

Metals Exploration Plc (MTL: AIM) Sector: Mining


25-11-09

Page 91

Company description Metals Exploration Plc's (MTL) stated principal activity is to identify, acquire and develop mining companies or projects with an emphasis on precious and base metal mining in the South-East Asia region. The company was founded in April 2004 and listed on the AIM in October 2004. Since then it has acquired 7 projects; Runruno, Dupax, Sulong, Puray, Worldwide and Capaz located in the Philippines, and Waigeo Island located in Indonesia. While Dupax and Sulong have received Exploratory Permits (EP), Puray, Worldwide, Capax and Waigeo are still at the application stage.

The company is currently concentrating on its flagship project, Runruno, which recently received a Financial and Technical Assistance Agreement (FTAA) permit. The FTAA is a legal contract between MTL and the Philippine government, allowing the company the right to 100% ownership of the project and ensuring security of title for 25 years with an option to extend for a further 25 years. It also offers a tax holiday for up to 5 years after commencement of production until the company has recovered its pre-operating expenses and investment. Thereafter the government will receive a 'Government Share' representing 5% of net mining revenues.

Runruno now has estimated total JORC compliant Measured, Indicated and Inferred mineral resources of 1.5Moz gold and 25.4Mlb Molybdenum (Mo), contained within 24.5 Mt at average grades of 1.91 g/t gold and 470 part per million (ppm) Mo. A scoping study released in November 2008 had estimated that Runruno could mine up to 3 Mt pa to produce an average of 183,000 oz of gold and 1.7 Mlb of Mo per year during an initial mine life of nine years, at a cash operating cost of USD285/oz net of projected Mo credits. At the time, the total capital cost of the project was estimated to be around USD208 mn which the company expected to be funded at a debt/equity ratio of 60:40. An independent technical review published on 19 November 2009 reported reduced resource estimates for Runruno, but with Measured and Indicated resources now representing 57% of the total resource, compared to 38% previously. To allow reworking for the revised resource figures, the Bankable Feasibility Study (BFS) will now be delayed beyond the original 1Q 10 target. Following delivery, MTL expects to secure funding and start construction on the project. Production is expected to commence at the end of 2011.




Revenues 0 0 N/AOperating income (2,092.0) (3,259.9) (55.8%)Net income (2,197.4) (3,438.8) (56.5%)Fully diluted EPS (GBP) (2.81) (3.55) (26.3%)Net cash 3,934.5 1,955.2 (50.3%)P/E N/A N/A

The figures identified are for the years ended 30 September 2007 & 2008. Subsequently, the reporting period has been realigned to end 31 December. Source: Company data

524,200

1M 3M 12M (23.2) 0 70.3


Name Capital44.10%

7.44%6.73%4.45%

25.48%

MTL

Hanson Westhouse LimitedBroker: Hanson Westhouse Limited

National Westminster Bank Plc Nexia Smith & William




Analyst:Managing analyst:

Company w ebsite: w w w .metalsexploration.comSanket Kulkarni

South East Asia

UKHead Of f ice location:

0.004Net debt / equityPrice perform ance (%)

Market capitalizationEnterprise value GBP39.20 mn

UK

Bankers:

M ajor shareholders

Law yers: Kerman & Co LLP

Baker Steel Capital Mngr

Total shares

Nominated advisor:

MTL

TIDM code:

12-m onth price volum e perform ance

Com pany dataStock data as of 19-11-09Price GBp15.75

Capitalization

Dividend yield 269.7 million (mn)

ISIN number: GB00B0394F6

A llianz Cornhill InsuranceOthers

Solomon Capital LtdWilliams de Broe

100.00%

Somatish Banerji


GBp24.25- GBp6.25

Last-12-month average daily trading volume (A IM)

GBP42.48 mn


N/A

Auditors:

0

1,000

2,000

3,000

4,000

5,000

05

1015202530

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Metals Exploration Plc (MTL: AIM) Sector: Mining


25-11-09

Page 92

SWOT


Flagship project – With an estimated mineral resource of 1.5Moz gold and

25.4Mlb Mo, at average grades of 1.91 g/t gold and 470ppm Mo, and as mining is expected to be straightforward, Runruno offers scope for healthy returns.

Received FTAA for Runruno – Indicating strong government support (with this only the 4th

FTAA permit granted), the permit allows 100% ownership of the project. It ensures security of title for 25 years with an option to extend for a further 25 years.

Solid local infrastructure at Runruno – The project's location, with established road infrastructure

and power available directly from the national grid, places it at an advantage to many Greenfield projects.

Support from Solomon Capital – Continued strong backing and an injection of funds from its

major shareholder, Solomon Capital, which now holds 44.1% of the company.

Current dependence on a single project – The Runruno project is currently the only focus area. The

remaining six projects are on hold, of which most are yet to receive EP.

Bankable Feasibility Study delayed – BFS is yet to be completed for Runruno, and has now been

delayed to consider revised resource estimates. Until this is completed, commercial viability remains unproven.

Funding challenges – 60% funding for Runruno project is to be through project

finance. In the prevailing economic environment, this could be a challenge.

Production is targeted to start at the end of 2011 only


Great potential from Runruno’s similarity with Cripple Creek – An independent study identified that Runruno has

remarkable geological similarities with the mineral rich multi-million ounce Cripple Creek mining district located in Colorado, US. With less than 15% of Runruno explored, further exploration is therefore likely to lead to an increase in grades and tonnages.

Government focus on mining sector – The government of the Philippines hopes to attract

USD14.5 bn in investment in the mining sector by 2013.

Potential fall in gold prices – If gold prices decline to the extent that revenues are

insufficient to cover exploration, construction and operating costs, the company could be forced to delay or abandon projects.

Opposition from local community to Runruno

Volatile Philippine tropical climate – The tropical climate and the site topography may present

obstacles to exploration and development activities.

Key recent news 19 November 2009: The company announced a revised independent resource estimate by Mining Associates Pty Limited (MA) on Runruno. While combined Measured and Indicated resources now comprise 56.7% of the total resource, compared to 37.8% previously, representing a strong conversion rate, both Indicated and Inferred resource estimates have been reduced significantly. Measured gold resource increased from 270,000oz to 560,000oz, Indicated gold resource reduced from 487,000oz to 290,000oz and Inferred gold resource reduced from 1,248,000oz to 650,000oz. As a result, finalization of the feasibility study will be delayed.

29 October 2009: The company announced the signing of its FTAA by the Philippine government for the Runruno gold-Mo project.

ManagementIan Holzberger - Executive Chairman: With over 35 years of experience in the mining industry, he was Managing Director of Highlands Pacific Limited from 1997 to 2007. He has extensive experience in the implementation of major project feasibility studies, equity raising, debt financing, government negotiations and all aspects of project development.

Jonathan Beardsworth - Managing Director: A former head of Standard Bank’s mining and metals team, he has more than 12 years of experience in investment banking focused solely on the mining and metals sector. He is responsible for overall company strategy.

Minco PLC (MIO: AIM) Sector: Mining


25-11-09

Page 93

Company description Minco PLC (Minco) is an Irish incorporated metals exploration & development company with zinc exploration projects in Ireland and zinc-silver investments in Mexico. The company is primarily focused on its Pallas Green project in Ireland, and is involved in the zinc-silver projects Bilbao and Laguna in Mexico through Toronto exchange listed Xtierra Inc (Xtierra), a 60% subsidiary. – Pallas Green project: Located on the southern boundary of

the Irish Midland Orefield between Limerick and Tipperary, the Pallas Green zinc-lead project is a joint venture between Minco (23.6% stake) and Xstrata Zinc (76.4% stake). Minco has identified four distinct lenses of massive zinc-lead sulphide mineralization at Castlegarde, Srahane West, Caherconlish and Tobermalug. The company estimates that the Caherconlish and Tobermalug sites currently have the potential for resources of 16.2 Mt at an average grade of 10.0% zinc and 1.7% lead. During 1H 09, a JORC compliant Inferred resource estimate of 11.3 Mt grading 10.2% zinc and 1.9% lead was released for the Tobermalug deposit. Minco estimates that 60% of the Pallas Green license area remains unexplored, reflecting tremendous potential for an increase in resources. The project is currently undergoing a preliminary scoping study and drilling after an extensive drilling program in FY 2008. Minco aims to increase the resource size at the project, with an extensive drilling program scheduled in FY 2010.

– Bilbao Project: This zinc-silver project, located in Zacatecas (Mexico) is spread over 1,407 ha and comprises 9 concessions. In 2008, Xtierra released a NI 43-101 compliant Indicated resource estimate of 3.6 Mt grading 3.53% zinc, 2.75% lead, 0.29% copper and 88.23 g/t silver and an Inferred resource estimate of 2.4 Mt grading 2.52% zinc, 2.79% lead, 0.28% copper and 83.08 g/t silver. The ongoing first phase of the feasibility study is expected to be completed by 4Q 09 followed by completion of the second phase of the feasibility study in 1H 10.

