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European Metals & Mining: Copper for

the Craftsman Cunning at His Trade


SEPTEMBER 2013
SEE DISCLOSURE APPENDIX OF THIS REPORT FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

US$10,000/t copper...theres no substitute for quality and this is in short supply

Is US$10,000/t copper a possibility? Yes, it is this Blackbook examines the forces that will
send the copper price to new highs, with 2016 seeing copper begin its ascent towards
US$10,000/t
Chile played a unique role in providing the world with two decades of copper at suppressed
prices; but it will be impossible to ever replicate the impact of Chile on copper; sources of supply
not economic at today's price must soon be brought into play
In the face of increased geopolitical risk, falling grades and the declining success of exploration,
significantly higher copper prices will be required to incentivize the necessary new mine
capacity
The total amount of copper embedded in China's capital stock today is 29kg/capita equivalent
to just 30% of the Japanese levels and 22% of South Korean levels; as a later-cycle commodity,
copper demand in industrializing China has a long way to go
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Portfolio Manager's Summary

Our analysis is complex, but the thesis is simple: We do not believe that the copper
price has become detached from the economics of supply and demand. Rather, we
believe that the rising copper price over the last decade has triggered five effects
critical for maintaining the supply/demand balance. First, it allowed for the entry of
1Mtpa of high-cost sub-scale material from China. Second, it enabled the
exploitation of lower-grade sections in existing mines, thus offsetting the effects of
the deposits' geological degradation. Third, it incentivized investment in new
projects, despite the declining exploration success and increased geopolitical risk.
Fourth, it accelerated the use of scrap copper as a substitute for mined material.
Finally, it has witnessed the replacement of copper in nonessential applications
with aluminum and steel. This Blackbook is primarily supply side focused and
examines the first three of these effects.
Our thesis can be summarized in five key points. First, copper is the most
overutilized major commodity, and a higher price should be the result of an
overexploited metal. Incentivizing an increase in the supply of a metal with little
availability and an already high rate of exploitation requires prices to move
upwards. Second, major new discoveries are declining. The rate of new large
copper porphyry discoveries has ground to a halt. In contrast, demand has
accelerated on the back of Chinese industrialization. Third, China's importance as a
copper supplier is rising. In terms of growth, the last decade has seen Chile stall
and China emerge as the fastest-growing source of supply currently the world's
second-largest supplier, despite a lack of high-quality geology. Fourth, the missing
1Mt of Chinese production is very high cost and will only get more expensive over
time, thus further steepening the cost curve. Fifth, grade declines increase costs
enormously. Although the declines in global head grade may be well known, the
implications of this on future copper prices are not. Because head grades are too
high today, they must fall tomorrow.
Of the movement in copper, 90% is explained by just three factors: grade, GDP
and inventories. A regression in the form of Price = +
1
x Grade +
2
x GDP
+
3
x Inventory explains nearly 90% of the variation in copper price over the
last 35 years. By far, the most important element is grade. We can then use this
relationship as the basis of a price forecast. Even the most conservative grade
profile gives rise to prices well in excess of US$10,000/t. It is only a question of
when this occurs, not if, in our view.
All the major miners have copper exposure but none more so than Glencore
Xstrata, which stands to benefit the most, should our forecast hold true. In
particular, we like the decisiveness of Glencore Xstrata in its commitment to the
development of the "new world" copper assets in Peru and Central Africa. For us,
the most significant new copper development belongs to Rio Tinto, with Oyu Tolgoi
in Mongolia. We also note that Rio Tinto has a number of longer-dated growth
options in La Granja and, especially, Resolution. In addition, we remain "believers"
in the copper price story. In our view, the fundamentals for copper are conducive to
the price staying genuinely "stronger for longer" relative to, say, iron ore.

Paul Gait paul.gait@bernstein.com +44-207-170-0599
Christian Cole christian.cole@bernstein.com +44-207-170-5101
Rusne Didziulyte rusne.didziulyte@bernstein.com +44-207-170-0541
September 24, 2013
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Table of Contents

Significant Research Conclusions 5
Copper Supply and China as the Marginal Producer 15
Copper Geology: Chile and the World's Deteriorating Deposits 29
Grade Is King 67
From Grade to Grunt and the Real Impact of Wage Inflation 101
Demand Waiting for the Trend to Reassert Itself 121
Price Forecast 135
Appendix 145
Index of Exhibits 187


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Exhibit 1 Financial Overview
Source: Bloomberg L.P., FactSet and Bernstein estimates and analysis.
9/20/2013 AngloAmerican BHPBilliton GlencoreXstrata RioTinto Vale MSCIEurope
AAL.LN BLT.LN GLEN.LN RIO.LN VALE3.BZ MSDLE15
Rating O O O O O
LocalCurrencyUnits BRL
CurrentSharePrice(LocalCurrency) 13.95 18.45 2.70 29.54 31.31 387.48
52WeekHigh(LocalCurrency) 20.72 22.36 3.98 37.57 44.10 390.06
CurrentLow(LocalCurrency) 12.07 16.67 2.57 25.82 28.39 317.35
YTDPerformance(%) (17.9%) (4.2%) (6.0%) 2.0% (5.2%) 14.8%
YTDRelativePerformance(%) (32.7%) (18.9%) (20.7%) (12.7%) (20.0%)
12MonthPriceTarget(LocalCurrency) 20.25 22.50 5.25 41.25 46.50
PotentialUpside/(Downside)toTP 45% 22% 94% 40% 49%
MCAP(US$m) 27,282 149,601 28,538 83,128 79,549
NetDebt/(Cash)(US$m) 9,719 32,169 22,551 21,769 26,088
Minorities 17,642 1,349 5,032 490 (4,702)
EV(US$m) 53,688 174,499 95,458 103,030 100,935
EBITDAUS$m AngloAmerican BHPBilliton GlencoreXstrata RioTinto Vale
2013E 10,002 25,614 15,902 24,183 22,523
2014E 11,494 38,119 20,203 31,348 26,230
2015E 14,005 45,903 26,252 38,698 32,415
EV/EBITDAUS$m AngloAmerican BHPBilliton GlencoreXstrata RioTinto Vale
2013E 5.4 6.8 6.0 4.3 4.5
2014E 4.7 4.6 4.3 3.3 3.8
2015E 3.8 3.8 3.3 2.7 3.1
EPSUS$/share AngloAmerican BHPBilliton GlencoreXstrata RioTinto Vale
2013E 2.10 2.70 0.43 5.27 2.28
2014E 2.64 3.73 0.63 7.19 2.55
2015E 3.10 4.73 0.97 9.33 3.58
DividendYield% AngloAmerican BHPBilliton GlencoreXstrata RioTinto Vale
2013E 4.0% 4.1% 3.4% 3.7% 2.2%
2014E 3.1% 3.4% 4.7% 3.8% 3.3%
2015E 3.4% 3.5% 5.6% 4.8% 4.6%
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Significant Research Conclusions

Our analysis is complex, but the thesis is simple: We do not believe that the copper
price has become detached from the fundamentals of supply and demand. We
believe that the rising copper price over the last decade has triggered five effects
critical for maintaining the supply/demand balance. First, it allowed for the entry of
1Mtpa of high-cost sub-scale material from China. Second, it enabled the
exploitation of lower-grade sections in existing mines, thus offsetting the effects of
the deposits' geological degradation. Third, it incentivized investment in new
projects, despite the declining exploration success and increased geopolitical risk.
Fourth, it accelerated the use of scrap copper as a substitute for mined material.
Finally, it has witnessed the replacement of copper in nonessential applications
with aluminum and steel. This Blackbook is primarily supply side focused and
examines the first three of these effects. We see no reason to believe that the price
agnosticism of consensus will hold true, and believe that copper will test the
US$10,000/t mark by 2018. All the major miners have copper exposure but none
more so than Glencore Xstrata, which stands to benefit the most, should our
forecast hold true.

The consumption of commodities varies with their geological abundance. The
world's economic system has adapted to use those materials that are most readily
accessible. More interesting, though, is not the relationship between commodity
abundance and its use itself, but rather the departures from this relationship. A low
geological abundance and high use tells us that the metal in question is relatively
more important for the world economy than a metal with a high abundance and low
use. All other things being equal, a higher and stronger price should result for an
overexploited metal and vice versa. In other words, incentivizing an increase in the
supply of a metal with little availability and an already high rate of exploitation
(absent improvements in the productivity of mining) requires prices to move
upwards.
Exhibit 2 shows the relative overutilization and underutilization of the main
industrial metals: The higher the figure, the more overexploited a commodity is. In
this context, copper stands as the most overexploited metal, with a production 16.4
times greater than the underlying relationship between abundance and use would
suggest. We already use copper at an incredible rate. Consequently, growing
production necessarily involves accessing more challenging geology.

We Do Not Believe That the
Copper Price Has Become
Detached from the
Fundamentals of Supply and
Demand
Copper Is the Most
Overutilized Major Commodity
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Exhibit 2 Copper Stands Out as Being the Most Overutilized Commodity Relative to
Underlying Geological Endowment Testimony to the Industrial Importance of This
Metal and the Difficulty in Growing Supply in Anything Other Than a Supportive
Price Environment
Source: USGS and Bernstein analysis and estimates.

Copper porphyry deposits are critical to support global copper demand. Exhibit 3
looks at the history of copper porphyry discovery and the real copper price.
Historically, copper mining was far more frequently an underground activity with
human labor chasing rich seams. It was inherently much less productive and
economic only insofar as labor was abundant and cheap.
The real price of copper halved in the 1920s, on the back of an explosion in
copper porphyry exploitation. The demonstration of the economic viability of low-
grade copper mining encouraged the delineation and discovery of significant
number of very large deposits that had hitherto been thought un-mineable using
human muscle power alone. In the post-World War II period, as the scale of new
copper porphyries began to decline, the real price of copper began to rise. Against a
rising demand environment (supported by electrification programs in the West), the
technological and geological step-change in new porphyry discovery began to run
its course.
An observer in the 1970s would have been forgiven for thinking that real price
increases for copper were likely to continue indefinitely. However, two things
intervened to change this the step-change in Western copper demand growth
after the oil shocks and the economic reforms in Chile. The Chilean economic
reforms of the late 1970s and 1980s and the return of foreign investment saw a new
wave of copper deposit discoveries. The supply of new material from Chile was
sufficient to result in two decades of negative price performance for copper.
However, since then the rate of new large copper porphyry discoveries has
ground to a halt. Moreover, demand has accelerated on the back of Chinese
industrialization, and we are now back to the territory of real price increases. That
is, we are back to where the copper price trend extrapolated from the end of the
1980s would have taken us, if the impact of Chile was taken out. It is worth noting
that there is no new Chile on the horizon, and that Chile occupies a unique
geological position as far as copper is concerned.

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Exhibit 3 The Long-Term History of Copper Porphyry Discovery Had a Marked Impact on the
Copper Price: Falling Prices Have Been Associated With Increased Finds of
Relatively Few Massive Ore Bodies We See No New Chile on the Horizon
Note: Bars are the average size of new copper porphyry discoveries and the line is the copper price.
Source: USGS and Bernstein analysis and estimates.

Chile's contribution to the supply of copper metal is hard to exaggerate (see Exhibit
4). It is 260% larger than its nearest rival, China. However, in terms of growth, the
last decade has seen Chile stall and China emerge as the fastest-growing source of
supply. The countries where growth has stalled (Chile, the U.S., Australia, Canada
and CIS) contain all of the "easy" political locations for mining investment.
This is highly suggestive of the fact that the mining industry first invested in
and developed the easiest projects from a risk-return perspective geology, which
makes perfect sense. But it also serves as yet another reminder of the difficulty that
future mined growth will encounter, as the copper industry is forced to take on ever
higher risk to secure new sources of supply.

Exhibit 4 Chile Stands Out as the Most Important Source of Supply, But This Was Not Always
the Case While Chile's Growth Has Slowed, China's Has Accelerated

Source: Wood Mackenzie and Bernstein analysis and estimates.
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Source and No. 2 Global
Supplier of Copper
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Copper price forecasting requires one to understand the industry's cost structure.
We believe that today's copper supply structure and price setting are radically
misunderstood by the broad market. Standard cost curves of Chinese copper supply
lack approximately 1 million tons of new mined Chinese copper that have been
added since 2003. We estimate the cost of these "missing mines" using data from
the Chinese National Bureau of Statistics. Knowledge of the industry's margins in
aggregate, copper price and total Chinese production enables us to estimate the
structure of the residual part of the cost curve (see Exhibit 5).
China has been the fastest-growing source of new mined copper over the last
decade, despite not having anywhere near the endowment of metal that would
ordinarily lead one to expect such a feat was possible. No one really understands
where this additional metal has come from and the nature of the mines that have
been required to come on line to satisfy Chinese copper demand. There has been a
huge growth in unknown and consequently "un-costed" metal over the last decade.
What we do know is that this growth in production has tracked the rise in
copper price (see Exhibit 5). What this relationship indicates: It is only through the
expedient of rising prices that supply has been able to match demand. Thus, we
assert that it is a large number of small, low-grade and high-cost Chinese mines that
stand at the right-hand side of the global cost curve and connect the cost curve to
the price of copper.

Exhibit 5 A Corrected China Cost Curve Would Display Much More High-Cost Production: The
Relationship Between Price and Chinese Copper Output Tells Us That They Are Not
Unrelated Phenomena

Source: Wood Mackenzie, NBS and Bernstein analysis and estimates.

A steep cost curve implies a price that is high relative to average industry costs, and
thus a high margin for the low-cost producers. A flat cost curve implies a price that
is low relative to average costs and, consequently, a low margin for the industry.
Of the three main cost drivers in mining, two diesel and power show
very little geographical variation. This is as expected: oil, coal and gas markets
trade, in large measure, on global markets with internationally determined prices. In
contrast, there is very significant international variation in the third cost driver
the price of labor. Consequently, labor cost evolution has the greatest ability to
drive differential mining cost escalation and so a margin-generating rotation in the
cost curve.
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The Missing 1Mt of Chinese
Production Is High Cost
Chinese Supply Is Relatively
Much More Costly This
Steepens the Cost Curve
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Given that a multitude of low-grade and labor-intensive Chinese mines sit at
the right-hand side of the global copper cost curve, the key determinant of future
marginal cost and hence price will be the future evolution of these mines.
Given the global nature of oil and energy price, a view on this evolution boils down
to a view on the future development of the Chinese copper's labor costs.
Exhibit 6 shows copper mining costs in the U.S. compared to those in China.
In real terms, we expect the U.S. mining costs to track roughly flat and China's to
rise dramatically. Given that Chinese production already sits at the right-hand side
of the global cost curve, this would lead to a steeper rather than flatter copper cost
curve. Consequently, not only will the productivity of the global copper industry
decline as the impacts of deeper mines and lower grades make themselves felt, but
the costs associated with the lower productivity will also rise. As a result, in our
view, the copper price must rise in real terms, thus generating further margin for the
mining industry.

Exhibit 6 It Is the Differential Cost Escalation That Drives Real Commodity Price Increases in
USD Terms
Source: Wood Mackenzie, IHS and Bernstein analysis and estimates.

Total costs of a mine are determined by the amount of ore and waste moved and the
volume of ore milled. The ore tonnage scales to the total cost base.
However, the grade determines the unit costs, as it determines the amount of
metal available to bear the total costs of the operation. Consequently, the unit costs
of a mining operation are inversely proportional to the grade of the material
exploited. It is possible to show the sensitivity of operating costs to changes in
mining parameters and efficiencies. To pick just one example, the hardness of a
rock will determine the power that is required to grind that rock to a suitable size
fraction. Exhibit 7 shows the huge differences in mining costs arise from
differences in head grade. Copper reserves have only grown in the face of
increasing consumption because the global reserve grade has collapsed. Reserves
have held up only because resources have been converted into reserves by
dramatically lowering the cut-off grade.
The inadequacy of reserves under current economic conditions necessitates
changing the conditions that are deemed necessary to decide what counts as
reserves. The geology is invariant, the economics must change. Even though the
declines in global head grade (that is, the material that stands behind the cost
2.89%
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+140%
China USA
DifferentialCostEscalationUSAtoChina
Grade Declines Increase Costs
Enormously Grade Is the
Most Important Determinant of
Mining Costs
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structure and price of copper today) may be well known, the implications of this for
future copper prices are not.
What matters for the price are the relative declines of the prevailing head
grade, the reserve grade and the cut-off grade. Critically, we see that 10 or so years
ago, global head grades moved from being below global reserve grades to being
significantly above them. The relationship between head grade and cut-off grade
enables one to calculate the trajectory of future head grades. Because head grades
are too high today, they must fall tomorrow. Our analysis would suggest that the
risk of grades falling faster than many anticipate is high.

Exhibit 7 "Grade Is King" and Global Head Grades Are Declining

Source: Wood Mackenzie and Bernstein analysis and estimates.

Our analysis suggests the structural form for a multivariate regression that explains
(without the introduction of specious exogenous regime shifts and Heaviside
functions) the copper price evolution over the last 35 years.
The following regression explains nearly 90% of the variation in copper price
over the last 35 years
Price = +
1
x Grade +
2
x GDP +
3
x Inventory
These elements serve as a proxy for an economic determinant of price; in
particular, the cost structure of the industry (grade), global demand (GDP) and
global supply (inventory). By far the most important driver of the three is grade.
This relationship gives the effective real-world cost increase implied in grade
decline (see Exhibit 8).
We can then use this relationship as the basis of a price forecast. We know that
global grades are going to continue declining as currently sub-economic resources
rather than the accelerated exploitation of existing high-grade reserves are called to
satisfy demand growth. The IMF provides a useful global GDP forecast. Finally,
we can assume relative stability in warehouse inventories. Even the most
conservative grade profile gives rise to prices well in excess of US$10,000/t. It is
only a question of when, not if, this occurs.
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Global Copper Head Grade
Of the Movement in Copper,
90% Is Explained by Just Three
Factors: Grade, GDP and
Inventories
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Exhibit 8 Nearly 90% of the Movement in Copper Is Explained by Just Three Factors: Grade,
Global GDP Growth and LME Inventory
Source: Bernstein analysis and estimates.

In addition to focusing on the supply side, we must, of course, look at demand. The
key point is that, recent weakness aside, we continue to believe that growth is
nowhere near over. We define "copper intensity" as consumption per unit of output
(i.e., copper per US$1,000 GDP), against the overall level of output (i.e., GDP per
capita). We think of it as a "rate," showing how rapidly the country is embedding
copper into the economy in a given period.
We define "cumulative copper intensity" or "copper capital stock" as the total
historical copper installed per capita against the level of output. We look at this as a
measure of the "level" of development, looking at how successful historic capital
investment decisions have been.
We believe that both of these measures are necessary to gauge the current
position of copper (and other commodities') consumption in an economy, as the
term "rate" by itself only tells how fast an economy is developing. However, only
by looking at the term "level" can we answer the question about the success and
longevity of the industrialization. We believe that it is impossible to use the history
of copper intensity alone to derive a forecast for future copper intensity.
Looking across the 35 countries (and country groupings) that actually consume
the world's refined copper, we can chart how far down the path of industrialization
each country is and the relationship of this to copper capital stock. It is only
relatively late in a country's economic development that the bifurcation between a
service- and a manufacturing-oriented economy actually takes place. There is a
certain base load of metal that must be installed before this economic "choice" is
made. In this context, it is important to note that China has a capital stock of copper
equivalent to 29kg/capita just 30% of Japanese levels and 22% of South Korean
levels.
Knowing the end role of copper consumption provides the "missing" data point
that is not supplied by an analysis of the rate of copper consumption alone.
Consequently, the trajectory from the present into the future, in terms of copper
intensity, can be constructed for any country.
The most important country for which we attempt this is China. We use the
relationship between copper stock and output in Japan to model a demand-side
trajectory for China. If we assume that copper productivity in China mirrors that
R = 0.8864
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
F
i
t
t
e
d

C
o
p
p
e
r

P
r
i
c
e

-
U
S
$
/
t
Actual Copper Price - US$/t
Copper Price Regression
We Use Copper Consumption
and Capital Stock to Derive the
Copper Intensity Curve for
China
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seen in Japan, the development of China's copper stock and its economy ought to
follow the same pattern. This translates into the pattern for copper intensity
development seen in Exhibit 9.

Exhibit 9 Our Analysis Gives Rise to the Following Trend Line for China's Copper Intensity
Source: Wood Mackenzie, USGS, Mitchell and Bernstein analysis and estimates.

As mining companies represent operationally and financially geared exposure to
underlying commodity baskets (with ~80% of weekly equity price moves explained
by moves in underlying commodity prices), we use a regression-based trading
model and our forward commodity price forecasts to determine our 12-month price
targets for our European metals and mining coverage.
To the extent that the regression holds, and the parameters of the regression
have not significantly shifted, we take the target price from the trading model. To
the extent that the regression is shifting or the equity is deviating, we look for
evidence of whether this shift or deviation is temporary (and hence may be
expected to close) or whether it signals a more fundamental re- or de-rating of the
equity. In the event that there is no significant deviation or if we believe a deviation
is temporary, the target price is set by the trading model. In the event that we
believe a deviation is signaling a fundamental change, we will adjust our target
price for this fundamental shift and disclose the manner and magnitude of the
adjustment made. At present, no adjustments have been made to the target prices
generated by our trading model. Note that we round final target prices in 25p/cent
increments.
In addition to the target price (and short-term price forecasts generated by our
trading model), we calculate a supplementary valuation that is DCF based. Given
the long-lived nature of mining assets, we believe a DCF is critical to
understanding the intrinsic value of a share (what the share price, in our view,
"ought" to be today). Our DCF model is constructed in nominal local currency
terms out to 2030, over which explicit commodity price and exchange rate forecasts
apply. The nominal local currency cash flows are de-escalated into real USD cash
flows and discounted at the company-specific WACC. A country risk premium
reflecting the geographic origin of the cash flows is added to the underlying WACC
to reflect cash flow items (i.e., expropriation) that cannot be explicitly modeled in
the cash flow. All reserves are considered exploited by the model. In addition 50%
of the incremental resources (i.e., 50% of the residual resources, excluding those
-
.10
.20
.30
.40
.50
.60
.70
.80
- 5.0 10.0 15.0 20.0 25.0 30.0 35.0
k
g
/
'
0
0
0
$

G
D
P
GDP/Capita (Real 2005$ PPP)
China Copper Intensity Forecast
China Actual China Trend China Forecast
Valuation Methodology
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that have already been converted to reserves) of the company are modeled. Where
residual life of the mine (LOM) may be inferred for operations beyond the 2030
time horizon, a terminal value is calculated for the remaining years of potentially
exploitable material. We use this methodology to derive all forward-looking
multiples and other valuation metrics. Note that we forecast our models in reporting
currency (USD), convert to listing currency (British pound sterling or Brazilian
real) at an average exchange rate, and round final DCF values in 25p/cent
increments.

The four most significant risks facing the major mining houses are: 1) lack of
capital discipline (specifically displacement of high-cost Chinese marginal
producers by low-cost Western production), 2) operating cost inflation (USD-
denominated unit costs in all the major mining houses have seen double-digit
growth rates over the last 10 years, roughly half of which are macro related and the
other half are real local currency), 3) a sustained downturn in the Chinese economy
(the largest consumer of global resources) and 4) resource nationalism (ranging
from increased share of rent extraction to outright asset confiscation).

Copper is the second-most important mined commodity after iron ore for the large
miners, contributing 16% of EBITDA in 2012 (see Exhibit 10). Unlike iron ore,
copper exposure is ubiquitous in our coverage group, with none of the world's
largest mining companies lacking deposits of this commodity (see Exhibit 11).
Glencore Xstrata is the most exposed, while Vale is the least. In particular, we like
the decisiveness of Glencore Xstrata in its commitment to the development of the
"new world" copper assets in Peru and Central Africa. For us, the most significant
new copper development belongs to Rio Tinto, with Oyu Tolgoi in Mongolia. We
also note that Rio Tinto has a number of longer-dated growth options in La Granja
and, especially, Resolution. In addition, we remain "believers" in the copper price
story. In our view, the fundamentals for copper are conducive to the price staying
genuinely "stronger for longer" relative to, say, iron ore.

Exhibit 10 Copper Makes the Second-Most Important
Contribution to the Cash Generation of the
Miners

Exhibit 11 Glencore Xstrata Is the Most Highly
Exposed in Our Coverage to the Copper
Price and Vale Is the Least
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.


Iron Ore
58%
Copper
16%
Nickel
1%
Zinc/Lead
3%
Coal
9%
Aluminum
1%
Other
12%
2012 Mining EBITDA (ex. Glencore
trading) (100% = US$83bn)
38%
25%
17%
9%
3%
62%
75%
83%
91%
97%
Glencore
Xstrata (100%
= US$12bn)
Anglo (100% =
US$9bn)
BHPB (100%
= US$25bn)
Rio (100% =
US$20bn)
Vale (100% =
US$18bn)
Contribution of Copper to Mining EBITDA
(2012)
Copper Other
Risks
Investment Conclusion
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Rio Tinto (TP 41.25) 91% of 2012 EBITDA from copper: We consider
Rio Tinto the most attractive stock in our coverage. Rio also has exposure to some
of the world's best operational copper assets not to mention two of the world's
best undeveloped copper deposits (Resolution and La Granja). Moreover, Rio owns
some of the highest-quality iron ore assets and (vitally) infrastructure globally. Tier
1 assets in copper include Escondida, Grasberg, Bingham Canyon and Oyu Tolgoi,
while iron ore includes Dampier and Cape Lambert (Australian Pilbara). The
prospects of genuine capital discipline and cost cutting under new CEO Sam Walsh
(who made his bones in low-cost brownfield Pilbara production), coupled with a
more reasoned approach to volume growth, mean that we continue to see Rio Tinto
as our top pick.
Vale (TP BRL 46.50) 3% of 2012 EBITDA from copper: Vale is the
world's largest iron ore producer and, in Carajas, has one of the most globally
attractive iron ore assets. It is the most operationally geared miner to the iron ore
price and we see an asymmetric risk to the upside in iron ore prices in the near
term, hence from a pure value consideration, we are more favorably inclined to
Vale now than previously. We do note the significant influence of the Brazilian
government (5.5% directly through Golden Shares and ~34% indirectly through the
strategic consortium of Valepar). The company is, in our view, most at risk should
a reduced iron ore price eventuate, given its geographic distance from the worlds
largest consumer of iron ore, China.
BHP (TP 22.50) 17% of 2012 EBITDA from copper: BHP Billiton is
our highest-quality stock. In 2012, the company generated the highest revenue of
the "Big Three" miners in our coverage (US$72 billion versus US$56 billion for
Rio and US$49 billion for Vale) and had the highest EBITDA margin (42% versus
39% for Vale and 36% for Rio). It is the second-most diversified (from a
commodity exposure perspective) company in our coverage, after Anglo American.
However, where platinum has been a drag on Anglo's portfolio, BHP's has received
a boost from its petroleum division (69% EBITDA margins in calendar 2012 versus
11% for Anglo's platinum division). The strong commodity risk diversification is
complemented with geographic diversification that, while skewed to Australia, is
nonetheless low risk.
Anglo American (TP 20.25) 25% of 2012 EBITDA from copper: Anglo
American has the most diversified portfolio of our coverage group from a
commodity perspective and is significantly smaller than the "Big Three" of BHP,
Rio and Vale due to its smaller iron ore exposure. Kumba, however, like AmPlats
and thermal coal, increases the company's country risk exposure due to its South
African location and earns the company the highest country risk premium in our
coverage 2.6% versus an average of 1.2% for the "Big Three." Given recent
operational difficulties (including failure to deliver on Minas Rio and Los Bronces,
not to mention the issues plaguing platinum), Anglo remains in our minds a
turnaround story one that will challenge new CEO Mark Cutifani, but one we
believe is solvable for a leader with his 36 years of operational expertise.
Glencore Xstrata (TP 5.25) 38% of 2012 EBITDA from copper:
Glencore Xstrata offers exposure for copper and coal bulls without a taste for iron.
It also offers exposure to the sales and trading house that Mr. Ivan Glasenberg
built. As such, it has a profile that is distinct relative to the pure miners in our
coverage. The impact of the high-turnover, low-margin trading business (2%
EBITDA margin in 2012 versus 25% for Glencore Xstrata combined) is clearer
even when contextualized against the average 33% for our coverage group. As an
owner operator (Mr. Glasenberg holds 8% of the combined entity's paper), the
CEO's incentives are squarely aligned with investors. We do consider that Glencore
has some ways to go yet before it will be "institutional quality" on the metrics of
reporting and governance. Furthermore, the company's operations in frontier
jurisdictions like the DRC not only result in the second-highest country risk
premium in our coverage but also carry headline risk as does Glencore's trading
division.
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Copper Supply and China as the
Marginal Producer

In 1814, Thomas Cooper, in the Emporium of Arts and Sciences, stated "Copper is
an article so necessary to us that I hardly know of any manufacture of such
importance after iron." Wise words indeed, which, after a gap of 200 years, forecast
exactly the relative importance of this metal to the earnings power of the miners
second only to iron ore. In the subsequent analysis, we lay out why we do not
believe that the copper price has become detached from the mine supply cost curve
over the last decade. As with iron ore, we trace the origin of structurally higher
copper prices to the low levels of productivity in sub-scale domestic Chinese mined
production. Moreover, we remain convinced that significantly higher copper prices
will be required to continue to incentivize the new mine capacity required to clear
demand in the face of increased geopolitical risk, falling grades and the declining
success of exploration.

We should begin by pointing out that copper is the second-most important mined
commodity after iron ore for large miners, contributing 16% of EBITDA in 2012
(see Exhibit 12). Unlike iron ore, copper exposure is ubiquitous in our coverage
group with none of the world's largest mining companies lacking deposits of it (see
Exhibit 14). Glencore Xstrata is the most exposed while Vale is the least. As we
show in Exhibit 13, along with iron ore, copper has been the standout performer
among the main industrial metals over the last decade. Despite these similarities,
copper and iron ore look very different from the perspective of fundamental
commodity economics.
As we will discuss in this Blackbook, the world's economic system has adapted
to use those materials that are most readily available (see Exhibit 15). It is also
worth noting that the economic role played by any metal depends upon its physical
and chemical characteristics (e.g., mass to strength ratio), which make it hard to
find substitutes for certain metals. Currently, copper stands out as one of the most
overexploited metals with a production 16.4 times as great as the underlying
relationship between abundance and use would suggest (iron ore at 7.4 times)
see Exhibit 16.
Cooper is not only more geologically challenging to mine in comparison to
iron ore or aluminum, but its supply is heavily concentrated in a specific region.
Chile is by far the most important producer of copper globally, and its mineral
wealth is behind copper price being as low as it has been for the last two or three
decades (see Exhibit 17). Chile's significance can be contextualized by simply
noting that the country is much more important to global copper supply than
Australia is to global iron ore supply. The scarcity of copper is evident in the fact
that Australia has been able to deliver steady year-over-year growth in iron ore,
while Chile's copper output has been stagnant.
We believe that Chile will have to work very hard just to maintain its copper
output constant against a backdrop of falling grades and deteriorating geological
quality.

As With Iron Ore, the
Emergence of the Chinese
Mines at the Margin of the
Global Copper Cost Curve
Drove the Fly-Up in Its Price
Over the Last Decade
Each Commodity Respects Its
Own Supply and Demand
Fundamentals; a Key
Difference Between Iron Ore
and Copper Relates to the
Difference in Geology Between
Australia and Chile
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Exhibit 12 Copper Is the Second-Most Important
Contributor to the Cash Generation of the
Miners

Exhibit 13 And Has Been Consistently Strong Over
the "Super-Cycle"
Source: Corporate reports and Bernstein analysis. Source: Bloomberg L.P. and Bernstein analysis.
Exhibit 14 Glencore Xstrata Is the Most Highly Exposed in Our Coverage to the Copper Price
While Vale Is the Least
Source: Corporate reports and Bernstein estimates and analysis.
Iron Ore
58%
Copper
16%
Nickel
1%
Zinc/Lead
3%
Coal
9%
Aluminum
1%
Other
12%
2012 Mining EBITDA (ex. Glencore
trading) (100% = US$83bn)
0
100
200
300
400
500
600
700
800
900
1000
J
u
n
e

2
0
0
0

=

1
0
0
Indexed Commodity Price
Performance
Iron Ore Copper HCC
38%
25%
17%
9%
3%
62%
75%
83%
91%
97%
Glencore Xstrata (100% =
US$12bn)
Anglo (100% = US$9bn) BHPB (100% = US$25bn) Rio (100% = US$20bn) Vale (100% = US$18bn)
Contribution of Copper to Mining EBITDA (2012)
Copper Other
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Exhibit 15 There Is a Very Strong Relationship Between Geological Abundance and Industrial
Use; the Most Useful Commodities, in Terms of Economic Application, Also Happen
to Be the Most Geologically Abundant
Source: USGS and Bernstein estimates and analysis.
Exhibit 16 Copper Stands Out as the Most Overutilized Commodity Relative to Its Underlying
Geological Endowment a Testimony to the Industrial Importance of This Metal and
the Difficulty in Growing Supply in Anything Other Than a Supportive Price
Environment
Source: USGS and Bernstein estimates and analysis.
Al
Fe
Mg
K
Na
P
Mn
V
Cr
Ni
Cu
Zn
Co
Li
Pb
U
Mo
Ag
Pd Pt
Au
R = 0.7852
0
1
10
100
1,000
10,000
100,000
1,000,000
10,000,000
1.E-03 1.E-02 1.E-01 1.E+00 1.E+01 1.E+02 1.E+03 1.E+04 1.E+05
A
n
n
u
a
l

P
r
o
d
u
c
t
i
o
n

(
k
t
)
Geological Abundance (ppm)
Use and Availability of Major Industrial Commodities
0
2
4
6
8
10
12
14
16
18
Cu Cr Pb Zn Fe Mo Ag Au P Mn Ni U Na K Al Co Pt Mg Pd Li V
A
c
t
u
a
l

U
s
e

R
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a
t
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e

t
o

T
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b
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G
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l

A
b
u
n
d
a
n
c
e
Over- and Underutilization of Geological Endowment by Commodity
Overutilized
Underutilized
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The Commodity ''Super-Cycle'' The World Still Looks Very Different
There has been a race to call the end of the nebulous phenomenon known as the
"super-cycle," with every week a new straw man erected and demolished to prove
the point. However, for us the world pre- and post-2003 continues to look radically
different. We expect this view to persist until the 7 million workers employed in
China's mines are replaced with capital.
As the readers of our work on iron ore
1
will know, we believe that the regime
change seen in commodity prices post-2003 has been driven by a fundamental
change in the global cost curve structure for commodities (see Exhibit 18). More
important than the extreme acceleration in commodity prices from 2003 to 2007 is
the fact that the new price level has been sustained for the past five years. Whatever
the "super-cycle" is, it has never been a belief that commodity prices would go on
doubling indefinitely. However, many commentators still claim that commodity
fundamentals do not drive commodity prices and that commodities have become
"detached" from the normal dynamics of supply and demand. We disagree with this
completely.
On the contrary, we believe that the microeconomics of the mining industry
remain as they have always been. In this regard, commodity prices represent the
interplay between capital and labor productivity (that is, capex and operating costs)
geared through the underlying geological endowment. The evolution of this
interplay results in the replacement of old and expensive mines with new and lower
cost production sources as and when the price is deemed sufficiently high to justify
new capital investment. To the extent that 2013 differs from 2003, it is the set of
agents engaged in the commodity price formation rather than the nature of how

1
European Metals & Mining: Iron, Cold Iron, Is Master of Them All...or at Least 60% of EBITDA and European Metals & Mining: A Strange
Love How I Learned to Stop Worrying and Love the Ore.

Exhibit 17 Chile Is Far More Important to Global Copper Supply Than Australia Is to Global Iron
Ore; However, in Both Commodities, the Production from China (Despite the Poverty
of Geological Endowment) Is Highly Significant
Source: Wood Mackenzie and Bernstein analysis.
The World Pre- and Post-2003
Continues to Look Radically
Different, at Least Until the 7
Million Workers Employed in
China's Mines Are Replaced
With Capital
0
1000
2000
3000
4000
5000
6000
Chile China Peru USA Australia Zambia (&
Northern
Rhodesia)
Russia Congo DR
(Zaire & Bel
Congo)
Canada Mexico
M
i
n
e
d

C
o
p
p
e
r

P
r
o
d
u
c
t
i
o
n

-
k
t
2012 Mine Supply of Copper
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commodity prices are set that is different. Prior to 2004, the marginal unit of supply
came from outside of China. Today it lies within it.
The Cause of Confusion Is Simply a Lack of Visibility Into China
The root cause of the desire to believe that this time "something is different" in
commodity pricing is the apparent breakdown of the simple pricing heuristic that
prevailed for the last 30 years or so. Traditionally, the price of commodities was
understood to be set by the cash costs of producing the marginal ton (typically
taken as somewhere between the 80
th
and 95
th
percentile of the cash cost curve).
However, from the middle of the last decade, this rule of thumb appeared to have
stopped working (see Exhibit 19). Rather than despair about the validity of
microeconomics, we note that for the heuristic to be of any use, two conditions
need to be satisfied.
The cost curve needs to be complete (i.e., cover all sources of supply).
To the extent that the cost curve is not complete, it has to at least be
representative (i.e., those sources of supply that have been excluded should not be
at or near the margin).
As shown in Exhibit 20, the first condition has not been met. Namely, for
copper (just as for pretty much any commodity), visibility into large swathes of
Chinese production is lacking, despite China being the second largest supplier of
mined copper globally.
There has been huge growth in unknown and consequently "un-costed" metal
supply over the last decade. What we do know is that this growth in production has
simply tracked the rise in copper price (see Exhibit 21). This is more than just a
Exhibit 18 2004-06 Saw a "Fly-Up" in Commodity Prices, Which, When Compared to the
Previous Cycles, Look Anomalous; We Strongly Believe That the Same
Microeconomic Forces Are at Work Now as Previously and That Fundamentals,
Rather Than "Funds," Offer the Best Explanation for the Movements in Commodity
Prices
Source: IMF and Bernstein analysis.
China's Inability to Adapt
Capital-Intensive Modes of
Production Has Prompted the
Change in the Position of the
Chinese Mines on the Cost
Curve; This Was Driven by the
Increase in Chinese Wages in
USD Terms, Making Chinese
Mining Uncompetitive Globally

0
50
100
150
200
250
300
1
9
8
0
M
0
1
1
9
8
1
M
0
1
1
9
8
2
M
0
1
1
9
8
3
M
0
1
1
9
8
4
M
0
1
1
9
8
5
M
0
1
1
9
8
6
M
0
1
1
9
8
7
M
0
1
1
9
8
8
M
0
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1
9
8
9
M
0
1
1
9
9
0
M
0
1
1
9
9
1
M
0
1
1
9
9
2
M
0
1
1
9
9
3
M
0
1
1
9
9
4
M
0
1
1
9
9
5
M
0
1
1
9
9
6
M
0
1
1
9
9
7
M
0
1
1
9
9
8
M
0
1
1
9
9
9
M
0
1
2
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0
M
0
1
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0
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0
1
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0
0
2
M
0
1
2
0
0
3
M
0
1
2
0
0
4
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0
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2
0
0
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0
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0
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6
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0
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7
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0
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0
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0
1
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0
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9
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0
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0
1
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0
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F

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s

P
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I
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x

2
0
0
5

1
0
0
Keyfeaturesofthebehaviour ofcommodity pricesprior to2005
Thetimefrom troughto peakofany cyclewastypically 1year
From peaktotrough, pricesdeclinedalonga smoothmonotonictrajectory towards a fixedand"well
known"longterm price
Thefundamental questionforminerswasnotwhy buthow toexecutethenextmine,essentiallya
questionforengineeringnoteconomicsascostwasmoreimportant than price.
Thekeyquestionnowfacing theminersis"howmuch Westerncapital ought tobeexpendedto
underwritetheindustrialisation ofChina?" thisisnotan engineeringproblemandrequiresa fresh
approachtohow theminersthinkabout value.
The durationofany
price spike was
limited, lastingno
more thantwoyears
Price pathspost a price
spike were smoothly
downwardtrending
Prior to2005 long term
price hada clear meaning
tiedtothe floor towards
whichpricesreverted.
Post 2005it wasclear that
the dynamichadchanged,
the keyquestioniswhy?
WIthout this
understanding mining
value isimpossible.
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coincidence. Once again, it points to the fact that it is not prices that have become
detached from the cost curve, but that it is only through the expedient of rising
prices that supply has been able to match demand.
In our view, low geological quality of China's endowment with certain
commodities (copper, coal [in part] and iron ore) makes capitalization of the
mining industry difficult. Consequently, it remains very labor intensive: the use of
significant manpower is the norm in China, while in the West human labor has
been largely displaced by machinery. As long as mining wage rates in China were
low by international standards, this did not matter. However, once labor became
expensive in USD terms, Chinese mining became uncompetitive globally. This led
to a rotation of the cost curve in a manner not seen before due to the lack of data. In
other words, we moved from a regime where the "known" cost curve was
incomplete, yet representative of the total i.e., where Chinese domestic mines
were on the left-hand side of the global cost curve to a regime where the
"known" cost curve was incomplete and unrepresentative of the total i.e., where
the Chinese mines were now on the right-hand side of the cost curve. The rapidity
of the shift of Chinese mines along the cost curve mirrored the pace of China's
overall industrialization. Thus, the apparent change in the regime from 2004 was
not due to the collapse of microeconomic principles, but simply due to our
inadequate understanding of the marginal source of supply.

