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<p><strong>Industrial Metals 2Q 2014: Commodity Outlook, Capital Management, and Mine Strikes</strong></p><br/>

<p><strong>Commodity Outlook</strong></p><br/>

<p>CHARL MALAN: The commodity outlook for 2014 is pretty mixed. On the supply side, we are seeing a number of companies stretching their operational supply budgets while governments are stepping in through numerous interventions either via export restrictions and/or increased taxes. The combination of companies running at 110% and governments reducing supply may lead to stressed supplies for 2014 and 2015. </p><br/>

<p>Demand outlook for those commodities are also mixed. The one that's most interesting is copper. We just looked at the 2014 February import data into China, and on a year-to-year basis, we saw about a 14% increase in copper import demand. Clearly some of the commodities on the demand side are looking good including copper and iron ore. On the supply side, I see a significant reduction of supply coming through with commodities such as nickel. I do believe nickel and copper have good upside risk, and that iron ore is probably going to be a very stable commodity for 2014. </p><br/>

<p><strong>Capital Management</strong></p><br/>

<p>MALAN: Capital management is broken into two categories in the mining industry. The first is the effective management of costs and the second is more efficient capital allocation such as reducing capital expenditure. In 2013, we saw a significant number of announcements in CAPEX reductions and we continue to see CAPEX reductions in 2014. I believe the latter part of 2014 is when those reductions will start to impact supply.</p><br/>

<p>The industry also made a number of cost reduction announcements. They initially focused on headcounts within head offices. Although these announcements have been made, their impact has not been reflected on income statements because it takes time for contracts to unwind and for people to send in their notice period. We anticipate a majority of that to come through in the second quarter of this year. </p><br/>

<p>We believe that towards the latter part of 2014, capital management, defined as cost management and CAPEX reductions, will be a significant kicker for higher earnings, i.e. higher cash flow because of lower CAPEX spending. I believe this combination will ultimately develop into a higher rating for these companies through either a cash flow multiple or an EV/EBITDA multiple. Not only does the second half of 2014 look potentially really good for mining companies, but 2015 is perhaps when we could start seeing some stronger commodity prices, which could bode well for these companies too.</p><br/>

<p><strong>South African Mine Strikes</strong></p><br/>

<p>MALAN: The South African mining industry continues to go through a very sad period. When I last spoke about this about a year ago, it was both the platinum industry and the gold industry that were in strike. Fast forward one year and we are in a situation today where the entire South African platinum industry is on strike. That's about 70-80% of world platinum supply. We appear to be in such a dire position that the industry, government, labor unions, and various Chambers of Mines are not even in conversation with each other. The reason for this is that unions are looking for 120-150% salary increases, while companies are only offering about 9-10% in salary increase. Considering that labor cost is around 50-60% of the cost base for platinum, a percentage increase of 120-150% as demanded by the unions is not affordable, and hence the companies are standing firmly for not raising salaries by more than 10%. Today, as we speak, there are no negotiations between unions and governments or companies, there's no production taking place in the South African industry. We are about to run out of all inventory that is stockpiled with Anglo American Platinum, the world's biggest producer. Both Impala and Lonmin, the second and third biggest producers of platinum, have already declared force majeure on their supply bases. We're in an environment with no supply coming out of the ground and demand still appears to be out there, driven by the auto industry.</p><br/>

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