– La Laguna Pedernalillo (Laguna) Tailings Project: This is a silver-gold-mercury tailings reprocessing project for which a bankable feasibility study was completed in 2006 by Micon International Ltd (Micon). Thereafter, Micon determined a revised reserve estimate of 6.8 Mt in the Proven and Probable category grading 57.92 g/t silver, 0.31 g/t gold and 328.92 g/t mercury in 2008. On 19 November 2009, it was announced that Xtierra had entered an Option and Sale Agreement for the deposit.




Revenues 0 0 N/AOperating income (857) (2,502) (191.9%)Net income (2,766) (2,195) 20.6% Fully diluted EPS (USD) (1.69) (1.27) 24.9%Net cash 2,472 2,367 (4.2%)P/E N/A N/A


192,855

1M 3M 12M (20.5) (6.9) 93.1


Name Capital13%7%6%6%5%

64%100%

MIO

J&E Davy J&E Davy

Barclays Bank Ireland PlcDeloitte & Touche

Supervising analyst:DOR:Source: Company data, Bloomberg


GBp1.38- GBp4.88


GBP5.74 mn

Dividend yield N/A

Capitalization

Bankers:

Barclayshare Nominees LtdAran Asset Management

Total shares

Broker:

N/A


Midlothian Limited

OthersThomas & Philomena O'Gorman

Directors and Promoters



Analyst:Company w ebsite:

ISIN number:


TIDM code:

170.2 million (mn)

Ritw ik Bhattacharjee

Principal area of operations: Ireland and Mexico

Ireland

Net debt / equityPrice performance (%)


Major shareholders

MIO

Auditors: Law yers: McEvoy Partners

IE0004678326Nominated advisor:


http://w w w .minco.ieRupainka Rajan

Head Off ice location: Ireland

0

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Minco PLC (MIO: AIM) Sector: Mining


25-11-09

Page 94

SWOT


JORC and NI 43-101 compliant resource estimates – Existence of 11.3 Mt JORC compliant Inferred resources at

Tobermalug deposit in Pallas Green; NI 43-101 compliant resource estimates of 3.6 Mt (Indicated) & 2.4 Mt (Inferred) at the Bilbao project and 6.8 Mt Proven and Probable reserves at Laguna project is highly valuable.

Pallas Green’s similarities with Lisheen and Galmoy mines – The company has identified that the geological composition of

deposits discovered at Pallas Green are similar to those at its existing, productive Lisheen and Galmoy mines.

Experienced Management team – The company has a strong Management team with the

Chairman, CEO, and CFO having approximately 35, 40 and 20 years of experience in the mining industry respectively.

Solid support from Juno Ltd and relationship with Xstrata – While its relationship with Xstrata (which also strengthens

technical expertise) will ease Pallas Green funding pressure, the assurance of adequate financial support for all projects from Juno Ltd, a shareholder of Minco, is a major benefit.

Production has not yet commenced at Minco’s key projects – Minco’s key projects have not yet commenced production,

leaving revenue and cash generation prospects uncertain.

Limited measured resources/proven reserves – Measured resources are of limited quantity so far, as a result

of which the asset-based valuation is weak, presenting limited upside to planned production.

Liquidity risk – Since the company has not yet started generating cash from

operations, it relies significantly on equity financing for its projects. Inability to raise further adequate funds would hamper further development of its projects.


About 60% of the Pallas Green license area unexplored – Nearly 60% of the Pallas Green license area remains

unexplored, indicating potential scope for a significant upside in resources.

Scope for diversification and growth in the event of acquisition of El Dorado gold project – If Xtierra exercises its option to acquire a 100% interest in the

El Dorado property in Mexico, high grade gold will be added to Minco’s portfolio, resulting in further diversification.

Volatility in prices of zinc, silver and lead – Significant volatility in prices of zinc, silver and lead may

negatively impact investor interest in the company’s projects.

Changes in government regulations – Changes in existing government regulations governing

Minco’s operations may have significant material impact on the company as it may increase exploration expenses, production overheads and other project expenses.

Key recent news 19 November 2009: Minco’s subsidiary, Xtierra, announced an Option and Sale agreement with Indo Gold Limited for the option and sale of the Laguna tailings deposit, the successful implementation of which will provide Xtierra with initial cash and a steady stream of revenue over the life of operations at Laguna.

04 November 2009: Announced update on Metallurgical Studies, part of the Phase One Feasibility Study at Xtierra's Bilbao Project, which suggested good metal recoveries from the oxide mineralization, with scope for improvement in recoveries with optimization in progress. The final metallurgical report will be released by mid-December 2009.

ManagementJohn Kearney, Executive Chairman: With over 35 years mining experience, he is currently a director or senior officer of several mining ventures and also serves as a director of the Mining Association of Canada. He was previously the CEO and President of the Northgate Group based in Toronto.

Terence McKillen, Chief Executive Officer: A professional geologist with 40 years mining experience, he is a founding director of Minco and has been instrumental in the development of Minco’s portfolio of Irish projects. He previously served as Vice-President of Exploration of Northgate Exploration Limited and Westfield Minerals Ltd. He is also President and CEO of Xtierra Inc.

Danesh Varma, CFO & Company Secretary: With over 20 years experience in the mining finance industry, he also serves as CFO of several other mining companies.The company has reviewed a draft of this profile and factual amendments have been made

Providence Resources Plc (PVR: AIM) Sector: Oil & Gas Producers


25-11-09

Page 95

Company description Founded in 1997 from the de-merger of Arcon International Resources Plc’s hydrocarbon assets, Providence Resource Plc (Providence) is an international upstream oil and gas company operating in exploration, appraisal, development and production of oil and gas. The company has recently entered gas storage and trading activities by exercising the option to acquire a 40% interest in the Kinsale Head Area assets (offshore Ireland) from Petroliam Nasional Berhad (PETRONAS). The acquisition is expected to complete by the end of 1Q 10.

Providence has a portfolio of offshore and onshore assets in Ireland, UK, US and Africa (Nigeria). To mitigate its risks, the company has invested in these assets in partnership with established industry players including ExxonMobil, Chevron, Chrysaor, Star Energy and PETRONAS The company plans to increase its production rate to 5,000 boepd by end of 2011 and to 10,000 boepd by end of 2014 from 2,000 boepd in 2008, through further development of its portfolio.

Providence has a portfolio of assets under appraisal and development, including 5% interest in Nigeria’s Aje field, 56% interest in the Spanish Point (Ireland), 72.5% interest in southern and central region of Celtic Sea Area (Ireland) and 25% interest in Dragon Gas field located in St George’s Channel Basin (Ireland). The company also has numerous assets under exploration of which a significant portion is located in Ireland.

Having invested significantly in a portfolio of onshore and offshore prospecting assets, the company embarked on the strategy to acquire interests in producing assets to reduce its risk profile and generate cash flows. The majority of Providence’s interests in producing assets, located in UK and US, have been acquired during the last few years. Singleton field (99.125% interest) – onshore asset located in West Sussex, UK - registered a production rate of 750 boepd in 2008 (with another 200 boepd of gas being flared but awaiting completion of gas-to-wire project). The company is undertaking numerous activities including facilities de-bottlenecking, drilling of a new production well to increase the production from this field to 1,500 boepd in 2012. Producing assets located in the Gulf of Mexico include High Island (5% interest) and the recently acquired Triangle portfolio (varying interests), with a combined production of ~1,300 boepd in 2008 which the company aims to increase up to 3,500 boepd by 2012 via re-instatement of production impacted by hurricanes in 2008, increasing production rate and new drilling and acquisition activities.


All figures in EUR '000, unless specified FY 2007A FY 2008A


Revenues 4,333 24,814 472.7%Operating income 5,185 (42,211) N/ANet income 569 (51,193) N/AFully diluted EPS (cents) 0.02 (2.06) N/ANet cash 2,257 (79,676) N/AP/E 358.33 N/A


888,525

1M 3M 12M - 8.7 57.0

FTSE AIM ALL Share Inde (3.2) 16.9 58.6

Name Capital34%8%

Artemis Investment Management Limited 3%55%

100%PVR

Cenkos Securities LimitedBroker: Cenkos Securities Limited, J&E Davy

Bankers:

KPMG

Law yers:



Managing analyst:

Ireland, UK, US

Matheson Ormsby Prentice,Morisons Solicitors

52-w eek rangeShares outstanding 2,922.4 million (mn)

GBp2.10- GBp4.93


GBP120.70 mn

Shubhashish Dubey

N/A

GBP180.72 mn

Head Office location: Republic of Ireland

Major shareholders

PVR

TIDM code:


BNP Paribas, Macquarie Bank Limited,Allied Irish Banks P.l.c., DnB NOR

Auditors:

JP Morgan Asset Management UK Limited

Capitalization

8.85 Net debt / equityPrice performance (%)


OthersTotal shares

ISIN number:


Enterprise value

Sir Anthony O’Reilly

Dividend yield

IE0001390784Nominated advisor:


Sonia BakshiAnalyst:

Company w ebsite:

w w w .providenceresources.com

Puneet Bhasin

Republic of Ireland

0

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Providence Resources Plc (PVR: AIM) Sector: Oil & Gas Producers


25-11-09

Page 96

SWOT


Diversified portfolio of assets – The company has a well diversified portfolio of exploration,

development and production assets, including both offshore and onshore assets. It has also recently diversified into gas storage activities in Ireland, strengthening its near- to mid-term cash generation prospects. Further, Providence’s presence is spread across four countries – UK, US, Ireland and Nigeria – mitigating its location risk to some extent.