Exhibit 19 At First Glance, the Old Heuristic of
Marginal Cash Costs Appeared to Have
Broken Down

Exhibit 20 But a Better Answer Is Provided by the
Negligible Visibility Into China's Mining
Costs
Source: Wood Mackenzie, Bloomberg L.P. and Bernstein analysis. Source: Wood Mackenzie, Bloomberg L.P. and Bernstein analysis.

0
50
100
150
200
250
300
350
400
450
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
U
S
c
/
l
b

N
o
m
i
n
a
l
Copper Costs and Price
C(90) Price
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Chile China
%

o
f

M
i
n
e

S
u
p
p
l
y

f
r
o
m

W
h
o
s
e

C
o
s
t
s

A
r
e

K
n
o
w
n
% of "Costed" Copper Supply
Known Unknown
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Exhibit 21 Virtually Nothing Is Known About the Cost Structure of Chinese Copper Mining (as
Shown in the Previous Exhibit), Yet the Relationship Between Price and Chinese
Copper Output Tells Us That They Are Not Unrelated Phenomena
Source: NBS and Bernstein estimates and analysis.
Reconstructing the Missing Chinese Mines
We aim to complete the unknown part of the global cost curve by estimating the
supply coming from the missing Chinese mines and plugging it back into the cost
curve. Without an understanding of the industry cost structure, forecasting copper
price is impossible.
As with iron ore, we believe that the present copper supply structure and price
setting are radically misunderstood by the broad market. In this regard, Exhibit 22
shows what is known with reasonable certainty about the highest-quality portion of
the Chinese copper industry (which is also not accidentally the most visible
portion). However, this cost curve lacks approximately 1 million tons of new mined
Chinese copper that has been added since 2003. We estimate the cost of these
missing mines using data from the Chinese National Bureau of Statistics (NBS),
which reports on the aggregate industry profitability in China. Knowledge of the
industry's margins in aggregate, copper price and the total Chinese copper
production enables us to estimate the structure of the residual part of the cost curve
(see Exhibit 23). In essence, whatever margin the industry is currently generating, it
is attributable to the low(ish) cost mines shown in Exhibit 22. Exhibit 24 gives the
details of this calculation. The remaining production is unevenly distributed
towards the right-hand side of the cost curve. Consequently, it acts to support
copper price.
The completed Chinese cost curve can be combined with the reasonably well-
known cost curve for the remainder of the global copper industry. Exhibit 25 and
Exhibit 26 show the global cost curve, excluding and including this high-cost
material. While the difference between the two curves appears marginal, the effect
is an important one. By increasing the volume of material on the right-hand side of
the cost curve, we are able to refute the thesis that prices have become detached
from the cost curve. In addition, we see additional price support for copper in the
medium to longer term. While we believe that the cash cost curve for any
commodity gives the price of that commodity over any meaningful period (i.e.,
most commodities follow an economically efficacious price discovery mechanism),
the level of the inflection of the cost curve provides the cash flow and the incentive
for new production capacity. It is the interaction of the current cash cost curve and
the current incentive price curve that generates the future cash cost curve and, with
R = 0.8588
0
50
100
150
200
250
300
350
400
450
500
250 450 650 850 1050 1250
C
o
p
p
e
r

P
r
i
c
e

U
S
c
/
l
b
Volume of "Uncosted" Chinese Copper kt
A Completed Chinese Cost
Curve, Obtained by Estimating
the Residual Part, Allows Us to
Refute the Thesis That Prices
Have Become Detached from
the Cost Curve; This Also
Indicates Price Support in the
Medium to Longer Term
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it, the future price for a commodity. The rapidity with which new assets are brought
on line and the place that they occupy in the industry's cash structure determine the
evolution of price over time.

Exhibit 22 The Apparent Cost Structure of the Copper
Industry in China Is Based on a Highly Non-
Representative Selection of Mines;
Moreover, It Fails to Adequately Describe
the Profitability of This Sector

Exhibit 23 A Corrected Chinese Cost Curve Would
Display Much More High-Cost Production
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie, NBS and Bernstein estimates and analysis.

Exhibit 24 Calculating the Volume and Costs of the Missing Portion of the Chinese Data Is
Possible Using Data from the NBS
Source: NBS, Bloomberg L.P. and Bernstein estimates and analysis.


11,000
4,000
3,000
2,000
1,000
0
450 350 400 50 100 150 200
12,000
0
10,000
9,000
8,000
7,000
250 300
6,000
5,000
CumulativeProduction kt CufromKnown ChineseMines
C
1

c
o
s
t
s

S
I
B

C
a
p
e
x

U
S
$
/
t
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2,000 1,500 1,000 500 0
CumulativeProduction kt CufromKnown andunknown
ChineseMines
C
1

c
o
s
t
s

S
I
B

C
a
p
e
x

U
S
$
/
t
CompletingtheChineseCostCurve
2012AverageCuPrice US$/t 7,949 Bloomberg
2011ChineseNonFerrousProfitMargin % 16.5% NBS
AverageCashCostsofKnowMines US$/t 3,898 Calculation
2012ProfitMarginofKnownMines % 25.5% Calculation
2012TotalDomesticCu US$/t 1,542 Kt,WM
2012IdentifiedCu kt 435 Calculation
2012ResidualCu US$/t 1,107 Calculation
2012MarginofResidualMines % 13.0% Calculation
AverageCashCostsofResidual US$/t 5,879 Calculation
MinimumCashCostsofResidual US$/t 4,183 Calculation
MaximumCashCostsofResidual US$/t 7,925 Calculation
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Exhibit 25 This Mined Tonnage Needs to Be Factored
Into the Global Cost Curve...

Exhibit 26 ...Where It Is Concentrated Towards Right-
Hand Side of the Curve, Filling Out the
High-Cost Volume
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.
Chinese Labor Productivity and Cost The True Cause of the ''Super-Cycle''
Following the economic reforms of the 1980s and 1990s, China appeared to be
embarking on rationalization and consolidation of its mining industry. However,
this trend came to an abrupt end in 2003 (see Exhibit 27). Concurrently, mining
wages started to follow the exponential growth rate seen in the economy as a whole
(see Exhibit 28).
In addition, from 2003 onwards, the mining industry experienced an above-
average wage growth, thus suggesting a requirement to pull labor into the sector
away from other, perhaps more attractive, employment opportunities that
industrializing economies can offer. Taken in RMB terms, this led to a 24% CAGR
in the costs attributable to labor alone. Given a gradual appreciation in RMB, this
led to a 28% CAGR in USD terms (see Exhibit 29).
From 2003 to present, the Chinese output of mined commodities has increased
significantly, particularly in iron ore (see Exhibit 30). In aggregate, almost
continual gains have been recorded in labor productivity on a copper equivalent
basis since 1990 (see Exhibit 31). However, since 2003, China's mining labor
productivity started to decelerate at the same time as mining wages started to
accelerate (see Exhibit 32). While historically labor costs and productivity in
Chinese mining tracked each other (as one would expect them to do), 2003 marked
a breakdown of this relationship. Subsequently, wages in Chinese mining were
driven not by output from mining, but rather by productivity in other sectors (e.g.,
manufacturing).
It is also worth stressing the sheer scale of the Chinese mining industry in
terms of employment. In aggregate, nearly 7 million people are employed in
mining in China, compared to 42,000 employed in the U.S. (0.9% of the Chinese
labor force versus 0.03% of the U.S. labor force a factor of 33 times greater).
Clearly, such labor intensity is possible only when labor is both abundant and
cheap. Given China's demographics and the stage of economic development, both
of these conditions have started to come under pressure. We believe that it will only
become more acute as China continues to urbanize.
We strongly believe that this dynamic is responsible for the rise of the
commodity "super-cycle." As such, the fly-up in commodity prices is explained
entirely by the traditional microeconomics of the mining industry. Exhibit 33
3,000
10,000
5,000
8,000
4,000
2,000
0
12,000
1,000
6,000
9,000
11,000
15,000 20,000
7,000
0 5,000 10,000
C
1

c
o
s
t
s

S
I
B

C
a
p
e
x

U
S
$
/
t
GlobalCumulative Production kt CuIncluding KnownChineseMines
10,000
7,000
3,000
4,000
10,000
5,000
1,000
6,000
12,000
8,000
0 5,000 20,000
11,000
9,000
2,000
15,000
0
C
1

c
o
s
t
s

S
I
B

C
a
p
e
x

U
S
$
/
t
GlobalCumulative Production kt CuIncluding KnownandunknownChineseMines
Nearly 7 Million People Are
Employed in the Chinese
Mining Sector; the Abundant
and Cheap Labor That Has
Allowed China to Maintain High
Labor Intensity Has Come
Under Pressure, and We
Believe It Will Remain So as
China Continues to Urbanize
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shows the rise in Chinese mined labor costs against the rise in aggregate
commodity prices. Exhibit 34 displays that the simple expedient of adding global
growth rates to capture cyclicality explains almost the entirety of the observed data
(R-squared = 96%).
In essence, China has moved from a low productivity, but very low-cost
mining location (and thus in aggregate being on the left-hand side of the global
mining cost curve) to a still low productivity, but now relatively high-cost location
(hence, currently on the right-hand side of the global cost curve).

Exhibit 27 Chinese Mining Employment Started to
Increase Slowly Post 2000...

Exhibit 28 ...With Mining Wages Tracking Exponential
Growth Seen in the Economy as a Whole
Source: NBS and Bernstein analysis. Source: NBS and Bernstein analysis.

Exhibit 29 In USD Terms, Labor Costs Have Grown in
Mining at a CAGR of 28% Since 2003

Exhibit 30 Which Is Significantly Above the Growth
Rates in Domestic Mining Output
Source: NBS and Bernstein analysis. Source: NBS and Bernstein analysis.

0
100
200
300
400
500
600
700
800
900
1000
Chinese Mining Employment
'0,000 People
0
10,000
20,000
30,000
40,000
50,000
60,000
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
L
a
b
o
r

W
a
g
e
s

Y
u
a
n

p
e
r

a
n
n
u
m
Chinese Wages
Mining Total
0
10,000
20,000
30,000
40,000
50,000
60,000
U
S
$

-
M
i
l
l
i
o
n
Total Chinese Mining Labor Cost
13%
6%
6%
7%
8%
5%
Iron ore Coal Copper Zinc Nickel Bauxite
Growth of Mined Commodities in
China
Output CAGR 1990-2011
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Exhibit 31 Chinese Mining Productivity Started to
Decelerate from 2003

Exhibit 32 And a Fundamental Disconnect Appeared
Between Mining Wages and Output
Source: NBS and Bernstein analysis. Source: NBS and Bernstein analysis.

Exhibit 33 The Exponential Rise in Chinese Mining
Labor Costs Has Driven a Corresponding
Rise in Commodity Prices

Exhibit 34 If the Cyclical Impact of Global GDP Is
Added, an R-Squared of 96% Is Returned
Source: IMF and Bernstein analysis. Source: IMF and Bernstein analysis.

Clearly, the rise in Chinese labor costs would not have mattered to global
commodity prices, if China's output of commodities had been able to track demand,
and if China remained self-sufficient in its consumption of raw materials. However,
the failure of productivity resulted in the need to import raw materials on a massive
scale. As soon as hitherto disconnected global commodity markets started
interacting with the domestic Chinese markets, the price of imported commodities
rose until the Chinese consumers were ambivalent between sourcing the required
material domestically or through international markets. The reason behind the
0
1
2
3
4
5
6
7
8
9
C
u

E
q
u
i
v
a
l
e
n
t

O
u
t
p
u
t

p
e
r

W
o
r
k
e
r

(
t
)
Chinese Mined Output per Worker
9%
4%
9%
22%
1990-2003 2003-2011
C
A
G
R
Chinese Mining Wages vs.
Productivity Growth
Productivity Wages
0
50
100
150
200
250
300
350
400
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
Chinese Labor Costs vs. Commodity
Prices
IMF Metals Index Chinese Mining Labor Costs
0
50
100
150
200
250
300
350
400
Chinese Costs and Global Growth
vs. Price
IMF Metals Index Chinese Costs + GDP
The Reason Behind the
Massive Increase in Raw
Material Imports Into China
Despite the Accelerating Cost
of Those Materials Is Simply
That It Was the Lowest-Cost
Alternative

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massive increase in raw material imports into China despite the accelerating costs
of those raw materials is simply that it was still the lowest cost alternative.
The pertinent questions thus become: how long will this state of play persist?
Why, if mining is a mature industry, cannot costs and labor be driven out of the
Chinese industry? This is the age-old equation in mining between capital and labor
productivity. The questions being asked come down to understanding why China
has not transitioned to capital-intensive modes of metal production. We believe that
there are three underlying reasons why this has not happened thus far.
Why Does China Not Transition to Capital-Intensive Production?
There are three reasons why China has not transitioned to capital-intensive modes
of production.
Geological endowment: Capitalization of mining assets is (in large measure) a
move to ever more massive scale. However, this scale means that the life of mine
(LOM) of assets will be proportionally reduced for a given geological endowment.
Thus, capitalizing assets is economically feasible only where a corresponding scale
exists in the underlying geology. We do not believe that such scalable assets exist
in China in sufficient measure, particularly in the core commodities of iron ore and
copper.
Efficiency of capital allocation processes: Even if the geological endowment
were present in China, the process of moving away from labor requires large
amounts of capital investment in relatively few assets and projects. This requires a
depth of experience in capital allocation that the relatively immature capital
markets and corporate governance structures in China do not provide. The mute
witness to this is the proliferation of operations that have sprung up in the mining
sector over the last 10 years.
Political will: Finally, even if the geological endowment were present and the
capital allocation mechanisms existed to be able to identify the most economically
productive path forward, the transition would require the displacement of over 6
million workers. While other forms of employment may be present in a rapidly
growing economy, the fear is always that the transition will result in wholesale
unemployment. This process could be incredibly politically disruptive (witness the
miner strikes in the U.K. a country with an established and generous welfare
system).
We believe that all three of these requirements are either lacking or limited in
China today. We believe that Chinese mining costs will track ever higher until such
a point that the requirement for Chinese mining labor is obviated. We also believe
that this will only happen when mining output from other regions with greater
geological endowment and/or lower wages increases significantly (i.e., Africa,
Latin America and Australia). Until that happens, there is asymmetric risk to the
upside for commodity prices. Against a normalizing demand environment, any pull
on the global commodity supply chain will see the copper price rally sharply. Only
when we see the "rebalancing" of the Chinese mining industry, will there be the
true end of the "super-cycle" with structurally lower commodity prices over a
sustained period.

We believe that there is a paradox at the heart of the Chinese economy
preindustrial modes of natural resource production are attempting to coexist with
industrial modes of production in other sectors. This has led to a decoupling
between the costs and the productivity of Chinese mining, which we see are driving
up both the imports of commodities into China and the costs of commodities
globally. We further believe that such a situation will last until either China can
access alternative non-Chinese mining assets (e.g., in Africa), which it can use to
displace domestic mines, or Western mining companies do so on behalf of China.
Thus, the duration of the "super-cycle" is largely in the hands of the current mining
incumbents and comes down to the question of how much Western capital will be
China Has Not Transitioned to
Capital-Intensive Modes of
Production Due to a Lack of
Geological Endowment, a Lack
of Experience in Capital
Allocation Required for the
Initial Capital Investments, and
a Lack of Political Will to
Displace Several Million
Workers from the Chinese
Mining Sector
The Duration of the ''Super-
Cycle'' Is in the Hands of the
Current Mining Incumbents; It
Boils Down to the Question of
How Much Western Capital Will
Be Put at Risk to Underwrite
the Industrialization of China
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put at risk to underwrite the continued industrialization of China (see Exhibit 35
and Exhibit 36).

Exhibit 35 Coal Mining in the U.K. in 1840

Exhibit 36 And in China Today

Source: Royal Commission for the Employment of Children in Mines
1842.
Source: EPA.



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Copper Geology: Chile and the
World's Deteriorating Deposits

The two critical questions this chapter attempts to answer are "what are the
consequences of Chile's unique geological endowment?" and "are current copper
reserves sufficient to satisfy future copper demand?" Our analysis suggests that no
other supply location has the potential to mirror the history of the Chilean copper
growth. Hopes that either the Democratic Republic of Congo (DRC), Zambia or
Peru will provide the world with another period of abundant copper supply at low
prices are inconsistent with the underlying geology of those locations. We also
explain how the financial implications of copper mine development link a country's
underlying geological endowment to its eventual maximum mined production.
Consequently, we are able to determine that existing reserves will be sufficient to
meet only one-third of the world's incremental copper demand by 2030. This issue
gets compounded by the 20+ year lead time between new copper discoveries and
eventual exploitation, which renders yet undiscovered deposits insufficient to make
up for the shortfall (even if there was evidence of ongoing copper exploration
success, which is not the case). Rather, new copper supply will have to come from
the already known sources that are uneconomic to develop at today's prices. The
implication of this is clear new copper supply is predicated upon higher prices
than those that prevail today.
Overexploited Copper and the World's Deteriorating Deposits
The geology and chemistry of metals within the Earth's crust form the basis of
mining, and hence all the economic activity of the modern industrial society. While
over 3,000 different minerals have been identified, only 30 of them form most
rocks in the planet's crust. The list of chemicals on which these common rocks are
based is even shorter and dominated by just nine elements: oxygen, silicon,
aluminum, iron, calcium, magnesium, sodium, potassium and titanium. In fact,
these nine elements account for 99% of the Earth's mass (see Exhibit 37).
Most commonly encountered minerals are silicates (of one form or another)
interspaced with oxides, hydroxides and carbonates. These elements collectively
constitute a category known as the "geologically abundant elements," which
consists of aluminum, iron, magnesium, potassium, titanium and manganese. The
economics of these metals are not primarily a function of their geological grade,
and it is fair to say that we will never "run out" of them.
2
However, this class of
elements does not include copper no rock-forming mineral contains copper as an
essential chemical consistent.


2
Just to make this clear, the prices of titanium and aluminum relate primarily to the price of the power required to strip oxygen from the metal.
For iron ore, it relates to the capital tied up in mass logistics systems in general and deep-water port capacity in particular.
What Are the Consequences of
Chile's Unique Geological
Endowment? Are Current
Copper Reserves Sufficient to
Satisfy Future Copper
Demand?
Once Exploited a Deposit Is
Gone Forever, and Once
Discovered a Deposit Cannot
Be Rediscovered; the Earth's
Endowment With High-Grade
Copper Deposits Is Finite, and
the Question Is When (Not If)
That Limitation Will Lead to
Higher Real Copper Prices

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Exhibit 37 Nine Elements Account for 99% of the Earth's Mass; Iron and Aluminum Are Among
Them, While Copper's Abundance Is Radically Different
Source: Pearson and Bernstein estimates and analysis.

There is a very strong correspondence between a metal's geological abundance and
its use this is unsurprising. What is surprising is the departures from this
relationship, as they tell us something about the relative demand and relative
importance of a commodity. In this respect, copper is unique.
Exhibit 38 shows how the consumption of major industrial commodities varies
with their geological abundance (we show this on a log-log basis where several
orders of magnitude of variation can be compressed). Clearly, the world's economic
system has adapted to use those materials that are the most readily accessible.
However, it is also worth noting that the economic role played by any metal
depends upon its physical and chemical characteristics (for example, mass to
strength ratio), which are not easily substitutable. The high geological abundance of
iron in the Earth's crust stands as one of the key forces behind the industrial
development of mankind. Even the use of aluminum the closest metallic
industrial substitute for steel and the closest element in terms of geological
abundance is predicated upon prior development of steel. Without the
metallurgical properties of steel, the process of electrification and power generation
necessary to develop aluminum as an economic metal would not have taken place.
Perhaps more interesting is not the relationship between commodity abundance
and its use in itself, but rather the departures from this relationship. For example,
low geological abundance yet high use would tell us that the metal in question is
more important to the global economy than a metal with high abundance and low
use.
3
Consequently, all other things being equal, a higher and stronger price should
result in an overexploited metal and vice versa. In other words, incentivizing an
increase in the supply of a metal with little availability and an already high rate of
exploitation (absent improvements in mining productivity) requires prices to move
upwards. In contrast, for metals whose exploitation is low relative to abundance,

3
Of course, geological abundance is not the same as a metal's reserves or resources, which add an economic filter to the underlying geological
endowment. In order to be economically accessible, all elements require some further geological process of enrichment and concentration. So,
while iron ore has an average abundance of 5.6%, it requires an approximately tenfold concentration of that abundance to generate the 60% Fe
grade ores exploited in Australia and Brazil. Likewise, copper has a geological abundance of 0.006%, thus requiring an approximately
hundredfold concentration of 0.6% to be economically viable.
Oxygen, 45%
Silicon, 27%
Aluminium, 8%
Iron, 6%
Calcium, 5%
Magnesium, 3%
Sodium, 2%
Potassium, 2% Titanium, 1%
Others, 1%
The Elements of the Earth's Crust
Copper Occupies a Unique
Role in the Industrial Society; It
Is the Most Overexploited of
the Main Metals, Testifying to
Its Industrial Importance
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any increase in price will simply trigger a wave of new supply, making sustained
high prices harder to achieve.
In Exhibit 39, we show the relative overexploitation of the main industrial
metals. The higher the figure, the more overexploited a commodity is. In this
context, copper stands out as the most overexploited metal with a production of
16.4 times as great as the underlying relationship between abundance and use
would suggest. Likewise, iron ore is 7.4 times overexploited and aluminum is
significantly underexploited. This relative exploitation suggests that despite its high
geological abundance, growing iron ore production is not as trivial a matter as
many seem to think. This is even truer for copper. We already use these metals at
incredible amounts. Consequently, growing their production necessarily involves
accessing more challenging geology.

Exhibit 38 A Very Strong Relationship Exists Between a Commodity's Geological Abundance
and Its Industrial Use; the Most Useful Commodities in Terms of Economic
Application Also Happen to Be the Most Geologically Abundant
Source: USGS and Bernstein estimates and analysis.

Exhibit 39 Copper Stands Out as the Most Overutilized Commodity Relative to Its Underlying
Geological Endowment; This Testifies to the Industrial Importance of This Metal and
the Difficulty in Growing Supply in Anything Other Than a Supportive Price
Environment
Source: USGS and Bernstein estimates and analysis.
Al
Fe
Mg
K
Na
P
Mn
V
Cr
Ni
Cu
Zn
Co
Li
Pb
U
Mo
Ag
Pd Pt
Au
R = 0.7852
0
1
10
100
1,000
10,000
100,000
1,000,000
10,000,000
1.E-03 1.E-02 1.E-01 1.E+00 1.E+01 1.E+02 1.E+03 1.E+04 1.E+05
A
n
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l

P
r
o
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t
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o
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(
k
t
)
Geological Abundance (ppm)
Use and Availability of Major Industrial Commodities
0
2
4
6
8
10
12
14
16
18
Cu Cr Pb Zn Fe Mo Ag Au P Mn Ni U Na K Al Co Pt Mg Pd Li V
A
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Over- and Underutilization of Geological Endowment by Commodity
Overutilized
Underutilized
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Copper (and a number of other important metals) are classified as geologically
scarce. It is within this metal class that geological grade plays the decisive role in
mining economics. As we mentioned earlier, copper does not form part of the
chemical composition of any common rock-forming mineral. Rather, copper exists
as individual atoms substituting for other metals at an atomic level within a host
rock. For example, copper will substitute out iron in the silicate mineral pyroxene
(FeSiO
3
), without altering the fundamental nature of the mineral in bulk. However,
there is a fundamental limit to the solubility of copper in any solid solution. The
evidence suggests that this limit is much lower than the lowest grades of any
copper ore that has ever been encountered. When we observe a rock with a grade of
above ~0.1% copper (Cu), we actually see a copper-rich sulphide (or oxide)
mineral with a grade of 30%+ disseminated through a copper barren host rock, thus
giving rise to the average 0.1% grade (see Exhibit 43). However, no common rock
has ever been encountered (and the sampling of common rocks is pretty
exhaustive) with a grade of copper as high as 0.1%. Furthermore, the crustal
abundance of copper is somewhere close to 0.007%. This implies that there is a
sharp discontinuity between copper ores, wherein copper exists in a concentrated
sulphide or oxide form and where copper exists dissolved within a silicate matrix.
As copper concentrations approach their saturation levels in the silicate host, there
is the generation of a new material form rather than any "super saturation" effect.
Put another way, the highest copper grades observed in common rock do not
overlap with the lowest grades observed in ores. Now, there is an order of
magnitude difference in the energy required to liberate copper metal from a silicate
rather than a sulphide. This then gives rise to the famous mineralogical barrier for
copper (see Exhibit 40). We cannot go on indefinitely dropping the grade of mined
copper there is a hard stop at grades approaching 0.1%, at which there is a
radical rather than continuous change in the cost structure of mined copper.
In addition, this suggests the equally famous bimodality of copper ore
distributions versus the unimodality that is more typically associated with the
geologically abundant metals (see Exhibit 41 and Exhibit 42).

Exhibit 40 Below Copper Grade of 0.1%, a Step-Change Emerges in the Cost Structure of
Copper Extraction; Consequently, We Face a Hard Stop in Our Ability to Exploit This
Metal, Once High-Grade Deposits Are Exhausted
Source: Bernstein estimates and analysis.

1.00E+07
1.00E+08
1.00E+09
1.00E+10
1.00E+11
0.001% 0.010% 0.100% 1.000% 10.000%
E
n
e
r
g
y

R
e
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e
d

T
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C
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-
J
/
k
g
Copper Grade
The Mineralogical Barrier for Copper
Themineralogical
barrier...below 0.1%
gradeastepchange
incoststructure.
For Geologically Scarce
Metals, Grade Plays the
Decisive Role
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Exhibit 41 Under a Unimodal Distribution, Grade and
Tonnage Are Continuous

Exhibit 42 Under a Bimodal Distribution, Grade and
Tonnage Are Discontinuous, With Clear
Implications for Cost and Availability of
New Material
Source: Bernstein estimates and analysis. Source: Bernstein estimates and analysis.

Exhibit 43 Copper Ores Represent the Dissemination of High-Grade Copper-Bearing Minerals
Within a Barren Matrix; Copper Mining Is the Process That Separates These Valuable
Minerals from the Worthless Gangue
Source: Wood Mackenzie, Gordon and Bernstein estimates and analysis.


L
o
g

T
o
n
n
a
g
e
Log Grade
Unimodal Grade Distribution
Mineralogical
Barrier
Current
exploitation
L
o
g

T
o
n
n
a
g
e
Log Grade
Bimodal Grade Distribution
Current
exploitation
Mineralogical
barrier
Mineral Chemical Composition % Cu by Mass Ore Type
Cuprite Cu
2
O 89 Oxide
Tenorite CuO 80 Oxide
Atacamite Cu
2
Cl(OH)
3 60 Oxide
Malachite Cu
2
O(OH)
2
CO
3 58 Oxide
Azurite Cu
3
(OH)
2
(CO
3
)
2 55 Oxide
Chrysocolla Cu
2
H
2
OSiO
3 36 Oxide
Chalcocite Cu
2
S 80 Secondary Sulphide
Covellite CuS 67 Secondary Sulphide
Bornite Cu
5
FeS
4 63 Primary Sulphide
Digenite Cu
9
S
5 78 Primary Sulphide
Enargite Cu
3
AsS
4 48 Primary Sulphide
Tetrahedrite Cu
12
Sb
4
S
13 58 Primary Sulphide
Chalcopyrite CuFeS
2 35 Primary Sulphide
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An Overview of the Copper Mining Process
Value maximization in many mining processes involves scaling of capital
equipment to the underlying geology. Consequently, efficient low-cost copper
production is predicated upon the existence of massive high-quality ore bodies.
Remove this feature and mining costs rise exponentially.
Mining is essentially a process of efficient material movement in pursuit of
separating valuable from valueless minerals. There are two basic mechanisms at
work by which this separation is achieved. The first one occurs at the mine site,
where waste material is separated from the valuable ore. The second one occurs at
the processing site, where the valuable metal-containing mineral in the ore is
separated from the worthless host rock or gangue. Exhibit 44 presents a schematic
illustration of this process.


Efficient Copper Mining
Involves Bulk Material
Movement, Which Requires a
High Degree of Capitalization
and a Corresponding Quality
and Scale in the Underlying
Geology
Exhibit 44 Copper Mining Involves the Identification, Liberation and Sale of Copper-Bearing
Minerals; This Is Achieved Through Two Processes of Waste Removal; the First One
Occurs at the Mine Site Where Ore Is Separated from Waste; the Second One
Happens at the Milling/Flotation Site Where Concentrate Is Separated from Tailings

Source: Bernstein estimates and analysis.
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Within the mining step, the most important division is between underground and
open-pit mining methods. The main advantage of underground mining is the
selectivity of the mining method, which enables one to focus extraction on high-
grade mineralized zones, while leaving waste and low-grade ore in situ. However,
this selectivity comes at a cost. Underground mines must be ventilated and
dewatered. Blasting is necessarily rather small scale, and the process of hauling
material to the surface is very energy intensive. By contrast, open-pit mining does
not have the expense of ventilation, while dewatering costs are often a fraction of
those incurred in underground operations. Moreover, the process lends itself to
economies of scale, with efficiencies gained through the utilization of ever larger
haul trucks and mining shovels as well as through the use of scalable blasting
programs.
The difference in the cost structures of these two methods is evident in the
amount of energy required to move a ton of rock. While this varies considerably
from operation to operation, the energy in an underground mine may be ~300MJ
per ton versus less than 40MJ per ton in an open pit mine. Clearly, the open-pit
mining methods lend themselves to the development of massive low-grade copper
deposits such as are currently the mainstay of the world's copper production.

Within the mined supply of copper, the most important division occurs between the
conventional milling route and what is termed SxEw (or solvent extraction and
electrowinning). The milling route accounts for ~80% of the current mine supply. It
seeks to exploit sulphide copper minerals. The basic steps of this process are laid
out below and illustrated schematically in Exhibit 45.
Mining: This involves separating ore containing the valuable metal-bearing
mineral from waste rock. The distinction between valuable and worthless rock is
achieved via the cut-off grade, which delineates the minimum amounts of metal
that a volume of material needs to contain to render its further treatment
economical.
Comminution: This is the crushing and grinding of the ore in order to achieve
physical liberation of the particles containing valuable mineral from the gangue
matrix of worthless material in which those particles reside.
Beneficiation: This involves separation of the particles liberated by comminution
in order to maximize the resulting concentration of the valuable mineral. For
copper, this is achieved through the process of froth flotation. A solution
consisting of the ground ore, water and a mix of various chemical reagents is
created. These reagents bind preferentially to the surface of copper containing
sulphides, so that when the solution is agitated, these particles float to the top of
the liquid while the waste particles fall. This difference in effective density in
water then enables the concentration of copper to take place. In this step, the first
revenue generating material is produced (copper concentrate), which is typically
what is sold by the miners (rather than the metal itself).
Pyrometallurgical reduction: Further treatment of copper concentrate needs to
take place to achieve two ends the reduction of the ore to metal ratio and the
removal of further gangue material. In the first step, copper concentrate is mixed
with various fluxes and fuels. The mix is then heated to a temperature of around
1,200C, at which point a copper matte is separated from a silicate slag in which
any residual gangue dissolves.
Conversion: The copper matte is blown with oxygen in a converter. This step
realizes copper metal for the first time, with the sulphur in the matte being
released as sulphur dioxide and the resulting blister copper achieving a purity of
between 97% and 99% Cu.
Electrolytic refining: The blister copper is taken to a refinery where it will serve
as the anode in an electrolytic refining process. The anode is immersed in a
solution of sulphuric acid and copper sulphate. A current is then passed through
the anode, causing it to dissolve into solution. The copper ions are then deposited
Underground Mines Carry
Much Greater Ore Extraction
Costs Than Open Pit Mines as
the Latter Requires Less
Energy and Are Scalable
There Are Two Routes of
Copper Extraction: Milling and
SxEw; Milling Accounts for
~80% of the Current Mine
Supply

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in a pure form (99.99% Cu) at the copper cathode, while any residual impurities
from the anode are left behind.
The alternative route was first developed at the Bluebird mine in the U.S. in
the 1980s. It was introduced as a way (initially) to exploit oxides that had hitherto
been considered waste material in the process of mining sulphide ores to be treated
through the milling route. Copper oxide materials arise as a result of the natural
weathering of a sulphide outcrop. Alternatively, they can emerge as a consequence
of the weathering achieved as low-grade waste copper sulphides are stockpiled and
thus exposed to the elements. They can also arise under the action of bacterial
agents such as Thiobacillus Ferrooxidans. Rather than simply being a mechanism
to exploit waste material, SxEw copper production now accounts for ~20% of
mined production. The main elements in this process are described below and
shown schematically in Exhibit 46.
Mining: As in the sulphide milling route, this process involves the separation of
ore containing sufficient quantities of valuable metal-bearing mineral from waste
rock.
Crushing: Rather than requiring the physical liberation of different mineral types
within a volume of ore, the SxEw route can proceed with coarser-sized material.
Consequently, only initial crushing rather than grinding is required.
Acid leaching: The crushed oxide ore is placed on a leach pad and treated with a
weak acid solution, into which copper then dissolves. The copper-rich solution,
rather appealingly known as pregnant liquor, is then collected and sent to the
solvent extraction stage of the process.
Solvent extraction: This step aims to increase the copper concentration in the
solution to such a level that electrolysis and deposition of copper can be achieved.
To this end, the pregnant liquor is first contacted with an organic solvent. Copper
passes into the solvent, thus restoring the original acid that is subsequently
recycled to the leach side. The organic solution is then itself stripped of its copper
by reacting with a concentrated acid solution. This returns the organic reagent,
which can once again be recycled. The concentrated copper/acid solution then has
a copper concentration high enough to proceed to the final phase of production.
Electrowinning: It is equivalent to the electrolytic refining process described
earlier, except that the copper is contained in solution rather than having to be
introduced via the anode. A current is passed through the copper solution
extracted previously and pure copper is deposited at the cathode.
As mentioned previously, copper oxide materials are often found as a
weathered cap at the outcropping of a primary copper ore body. This weathering
process is also responsible for another (arguably more important) feature of mined
copper production the secondary or supergene enrichment (see Exhibit 47). The
action of water on an outcropping of sulphide material oxidizes and also leaches
that material (through the process of naturally forming acid solutions, as the water
reacts with sulphide minerals). This leaching results in copper dissolving out of the
oxide layer and travelling down through the ore body, until it hits the water table.
At this point, the copper in solution is re-precipitated out, resulting in the
enrichment of the ore at the level of the water table. This enrichment creates a
target for the miners. Specifically, targeting the secondary sulphide zone enables
generation of higher cash flows early in a mine's life before moving on to the lower
grade primary sulphide. This can have a very significant impact on the economics
of a mine's development.

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Exhibit 45 The Traditional Mining Route, Involving the Concentration of Sulphide Ores, Drives
the Vast Majority of Mined Copper Production (~80%)
Source: Corporate reports.

Exhibit 46 The SxEw Route Exploits Oxide Ores and Accounts for the Residual 20% of the
Mined Copper Production
Source: Corporate reports.

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Exhibit 47 An Important Feature of the Sulphide Route Is the Ability to Take Advantage of High-
Grade Copper Ores in Secondary or Supergene Enrichment Zones; These Locations
Can Provide Significant Additional Early Stage Cash Flows for a Miner
Source: Bernstein estimates and analysis.
The Dependency of Global Copper Supply on Chile's Unique Geology
Over the second half of the 20
th
century, the ability to supply the tremendous
demand for copper at a low price depended on the exploitation of the massive
copper porphyries in Chile. However, Chile's geology is unique and radically
different from that of the second largest copper miner China. In our view, the
expectations that there will ever be a repeat of the Chilean copper boom are
misplaced.
The geology of copper deposits is highly technical with a huge variety of
physical and chemical processes at work in the development of the ore bodies that
stand behind today's industrial production of copper. Very broadly, however, the
deposits of economic interest may be grouped into three types.
Porphyry deposits: These are deposits associated with volcanism in general and
with the tectonic subduction zones (one continental plate moving beneath
another) in particular along the eastern edge of the Americas and around the entire
perimeter of the Pacific Basin. These deposits are hydrothermal in nature and rely
on the mineral solvency and concentrating abilities of pressurized high-
temperature water. Hot aqueous solutions circulating through the Earth's crust
dissolve the minerals contained in the host rocks through which they circulate. As
these solutions cool down, the dissolved minerals are precipitated out of the
solution. When the hydrothermal solution is rich in an economically interesting
(i.e., scarce) metal, the precipitated concentration results in a mineable ore body.
Porphyry deposits consist of numerous fractures (typically these fractures being
millimeters in width separated by centimeters in the host deposit) resulting from a
magmatic intrusion into a host rock. These fractures form the veins through which
hydrothermal solutions were able to escape from the Earth's crust and, in doing
so, undergo the process of cooling and mineral precipitation. The economic
implication of the porphyry form is that selective mining (whereby individual
PrimarySulphideOre
SecondaryEnriched
SulphideOre
LeachedorOxidised
Zone
WaterTable
Surface
Actionofwaterin
dissolvingsulphide
mineralisation
SupergeneZone
HypogeneZone
Knowing Chile's Influence on
Global Copper Supply Allows
Us to Form Expectations About
the Viability of Future Supply
Growth Accordingly by
Factoring the Absence of
"Another Chile'' Emerging on
the Horizon
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high-grade veins are extracted) is impossible. Rather, bulk mining techniques
must be employed. Consequently, this step marks the breakthrough from small-
scale labor-intensive copper mining to the large-scale capital-intensive mining
techniques employed today. As a piece of trivia, it was at Rio's Bingham Canyon
that the first-ever demonstration of economic bulk copper mining was made. The
existence of low-grade but massive copper porphyry deposits mined by bulk
techniques stands behind the use of copper on the scale that we see in industrial
societies today (see Exhibit 49). Without this step, the intensity of power and
electricity use that fuels modern society would be impossible.
Massive sulphide deposits: These are a second class of hydrothermal deposits
that rely on the enrichment properties of hydrothermal solutions for their ultimate
origin. However, the mechanism by which the precipitation of minerals occurs is
markedly different. Massive sulphide deposits are created in submarine
environments where a volcanic phenomenon leads to the direct expulsion of a
sulphide and metal-enriched hydrothermal solution into the ocean. The rapid
cooling of the hot solution leads to mineral precipitation and the formation of a
"blanket" of sulphide material around the vent. The portions of the ocean's crust
where this process has taken place (and that are now above sea level) can be
mined for copper and other minerals. The fact that the hydrothermal solution is
expelled directly into the ocean explains why there is very little gangue material
present in these deposits. The term "massive" is intended to reflect this mineral's
concentration rather than the size of the deposit per se. This process of ore
formation is ongoing today on the ocean's floor through the medium of "black
smokers," whose name arises as a consequence of the sulphide precipitation
having the appearance of soot. As another piece of trivia, the word copper
ultimately derives from the Greek word (and island) Cyprus, where copper was
mined in ancient times from a massive sulphide ore body.
Sediment-hosted deposits: The last broad class of ore bodies is sediment hosted
copper or stratiform sedimentary deposits. Unlike the previous two types that
have an intrusive nature and are associated with volcanic activity, sedimentary
hosted deposits are found in marine sedimentary rocks and have a characteristic
of being flat (or layered) in nature. They can extend horizontally over a very
significant area. The most famous stratiform deposit the Kupferscheifer of
Northern Europe, which has been mined continuously since the 14
th
century
extends over 6,000 square kilometers but averages just 20 centimeters in depth!
The origin of these deposits is controversial, but the most likely explanation is the
leaking of hydrothermal fluids into sediments during the deposition either at or
before the consolidation of the sediment into rock. The Zambian copper belt and
DRC deposits fall within this classification.
For the sake of completeness, we also include a description of two further
types of copper deposits. However, neither of them is as important economically as
the three categories discussed earlier.
Vein deposits: These deposits are tabular in nature with sharply defined
boundaries distinguishing valuable ore from the worthless host rock. They arise
due to the presence of a clear fracture within a host rock through which
hydrothermal fluid flows, with the fracture being filled with ore through the
deposition of dissolved sulphides over time. These deposits can be incredibly rich
but are (quantitatively speaking) very small. The deposits found in Cornwall,
which played a pivotal role in the early industrial history of the U.K. but are now
only of historical interest, belong to this category.
Magmatic segregation deposits: These deposits are unusual in not having
anything to do with the circulation of hydrothermal solutions and their ability to
concentrate copper-bearing minerals. During their formation, certain magmas,
upon rising through the Earth's crust, become saturated with iron sulphide (FeS).
As the magma begins to cool down, the iron sulphide forms into droplets that sink
through the less dense host magmatic solution, forming a molten iron sulphide
solution at the bottom of the magma chamber. As this solution solidifies, it forms
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a mass of pyrrhotite (FeS) dotted with grains of chalcopyrite (CuFeS
2
) and also
nickel-bearing minerals. The Sudbury basin is an example of this type of deposit,
where copper exists as a fairly significant by-product of the nickel mining
operation.
Returning to the three most important types of copper deposits, we show the
grade to tonnage distribution of the 1,400 known copper deposits in Exhibit 48. The
inverse relationship between grade and size is readily apparent. We see massive
sulphide deposits fairly evenly distributed at the higher grades, sedimentary hosted
deposits in the middle of the grade tonnage distribution, and copper porphyry
deposits at the far end being the largest but the lowest grade of the three types (see
Exhibit 49 through Exhibit 51). As is evident in Exhibit 51, the scale overwhelms
quality as far as the availability of metal is concerned. 80% of the copper identified
for possible exploitation sits within the lowest-grade ore bodies (and it should be
remembered that costs are inversely related to grade). Given that the world's copper
supply relies on the economic exploitation of porphyry deposits, it must be
uniquely reliant on one country in particular. This country is, of course, Chile.

Exhibit 52 sets out the endowment of copper by country and by ore type. Exhibit
53 shows the total cumulative copper that this represents. The purpose of this
analysis is to make the unique position of Chile clear. Not only is Chile the world's
largest producer of mined copper metal (nearly 4,000ktpa more than the second
largest producer China), but it is uniquely well-endowed with the metal. At first
instance, the industrial-scale consumption of copper on the back of mass
electrification programs was permitted by the exploitation of the U.S. copper
endowment (second only to Chile). Subsequently, electrification on a more global
scale was occasioned by the development of the Chilean deposits post the market
reforms of the 1970s and 1980s.
This analysis also highlights a few further features. First, as rich as the deposits
of the DRC and Zambia are, they cannot possibly support the world's copper needs.
The contained metal of these locations is simply too small. It is not only the
political risk but also the geological endowment that will limit the contribution that
these countries can make. While there will be significant value created for those
that can enter these jurisdictions and take advantage of the incredibly high grade on
offer (Glencore Xstrata within our coverage), this does not imply that Africa will
ever be able to challenge the position currently occupied by Latin America. The
second point is that Peru is not a new Chile. Peru is at best a "Chile lite." Despite
the grandiose claims in some quarters as to what Peru may be capable of delivering,
the ultimate output of any location depends on its geology. While Peru has
significant room for expansion, this does not imply that it will ever be able to
replicate the impact that the Chilean tons had on global copper prices.
There is also more to Chile than just the absolute magnitude of its total
endowment. Specifically, it is the individual scale of the deposits within the
country (see Exhibit 54). Chile is not only blessed with the lion's share of the
world's copper, but also the copper that it has comes readily packaged in the most
convenient possible form massive ore bodies with high inherent mining
optionality. Scale in mining creates options and the possibility of numerous
exploitation and development patterns. All other things being equal, it makes
mining easier. Once again, no other location will present as much in the way of a
"low hanging fruit" as was on offer during the development of the Chilean copper
industry. The future is going to be far harder than the history of the last few
decades might suggest. Consequently, an analysis of the historical development of
Chile's deposits will offer some important conclusions for how the future
development of global copper supply may proceed.



Chile Is the World's Largest
Copper Producer and Has the
Best Endowment of the Metal;
It Is Hard for DRC, Zambia and
Peru to Ever Compare
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Exhibit 48 In the Distribution of Known Copper Deposits, the Graph Shows the Typical Inverse
Relationship Between Grade and Size, With Copper Porphyry Occupying a Place of
Privilege at One End of That Distribution
Source: USGS and Bernstein estimates and analysis.

0.03
0.06
0.13
0.25
0.50
1.00
2.00
4.00
8.00
16.00
0.01 0.1 1 10 100 1000 10000 100000
O
r
e

G
r
a
d
e


(
%
C
u
)
Ore Tonnage (Mt)
Distribution of the World's Main Copper Deposits
Massive Sulphide Sediment Hosted Porphyry
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Exhibit 49 Copper Porphyries Represent the Lowest Grade But the Most Abundant Source of
Copper Supply; Their Exploitation by Bulk Mining Methods Enabled the Development
of the Modern Power-Intensive Industrial Society
Source: USGS and Bernstein estimates and analysis.

Exhibit 50 The Average In Situ Geological Abundance in Copper Porphyry Deposits Is 0.5%,
Which Has Important Implications for the Long-Term Grade Profile of Copper
Production; Anything Higher Than This Must Be Temporary
Source: USGS and Bernstein estimates and analysis.

0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Massive Sulphide Sediment Hosted Porphyry
M
t

O
r
e
Ore Tonnage by Deposit Type
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Massive Sulphide Sediment Hosted Porphyry
C
o
p
p
e
r

G
r
a
d
e
Average Ore Grade by Deposit Type
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Exhibit 51 The World's Consumption of Copper Is Predicated Upon the Exploitation of the
Lowest-Grade Copper Deposits
Source: USGS and Bernstein estimates and analysis.

Exhibit 52 Poland, Zambia and the DRC Are High Grade But Too Small to Displace American
Preeminence

Source: USGS and Bernstein estimates and analysis.


0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Massive Sulphide Sediment Hosted Porphyry
C
o
n
t
a
i
n
e
d

M
e
t
a
l

(
M
t
)
Contained Copper by Deposit Type
2.2
2.4
2.6
2.8
3.0
3.2
3.4
0.6
0.8
1,400 1,300 1,200 400 500
1.6
0.2
0.0
2,100 900 2,000 1,900 1,800 1,700 1,600 1,500 600 1,100 1,000 800 700 300 0 100 200
1.4
1.2
1.0
1.8
0.4
2.0
Sediment Hosted
Massive Sulphide
Porphyry
O
r
e
G
r
a
d
e
-
%
C
u
Contained Metal - Mt
DRC
Zambia
Poland
Chile
United States
Peru China
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
44 EUROPEAN METALS & MINING: COPPER FOR THE CRAFTSMAN CUNNING AT HIS TRADE





Exhibit 53 Chile's Dominance in the Ability to Supply the World's Copper Demand Is Clear
Source: USGS and Bernstein estimates and analysis.

Exhibit 54 Chile Is Not Only Uniquely Well-Endowed in Absolute Tons, But the Size of Its
Deposits Is Unmatched
Source: USGS and Bernstein estimates and analysis.


900 1,200 1,100 1,000
150
800 700 600 500 400 300
200
250
300
350
400
450
500
550
600
650
700
200 100 0
50
100
0
2,100 2,000 1,900 1,800 1,700 1,600 1,500 1,400 1,300
Sediment Hosted
MassiveSulphide
Porphyry
C
o
n
t
a
i
n
e
d

M
e
t
a
l

M
t
Global Cumulative ContainedMetal Mt
GlobalCopper Endowment
Chile
USA
Peru
DRC
Zambia
Canada
Poland
China
0
5
10
15
20
25
C
o
n
t
a
i
n
e
d

C
u

(
M
t
)
Average Copper Porphyry Size
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
EUROPEAN METALS & MINING: COPPER FOR THE CRAFTSMAN CUNNING AT HIS TRADE 45





Low Copper Prices During the 1980s and 1990s Were Predicated Upon Chile
Between 1983 and 2003, the average real copper price was just US$3,250/t.
Meanwhile, Chile increased copper production by 3,700ktpa. Since 2003, the
largest source of copper growth has been China a country with an endowment
just 8% that of Chile's!
Chile's contribution to the copper supply is hard to exaggerate it is 260%
larger than its nearest rival China (see Exhibit 55). As the previous analysis has
made clear, it is Chile's unsurpassed geological endowment that makes this
possible. However, in terms of supply growth, the last decade has seen Chile stall
and China emerge as the fastest-growing producer (see Exhibit 56). Exhibit 57
through Exhibit 66 show the history of the last century of supply from today's 10
most important locations. These exhibits highlight that in five of the top 10
producing countries, mined growth has stalled and in some cases even declined.
Moreover, the countries wherein growth has stalled (Chile, the U.S., Australia,
Canada and Commonwealth of Independent States [CIS]) represent the "easy"
political locations for mining investment. That is, the mining industry invested in,
and developed, the most attractive deposits from risk-return perspective geology
first (which makes perfect sense). This serves as yet another reminder of the
difficulty that future supply growth will encounter, as the copper industry is forced
to take on ever higher risk to secure new sources of supply. These exhibits also
help contextualize the recent increases we have seen in output from Africa. In the
DRC and Zambia, copper production growth has been strong but only in so far as it
corresponds to the recovery from the catastrophic political disruptions the Great
Lakes conflict in the DRC and the nationalization of the Copper Belt in Zambia.
Production today has only just surpassed the levels reached prior to these political
events.





In the Past, the Mining Industry
Invested in and Developed the
Most Attractive Deposits, in
Risk-Return Terms; This
Serves as a Reminder of the
Difficulty That Future Mined
Growth Will Encounter
Exhibit 55 Chile Stands Out as the Most Important Source of Copper Supply; However, This
Was Not Always the Case, and the Study of Chile's Development Is Critical to an
Understanding of the Future Copper Price Trajectory
Source: Wood Mackenzie and Bernstein estimates and analysis.
0
1000
2000
3000
4000
5000
6000
Chile China Peru USA Australia Zambia (&
Northern
Rhodesia)
Russia Congo DR
(Zaire & Bel
Congo)
Canada Mexico
M
i
n
e
d

C
o
p
p
e
r

P
r
o
d
u
c
t
i
o
n

(
k
t
)
2012 Mine Supply of Copper
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46 EUROPEAN METALS & MINING: COPPER FOR THE CRAFTSMAN CUNNING AT HIS TRADE







Exhibit 56 While Chile's Growth Has Slowed Down Over the Last Decade, China's Has
Accelerated
Source: Wood Mackenzie and Bernstein estimates and analysis.
Exhibit 57 It Was the 20 Years from 1980 to 2000 That
Saw Chilean Copper Growth Explode

Exhibit 58 However, Since 2000, Chile Has Stagnated
and China Emerged as the Second Largest
Producer of Mined Copper
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
-4%
-2%
0%
2%
4%
6%
8%
10%
China Peru Chile Australia Mexico DRC Zambia Russia Canada USA
C
A
G
R

1
9
9
0
-
2
0
0
3
Mined Output Growth of Largest Copper Producers
-
1,000
2,000
3,000
4,000
5,000
6,000
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
Chile Mined Copper Output
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
China Mined Copper Output
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Exhibit 59 Peru's Growth Has Been Sporadic

Exhibit 60 The U.S. Has Played a Critical Role in the
Copper Industry and Was, for a Long While,
the World's Largest Producer
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
Exhibit 61 As With Chile, Australian Output Has
Reached a Plateau

Exhibit 62 Meanwhile, Zambia Has Only Just
Recovered from the Effects of the Previous
Nationalization
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
-
200
400
600
800
1,000
1,200
1,400
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
Peru Mined Copper Output
-
500
1,000
1,500
2,000
2,500
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
USA Mined Copper Output
-
100
200
300
400
500
600
700
800
900
1,000
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
Australia Mined Copper Output
-
100
200
300
400
500
600
700
800
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
Zambia Mined Copper Output
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We also chart the history of global copper mining somewhat differently from the
simple chronology of the last few exhibits, i.e., as the tale of the U.S. and Chile
alone. For the first 80 years of the 20
th
century, the U.S. was the world's largest
producer of copper. In fact, it was leading by a greater degree than that seen in
Chile today. In 1900, the U.S. produced over 400% more copper than its nearest
rival Spain (see Exhibit 67). The subsequent history of copper can be thought of as
the transition of the title of the world's copper hegemon from the U.S. to Chile (see
Exhibit 68 through Exhibit 72).
Exhibit 63 The Same Stagnation That We See in Chile
(Once the Limits of Geology Are Reached)
Is Evident in the CIS

Exhibit 64 The Impact of the Great Lakes Conflict on
DRC Output Is Painfully Clear

Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
Exhibit 65 Canada, While Still a Significant Producer,
Is in Decline

Exhibit 66 Mexico Is Likely to Become a More
Important Producer Over Time
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
The Unique Features of the
Last Century Have Been the
Transition of Copper Supply
from the Second- to First-Most
Endowed Country
Accompanied by a Change in
Bulk Mining Technology
-
200
400
600
800
1,000
1,200
1,400
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
CIS Mined Copper Output
-
100
200
300
400
500
600
700
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
DRC Mined Copper Output
-
100
200
300
400
500
600
700
800
900
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
Canada Mined Copper Output
-
50
100
150
200
250
300
350
400
450
500
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
Mexico Mined Copper Output
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As a result, the last century involved a movement of copper production from
the geology of the world's second-most endowed country the U.S. to the
world's most endowed country Chile. In addition, the mining technology behind
copper production has advanced substantially, and the change is intimately tied up
with the nature of copper porphyry deposits. In Exhibit 73, we show one of the first
uses of industrial capital equipment on a copper mine in Australia at the start of the
19
th
century. Prior to this, copper mining far more frequently took place
underground, with human labor chasing rich streams an activity that is
inherently less productive and economic only insofar as labor is abundant and
cheap. In Exhibit 74, we show the modern day equivalent of the early steam shovel,
capable of moving 110 tons of material in each movement. The most striking
feature of the modern vehicle versus its predecessor (apart from the improvement in
color scheme) is, of course, size. A vast increase in scale and accompanying
mechanical efficiency has been achieved over a century or so from the introduction
of mechanical shovels into mining. However, as important as the increase in scale
is, the basic concept has remained unchanged. Overall, the radical and
discontinuous transition in mining took place when capital displaced labor and bulk
mining displaced selective mining. Since then, mining has witnessed marginal
improvement of the same basic underlying idea.
We summarize both of these trends in Exhibit 75, which looks at the history of
copper porphyry discoveries, and the impact of the discoveries in the U.S. and,
subsequently, in Chile on the real copper price. The real price of copper halved in a
decade on the back of an explosion in copper porphyry exploitation at the start of
the 20
th
century. The demonstration of the economic viability of low-grade copper
mining encouraged the delineation and discovery of a significant number of very
large deposits that had hitherto been thought un-mineable using human muscle
power alone. In the post-war period, as the scale of new copper porphyries began to
decline, the real price of copper began to rise. Against a rising demand environment
(supported by electrification programs in the West), the technological and
geological step-change of new porphyry deposit discoveries began to run its course.

Exhibit 67 In 1900, the U.S. Played a Very Similar Role in the Global Copper Supply as Chile
Does Today; the Development of the Supply Side of the Copper Industry Over the
Last Century Is the History of the Volume Transition from the U.S. to Chile
Source: Wood Mackenzie, Mitchell and Bernstein estimates and analysis.

0
50
100
150
200
250
300
USA Spain Japan Chile Australia Mexico Germany Canada Peru CIS
M
i
n
e
d

C
o
p
p
e
r

(
k
t
)
1900 Copper Supply by Origin
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Exhibit 68 By 1925, the Importance of Chile Was Starting to Become Clear...
Source: Wood Mackenzie, Mitchell and Bernstein estimates and analysis.

Exhibit 69 ...Though Africa (Zambia and DRC) Have Always Had a Role to Play in the Supply of
Copper
Source: Wood Mackenzie, Mitchell and Bernstein estimates and analysis.


0
100
200
300
400
500
600
700
800
USA Chile Congo DR
(Zaire & Bel
Congo)
Japan Mexico Canada Spain Peru Germany Cuba
M
i
n
e
d

C
o
p
p
e
r

(
k
t
)
1925 Copper Supply by Origin
0
100
200
300
400
500
600
700
800
900
USA Chile Zambia (&
Northern
Rhodesia)
Canada CIS Congo DR
(Zaire & Bel
Congo)
Mexico Serbia (&
Yugoslavia)
Japan South Africa
M
i
n
e
d

C
o
p
p
e
r

(
k
t
)
1950 Copper Supply by Origin
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Exhibit 70 By 1975, the Dominance of the U.S. in the Supply of Copper Was Already Challenged
Source: Wood Mackenzie, Mitchell and Bernstein estimates and analysis.

Exhibit 71 However, It Was the Market Reforms That Inaugurated the "Miracle of Chile" That
Saw the U.S. Finally Topple as the Superior Geology and Lower Labor Costs
Established Chile as the Leading Global Copper Producer
Source: Wood Mackenzie, Mitchell and Bernstein estimates and analysis.


0
200
400
600
800
1,000
1,200
1,400
USA CIS Chile Canada Zambia (&
Northern
Rhodesia)
Congo DR
(Zaire & Bel
Congo)
Poland Philippines Australia Peru
M
i
n
e
d

C
o
p
p
e
r

(
k
t
)
1975 Copper Supply by Origin
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Chile USA Indonesia Australia Canada China Russia Peru Poland Kazakhstan
M
i
n
e
d

C
o
p
p
e
r

(
k
t
)
2000 Copper Supply by Origin
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Exhibit 72 Despite All of These Changes, Copper Production Remains Highly Concentrated in
Very Few Regions
Source: Wood Mackenzie, Mitchell and Bernstein estimates and analysis.

Exhibit 73 An Early Steam Shovel at Mt. Morgan Copper Mine in Australia at the Turn of the 20
th

Century
Source: Wikimedia Commons.


70.0%
75.0%
80.0%
85.0%
90.0%
95.0%
100.0%
1900 1925 1950 1975 2000 2012
Top 10 Producers' Share of Global Copper Supply
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Exhibit 74 An Electric Rope Shovel at the Turn of the 21
st
Century Same Idea, Slightly Bigger
Scale
Source: Rio Tinto.

Exhibit 75 The Long-Term History of Copper Porphyry Discoveries Shows the Marked Impact
That These Deposits Have Had on the Real Copper Price; Structurally Falling Prices
Have Been Associated With Increased Finds of Relatively Few Massive Ore Bodies;
We Are Not Currently in Such a Situation There Is No New Chile on the Horizon
Note: Bars are the average size of new copper porphyry discoveries and the line is the copper price.
Source: USGS and Bernstein estimates and analysis.
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
0
2
4
6
8
10
12
14
16
18
C
o
p
p
e
r

P
r
i
c
e

-
U
S
$
/
t

-
R
e
a
l

2
0
1
1
U
S
$
A
v
e
r
a
g
e

S
i
z
e

o
f

N
e
w

C
u

P
o
r
p
h
y
r
y

D
i
s
c
o
v
e
r
y

-
M
t

C
u
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
54 EUROPEAN METALS & MINING: COPPER FOR THE CRAFTSMAN CUNNING AT HIS TRADE





An observer in the 1970s would have been forgiven for thinking that real copper
price increases were likely to continue indefinitely. However, two things intervened
to change this. First, the Western copper demand underwent a step-change post the
oil shocks. Second, the supply side saw the emergence of Chile. Chile's economic
reforms of the late 1970s and 1980s drove the return of foreign investment and saw
a new wave of copper deposit discoveries. Escondida (discovered 1981) and
Collahuasi Rosario (1985) are just a few deposits discovered then. The supply of
new material from Chile was sufficient to instigate two decades of negative copper
price performance. However, since that time, the rate of new large copper porphyry
discoveries has ground to a halt.
Fast forward to today. Demand for commodities has accelerated on the back of
China's industrialization, and we are back in the territory of real price increases. Or
rather, we are back to where the trend line of price increases would have been if
extrapolated out from the end of the 1980s and the impact of Chile was removed.
Clearly, this high-level argument is insufficient to justify a price forecast, but it
does help set the scene for the arguments to come.
As we have discussed, there is no new Chile on the horizon. Peru is the closest
comparison, and even its geological endowment is less than half that of Chile.
While Zambia and the DRC undoubtedly have high-grade deposits, they are simply
not large enough to play the role of Chile in the global copper supply.
Considered over a very long term, there have been two periods of significant
real-term price declines in copper driven by two discrete supply side events
(ignoring demand-side events for the time being).
Introduction of bulk mining techniques on the copper porphyry's of the U.S. at the
start of the 20
th
century.
The exploitation of Chile's superior geology using these techniques during the
1980s and 1990s.
These two factors first established the U.S. as the world's leading copper
producer and subsequently displaced it in favor of Chile. In both cases, the
transition was achieved through the supply of significant new low-cost volumes of
metal and was mirrored by a period of sustained low copper prices. However, this
twofold transition was also one that established Chile's rightful place (given its
geology) as the world's premier copper producer. The history of copper over the
last century is the history of production from the world's two most well-endowed
supply locations. All subsequent history will come from regions with inferior
geology and more challenging political and technical environments. Consequently,
we struggle to see how new supply can be unlocked with stagnant or declining
copper prices.
China Versus Chile
A very strong relationship exists between a country's geological endowment and its
production of copper. It suggests that China is producing far too much metal and
that there is very limited additional upside available from Chile.
To understand just how difficult the future of copper mining will be outside of
the U.S. and Chile, we perform another piece of analysis looking at copper
endowment and production (see Exhibit 76). Understandably, there is a very strong
relationship between the percentage of the world's output that is attributable to a
particular location and the percentage of the world's copper that is present there. A
country tends to produce more metal to the extent that the metal is in the ground
waiting to be developed. However, it is the departures from this relationship that
are interesting. They tell us which countries are producing too much metal relative
to their geological endowment (in which case the production must be under threat if
costs in that location begin to rise) and which ones have potential headroom for
further expansion (see Exhibit 77).
The exhibits highlight the anomalous position occupied by China, whose
copper production is significantly out of proportion with its underlying geology.
We believe that this situation has arisen only as a consequence of the recently high
Previous Increases in Real
Copper Prices Were Reversed
in the 1980s on the Back of a
Step-Change in the Western
Copper Demand and Chile's
Economic Reforms;
Introduction of Bulk Mining
Techniques in Copper
Porphyry Mining Aided the
Process Considerably
China Is Producing Far Too
Much Metal Given Its
Geological Endowment, While
Chile Has Reached a Plateau
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copper prices and the low-wage environment in China relative to other mining
jurisdictions. If this interpretation is correct, it highlights the fragility of the world's
current mine supply to falling prices. The majority of growth in mined supply
observed over the last decade has come from a country with a very limited
endowment of the metal. In addition, this country will face increasing mining costs
as the returns to labor (and away from capital) begin to take effect and the Lewis
tipping point is reached, at which the rate of capital formation begins to slow down.
However, so far the discussion of Chile has focused on a description rather
than an explanation of the growth that the country has enjoyed. In order to really
understand the implications of the Chilean story for other regions, we must now
explain the growth.

Exhibit 76 If We Chart Countries' Current Copper Supply vs. Their Underlying Endowment, We
See an Understandably Strong Relationship; Good Geology Tends to Imply Easy
Mining
Source: USGS, Wood Mackenzie and Bernstein estimates and analysis.

0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
%

o
f

P
r
o
d
u
c
t
i
o
n
%ofIdentifiedCopper
Chile
USA
China
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Exhibit 77 It Is the Departures from This Relationship That Are Interesting; Chile Is No Longer
an Easy Win and the Largest Source of Mined Copper Growth; Over the Last Decade,
China Has Been Producing at More Than Twice the Level Its Geology Would Suggest
Source: USGS, Wood Mackenzie and Bernstein estimates and analysis.
Future Copper Development Will Prove Harder Than Many Anticipate
Chile was able to increase the production of copper through two mechanisms: more
rapid exploitation of deposits already known and new deposit discoveries. The
application of the first process to the locations outside of Chile yields only one-
third the required copper while the second process is simply not working.
There are two basic mechanisms by which a country can increase its output of
any mined commodity:
Discovery In the first place, a country can discover more of the commodity in
question and increase its geological endowment as well as relative production at
the same time. The classic example of this is Escondida the world's largest
copper mine discovered in 1981 and commissioned in 1990. It increased both the
reserve base and production of Chile.
Development As opposed to discovering more of a commodity, a country can
choose to accelerate the development of the resources that it has. In this case,
production increases beyond the level implied in the geological endowment of the
country. This is what has happened in China.
If we go back to the very beginning of the Chilean copper industry, we can see
both of these effects in operation. In Exhibit 78 and Exhibit 79, we see the
enormous increase in exploitable material occasioned by the ability to target the
lower grades of material contained in copper porphyry deposits through the
application of capital rather than labor. As with copper porphyries in general, the
increase in ore tonnage more than offsets the decreases in grade and the contained
metal increases sharply (see Exhibit 80). The increase in production out of Chile
has been greater than the increase in contained metal (see Exhibit 81). Between
1935 and 2012, Chile's exploitable metal increased 630% while production
increased 1,970%. The increase in available metal clearly indicates the significant
role the exploration and the discovery of new deposits have had on Chile's output.
However, the greater increase in output tells us that accelerated exploitation of
existing reserves also contributed. This is seen most clearly in the reserve life of
0.0
0.5
1.0
1.5
2.0
2.5
3.0
China Indonesia Russia Peru Mexico Zambia Poland Chile Canada DRC USA
>
1

I
m
p
l
i
e
s

P
r
o
d
u
c
t
i
o
n

i
n

E
x
c
e
s
s

o
f

E
n
d
o
w
m
e
n
t
Copper Production to Copper Endowment of 10 Largest Producers
More Rapid Exploitation of
Existing Deposits Would Fail to
Clear Demand While New
Discoveries Have Come to a
Complete Halt; Hence, an
Increase in Real Copper Price
Seems to Be Unavoidable
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Chile, which was sufficient to support nearly 100 years of output in 1935 and has
fallen to just over 30 years today (see Exhibit 82).

The fundamental reason for the acceleration in mined output above the rate of new
discoveries, with the corresponding reduction in mine life, is that it makes
economic sense. In any discounted cash flow model of mine value, the far out years
are so highly discounted that they add very little value today. From a value
perspective, there is no point in having 100 years worth of mine supply above, say,
50 years. However, if those extra years can be brought forward so that they count
towards today's production, then very significant value is unlocked. Investing
capital to double the rate of exploitation (say through increasing milling capacity)
while reducing the mine life enables shareholders to benefit today from tomorrow's
production. This is clearly what has happened in Chile. However, this process
cannot continue indefinitely. Once there is roughly 30-year life of mine left, all the
years of production are relevant to the value proposition of the mine. It is no longer
the case that some years are so far in the future so as to be essentially worthless.
Consequently, the expenditure of capital in an attempt to bring those years forward
destroys rather than creates value. Clearly, the amount of value creation or
destruction depends on the intensity of capital that must be expended to accelerate
production. Exhibit 83 shows how this trade-off works. The lower the capital
intensity, the easier it is to create value through accelerating production. The
critical point is that when the reserve life of a country reaches between 25 and 35
years, there is no value to be gained from increasing the rate of exploitation of
existing deposits. Exhibit 84 and Exhibit 85 show how the investment case for
doubling capacity and halving life changes depending on the original mine life. The
critical point for Chile is that the country has passed this threshold the rate of
growth in its resource base has slowed, the rate of growth in production has
increased, and Chile's current life of reserves suggests that it will struggle to keep
track with depletion, let alone grow through more efficient exploitation of existing
reserves. This mechanism stands behind the stagnation of Chilean mined output at
~5,500ktpa. It also provides the fundamental explanation why a country's output of
a commodity should be given by its underlying geological endowment. Past this
critical point, all subsequent increases in mined growth must come from one of the
two sources.
The exploitation of resources that did not originally pass the economic filter to be
included in reserves (thus it requires much higher prices to render the resources
into economically viable sources of production).
New discoveries that enable the resource base to increase in proportion to the
increase in mined production.
Having understood the financial mechanism that generates the coupling
between production and reserves through an analysis of Chile's copper mining
history, we are in a position to extend it globally. Exhibit 86 shows the current
reserve life of the 10 largest copper producers (which collectively account for more
than 80% of supply). As can be seen, there are some locations notably China
where known reserves are woefully short of current production, and others such
as Peru where there is significant upside. This enables us to calculate the
increase in mined production that the politically unimpeded development of a
country's geology should allow. We then predict the ultimate trajectories for peak
production for those countries whose history we have shown in Exhibit 57 through
Exhibit 66. We look at this for every country with known copper deposits. The
outcome of our analysis for the top 10 most significant new supply locations is
shown in Exhibit 87. It indicates that current copper reserves have the ability to
supply less than one-third of the world's incremental copper demand by 2030.
Frontloading Cash Generation
Unlocks Significant Value
Potential; However, If We
Frontload Cash at the Expense
of Reducing LOM Below 25-30
Years, the Exercise Becomes
Value Destructive as Opposed
to Value Generating
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In sum, either more production will have to come from material currently defined
as resources rather than reserves, which will necessitate a price higher than today's,
or new supply will have to come from fresh discoveries. However, if we look at the
recent history of new copper porphyry discoveries, two things become clear. First,
the rate of discovery of massive new ore bodies has declined sharply. Second, the
lead time to development of the deposits that are actually capable of making a
difference to the supply/demand dynamic has increased dramatically (see Exhibit
88). It took 10 years to bring Escondida on line. It will have taken 17 to develop
Oyu Tolgoi (and probably more like 20-25 years for it to realize its full potential).
Finally, Pebble is at 25 years and counting. Consequently, new discoveries are
incapable of meeting the world's copper demand. That leaves one alternative
namely, higher prices and the ability to supply the world from deposits that do not
meet investment thresholds at today's prices.

Exhibit 78 The History of Chilean Copper
Development Is One of Massive Increases
in Resources...

Exhibit 79 ...Occasioned by the Ability to Exploit Ever
Lower-Grade Material

Source: Wood Mackenzie, ABMS and Bernstein estimates and
analysis.
Source: Wood Mackenzie, ABMS and Bernstein estimates and
analysis.

Exhibit 80 However, the Net Result Is a Massive
Increase in Available Metal...

Exhibit 81 ...And an Even Greater Rise in Metal
Output; Hence, There Has to Be More to
Chile Than Increasing Discovery Rates...

Source: Wood Mackenzie, ABMS and Bernstein estimates and
analysis.
Source: Wood Mackenzie, ABMS and Bernstein estimates and
analysis.

0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1935 2012
O
r
e

(
M
t
)
Chile Ore Reserves
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1935 2012
O
r
e

G
r
a
d
e

(
%
)
Chile Reserve Grade
0
50,000
100,000
150,000
200,000
250,000
1935 2012
C
o
p
p
e
r

i
n

O
r
e

(
k
t
)
Chile Contained Copper in Reserves
0
1,000
2,000
3,000
4,000
5,000
6,000
1935 2012
C
o
p
p
e
r

p
r
o
d
u
c
t
i
o
n

(
k
t
)
Chile Copper Production
Given That New Discovery
Rates Have Declined Sharply
and That Lead Time to Deposit
Development Has Increased
Dramatically, an Organic
Increase in Copper Supply Will
Be Possible Only When Copper
Price Rises Sufficiently to
Render Mining of Current
Resources Economic
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Exhibit 82 ...And There Is It Is the Increased Efficiency in Exploiting Existing Material as Seen
in Mine Life Reductions
Source: Wood Mackenzie, ABMS and Bernstein estimates and analysis.

Exhibit 83 A Highly Non-Linear Relationship Exists in the Value Proposition Represented by
Mine Life Reductions; They Represent Efficiency Gains Down Only to ~30 Years
LOM; Afterwards, They Become Value Destructive
Source: Bernstein estimates and analysis.


0
20
40
60
80
100
120
1935 2012
Y
e
a
r
s
Chile Reserve Life
0%
20%
40%
60%
80%
100%
120%
140%
160%
100 90 80 70 60 50 40 30 20 10
V
a
l
u
e

A
c
c
r
e
t
i
o
n

>
1
0
0
%

I
m
p
l
i
e
s

V
a
l
u
e

G
a
i
n

Reserve Life of Original Mine
Value Generation Through Doubling Mine Capacity and Halving Life of Mine
US$15,000/t Capital Intensity US$10,000/t Capital Intensity
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Exhibit 84 For a Given Geology, Halving a Mine's Life from 50 Years to 25 Years Is a Highly
Profitable Exercise
Source: Bernstein estimates and analysis.

Exhibit 85 Halving a Mine's Life from 30 Years to 15 Years (from the Same Geology) Is a Value
Destructive Exercise
Source: Bernstein estimates and analysis.


1500
2000
2500
3000
3500
4000
4500
5000
NPV Years 0-25 NPV Years 26-50 NPV Unexpanded
Mine
NPV Gain on
Bringing Years 26-50
Forward
NPV Loss Due to
Capex
NPV Expanded Mine
N
P
V

(
U
S
$
m
)
Value of Expansion for 50-Year Life of Mine
1500
2000
2500
3000
3500
4000
4500
5000
NPV Years 0-15 NPV Years 16-30 NPV Unexpanded
Mine
NPV Gain on
Bringing Years 16-30
Forward
NPV Loss Due to
Capex
NPV Expanded Mine
N
P
V

(
U
S
$
m
)
Value of Expansion for 30-Year Life of Mine
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Exhibit 86 This Goes Some Way to Explaining Why Chilean Metal Output Stalled After Hitting
5.5Mtpa and a 35-Year Average LOM; It Also Highlights Why Chinese Production
Looks Challenged and Where the "Low(ish) Hanging Fruit" Lie
Source: Wood Mackenzie, ABMS and Bernstein estimates and analysis.

Exhibit 87 Mine Life Expansions from Existing Reserves Have the Potential to Deliver Less
Than One-Third of the Required Copper Demand by 2030; Projects Exploiting New
Resources Will Be Needed and This Requires New Finds of Copper
Source: Wood Mackenzie, ABMS and Bernstein estimates and analysis.


0
10
20
30
40
50
60
70
80
90
100
Chile China Peru USA Australia Zambia Russia DRC Canada Mexico
Y
e
a
r
s
Reserve Life of 10 Largest Copper Producers
0
200
400
600
800
1,000
1,200
1,400
1,600
Peru Mexico USA Mongolia Indonesia Pakistan Brazil Canada Iran Poland
A
d
d
i
t
i
o
n
a
l

C
o
p
p
e
r

(
k
t
)
Additional Production Potential in Moving to 35-Year Reserve Life
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Exhibit 88 However, the Exploitation Is Looking Ever Less Likely to Yield Results; Even If
Massive New Finds Are Encountered, the History of Pebble and Oyu Tolgoi Tells Us
That It Will Take 20-30 Years for These Finds to Deliver Commercially Meaningful
Metal (Compared to 10 Years for Escondida)
Source: USGS and Bernstein estimates and analysis.
The Structure of New Supply It Will Struggle at Current Price Levels
We examine the cash and capital costs of approximately 300 greenfield projects
and the associated brownfield expansions. Unsurprisingly, there is significant
operating margin to be made through capacity expansion. However, we also note
that the capital requirement is such that, against a fully loaded discount rate (i.e.,
including an adjustment for country risk), it is only at prices above US$8,000/t to
US$9,000/t that the majority of them will be value accretive (see Exhibit 91). Now,
more than ever, shareholders are aware of the risks inherent in new greenfield
projects (e.g., Pascua Lama, Minas Rio and Riversdale). Consequently, many
investors have been demanding that capital is returned rather than expended in an
effort to push commodity prices down. While we have not factored these strategic
issues into our analysis of the returns required for new investment (basing them on
our understanding of the investment protocols in the large mining houses), they
support our belief that new copper project approvals will struggle. Moreover, in a
period of declining or flattening commodity prices, concerns of value rather than
growth dominate the thoughts of the miners. This acts as a break on new volume
growth.
As with iron ore, the majority of the potential copper volume expansion belongs
to a handful of projects (see Exhibit 92). However, the number of projects
accounting for 50% of new copper capacity is larger for copper than for iron ore
(i.e., 49 for copper versus 16 for iron ore). This raises an interesting side point
asset differentiation creates variation in costs between operations, thus leading to
an inflection in the cost curve and hence margin creation. In other words, an asset is
valuable to the extent that it is unique or at least enjoys a privileged position
relative to other assets. If all assets in a commodity class were exactly the same, the
industry would be unattractive. The asset or project size relative to all assets or
projects can be used as a proxy for asset attractiveness (at the very least indicating
how amenable it is to the deployment of ever more massive bulk mining techniques
and avoidance of the risk of selective mining). This enables us to make a relatively
objective comparison between commodity classes and an assessment of their
0
10
20
30
40
50
60
70
80
90
100
1
9
8
0
1
9
8
1
1
9
8
2
1
9
8
3
1
9
8
4
1
9
8
5
1
9
8
6
1
9
8
7
1
9
8
8
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
C
o
n
t
a
i
n
e
d

C
u

-
M
t
History of New Copper Discoveries
Chile Canada China Ecuador Peru Kazakhstan Indonesia United States Australia Papua New Guinea Philippines Pakistan Mongolia
Escondida
Pebble
Oyu Tolgoi
It Is Only at Prices Above
US$8,000/t to US$9,000/t That
the Majority of Projects Will Be
Value Accretive; Given the
Current Price Environment,
Miners Are Reluctant to
Approve New Projects; We See
This Situation Persisting Until
the Copper Price Starts Rising
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fundamental attractiveness (see Exhibit 89). The most differentiated commodities
are iron ore and copper, followed by nickel and aluminum. This conclusion comes
in striking agreement with the observed pricing behavior of these commodities (see
Exhibit 90). We would, however, stress that this analysis is included more as an
interesting observation rather than a fundamental derivation of why certain
commodities outperform others. Nevertheless, it helps to make the case that
geological differentiation is a key component of return generation in mining.