Potential upside from exploration and development assets – Providence’s oil and gas production is expected to receive a

major boost in the coming years from some recent favourable exploration results, such as those at Dragon (Ireland) and Aje (Nigeria).

Strategic partnerships with established industry players – Providence has entered strategic partnerships with

established oil and gas companies, such as ExxonMobil, Chevron, Chrysaor and PETRONAS, which helps mitigate overall risk and leverage its partners’ skills and expertise.

Increased debt-to-equity ratio owing to compressed equity and higher debt – The company’s equity compressed significantly in 2008 on

the back of an impairment charge of EUR49.7 mn arising primarily from the poor drilling outcome at the two wells in the Celtic Sea (Hook Head and Dunmore) which were considered sub-economic following the drilling results.

– The decline in equity coupled with higher debt levels resulted in significant increase in the company’s debt-to-equity ratio which rose to 11.0x as at 30 June 2009 from a mere 1.1x as at 30 June 2008.


Ireland’s energy security needs – Given Ireland’s growing energy consumption and its high oil

import dependence (~89% in 2007), focus on domestic oil production is increasing, thus providing thrust to Providence’s exploration & development operations in Ireland.

Opportunities in the gas storage sector – There exist huge opportunities in the Irish and UK gas

storage sector. The Irish government has identified gas storage as a strategic requirement to ensure uninterrupted energy supplies. Currently, only ~3% of Ireland’s annual gas consumption can be stored in its existing gas storage facilities. Similarly, the UK has storage capacity of only ~4% of its annual gas consumption.

– The European Union requires countries to have storage facilities to ensure 3 months of gas supply to meet unexpected supply disruptions.

Exploration and development risk– The company is exposed to the general exploration and

development risks including estimates of potential reserves and unexpected operating problems that could make projects economically unviable, resulting in loss of investment.

Oil price volatility– Although Providence hedges part of its production for

volatility in oil and gas prices, there still exists significant exposure to oil price volatility. Further, decline in oil prices beyond a level that could render certain exploration activities economically unviable.

Natural calamities – Providence’s production from its Gulf of Mexico sites was

significantly impacted by hurricanes which struck in August 2008. The company’s producing assets in this region remain susceptible to such natural disasters.

Key recent news 30 September 2009: Announced interim financial results for 1H 09. Revenues declined 6.9% to EUR10.5 mn in 1H 09 compared with EUR11.2 mn in 1H 08 owing to lower oil and gas prices and decline in production caused by hurricanes in the Gulf of Mexico. The company reported net loss of EUR5.6 mn in 1H 09 against net profit of EUR3.3 mn in 1H 08 primarily due to higher finance expenses and one-off expenses including costs related to hurricanes.

ManagementDr Brian Hillery, Non-executive Chairman: He has been the chairman of the company since its incorporation. He is also a non-executive chairman of Independent News & Media PLC and is a director of the Central Bank of Ireland.

Tony O'Reilly, Chief Executive Officer: He is the founder of the company and has been its CEO since 2005. Previously, he worked in mergers and acquisitions at Dillon Read and in corporate finance at Coopers and Lybrand, where he advised natural resource companies.


Sirius Exploration PLC (SXX: AIM) Sector: Mining


25-11-09

Page 97

Company description Sirius Exploration Plc (Sirius) is a diversified mining and exploration company with exploration leases for salt and potash mining assets in Australia and the US. In addition to mining, Sirius intends to use salt caverns created during mining to store electricity and hydrocarbons. Although Sirius also has minority stakes in metal mining assets, Management intends to focus on potash and storage of energy, natural gas and carbon dioxide over the coming years. The company followed a major acquisition program in 2009, funded through the issuance of equity, which has led to a surge in its equity base from 102.2 mn in January 2009 to 606.7 mn on 04 November 2009. Effective 06 April 2009, ADRs have been traded on the Pink OTC Markets under the ticker SRUXY. The company's mining assets are:

– 5,000 acres of exploration leases in North Dakota: The acquisition of Dakota Salts LLC in January 2009 granted control of 5,000 acres of potash salt deposits in Williston Basin. The land is adjacent to Canada's Saskatchewan province, which possesses high quality potash salt deposits.

– Potash mining assets in Australia: The company has established a firm foothold in Australia through recent acquisitions, now holding leases for exploration and mining of potash salt deposits in Queensland (640 sq km) and the Kimberley region of Western Australia (1,250 sq km).

– Metal mining assets in China and Macedonia: Sirius owns gold and copper exploration assets in Macedonia. It also now owns a minority stake in IMG Group which manages the iron ore business of CIC Mining Resources Ltd and is expected to be listed in 1H 10. IMG Group owns iron ore production assets in China and exploration leases in Africa and Latin America.

Sirius plans to develop salt caverns as a medium to store energy and natural gas through the Compressed Air Energy storage (CAES) process. Also, as the windiest state in the US, there is significant potential in North Dakota to harness wind energy for electricity generation, with Sirius’s salt caverns well-placed to store such electricity. Sirius also plans to exploit its proximity to gas intake points to store natural gas. To further build on CAES potential, the company acquired three companies developing carbon dioxide sequestration and energy storage technology and their patents in October 2009.




Revenues 0 0 N/AOperating income (303) (339) (11.9%)Net income (676) (533) 21.2%Fully diluted EPS (GBP) N/A (0.00) N/ANet cash 4 (59) N/AP/E N/A N/A


1M 3M 12M (38.3) 11.5 723.9


Name CapitalGlobal Opportunities Breakaw ay Limited 7.6%

4.0%88.4%100%

SXX

Beaumont Cornish LimitedBroker Rivington Street Corporate Finance Limited

UBS AGNexia Smith & Williamson


United Kingdom

GBP 44.46 mn



Australia, USHead Off ice location: London

Bankers:

Major shareholders

Law yers:

Analyst:Managing analyst:

Company w ebsite: w w w .siriusexploration.comAshish Tripathi

Ritw ik Bhatacharjee

Pinsent Mason

Transparent Holding LimitedOthersTotal shares

Auditors:

ISIN number:

0.08Net debt / equityPrice performance (%)

Company dataStock data as of 19-11-09Price GBp 7.2552-w eek rangeShares outstanding 606.7 million (mn)

GBp15.50 - GBp0.75


GBP 43.98 mn

N/ADividend yield

Capitalization


Market capitalizationEnterprise value

2,071,156

GB00B0DG3H29Nominated advisor:

SXX

TIDM code:


-4001,1002,6004,1005,6007,1008,60010,10011,600

02468

10121416


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Sirius Exploration PLC (SXX: AIM) Sector: Mining


25-11-09

Page 98


Potash assets in North Dakota – The Williston basin site is expected to contain significant

amounts of potash, in line with the high potash content found in Saskatchewan. Initial volumetric analysis estimates the mines contain high grade potash deposits in the range of 2.1 Mt-5.2 Mt per sq km. These deposits are also close to railway lines, providing established logistical support.

Australian assets with high potash deposit potential – Sirius holds leases to explore large tracts of potential salt

deposits in Australia. Historical data from preliminary exploration in nearby deposits points to large scale deposits.

Right to patent applications on capture, storage and use of carbon dioxide in CAES – The acquisition of companies with patent applications for

methods to capture and store carbon dioxide in salt caverns and subsequently to use carbon dioxide in CAES in place of compressed air, places Sirius at the forefront of technology developments likely to become increasingly economically viable as carbon capture gains ground.

Cash crunch – Although Sirius has strengthened its cash position, since it

was reported at GBP8,553 as of March 2009 (net current liabilities were GBP0.5 mn) by approximately GBP3.9 mn, through raising additional funds and gaining the liquid assets of acquired companies, its cash position remains inadequate to meet the capex required to develop its potash assets.

Long gestation period – Development of Greenfield potash projects takes 5-7 years.

CAES plant build time is 2-3 years. The long gestation period, coupled with volatile commodity prices and uncertain outcome from CAES, could prevent Sirius from finding the investment that it needs.

No measured resources or proven reserves that meet current compliance standards – Although available data from historical exploration activities

points towards an abundance of potash resources in the company’s mines, Sirius has not yet identified any reserves or measured resources in today's compliance standards, recognition of which is highly valued by the market.


Proximity to gas pipelines and wind energy provides ready customers for energy storage – North Dakota is the windiest state in the US and the current

administration aims to tap wind energy for electricity generation. As the flow of wind can’t be controlled, Sirius plans to use its salt caverns to store electricity in the form of CAES during off peak hours, transmitting it back to the grid during peak hours. Sirius also intends to use the salt caverns as storage for natural gas from proximate gas pipelines.

Potential sale of metal assets to generate cash flow – As Management plans to focus on potash and alternative

energy, it has the option to raise capital through the sale of its metal mining assets. The probable listing of IMG Group in 1H 10 provides the opportunity to encash metal assets.

A prolonged downturn in commodity prices could thwart potential investment – An extended period of depressed commodity prices,

particularly of crude oil and potash, would lessen appetites for stock in the fertilizer and alternative energy sectors.

Despite its long history, CAES technology as a commercial proposition is at a relatively early stage – Although the small number of CAES plants in operation have

proven successful, the technology has not yet been widely implemented. Any obstacles arising to commercial viability, or failure of the technology currently pending patents, would hamper application of CAES, delaying Sirius’ energy and carbon dioxide storage plans.

Key recent news 23 October 2009: Sirius acquired a 100% stake in Derby Salt Pty Ltd in an all share deal of 100 mn shares. Derby holds mineral leases to explore 125,000 hectares in the Kimberley region of Western Australia.

ManagementRichard Poulden, Executive Chairman: He began his career in merchant banking, moving on to management consultancy, working in Arthur D Little's European strategy practice and co-founding the Financial Industries Group. He has a wide range of natural resource project experience in the US, South America, the Middle East and Central Asia.

Jonathan Harrison, Finance Director: A chartered accountant, he has previously held positions in Intercontinental Hotels Corporation, Boddington Group, Country Hotels Group plc and Topnotch Health Clubs plc. He has led management buy-ins, refinancing programs, overseen listings and the sale of a company. He is also FD for World Mining Services Ltd and Non-Executive Director of Fundy Minerals Ltd.The company has reviewed a draft of this profile and factual amendments have been made

Sovereign Oilfield Group Plc (SOGP: AIM) Sector: Oil Equipment, Services & Distribution


25-11-09

Page 99

Company description Sovereign Oilfield Group Plc (SOGP), established in 2003, provides fabrication and drilling services to oil and gas companies and contractors in the UK and overseas through 10 subsidiaries. It operates through two divisions: – Sovereign Fabrication Services: This division operates

through subsidiaries Caledonian Petroleum Services Ltd, Cooltime Engineering Services Ltd, Forfab Ltd, Labtech Services Ltd, OIL Engineering Ltd, OIL Engineering Middle East LLC, RDT Precision Engineers Ltd and Sovereign Dimensional Survey Ltd, with fabrication facilities in the UK and Abu Dhabi. These subsidiaries provide onshore and offshore fabrication, manpower, project management, installation/spooling/repairs and site services; manufacture well service and packaged equipment; fabricate pipework and subsea structures; and design and manufacture bespoke pressure vessels, storage vessels, silos, site erected storage tanks, heat exchangers, columns, pre-assembled units condensers, evaporators, containerised and skid mounted equipment as well as purpose built air conditioners used in extreme environmental conditions. As of FY 2009, this division accounted for 70% of total revenues.

– Sovereign Drilling Services: This division comprises subsidiaries MaxWell Downhole Technology Ltd (MaxWell) and Serco SA (Serco). MaxWell develops and manufactures high technology instrumentation for the drilling industry, with North America, Europe, India and China as its major target markets. Serco supplies down-hole tools and services to drilling and fishing operations, with key clientele including French drilling companies and global oilfield operators across Southern Europe, North Africa and West Africa.

SOGP is focused on developing its core business and reducing its considerable debt. As a result, and as a condition of continued support from its lending consortium, SOGP sold its non-core subsidiaries; Diamant Drilling Services SA, in Mar 2009 for a cash consideration of EUR0.2 mn, with a further EUR0.3 mn due subject to meeting performance criteria; and Vertec Engineering Ltd, along with the rental cabin assets of Labtech Services Ltd in Jun 2009, for GBP5.45 mn. The company also proposed the sale of Prodrill Engineering Limited (Prodrill) for GBP2.25 mn and sale and leaseback of its Sovereign House headquarters for GBP1.58 mn in Aug 2009, which was approved by shareholders. The Prodrill sale was completed in Sep 2009. SOGP expects to use the proceeds from these disposals to reduce debt and improve its working capital.


All figures in GBP mn, unless specified FY 2008A FY 2009A


Revenues 80.2 82.8 3.2%Operating income/(loss) 1.2 (6.5) N/ANet income/(loss) (7.4) (13.1) (77.0%)Fully diluted EPS (GBP) (0.43) (0.78) (79.1%)Net cash (32.8) (32.5) 0.9% P/E N/A N/A


46,754

1M 3M 12M (32.3) 5.0 N/A


Name Capital30%5%5%

59%100%SOGP

Charles Stanley SecuritiesCharles Stanley SecuritiesMerrill Lynch International

Ernst & Young LLP


Supervising analyst:

Broker:



GBp7.00- GBp19.00


GBP1.82 mn

Dividend yield


Net debt / equity


N/A

Enterprise value GBP34.62mn

Head Off ice location: United Kingdom

Bankers:

TIDM code:

Others

Nominated advisor:


Major shareholders

SOGP

12-month price volume performance1

Capitalization

N/A

Global

United Kingdom

Auditors: Law yers:

Directors and PromotersBrew in Dolphin SecuritiesRensburg Sheppards Investment

Total shares

ISIN number: GB00B0K9D075

CMS Cameron McKenna LLP



Ritw ik BhattacharjeeAnalyst:Company w ebsite: http://w w w .sovereign-oil.eu/

Rupainka Rajan

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Sovereign Oilfield Group Plc (SOGP: AIM) Sector: Oil Equipment, Services & Distribution


25-11-09

Page 100

SWOT


Diversified services and equipment provider – The company is a diversified services and equipments

provider catering to a wide range of oil and gas industry requirements.

Diverse customer base – The company caters to a wide range of customers including

global oil and gas companies such as Total SA, national companies such as Dubai Petroleum as well as oilfield engineering (eg: Wood Group Plc) and specialized service companies.

Negative net worth position – As of FY 2009, SOGP's net worth position was negative,

reflecting significant accumulated losses.

High net debt position – The company is highly leveraged with a net debt position of

GBP32.5 mn at the end of FY 2009. Although this has been reduced by divestments, debt remains extremely high, which will limit the company’s ability to procure additional funds and capitalize on other business opportunities. Furthermore, in the process of complying with lending consortium conditions the company may be compelled to take certain decisions which may be unfavourable to its existing business.


Increased exploration and drilling activities – Increased exploration and drilling activities resulting from low

oil reserves and rising oil consumption, particularly in emerging markets, provides huge scope for upside in demand for oil and gas service providers in the long term.

Volatility in oil prices – Volatility in oil prices affects exploration and drilling activities

which in turn impacts demand for oil and gas services.

Political, social and economic instability– The company derived 21% of FY 2009 revenues from regions

outside the UK and Europe, including the Middle East, West Africa and Latin America. Any political/social/economic instability in these regions may significantly impact the company’s operations.

Key recent news 04 November 2009: Christopher McGeehan, Chief Operating Officer of Sovereign Oilfield, resigned with effect from 31 December 2009 but will remain as a Non-Executive Director of the company.

16 September 2009: Sovereign Oilfield completed the sale of Prodrill Engineering Ltd to Claymore Investments Ltd for GBP2.3 mn as part of the company’s efforts to reduce debt and improve its working capital facilities.

07 September 2009: The company reported FY 2009 preliminary results. FY 2009 revenues increased 3.2% y-o-y to GBP82.8 mn while net loss increased from GBP7.4 mn to GBP13.1 mn.

ManagementGraham Burgess, Executive Chairman: Prior to co-founding SOGP in 2003, he was CEO of MOS International Plc. His noteworthy experience includes serving as the head of Drilling & Subsea Engineering for Texaco North Sea until 1989 and also as worldwide Operations Manager for Premier Oil Plc. until 1994.

Julie Cowie, Group Finance Director: A qualified account with 17 years of experience in the oil & gas sector, she has worked with oil & gas companies including Chevron UK Limited, Premier Oil & Gas Plc and Abbot Group Plc.

1Please note that trading on AIM was suspended in September 2008 pending completion of FY 2008 annual and interim report and accounts. Trading was restored effective 18 May 2009 following publication of 2008 annual and interim report and accounts.

Strategic Natural Resources Plc (SNRP: AIM)

Sector: Mining Sub-sector: Coal

25-11-09

Page 101

Company description Strategic Natural Resources Plc (Strategic) was founded in 2004 as a vehicle to develop, own and manage natural resource extraction enterprises in South Africa. The company is headquartered in London, UK and was admitted to AIM on 07 August 2007.