Exhibit 89 We Look at Project-Size Differentiation, i.e.,
the Difference Between Percentage of
Mines and Supply

Exhibit 90 This Measure Shows a Striking Correlation
to Commodity Returns
Source: AME, CRU, Wood Mackenzie and Bernstein analysis. Source: Bernstein analysis.


0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
%
1
0
%
2
0
%
3
0
%
4
0
%
5
0
%
6
0
%
7
0
%
8
0
%
9
0
%
1
0
0
%
%

o
f

M
i
n
e
s
% of Supply
Asset "Differentiation" by Commodity
Fe Cu Ni Al
Fe
Cu
Ni
Al
0%
5%
10%
15%
20%
25%
0% 10% 20% 30% 40%
A
n
n
u
a
l
i
s
e
d

A
v
e
r
a
g
e

C
o
m
m
o
d
i
t
y

R
e
t
r
u
n
% of Projects accounting for 50% of Possible New
Supply
Geological Differentiation vs. Annual
Returns
Exhibit 91 Against a Fully Loaded Cost of Capital,
Many of Today's New Projects Will Struggle
to Create Value

Exhibit 92 The Majority of the World's Largest Projects
Are in the Hands of Relatively Few Major
Mining Houses


Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.
20,000
17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
10,000 15,000 25,000 0
0
5,000
GlobalCumulative NewProduction kt Cu
I
n
c
e
n
t
i
v
e

P
r
i
c
e

U
S
$
/
t
15,000 20,000 25,000
500
550
600
650
700
10,000
0
50
100
150
200
250
300
350
400
450
0 5,000
GlobalCumulative NewProduction kt Cu
N
e
w

P
r
o
d
u
c
t
i
o
n

k
t
C
u
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While the incentive price curve is critical in analyzing forward-looking prices, we
believe its role is often misinterpreted. It is true that an incentive to supply new
mined volume has to be estimated. However, it is far from clear that the market
delivers this via a guarantee return on capital. Rather, we believe that it is a
perception of value creation engendered by current prices rising above the incentive
price for new capacity that triggers the investment decision. Once this happens, it
typically results in oversupply, leading to price deterioration and the emergence of
the cycle. Thus, an incentive is delivered over the cycle through massive initial
cash generation followed by long periods of low margin and effective stagnation.
The only difference in today's commodity cycle versus the "normal" cycle is the
degree of oversupply necessary to displace the Chinese domestic mining industry.
In the case of iron ore, this requires a significant volume of material. In the
case of copper, the quantum is much smaller. However, we believe that there are a
number of factors that differentiate copper from iron ore to the benefit of copper. In
our view, even where capital discipline is lacking, geological barriers to entry
provide greater protection against the threat of imminent oversupply. The world's
largest iron ore supply location Australia has been able to grow output, while
the world's largest copper supply location Chile has not been able to do the
same (see Exhibit 93). We would highlight two factors behind this, both of which
speak to a decline in geological copper quality.
Head grade: The head grade of milled copper has fallen over 25% in the last six
years. This does both: increases mine operating costs directly via a reduction of
actual metal content, and reduces concentrate qualities and mill productivity (see
Exhibit 94).
Stripping ratios: Mines are getting older and deeper. In addition to the grade of
the accessed material deteriorating, the process by which this material is obtained
is getting more difficult. This puts upward pressure on operating costs for the
industry as a whole and acts to support price.
That said, we would reiterate the view that no demand-side scenario and no
degree of geological attractiveness is sufficient to protect an industry from the
prospect of oversupply indefinitely if capital discipline is lacking in the investment
decisions of the major incumbents. Given that the most significant projects belong
to industry incumbents, for copper as for iron ore, the fate of value creation in
mining is largely in the hands of the miners themselves. They can either create or
destroy the conditions for the continuation of the "super-cycle," depending almost
entirely upon their own understanding of the role they play in determining
commodity prices.


Even if Capital Discipline for
Copper Is Lacking, Geological
Barriers to Entry Provide
Greater Protection Against the
Threat of Imminent Oversupply
Relative to Other Commodities;
Nevertheless, Capital
Discipline Still Plays a Huge
Role and So the Fate of Value
Creation in Copper Mining Is
Largely in the Hands of the
Miners Themselves
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Exhibit 93 Unlike With Iron Ore, There Are Some Genuine Supply Side Constraints That Have
Prevented Chilean Copper Supply from Responding to Price Increases in the Same
Way as Australian Iron Ore Did
Source: AME, CRU, Wood Mackenzie and Bernstein analysis.

Exhibit 94 In Mining, Grade Is King; It Acts as Geological Gearing of the Labor Cost; Halve the
Grade and You Will Double (at Least) the Unit Cost of Metal Output
Source: Wood Mackenzie and Bernstein estimates and analysis.

Fundamentally, we do not believe that there is any incremental value in industry
consolidation unless industry incumbents act with awareness of the role they play
in determining commodity prices. In other words, they have to explicitly
understand that value destruction through price reduction has a far more significant
effect on their value than value creation through volume growth.
We see three levers arising from this, through which the miners can control
their impact on the markets and maximize their value.
0
20
40
60
80
100
120
140
160
180
200
2007 2008 2009 2010 2011 2012
I
n
d
e
x
e
d

p
r
o
d
u
c
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2
0
0
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=

1
0
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Chilean Copper vs. Australian Iron Ore
Chile - Copper Australia - Iron Ore
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
%

C
u
Mined Copper Head Grade
Value Maximization Can Be
Achieved Via More Explicit
Awareness of the Need for
Capital Discipline, Greater
Focus on Operating Cost
Control and M&A
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Capital discipline: Greater and more explicit awareness of the need for capital
discipline is of most pressing importance. In a commoditized market, the only
strategic variables in the miners' control are production volume and price, which
are inversely related. Expending capital to depress commodity prices is very
rarely optimal locally and invariably suboptimal globally.
Focus on operating cost reductions: We would much rather see capital
expended to improve productivity at existing operations and effect cost reductions
than grow volumes. We believe that geological and technological differentiation
is what drives margins. Incumbent players with privileged assets ought to be
better able to drive cost reductions than those with more compromised assets.
Consequently, the benefits of productivity improvement by the majors should
accrue to the shareholders of the incumbents instead of being passed on to
consumers through lower prices.
M&A: Keeping the best assets within the portfolios of the incumbent majors is a
key barrier to entry for new players. We see significant value (even if it is
difficult to quantify) in the optionality inherent in owning the best geology, even
if that means expending capital on acquiring assets whose exploitation will be
some way in the future. However, the rush to develop assets engendered by too
simple an understanding of value creation and the "time value of money"
represents a significant flaw in most mining asset valuation methodologies. The
big difference between acquisitive and organic growth is that M&A does not add
to the supply of raw materials. Therefore, it does not put downward pressure on
price. Consequently, to the extent that there is "spare" capital in the miners, in our
view, it makes much more sense to buy rather than build.

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Grade Is King

Ninety percent of copper prices over the last 35 years can be explained by just three
variables: mined grade, global GDP growth and the level of terminal market
inventory. In this chapter, we show the mechanism that will continue to drive the
grade of mined copper downwards and its price implications. In the previous
chapters, we showed that sub-economic resources will increasingly be required to
satisfy copper demand going forward, as the financial mechanism behind the
accelerated exploitation of existing reserves begins to break down. This chapter
analyzes the role that grade plays in copper mining. While copper grade declines
are a widely known feature of the mining industry, the true importance of these
declines is not. For the first time in the last 35 years, global head grades have
moved above reserve grades. Consequently, copper grades are on an inexorable
path downwards, and continued exploitation of the ore that stands behind today's
copper consumption necessarily degrades the remaining reserve base. While the
apparent global copper reserves still stand above 30% of consumption, this has
been achieved only through the expedient of slashing of the minimum threshold of
copper that is allowed to stand behind reserves (i.e., the cut-off grade). We do not
see a way for this situation to be stable in the face of declining copper prices.
Again, our analysis leads us to the conclusion that the satisfaction of future demand
will require copper price to rise in excess of US$10,000/t.
Three Definitions of Grade
It is hard to underestimate the importance of grade in base metal mining. There is
an old mining aphorism "grade is king," which captures the importance of grade
perfectly. It is the high-grade mines and deposits that continue to make money
through the cycle. Consequently, while scale is responsible for the economic
viability of a deposit, the grade will determine its cost position and the ultimate
value. It is widely known that grades in the copper industry have generally been
under pressure. However, the term "grade" covers a multitude of different purposes,
and it is important to be clear about what exactly we are referring to when asserting
that grades are declining. The implications of deterioration in grades differ
markedly depending on what exactly the statement refers to. At the very least, there
are three crucial distinctions.
Reserve grade is the average grade of the ore that has been identified as
economically viable to extract in the current conditions. So it represents the total
available material that the mine will exploit over its operating life.
Head grade is the average grade of ore fed into the processing plant of a mine.
For a copper mine, it will either be the mill (for the traditional sulphide route) or
the leach pad (for the SxEw route). It refers to the quality of material standing
behind today's production and costs.
Cut-off grade is the minimum grade of ore used to establish reserves. It is the
threshold grade between the ore that will eventually be fed into the processing
plant and the material that will be discarded as waste.
The distinction between the average measures of both head and reserve grades
stands in contrast to the limit measure represented by the cut-off grade. This
distinction carries significant implications, as we will explain. However, a further
explanation of the nature of averages used in measuring grade is necessary. Exhibit
95 shows the differing evolutions of copper grade when a measure is weighted by
paid metal (i.e., weighted by the output of the mining process) versus when the
same grade is weighted by ore milled (i.e., weighted by the input into the mining
process). The difference arises due to a number of very large high-grade mines that
The Operation of a Mine
The Operation of a Mine
Depends on the Interplay of the
Reserve Grade, the Head
Grade and the Cut-Off Grade
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account for a disproportionate share of the copper metal output. Were all assets
equal in terms of size and grade, the disparity would not have arisen. In the next
section, we will be looking at grade weighted by tons of ore milled as it is the best
indicator of the material that actually leaves the mine site.
In terms of determining the economics of mine development, the most
important measure is the cut-off grade. It will determine the scale of the mining
operation, the volume of material that will be exploited and the ultimate life of the
mining operation. It also directly influences the quality of ore that is processed on a
given day. Consequently, it proves critical in setting the operating cost of a mine.
The general rule is that the lower the cut-off grade, the higher the total volume of
material available and, consequently, the greater the scale and life of an operation.
However, the lower the cut-off grade, the lower the average grade of material and,
consequently, the higher the cost of operation. It is the balance between scale and
quality that ultimately determines the cost and hence the overall economics of a
mine.

Exhibit 95 We Need to Be Careful When Referring to Declines and Understand How Those
Declines Are Measured
Source: Wood Mackenzie and Bernstein estimates and analysis.
The Interplay of Grades
We begin our analysis by examining how the three types of grades influence the
mining process. There will always be some relationship between a deposit's copper
grade and some spatial parameters that describe the given ore body (see Exhibit
96). The easiest way to think about this is to assume that the grade declines as one
moves down through an ore body. At a certain depth, the copper contained in a
volume of rock is simply too low to make the exploitation of that material
worthwhile. However, the average grade of the material above this threshold must
be considerably higher than the grade that determines the threshold separating ore
from waste.
In order to quantify the nature of the relationship between the various mining
parameters, it is necessary to specify the grade distribution in some way. To make
things easy for ourselves, we have simplified this distribution as an exponentially
declining relationship between depth and grade, which we might obtain for a large
copper porphyry deposit (see Exhibit 97). Now, an exponential decline is not one
0.60
0.80
1.00
1.20
1.40
1.60
1.80
%

C
u
Mined Copper Head Grade
Weighted by Paid Copper Weighted by Ore Milled
Grade Declines as One Moves
Down Through an Ore Body,
and an Exponentially Declining
Relationship Exists Between
Depth and Grade for Copper
Porphyry Deposits
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that could actually be realized in practice. The mineralogical barrier we described
in the previous chapters renders a continuous grade distribution impossible. The
distribution of ore grades must exhibit a discontinuity for grades below ~0.1% Cu
and an exponential function exhibits no such discontinuity. However, the impact of
this technical point can be neglected for the time being and the main conclusions
drawn from the simplified relationship still stand.

Exhibit 96 The Cut-Off Grade Delineates the Boundary Between the Material That Will Be Mined
and Treated and the Waste Material That Will Need to Be Mined to Access the Ore,
But Will Be Dumped Subsequently
Source: Bernstein estimates and analysis.


Directionof
Declining Grade
Ore
Waste
CutOffGrade asa Limit
ReserveGradeis the
Averageofthe
Economically
Exploitable Ore
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Exhibit 97 For Purposes of Illustration, We Assume a Grade Profile That Declines Exponentially
With Depth; at Some Depth, Grade Will Be Insufficient to Allow the Material to Be
Mined Economically
Source: Bernstein estimates and analysis.

The lower the cut-off grade is allowed to fall, the more volume of material is
opened up for exploitation and, consequently, the larger the mine will be (see
Exhibit 98). It is also possible to calculate the relationship between the average
grade of all the material to be exploited by looking at the grade of the tons above
the cut-off grade. This is measured by the reserve grade of a deposit (see Exhibit
99). The reserves will be extracted over the life of the mine. Exhibit 99 describes a
fundamental relationship in how the structure of any mine operates and the nature
of the material that stands behind the operation. The important point is the
concavity of the curve as the cut-off grade falls, the reserve grade falls even
faster. This is also evident in the ratio between the cut-off grade and the reserve
grade (see Exhibit 100). At high reserve grades, the cut-off grade will also be high,
and the difference between the marginal ton and the average ton mined is small.
However, as the reserve grade falls, the distinction between the marginal ton and
the average ton becomes even more pronounced.


0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250
G
r
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o
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O
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e
Depth (meters)
Exponentially Declining Grade With Distance
The Lower the Cut-Off Grade Is
Allowed to Fall, the More
Volume of Material Is Opened
Up for Exploitation, and We
Have a Larger Mine; When the
Cut-Off Grade Falls, the
Reserve Grade Falls Even
Faster
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Exhibit 98 The Total Tonnage That Will Be Classified as Ore Depends on How Much the Cut-Off
Grade Is Allowed to Fall; the Lower the Grade That a Miner Is Prepared to Exploit, the
More Tons Are Available
Source: Bernstein estimates and analysis.

Exhibit 99 The Average Grade of the Tons Mined Will Naturally Be Higher With a Higher Cut-Off
Grade, as There Will Be Less Low-Cost Material Present to Dilute the High-Grade Ore
Source: Bernstein estimates and analysis.


0
20
40
60
80
100
120
140
160
180
200
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Exhibit 100 However, the Relationship Between the Average Reserve Grade and the Cut-Off
Grade Is Non-Linear; as Reserve Grade Falls, the Miner Is Increasingly "Scraping the
Bottom of the Barrel"
Source: Bernstein estimates and analysis.

The discussion so far serves to illustrate how the structure of a mine is delineated,
but not how the mine will actually be developed. The choice of head grade
ultimately refers to the "life of mine" plan and how the removal and use of different
volumes will be sequenced. This sequencing must, of course, look at more than just
grade. It must account for the fact that different grades may have different stripping
ratios (requiring one to move more waste to access the ore), and that the geometry
of an ore body is seldom simple. In reality, significant computational effort and
mine planning software is expended to put together a cost-minimizing (and value
maximizing) mine plan. However, the point that we wish to make does not require
such complexity. Rather, we wish to explain the implications of having different
head and reserve grades. It is possible to develop a mine with no temporal variation
in the grade of material exploited. In such case, each year's mining corresponds to
taking an identical "slice" out of the ore body. To the extent that this happens, the
head grade (the average grade exploited material in a given year) will be identical
to the reserve grade, i.e., the material removed in a year and the material left behind
will be identical from a grade perspective (see Exhibit 101). However, to the extent
that the head grade is higher than the reserve grade, mining leads to a degradation
of the ore body. The material that is left behind after a year's production will be of
lower quality than the material taken out (see Exhibit 102).

0.00
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Ratio of Cutoff Grade to Reserve Grade With Falling Reserve Grade
The Choice of Head Grade
Ultimately Determines the "Life
of Mine" Plan and How the
Removal and Use of Different
Volumes Will Be Sequenced
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Exhibit 101 The Mine Plan Determines the Sequencing of Blocks of Material Extracted from the
Reserve Base; in This Instance, the Block Taken and the Block Left Behind Are
Identical from a Grade Perspective; as a Result, the Mine Plan Sees a Grade Profile
That Is Constant Over Time
Source: Bernstein estimates and analysis.


Directionof
Declining Grade
Ore
Waste
CutOffGrade asa Limit
Year1Production, a
homogeneousslice
takenoutof theore
bodyleaving residual
oregradeinvariant.
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Exhibit 102 Under a Different Sequence, the Mine Plan Removes the Highest Grade First,
Leaving Lower Grade Material Behind; Over Time, This Means That the Head Grade
Must Fall as the Cut-Off Grade Limit Is Approached
Source: Bernstein estimates and analysis.

Directionof
Declining Grade
Ore
Waste
CutOffGrade asa Limit
Year1Production, a
heterogeneousslice
takenoutof theore
bodyleaving residual
oregradelowerthan
priortomining.
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There are two basic actions that may see an instantaneous head grade higher than
the deposit reserve grade.
The mine plan may be preferentially extracting high-grade ore zones from the ore
body while leaving lower grade ore in situ. Thus, the head grade of the material
taken to the milling plant will be higher than the average grade of the material in
the deposit. This allows high grading without increasing the size of the mining
fleet.
Low and high-grade ore may be extracted from the mine at the same time, but the
low-grade ore will be stockpiled with only the high-grade ore being put through
the processing plant. The low-grade ore will be exploited from the stockpile once
the mine site itself is exhausted. However, this approach requires an increase in
total tons moved, hence an increase in mining fleet.
Irrespective of the mine plan employed, the net result sees head grade above
reserve grade in the short run being compensated for by head grade falling below
reserve grade (and tending towards the cut-off grade) in the medium to long run. In
contrast, if head grades are below reserve grades today, the grades will increase in
the future as higher-quality material gets accessed later. Three related questions
follow immediately from this analysis:
Why should different mine profiles exist, i.e., is there any reason why mine
campaigns preferentially attack low grade first versus high grade first or vice
versa?
What are the cost implications behind different grade profiles?
Where, in the process of grade development, do we stand today?
Both Geology and Finance Prioritize High-Grade Extraction
Maximizing high-grade ore at the start of a mine's life dramatically increases both
the value of the mine and the chance of project investment approval. Meanwhile,
supergene enrichment provides a geological mechanism that makes high-grade ore
available.
A first glance, it might seem odd that there is a systemic reason why high-
grade ore rather than low-grade ore should be mined first. After all, it is not as if
the nature favors any particular orientation of ore body. Ought one not to be as
likely to see low-grade ore close to the surface (and therefore mined first) as high-
grade ore?
This is not quite the right picture to have. As is almost always the case in
mining, financial and geological reasons exist why high-grade ores are extracted
preferentially and low-grade ores subsequently.
To start with financial motivation first, Exhibit 103 shows three different grade
profiles for developing exactly the same reserve. The total amount of metal
extracted from the mine is identical. Sequencing of extraction is the only variable.
Assuming exactly the same capital investment, Exhibit 104 shows the value of each
development path (given that the milled tonnage is the same in each scenario, it is
fair to assume the same capital costs). High-grading the deposit and extracting cash
earlier rather than later has a huge impact on value. In addition to changing the
value, it alters the investment decision for building copper projects. High-grading is
not just a "sweetener" for investments that would just as well proceed without it.
Rather, it is critical for new investment economics.

There Are Two Cases When
Head Grade Can Be Higher
Than the Reserve Grade: the
Mine Plan Is Preferentially
Extracting High-Grade Ore
Zones First or Low-Grade Ore
Is Stockpiled With Only High-
Grade Ore Being Processed
From a Financial Perspective,
Frontloading Cash Generation
Is Preferable Due to the Time
Value of Money; from a
Geological Perspective,
Secondary Enrichment Is
Closer to the Surface Than the
Low-Grade Ore Zones
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While generating the same total lifetime cash, high-grading the ore body
delivers cash sooner. Exhibit 105 shows the basic reason for this improvement
the time value of money. Given that the total metal and the total capex are the same
under all three scenarios, the value uplift of high-grading is due entirely to it paying
back the initial investment sooner.
Nevertheless, this financial incentive is insufficient. After all, if all deposits
were perfectly homogenous, high-grading would be impossible. However, again as
we discussed in the previous chapters, geology actually conspires to help miners
develop projects (see Exhibit 106). Secondary enrichment (whereby weathering on
a sulphide outcrop results in the formation of high grade zones where the ore body
intersects the historic water table) provides the miners with exactly what they need
to maximize the time value of money. However, even without this, the general
heterogeneity in a natural ore body will always give clever mine planners the
ability to target higher cash flow upfront and leave the painful fallow years for
someone else to deal with.

Exhibit 103 Three Different Grade Profiles for the Development of Exactly the Same Underlying
Ore Body...
Source: Bernstein estimates and analysis.

0.6%
0.7%
0.8%
0.9%
1.0%
1.1%
1.2%
1.3%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
H
e
a
d

G
r
a
d
e

(
%

C
u
)
Years
Three "Life of Mine" Grade Profiles
Scenario 1 - Flat Grade Scenario 2 - Increasing Grade Scenario 3 - Declining Grade
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Exhibit 104 ...Lead to Radically Different Value Propositions; Under Realistic Mining Investment
Guidelines, Only the Third Scenario of Declining Ore Grade Will Get Approved and
Subsequently Developed; the Other Two Mining Solutions Are Unlikely to Attract
Capital
Source: Bernstein estimates and analysis.

Exhibit 105 While Generating the Same Total Lifetime Cash, High-Grading the Ore Body Delivers
Cash Sooner
Source: Bernstein estimates and analysis.

-100
-50
0
50
100
150
200
250
300
350
400
450
Scenario 1 - Flat Grade Scenario 2 - Increasing Grade Scenario 3 - Declining Grade
N
P
V

(
U
S
$
m
)
Value Impact of Different Grade Profiles
-2000
-1000
0
1000
2000
3000
4000
5000
6000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
C
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F

(
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S
$
m
)
Project Time Line (Years)
Cumulative FCF vs. Mine Plan
Scenario 1 - Flat Grade Scenario 2 - Increasing Grade Scenario 3 - Declining Grade
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Exhibit 106 Geology Conspires With Finance, as Secondary Enrichment Zones Help Create High-
Grade Ore Near the Surface, Which Can Be Extracted Early on in the Mine Life
Source: Bernstein estimates and analysis.

PrimarySulphideOre
SecondaryEnriched
SulphideOre
LeachedorOxidised
Zone
WaterTable
Surface
Actionofwaterin
dissolvingsulphide
mineralisation
SupergeneZone
HypogeneZone
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Grade The Most Important Determinant of Mining Costs
Two effects drive the sensitivity of costs to falling grades. First, the same mining
and milling expense must cover a smaller output of contained metal in the ore.
Second, the efficiency of metal recovery declines as the grade falls. In all of this,
"grade is king" and low-cost production is entirely predicated on high grades.
Having understood the structure of grade profiles and the incentive that drives
the exploitation of high-grade zones early in the mine plan, we now turn to the
impact this has on mine costs. Total cost of a mining operation is driven not by the
amount of metal produced, but rather by the amount of ore and waste moved and
the volume of ore milled. The ore tonnage scales the total cost base. However, the
grade determines the unit costs, as it determines the amount of metal available to
bear the total costs of the operation. As a result, the unit costs of a mining operation
are inversely proportional to the grade of the material exploited. Four buckets of
costs matter to a copper operation.
Labor involves paying the people that drive the trucks, run the mills and service
the mine fleet as well as look after the general safety and well-being of the
operation.
Diesel is the fuel source for the trucking and mining fleet.
Power is used in the crushing of ore in the milling circuits to grind it prior to
froth flotation.
Consumables include explosives, tyres, grinding media and reagents used in the
flotation cells.
We will be turning our attention to the cost structure of mining more explicitly
in the following chapter, which will look at differential cost escalation and the
incentive structure of the industry. However, here we want to examine how various
physical factors influence the costs of a mine, even if cost escalation per se (e.g.,
rising fuel prices) is left out of the equation. Exhibit 107 shows a simplified
schematic for the operating cost structure of a copper mine. We deliberately try to
mimic the costs of a large Chilean-style copper porphyry mine, exploiting
reasonably high-grade ore with an efficient and productive labor force. In Exhibit
108, we show a small-scale, low-efficiency and high-cost mine to illustrate the type
of operation that we believe is responsible for the 1Mtpa increase in Chinese
copper production over the last decade.
Having constructed this simple model, it is possible to show the sensitivity of
operating costs to changes in mining parameters and efficiencies. To pick just one
example, the hardness of a rock will determine the power that is required to grind
that rock to a suitable size fraction (see Exhibit 114). In general, the sensitivity
analysis for a range of parameters is included in Exhibit 109 through Exhibit 115.
Exhibit 116 displays the most important factor different head grades translate to
the greatest differences in mining costs.
A second-order effect of falling grade that is often overlooked relates to the
separation of valuable copper concentrate from worthless tailing in the flotation
cells. Froth flotation is based on the differences in surface chemistry that arise
between copper sulphide ores and the gangue of the host rock when treated with
certain reagents. However, any process of physical or chemical discrimination
requires the differences exploited to be sufficiently wide to induce separation.
When the grade of ore falls, the distinction between tailing and concentrate
necessarily gets smaller. This, in turn, reduces the ability of flotation cells to
discriminate between revenue-generating material and waste product.
Consequently, recovery (productivity) falls (see Exhibit 117). Once the cost impact
of this second-order effect is included, the role of grade in cost determination
becomes even more pronounced (see Exhibit 118). The grade profile of the copper
industry is critical for its cost structure and consequently price.

Head Grade Is the Greatest
Differentiator in Contemporary
Mining Costs; Falling Head
Grade Also Has a Second-
Order Impact via Reduced
Recovery Rates
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Exhibit 107 The Basic Structure of the Operating Costs of a Stylized Large Chilean Copper Mine
Source: Bernstein estimates and analysis.

Simplified Copper Mine Cost Calculation Low-Cost Mine
Milling Rate ktpd a 100
ROM Tonnage Mtpa b = a * 365 / 1,000 37
Stripping Ratio - c 2.0
Tons Moved Mtpa d =b * (1 + c) 110
Labor Productivity kt/Man-Year e 100
Labor Required Men f = d / e * 1,000 1,095
Unit Labor Cost US$pa g 100,000
Total Labor Cost US$m h = f * g / 1,000,000 110
Diesel Consumed Liters/t Moved i 0.75
Diesel Price US$/Liter k 1.00
Unit Diesel Cost US$/t Moved l = i * k 0.75
Diesel Cost US$m m = l * d 82
Unit Mining Consumables Cost US$/t Moved n 1.00
Mining Consumables Cost US$m o = n * d 110
Total Mining Cost US$m p = o + m + h 301
Milling Power Intensity kwh/t Milled q 25.0
Unit Power Cost USc/kwh r 7.5
Milling Power Cost US$m s = b * q * r / 1,000 68
Milling Consumables Cost US$/t Milled t 2.0
Milling Consumables Cost US$m u = t * b 73
Milling Labor Productivity kt/Man-Year v 55
Milling Labor Required Men w = b / v * 1000 664
Milling Labor Cost US$m x = w * g / 1,000,000 66
Total Milling Cost US$m y = s + u + x 208
Milling & Mining Cost US$m z = y + p 509
G&A as % of Total Costs % aa 20%
Other G&A US$m ab = aa / (1-aa) * z 127
Total Minesite Cost US$m ac = ab + z 636
Head Grade % ad 1.00%
Milling Recovery % ae 85%
Concentrate Grade % af 35%
Concentrate Produced ktpa ag = b * ad * ae / af *1000 886
Recovered Metal ktpa ah = ag * af 310
Metal Payability % ai 97.5%
Payable Metal ktpa aj = ah * ai 302
Land Freight US$/t Concentrate ak 20
Ocean Freight US$/t Concentrate al 50
Freight Cost US$m am = ag * (ak + al) / 1,000 62
TC US$/t Concentrate an 80
RC Usc/lb Copper ao 8
Treatment Charge US$m ap = an * ag / 1,000 71
Refining Charge US$m aq = (2,204 * ao * aj) / 10,0000 53
Realization Cost US$m ar = ap + aq 124
Total Cost US$m as = ac + ar + am 822
Cost per Ton US$/t at = as / aj * 1000 2,719
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Exhibit 108 The Picture for a Small Chinese Type Operation (or at Least What We Believe They
Look Like!) Is a Little Different
Source: Bernstein estimates and analysis.

Simplified Copper Mine Cost Calculation High-Cost Mine
Milling Rate ktpd a 1
ROM Tonnage Mtpa b = a * 365 / 1,000 0.37
Stripping Ratio - c 3.0
Tons Moved Mtpa d =b * (1 + c) 1.46
Labor Productivity kt/Man-Year e 10
Labor Required Men f = d / e * 1,000 146
Unit Labor Cost US$pa g 8,000
Total Labor Cost US$m h = f * g / 1,000,000 1.17
Diesel Consumed Liters/t Moved i 0.75
Diesel Price US$/Liter k 1.00
Unit Diesel Cost US$/t Moved l = i * k 0.75
Diesel Cost US$m m = l * d 1.10
Unit Mining Consumables Cost US$/t Moved n 1.00
Mining Consumables Cost US$m o = n * d 1.46
Total Mining Cost US$m p = o + m + h 3.72
Milling Power Intensity kwh/t Milled q 25.0
Unit Power Cost USc/kwh r 7.5
Milling Power Cost US$m s = b * q * r / 1,000 0.68
Milling Consumables Cost US$/t Milled t 2.0
Milling Consumables Cost US$m u = t * b 0.73
Milling Labor Productivity kt/Man-Year v 10
Milling Labor Required Men w = b / v * 1000 37
Milling Labor Cost US$m x = w * g / 1,000,000 0.29
Total Milling Cost US$m y = s + u + x 1.71
Milling & Mining Cost US$m z = y + p 5.43
G&A as % of Total Costs % aa 20%
Other G&A US$m ab = aa / (1-aa) * z 1.36
Total Minesite Cost US$m ac = ab + z 6.79
Head Grade % ad 0.30%
Milling Recovery % ae 85%
Concentrate Grade % af 35%
Concentrate Produced ktpa ag = b * ad * ae / af *1000 2.66
Recovered Metal ktpa ah = ag * af 0.93
Metal Payability % ai 97.5%
Payable Metal ktpa aj = ah * ai 0.91
Land Freight US$/t Concentrate ak 20
Ocean Freight US$/t Concentrate al 0
Freight Cost US$m am = ag * (ak + al) / 1,000 0.05
TC US$/t Concentrate an 80
RC Usc/lb Copper ao 8
Treatment Charge US$m ap = an * ag / 1,000 0.21
Refining Charge US$m aq = (2,204 * ao * aj) / 10,0000 0.16
Realization Cost US$m ar = ap + aq 0.37
Total Cost US$m as = ac + ar + am 7.21
Cost per Ton US$/t at = as / aj * 1000 7,948
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Exhibit 109 Stripping Ratio: The Deeper You Go the
Higher the Cost

Exhibit 110 Labor Productivity: Efficient and Well-
Capitalized Mines Are Far Lower Cost Than
Those Relying on Human Labor
Source: Bernstein estimates and analysis. Source: Bernstein estimates and analysis.

Exhibit 111 The Price of Labor Matters...

Exhibit 112 ...While the Impact of Diesel Is Surprisingly
Low
Source: Bernstein estimates and analysis. Source: Bernstein estimates and analysis.

1,000
1,500
2,000
2,500
3,000
3,500
U
S
$
/
t
Stripping Ratio
Cost Sensitivity to Stripping
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
U
S
$
/
t
kt/man-year
Cost Sensitivity to Labor Productivity
1,000
1,500
2,000
2,500
3,000
3,500
U
S
$
/
t
US$/man-year
Cost Sensitivity to Labor Cost
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
3,000
U
S
$
/
t
US$/liter
Cost Sensitivity to Diesel Price
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Exhibit 113 Power Has Less Impact Than One Might
Expect

Exhibit 114 Rock Hardness Affects the Milling Power
Rate and Drives Cost in High Power-Cost
Regions
Source: Bernstein estimates and analysis. Source: Bernstein estimates and analysis.

Exhibit 115 Higher Mill Recovery (Finer Grind) Implies
Lower Cost

Exhibit 116 Nevertheless, in All of This "Grade Is King"
Source: Bernstein estimates and analysis. Source: Bernstein estimates and analysis.

1,000
1,500
2,000
2,500
3,000
3,500
U
S
$
/
t
USc/kwh
Cost Sensitivity to Power Price
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
3,000
U
S
$
/
t
kwh/t milled
Cost Sensitivity to Milling Power Rate
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
3,000
U
S
$
/
t
Mill Recovery
Cost Sensitivity to Mill Recovery
1,000
3,000
5,000
7,000
9,000
11,000
13,000
15,000
17,000
U
S
$
/
t
Head Grade
Cost Sensitivity to Head Grade
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Exhibit 117 Compounding the Critical Role That Grade Plays Is the Fact That the Productivity of
Milling Circuits Varies With It; a "Constant Tail" of Copper Is Always Lost, Given That
Below a Certain Copper Concentration, Froth Flotation Cannot Discriminate Between
Ore and Tailings
Source: Bernstein estimates and analysis.

Exhibit 118 This Radically Increases the Cost of Low-Grade Volume Exploitation
Source: Bernstein estimates and analysis.


0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70% 0.80% 0.90% 1.00% 1.10% 1.20% 1.30% 1.40%
M
i
l
l

R
e
c
o
v
e
r
y
Head Grade (% Cu)
Mill Recovery vs. Head Grade
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0.20% 0.30% 0.40% 0.50% 0.60% 0.70% 0.80% 0.90% 1.00% 1.10% 1.20%
C
o
p
p
e
r

C
o
s
t
s

(
U
S
$
/
t
)
Head Grade (% Cu)
Impact of Mill Recovery on Cost Sensitvity of Grade Decline
Including Recovery Impact Excluding Recovery Impact
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Looking Beyond the Superficial
Today, global copper reserves have a life of roughly 30 years, and this is relatively
unchanged from 35 years ago. However, the persistently steady reserves have only
been made possible through a dramatic decline in cut-off grades. Apparent reserve
security belies the radical change implied in moving from a situation of deposit
head grades being below reserve grades to one where the reverse is true. As a
result, the security of 30 years worth of reserves would vanish in the face of a
dramatic price decline.
So far, we have discussed three issues:
Established the nature of the grade relationships in copper mining
Explained why the grade profiles drive mine life plans
Demonstrated the importance of grade to the global cost structure
We now turn to the final piece of the puzzle and look at the current state of the
global copper industry, in order to determine the implications of all these
considerations on the copper price. At first glance, the overall picture for the
security of copper supply considered from a global perspective does not look very
different now compared to 35 years ago. At least on a very superficial level, one
would look at Exhibit 119 and conclude that despite the fact that mined copper
production has grown by nearly 10Mtpa, the world has been able to meet this
increase, and that any Malthusian concerns about imminent supply shortage are
overdone (see Exhibit 120).
The driving force behind this is the fact that copper reserve base has grown
more or less in proportion to production, leading to only modest declines in global
mine life (see Exhibit 121). However, this is not the complete story. In fact, the
truth is far more complicated. The superficial statements that there is plenty of
copper left in the ground and our ability to replace what we consume means that
production is secure would be true only in so far as price stays high and trends
higher with time. In fact, reserves have only grown together with increasing
consumption because the global reserve grade has collapsed (see Exhibit 122).
Reserves have held up only because resources have been converted into reserves by
dramatically lowering the cut-off grade (see Exhibit 123).

Exhibit 119 The Life of Available Copper Deposits Has
Held Up Very Well, Despite the Massive
Increases in Mined Production

Exhibit 120 So There Is No Need for Any Malthusian
Concerns; We Have as Much Copper "on
Hand" Now as 35 Years Ago
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

0
5
10
15
20
25
30
35
40
45
1980 1985 1990 1995 2000 2005 2010
Y
e
a
r
s
Global Copper Reserve Life
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1980 1985 1990 1995 2000 2005 2010
C
o
p
p
e
r

(
k
t
)
Global Mined Copper Production
The Reason Why Reserves
Have Held Up Is Because
Resources Have Been
Converted Into Reserves by
Dramatically Lowering the Cut-
Off Grade; Hence, 30 Years
Worth of Reserves Would
Vanish in the Face of a
Dramatic Price Decline
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Exhibit 121 This Security Is Engendered by the Fact
That Reserves Seem to Have Held Up Well

Exhibit 122 However, the Truth Is Somewhat More
Complicated; Reserves Have Held Up Well
Only Because of a Dramatic Reduction in
the Reserve Grade...
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 123 ...Driven by Dropping the Cut-Off Grade to below 0.3% Cu
Source: Wood Mackenzie and Bernstein estimates and analysis.

The inadequacy of reserves under current economic conditions necessitates
changing the conditions that are deemed necessary. The geology is invariant, the
economics must change. However, although the declines in global head grade (i.e.,
the material that stands behind today's cost structure and copper price) may be well
known, the implications of this for future copper prices are not (see Exhibit 124). It
is the relative decline in the prevailing head grade, the reserve grade and the cut-off
grade that matters for price. Critically, we see that 10 or so years ago, global head
grades moved from being below global reserve grades to being significantly above
them (see Exhibit 125 and Exhibit 126). This move reflects a change in global
mining practice. Twenty years ago, the extraction of copper in a given year did not
degrade the quality of the ore body from which the copper was extracted. In fact,
0
100
200
300
400
500
600
1980 1985 1990 1995 2000 2005 2010
C
o
n
t
a
i
n
e
d

C
u

(
M
t
)
Global Copper Reserves
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
1.10%
1980 1985 1990 1995 2000 2005 2010
A
v
e
r
a
g
e

R
e
s
e
r
v
e

G
r
a
d
e

(
%
)
Global Copper Reserve Grade
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
0.50%
0.55%
1980 1985 1990 1995 2000 2005 2010
A
v
e
r
a
g
e

R
e
s
e
r
v
e

G
r
a
d
e

(
%
)
Global Copper Cutoff Grade
Extraction of Today's Ore Has
a Deleterious Impact on the
Quality of Ore That Will Be Left
to Satisfy Demand Tomorrow
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the average quality of the ore left behind was slightly higher than the ore extracted,
as below-average grade material was taken out first. The reverse is true now: the
highest-quality fractions of the global reserve base are required to satisfy demand,
and the extraction of today's ore has a deleterious impact on the ore that will be left
for tomorrow (see Exhibit 127 and Exhibit 128). The transition in the copper
industry over the last 10-15 years has been from self-perpetuating to one that is
increasingly unstable in the face of price shocks or other disruptions.