The company currently engages in mining and exploration of coal in South Africa through its subsidiary, Elitheni Coal (Pty) Limited (Elitheni). The principal asset of Elitheni is phase 1 and 2 prospecting rights granted in 2005, which cover over 9,200 ha of coal prospecting area near Indwe in Eastern Cape, South Africa. Subsequent to 2005, the company has increased its prospecting rights area from 9,200 ha granted under phase 1 and 2 area, to 190,000 ha and demarcated it into 5 phases. The company received its prospecting rights to Phase 3 (approximately 28,000 ha) in December 2007. The applications to phase 4 and 5 areas were accepted by the South African Department of Minerals and Energy and prospecting rights are expected to be signed before 2009 end. The company has full mining licence to access all the coal in its phase 1 and 2 prospecting rights area which was initially estimated to contain approximately 15 Mt of coal, but further drilling has raised the resource to approximately 92.7 Mt (only 5.0% of the area under license has been drilled so far). Of this, extractable coal is conservatively estimated at 52 Mt. In October 2008, Elitheni signed a coal supply contract with Indwe Power (Pty) Ltd, a subsidiary of IPSA Group PLC, to supply 1 Mt of coal per annum for 25 years to Indwe Power’s 250MW electrical power plant to be located at the mine mouth of Elitheni’s coal deposit at Indwe. The plant is due to be commissioned in 2011. In the meantime, Elitheni is targeting brickyards, metallurgical markets and the local heating market for supply of coal locally. Towards this, Elitheni has established 20 small depots in the local area to sell coal and is planning to set up a further 80 depots. Strategic is also making inroads into the industrial boiler market, having entered into strategic partnerships with contractors and designers to convert existing boilers into fluidised bed boilers that can use Elitheni’s coal. Strategic reckons there are around 300 boilers in the Western and Eastern Cape regions that could save up to 20% per annum in fuel costs by making the switch.




Revenues N/A N/A N/A Operating income (730) (664) 9.0%Net income (667) 1,699 N/A Fully diluted EPS (GBp) (1.11) 2.74 N/ANet cash 1,351 287 (78.8%)P/E N/A 4.38


78,468

1M 3M 12M 41.9 22.0 (27.4)


Name Capital18.8%15.0%9.1%6.2%

50.9%100.0%

SNRP

Allenby Capital LimitedBroker: Religare Hichens, Harrison plcBankers:

Grant Thornton UK LLPLaw yers:


GB00B1VQ5F36Nominated advisor:



Sonia BakshiAnalyst:Company w ebsite: http://w w w .snrplc.co.uk/

Nipun Jain

South Africa


Enterprise value

Auditors:

Capitalization

N/A

Southern Cape Corridor Pow er (Pty) Limited

ISIN number:



Coal of Africa Limited

OthersTotal shares


Hanover Nominees LimitedPershing Nominees Limited

GBP11.4 mn

Dividend yield N/A

GBP11.8 mn

Head Off ice location: United Kingdom

Major shareholders

SNRP

TIDM code:

United Kingdom

Net debt / equity1

Managing analyst:Shubhashish Dubey

Royal Bank of Scotland plc

Hammonds


GBp21.00- GBp7.50


01,0002,0003,0004,0005,0006,0007,0008,0009,000

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Strategic Natural Resources Plc (SNRP: AIM)

Sector: Mining Sub-sector: Coal

25-11-09

Page 102

SWOT


Favourable location of the Elitheni project – Elitheni is the sole coal mine active in the Eastern

Cape region of South Africa (the country’s coal industry is predominantly based in the North Eastern part). This gives Elitheni an advantageous position to meet the coal requirements of power plants and industrial market coming up in the Eastern Cape region.

Coal supply contract with Indwe Power – Elitheni has a secure supply contract in place for its coal by

way of the 25-year supply contract with Indwe Power (Pty) Ltd for supplying 1 Mt of coal to Indwe Power’s upcoming 250MW power plant at mine mouth of Elitheni’s coal deposit.

Lack of secured financing – Strategic has been facing financing problems over the last

year with its GBP4.2 mn loan note due from Black Economic Empowerment Partners, led by Vuwa, standing unpaid. In addition, the recent economic crisis has aggravated the company’s financial woes.

– However, recently the company has raised GBP650,000 through the issue of 6,500,000 new ordinary shares at 10 pence per share, to meet its general working capital requirements.


Expected rise in coal demand in South Africa – In 2008, about 48% of South Africa's coal was sold to Eskom

for power generation, 18% was used to make synthetic fuels and 25% was exported. With expected expansion in Eskom's and Sasol’s electricity generation capacity, coal demand in South Africa is slated to rise many-fold.

– Further, coal exports to Asia from South Africa are expected to rise significantly on the back of rising coal demand in Asia from booming economic activity in the region.

Upcoming power plants and industrial market in Eastern Cape region – The Eastern Cape region of South Africa is likely to witness

increased demand for low cost coal from the upcoming coal-based power generation projects, including a few projects by IPSA Group plc and a power station near Emalahleni. This, together with the expected growth in the region’s industrial market, will create a considerable market for Elitheni’s coal.

Competition from established players – The South African coal mining industry is highly consolidated

with the top four players controlling most of the country’s coal resources. Such competitive conditions could exert pressure on the margins of smaller players like Strategic, besides making it difficult for smaller companies to build market presence.

Increasing focus on renewable energy sources – While the progress towards renewable energy generation in

South Africa has been slow so far, increasing focus on renewable energy could prove to be a potent threat for Strategic’s coal mining operations in the long run. In addition, environmental regulations, particularly those related to reducing harmful effects of mining and controlling carbon emissions, could impact Strategic’s current and future operations and profitability.

Key recent news 04 November 2009: Announced that it has raised GBP650,000 through the issue of 6,500,000 new ordinary shares at 10 pence per share. The funds raised under the placing will be used for general working capital purposes.

29 October 2009: Announced interim financial results for 1H 010, reporting sales of GBP72,000 against nil sales in 1H 09. Operating loss declined to GBP137,000 compared with GBP189,000 in 1H 09 (excluding profit on the sale of 26% interest in Elitheni).

ManagementRichard Latham, Non-executive Chairman: He has worked for 27 years with companies in the upstream oil and gas sector at various positions. He also serves as chairman of Northern Petroleum Plc. Previously, he served as deputy chairman of Aberdeen Petroleum Plc, chairman and managing director of Claremount Oil and Gas Limited, and non-executive director of Atlantis Resources Limited. He did his MBA at Cranfield University.

Jeremy Peter Metcalfe, Chief Executive Officer: Previously, he served as chairman of Minmet plc, Connary Minerals plc, Crediton Minerals plc and Tiger Resource Finance plc. He was also involved in arranging early funding of Golden Prospect plc and of Tiger Resource Finance plc. 1 The company has net cash position The company has reviewed a draft of this profile and factual amendments have been made

Toledo Mining Corp Plc (TMC: AIM) Sector: Industrial Metals & Mining

Sub-sector: Nonferrous Metals

25-11-09

Page 103

Company description Toledo Mining Corporation Plc (Toledo) is a nickel exploration and development company with operations on Palawan Island in the Philippines. The company estimates combined pre-JORC resources in excess of 300 Mt grading 1.3% nickel. It reported 563,280 wet-Mt of ore production and shipped 418,350 wet-Mt in FY 2009. Details of the projects in which the company has major interests are as follows: – Berong Deposit: Toledo has a 56.1% interest in Berong

Nickel Corporation (BNC), which owns nickel laterite deposits in Berong, Moorsom and Long Point, collectively known as the Berong Deposit. The company identifies 140 Mt of pre-JORC resource grading 1.41% nickel and a JORC resource estimate of 10 Mt grading 1.55% nickel at Berong. It identifies pre-JORC resource of 120 Mt grading 1.25% nickel at Long Point and Moorsom together. Limited mining was commenced at Berong in 2007 and a long term contract signed to supply the Yabulu nickel refinery with 300,000t-500,000t of ore per year. That contract, due to expire in August 2012, has now been terminated.

– Ipilan Deposit: The company has a 52% stake in Ipilan Nickel Corporation which owns the Ipilan deposit. The deposit has a pre-JORC resource estimate in excess of 46 Mt grading 1.25% nickel, with a JORC resource estimate of 30.6 Mt grading 1.36% nickel for a portion of the total deposit area. Toledo has an option to acquire 40% of venture partner, Brookes Nickel Ventures Inc.'s 24% stake at USD5 mn up to the time of decision to mine and an option to acquire 40% of Celestial Nickel Mining Exploration Corp's 24% stake in the deposit at USD8 mn within a year from the commencement of commercial production. Exercising its options would take Toledo's stake in the Ipilan Deposit to 71.2%.Ipilan is part of the broader Celestial Deposit, the rest of which is owned by MacroAsia Corp, with which Toledo has a MOU for possible joint development of adjoining properties. Toledo estimates a combined pre-JORC resource of over 100 Mt for the combined entity. The company also has an MOU with Jiangxi Rare Earth and Rare Metals Tungsten Group Co., Ltd (JXTC) for the construction of a plant on Palawan.