Exhibit 124 While the Decline in Head Grade Is Well
Known...

Exhibit 125 ...Its Implications Are Not, Given the Nature
of the Copper Forward Curve and
Consensus Price Expectations
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 126 Production Over the Last Decade Has Been Sustained Only Through Moving Head
Grades Above Reserve Grade and Global High-Grading
Source: Wood Mackenzie and Bernstein estimates and analysis.

0.60%
0.65%
0.70%
0.75%
0.80%
0.85%
0.90%
0.95%
1.00%
1980 1985 1990 1995 2000 2005 2010
H
e
a
d

G
r
a
d
e

(
%
)
Global Copper Head Grade
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1980 1985 1990 1995 2000 2005 2010
%

C
u
Reserve to Head Grade
Reserve Grade Head Grade
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1980 1985 1990 1995 2000 2005 2010
Head Grade to Reserve Grade Ratio
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Exhibit 127 This Means That Grades Must Decline Sharply in the Future; in Fact, Grades Must
Decline Towards the Much Lower Level Given by the Cut-Off Grade
Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 128 2003 (or Thereabouts) Saw a Structural Break in the Industry, Which Moved from a
Period Where Mining Did Not Imply Geological Degradation to One Where It Most
Certainly Does
Source: Wood Mackenzie and Bernstein estimates and analysis.

0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
H
e
a
d

G
r
a
d
e

F
o
r
e
c
a
s
t

(
%
C
u
)
Years Out from Forecast Date
Implied Head Grade With Exponential Decline
1980 1985 1990 1995 2000 2005 2010
30
40
50
60
70
80
90
100
110
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
I
n
d
e
x
e
d

H
e
a
d

G
r
a
d
e

R
e
l
a
t
i
v
e

t
o

I
n
i
t
i
a
l

L
e
v
e
l
s
Years Out from Forecast Date
Indexed Implied Head Grade With Exponential Decline
1980 1985 1990 1995 2000 2005 2010
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In Exhibit 129, we show the long-term history of Australian copper grades. It is
remarkable that little more than a century and a half of industrial copper
consumption has seen the grade fall from well in excess of 20% to below 1%. A
belief that this trajectory is commensurate with ever declining real copper prices
seems, at least to us, absurd. However that may be, the more serious point is
illustrated in just the last century of Australia's development (see Exhibit 130).
Australian copper production has stagnated it has hit the threshold we described
in the previous chapters, wherein the financial barrier to easy expansion caps the
maximum production that a given resource base can support. However, production
has not declined. Instead, grade has declined by over 62%, as the material that was
previously uneconomic to mine has been dragged in to support production. There is
no way that this would have happened, had copper price increases not allowed it.
Once again, the economics of copper mining had to change to enable the "reserve
to resource" conversion, once simple mine expansion was no longer viable.

Exhibit 129 Just for Fun, We Provide a Long-Term History of Copper Grades in Australia
Source: Monash University and Bernstein estimates and analysis.



0
5
10
15
20
25
30
C
o
p
p
e
r

H
e
a
d

G
r
a
d
e

-
%

C
u
Australian Copper Grade Over Time
A Century and a Half of
Industrial Copper
Consumption Has Seen Grade
Fall from >20% to <1%, Which
in Itself Makes It Obvious That
the Prospect of Ever Declining
Real Copper Prices Is Absurd
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Exhibit 130 But on a Serious Point: Post-2000, We See Stagnation in the Copper Industry, Which
Saw Mine Output Holding Up Only Through a Radical Grade Decline; What Happened
in Australia Was Repeated Globally
Source: Monash University and Bernstein estimates and analysis.

Three Things You Need to Know About Copper
The relationship between head grade and cut-off grade enables one to calculate the
trajectory of future head grades (see Exhibit 131). Because head grades are very
high today, they must fall tomorrow. Our analysis suggests that the risk of grades
falling faster than many anticipate is high. However, any grade decline (let alone a
more rapid one than may be embedded in consensus price expectations) would
result in a radical change in the cost structure of the copper mining industry. We
cannot see how this change in cost structure can be balanced with an increased
demand environment and a falling or flat price dynamic.
Fortunately, one can do more than just qualitatively state the direction of the
impact. In Exhibit 132 and Exhibit 133, we show how prices and grades track each
other. This immediately suggests the structural form for a multivariate regression
that explains (without the introduction of specious exogenous regime shifts and
Heaviside functions) the copper price evolution over the last 35 years.
The following regression explains nearly 90% of the variation in copper price
over the last 35 years.
Price = +
1
*Grade +
2
*GDP +
3
*Inventory
The elements in this are not a result of data mining with an aim to find the
highest R-squared. Rather, they are included for their economic significance. All
three variables serve as a proxy for an economic determinant of price. In particular,
they proxy the cost structure of the industry (grade), global demand (GDP) and
global supply (inventory).
By far, the most important driver of the three is grade. This relationship gives
us the effective real-world cost increase implied in grade decline. The sensitivity
analysis in the previous section illustrated the theoretical impact of grade on cost
and, ultimately, price. However, it was necessarily a simplification of the multitude
of factors at play in the real world. The regression analysis enables one to see the
actual impact of falling grades (see Exhibit 134 and Exhibit 135).
-
100
200
300
400
500
600
700
800
900
1,000
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
A
u
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G
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-
%
Grade and Production Relationship in Australia
Cu Grade Cu Production
A Multivariable Regression
With Three Variables (Grade,
Global GDP Growth and LME
Inventory) Explains 90% of the
Variation in Copper Price Over
the Last 35 Years; It Is Only a
Matter of When, Not If, Copper
Prices Will Exceed US$10,000/t
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We also show the distribution of the errors between the fitted copper price and
the actual copper price, in order to illustrate that the errors are normally distributed,
so there is no evidence of bias that an otherwise overlooked explanatory variable
would need to correct for. In our view, the error between the actual and predicted
copper price is just "noise" rather than a reflection of any structural oversight (see
Exhibit 136). We also include the statistical summary of the relationship in Exhibit
137. This is important because it highlights the p-values of the fit, which represent
a measure of chance that the regression relationship was due to a coincidence. All
of the regression parameters are significant at well below the 1% level.
Collectively, the regression has a p-value of 1.3E-16. In other words, the regression
has a 1 in 10 quadrillion (thousand trillion) chance of being the result of luck alone.
Consensus copper price forecast is essentially flat with a slight longer-term
backwardation. The strength of the regression poses a very strong challenge to the
consensus view. Our disbelief in the consensus forecast comes from the
inescapable reality of grade declines driven by the current mining practices in the
copper industry (see Exhibit 138). We see no way to escape this phenomenon in the
medium term. Consequently, any explanation of a copper price that differs from
our price target of US$10,000/t must look at something other than grade.
The two most likely variables other than cost are supply and demand (or in
terms of our regression analysis their proxies of global GDP growth and
terminal market inventories). These are the only places wherein the bear thesis for
this metal can hide. We calculate the sensitivity of copper price to changes in each
of these variables (see Exhibit 139 through Exhibit 141).
As expected, grade is by far the most important variable. Differences in supply
and demand determine only where on that cost structure price must fall to ensure
equilibrium. As we have pointed out before, the price of commodities and the
"super-cycle" is primarily a supply rather than a demand-side phenomenon. The
sensitivity analysis enables us to reconstruct the implicit (and assuredly not
explicit) assumptions discounted by the current copper consensus price.
The most implausible explanation for flat or declining real copper prices is
based on demand-side fears. While the stocking and destocking cycle for any metal
is a cause of huge volatility, it is simply insufficient to derail copper price
appreciation in the face of declining grades. Exhibit 142 shows the global growth
trajectory implicit in consensus price expectations. It requires an outcome that
would dwarf the global financial crisis of 2008-09 in terms of severity. Clearly, the
data points that are described in the exhibit lie outside the range of the regression.
This only highlights the unlikely nature of the required demand-side failure. Simply
put, we have never seen the kind of growth required to support the bear thesis for
the copper price.
Low copper prices could also be explained by oversupply from the miners.
Indeed, we are currently at a subdued price for copper as a consequence of such a
situation. Metal that does not have a natural industrial demand ends up in terminal
market warehouses rather than being embedded into the infrastructure of the global
economy in the form of wiring and pipes. But how bad would the oversupply have
to be to justify the consensus price path (see Exhibit 143)? The miners would have
to continue producing metal that was palpably not required by any consumer on an
indefinite basis, leading to the accumulation of unwanted metal in warehouses
some 116% higher than the previous historical high of 2002 (the very bottom of the
copper cycle).
Even if the level of global growth does not improve and even if metal
inventories stay at their current elevated levels (despite the fact that the last few
months have seen falling inventories), the copper price would hit US$10,000/t by
2017. In fact, under a range of more plausible growth and grade scenarios
US$10,000/t is unavoidable on an even shorter time frame (see Exhibit 144). We
strongly believe that the question is when, not if. In order for the consensus price
forecast to hold true (at the same time respecting the strength of the explanation of
the simple regression presented here), a highly implausible set of supply and
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demand circumstances must persist almost without break and without response
from either the miners or global policymakers. Hence, the question becomes:
"Which is more unlikely, that the regression explaining the entirety of copper price
history over the last 35 years stopped working or that the implicit assumptions
standing behind consensus copper price expectations are untenable?" Surely, an
unbiased interpretation of probability and risk would conclude that it is copper
prices that will rise rather than the assumptions discounted by consensus come to
pass.
It should also be noted that this analysis excludes the impact of any other real-
term cost escalation in the drivers of copper prices (such as rising labor costs in
China or increasingly expensive diesel and power). The covariance of the variables
with the copper price itself renders them unsuitable for inclusion in the regression
analysis discussed earlier.

Exhibit 131 The Relationship Between Cut-Off Grade, Head Grade and Reserve Grade Over the
Life of the Reserve Base Enables One to Calculate How Head Grades Will Need to
Evolve Going Forward
Source: Wood Mackenzie and Bernstein estimates and analysis.

0.50%
0.55%
0.60%
0.65%
0.70%
0.75%
0.80%
0.85%
0.90%
0.95%
1.00%
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
H
e
a
d

G
r
a
d
e
Impact of Analysis vs. Consensus Grade Expectations
Wood Mac Forecast Implied Convergence to Cutoff Grade Trend 2003-2013
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Exhibit 132 How Is All This Related to Price? Well, in the First Instance, We Can Observe That
the Step-Up in Prices Occurred When Global Head Grades Started to Fall
Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 133 Indeed, There Is a Very Strong Relationship Between These Two Factors
Source: Wood Mackenzie and Bernstein estimates and analysis.


0.50%
0.55%
0.60%
0.65%
0.70%
0.75%
0.80%
0.85%
0.90%
0.95%
1.00%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
H
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History of Copper Grade and Copper Price
Real Copper Price Global Copper Head Grade
R = 0.8173
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
0.65% 0.70% 0.75% 0.80% 0.85% 0.90% 0.95% 1.00%
R
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(
U
S
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Copper Head Grade
Copper Grade to Price
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Exhibit 134 We Use This as the Basis of a Simple Multivariate Regression, Which Almost
Perfectly Describes the Copper Price
Source: Bernstein estimates and analysis.

Exhibit 135 Nearly 90% of the Movement in Copper Is Given by Just Three Factors: Grade,
Global GDP Growth and LME Inventory
Source: Bernstein estimates and analysis.


0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
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(
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Fitted vs. Actual Copper Price
Actual Price Fitted Price
R = 0.8864
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
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(
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Actual Copper Price (US$/t)
Copper Price Regression
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Exhibit 136 The Normalcy of the Errors Between Regressed and Actual Copper Prices Implies No
Systemic Bias or Neglected Explanatory Variable
Source: Bernstein estimates and analysis.

Exhibit 137 Leading to a Regression Analysis Whose Component Parts Are All Highly
Significant
Source: Bernstein estimates and analysis.

0
1
2
3
4
5
6
7
8
-1250 -1000 -750 -500 -250 0 250 500 750 1000 1250
C
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Error Actual vs. Regression (US$/t)
Analysis of Errors of Regression
Regression Statistics
Multiple R 94.5%
R-Square 89.3%
Adjusted R-Square 88.2%
Standard Error 699
Observations 33
Coefficients t Stat P-value
Intercept 26,751 17.0 1.2E-16
Head Grade -2,551,983 -14.9 3.8E-15
Global GDP 26,680 2.9 7.5E-03
Termonal Inventory -1.19 -3.0 5.6E-03
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Exhibit 138 Grade Declines Are An Irreversible Feature of the Industry, Driven by the Structure of
Current Mine Plans That Stand Behind Current Copper Consumption
Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 139 Grade Is by Far the Most Important to Price Sensitivity
Source: Bernstein estimates and analysis.


0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
Cutoff Grade Reserve Grade Head Grade
C
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G
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Global Average Grade Profile
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
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P
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(
U
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Head Grade
Price Sensitivty of Regression Analysis to Grade
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Exhibit 140 But Economic Growth Prospects Can Swing the Price by ~US$1,500/t
Source: Bernstein estimates and analysis.

Exhibit 141 With a Similar Order of Magnitude Contribution from Terminal Market Inventory
Source: Bernstein estimates and analysis.


4,000
4,200
4,400
4,600
4,800
5,000
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5,400
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Global Economic Growth
Price Sensitivity of Regression Analysis to Global GDP
4,200
4,400
4,600
4,800
5,000
5,200
5,400
5,600
5,800
6,000
C
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(
U
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LME, SHFE, COMEX Copper Inventory (kt)
Price Sensitivity of Regression Analysis to Copper Stocks
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Exhibit 142 This Implies That GDP Has to "Work" Incredibly Hard to Overcome the Inevitable
Grade Decline and Return Consensus Price Expectations; to Put It Mildly, the Implicit
Assumption of Consensus Is Implausible

Source: Bernstein estimates and analysis.

Exhibit 143 Likewise for Terminal Market Inventory; Surely, the Most Likely Read Through Is
Not That the Miners Forget How to Run Their Businesses, But That Prices Will Trend
Higher Than Consensus Currently Anticipates
Source: Bernstein estimates and analysis.

-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015E 2017E
G
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G
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Global Growth Required for Consensus Copper Price
GDP Actual GDP Required for Consensus Cu Price Forecast
0
500
1,000
1,500
2,000
2,500
3,000
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015E 2017E
T
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(
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Terminal Inventory Required for Consensus Copper Price
Inventory Actual Inventory Required for Consensus Cu Price Forecast
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Exhibit 144 Grade Is by Far the Strongest Driver of Price; Under Any Scenario, Dropping the Cut-
Off Grade to the Point Where the Head Grade Would Be Below the Reserve Grade
Implies Prices Well in Excess of US$10,000/t
Source: Bernstein estimates and analysis.










0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1
9
8
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(
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$
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Copper Price Forecasts Under Three Grade Scenarios
WM Head Grade SCB Head Grade Historical Head Grade Trend
Actual Price Trend Price Line
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From Grade to Grunt and the Real
Impact of Wage Inflation

Margin in mining is generated through geological and technological differentiation.
In other words, it depends on both the quality of geology and the methods
employed to exploit that geology economically. Having discussed the impact of
that declining geological quality of new copper deposits is expected to have on the
copper price going forward, we now turn to the second mechanism behind margin
generation the productivity and cost required to develop a particular geological
formation. We show that the implicit assumptions behind the current consensus
copper price line are, at best, highly unlikely to come true. Specifically, for
consensus to prove correct, we would have to see nominal wage declines
compensate for the cost effects of geological deterioration. Instead, our analysis
suggests that the greatest real-term cost increases will occur in what is already the
highest-cost supply location (China). This will inexorably lead to a steepening
rather than a flattening of the global copper cost curve. In addition, a close look at
the incentive price structure of the copper industry explains why higher prices are
unlikely to induce a wave of new supply that could otherwise undermine this
structural dynamic.
Mining Margin Generation
Inflection in the cost curve of a commodity industry generates the margin for
incumbent players. A steep cost curve implies a price that is high relative to the
average industry costs, and hence a high margin for the low-cost producers. A flat
cost curve implies a price that is low relative to the average costs and,
consequently, a low margin for the industry. However, the cost curve structure of
an industry is not fixed and varies over time. First, it changes as old mines become
ever higher cost and need to access marginal tons at an ever greater depth. Second,
it varies as new lower-cost mines are brought on line to displace the higher-cost
sources of supply. The resilience of the cost curve inflection to supply side
disruptions generates a sustainable margin and creates a strategically attractive
industry.
An attractive industry is one where the barriers to entry ensure that higher
commodity prices will not automatically translate into unwanted new capacity. In
contrast, a strategically unattractive industry has a natural tendency towards cost
curve flattening due to an inherent ubiquity in geology and mining method.
Strategy in mining is all about one thing the dynamics of commodity cost curves
and the miners' capital allocation choices. These two factors determine the
dynamics and simultaneously seek to exploit them. At the simplest level, cost curve
inflection depends on two factors.
Geological differentiation: A high degree of geological differentiation speaks to
the degree of scarcity behind commodity production (after all, if the commodity
was not scarce everyone would be able to find high-grade deposits!). A radical
difference in cost is determined by the deposit's grade. Other geological factors
such as stripping ratio and rock hardness add further complexity to the issue.
Clearly, the best position for a miner is to be a sole possessor of the only high-
grade deposit of a mineral in a world dominated by low-grade production.
Technological differentiation: There are several ways in which an ore body can
be exploited. Deciding which mine plan is the most value accretive requires skill
in project evaluation. The trade-off between capital and operating cost is a
Expected Chinese Mining
Wage Inflation and a Lack of
Incentive to Sink in New Capex
in Copper Projects Today
Stand Behind Our Bullish
Long-Term Outlook for Copper
Margin Is Generated Through
Inflection in the Cash Cost
Curve; in Mining, This
Requires Either (or Preferably
Both) Geological
Differentiation or Differences in
Exploitation Productivity
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fundamental choice in a mine plan. It, in turn, reflects a more basic interplay
between the productivity of labor and capital.
These two factors together determine the attractiveness of a particular
commodity over the long term. In a world of perfect geological and technological
homogeneity, the cost structure of every agent involved in production would be
identical, and the cost curve would be perfectly flat. In terms of value creation, a
world dominated by identically efficient mines is just as bad as a world dominated
by identically inefficient mines. It is the relative difference between the good and
the bad mines (rather than the absolute level per se) that generates margin. After all,
no one values the commonplace.
Deconstructing Copper Mining and Milling Costs
The subsequent analysis exposes some of the unreasonable assumptions implicit in
the current consensus expectation of flat or declining commodity prices. We
decompose copper mining costs on a region-by-region basis and show how
differences in labor costs will likely lead to a steepening in the copper cost curve.
We expect this effect to deliver copper prices of US$10,000/t over the medium
term. Furthermore, we derive the fully loaded (i.e., capturing the full impact of
political and country risk for each mining jurisdiction) incentive price curve for the
copper industry. Again, we show why US$10,000/t will be required to close any
future supply/demand imbalances.
Previously, we have focused on a generalized cost analysis for copper mines in
order to test the copper mining cost sensitivity to various scenarios. In Exhibit 145
through Exhibit 148, we present an overall breakdown of costs for a copper mine
by stage of the mining process and by cost category. One should bear in mind that
each mine is unique and, consequently, there are very significant variations from
one mine site to another. Furthermore, each country will have a unique cost
structure that will reflect the local economic circumstances. We have broken down
the mining process into three stages:
Mining involves the movement of ore and waste material with an aim to deliver
valuable ore to the milling circuits for treatment. Its cost is fundamentally tied to
the efficient movement of material in bulk.
Milling is the process of ore crushing and grinding, followed by the separation of
valuable copper containing minerals from waste tailings.
G&A relates to the overhead costs of the mining operation.
These then yield five cost categories:
Labor is the cost of employing the people working directly at the mine.
Services comprise the secondary activities that, while not directly connected to
the mining process, are essential for its ongoing activity (e.g., site security,
laboratory work or the canteen). This represents just another form of labor cost.
Diesel is the fuel source behind the mining fleet of trucks and shovels. In
addition, it is also required for crushing and grinding. For some operations
electrification of the mining fleet is an option. In general, diesel costs will be a
very significant part of the mining operation costs, but relatively insignificant for
milling.
Power is the electricity used in crushing, grinding and separation of ore.
Consequently, it is an important, but a relatively small, part of the milling
process.
Consumables cover explosives, tires and lubricants used on the mine site. For the
milling step, it will cover grinding media used in the mills as well as chemical
reagents used during froth floatation where copper concentrate is separated from
gangue tailings.

By Decomposing Mining and
Milling Costs We Explore Cost
Sensitivity of Copper Mining to
Different Parameters and
Determine the Differences That
Will Translate Into Margin
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Exhibit 147 Overhead Costs of a Mine Site Mainly
Comprise Labor

Exhibit 148 The Split Between Mining and Milling Is
Roughly Even With G&A Being a Relatively
Small Part of the Overall Costs
Source: Wood Mackenzie and Bernstein analysis. Source: Wood Mackenzie and Bernstein analysis.

In Exhibit 149 through Exhibit 151, we show the current status of the three main
cost categories: diesel, power and labor. We break down our analysis by copper-
producing region and highlight the cost positions of top 10 supply locations. Chile
is no longer a low-cost mining jurisdiction. In addition, the developed world is a
high-cost mining location. Latin America is already a medium- to high-cost
producer, and the only low-cost producing regions are Africa and China.
However, of the three main cost drivers, two (diesel and power) show very
little geographical variation (see Exhibit 152). This is as expected oil, coal and
gas trade in large measure on global markets with internationally determined prices.
On the other hand, there is very significant international variation in the price of
labor. Consequently, labor cost evolution has the greatest ability to drive
Labor,
76%
Services,
10%
Diesel,
1%
Power,
3%
Consumables
, 9%
G&A Cost Composition
Mine, 46%
Mill, 41%
G&A, 14%
Copper Cost Breakdown by Process
Exhibit 145 Labor (Including Services) and
Consumables Represent the Largest Cost
Elements for the Mine Site

Exhibit 146 Consumables and Power Form the Largest
Cost Element for Milling
Source: Wood Mackenzie and Bernstein analysis. Source: Wood Mackenzie and Bernstein analysis.
The Three Main Cost Drivers
Are Diesel, Power and Labor,
With the Former Two Showing
Very Little Geographical
Variation Due to the Global
Nature of Oil, Coal and Gas
Markets
Labor
26%
Services
21%
Diesel
20%
Power
5%
Consumables
28%
Mine Cost Composition
Labor
12%
Services
16%
Diesel
2%
Power
32%
Consumables
38%
Mill Cost Composition
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differential mining cost escalation, therefore a margin-generating rotation in the
cost curve.

Exhibit 150 Chile Stands Out as a Very High Power Cost Region; in Africa, It Is Not the Cost But
Rather the Reliability of Power Supply That Is the Issue
Source: Wood Mackenzie and Bernstein analysis.

0
2
4
6
8
10
12
14
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Exhibit 149 The Price of Diesel Shows Relatively Small Variation from One Mining Jurisdiction to
the Next
Source: Wood Mackenzie and Bernstein analysis.
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Diesel Price by Copper-Producing Location
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Exhibit 151 Unsurprisingly, the Developed World Has the Highest Labor Cost; Cheap Labor (as
Well as High Grades) Will Drive the Value of the African Copper Production; Chile Is
Already a Medium- to High-Cost Mining Location
Source: ILO, BLS and Bernstein estimates and analysis.

Exhibit 152 While Diesel and Power Are Tied to Global Pricing Trends, Labor Shows the Highest
Variation Across Regions
Source: ILO, BLS and Bernstein estimates and analysis.

0
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What Is Embedded in Consensus?
Before we explain how we forecast component cost escalators, it is worth drawing
attention to the cost evolution anticipated by the most influential independent
copper industry consultants. It is precisely these assumptions that will in turn be
reflected in the consensus price expectations (see Exhibit 153 through Exhibit 156).
We note that these are nominal escalators! Despite the fact that the world's financial
system is driven by the expectation of nominal growth (as the talk surrounding the
nominal GDP target after Mark Carney's appointment as governor of the Bank of
England testified to), consensus anticipates that all input costs in copper mining
will either fall or track flat from today to perpetuity. This assumption then
translates into the declining consensus price expectation. In our view, this
reasoning just commits the logical fallacy of begging rather than answering the
question.

Exhibit 153 A Belief in Declining Labor Costs Is at Odds
With the Reality of Demands for Increasing
Nominal Wages

Exhibit 154 Power Costs Are Historically Highly
Correlated With Oil Prices...
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 155 ...And a Belief in an Immediate and Sharp
Downward Correction Is Not the View We
Endorse

Exhibit 156 The Aggregate Cost Escalator That Stands
Behind the Consensus View of the Copper
Price Seems, at Least to Us, Highly
Implausible

Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.
0
50
100
150
200
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450
2
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Wood Mackenzie Indexed Nominal
Labor Escalator
0
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Power Escalator
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Diesel Escalator
0
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Wood Mackenzie Indexed Nominal
Other Costs Escalator
In Contrast to Consensus, We
Do Not Believe That All Input
Costs in Copper Mining Will
Either Fall or Track Flat from
Today to Perpetuity
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While it could be reasonable to expect that power and energy will suddenly become
abundant as resource depletion and demand growth take their toll, this is certainly
not the view of Bernstein (see Global Oil Prices: At "Base Camp" Before the Final
Ascent). Still, we would concede that the path for energy costs is uncertain and that
a case for declines in diesel and power prices could be made. However, it is on the
issue of labor costs that an expectation of decline, in our view, is completely
unfounded. In Exhibit 157, we show the history of nominal wages in the U.S. since
1900. An expectation of growth in wealth (at least in name, if not in reality) is
critical to the political well-being of an industrial society. One has to look at only
the demands from union representatives all over the world to see how ingrained this
expectation is irrespective of the inherent cyclicality in mining. Consequently, we
take the expectation of an upward trajectory in nominal wages denominated in the
local currency as a fact of life. To us, the only questions are how these increases
will vary from country to country, what their articulation will be in USD terms and,
consequently, how they will impact the real copper price. In Exhibit 158, we show
our forecasts for labor cost increases for the key mining jurisdictions and contrast
them with the expectation that we believe informs the consensus copper price line.
Given that a multitude of low-grade and labor-intensive Chinese mines sit on
the right-hand side of the global copper cost curve, the key determinant of its future
marginal cost (and thus, price) will be the future evolution of these mines. Given
the global nature of oil and energy price, a view on this evolution boils downs to a
view on the future development of the Chinese mining labor costs. First, we expect
the RMB to appreciate (see Exhibit 159), as the Chinese economy develops and the
RMB becomes more firmly established as a store of value. Second, we also expect
that the nominal local currency growth in the Chinese economy will continue at
pace (see Exhibit 160). However, this growth will be supported by a declining
workforce (see Exhibit 161). All these factors imply a very significant increase in
the USD-denominated output per active Chinese worker (see Exhibit 162).
The only way for this not to lead to significant increases in wages is if all
production growth accrues to capital rather than the Chinese labor (i.e., labor
subsidizing capital). In our view, this is highly unlikely. First, the degree of subsidy
is just too great for it to be realistic. Second, political implications of such a subsidy
would be entirely unacceptable.


SCB's O&G Team Shares Our
View on the Future Oil Prices;
With Labor as a Key Driver
Behind Mining Costs, We View
an Expectation of Declining
Labor Costs as Unreasonable
Exhibit 157 Nominal Wage Increases and the Expectation of a Higher Living Standard Over Time
Form the Basis of the Political Mandate in Most Developed and Developing Countries
Source: BLS and Bernstein estimates and analysis.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1
9
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US Wages Over Time
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Exhibit 158 We Take a Different View from Wood Mackenzie (and Hence from Consensus) on
How Mining Costs Will Evolve, With the Differences Being Particularly Pronounced
for Expected Future Labor Costs
Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 159 Our Base Case Has Continued Appreciation
in the RMB...

Exhibit 160 ...And Significant Growth in Nominal RMB-
Denominated Output

Source: IHS and Bernstein estimates and analysis. Source: IHS and Bernstein estimates and analysis.


-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
China Chile Peru USA Zambia Wood Mac
L
a
b
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C
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t


C
A
G
R
2013-2025 Nominal Labor Cost Escalator
5.13
6.18
+20%
2025 2013
RMBAppreciation
195,024
58,568
2025 2013
+233%
NominalRMBGDP(bn)
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Mining Cost Escalation
In our analysis, we assume that the labor share of output stays constant and that
wages will rise in line with output per worker. One of the key arguments behind the
slowing rate of capitalization in China (i.e., industrialization) is that the country is
approaching the Lewis tipping point (Euro Metals & Mining: China's industrial
behemoth with bones like iron bars - fuelled by inexpensive labor for how long?).
This means that the historically high supply of cheap rural labor (which has acted
to subsidize the returns to capital and support high rates of capital formation
previously) is running out. As the cheap labor becomes ever scarcer, the rate of
capital formation will slow down. However, the deceleration is possible only
because of the increasing returns to labor. If remuneration did not rise, there would
be no brake imposed on the rate of capital formation from declining labor supply.
Consequently, the flip side of the deceleration in the Chinese fixed asset investment
growth ought to be the acceleration in the share of output claimed by labor.
Although we recognize it as a source of upside potential to our copper price
forecast, to err on the side of caution, we have not assumed this in our analysis.
We repeat this labor-cost analysis for all copper-producing regions. We also
add the SCB view on the global price of oil and energy (see Exhibit 163 and
Exhibit 164) in proportion to the weight of each cost component in the overall cost
structure of each step in the copper mining value chain. Subsequently, we calculate
an escalator for each cost category and generate an overall copper mine cost
escalator on a country-by-country basis (see Exhibit 165 through Exhibit 168).

Exhibit 161 At the Same Time, We Expect the Chinese
Workforce to Continue to Decline

Exhibit 162 Overall, We Expect the Dollar Output per
Chinese Worker to Increase Significantly,
and This Drives Our Forecast for the
Chinese Mining Labor Cost Escalation

Source: IHS and Bernstein estimates and analysis. Source: IHS and Bernstein estimates and analysis.
By Repeating the Labor-Cost
Analysis for Each Copper-
Producing Region and by
Adding the SCB View on Oil
and Energy Prices in
Proportion to the Weight of
Each Cost Component in the
Overall Cost Structure, We
Construct an Overall Copper
Mine Cost Escalator on a
Country-by -Country Basis
764
790
3%
2025 2013
WorkForceDecline(m)
49.70
12.70
+291%
2025 2013
US$OutputPerWorker
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Exhibit 163 Added to This Is the SCB View on the
Evolution of the Oil Price...

Exhibit 164 ...Which We Believe Will Imply a
Continuation of the Increase in the Nominal
Price of Energy
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.
Exhibit 165 Adding These Factors Together Gives a
Country-Specific Mining Cost Escalator...

Exhibit 166 ...As Well as Milling Cost...
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.
0
100
200
300
400
500
600
700
800
900
1
9
9
0

=

1
0
0
Wood Mackenzie vs. SCB Indexed Nominal
Diesel Escalator
SCB Wood Mac
0
100
200
300
400
500
600
1
9
9
0

=

1
0
0
Wood Mackenzie vs. SCB Indexed Nominal
Power Escalator
SCB Wood Mac
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Average Mining Cost Growth 2013-2025
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Average Milling Cost Growth 2013-2025
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Exhibit 167 ...And Ancillary Costs...

Exhibit 168 ...For a Total Cost Escalator for Mined
Copper on a Region-by-Region Basis
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

As we have stressed before, it is differential rather than absolute movements in the
cost curve (i.e., rotations rather than translations) that generate margin.
Furthermore, if high-cost growth is associated with low-cost regions and low-cost
growth is associated with high-cost regions, the effects flatten the cost curve and
reduce (rather than increase) the margin. In the first instance, we show how the
copper mining costs in the U.S. compare to those in China (see Exhibit 169). In real
terms, we expect the former to track roughly flat and the latter to rise dramatically.
Given that the Chinese production already sits on the right-hand side of the global
cost curve, this would lead to a steeper (rather than flatter) copper cost curve.
Consequently, not only will the productivity of the global copper industry decline
as the impact of deeper mines and lower grades makes itself felt, but the costs
associated with the lower productivity will also rise (see Exhibit 170 through
Exhibit 173). As a result, in our view, copper price must rise in real terms, thus
generating further margin for the mining industry. The only way this can be
avoided is if there is some kind of geological or technological step-change in the
industry. Any geological step-change would simply take too long to make itself felt
over the forecast period (the lead time between new discovery and first production
is simply very long). In terms of technological step-change, we see nothing on the
immediate horizon that would have the required potential (in situ acid leaching is
unproven and deep sea mining is deemed as uneconomic and too small). Any even-
handed analysis of the copper industry ought to conclude that nominal input costs
will rise (rather than fall) and that there is nothing to offset the impact of declining
mined grades. In such a situation, US$10,000/t becomes ever more inevitable.

0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Average G&A Cost Growth 2013-2025
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Total Copper Cost Growth 2013-2025
The Only Way Copper Price
Increases Can Be Avoided Is if
There Was Some Geological or
Technological Step-Change in
the Industry
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Exhibit 169 It Is the Differential Cost Escalation That Drives Real Commodity Price Increases in
USD Terms
Source: Wood Mackenzie, IHS and Bernstein estimates and analysis.

Exhibit 170 The Increase in Cost Pressure Is Powerfully
Attested to by the Increase in Ore That
Needs to Be Treated...

Exhibit 171 ...And the Declining Grade of the Ore That
Is Processed
Source: Wood Mackenzie and Bernstein analysis. Source: Wood Mackenzie and Bernstein analysis.

2.89%
6.95%
+140%
China USA
DifferentialCostEscalationUSAtoChina
1,000
1,500
2,000
2,500
3,000
3,500
2
0
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Global Ore Milled
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
2
0
0
5
2
0
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6
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(
%
)
Global Ore Grade
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Exhibit 172 It Implies Lower Mill Recoveries

Exhibit 173 All These Factors Feed Into Our
Expectation of Decreasing Labor
Productivity and a Macro Environment With
Ever-Increasing Nominal Wages
Source: Wood Mackenzie and Bernstein analysis. Source: Wood Mackenzie and Bernstein analysis.

Summary of Supply Side
If we summarize the totality of the arguments presented so far looking at the supply
side of the industry, the supply side story runs as follows.
Geological degradation and declines in the quality of mined copper ore is, in our
view, inevitable. It will push the price of the metal up, unless this effect is offset
by mining input cost declines.
Over time, we expect input costs to increase rather than fall, driven by nominal
wage increases as well as continued energy scarcity.
Both expected cost escalation and cost position make us anticipate a steeper rather
than flatter future global copper cost curve. The high-cost Chinese mines are the
most exposed to cost escalation and also sit at the high end of the cost curve.
All these factors suggest that copper prices will have to rise in real terms and
offer compelling support to the thesis that the world will soon face US$10,000/t
copper price. However, the final piece of the puzzle (on the supply side at least)
requires an analysis of the incentive price structure of the industry. The threat is
that as prices rise, a new "wave" of supply from projects that are already waiting in
the wings will hit the market, therefore postponing the date that will see copper at
US$10,000/t. Our analysis has already demonstrated that new copper supply is
insufficient to derail the eventual realization of US$10,000/t, as there is simply not
enough geological endowment that could enable this. Chile is unique, and no
country will replicate the impact it had on the global copper market. However, it is
possible that a wave on new supply could postpone the day of reckoning. It is to
this risk that we turn our attention in the final piece of our supply side analysis.

83.0%
83.5%
84.0%
84.5%
85.0%
85.5%
86.0%
86.5%
87.0%
87.5%
2
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(
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Milled Ore Recovery
2.5
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Global Copper Productivity
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Structure of the Incentive Price Curve What Is Needed to Clear the Market
Bob Dylan once sang that "what looks large from a distance, close up ain't never
that big." These words definitely relate to copper projects. Far-dated supply
potential always looks impressive, but the closer you get to it, the less realistic it
becomes. Aynak is the latest example of a project that demonstrates why today's
price environment is insufficient to close any future supply/demand imbalance.
We would like to simply recap what we have briefly touched upon earlier
regarding current copper prices not being high enough to incentivize new capacity
to come on line. We examine the cash and capital costs of approximately 300
greenfield projects and the associated brownfield expansions. Unsurprisingly, there
is significant operating margin to be made through capacity expansion. However,
we also note that the capital requirement is such that against a fully loaded discount
rate (i.e., including an adjustment for country risk), it is only at prices above
US$8,000/t to US$9,000/t that the majority of them will be value accretive (see
Exhibit 174). Today, more than ever, shareholders are aware of the risks inherent in
new greenfield projects (e.g., Pascua Lama, Minas Rio and Riversdale).
Consequently, many investors have been demanding that capital is returned rather
than expended in an effort to push commodity prices down. While we have not
factored these strategic issues into our analysis of the returns required for new
investment (basing them on our understanding of the investment protocols in the
large mining houses), they support our belief that new copper project approvals will
struggle. Moreover, in a period of declining or flattening commodity prices,
concerns of value dominate the thoughts of the miners ahead of growth. This acts
as a break on new volume expansion.


Only at Prices Above
US$8,000/t to US$9,000/t Will
the Majority of Projects Be
Value Accretive; Given the
Current Price Environment,
Miners' Reluctance to Approve
New Projects Will Persist Until
Copper Prices Go Up
Exhibit 174 Against a Fully Loaded Cost of Capital, It Is Clear That Many of Today's New Projects
Will Struggle to Create Value
Source: Wood Mackenzie and Bernstein estimates and analysis.
10,000 0 2,000 6,000 4,000 8,000 12,000 14,000 16,000 18,000 22,000 24,000
17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
9,000
6,000
7,000
8,000
5,000
4,000
3,000
2,000
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20,000
GlobalCumulative NewProduction kt Cu
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However, there is more than just the aggregate structure of the copper incentive
price curve that needs to be considered. The incentive price curve gives a snapshot
of the entirety of all known and possible sources of supply. However, the evolution
of price is necessarily a temporal sequence, yet there is no temporal component in
the incentive price curve. There is also a financial barrier to investment in copper
projects, which is what the incentive price does capture and there is a technical
barrier. Not all projects are equally well developed some are at a very early
stage and are not investment-ready, others are already in possession of a bankable
feasibility study. It could well be the case that while the average incentive price is
high, the projects that are investment-ready and well advanced have a low incentive
price while those that are far-dated options have a high incentive price. It would be
exactly this circumstance that could lead to a situation where rising prices trigger a
wave of new supply that (at least temporarily) halts the rise in copper prices.
Nevertheless, this is not what we observe. In fact, the distribution of incentive
prices over time is remarkably constant (see Exhibit 175). Therefore, while post
2016 there is sufficient copper to cover demand, it is sufficient only at prices that
afford developers a reasonable return. It is some way higher than the price today.

We regard the structure of the incentive price curve as generating a bare minimum
long-term price for two further reasons.
The natural tendency for project costs to rise, as they move through the stage gate
process from conceptual to prefeasibility and to feasibility. Not all conceptual
projects pass the screening of a prefeasibility study, and not all prefeasibility
study projects make it to a feasibility study. This tells us that the economics of
mining projects have a tendency to deteriorate (rather than improve) as the project
moves toward technical viability. Consequently, the further dated options that
form part of the set of projects used to calculate the incentive price probably
underestimate (rather than overestimate) their true incentive price.
The cost structure in Exhibit 174 is denominated in today's money. However,
capital costs (as well as operating costs) are subject to cost escalation. A very
significant part of the overall capital cost of a project is the capitalization of labor
We Observe That the
Distribution of Incentive Prices
Over Time Is Remarkably
Constant, Hence Not Allowing
for an Unexpected Wave of
Incremental Supply to Halt
Copper Price Escalation
Exhibit 175 There Is Always a Bias to Execute the Best Projects First; Even So, a Real Price of
Above US$9,000/t Will Be Required to Bring the New Projects On Line Over the Next
Decade
Source: Wood Mackenzie and Bernstein estimates and analysis.
Incentive Price Curve Is an
Indicator of ''the Bare Minimum
Long-Term Price'' Required to
Incentivize Further Capital
Investment
0
500
1000
1500
2000
2500
3000
3500
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2,000
4,000
6,000
8,000
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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
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Max New Volume Average Incentive Price
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that has been expended in construction. Just as in the analysis of operating costs
presented previously, we ought to expect real-term labor cost increases to raise
capital intensities. Moreover, capital costs (just like operating costs) are geared to
grade. For example, the milling circuits scale with the tons milled, yet metal
output is a product of tons milled and ore grade.

A key part in any incentive price analysis is, of course, the discount rate used to
establish the price of metal that yields a zero NPV. While country risk (strictly
speaking) should be handled as a cash-flow adjustment (and should be valued
through the price of political insurance or the cost of greater security), it is common
practice to compensate for it through an adjustment to the discount rate, which is
the practice we adopt here. When decisions are made on project investments, very
few will attract investment if they just meet the cost of capital. Instead, they must
exceed it and also exceed it after adjustment for country risk. Exhibit 176 shows the
country risk premiums that we use in constructing our incentive price curve. There
is (in general) a negative relationship between the country risk and its copper
production (see Exhibit 177). This tells us that mining investment has preferentially
targeted those locations that are the easiest to manage from a political perspective.
In addition, it shows that our expectation of how easily and rapidly new projects
can be brought on line is likely to be highly influenced by the experiences of the
recent past. The last few decades of copper growth have been relatively easy, but
only because of the bias towards investment in easy locations.

Due to the Way Project
Investment Decisions Are
Made, Many Find Themselves
Overly Optimistic About How
Easily New Projects Can Be
Brought On Line Given That All
of the ''Easy'' Locations Have
Been Highly Exploited
Exhibit 176 A Key Component of the Required Price Is Due to the Requirement to Compensate
for the Risk and Losses That Will Be Borne as a Consequence of More Supply
Coming from New Frontier Regions
Source: Frasier Institute and Bernstein estimates and analysis.
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The very recent example of Aynak just shows how difficult new copper
development will be in higher-risk locations. This Afghan deposit, discovered in
the 1970s by Soviet geologists on the site of ancient copper workings, was acquired
by Chinese investors (Metallurgical Corp of China and Jiangxi copper) in 2007.
The concession was won amid allegations of impropriety after an agreement was
reached that would see the winning consortium invest US$3.7 billion to develop the
project. Putting aside the requirement to demolish the archaeological remains of
Afghanistan's oldest Buddhist monastery to make way for the mine, the consortium
also agreed to construct rail infrastructure, a power plant and a copper smelter as
part of the development, not to mention the 20% royalty. In 2009, the expectation
was that commercial copper production would start in 2011. In 2012, this was
revised to a start date of year 2014. The latest publicly available capital cost
estimate has seen costs rise to US$4.4 billion. This month, the consortium has
demanded a review of the entire deal and has asked that the royalty rate be halved
to 10%, the requirement to build the smelter and power plant be cancelled, and the
requirement to lay the railway line postponed. Furthermore, production from the
mine is delayed to 2011.
4
It is hard to speculate on exactly what the latest capital

4
http://www.miningweekly.com/article/landmark-chinese-copper-deal-with-afghanistan-at-risk-2013-08-27.
Exhibit 177 The Current World Production of Copper Has Been Achieved Through Targeting the
Easy Win Locations, Which Combined High Geological Prospectivity With Low
Political Risk; This Model No Longer Holds and Higher Prices Will Be Required to
Reflect This Reality
Source: Bernstein estimates and analysis.
Aynak Proves to Be a Good
Example of the Above
Described Phenomenon
1,400 1,500 1,600 5,900 200
2.5
3.5
4.0
4.5
5.0
5.5
6.0
1.5
3.0
2.0
8.0
7.5
7.0
6.5
8.5
9.0
9.5
10.0
1,300 1,100 1,000 900 800 700 600 500 400 300 1,200 100 0
1.0
0.5
0.0
Argentina
Mongolia
USA
Canada
CountryRisk Premium %
Peru
Chile
Kazakhstan
Iran
Afghanistan
CIS
Ecuador
Brazil
Panama
Zambia
Mexico
Philippines
Existing CopperProduction
Australia
DRC
PapuaNewGuinea
China
DiameterRepresentsNewProjectCapacity
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costs estimates are given the change of events, but the requirement to cancel all
associated project infrastructure tells us everything that we need to know. At
today's copper price even an operation seeking to exploit 1.6% Cu grade in an area
where labor will essentially be free is incapable of meeting the cost of capital of a
Chinese investment consortium (whatever that may be).
If there is no wave of new capacity in the medium term, the final threat to
higher copper prices (given a normalized demand environment) is removed. The
cost curve will steepen and prices will rise, which is exactly what stands behind our
US$10,000/t copper prediction (see Exhibit 178). Clearly, all of this is predicated
on the return of a "normalized" demand environment.

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Exhibit 178 We Believe That Low-Grade High-Cost Chinese Producers Already Sit at the Right-
Hand Side of the Global Cost Curve and That Their Presence There Is Poorly
Understood; As Real USD Cost Escalation in China on the Back of Increasing Labor
Costs Takes Hold, It Will Steepen the Cost Curve and Lead to Ever Higher Copper
Prices
Source: Wood Mackenzie and Bernstein estimates and analysis.
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95%100%
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Cumulative Mined Production as % of Demand
2012 2017 2022
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Demand Waiting for the Trend to
Reassert Itself

We believe that copper is a "later cycle" commodity than steel. Consequently, we
have a more positive view on the future demand for copper compared to iron ore.
There are more demand drivers in copper than in iron ore, which is heavily skewed
to the two sectors of infrastructure and automotive demand. To arrive at our view
on demand growth, we continue to look at more than just the copper consumption
rate. Critically, we examine the total amount of metal embedded in the capital stock
of a country. For China, we calculate copper stock of 29kg/capita, which is
equivalent to just 30% of Japanese levels and 22% of South Korean levels.
Moreover, whatever is taking place in China today, it is not the same as Japan's
"lost decade" in 1990s. By 1990, Japan had completed the installation of its capital
stock (copper stock stood at 92kg/capita compared to 94kg/capita today). Knowing
the end to which copper consumption is oriented namely, the development of an
industrial society enables us to forecast copper intensity evolution based on
something more scientific than simply the aesthetics of curve drawing.
What Does History Tell Us?
On the demand side of the copper market analysis, the main concern has been the
relatively muted volume growth seen over the last three years (1.2% CAGR since
2010). This immediately raises the question of whether we think that 2013
represents either:
The point at which copper goes ex-growth globally?
Or the point at which there is a downward step-change in demand growth relative
to the last decade?
The answer to the first question is an emphatic "no." Unlike steel, we have
never seen a period in which global copper demand goes ex-growth on a sustained
basis (see Exhibit 179). The belief that the last three years have been something
more profound than the periodic volatility affecting all commodity markets seems
to us, at least statistically speaking, highly unconvincing. However, the second
question is by far more interesting and we dedicated this chapter to it.
To begin with, trajectories taken by copper and steel consumption post the oil
shocks and following the rise of China have been markedly different. We divide
this into four very broad periods (see Exhibit 180 through Exhibit 182):
Period 1 (1900 to 1948) Initial capital build in the West.
Period 2 (1948 to c. 1975) Post-war reconstruction of Europe and integration
of Japan.
Period 3 (1975 to c. 1995) End of Western industrialization and change in
economic model precipitated by oil shocks.
Period 4 (1995 to present) The start of Chinese industrialization.
For steel, the punctuation in demand in period 3 is much more severe than for
copper. Following this, as we enter period 4, the trend demand rate for steel returns
to almost exactly the same trajectory as before the oil shocks/Cultural Revolution
(see Exhibit 183).
However, copper shows a markedly lower demand growth than might have
otherwise been expected. Prior to the start of China's industrialization, steel and
copper growth rates had tracked each other very closely. Since the turn of the
century, copper demand growth has moved from being at parity with steel to
representing only a fraction of steel growth. Consequently, we believe that copper
is genuinely a "later cycle" commodity whose growth is predicated on a wider base
Demand for Copper Will Be
Well-Supported in the Medium
Term
Copper Is a ''Later Cycle''
Commodity Whose Growth Is
Predicated on a Wider Base of
Applications Than Steel
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of applications than steel. While it may not enjoy the same growth rate as steel in
the initial phases of industrialization, it will not be so quickly displaced once the
economy begins to move beyond the initial capital accumulation phase.

Exhibit 179 Post the Oil Shocks of the 1970s, There Was a Step-Change in Demand for Copper;
While Growth Slowed, It Never Went Ex-Growth in a Trend Sense
Source: Wood Mackenzie, Mitchell and Bernstein estimates and analysis.

Exhibit 180 Global Copper Growth Is Still Not as Strong
as It Was Post World War II...

Exhibit 181 ...With the West Acting as a Drag on Overall
Demand
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.

2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
1
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Global Refined Copper Demand
Actual Refined Cu Demand Trend Cu Demand Continuation of Pre-1975 Trend
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1900-1948 1948-1972 1972-1991 1991-2012
Global Copper Demand Growth CAGR
-2.0%
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0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1900-1948 1948-1972 1972-1991 1991-2012
USA, Canada, Japan and Western Europe
Refined Copper Demand Growth CAGR
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Exhibit 182 China and Developing Asia Have Taken
Over the Lead in Copper Demand

Exhibit 183 The Current Cycle Shows Markedly Lower
Copper Growth Than Steel
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
Source: Wood Mackenzie, Mitchell and Bernstein estimates and
analysis.
First Versus Final Copper Use
One of the problems with any commodity demand analysis relates to disentangling
first versus final demand. The classic example of this is that the copper in an air
conditioner built in China, but exported to the U.S. will appear as "first use"
demand for China but is really "final use" demand for the U.S. (see Exhibit 184). In
general, the lower the value of the commodity relative to global freight rates, the
less of an issue "first versus final use" becomes. Hence, while not critical for iron
ore, we have to account for this in copper demand estimation.
We could do this by tracking inflows and outflows (possibly through multiple
cycles of entry and exit of the same material) of all metal-bearing goods. However,
we believe that this task is unfeasibly complicated, given the errors associated with
each of the inevitable assumptions. Attempted in detail, this task usually ends with
so large a degree of uncertainty that it renders the attempt moot. Accordingly, we
adopted a method for adjustment that, although simple, we believe captures the
essence of the situation.
We divide copper into "exportable" and "non-exportable" forms. This comes
down to estimating metal used in "goods" versus that used in infrastructure and
buildings (see Exhibit 185).
We assume that the overall level of economic activity is homogeneous (i.e., that
copper in "goods" is as likely to arise in the part of GDP based on exports as in
the part based on domestic consumption). Although this assumption is debatable
for China, we believe it is first order correct (see Exhibit 186). Nevertheless, we
hope to explore this issue in more detail in subsequent research.
For each exporting country, we calculate the size of the available export market
based on the proportion of global trade (i.e., what does each export destination
look like when viewed through the eyes of a Chinese exporter?). Hence, for each
country, we calculate the degree of net copper imports and exports (see Exhibit
187).
We arrive at the estimated "final use" copper demand history for each location
analyzed in our demand forecast.
While China is clearly a massive exporter of goods containing copper, its
largest import category is electrical machinery (US$200 billion p.a.). Metal ores
represent one-third on the list of imports (US$85 billion p.a.).
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
1900-1948 1948-1972 1972-1991 1991-2012
China Refined Copper Demand Growth
CAGR
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1900-1944 1944-1972 1972-1999 1999-2010
Steel Versus Copper CAGRs
Copper Steel
The Lower the Value of the
Commodity Relative to Global
Freight Rates, the Less of an
Issue the "First Versus Final
Use" Becomes; Thus, While
Not as Crucial for Iron Ore, We
Have to Account for It in
Copper Demand Estimation
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Exhibit 184 How Much of the First Use Copper Demand
Decline Is Attributable to Imports of Metal
in Other Forms?

Exhibit 185 We Believe That Only About 50% of Copper
Use Is "Exportable"
Source: Wood Mackenzie, USGS and Bernstein analysis. Source: WCGS and Bernstein analysis.

Exhibit 186 In Our View, Net Export to Import Positions
Are Representative of the Overall Flow of
Copper in Goods

Exhibit 187 This Yields the Following "Finished to
Final" Use Correction
Source: WCGS and Bernstein analysis. Source: WCGS and Bernstein analysis.


0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
3,000
3,200
k
t
US First Use Refined Copper
Consumption
33%
33%
13%
13%
8%
Global Copper Consumption by End Use
Construction Electrical Applications
Industrial Machinery Transportation
Consumer Products
0%
5%
10%
15%
20%
25%
30%
35%
USA China
Export/Import Position, China and US
Exports % of GDP (2011) Imports % of GDP (2011)
-800
-600
-400
-200
0
200
400
600
k
t
Net Cu Imports/(Exports) in Goods
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Copper Consumption, Capital Stock and the Derivation of Intensity Curves
We look at two metrics to understand the current stage of a country's copper
industry:
Current copper intensity: We define this as copper consumed per unit of output
(i.e., copper per US$1,000 GDP), against the overall level of output (i.e., GDP per
capita). We think of it as a "rate" term, showing how rapidly the country is
embedding copper into the economy in a given period.
Cumulative copper intensity or copper capital stock. We define this as the
total historical copper installed per capita against the overall level of output (again
GDP per capita). We look at this as a measure of the "level" of the economy's
development, looking at how successful historical capital investment decisions
have been (i.e., the current level of output being generated by historical
investment decisions).
We believe that both of these measures are necessary to gauge the current
position of copper (and other commodities') consumption in an economy, as the
"rate" term by itself only tells how fast an economy is developing. However, it does
not tell us whether this development is to be regarded as successful or for how long
that rate can be sustained. Only by looking at the "level" term can we answer the
question about the success and longevity of the industrialization. We also derive a
third measure of copper consumption per capita. It is best thought of as a derivative
relationship rather than a causative one, as the basis of its relationship to economic
activity is unclear. Put simply, we believe that it is impossible to use the history of
copper intensity alone (whether measured per unit output or per capita) to derive a
forecast for future copper intensity. There is simply not enough information in the
"rate" term of copper consumption to solve the problem of where any trajectory is
ultimately heading. Another piece of information is required. We find that
information in the role played by copper stock in supporting the generation of
wealth.

With that in mind, we take China's Asian neighbor Japan as an exemplar of how to
derive the relationship between copper demand growth and overall economic
growth (we could have also chosen the U.S., but given the change in the role of
copper use brought by electrification, we wanted a parallel closer in time). Exhibit
188 shows the history of Japanese refined copper consumption since 1900 and
Exhibit 189 converts that data from a temporal to an economic sequence. This data
shows the paradigmatic path that we see in all analysis of metal intensity through
the course of economic development. It can be divided into three periods:
Development During the build up of industrialization, copper use grows faster
than underlying GDP. This corresponds to the installation of a capital base that
will subsequently generate output.
Peak The "peak" refers to a peak in intensity, where GDP growth and copper
growth are matched. During this phase, we see the effect of diminishing returns
additional capital spending starts to deliver incrementally less output.
Decline The development of an economy is based on tertiary forms of value-
add or forms of manufacturing that require little incremental consumption of
resources. Once this occurs, overall economic growth will be faster than growth
in metal consumption.


When Understanding a
Country's Copper Industry, We
Think About the Problem in
Terms of Current Copper
Intensity and Cumulative
Copper Intensity; the Latter,
We Believe, Is Often Ignored by
Many
The Relationship Between
Copper Demand Growth and
Overall Economic Growth Can
Be Divided Into Three Periods:
Development, Peak and
Decline
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Exhibit 188 Japan Presents an Interesting Precedent for Current Chinese Copper Consumption
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.

Exhibit 189 The Copper Consumption in Japan Can Best Be Understood by Looking at Copper
Intensity
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.

More than just the rate of copper consumption, we can look at the total amount of
metal embedded in the capital stock of Japan by taking the cumulative metal
consumption after adjusting for losses through depreciation (see Exhibit 190). The
productivity of the economy starts increasing after a certain critical level of capital
stock is reached (~100kg per capita). The current levels of Japanese copper
consumption keep track with depreciation, but do not materially add to the total
capital stock. Instead, economic growth occurs as a function of utilizing the
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
Japan Final Use Refined Copper
-
.10
.20
.30
.40
.50
.60
.70
.80
.90
- 5.0 10.0 15.0 20.0 25.0 30.0 35.0
k
g
/
'
0
0
0
$

G
D
P
GDP/Capita (Real 2005$ PPP)
Japan Copper Intensity
Japan Actual Japan Trend
Productivity of an Economy
Starts to Increase After a
Certain Critical Level of Capital
Stock Is Reached
(~100kg/capita)
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installed capital more efficiently. This relationship enables one to assert the "end"
to which copper consumption is oriented namely, the development of an
industrial. Unsurprisingly, we see a very strong relationship exists between the
overall level of capital stock in a country and its output (see Exhibit 191).
Moreover, it is only relatively late in a country's economic development that the
bifurcation between a service and a manufacturing-oriented economy actually takes
place. There is a certain base load of metal that must be installed before this
economic "choice" is made. In this context, it is important to note that China has a
capital stock of copper equivalent to 29kg/capita just 30% of Japanese levels
and 22% of South Korean levels. Whatever is taking place in China today, it cannot
be the Japanese "lost decade" post-1990. By 1990, Japan had fully installed its
capital stock (copper stock stood at 92kg/capita versus 94kg/capita today). China is
nowhere near these levels today. We are not saying that its growth is not slowing.
Rather, we aim to highlight the dangers of too simplistic a historical comparison
between economies and political systems at different points in their development.
Knowing the end role of copper consumption provides the "missing" data point
that is not supplied by an analysis of copper consumption rate alone. Consequently,
the trajectory from the present into the future in terms of copper intensity can be
constructed for any country. Clearly, the most important country for which we
attempt this is China. In Exhibit 192 through Exhibit 194, we show the history of
copper consumption, copper intensity and copper stock (respectively) from 1900 to
today. The resultant pattern is all deeply familiar. The critical question is how to
draw the path of forward-looking copper intensity shown in Exhibit 193. Apart
from the aesthetics of line drawing, what makes any one trajectory for China more
plausible than another? It is always possible to attempt to build a "bottom up"
demand model and try to disguise the nature of the macro call being made along the
lines of "if I know the number of washing machines made in China each year and
the contained copper in each machine, I can calculate the copper contained in that
demand leg." However, how does one project the figure of washing machine
demand without reference to an underlying growth assumption? In our view, such
calls substantially increase the forecast error and do not actually alter the central
demand-side call namely, that of Chinese growth. With that in mind, we use the
canonical relationship between copper stock and output presented by the Japanese
economy to model a demand-side trajectory for China. If we assume that copper
productivity in China mirrors that seen in Japan, the development of China's copper
stock and its economy in total ought to follow the pattern set out in Exhibit 195.
This translates into the pattern for copper intensity development seen in Exhibit
196. The resultant China "final use" refined copper demand forecast is shown in
Exhibit 197. We repeat this methodology for each of the forecast countries and then
aggregate the result to get to our view on total global copper intensity and copper
demand (see Exhibit 198 and Exhibit 199). While there is more to copper demand
than just China (in contrast to demand for iron ore), it is nonetheless true that China
is the most important element in global demand by some margin.




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Exhibit 190 However, There Needs to Be a Way of Bridging Between Metal Intensity in One Time
Period to Another; We Find That Bridge in Metal (Capital) Stock Formation
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.


R = 0.9945
0
20
40
60
80
100
120
- 5.0 10.0 15.0 20.0 25.0 30.0 35.0
C
u

C
a
p
i
t
a
l

S
t
o
c
k

-
k
g
/
C
a
p
i
t
a
GDP/Capita (Real 2005$ PPP)
Japan Copper Stock
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Exhibit 191 Unsurprisingly, a Very Strong Relationship Exists Between the Overall Level of
Capital Stock in a Country and Its Output; We Link the Metal Intensity in Different
Time Periods Through the Assumption That the Rate of Overall Economic
Development Must Be Accompanied by a Corresponding Development in Capital
Stock
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.


R = 0.6442
-
50
100
150
200
250
- 5 10 15 20 25 30 35 40 45 50
C
o
p
p
e
r

C
a
p
i
t
a
l

S
t
o
c
k

-
k
g
/
C
a
p
i
t
a
Output - GDP/Capital (Real 2005$ PPP)
Capital Stock of Copper to Overall Economic Output
South
Korea
USA
Japan
Germany
China
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Exhibit 192 In Order to Forecast China's (as Well as Any Other Country's) Consumption, We
Begin With the History of Copper Consumption...
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.

Exhibit 193 ...And the Corresponding Copper Intensity...
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.


-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
k
t

C
u
China Final Use Refined Copper
-
.10
.20
.30
.40
.50
.60
.70
.80
- 5.0 10.0 15.0 20.0 25.0 30.0 35.0
k
g
/
'
0
0
0
$

G
D
P
GDP/Capita (Real 2005$ PPP)
China Copper Intensity
China Actual China Trend
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Exhibit 194 That Gives Rise to a Corresponding Development in Capital Stock
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.

Exhibit 195 We Expect the Chinese Copper Stock Development to Resemble That of Japan; We
Use This Expectation to Calculate Both How Copper Intensity in Any Developing
Country Tracks the Overall Economic Development and the Multiplier Between Metal
Growth and Economic Growth at Any Point in Time
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.


R = 0.9943
0
5
10
15
20
25
30
35
- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
C
u

C
a
p
i
t
a
l

S
t
o
c
k

-
k
g
/
C
a
p
i
t
a
GDP/Capita (Real 2005$ PPP)
China Copper Stock
R = 0.9945
0
20
40
60
80
100
120
- 5.0 10.0 15.0 20.0 25.0 30.0 35.0
C
u

C
a
p
i
t
a
l

S
t
o
c
k

-
k
g
/
C
a
p
i
t
a
GDP/Capita (Real 2005$ PPP)
China Copper Stock Forecast
Japan Actual China Actual China Forecast
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Exhibit 196 This Gives Rise to the Following Trend Line for China's Copper Intensity...
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.

Exhibit 197 ...And a Corresponding Development in Its Copper Consumption; We Expect It to
Peak at 14Mtpa Post-2025; in This Regard, Copper Is a "Later Cycle" Commodity
Than Steel, Whose Peak We Anticipate Nearer 2020
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.


-
.10
.20
.30
.40
.50
.60
.70
.80
- 5.0 10.0 15.0 20.0 25.0 30.0 35.0
k
g
/
'
0
0
0
$

G
D
P
GDP/Capita (Real 2005$ PPP)
China Copper Intensity Forecast
China Actual China Trend China Forecast
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
2
0
1
5
2
0
2
0
2
0
2
5
2
0
3
0
2
0
3
5
2
0
4
0
k
t

C
u
China Final Use Refined Copper Forecast
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Exhibit 198 We Then Aggregate Each of the Country-Specific Demand Forecasts to Arrive at a
Global Total That Enables Us to Derive a Picture of Still Rising Copper Intensity Out
Till 2020
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.

Exhibit 199 Nonetheless, China Remains the Most Important Driver of Overall Demand
Source: Wood Mackenzie, USGS, Mitchell and Bernstein estimates and analysis.





(0.5)
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1
9
1
0
1
9
2
0
1
9
3
0
1
9
4
0
1
9
5
0
1
9
6
0
1
9
7
0
1
9
8
0
1
9
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Y
r
.

A
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g
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o
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t
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G
D
P

g
r
o
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t
h
Copper Growth vs. Economic Growth
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030
R
e
f
i
n
e
d

C
o
p
p
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r

-
k
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C
u
Copper Consumption Forecast
Africa China India Japan Other Asia Europe Lat Am Middle East North Am Oceania
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Price Forecast

We base our price forecast on the interplay between the cash cost curve, the
incentive price curve, and the differential cost escalators that prevail between one
mining jurisdiction and another. We see no reason to believe that the price
agnosticism of consensus will hold true. In our view, copper will test the
US$10,000/t mark by 2018.
We derive our price forecast through an analysis of the cost structure of the
industry at each point in time. We identify the price that will be needed to clear the
cost of the marginal unit of supply required to satisfy demand. We use the incentive
price not as a measure of long-term price, but as the mechanism that determines the
evolution of the shape of the future cost curve. The key components of our
methodology for the copper price forecast are the following:
We calculate operating cost curves for each year between 2005 and 2040 for 316
greenfield projects, 530 existing mines and associated brownfield expansions, the
53 known Chinese mines alongside estimates for structure of the "unknown"
residual Chinese mines.
We look at the economically "rational" development of new projects based on an
analysis of the earliest possible technical start date for that project and a
comparison of the incentive price of that project with the prevailing price
environment. We have the option of overlaying varying degrees of industry
capital discipline by limiting the quantum of capital that the industry will expend
in any given year (allocated to the highest-quality projects first), but in the base
case, we leave this unconstrained.
We estimate country-specific real mining cost escalators through an explicit
forecast of mining labor productivity, labor costs, consumable and power costs as
well as currency appreciation (using Global Insight forecasts).
We piece together the future global cost curve by looking at the current structure
of supply, the real cost escalation of each existing mine site and the modification
to the cost curve that emerges as a consequence of the commissioning of new
projects and the depletion of old assets.
We look at the price required to clear demand from all currently operating assets.
The difference between this approach and that employed in our forecast for
iron ore (and other bulk commodities) lies in the analysis of trade flows. Given that
freight rates are smaller than the value of copper, there is no real difference
between CIF and FOB prices. Hence, we do not look at the impact that trade flows
have on the price.
In order to calculate the relative competitiveness of each supply location (and
hence the real cost escalator to be applied), we first break down the overall mining
costs into their underlying components. This is shown for the mine site in Exhibit
200 and for the milling in Exhibit 201. As expected, labor, diesel and consumables
(e.g., tires, explosives) form the largest cost element at the mine site, whereas
electrical power, grinding media and reagents form the largest component of the
milling cost base. Each of these elements is then separately forecasted to arrive at
the overall cost escalator for each mine site in a particular geography (see Exhibit
202). The two important sources of differentiation between geographies arise from
labor costs and any real currency appreciation or depreciation. Taken together,
these escalators imply an overall cost escalator for each geography (see Exhibit
203). Unsurprisingly, Chinese costs show the greatest pressure on the back of the
early stage of economic development and the rapidity of its growth.

Our Analysis Suggests That
Copper Will Test the
US$10,000/t by 2018
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Exhibit 200 Labor (Including Services) and
Consumables (Tires, etc.) Represent the
Largest Cost Elements for the Mine Site...

Exhibit 201 ...While It Is Consumables (Grinding Media
and Reagents) and Power That Form the
Largest Cost Element for Milling
Source: Wood Mackenzie and Bernstein analysis Source: Wood Mackenzie and Bernstein analysis

Exhibit 202 The Variation in Labor Costs Is the Most
Important Source of Differentiation for Cost
Escalators

Exhibit 203 Adding in Currency Effects Generates the
Overall Cost Escalator for Each Region
Source: Global Insight and Bernstein analysis. Source: Global Insight and Bernstein analysis.

26%
21%
20%
5%
28%
Mine Cost Composition
Labor Services Diesel Power Consumables
12%
16%
2%
32%
38%
Mill Cost Composition
Labor Services Diesel Power Consumables
0
50
100
150
200
250
300
350
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
2
0
1
2

=

1
0
0
Operating Cost Escalators by Category
Steel Oil Labor - Chile
Labor - China Labor - USA
0
20
40
60
80
100
120
140
160
180
200
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
2
0
1
2

=

1
0
0
Operating Cost Escalators by Geography
Chile China USA
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However, a consideration of cost escalators alone is insufficient to generate the
future cost projection. Labor productivity must also be factored in (as with
increasing labor productivity, more labor can be removed for the same level of
output, thus obviating some of the impacts of labor inflation). Unfortunately, we
believe that global mining productivity will continue to decline. We see no reason
to believe that the underlying geological deterioration occasioned by exploitation of
copper bodies should axiomatically be offset by increases in mining technology.
Indeed, we believe quite the opposite depletion and degradation are irreversible
and represent a necessary component of ore extraction. On the other hand,
technological improvement in mining has been achieved through ever more
massive capitalization of mine sites. This factor is up against the inexorability of
declining returns on capital. The key elements of this argument are laid out in
Exhibit 204 through Exhibit 207.

Exhibit 204 The Increase in Cost Pressure Is Powerfully
Attested to by the Increase in Ore That
Needs to Be Treated...

Exhibit 205 ...And the Declining Grade of the Ore That
Is Processed

Source: Wood Mackenzie and Bernstein analysis. Source: Wood Mackenzie and Bernstein analysis.

Exhibit 206 It Implies Lower Mill Recoveries

Exhibit 207 All These Factors Feed Into Our
Expectation of Decreasing Labor
Productivity and a Macro Environment With
Ever Increasing Nominal Wages
Source: Wood Mackenzie and Bernstein analysis. Source: Wood Mackenzie and Bernstein analysis.
1000
1500
2000
2500
3000
3500
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
M
t

O
r
e
Global Ore Milled
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
C
u

G
r
a
d
e

-
%
Global Ore Grade
83.0%
83.5%
84.0%
84.5%
85.0%
85.5%
86.0%
86.5%
87.0%
87.5%
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
C
u

r
e
c
o
v
e
r
y

-
%
Milled Ore Recovery
2.5
2.7
2.9
3.1
3.3
3.5
3.7
3.9
4.1
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
T
o
n
n
e
s

M
i
l
l
e
d

p
e
r

M
a
n

H
o
u
r
Global Copper Productivity
We Believe That Global Mining
Productivity Will Continue to
Decline Due to the Underlying
Geological Deterioration; We
Do Not Think the Potential
Increase in Mining Technology
Would Be Able to Reverse the
Productivity Trend
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In our base-case price forecast, we do not model any capital discipline and simply
have new projects being commissioned as and when this becomes technically
feasible. However, we note that the degree of technical feasibility for projects is
often (very) difficult to assess. It can lead to some over-optimistic views on just
how quickly new capacity can be brought on line. Furthermore, if we look at the
level of depletion from existing sources of supply, it is severe. Consequently, by
accounting for both the existing operating assets and those projects that already in
production, we arrive at a picture as shown in Exhibit 208. We expect a 15Mt
supply gap to open up by 2030 in mined copper. This imbalance is purely notional.
When we look at the history, bar movements in terminal market inventory, the
market is always in balance, and periods of under- or oversupply only apply on a
forward-looking basis. Of course, price adjustments serve to close the gap between
apparent supply and demand with the price level required to effect any change in
these balances being determined by the underlying industry cost structure.
However, for the next 18 months or so, it is clear that the market is in balance to a
slight oversupply. Beyond this, a gap appears to open up and this gap ought to put
upward pressure on price. The question is, of course, how this change in price will
manifest itself in the supply and demand of copper.

Exhibit 208 In Aggregate, We See a Balanced to Slightly Oversupplied Copper Market for the
Next 18 to 24 Months (Assuming No Further Supply Side Shocks or Demand-Side
Weakness); However, Post This Period, Current Capacity Falls Well Short of Demand
Source: Wood Mackenzie and Bernstein analysis.

We see four mechanisms at work here:
Demand will be shed as high prices either deter the consumption of metal
altogether or encourage the consumption of lower-priced metals (i.e., substitution
out of copper into aluminum).
Scrap and secondary consumption will rise as price encourages faster recycling
rates and more effective reclamation of metal.
Short-term mine output will rise as changes to short-term mine plans are
incentivized (i.e., mines exploiting low-grade material that would have closed at
lower prices can continue producing for a few more years). In addition, high-
grade mines are more likely to be front-loading exploitation of above-average
grade zones of mineralization, given the often mistaken belief that a price fall will
0
5,000
10,000
15,000
20,000
25,000
30,000
M
i
n
e
d

C
o
p
p
e
r

-
k
t
Supply Demand Balance from Existing Operations and Projects in Construction
SxEw Concentrate Demand
The Difficulty in Assessing
Technical Feasibility Is
Something That Can Lead to
Very Different Forecasts of
Future Copper Supply
There Are Four Mechanisms
That Explain the Interplay
Between the Change in Price
and the Underlying Supply and
Demand of Copper, With Only
the ''Approval of New Projects''
Mechanism Having the
Capacity to Alter the Cost
Curve Structure
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subsequently follow and front-loading volumes therefore represents a value-
maximizing strategy.
New projects will be approved.
Only the last one of these mechanisms has the capacity to alter the structure of
the cost curve significantly and permanently. Consequently, it is the mechanism
that is most often scrutinized in price analysis. However, new project execution is
the most uncertain of all the means by which equilibrium is established, as it is the
most geared to long-term future price expectations. It is clear that there is plenty of
new potential copper capacity from a fundamental geological perspective (see
Exhibit 209). The issue, however, is not that the world cannot supply more copper,
but the price that will be required to incentivize this. The incentive curve for new
copper projects suggests that many of them will fail to make an adequate return, if
invested at today's prices. Moreover, there is further difficulty in getting boards to
approve new investments at a time of falling or flat prices and in the face of
increasingly vociferous calls for capex discipline and returns of capital to
shareholders. When we factor in these variables, the picture seen in Exhibit 210
emerges. The cyclical nature of price and investment in new projects is clear. In
order to close the 2020 gap, new investment will have to be made in copper and
today's environment makes that difficult. As the supply/demand gap begins to make
itself felt, prices will rise to ensure that the gap is never actually seen. We expect
this rise in price to bring the new wave of fresh mine capacity on line. However, it
is difficult to see how this dynamic can play out if (as consensus has it) prices
continue to decline monotonically, yet productivity falls and costs rise.
When we look at the geographic origin of new supply, we see a number of
interesting contrasts (see Exhibit 211).
The rise of Africa as a key component in global supply. Increasingly, the world
will come to rely on Zambian and DRC copper supply. However, this also comes
with a risk and the compensation for this risk must imply a slower rate of
capitalization of African geology than would be the case if that risk were not
present (see Exhibit 212).
The struggle to continue growth in Chile versus the rise of Peru. Given the
level of current Chilean copper production, we deem it very unlikely that Chile
will be able to grow overall production significantly, absent significant capital
investment. At best, we expect it to be able to keep pace with depletion and
maintain its current position. In contrast, we believe that Peru offers real growth
potential assuming that the political environment does not deteriorate (see Exhibit
213). This highlights the move out of the "safe" mining jurisdictions into
increasingly untested new frontier geographies.


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Exhibit 209 There Is a Sufficient "Reservoir" of New Projects to Fill Any Supply/demand Gap; the
Only Question Is the Price Required to Incentivize These Projects to Come on Line
Source: Wood Mackenzie and Bernstein analysis.

Exhibit 210 The Current Low Price for Copper (and Copper By-Products Such as Gold and
Molybdenum) Makes It Very Hard for New Projects to Get Approved, Thus Opening
up a Supply Gap in the 2015E-20E Period
Source: Wood Mackenzie and Bernstein analysis.


0
5000
10000
15000
20000
25000
30000
35000
40000
Existing Mined Supply by 2030 Possible New Projects Mined Copper Demand by
2030
Hypothetical Surplus by 2030
M
i
n
e
d

O
o
p
p
e
r

-
k
t
Potential New Supply by 2030
0
5,000
10,000
15,000
20,000
25,000
30,000
M
i
n
e
d

C
o
p
p
e
r

-
k
t
Supply Demand Balance With as Yet Unapproved Projects
SxEw Concentrate Unapproved SxEw Unapproved Conc Demand
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Exhibit 211 We See the U.S. as One of the Biggest Winners (Along With Peru) in the Supply of
Future Copper
Source: Wood Mackenzie and Bernstein analysis.

Exhibit 212 However, African Growth Is an Absolute Requirement for Longer-Term Copper
Supply
Source: Wood Mackenzie and Bernstein analysis.


0
5,000
10,000
15,000
20,000
25,000
30,000
M
i
n
e
d

C
o
p
p
e
r

-
k
t
Mined Supply by Location
Chile USA China Peru Zambia DRC Canada Australia Mexico Mongolia Other
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
M
i
n
e
d

C
o
p
p
e
r

-
k
t
"New World" Copper DRC and Zambia
Zambia DRC
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Exhibit 213 We Are Getting Increasingly Worried About the Longer-Term Ability of Chile to
Maintain Its Capacity
Source: Wood Mackenzie and Bernstein analysis.


0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
M
i
n
e
d

C
o
p
p
e
r

-
k
t
"Old World" Copper Chile and Peru
Chile Peru
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Cost Curve Dynamics The Evolution of the Cost Structure of Supply
We summarize the net effect of our demand forecast, coupled to the incentive and
cash cost structure of the industry, in Exhibit 214. It shows how the marginal unit
of supply is expected to move over time. The dynamic represents an interplay
between differential cost escalations in mining versus the net supply/demand
balance.


Exhibit 214 We Expect Copper Price to Remain High for as Long as China's Wage Inflation
Grows Faster Than Its Mining Productivity, Unless the Western Miners Expend So
Much Capital as to Displace the Need for Such Marginal Activity Entirely
Source: Bernstein analysis and estimates.


-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95%100%
C
a
s
h

C
o
s
t
s

C
1
+
S
I
B

C
a
p
e
x

-
U
S
$
/
t

-
N
o
m
i
n
a
l
Cumulative Mined Production as % of Demand
2012 2017 2022
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Our ''Base-Case'' Price Forecast
Exhibit 215 shows our "base-case" price forecast. We use the evolving dynamics of
how the marginal unit of supply will be sourced to anchor our forecast. We are
more bullish than consensus over the whole of the forecast period as we believe
that the real driver of the copper price "super-cycle" is the Chinese mining
productivity. We believe that non-Chinese mine supply will struggle to maintain
current output levels and, as such, we are optimistic about the prospects for this
commodity even if an understanding of the need for greater capital discipline does
not emerge in the major mining houses. Naturally, should we see greater capital
discipline emerge from the mining majors, we would become incrementally more
positive on the outlook for copper as well as other commodities.