Revenues 981 1,190 21.3%Operating income 515 1,394 170.7%Net income 1,003 1,640 63.4%Fully diluted EPS (GBp) 3.36 5.48 63.1%Net cash 5,458 2,883 (47.2%)P/E 31.08 4.50


391,937

1M 3M 12M (18.2) (6.7) 110.0


Name Capital24%14%10%53%

100%TMC

Ambrian Partners LimitedAmbrian Partners Limited

Coutts & CoSaw in & Edw ards




Daintree Resources Limited

GB00B0CRWC45Nominated advisor:

N/A

GBP13.29 mn

Dividend yield


Market capitalizationEnterprise value

N/ANet debt / equity

Fevamotinico SARL

Total shares

ISIN number:


Thring Tow nsend Lee & Pembertons

TMC

TIDM code:


GBP10.64 mn

Capitalization


GBp7.75- GBp48.5

United Kingdom

Bankers:

Major shareholders

Law yers:

European Nickel PLC

Broker:

United Kingdom

Auditors:

Others



Somatish Banerji Analyst:Managing analyst:

Company w ebsite: http://w w w .toledomining.comShazia Naik

PhilippinesHead Off ice location:

06001,2001,8002,4003,0003,6004,200

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Toledo Mining Corp Plc (TMC: AIM) Sector: Industrial Metals & Mining


25-11-09

Page 104

SWOT


Vast resource base – The company estimates combined pre-JORC resource of 300

Mt grading 1.3% nickel across all its projects. Its identified JORC resource base consists of 10 Mt grading 1.55% nickel at Berong and 30.6 Mt at 1.36% nickel at Ipilan.

Experienced Management team – The company has a strong Management team, consisting of

experienced personnel and former Management of mining companies, including European Nickel Plc and Larco Plc, as well as experienced personnel from financial companies.

Strong balance sheet – As of August 2009, the company is debt-free and has a book-

value per share of GBp91, reflecting potential upside over its current stock price.

Presence of ready mining deposit – Unlike many junior mining companies, Toledo has a ready

mining deposit at Berong. Although the company has ceased production until March 2010, it can be restarted at the discretion of Management.

JORC compliance pending for a majority of resources – Of the currently identified over 300 Mt of pre-JORC resource,

the company has reported only 41 Mt of JORC compliant resource.

Repayment of loans & receivables dependent on project viability – Despite an apparently strong balance sheet, approximately

45% of the company's assets were in the form of loans and receivables extended to venture partners as of August 2009, repayment of which is linked to the successful commercial exploitation of the Berong and Ipilan deposits.

Dependence on barge transport restricts shipments – The company depends on barge shipment of ore to offshore

ships, which are dependent on local weather and tidal conditions, restricting shipments between the months of October and March.


Leaching plant MOU reflects intention to vertically integrate – The company's plan to construct a leaching plant, the next

step from Direct Ore Shipping (DOS), will strengthen its position in the mining value chain.

Presence of unexplored territory – Exploration is still pending for the better part of Ipilan and the

broader Celestial deposit as well as for parts of Berong.

Government focus on mining sector – The government of the Philippines hopes to attract USD14.5

bn in investment in the mining sector by 2013.

Potential upside in nickel prices from resurgence in Chinese construction/infrastructure sector

Termination of contract for supply to the Yabulu refinery – The long term contract provided Toledo with a steady client,

subject to meeting supply agreements, up to mid 2012, and termination of the contract, assuming BNC's challenge to the termination fails, leaves the company with a worrying client gap.

Downward movement in nickel prices will negatively impact commercial viability of projects and operations

Key recent news 11 November 2009: The company announced that BNC has received a notice from Queensland Nickel Pty Ltd. for the termination of its contract to supply nickel to the Yabulu nickel refinery.

07 July 2009: The company announced the successful placement of 12,000,000 shares for GBP3.36 mn, for planned exploration at Berong, permit compliance expenses at Ipilan and working capital requirements until the end of 2010.

ManagementReginald Eccles, Chairman: Has vast experience in the mining industry in areas of planning, strategy and finance. Mr. Eccles has previously worked at major mining companies including Anglo American Corporation and Consolidated Goldfields Plc and served as the Head of Global mining equities for UBS and ABN AMRO.

The company has reviewed a draft of this profile

Uranium Resources plc (URA: AIM) Sector: Industrial Metals and Mining


25-11-09

Page 105

Company description Uranium Resources plc (Uranium Resources) is an exploration and development company focused on acquiring and developing resources within intermediate-term development cycles. The company seeks to increase its acreage, acquire precious metals projects and use its expertise to build a multi-commodity portfolio.

– Core Team: Uranium Resources has assembled a core team with a strong track record in resource project evaluation, development, management and financing.

– Projects: Currently, Uranium Resources is involved in multiple development projects in Tanzania. The company is evaluating a number of other projects in Tanzania as well as in other jurisdictions that fit its investment criteria.

– Licenses: Along with development partners, Uranium Resources holds uranium licenses for a net 12,700 sq. km. in what it regards as the highly prospective Karoo Basin in Southern Tanzania.


All figures in GBP, unless specified FY 2007A FY 2008A


Revenues 0 0 N/AOperating income (1,634,071) (172,954) 89.4%Net income (1,590,231) (60,656) 96.2%Diluted income per share (GBp) (0.64) (0.02) 96.9%

Net cash 2,071,367 1,810,971 (12.6%)P/E N/A N/ASource: Company data, Argus Research estimates

1M 3M 12M16.0% -2.4% 70.6%-3.8% 6.4% -28.2%

Name CapitalBNY (OCS) Nominees Limited 14.43%Hugh Warner 8.49%Ronald Bruce Row an 8.42%Other 68.66%Total Shares

URA

Ambrian CapitalBarclays Bank PLC

UHY HACKER YOUNG


Broker:

ISIN number:

100.00%

Nominated broker/advisor: Ambrian CapitalGB00B068N088

Capitalization

Company data

Price GBp 2.052-w eek range GBp 0.5 - 2.8Shares outstandingDividend yield 0.0Last-12-month average daily trading volume (AIM) 406,972


291.0 million (mn)


Company w ebsite: w w w .uraniumresources.co.uk


URA


Major shareholders


TIDM code:

Bankers: Auditors:


James Kelleher, CFA

Country of incorporation: UKLaw yers:

UKPrincipal area of operations: AfricaHead Off ice location:

Watson, Farley &

01,0002,0003,0004,0005,0006,0007,000

0112233


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Uranium Resources plc (URA: AIM) Sector: Industrial Metals and Mining


25-11-09

Page 106

SWOT


Prices– The company participates in a commodity with fast-

appreciating prices. Based on the growing popularity of nuclear as a source for generating electricity in the emerging world, uranium prices are up four-fold since the 1990s.

Investor base – The company was established with a strong investor base

from public and private offerings. The group should be able to satisfy the Going Concern basis for the foreseeable future.

Partnering– URA has lain off some risk, in our view, by partnering with Rio

Tinto to develop coal resources on properties it controls.

Early-stage status – Uranium Resources is an early-stage company that has

primarily used farm-in partners for its exploration activity. It is now in the process of buying out its main partner, Indago Partners.

Not profitable – Uranium Partners has not yet earned revenue and is thus not

profitable. The group is reliant on support from existing and future shareholders, and operations are being financed by funds raised in earlier offerings.

Exploration risk – Should the pace or results of exploratory activities disappoint,

existing and prospective investors could withdraw/defer future funding.


Uranium demand – Uranium Resources is primarily focused on mining for

uranium, which we believe will continue to grow in demand as global electricity needs approximately double by 2030

Location – By establishing a focus in stable and mineral-rich Tanzania,

Uranium Resources has a chance to emerge as a major player in an untapped area.

Other minerals – Uranium Resources has the opportunity to develop, alone or

mainly in partnership, rights to other minerals on its properties.

Financially powerful competition – As an early-stage development company, Uranium Resources

is at risk from financially stronger and more established companies that can potentially outbid it for lucrative properties.

Use of nuclear energy in the developed world – While the emerging world is promoting nuclear solutions,

nuclear development in the developed world, and particularly in key nations such as the US, is moribund.

Tanzanian infrastructure – While the Tanzanian properties appear promising, the

potential lack of development infrastructure could compromise profitable extraction.

Key recent news 30 October 2009: Reached agreement with Tanzanian JV partner Indago Resources Ltd. and its group companies to acquire Indago’s interest in the Karoo Basin project. Agreement is conditional on Uranium Resources raising cash and issuing new shares by late December 2009.