Exhibit 215 We See a Supply-Demand Balance in the Immediate Short Term; We Expect the
Market to Become Increasingly Stretched Over the Next Two Years; by Then We
Expect Cost Escalation and Productivity in China (and Elsewhere) to Have Only
Deteriorated Further, Thus Leading to Ever Higher Prices Necessary to Incentivize
the Next Wave of Mine Investment
Source: Bernstein analysis and estimates.



0
2,000
4,000
6,000
8,000
10,000
12,000
J
a
n
-
0
4
J
u
n
-
0
4
N
o
v
-
0
4
A
p
r
-
0
5
S
e
p
-
0
5
F
e
b
-
0
6
J
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-
0
6
D
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c
-
0
6
M
a
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-
0
7
O
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-
0
7
M
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-
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8
A
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g
-
0
8
J
a
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-
0
9
J
u
n
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
u
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-
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1
D
e
c
-
1
1
M
a
y
-
1
2
O
c
t
-
1
2
M
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r
-
1
3
A
u
g
-
1
3
J
a
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-
1
4
J
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-
1
4
N
o
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-
1
4
A
p
r
-
1
5
S
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1
5
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e
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1
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J
u
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-
1
6
D
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M
a
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O
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-
1
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M
a
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-
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8
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-
1
8
J
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-
1
9
J
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-
1
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N
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A
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2
0
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-
2
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C
o
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r

P
r
i
c
e

-
U
S
$
/
t
SCB vs. Consensus and the Forward Curve
Cu Spot Cu Forward Cu Consensus Cu SCB
We Believe That the Real
Driver of the Copper Price
''Super-Cycle'' Is the Chinese
Mining Productivity, and We
See China Struggling to
Maintain Current Output Levels
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Appendix

Appendix: Top 10 Mines Account for a Quarter of Global Copper Supply
To powerfully end the supply side portion of the Blackbook, we wanted to shed
some light on the 10 largest copper mines globally, of which eight are located in
Chile and one each in Peru and Indonesia. The development of these mines has
been instrumental in securing cheap copper supply over the last few decades.
So far, we have looked at the development of the world's copper supply on a
country-by-country basis. However, there is significant granularity within any
country's mine supply, with a finite number of assets contributing to overall output.
Moreover, a very significant difference exists between the average copper asset and
the handful of truly "Tier 1" operations that have stood behind the increases in
mined production over the last few decades. The top 10 mines (or top 1.5% mines
out of ~640 known copper operations) account for 25% of mined copper supply
(see Exhibit 216). These mines are hugely influential in determining the future
copper price not because they set the supply of the marginal ton themselves, but
because they determine the requirement for marginal units of supply.
Consequently, a familiarity with these operations is essential for any view on the
future of the copper price (see Exhibit 217). The appendix offers an overview of the
10 largest copper mines (see Exhibit 220 through Exhibit 289).
We also present the 10 largest new copper projects, which account for 18% of
possible new supply (see Exhibit 218). The potential incremental recovered copper
is categorized project by project in Exhibit 219. Given the concentration of new
sources of supply in a handful of very large projects, we also provide further details
on each one of them as a guide to the most important new supply side
developments (see Exhibit 290 through Exhibit 359).

Exhibit 216 1.5% of Mines Account for 25% of Global
Copper Supply

Exhibit 217 Understanding the Development of These
10 Mines Is Critical in Understanding the
Forward-Looking Copper Balance
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

25%
75%
Supply from Top 10 Mines Globally
Top 10 Bottom 630
0
200
400
600
800
1,000
1,200
k
t

C
u
10 Largest Copper Mines in 2012
Just 10 Mines Account for 25%
of Global Supply; We See a
Similar Pattern Replicated in
New Project Development 10
Projects Represent 18% of
Potential New Supply
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Exhibit 218 3% of New Projects Account for 18% of
Possible New Supply

Exhibit 219 It Is Rio Tinto and Glencore Xstrata That
Have the Greatest Exposure to These
Developments
Source: MEG and Bernstein analysis. Source: MEG and Bernstein analysis.


18%
82%
Top 10 Copper Projects by Recovered Cu
Top 10 Bottom 317
0
100
200
300
400
500
600
700
800
10 Largest Projects by Recovered Cu
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Escondida

Exhibit 220 Escondida Overview
Source: MEG and Bernstein estimates and analysis.


Exhibit 221 Escondida Ownership

Exhibit 222 Escondida Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Chile
Location 170km SE of Antofagasta
State/Province Antofagasta
Locale Atacama Desert In N. Chile
Start Up 1990 (Q4)
Commodity Copper/Gold/Silver
Development Stage Production
Mine Type Open Pit
Latitude/Longitude 2416'0" S, 694'0" W
Geology Details/Facts
Zone Name Escondida
Ore Genesis Supergene (Secondary) Enrichment Hydrothermal processes
Orebody Type Porphyry Deposit
Ore Mineral Chalcocite, Covellite, Chalcopyrite, Pyrite, Bornite
Class of Ore Oxide, Sulfide
Ore Controls Faulting
Width 2.5 km
Length 4.5 km
Thickness 600 m
Host Rock Andesite (Paleocene)
Country Rock Sedimentary (Mesozoic), Volcanics (Paleozoic)
Strike N/A
57.5%
30.0%
8.3%
3.0%
1.3%
Ownership of Escondida
BHP Billiton Rio Tinto Mitsubishi Corp
Nippon Mining Mitsubishi Minerals
97%
1%
2%
Escondida Metal-by-Metal Revenue
Cu Ag Au
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Exhibit 223 Escondida Geological Endowment

Exhibit 224 Escondida Ore Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 225 Escondida Head Grade

Exhibit 226 Escondida Cost Position
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Reserves Resources
Escondida Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Reserves Resources
Escondida Reserves & Resources Cu
Grade (%)
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Escondida Cu Mill Head Grade (%)
10,000
9,000
12,000
11,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
20,000 15,000 10,000 0 5,000
C
1

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S
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C
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x

U
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$
/
t
GlobalCumulative Production kt CuIncluding KnownandunknownChineseMines
Escondida
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Antamina

Exhibit 227 Antamina Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 228 Antamina Ownership

Exhibit 229 Antamina Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Peru
Location 280 km N of Lima; 135 km NE of Huarmey
State/Province Ancash (District/Town is San Marcos)
Locale Andes Mountains
Start Up 2001 (Q4)
Commodity Copper/Zinc/Molybdenum/Lead/Silver/Bismuth
Development Stage Production
Mine Type Open Pit
Latitude/Longitude 932'21" S, 773'0" W
Geology Details/Facts
Zone Name Antamina
Ore Genesis N/A
Orebody Type N/A
Ore Mineral Chalcopyrite, Sphalerite, Bornite, Pyrite, Magnetite
Class of Ore N/A
Ore Controls N/A
Width 1 km
Length 2.5 km
Thickness N/A
Host Rock Skarn (Tacite)
Country Rock N/A
Strike SW-NE
33.8%
33.8%
22.5%
10.0%
Ownership of Antamina
BHP Biliton Glencore Xstrata
Teck Resources Mitsubishi Corp
76%
0%
10%
4%
10%
Antamina Metal-by-Metal Revenue
Cu Pb Zn Mo Ag
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Exhibit 230 Antamina Geological Endowment

Exhibit 231 Antamina Ore Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 232 Antamina Head Grade

Exhibit 233 Antamina Cost Position
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0
200
400
600
800
1,000
1,200
Reserves Resources
Antamina Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Reserves Resources
Antamina Reserves & Resources Cu Grade
(%)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Antamina Cu Mill Head Grade (%)
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
20,000 15,000 10,000 5,000 0
10,000
9,000
11,000
12,000
C
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t
GlobalCumulative Production kt CuIncluding KnownandunknownChineseMines
Antamina
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
EUROPEAN METALS & MINING: COPPER FOR THE CRAFTSMAN CUNNING AT HIS TRADE 151





Los Pelambres

Exhibit 234 Los Pelambres Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 235 Los Pelambres Ownership

Exhibit 236 Los Pelambres Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Chile
Location 46 km E of Salamanca; 200 km N of Santiago
State/Province Coquimbo
Locale Andes Mountains
Start Up 1999 (Q4)
Commodity Copper/Molybdenum/Gold/Silver
Development Stage Production
Mine Type Open Pit
Latitude/Longitude 3143'4" S, 7029'22" W
Geology Details/Facts
Zone Name Los Pelambres
Ore Genesis N/A
Orebody Type Porphyry Deposit
Ore Mineral Chalcocite, Chalcopyrite, Bornite
Class of Ore N/A
Ore Controls N/A
Width N/A
Length N/A
Thickness N/A
Host Rock Andesite, Diorite
Country Rock N/A
Strike N/A
60.0%
16.3%
10.0%
8.8%
5.0%
Ownership of Los Pelambres
Antofagasta Plc Pan Pacific Copper Co Ltd
Mitsubishi Materials Corp Marubeni Corp
Mitsubishi Corp
87%
8%
2%
3%
Los Pelambres Metal-by-Metal Revenue
Cu Mo Ag Au
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Exhibit 237 Los Pelambres Geological Endowment

Exhibit 238 Lost Pelambres Ore Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 239 Los Pelambres Head Grade

Exhibit 240 Los Pelambres Cost Position
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Reserves Resources
Los Pelambres Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Reserves Resources
Los Pelambres Reserves & Resources Cu
Grade (%)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Los Pelambres Cu Mill Head Grade (%)
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
20,000 15,000 10,000 5,000 0
C
1

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GlobalCumulative Production kt CuIncluding KnownandunknownChineseMines
LosPelambres
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
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El Teniente

Exhibit 241 El Teniente Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 242 El Teniente Ownership

Exhibit 243 El Teniente Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Chile
Location 44 km NE of Rancagua, 80 Km SE of Santiago
State/Province Region lV (District/Town O'Higgins [Region VI])/Rancagua
Locale N/A
Start Up 1904
Commodity Copper/Molybdeum/Gold/Silver
Development Stage Production
Mine Type Underground
Latitude/Longitude 344'59" S, 7022'0" W
Geology Details/Facts
Zone Name N/A
Ore Genesis N/A
Orebody Type Porphyry Deposit
Ore Mineral N/A
Class of Ore N/A
Ore Controls Brecciation
Width N/A
Length N/A
Thickness N/A
Host Rock Intrusive (plutonic)
Country Rock N/A
Strike N/A
100%
Ownership of El Teniente
Codelco
93%
4%
2%
1%
El Teniente Metal-by-Metal Revenue
Cu Mo Ag Au
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Exhibit 244 El Teniente Geological Endowment

Exhibit 245 El Teniente Ore Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 246 El Teniente Head Grade

Exhibit 247 El Teniente Cost Position
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0
500
1,000
1,500
2,000
2,500
3,000
Reserves Resources
El Teniente Reserves & Resources (Mt)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Reserves Resources
El Teniente Reserves & Resources Cu
Grade (%)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
El Teniente Cu Mill Head Grade (%)
0
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
20,000 15,000 10,000 5,000
C
1

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GlobalCumulative Production kt CuIncluding KnownandunknownChineseMines
ElTeniente
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
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Chuquicamata

Exhibit 248 Chuquicamata Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 249 Chuquicamata Ownership

Exhibit 250 Chuquicamata Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Chile
Location 16 km N of Calama; 1,592 km N of Santiago
State/Province Antofagasta
Locale Atacama Desert; northern Chile
Start Up 1910
Commodity Copper/Molybdenum/Gold/Silver/Rhenium
Development Stage Production
Mine Type Open Pit/Tailings/Underground
Latitude/Longitude 2217'30" S, 6854'30" W
Geology Details/Facts
Zone Name N/A
Ore Genesis N/A
Orebody Type N/A
Ore Mineral N/A
Class of Ore N/A
Ore Controls N/A
Width N/A
Length N/A
Thickness N/A
Host Rock N/A
Country Rock N/A
Strike N/A
100%
Ownership of Chuquicamata
Codelco
90%
5%
4%
1%
Chuquicamata Metal-by-Metal Revenue
Cu Mo Ag Au
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Exhibit 251 Chuquicamata Geological Endowment

Exhibit 252 Chuquicamata Ore Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 253 Chuquicamata Head Grade

Exhibit 254 Chuquicamata Cost Position
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Reserves Resources
Chuquicamata Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Reserves Resources
Chuquicamata Reserves & Resources Cu
Grade (%)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Chuquicamata Cu Mill Head Grade (%)
0
20,000 15,000 10,000 5,000 0
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
12,000
11,000
10,000
9,000
C
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GlobalCumulative Production kt CuIncluding KnownandunknownChineseMines
Chuqui
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
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Grasberg

Exhibit 255 Grasberg Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 256 Grasberg Ownership

Exhibit 257 Grasberg Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Indonesia
Location N/A
State/Province Papua (Town/District Timika/Jaya Wijaya Mountains)
Locale N/A
Start Up 1972
Commodity Copper/Gold/Silver
Development Stage Production
Mine Type Open Pit and Underground
Latitude/Longitude 47'59" S, 13740'0" E
Geology Details/Facts
Zone Name Grasberg
Ore Genesis N/A
Orebody Type Porphyry Deposit, Skarn
Ore Mineral N/A
Class of Ore N/A
Ore Controls N/A
Width N/A
Length N/A
Thickness N/A
Host Rock Limestone, Monzonite, Granodiorite
Country Rock N/A
Strike N/A
90.6%
9.4%
Ownership of Grasberg
Freeport-Mcmoran Copper and Gold Inc
Government of Indonesia
61%
2%
37%
Grasberg Metal-by-Metal Revenue
Cu Ag Au
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Exhibit 258 Grasberg Geological Endowment

Exhibit 259 Grasberg Ore Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 260 Grasberg Head Grade

Exhibit 261 Grasberg Cost Position
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0
500
1,000
1,500
2,000
2,500
3,000
Reserves Resources
Grasberg Reserves & Resources (Mt)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Reserves Resources
Grasberg Reserves & Resources Cu Grade
(%)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Grasberg Cu Mill Head Grade (%)
5,000
4,000
3,000
2,000
1,000
0
20,000 15,000 10,000 5,000 0
12,000
11,000
10,000
9,000
8,000
7,000
6,000
C
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GlobalCumulative Production kt CuIncluding KnownandunknownChineseMines
Grasberg
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
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Los Bronces

Exhibit 262 Los Bronces Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 263 Los Bronces Ownership

Exhibit 264 Los Bronces Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Chile
Location 45 km NE of Santiago
State/Province Valparaiso (Town Santiago)
Locale N/A
Start Up 1925
Commodity Copper/Molybdenum
Development Stage Production
Mine Type Open Pit
Latitude/Longitude 338'56" S, 7016'54" W
Geology Details/Facts
Zone Name Los Bronces
Ore Genesis Hydrothermal processes
Orebody Type Breccia Fill, Stockwork
Ore Mineral Chalcopyrite, Specularite, Molybdenite
Class of Ore N/A
Ore Controls N/A
Width N/A
Length N/A
Thickness N/A
Host Rock Intrusive (plutonic), Volcanics
Country Rock N/A
Strike N/A
50.1%
24.5%
20.4%
5.0%
Ownership of Los Bronces
Anglo American Codelco
Mitsubishi Corp Anglo American Sur
94%
1%
2%
3%
Los Bronces Metal-by-Metal Revenue
Cu Mo Ag Au
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Exhibit 265 Los Bronces Geological Endowment

Exhibit 266 Los Bronces Ore Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 267 Los Bronces Head Grade

Exhibit 268 Los Bronces Cost Position
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Reserves Resources
Los Bronces Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
Reserves Resources
Los Bronces Reserves & Resources Cu
Grade (%)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Los Bronces Cu Mill Head Grade (%)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
20,000 15,000 10,000 5,000 0
12,000
11,000
10,000
9,000
8,000
C
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t
GlobalCumulative Production kt CuIncluding KnownandunknownChineseMines
LosBronces
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
EUROPEAN METALS & MINING: COPPER FOR THE CRAFTSMAN CUNNING AT HIS TRADE 161





Radomiro Tomic SxEw

Exhibit 269 Radomiro Tomic Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 270 Radomiro Tomic Ownership

Exhibit 271 Radomiro Tomic Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Chile
Location 35 km N of Calama; 6 km N of the Chuquicamata mine
State/Province Atacama
Locale Atacama Desert; northern Chile
Start Up 1998 (Q1)
Commodity Copper/Molybdenum
Development Stage Production
Mine Type Open Pit
Latitude/Longitude 2213'59" S, 6855'0" W
Geology Details/Facts
Zone Name Radomiro Tomic
Ore Genesis N/A
Orebody Type N/A
Ore Mineral Atacamite
Class of Ore Oxide, Sulfide
Ore Controls N/A
Width N/A
Length N/A
Thickness N/A
Host Rock N/A
Country Rock N/A
Strike N/A
100%
Ownership of Radomiro Tomic
Codelco
100%
Radomiro Tomic Metal-by-Metal Revenue
Cu
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Exhibit 272 Radomiro Tomic Geological Endowment

Exhibit 273 Radomiro Tomic Ore Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 274 Radomiro Tomic Leach Grade

Exhibit 275 Radomiro Tomic Cost Position
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0
100
200
300
400
500
600
700
800
900
Reserves Resources
Radomiro Tomic Reserves & Resources
(Mt)
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
Reserves Resources
Radomiro Tomic SX-EW Reserves &
Resources Cu Grade (%)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Radomiro SX-EW Leach Head Grade (%)
20,000 15,000 10,000 5,000 0
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
C
1

c
o
s
t
s

S
I
B

C
a
p
e
x

U
S
$
/
t
GlobalCumulative Production kt CuIncluding KnownandunknownChineseMines
Radomiro Tomic
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
EUROPEAN METALS & MINING: COPPER FOR THE CRAFTSMAN CUNNING AT HIS TRADE 163





Andina

Exhibit 276 Andina Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 277 Andina Ownership

Exhibit 278 Andina Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Chile
Location 40 km NE of Santiago
State/Province Valparaiso (Town Santiago)
Locale Mt Aconcagua; Fifth Region
Start Up 1970
Commodity Copper/Molybdenum/Gold/Silver
Development Stage Production
Mine Type Underground and Open Pit
Latitude/Longitude 339'5" S, 7015'21" W
Geology Details/Facts
Zone Name Andina Division
Ore Genesis N/A
Orebody Type Porphyry Deposit
Ore Mineral Chalcopyrite, Molybdenite
Class of Ore N/A
Ore Controls Brecciation
Width N/A
Length N/A
Thickness N/A
Host Rock Intrusive (plutonic), Volcanics
Country Rock N/A
Strike N/A
100%
Ownership of Andina
Codelco
90%
6%
3%
1%
Andina Metal-by-Metal Revenue
Cu Mo Ag Au
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
164 EUROPEAN METALS & MINING: COPPER FOR THE CRAFTSMAN CUNNING AT HIS TRADE





Exhibit 279 Andina Geological Endowment

Exhibit 280 Andina Ore Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 281 Andina Head Grade

Exhibit 282 Andina Cost Position
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Reserves Resources
Andina Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Reserves Resources
Andina Reserves & Resources Cu Grade
(%)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Andina Mill Cu Head Grade (%)
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
20,000 15,000 10,000 5,000 0
12,000
11,000
10,000
C
1

c
o
s
t
s

S
I
B

C
a
p
e
x

U
S
$
/
t
GlobalCumulative Production kt CuIncluding KnownandunknownChineseMines
Andina
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
EUROPEAN METALS & MINING: COPPER FOR THE CRAFTSMAN CUNNING AT HIS TRADE 165





Collahuasi

Exhibit 283 Collahuasi Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 284 Collahuasi Ownership

Exhibit 285 Collahuasi Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


Country Chile
Location 160 km SE of the port of Iquique
State/Province Tarapaca (Town Iquique)
Locale Andes Mountains; Northern Chile
Start Up 1999 (Q1)
Commodity Copper/Molybdenum/Silver
Development Stage Production
Mine Type Open Pit
Latitude/Longitude 2059'21" S, 6838'9" W
Geology Details/Facts
Zone Name Collahuasi
Ore Genesis Hydrothermal processes; Replacement
Orebody Type Porphyry Deposit
Ore Mineral Chalcocite, Chalcopyrite, Bornite, Covellite
Class of Ore Sulfide, Oxide
Ore Controls Fracturing, Vein (Lode)
Width N/A
Length N/A
Thickness N/A
Host Rock Intrusive (plutonic)
Country Rock N/A
Strike N/A
44%
44%
8%
4%
Ownership of Collahuasi
Glencore Anglo Mitsui Nippon
90%
4%
4%
2%
Collahuasi Metal-by-Metal Revenue
Cu Mo Ag Au
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Exhibit 286 Collahuasi Geological Endowment

Exhibit 287 Collahuasi Ore Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 288 Collahuasi Head Grade

Exhibit 289 Collahuasi Cost Position
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0
500
1,000
1,500
2,000
2,500
3,000
3,500
Reserves Resources
Collahuasi Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Reserves Resources
Collahuasi Reserves & Resources Cu
Grade (%)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Collahuasi Cu Mill Head Grade (%)
1,000
0
20,000 15,000 10,000 5,000 0
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
C
1

c
o
s
t
s

S
I
B

C
a
p
e
x

U
S
$
/
t
GlobalCumulative Production kt CuIncluding KnownandunknownChineseMines
Collahuasi
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 25-Sep-2013
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Oyu Tolgoi

Exhibit 290 Oyu Tolgoi Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 291 Oyu Tolgoi Ownership

Exhibit 292 Oyu Tolgoi Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.




General Information Details/Facts
Country Mongolia
Location 550 km S of Ulaanbaatar; 80 km N of the Chinese border
State/Province Omnogovi
Locale South Gobi region of Southern Mongolia
Start Up 2013 (Q1)
Commodity Copper/Gold/Silver/Molybdenum
Development Stage Production
Mine Type Open Pit, Underground, Stock Pile
Latitude/Longitude 431'0" N, 10651'0" E
Geology Details/Facts
Zone Name Tuquoise Hill
Ore Genesis N/A
Orebody Type Porphyry Deposit
Ore Mineral Chalcopyrite, Bornite, Magnetite, Chalcocite
Class of Ore Sulfide
Ore Controls Brecciation
Width N/A
Length N/A
Thickness N/A
Host Rock Andesite (Devonian), Monzodiorite
Country Rock N/A
Strike N/A
34%
34%
32%
Ownership of Oyu Tolgoi
Rio Tinto Government of Mongolia Other
81%
2%
17%
Oyu Tolgoi Expected Revenue (Y2025)
Metal-by-Metal Split
Cu Ag Au
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Exhibit 293 Oyu Tolgoi Grade Profile

Exhibit 294 Oyu Tolgoi Production Profile
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 295 Oyu Tolgoi Geological Endowment

Exhibit 296 Oyu Tolgoi Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Oyu Tolgoi Cu Mill Head Grade (%)
0
100
200
300
400
500
600
700
800
900
2
0
1
0
2
0
1
2
2
0
1
4
E
2
0
1
6
E
2
0
1
8
E
2
0
2
0
E
2
0
2
2
E
2
0
2
4
E
2
0
2
6
E
2
0
2
8
E
2
0
3
0
E
2
0
3
2
E
2
0
3
4
E
2
0
3
6
E
2
0
3
8
E
2
0
4
0
E
k
t

C
u
Oyu Tolgoi Production Profile
0
500
1,000
1,500
2,000
2,500
Reserves Resources
Oyu Tolgoi Reserves & Resources (Mt)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Reserves Resources
Oyu Tolgoi Reserves & Resources Cu
Grade (%)
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Resolution

Exhibit 297 Resolution Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 298 Resolution Ownership

Exhibit 299 Resolution Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country United States
Location 145 km E of Phoenix
State/Province Arizona
Locale N/A
Start Up 2023
Commodity Copper/Gold/Molybdenum
Development Stage Feasibility
Mine Type Underground - Block & Panel Caving
Latitude/Longitude 3318'18" N, 1113'52" W
Geology Details/Facts
Zone Name Superior Mine
Ore Genesis Hydrothermal processes
Orebody Type Porphyry Deposit
Ore Mineral Chalcopyrite, Chalcocite, Bornite, Gold, Enargite, Tennantite
Class of Ore Sulfide, Native
Ore Controls Stratigraphy, Folding
Width 590 m (average)
Length 1200 m (average)
Thickness 6 m (average)
Host Rock Limestone (Precambrian), Monzonite, Diabase (Precambrian)
Country Rock N/A
Strike North 00 degrees South
55%
45%
Ownership of Resolution Copper
Rio Tinto BHP Billiton
90%
3%
3%
4%
Resolution Copper Expected Revenue
(Y2025) Metal-by-Metal Split
Cu Mo Ag Au
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Exhibit 300 Resolution Grade Profile

Exhibit 301 Resolution Production Profile
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 302 Resolution Geological Endowment

Exhibit 303 Resolution Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Resolution Copper Cu Mill Head Grade (%)
0
100
200
300
400
500
600
2
0
1
0
2
0
1
2
2
0
1
4
E
2
0
1
6
E
2
0
1
8
E
2
0
2
0
E
2
0
2
2
E
2
0
2
4
E
2
0
2
6
E
2
0
2
8
E
2
0
3
0
E
2
0
3
2
E
2
0
3
4
E
2
0
3
6
E
2
0
3
8
E
2
0
4
0
E
k
t

C
u
Resolution Production Profile
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Reserves Resources
Resolution Copper Reserves & Resources
(Mt)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Reserves Resources
Resolution Copper Reserves & Resources
Cu Grade (%)
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La Granja

Exhibit 304 La Granja Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 305 La Granja Ownership

Exhibit 306 La Granja Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Peru
Location 650 km N of Lima
State/Province Chota
Locale Northern Peru
Start Up 2017 (Q4)
Commodity Copper/Gold/Silver/Zinc
Development Stage Reserves Development
Mine Type Open Pit
Latitude/Longitude 621'23" S, 797'0" W
Geology Details/Facts
Zone Name La Granja
Ore Genesis N/A
Orebody Type Disseminated, Porphyry Deposit, Skarn
Ore Mineral Chalcopyrite, Bornite, Chalcocite, Covellite
Class of Ore N/A
Ore Controls Faulting
Width N/A
Length N/A
Thickness N/A
Host Rock Skarn (Tacite)
Country Rock Limestone, Siltstone, Quartzite
Strike N/A
100%
Ownership of La Granja SX-EW
Rio Tinto
100%
La Granja Expected Revenue (Y2025)
Metal-by-Metal Split
Cu
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Exhibit 307 La Granja Grade Profile

Exhibit 308 La Granja Production Profile
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 309 La Granja Geological Endowment

Exhibit 310 La Granja Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
La Granja SX-EW Cu Leach Head Grade
(%)
0
50
100
150
200
250
300
350
2
0
1
0
2
0
1
2
2
0
1
4
E
2
0
1
6
E
2
0
1
8
E
2
0
2
0
E
2
0
2
2
E
2
0
2
4
E
2
0
2
6
E
2
0
2
8
E
2
0
3
0
E
2
0
3
2
E
2
0
3
4
E
2
0
3
6
E
2
0
3
8
E
2
0
4
0
E
k
t

C
u
La Granja Production Profile
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Reserves Resources
La Granja Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
Reserves Resources
La Granja Reserves & Resources Cu Grade
(%)
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Tampakan

Exhibit 311 Tampakan Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 312 Tampakan Ownership

Exhibit 313 Tampakan Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Philippines
Location about 14 km E of Tampakan; 55 km NNW of General Santos
State/Province South Cotabato
Locale N/A
Start Up 2019
Commodity Copper/Gold/Molybdenum/Arsenic
Development Stage Feasibility
Mine Type Open Pit
Latitude/Longitude 628'32" N, 1253'22" E
Geology Details/Facts
Zone Name Tampakan
Ore Genesis Epithermal
Orebody Type Porphyry Deposit
Ore Mineral Chalcopyrite, Bornite, Pyrite, Molybdenite
Class of Ore Sulfide
Ore Controls N/A
Width N/A
Length N/A
Thickness N/A
Host Rock N/A
Country Rock N/A
Strike Andesite
63%
38%
Ownership of Tampakan
Glencore Xstrata Indophil Resources NL
81%
19%
Tampakan Expected Revenue (Y2025)
Metal-by-Metal Split
Cu Au
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Exhibit 314 Tampakan Grade Profile

Exhibit 315 Tampakan Production Profile
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 316 Tampakan Geological Endowment

Exhibit 317 Tampakan Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Tampakan Cu Mill Head Grade (%)
0
50
100
150
200
250
300
350
400
450
500
2
0
1
0
2
0
1
2
2
0
1
4
E
2
0
1
6
E
2
0
1
8
E
2
0
2
0
E
2
0
2
2
E
2
0
2
4
E
2
0
2
6
E
2
0
2
8
E
2
0
3
0
E
2
0
3
2
E
2
0
3
4
E
2
0
3
6
E
2
0
3
8
E
2
0
4
0
E
k
t

C
u
Tampakan Production Profile
0
500
1,000
1,500
2,000
2,500
3,000
Reserves Resources
Tampakan Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Reserves Resources
Tampakan Reserves & Resources Cu
Grade (%)
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Escondida Ph VI

Exhibit 318 Escondida Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 319 Escondida Ownership

Exhibit 320 Escondida Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Chile
Location 170km SE of Antofagasta
State/Province Antofagasta
Locale Atacama Desert in Norther Chile
Start Up 1990 (Q4)
Commodity Copper/Gold/Silver
Development Stage Production
Mine Type Open Pit
Latitude/Longitude 2416'0" S, 694'0" W
Geology Details/Facts
Zone Name Escondida
Ore Genesis Supergene (Secondary) Enrichment, Hydrothermal processes
Orebody Type Porphyry Deposit
Ore Mineral Chalcocite, Covellite, Chalcopyrite, Pyrite, Bornite
Class of Ore Oxide, Sulfide
Ore Controls Faulting
Width 2.5 km
Length 4.5 km
Thickness 600 m
Host Rock Andesite (Paleocene)
Country Rock Sedimentary (Mesozoic), Volcanics (Paleozoic)
Strike N/A
58%
30%
8%
3% 1%
Ownership of Escondida
BHP Billiton Rio Tinto Mitsubishi Corp
Nippon Mining Mitsubishi Minerals
97%
1%
2%
Escondida (overall) Expected Revenue
(Y2025) Metal-by-Metal Split
Cu Ag Au
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Exhibit 321 Escondida Grade Profile

Exhibit 322 Escondida Production Profile
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 323 Escondida Geological Endowment

Exhibit 324 Escondida Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Escondida (overall) Cu Mill Head Grade (%)
0
200
400
600
800
1,000
1,200
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
2
0
1
5
E
2
0
1
8
E
2
0
2
1
E
2
0
2
4
E
2
0
2
7
E
2
0
3
0
E
2
0
3
3
E
2
0
3
6
E
2
0
3
9
E
k
t

C
u
Escondida Production Profile
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Reserves Resources
Escondida Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Reserves Resources
Escondida Reserves & Resources Cu
Grade (%)
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Golpu

Exhibit 325 Golpu Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 326 Golpu Ownership

Exhibit 327 Golpu Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Papua New Guinea
Location 65 km SW of Lae; 300 km N of Port Moresby
State/Province Morobe
Locale N/A
Start Up 2019 (Q1)
Commodity Gold/Copper/Molybdenum/Silver
Development Stage Reserves Development
Mine Type Underground
Latitude/Longitude 643'31" S, 14637'45" E
Geology Details/Facts
Zone Name Wafi
Ore Genesis Hydrothermal processes
Orebody Type Porphyry Deposit, Vein (Lode)
Ore Mineral N/A
Class of Ore N/A
Ore Controls N/A
Width N/A
Length N/A
Thickness N/A
Host Rock Volcanics, Sedimentary
Country Rock N/A
Strike N/A
50% 50%
Ownership of Golpu
Newcrest Mining Harmony Gold Mining Co
78%
22%
Golpu Expected Revenue (Y2025) Metal-
by-Metal Split
Cu Au
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Exhibit 328 Golpu Grade Profile

Exhibit 329 Golpu Production Profile
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 330 Golpu Geological Endowment

Exhibit 331 Golpu Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Golpu Head Mill Grade (%)
0
50
100
150
200
250
300
350
2
0
1
0
2
0
1
2
2
0
1
4
E
2
0
1
6
E
2
0
1
8
E
2
0
2
0
E
2
0
2
2
E
2
0
2
4
E
2
0
2
6
E
2
0
2
8
E
2
0
3
0
E
2
0
3
2
E
2
0
3
4
E
2
0
3
6
E
2
0
3
8
E
2
0
4
0
E
k
t

C
u
Golpu Production Profile
0
100
200
300
400
500
600
Reserves Resources
Golpu Reserves & Resources (Mt)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Reserves Resources
Golpu Reserves & Resources Cu Grade (%)
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Las Bambas

Exhibit 332 Las Bambas Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 333 Las Bambas Ownership

Exhibit 334 Las Bambas Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Peru
Location 260 km SW of Cusco
State/Province Grau
Locale Inca Central Andean
Start Up 2015 (Q1)
Commodity Copper/Molybdenum/Gold/Silver
Development Stage Preproduction
Mine Type Open Pit, Underground
Latitude/Longitude 145'6" S, 7228'2" W
Geology Details/Facts
Zone Name Las Bambas
Ore Genesis N/A
Orebody Type Skarn, Porphyry Deposit
Ore Mineral N/A
Class of Ore N/A
Ore Controls N/A
Width N/A
Length N/A
Thickness N/A
Host Rock N/A
Country Rock N/A
Strike N/A
100%
Ownership of Las Bambas
Glencore Xstrata
66%
5%
27%
2%
Las Bambas Expected Revenue (Y2025)
Metal-by-Metal Split
Cu Mo Ag Au
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Exhibit 335 Las Bambas Grade Profile

Exhibit 336 Las Bambas Production Profile
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 337 Las Bambas Geological Endowment

Exhibit 338 Las Bambas Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0.00
0.20
0.40
0.60
0.80
1.00
1.20
Las Bambas Cu Mill Head Grade (%)
0
100
200
300
400
500
600
2
0
1
0
2
0
1
2
2
0
1
4
E
2
0
1
6
E
2
0
1
8
E
2
0
2
0
E
2
0
2
2
E
2
0
2
4
E
2
0
2
6
E
2
0
2
8
E
2
0
3
0
E
2
0
3
2
E
2
0
3
4
E
2
0
3
6
E
2
0
3
8
E
2
0
4
0
E
k
t

C
u
Las Bambas Production Profile
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Reserves Resources
Las Bambas Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Reserves Resources
Las Bambas Reserves & Resources Cu
Grade (%)
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Los Pelambres Expansion

Exhibit 339 Los Pelambres Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 340 Los Pelambres Ownership

Exhibit 341 Los Pelambres Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Chile
Location 46 km E of Salamanca; 200 km N of Santiago
State/Province Coquimbo
Locale Andes Mountains
Start Up 1999 (Q4)
Commodity Copper/Molybdenum/Gold/Silver
Development Stage Production
Mine Type Open Pit
Latitude/Longitude 3143'4" S, 7029'22" W
Geology Details/Facts
Zone Name Los Pelambres
Ore Genesis N/A
Orebody Type Porphyry Deposit
Ore Mineral Chalcocite, Chalcopyrite, Bornite
Class of Ore N/A
Ore Controls N/A
Width N/A
Length N/A
Thickness N/A
Host Rock Andesite, Diorite
Country Rock N/A
Strike N/A
60%
16%
10%
9%
5%
Ownership of Los Pelambres
Antofagasta Plc Pan Pacific Copper Co Ltd
Mitsubishi Materials Corp Marubeni Corp
Mitsubishi Corp
90%
6%
2%
2%
Los Pelambres (overall) Expected Revenue
(Y2025) Metal-by-Metal
Cu Mo Ag Au
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Exhibit 342 Los Pelambres Grade Profile

Exhibit 343 Los Pelambres Production Profile
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 344 Los Pelambres Geological Endowment

Exhibit 345 Los Pelambres Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Los Pelambres (overall) Cu Mill Head
Grade (%)
0
50
100
150
200
250
300
350
400
450
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
2
0
1
5
E
2
0
1
8
E
2
0
2
1
E
2
0
2
4
E
2
0
2
7
E
2
0
3
0
E
2
0
3
3
E
2
0
3
6
E
2
0
3
9
E
k
t

C
u
Los Pelambres Production Profile
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Reserves Resources
Los Pelambres Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Reserves Resources
Los Pelambres Reserves & Resources Cu
Grade (%)
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Pebble

Exhibit 346 Pebble Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 347 Pebble Ownership

Exhibit 348 Pebble Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country United States
Location 330 km WSW of Anchorage; 27 km WSW of Nondalton
State/Province Alaska
Locale SW Alaska
Start Up 2016
Commodity Copper/Gold/Molybdenum/Silver/Palladium/Rhenium
Development Stage Reserves Development
Mine Type Open Pit, Underground
Latitude/Longitude 5953'53" N, 15517'44" W
Geology Details/Facts
Zone Name Pebble Copper
Ore Genesis Supergene (Secondary) Enrichment, Hydrothermal processes
Orebody Type Porphyry Deposit
Ore Mineral Chalcocite, Chalcopyrite, Bornite, Molybdenum
Class of Ore Sulfide, Oxide
Ore Controls N/A
Width N/A
Length N/A
Thickness N/A
Host Rock Argillite, Siltstone
Country Rock Granodiorite
50% 50%
Ownership of Pebble
Anglo American Northern Dynasty Minerals
61%
9%
2%
28%
Pebble Expected Revenue (Y2025) Metal-
by-Metal Split
Cu Mo Ag Au
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Exhibit 349 Pebble Grade Profile

Exhibit 350 Pebble Production Profile
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 351 Pebble Geological Endowment

Exhibit 352 Pebble Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.


0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
Pebble Cu Mill Head Grade (%)
0
50
100
150
200
250
300
350
400
2
0
1
0
2
0
1
2
2
0
1
4
E
2
0
1
6
E
2
0
1
8
E
2
0
2
0
E
2
0
2
2
E
2
0
2
4
E
2
0
2
6
E
2
0
2
8
E
2
0
3
0
E
2
0
3
2
E
2
0
3
4
E
2
0
3
6
E
2
0
3
8
E
2
0
4
0
E
k
t

C
u
Pebble Production Profile
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Reserves Resources
Pebble Reserves & Resources (Mt)
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
Reserves Resources
Pebble Reserves & Resources Cu Grade
(%)
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Andina Expansion

Exhibit 353 Andina Overview
Source: MEG and Bernstein estimates and analysis.

Exhibit 354 Andina Ownership

Exhibit 355 Andina Metal Exposure
Source: MEG and Bernstein estimates and analysis. Source: MEG and Bernstein estimates and analysis.


General Information Details/Facts
Country Chile
Location 40 km NE of Santiago
State/Province Valparaiso
Locale Mt Aconcagua, Fifth Region
Start Up 1970
Commodity Copper/Molybdenum/Gold/Silver
Development Stage Production
Mine Type Open Pit, Underground
Latitude/Longitude 339'5" S, 7015'21" W
Geology Details/Facts
Zone Name Andina Division
Ore Genesis N/A
Orebody Type Porphyry Deposit
Ore Mineral Chalcopyrite, Molybdenite
Class of Ore N/A
Ore Controls Brecciation
Width N/A
Length N/A
Thickness N/A
Host Rock Intrusive (Plutonic), Volcanics
Country Rock N/A
Strike N/A
100%
Ownership of Andina
Codelco
91%
5%
3% 1%
Andina (overall) Expected Revenue (Y2025)
Metal-by-Metal Split
Cu Mo Ag Au
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Exhibit 356 Andina Grade Profile

Exhibit 357 Andina Production Profile
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 358 Andina Geological Endowment

Exhibit 359 Andina Grade
Source: Wood Mackenzie and Bernstein estimates and analysis. Source: Wood Mackenzie and Bernstein estimates and analysis.





0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Andida (overall) Cu Mill Head Grade (%)
0
50
100
150
200
250
300
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
2
0
1
5
E
2
0
1
8
E
2
0
2
1
E
2
0
2
4
E
2
0
2
7
E
2
0
3
0
E
2
0
3
3
E
2
0
3
6
E
2
0
3
9
E
k
t

C
u
Andina Production Profile
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Reserves Resources
Andina (overall) Reserves & Resources (Mt)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Reserves Resources
Andina (overall) Reserves & Resources Cu
Grade (%)
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Index of Exhibits

1 Financial Overview 4
2 Copper Stands Out as Being the Most Overutilized Commodity
Relative to Underlying Geological Endowment Testimony to
the Industrial Importance of This Metal and the Difficulty in
Growing Supply in Anything Other Than a Supportive Price
Environment 6
3 The Long-Term History of Copper Porphyry Discovery Had a
Marked Impact on the Copper Price: Falling Prices Have Been
Associated With Increased Finds of Relatively Few Massive Ore
Bodies We See No New Chile on the Horizon 7
4 Chile Stands Out as the Most Important Source of Supply, But This
Was Not Always the Case While Chile's Growth Has Slowed,
China's Has Accelerated 7
5 A Corrected China Cost Curve Would Display Much More High-
Cost Production: The Relationship Between Price and Chinese
Copper Output Tells Us That They Are Not Unrelated Phenomena 8
6 It Is the Differential Cost Escalation That Drives Real Commodity
Price Increases in USD Terms 9
7 "Grade Is King" and Global Head Grades Are Declining 10
8 Nearly 90% of the Movement in Copper Is Explained by Just Three
Factors: Grade, Global GDP Growth and LME Inventory 11
9 Our Analysis Gives Rise to the Following Trend Line for China's
Copper Intensity 12
10 Copper Makes the Second-Most Important Contribution to the Cash
Generation of the Miners 13
11 Glencore Xstrata Is the Most Highly Exposed in Our Coverage to
the Copper Price and Vale Is the Least 13
12 Copper Is the Second-Most Important Contributor to the Cash
Generation of the Miners 16
13 And Has Been Consistently Strong Over the "Super-Cycle" 16
14 Glencore Xstrata Is the Most Highly Exposed in Our Coverage to
the Copper Price While Vale Is the Least 16
15 There Is a Very Strong Relationship Between Geological
Abundance and Industrial Use; the Most Useful Commodities, in
Terms of Economic Application, Also Happen to Be the Most
Geologically Abundant 17
16 Copper Stands Out as the Most Overutilized Commodity Relative to
Its Underlying Geological Endowment a Testimony to the
Industrial Importance of This Metal and the Difficulty in Growing
Supply in Anything Other Than a Supportive Price Environment 17
17 Chile Is Far More Important to Global Copper Supply Than
Australia Is to Global Iron Ore; However, in Both Commodities,
the Production from China (Despite the Poverty of Geological
Endowment) Is Highly Significant 18
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18 2004-06 Saw a "Fly-Up" in Commodity Prices, Which, When
Compared to the Previous Cycles, Look Anomalous; We Strongly
Believe That the Same Microeconomic Forces Are at Work Now
as Previously and That Fundamentals, Rather Than "Funds," Offer
the Best Explanation for the Movements in Commodity Prices 19
19 At First Glance, the Old Heuristic of Marginal Cash Costs Appeared
to Have Broken Down 20
20 But a Better Answer Is Provided by the Negligible Visibility Into
China's Mining Costs 20
21 Virtually Nothing Is Known About the Cost Structure of Chinese
Copper Mining (as Shown in the Previous Exhibit), Yet the
Relationship Between Price and Chinese Copper Output Tells Us
That They Are Not Unrelated Phenomena 21
22 The Apparent Cost Structure of the Copper Industry in China Is
Based on a Highly Non-Representative Selection of Mines;
Moreover, It Fails to Adequately Describe the Profitability of This
Sector 22
23 A Corrected Chinese Cost Curve Would Display Much More High-
Cost Production 22
24 Calculating the Volume and Costs of the Missing Portion of the
Chinese Data Is Possible Using Data from the NBS 22
25 This Mined Tonnage Needs to Be Factored Into the Global Cost
Curve... 23
26 ...Where It Is Concentrated Towards Right-Hand Side of the Curve,
Filling Out the High-Cost Volume 23
27 Chinese Mining Employment Started to Increase Slowly Post
2000... 24
28 ...With Mining Wages Tracking Exponential Growth Seen in the
Economy as a Whole 24
29 In USD Terms, Labor Costs Have Grown in Mining at a CAGR of
28% Since 2003 24
30 Which Is Significantly Above the Growth Rates in Domestic
Mining Output 24
31 Chinese Mining Productivity Started to Decelerate from 2003 25
32 And a Fundamental Disconnect Appeared Between Mining
Wages and Output 25
33 The Exponential Rise in Chinese Mining Labor Costs Has Driven a
Corresponding Rise in Commodity Prices 25
34 If the Cyclical Impact of Global GDP Is Added, an R-Squared of
96% Is Returned 25
35 Coal Mining in the U.K. in 1840 27
36 And in China Today 27
37 Nine Elements Account for 99% of the Earth's Mass; Iron and
Aluminum Are Among Them, While Copper's Abundance Is
Radically Different 30
38 A Very Strong Relationship Exists Between a Commodity's
Geological Abundance and Its Industrial Use; the Most Useful
Commodities in Terms of Economic Application Also Happen to
Be the Most Geologically Abundant 31
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39 Copper Stands Out as the Most Overutilized Commodity Relative to
Its Underlying Geological Endowment; This Testifies to the
Industrial Importance of This Metal and the Difficulty in Growing
Supply in Anything Other Than a Supportive Price Environment 31
40 Below Copper Grade of 0.1%, a Step-Change Emerges in the Cost
Structure of Copper Extraction; Consequently, We Face a Hard
Stop in Our Ability to Exploit This Metal, Once High-Grade
Deposits Are Exhausted 32
41 Under a Unimodal Distribution, Grade and Tonnage Are
Continuous 33
42 Under a Bimodal Distribution, Grade and Tonnage Are
Discontinuous, With Clear Implications for Cost and Availability
of New Material 33
43 Copper Ores Represent the Dissemination of High-Grade Copper-
Bearing Minerals Within a Barren Matrix; Copper Mining Is the
Process That Separates These Valuable Minerals from the
Worthless Gangue 33
44 Copper Mining Involves the Identification, Liberation and Sale of
Copper-Bearing Minerals; This Is Achieved Through Two
Processes of Waste Removal; the First One Occurs at the Mine
Site Where Ore Is Separated from Waste; the Second One
Happens at the Milling/Flotation Site Where Concentrate Is
Separated from Tailings 34
45 The Traditional Mining Route, Involving the Concentration of
Sulphide Ores, Drives the Vast Majority of Mined Copper
Production (~80%) 37
46 The SxEw Route Exploits Oxide Ores and Accounts for the
Residual 20% of the Mined Copper Production 37
47 An Important Feature of the Sulphide Route Is the Ability to Take
Advantage of High-Grade Copper Ores in Secondary or
Supergene Enrichment Zones; These Locations Can Provide
Significant Additional Early Stage Cash Flows for a Miner 38
48 In the Distribution of Known Copper Deposits, the Graph Shows
the Typical Inverse Relationship Between Grade and Size, With
Copper Porphyry Occupying a Place of Privilege at One End of
That Distribution 41
49 Copper Porphyries Represent the Lowest Grade But the Most
Abundant Source of Copper Supply; Their Exploitation by Bulk
Mining Methods Enabled the Development of the Modern Power-
Intensive Industrial Society 42
50 The Average In Situ Geological Abundance in Copper Porphyry
Deposits Is 0.5%, Which Has Important Implications for the
Long-Term Grade Profile of Copper Production; Anything Higher
Than This Must Be Temporary 42
51 The World's Consumption of Copper Is Predicated Upon the
Exploitation of the Lowest-Grade Copper Deposits 43
52 Poland, Zambia and the DRC Are High Grade But Too Small to
Displace American Preeminence 43
53 Chile's Dominance in the Ability to Supply the World's Copper
Demand Is Clear 44
54 Chile Is Not Only Uniquely Well-Endowed in Absolute Tons, But
the Size of Its Deposits Is Unmatched 44
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55 Chile Stands Out as the Most Important Source of Copper Supply;
However, This Was Not Always the Case, and the Study of
Chile's Development Is Critical to an Understanding of the Future
Copper Price Trajectory 45
56 While Chile's Growth Has Slowed Down Over the Last Decade,
China's Has Accelerated 46
57 It Was the 20 Years from 1980 to 2000 That Saw Chilean Copper
Growth Explode 46
58 However, Since 2000, Chile Has Stagnated and China Emerged as
the Second Largest Producer of Mined Copper 46
59 Peru's Growth Has Been Sporadic 47
60 The U.S. Has Played a Critical Role in the Copper Industry and
Was, for a Long While, the World's Largest Producer 47
61 As With Chile, Australian Output Has Reached a Plateau 47
62 Meanwhile, Zambia Has Only Just Recovered from the Effects of
the Previous Nationalization 47
63 The Same Stagnation That We See in Chile (Once the Limits of
Geology Are Reached) Is Evident in the CIS 48
64 The Impact of the Great Lakes Conflict on DRC Output Is Painfully
Clear 48
65 Canada, While Still a Significant Producer, Is in Decline 48
66 Mexico Is Likely to Become a More Important Producer Over Time 48
67 In 1900, the U.S. Played a Very Similar Role in the Global Copper
Supply as Chile Does Today; the Development of the Supply Side
of the Copper Industry Over the Last Century Is the History of the
Volume Transition from the U.S. to Chile 49
68 By 1925, the Importance of Chile Was Starting to Become Clear... 50
69 ...Though Africa (Zambia and DRC) Have Always Had a Role to
Play in the Supply of Copper 50
70 By 1975, the Dominance of the U.S. in the Supply of Copper Was
Already Challenged 51
71 However, It Was the Market Reforms That Inaugurated the
"Miracle of Chile" That Saw the U.S. Finally Topple as the
Superior Geology and Lower Labor Costs Established Chile as the
Leading Global Copper Producer 51
72 Despite All of These Changes, Copper Production Remains Highly
Concentrated in Very Few Regions 52
73 An Early Steam Shovel at Mt. Morgan Copper Mine in Australia at
the Turn of the 20
th
Century 52
74 An Electric Rope Shovel at the Turn of the 21
st
Century Same
Idea, Slightly Bigger Scale 53
75 The Long-Term History of Copper Porphyry Discoveries Shows the
Marked Impact That These Deposits Have Had on the Real
Copper Price; Structurally Falling Prices Have Been Associated
With Increased Finds of Relatively Few Massive Ore Bodies; We
Are Not Currently in Such a Situation There Is No New Chile
on the Horizon 53
76 If We Chart Countries' Current Copper Supply vs. Their Underlying
Endowment, We See an Understandably Strong Relationship;
Good Geology Tends to Imply Easy Mining 55
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77 It Is the Departures from This Relationship That Are Interesting;
Chile Is No Longer an Easy Win and the Largest Source of Mined
Copper Growth; Over the Last Decade, China Has Been
Producing at More Than Twice the Level Its Geology Would
Suggest 56
78 The History of Chilean Copper Development Is One of Massive
Increases in Resources... 58
79 ...Occasioned by the Ability to Exploit Ever Lower-Grade Material 58
80 However, the Net Result Is a Massive Increase in Available Metal... 58
81 ...And an Even Greater Rise in Metal Output; Hence, There Has to
Be More to Chile Than Increasing Discovery Rates... 58
82 ...And There Is It Is the Increased Efficiency in Exploiting
Existing Material as Seen in Mine Life Reductions 59
83 A Highly Non-Linear Relationship Exists in the Value Proposition
Represented by Mine Life Reductions; They Represent Efficiency
Gains Down Only to ~30 Years LOM; Afterwards, They Become
Value Destructive 59
84 For a Given Geology, Halving a Mine's Life from 50 Years to 25
Years Is a Highly Profitable Exercise 60
85 Halving a Mine's Life from 30 Years to 15 Years (from the Same
Geology) Is a Value Destructive Exercise 60
86 This Goes Some Way to Explaining Why Chilean Metal Output
Stalled After Hitting 5.5Mtpa and a 35-Year Average LOM; It
Also Highlights Why Chinese Production Looks Challenged and
Where the "Low(ish) Hanging Fruit" Lie 61
87 Mine Life Expansions from Existing Reserves Have the Potential to
Deliver Less Than One-Third of the Required Copper Demand by
2030; Projects Exploiting New Resources Will Be Needed and
This Requires New Finds of Copper 61
88 However, the Exploitation Is Looking Ever Less Likely to Yield
Results; Even If Massive New Finds Are Encountered, the
History of Pebble and Oyu Tolgoi Tells Us That It Will Take 20-
30 Years for These Finds to Deliver Commercially Meaningful
Metal (Compared to 10 Years for Escondida) 62
89 We Look at Project-Size Differentiation, i.e., the Difference
Between Percentage of Mines and Supply 63
90 This Measure Shows a Striking Correlation to Commodity Returns 63
91 Against a Fully Loaded Cost of Capital, Many of Today's New
Projects Will Struggle to Create Value 63
92 The Majority of the World's Largest Projects Are in the Hands of
Relatively Few Major Mining Houses 63
93 Unlike With Iron Ore, There Are Some Genuine Supply Side
Constraints That Have Prevented Chilean Copper Supply from
Responding to Price Increases in the Same Way as Australian Iron
Ore Did 65
94 In Mining, Grade Is King; It Acts as Geological Gearing of the
Labor Cost; Halve the Grade and You Will Double (at Least) the
Unit Cost of Metal Output 65
95 We Need to Be Careful When Referring to Declines and Understand
How Those Declines Are Measured 68
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96 The Cut-Off Grade Delineates the Boundary Between the Material
That Will Be Mined and Treated and the Waste Material That
Will Need to Be Mined to Access the Ore, But Will Be Dumped
Subsequently 69
97 For Purposes of Illustration, We Assume a Grade Profile That
Declines Exponentially With Depth; at Some Depth, Grade Will
Be Insufficient to Allow the Material to Be Mined Economically 70
98 The Total Tonnage That Will Be Classified as Ore Depends on How
Much the Cut-Off Grade Is Allowed to Fall; the Lower the Grade
That a Miner Is Prepared to Exploit, the More Tons Are Available 71
99 The Average Grade of the Tons Mined Will Naturally Be Higher
With a Higher Cut-Off Grade, as There Will Be Less Low-Cost
Material Present to Dilute the High-Grade Ore 71
100 However, the Relationship Between the Average Reserve Grade and
the Cut-Off Grade Is Non-Linear; as Reserve Grade Falls, the
Miner Is Increasingly "Scraping the Bottom of the Barrel" 72
101 The Mine Plan Determines the Sequencing of Blocks of Material
Extracted from the Reserve Base; in This Instance, the Block
Taken and the Block Left Behind Are Identical from a Grade
Perspective; as a Result, the Mine Plan Sees a Grade Profile That
Is Constant Over Time 73
102 Under a Different Sequence, the Mine Plan Removes the Highest
Grade First, Leaving Lower Grade Material Behind; Over Time,
This Means That the Head Grade Must Fall as the Cut-Off Grade
Limit Is Approached 74
103 Three Different Grade Profiles for the Development of Exactly the
Same Underlying Ore Body... 76
104 ...Lead to Radically Different Value Propositions; Under Realistic
Mining Investment Guidelines, Only the Third Scenario of
Declining Ore Grade Will Get Approved and Subsequently
Developed; the Other Two Mining Solutions Are Unlikely to
Attract Capital 77
105 While Generating the Same Total Lifetime Cash, High-Grading the
Ore Body Delivers Cash Sooner 77
106 Geology Conspires With Finance, as Secondary Enrichment Zones
Help Create High-Grade Ore Near the Surface, Which Can Be
Extracted Early on in the Mine Life 78
107 The Basic Structure of the Operating Costs of a Stylized Large
Chilean Copper Mine 80
108 The Picture for a Small Chinese Type Operation (or at Least What
We Believe They Look Like!) Is a Little Different 81
109 Stripping Ratio: The Deeper You Go the Higher the Cost 82
110 Labor Productivity: Efficient and Well-Capitalized Mines Are Far
Lower Cost Than Those Relying on Human Labor 82
111 The Price of Labor Matters... 82
112 ...While the Impact of Diesel Is Surprisingly Low 82
113 Power Has Less Impact Than One Might Expect 83
114 Rock Hardness Affects the Milling Power Rate and Drives Cost in
High Power-Cost Regions 83
115 Higher Mill Recovery (Finer Grind) Implies Lower Cost 83
116 Nevertheless, in All of This "Grade Is King" 83
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117 Compounding the Critical Role That Grade Plays Is the Fact That
the Productivity of Milling Circuits Varies With It; a "Constant
Tail" of Copper Is Always Lost, Given That Below a Certain
Copper Concentration, Froth Flotation Cannot Discriminate
Between Ore and Tailings 84
118 This Radically Increases the Cost of Low-Grade Volume
Exploitation 84
119 The Life of Available Copper Deposits Has Held Up Very Well,
Despite the Massive Increases in Mined Production 85
120 So There Is No Need for Any Malthusian Concerns; We Have as
Much Copper "on Hand" Now as 35 Years Ago 85
121 This Security Is Engendered by the Fact That Reserves Seem to
Have Held Up Well 86
122 However, the Truth Is Somewhat More Complicated; Reserves
Have Held Up Well Only Because of a Dramatic Reduction in the
Reserve Grade... 86
123 ...Driven by Dropping the Cut-Off Grade to below 0.3% Cu 86
124 While the Decline in Head Grade Is Well Known... 87
125 ...Its Implications Are Not, Given the Nature of the Copper Forward
Curve and Consensus Price Expectations 87
126 Production Over the Last Decade Has Been Sustained Only
Through Moving Head Grades Above Reserve Grade and Global
High-Grading 87
127 This Means That Grades Must Decline Sharply in the Future; in
Fact, Grades Must Decline Towards the Much Lower Level Given
by the Cut-Off Grade 88
128 2003 (or Thereabouts) Saw a Structural Break in the Industry,
Which Moved from a Period Where Mining Did Not Imply
Geological Degradation to One Where It Most Certainly Does 88
129 Just for Fun, We Provide a Long-Term History of Copper Grades in
Australia 89
130 But on a Serious Point: Post-2000, We See Stagnation in the Copper
Industry, Which Saw Mine Output Holding Up Only Through a
Radical Grade Decline; What Happened in Australia Was
Repeated Globally 90
131 The Relationship Between Cut-Off Grade, Head Grade and Reserve
Grade Over the Life of the Reserve Base Enables One to
Calculate How Head Grades Will Need to Evolve Going Forward 92
132 How Is All This Related to Price? Well, in the First Instance, We
Can Observe That the Step-Up in Prices Occurred When Global
Head Grades Started to Fall 93
133 Indeed, There Is a Very Strong Relationship Between These Two
Factors 93
134 We Use This as the Basis of a Simple Multivariate Regression,
Which Almost Perfectly Describes the Copper Price 94
135 Nearly 90% of the Movement in Copper Is Given by Just Three
Factors: Grade, Global GDP Growth and LME Inventory 94
136 The Normalcy of the Errors Between Regressed and Actual Copper
Prices Implies No Systemic Bias or Neglected Explanatory
Variable 95
137 Leading to a Regression Analysis Whose Component Parts Are
All Highly Significant 95
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138 Grade Declines Are An Irreversible Feature of the Industry, Driven
by the Structure of Current Mine Plans That Stand Behind Current
Copper Consumption 96
139 Grade Is by Far the Most Important to Price Sensitivity 96
140 But Economic Growth Prospects Can Swing the Price by
~US1,500/t 97
141 With a Similar Order of Magnitude Contribution from Terminal
Market Inventory 97
142 This Implies That GDP Has to "Work" Incredibly Hard to
Overcome the Inevitable Grade Decline and Return Consensus
Price Expectations; to Put It Mildly, the Implicit Assumption of
Consensus Is Implausible 98
143 Likewise for Terminal Market Inventory; Surely, the Most Likely
Read Through Is Not That the Miners Forget How to Run Their
Businesses, But That Prices Will Trend Higher Than Consensus
Currently Anticipates 98
144 Grade Is by Far the Strongest Driver of Price; Under Any Scenario,
Dropping the Cut-Off Grade to the Point Where the Head Grade
Would Be Below the Reserve Grade Implies Prices Well in
Excess of US$10,000/t 99
145 Labor (Including Services) and Consumables Represent the Largest
Cost Elements for the Mine Site 103
146 Consumables and Power Form the Largest Cost Element for Milling 103
147 Overhead Costs of a Mine Site Mainly Comprise Labor 103
148 The Split Between Mining and Milling Is Roughly Even With G&A
Being a Relatively Small Part of the Overall Costs 103
149 The Price of Diesel Shows Relatively Small Variation from One
Mining Jurisdiction to the Next 104
150 Chile Stands Out as a Very High Power Cost Region; in Africa, It Is
Not the Cost But Rather the Reliability of Power Supply That Is
the Issue 104
151 Unsurprisingly, the Developed World Has the Highest Labor Cost;
Cheap Labor (as Well as High Grades) Will Drive the Value of
the African Copper Production; Chile Is Already a Medium- to
High-Cost Mining Location 105
152 While Diesel and Power Are Tied to Global Pricing Trends, Labor
Shows the Highest Variation Across Regions 105
153 A Belief in Declining Labor Costs Is at Odds With the Reality of
Demands for Increasing Nominal Wages 106
154 Power Costs Are Historically Highly Correlated With Oil Prices... 106
155 ...And a Belief in an Immediate and Sharp Downward Correction Is
Not the View We Endorse 106
156 The Aggregate Cost Escalator That Stands Behind the Consensus
View of the Copper Price Seems, at Least to Us, Highly
Implausible 106
157 Nominal Wage Increases and the Expectation of a Higher Living
Standard Over Time Form the Basis of the Political Mandate in
Most Developed and Developing Countries 107
158 We Take a Different View from Wood Mackenzie (and Hence from
Consensus) on How Mining Costs Will Evolve, With the
Differences Being Particularly Pronounced for Expected Future
Labor Costs 108
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159 Our Base Case Has Continued Appreciation in the RMB... 108
160 ...And Significant Growth in Nominal RMB-Denominated Output 108
161 At the Same Time, We Expect the Chinese Workforce to Continue
to Decline 109
162 Overall, We Expect the Dollar Output per Chinese Worker to
Increase Significantly, and This Drives Our Forecast for the
Chinese Mining Labor Cost Escalation 109
163 Added to This Is the SCB View on the Evolution of the Oil Price... 110
164 ...Which We Believe Will Imply a Continuation of the Increase in
the Nominal Price of Energy 110
165 Adding These Factors Together Gives a Country-Specific Mining
Cost Escalator... 110
166 ...As Well as Milling Cost... 110
167 ...And Ancillary Costs... 111
168 ...For a Total Cost Escalator for Mined Copper on a Region-by-
Region Basis 111
169 It Is the Differential Cost Escalation That Drives Real Commodity
Price Increases in USD Terms 112
170 The Increase in Cost Pressure Is Powerfully Attested to by the
Increase in Ore That Needs to Be Treated... 112
171 ...And the Declining Grade of the Ore That Is Processed 112
172 It Implies Lower Mill Recoveries 113
173 All These Factors Feed Into Our Expectation of Decreasing Labor
Productivity and a Macro Environment With Ever-Increasing
Nominal Wages 113
174 Against a Fully Loaded Cost of Capital, It Is Clear That Many of
Today's New Projects Will Struggle to Create Value 114
175 There Is Always a Bias to Execute the Best Projects First; Even So,
a Real Price of Above US$9,000/t Will Be Required to Bring the
New Projects On Line Over the Next Decade 115
176 A Key Component of the Required Price Is Due to the Requirement
to Compensate for the Risk and Losses That Will Be Borne as a
Consequence of More Supply Coming from New Frontier
Regions 116
177 The Current World Production of Copper Has Been Achieved
Through Targeting the Easy Win Locations, Which Combined
High Geological Prospectivity With Low Political Risk; This
Model No Longer Holds and Higher Prices Will Be Required to
Reflect This Reality 117
178 We Believe That Low-Grade High-Cost Chinese Producers Already
Sit at the Right-Hand Side of the Global Cost Curve and That
Their Presence There Is Poorly Understood; As Real USD Cost
Escalation in China on the Back of Increasing Labor Costs Takes
Hold, It Will Steepen the Cost Curve and Lead to Ever Higher
Copper Prices 119
179 Post the Oil Shocks of the 1970s, There Was a Step-Change in
Demand for Copper; While Growth Slowed, It Never Went Ex-
Growth in a Trend Sense 122
180 Global Copper Growth Is Still Not as Strong as It Was Post World
War II... 122
181 ...With the West Acting as a Drag on Overall Demand 122
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182 China and Developing Asia Have Taken Over the Lead in Copper
Demand 123
183 The Current Cycle Shows Markedly Lower Copper Growth Than
Steel 123
184 How Much of the First Use Copper Demand Decline Is Attributable
to Imports of Metal in Other Forms? 124
185 We Believe That Only About 50% of Copper Use Is "Exportable" 124
186 In Our View, Net Export to Import Positions Are Representative of
the Overall Flow of Copper in Goods 124
187 This Yields the Following "Finished to Final" Use Correction 124
188 Japan Presents an Interesting Precedent for Current Chinese Copper
Consumption 126
189 The Copper Consumption in Japan Can Best Be Understood by
Looking at Copper Intensity 126
190 However, There Needs to Be a Way of Bridging Between Metal
Intensity in One Time Period to Another; We Find That Bridge in
Metal (Capital) Stock Formation 128
191 Unsurprisingly, a Very Strong Relationship Exists Between the
Overall Level of Capital Stock in a Country and Its Output; We
Link the Metal Intensity in Different Time Periods Through the
Assumption That the Rate of Overall Economic Development
Must Be Accompanied by a Corresponding Development in
Capital Stock 129
192 In Order to Forecast China's (as Well as Any Other Country's)
Consumption, We Begin With the History of Copper
Consumption... 130
193 ...And the Corresponding Copper Intensity... 130
194 That Gives Rise to a Corresponding Development in Capital
Stock 131
195 We Expect the Chinese Copper Stock Development to Resemble
That of Japan; We Use This Expectation to Calculate Both How
Copper Intensity in Any Developing Country Tracks the Overall
Economic Development and the Multiplier Between Metal
Growth and Economic Growth at Any Point in Time 131
196 This Gives Rise to the Following Trend Line for China's Copper
Intensity... 132
197 ...And a Corresponding Development in Its Copper Consumption;
We Expect It to Peak at 14Mtpa Post-2025; in This Regard,
Copper Is a "Later Cycle" Commodity Than Steel, Whose Peak
We Anticipate Nearer 2020 132
198 We Then Aggregate Each of the Country-Specific Demand
Forecasts to Arrive at a Global Total That Enables Us to Derive a
Picture of Still Rising Copper Intensity Out Till 2020 133
199 Nonetheless, China Remains the Most Important Driver of Overall
Demand 133
200 Labor (Including Services) and Consumables (Tires, etc.) Represent
the Largest Cost Elements for the Mine Site... 136
201 ...While It Is Consumables (Grinding Media and Reagents) and
Power That Form the Largest Cost Element for Milling 136
202 The Variation in Labor Costs Is the Most Important Source of
Differentiation for Cost Escalators 136
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203 Adding in Currency Effects Generates the Overall Cost Escalator
for Each Region 136
204 The Increase in Cost Pressure Is Powerfully Attested to by the
Increase in Ore That Needs to Be Treated... 137
205 ...And the Declining Grade of the Ore That Is Processed 137
206 It Implies Lower Mill Recoveries 137
207 All These Factors Feed Into Our Expectation of Decreasing Labor
Productivity and a Macro Environment With Ever Increasing
Nominal Wages 137
208 In Aggregate, We See a Balanced to Slightly Oversupplied Copper
Market for the Next 18 to 24 Months (Assuming No Further
Supply Side Shocks or Demand-Side Weakness); However, Post
This Period, Current Capacity Falls Well Short of Demand 138
209 There Is a Sufficient "Reservoir" of New Projects to Fill Any
Supply/demand Gap; the Only Question Is the Price Required to
Incentivize These Projects to Come on Line 140
210 The Current Low Price for Copper (and Copper By-Products Such
as Gold and Molybdenum) Makes It Very Hard for New Projects
to Get Approved, Thus Opening up a Supply Gap in the 2015E-
20E Period 140
211 We See the U.S. as One of the Biggest Winners (Along With Peru)
in the Supply of Future Copper 141
212 However, African Growth Is an Absolute Requirement for Longer-
Term Copper Supply 141
213 We Are Getting Increasingly Worried About the Longer-Term
Ability of Chile to Maintain Its Capacity 142
214 We Expect Copper Price to Remain High for as Long as China's
Wage Inflation Grows Faster Than Its Mining Productivity,
Unless the Western Miners Expend So Much Capital as to
Displace the Need for Such Marginal Activity Entirely 143
215 We See a Supply-Demand Balance in the Immediate Short Term;
We Expect the Market to Become Increasingly Stretched Over the
Next Two Years; by Then We Expect Cost Escalation and
Productivity in China (and Elsewhere) to Have Only Deteriorated
Further, Thus Leading to Ever Higher Prices Necessary to
Incentivize the Next Wave of Mine Investment 144
216 1.5% of Mines Account for 25% of Global Copper Supply 145
217 Understanding the Development of These 10 Mines Is Critical in
Understanding the Forward-Looking Copper Balance 145
218 3% of New Projects Account for 18% of Possible New Supply 146
219 It Is Rio Tinto and Glencore Xstrata That Have the Greatest
Exposure to These Developments 146
220 Escondida Overview 147
221 Escondida Ownership 147
222 Escondida Metal Exposure 147
223 Escondida Geological Endowment 148
224 Escondida Ore Grade 148
225 Escondida Head Grade 148
226 Escondida Cost Position 148
227 Antamina Overview 149
228 Antamina Ownership 149
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229 Antamina Metal Exposure 149
230 Antamina Geological Endowment 150
231 Antamina Ore Grade 150
232 Antamina Head Grade 150
233 Antamina Cost Position 150
234 Los Pelambres Overview 151
235 Los Pelambres Ownership 151
236 Los Pelambres Metal Exposure 151
237 Los Pelambres Geological Endowment 152
238 Lost Pelambres Ore Grade 152
239 Los Pelambres Head Grade 152
240 Los Pelambres Cost Position 152
241 El Teniente Overview 153
242 El Teniente Ownership 153
243 El Teniente Metal Exposure 153
244 El Teniente Geological Endowment 154
245 El Teniente Ore Grade 154
246 El Teniente Head Grade 154
247 El Teniente Cost Position 154
248 Chuquicamata Overview 155
249 Chuquicamata Ownership 155
250 Chuquicamata Metal Exposure 155
251 Chuquicamata Geological Endowment 156
252 Chuquicamata Ore Grade 156
253 Chuquicamata Head Grade 156
254 Chuquicamata Cost Position 156
255 Grasberg Overview 157
256 Grasberg Ownership 157
257 Grasberg Metal Exposure 157
258 Grasberg Geological Endowment 158
259 Grasberg Ore Grade 158
260 Grasberg Head Grade 158
261 Grasberg Cost Position 158
262 Los Bronces Overview 159
263 Los Bronces Ownership 159
264 Los Bronces Metal Exposure 159
265 Los Bronces Geological Endowment 160
266 Los Bronces Ore Grade 160
267 Los Bronces Head Grade 160
268 Los Bronces Cost Position 160
269 Radomiro Tomic Overview 161
270 Radomiro Tomic Ownership 161
271 Radomiro Tomic Metal Exposure 161
272 Radomiro Tomic Geological Endowment 162
273 Radomiro Tomic Ore Grade 162
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274 Radomiro Tomic Leach Grade 162
275 Radomiro Tomic Cost Position 162
276 Andina Overview 163
277 Andina Ownership 163
278 Andina Metal Exposure 163
279 Andina Geological Endowment 164
280 Andina Ore Grade 164
281 Andina Head Grade 164
282 Andina Cost Position 164
283 Collahuasi Overview 165
284 Collahuasi Ownership 165
285 Collahuasi Metal Exposure 165
286 Collahuasi Geological Endowment 166
287 Collahuasi Ore Grade 166
288 Collahuasi Head Grade 166
289 Collahuasi Cost Position 166
290 Oyu Tolgoi Overview 167
291 Oyu Tolgoi Ownership 167
292 Oyu Tolgoi Metal Exposure 167
293 Oyu Tolgoi Grade Profile 168
294 Oyu Tolgoi Production Profile 168
295 Oyu Tolgoi Geological Endowment 168
296 Oyu Tolgoi Grade 168
297 Resolution Overview 169
298 Resolution Ownership 169
299 Resolution Metal Exposure 169
300 Resolution Grade Profile 170
301 Resolution Production Profile 170
302 Resolution Geological Endowment 170
303 Resolution Grade 170
304 La Granja Overview 171
305 La Granja Ownership 171
306 La Granja Metal Exposure 171
307 La Granja Grade Profile 172
308 La Granja Production Profile 172
309 La Granja Geological Endowment 172
310 La Granja Grade 172
311 Tampakan Overview 173
312 Tampakan Ownership 173
313 Tampakan Metal Exposure 173
314 Tampakan Grade Profile 174
315 Tampakan Production Profile 174
316 Tampakan Geological Endowment 174
317 Tampakan Grade 174
318 Escondida Overview 175
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319 Escondida Ownership 175
320 Escondida Metal Exposure 175
321 Escondida Grade Profile 176
322 Escondida Production Profile 176
323 Escondida Geological Endowment 176
324 Escondida Grade 176
325 Golpu Overview 177
326 Golpu Ownership 177
327 Golpu Metal Exposure 177
328 Golpu Grade Profile 178
329 Golpu Production Profile 178
330 Golpu Geological Endowment 178
331 Golpu Grade 178
332 Las Bambas Overview 179
333 Las Bambas Ownership 179
334 Las Bambas Metal Exposure 179
335 Las Bambas Grade Profile 180
336 Las Bambas Production Profile 180
337 Las Bambas Geological Endowment 180
338 Las Bambas Grade 180
339 Los Pelambres Overview 181
340 Los Pelambres Ownership 181
341 Los Pelambres Metal Exposure 181
342 Los Pelambres Grade Profile 182
343 Los Pelambres Production Profile 182
344 Los Pelambres Geological Endowment 182
345 Los Pelambres Grade 182
346 Pebble Overview 183
347 Pebble Ownership 183
348 Pebble Metal Exposure 183
349 Pebble Grade Profile 184
350 Pebble Production Profile 184
351 Pebble Geological Endowment 184
352 Pebble Grade 184
353 Andina Overview 185
354 Andina Ownership 185
355 Andina Metal Exposure 185
356 Andina Grade Profile 186
357 Andina Production Profile 186
358 Andina Geological Endowment 186
359 Andina Grade 186

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Disclosure Appendix
VALUATION METHODOLOGY
As mining companies represent operationally and financially geared exposure to underlying commodity baskets (with ~80% of
weekly equity price moves explained by moves in underlying commodity prices), we use a regression-based trading model and our
forward commodity price forecasts to determine our 12-month price targets for our European metals and mining coverage.
To the extent that the regression holds, and the parameters of the regression have not significantly shifted, we take the target price
from the trading model. To the extent that the regression is shifting or the equity is deviating, we look for evidence of whether this
shift or deviation is temporary (and hence may be expected to close) or whether it signals a more fundamental re- or de-rating of the
equity. In the event that there is no significant deviation or if we believe a deviation is temporary, the target price is set by the trading
model. In the event that we believe a deviation is signaling a fundamental change, we will adjust our target price for this fundamental
shift and disclose the manner and magnitude of the adjustment made. At present, no adjustments have been made to the target
prices generated by our trading model. Note that we round final target prices in 25p/cent increments.
In addition to the target price (and short-term price forecasts generated by our trading model), we calculate a supplementary
valuation that is DCF based. Given the long-lived nature of mining assets, we believe a DCF is critical to understanding the intrinsic
value of a share (what the share price, in our view, "ought" to be today). Our DCF model is constructed in nominal local currency
terms out to 2030, over which explicit commodity price and exchange rate forecasts apply. The nominal local currency cash flows
are de-escalated into real USD cash flows and discounted at the company-specific WACC. A country risk premium reflecting the
geographic origin of the cash flows is added to the underlying WACC to reflect cash flow items (i.e., expropriation) that cannot be
explicitly modeled in the cash flow. All reserves are considered exploited by the model. In addition 50% of the incremental resources
(i.e., 50% of the residual resources, excluding those that have already been converted to reserves) of the company are modeled.
Where residual life of the mine (LOM) may be inferred for operations beyond the 2030 time horizon, a terminal value is calculated
for the remaining years of potentially exploitable material. We use this methodology to derive all forward-looking multiples and other
valuation metrics. Note that we forecast our models in reporting currency (USD), convert to listing currency (British pound sterling or
Brazilian real) at an average exchange rate, and round final DCF values in 25p/cent increments.
RISKS
The four most significant risks facing the major mining houses are: 1) lack of capital discipline (specifically displacement of high-cost
Chinese marginal producers by low-cost Western production), 2) operating cost inflation (USD-denominated unit costs in all the
major mining houses have seen double-digit growth rates over the last 10 years, roughly half of which are macro related and the
other half are real local currency), 3) a sustained downturn in the Chinese economy (the largest consumer of global resources) and
4) resource nationalism (ranging from increased share of rent extraction to outright asset confiscation).
SRO REQUIRED DISCLOSURES
References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong
Kong) Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd.
which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C,
collectively.
Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account
penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or
contributions to, generating investment banking revenues.
Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on
the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for
Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets
exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-
Japan) exchanges - unless otherwise specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.
As of 09/24/2013, Bernstein's ratings were distributed as follows: Outperform - 41.3% (0.9% banking clients) ; Market-Perform -
46.2% (0.4% banking clients); Underperform - 12.5% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers
in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services
within the last twelve (12) months.
Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common
stock of the following companies RIO.LN / Rio Tinto PLC, BLT.LN / BHP Billiton PLC.
This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you
can also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y.
10105 or Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, United Kingdom; or Sanford
C. Bernstein (Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour
View Street, Central, Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein
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(Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No.
199703364C, Director of Compliance, 30 Cecil Street, #28-08 Prudential Tower, Singapore 049712.
12-Month Rating History as of 09/23/2013
Ticker Rating Changes
AAL.LN O (IC) 09/05/12
BHP O (IC) 09/05/12
BHP.AU O (IC) 09/26/12
BLT.LN O (IC) 09/05/12
GLEN.LN O (RC) 02/13/13 M (IC) 09/05/12
RIO O (IC) 09/05/12
RIO.LN O (IC) 09/05/12
VALE O (RC) 06/07/13 U (IC) 09/05/12
VALE3.BZ O (RC) 06/07/13 U (IC) 09/05/12

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated
Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

OTHER DISCLOSURES
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