22 January 2009: Signed agreement with Rio Tinto whereby Rio Tinto has exclusive right to explore for coal at 2,938 km of Uranium Resources’ exploration license areas in Southern Tanzania. The option relates to all coal contained within the Mtonya and Ruhuhu farm-in license areas, and is in addition to URA’s current uranium farm-in agreement with Indago and its group companies.

ManagementAlex Gostevskikh, Managing Director: A geologist with more than 20 years experience in international mining and exploration for such commodities as gold, silver, and non-ferrous and base metals. He has extensive corporate experience through his involvement with listed companies on the TSX and NYSE.

Velosi Limited (VELO: AIM)Sector: Oil Equipment, Services & Distribution


25-11-09

Page 107

Company description Velosi Limited (Velosi), incorporated in March 2006, is the holding company for Velosi Group. The Group, founded in 1982, provides asset integrity management, health, safety and environment services, which cover quality assurance and quality control services, to a number of leading national and multi-national companies, primarily in the oil and gas sector. The Group’s principal services are: – Asset Integrity Management Services: These involve

ensuring that people, systems, processes and resources are in place, in use and will perform when required over the whole lifecycle of the asset.

– Project verification service: The Group manages and controls quality, right from purchasing and construction through to commissioning, on behalf of the asset owner. These services include reviews of project designs, implementation and operation of quality management systems, auditing and monitoring of contractor quality procedures and on-site supervision of contractors.

– Maintenance quality management services: The Group enables asset owners to safeguard capital investments and take steps to ensure that production output is not disrupted. These services comprise corrosion monitoring and consultancy services, CCTV services, tube inspection, lifting equipment inspection, rig inspection, high definition laser surveying and risk based inspection.

– Certification services: The Group is accredited to international technical authorities to certify plant and equipment for international quality standards. Equipment which the Group is approved to certify includes pressure equipment, heavy lifting equipment (including cranes) and boilers.

– Statutory inspection services: There are certain statutory requirements which require asset owners and operators to have their equipment certified on a regular basis so that the equipment are sold or operated in accordance with local or international legislations.

The Group operates globally through four principal offices in the US, UK, Malaysia and UAE and has operational or representative offices in more than 30 countries worldwide. Its key customers include multinational companies, public utilities, engineering contractors, manufacturing facilities, and small fabrication workshops. Some of the Group’s major clients are BP, Enppi, ExxonMobil, Qatar Petroleum, Transco and Shell.




Revenues 116,997 182,072 55.6%Operating income 11,159 14,389 28.9%Net income 9,756 11,654 19.5%(cents) 18.20 19.60 7.7%Net cash 2,393 15,784 559.6%P/E 13.02 2.85Source: Company data, Bloomberg, Pipal Research

62,680

1M 3M 12M (0.5) 2.8 61.7


Name Capital14.4%11.4%11.1%4.8%

58.3%100.0%

VELO

Strand PartnersBroker: Charles Stanley & Co Limited

Bankers:

Auditors: Mazars LLPLaw yers:


Nipun Jain

Global

Managing

Jersey

GB00B19H9890Nominated advisor:


Country of incorporation: Head Office location:

ISIN number:

GBP43.5 mn GBP37.9 mn


Enterprise value

Velosi (M) SDN BHD

Capitalization

Dividend yield


Raptor Worldw ide Limited

OthersTotal shares


N/ANet debt / equity1


Stephenson Harw ood

UK

Major shareholders

VELO

TIDM code:


GBp115.50- GBp35.50


Sonia BakshiAnalyst:Company http://w w w .velosi.com/

0.71%

Chee Peck KiatMohamed Ashari Bin Abas

Shubhashish Dubey

The Hongkong and Shanghai Banking Corporation Limited

05001,0001,5002,0002,5003,000

020406080

100120140


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Velosi Limited (VELO: AIM)Sector: Oil Equipment, Services & Distribution


25-11-09

Page 108


Long term contracts giving good visibility on future revenues – Around 38.0% of Velosi’s long term contracts had over three

years to run as of 2008-end, providing good visibility on the Group’s future revenues.

Diversified business – Velosi not only provides a broad range of services but is also

geographically well diversified. The Group is increasingly winning one-stop centre contracts to provide services to individual companies in a number of markets.

Consistent revenue growth – Velosi Group has registered impressive revenue growth

(159.3% over a two-year period from 2006 to 2008), on the back of organic expansion coupled with acquisitions. The company is constantly looking to increase its market share through organic and inorganic growth. In 2008, the Group signed14 new contracts of which 6 contracts were in new markets. It also acquired PSC Europe Srl, adding significantly to its portfolio of inspection and expediting services.

Falling margins – Velosi has witnessed some compression in its margins in

the past two years. The company’s operating margin declined to 9.5% in 2007 from 10.9% in 2006, and further to 7.9% in 2008. The significant compression in the margin in 2008 was primarily the result of tougher operating environment in the oil and gas sector off the global economic crisis. Though the margin has improved to 8.04% in 1H 09, it is still below the previous years’ levels.


Growing emphasis on asset integrity and quality control – Regulatory pressures and increasing focus by oil and gas

companies to ensure safety and protection of people, systems, processes, resources and the environment worldwide has led to increased investment on asset integrity and quality control. Companies are increasingly spending to ensure that everything is safeguarded to the highest standards, thus creating increasing demand for Velosi’s services.

Expansion opportunities in new geographies – Increasing oil and gas activity in certain new regions, such as

Kazakhstan, West Africa, Australia and Brazil, presents significant expansion opportunity for Velosi.

Hindrance to growth from weak global economy – Velosi’s growth initiatives have been hindered to some

extent by the weakening of the global economy which has caused many oil and gas companies to cancel or delay some of their projects besides cutting expenditure on asset integrity, quality management and certification.

Competition from larger players – The Group’s global competitors include international quality

certification companies, such as Bureau Veritas, Moody International Group, Lloyd’s Register Group and AIB Vincotte International. These large global players create stiff competition for Velosi. However, Velosi has an edge since it is more flexible in its offerings than these large players.

Key recent news 03 November 2009: Announced that Velosi has reached an agreement with the beneficiaries of Richard Ogunmakin’s estate to acquire shares in Velosi Nigeria and Velosi Angola owned by them.

21 September 2009: Announced financial results for 1H 09, recording 15.4% rise in sales to USD89.2 mn against USD77.3 mn in 1H 08. Pre-tax profit increased 10.4% to USD7.9 mn compared with USD7.2 mn in 1H 08.

ManagementJohn Anthony Hogan, Non-executive Chairman: He was appointed non-executive chairman of Velosi in August 2006. He has 30 years experience in the oil and gas industry and also serves as chief executive of Argos Resources Limited, chairman of PanGeo Inc, and deputy chairman of Noreco ASA, a Norwegian exploration company.

Dr Nabil Abdul Jalil, CEO: He founded the Velosi Group in 1982 and was appointed chief executive officer of Velosi Ltd. in August 2006. Previously, he worked as a research officer with the Malaysian Tun Ismail Atomic Research Centre.

Ooi Soon Teik (Dan), Group Finance Director: He is a certified public accountant and was appointed group finance director of Velosi in March 2006. He also acted as a consultant to Velosi from November 2004 to March 2006.

� 1 The company has net cash position The company has reviewed a draft of this profile and factual amendments have been made

Xtract Energy Plc (XTR: AIM) Sector: Oil and Gas Producers


25-11-09

Page 109

Company description Xtract Energy Plc (Xtract) is primarily focused on identifying and investing in early stage technologies and businesses in both the conventional and unconventional energy sectors. The company’s current activities include various oil and gas exploration and production interests in Australia, Turkey, Morocco, Central Asia, Denmark and the Netherlands. The company was established in October 2004 as Resmex Plc and was listed on AIM in March 2005.

The company is organised into two main operating divisions:

– Oil & gas exploration, evaluation and development:Principal activities of this division are Xtract’s oil and gas exploration and production interests in the Danish North Sea through holdings in Elko Energy Inc, in Turkey through Extrem Energy (a joint venture with Merty Energy) and in Kyrgyzstan through subsidiary, Xtract International Ltd. Xtract owns approximately 36.8% of the issued share capital of Elko Energy Inc which holds an 80% interest in 26 offshore blocks in a 5,400 sq km exploration and production license in the Danish North Sea and a 60% operating interest in gas-bearing P1 and P2 license blocks in the Dutch North Sea. Xtract owns 34% of the issued share capital of Extrem Energy, which holds a portfolio of seven oil and gas exploration and production licenses in Turkey, including a significant potential prospect at Candarli Bay in south-west Turkey. Xtract holds a 25% stake in Zhibek Resources Ltd, which owns a 72% interest in the Tash Kumyr and Pishkoran exploration licenses in the Kyrgyz Republic.

– Oil shale exploitation: Activities in this division revolve around the development of a proprietary supercritical technology for the commercial extraction of liquid hydrocarbons from oil shale, and the development of the company’s oil shale resources in Australia through wholly owned subsidiary Xtract Oil Ltd. Through Xtract Energy (Oil Shale) Morocco SA (XOSM; a joint venture with Alraed Ltd Investment Holding Company WLL in which Xtract holds a 70% interest), it is also planning to evaluate and possibly develop oil shale deposits in Morocco.




Revenues 0 0 N/AOperating income (4,592) (3,532) 23.1%Net income (788) (18,101) (2,197%)Fully diluted EPS (GBP) (0.11) (2.41) (2,091%)Net cash 6,362 3,182 (50.0%)P/E N/A N/A


3,948,484

1M 3M 12M (27.8) (17.2) 163.7


Name Capital45.3%

9.3%45.4%100%

XTR

Smith & Williamson CorporateSmith & Williamson Corporate

The Royal Bank of ScotlandDeloitte and Touche LLP


Com pany dataStock data as of 19-11-09Price GBp2.98

GBp5.03 - GBp0.60


52-w eek range

Lynchw ood Nominees LtdOthersTotal sharesTIDM code:

Net debt / equity

Broker:

12-m onth price volum e perform ance

CapitalizationGBP22.4 mn

Price perform ance (%)


Head Off ice location:


Cambrian Investment Holdings Ltd

Shares outstanding 751.8 million (mn)


N/A

ISIN number: GB00B06QGC5 GB

Dividend yield

Major shareholders

XTR

N/A

Ritw ik BhattacharjeeAnalyst:Managing analyst:

Company w ebsite: w w w .xtractenergy.co.ukMeera Patil

United Kingdom

Nominated advisor:

Bankers:


Country of incorporation: United Kingdom

Auditors: Law yers: Trow ers & Hamlins

Turkey

06,00012,00018,00024,00030,00036,00042,00048,00054,000

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Xtract Energy Plc (XTR: AIM) Sector: Oil and Gas Producers


25-11-09

Page 110

SWOT


Healthy and diverse portfolio of license interests – Xtract holds seven oil and gas exploration and production

licenses in Turkey, exploration and production licenses in gas-bearing license blocks in the Dutch North Sea and an interest in offshore oil blocks in the Danish North Sea.

Support for oil shale from Moroccan government – As a major oil importer, Morocco is seeking to increase its

energy self-sufficiency through exploitation of its oil shale deposits, which contain in excess of 50 mmbbl of oil.

Presence in politically stable economies – Xtract Energy’s existing operational projects are present in

the politically stable economies of the Netherlands, Denmark, Turkey and Morocco.

Current asset holdings are illiquid in nature – Post the sale of stakes in MEO Australia Ltd and Wasabi

Energy Ltd, Xtract no longer holds any interest in publicly listed companies, making its assets/investments illiquid in nature.

A significant portion of assets yet to be monetized – Apart from the Sarikiz-2 oil well in Turkey, which is expected

to begin commercial operations in the last quarter of 2009, other assets are yet to be monetized.


Industry growth potential for conventional and unconventional oil resources exploitation – The EIA predicts global energy demand to rise by 44% over

the next 20 years with petroleum accounting for nearly one-third of the world energy supply.

– Increasing crude oil prices make development of oil shale deposits more viable. The EIA predicts world production of unconventional oil resources to grow fourfold to 13.4 mmbbl/day by 2030, accounting for 13% of total global petroleum supplies.

Interest in entering clean coal technology – The company has stated that it is interested in acquiring coal

assets and developing clean coal technology, such as Coal Gasification. Worldwide gasification capacity is projected to grow 70% by 2015, with 80 % of the growth occurring in Asia (source: GTC).

Regulatory impositions on shale oil extraction in Australia – In August 2008, the State of Queensland announced a 20-

year moratorium on a proposed oil shale development in the Whitsunday region and a two-year review period on all oil shale development activities in the state. Although it does not impact existing mining rights, it restricts new mining activity in the state, pushing Xtract Oil’s oil shale business activity and work on a proprietary technology into a state of hibernation.

Financial viability and existing environmental impact issues – Commercialization of shale oil has met with failures in the

past as a result of lack of financial viability arising from the need to employ expensive technologies. Concerns over the environmental impact of the oil shale extraction process, such as acid drainage, entry of metals into surface and ground water, increased erosion, and greater green-house gas emissions compared to traditional fossil fuels could also prove an obstacle to the success of this division.

Key recent news 16 November: Xtract released preliminary results for FY 2009. The company reported a loss of GBP18 mn for the year, primarily attributable to loss on disposal of available for sale assets and impairment of intangibles.

06 November 2009: Xtract announced the suspension of testing work on the Alasehir-1 well, which had been re-entered in September 2009, as conditions encountered were worse than expected and several attempts to repair the cement bonds were unsuccessful. Reports by the independent expert firm commissioned to make an initial evaluation on the concession areas estimated the recoverable oil from Sarikiz field at 13 mmbbl, considerably lower than Extrem Energy’s previously published estimate of 74 mmbbl. On a positive note, the company stated that work at Sarikiz-2 is progressing well and the oil well is being prepared to begin commercial production in the last quarter of 2009.

ManagementAndrew Morrison, Chief Executive Officer: With over 25 years of experience in the energy and related services industry, he has served in strategic and business development roles at the BOC Group, BG Group and Shell.

John Newton – Executive Chairman: An investment advisor and consultant involved in the Australian and International financial sector. He has been the director of many listed companies in Australia and Canada.The company has reviewed a draft of this profile and factual amendments have been made

Commodities Initiation Report

25-11-09

Page 111

Disclaimer This report has been prepared under the PSQ Analytics service (“PSQ”), which comprises three research providers – Argus Research Company; Pipal Research, whose group company Firstsource Solutions UK Limited is regulated and authorised by the Financial Services Authority; and Independent International Investment Research Plc, whose subsidiary Pronet Analytics.com Limited is regulated and authorised by the Financial Services Authority. The research providers (“Research Providers”) are responsible for the publication of this report. This report has been produced in accordance with the CFA Institute/National Investor Relations Institute Best Practice Guidelines governing analyst/corporate issuer relations, available at the PSQ Analytics website at www.psqanalytics.com

Prior to the publication of this report, relevant sections of this report had been submitted to management of the companies that are discussed in this report for review for factual accuracy. If management has not been able to discuss its view, it is duly noted at the appropriate places within the report.

The Research Providers are independent investment research providers and are not members of the London Stock Exchange, the New York Stock Exchange, the Financial Industry Regulatory Authority, or the Securities Investor Protection Corporation and may not be authorised by the Financial Services Authority or registered with the United States Securities and Exchange Commission. The Research Providers are not registered broker dealers, do not have investment banking operations and do not make markets in any securities. The Research Providers and their affiliates each apply an employee dealing code of practice that prohibits employees, officers and directors of the Research Providers and their affiliates from taking positions in the companies covered in this report. Neither the analyst(s) responsible for this report nor any related household member is a director, officer or advisory board member of the companies covered in this report. No one at the companies covered in this report is a director of the Research Providers.

Any trade mark, service mark or logo contained in this report is the intellectual property of its owner(s). The information contained in this report is produced and copyrighted by the Research Providers and any unauthorised duplication, editing or re-use of the data or commentary included in this report is prohibited by law and can result in prosecution.

The content of this report may be derived from the Research Providers’ research reports, public information sources, management interviews, notes or analyses. The opinions and information contained herein have been obtained or derived from sources believed to be reliable but the Research Providers makes no representation as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. The Research Providers shall accept no liability for any loss arising from the use of this report other than any liability for loss that the Research Providers cannot exclude by law. The Research Providers shall not treat any recipient of this report as a customer simply by virtue of his, her or its receipt of this report. Investments involve risk and investors may incur either profits or losses.

Any macro assumptions and conclusions contained in this report are those of the Research Providers and not of the companies covered in this report. The foregoing may differ between different research providers that are providing research in connection with the PSQ Analytics service.

This report is not an offer to sell, or a solicitation of an offer to buy, any security. Past performance should not be taken as an indication or guarantee of future performance.

The information and material presented in this report are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this report. Any advice or recommendations contained in this report may not be suitable for you and are not intended to be relied upon by you in the making (or refraining from making) of any specific investment or other decision. Investing in any security or investment strategy discussed may not be suitable for you and it is recommended that you consult an appropriately qualified independent adviser. Nothing in this report constitutes individual investment, legal or tax advice. The Research Providers may issue or may have issued other reports that are inconsistent with or may reach different conclusions than those represented in this report, and all opinions are reflective of judgments made on the original date of publication. The Research Providers are under no obligation to ensure that other reports are brought to the attention of any recipient of this report.

Commodities Initiation Report

26-11-2009

Main report authors: Ashish Tripathi

Deepak Chugh

Nirav Shah

Ritwik Bhattacharjee

Simi Panicker

Somatish Banerji

Contacts: [email protected] [email protected] [email protected]

©Argus Research Company, Independent International Investment Research Plc and Pipal Research Group 2009. All rights reserved.

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