The m etals and m ining industry under structural changes - - PowerPoint PPT Presentation

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The m etals and m ining industry under structural changes

Singapore March 2 4 , 2 0 0 9 Singapore March 2 4 , 2 0 0 9

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“This presentation may include declarations about Vale's expectations regarding future events or results. All declarations based upon future expectations, rather than historical facts, are subject to various risks and

• uncertainties. Vale cannot guarantee that such declarations will prove to be
• correct. These risks and uncertainties include factors related to the following:

(a) the countries where Vale operates, mainly Brazil and Canada; (b) the global economy; (c) capital markets; (d) the mining and metals businesses and their dependence upon global industrial production, which is cyclical by nature; and (e) the high degree of global competition in the markets in which Vale

• perates. To obtain further information on factors that may give rise to results

different from those forecast by Vale, please consult the reports filed with the Brazilian Comissão de Valores Mobiliários (CVM), the French Autorité des Marchés Financiers (AMF), and with the U.S. Securities and Exchange Commission (SEC), including Vale’s most recent Annual Report on Form 20F and its reports on Form 6K.”

Disclaimer

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A dynamic mining landscape

The metals and mining industry has experienced

significant structural changes over the last ten years.

Economic growth has led to deep changes in the

demand as well as in the supply side.

Financial globalization has stimulated supply growth and

changes in the industrial organization of mining.

The global financial crisis is expected to generate

important implications for the metals and mining industry.

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Econom ic grow th and a changing environm ent

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2 . 4 % 1 . 8 % 4 . 9 % 3 . 3 % 4 . 1 % 1870-1913 1914-1950 1950-1973 1974-2001 2002-2008

Sources: Angus Maddison, “The world Economy: Historical Statistcs”, IMF and Vale

Over the last few years, the world economy has experienced one of its highest growth periods

Global GDP grow th

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35% 45% 66% 55%

1986-2005 2005-2007

One of the main characteristics of this recent period was the rising importance of emerging market economies, particularly Asian EM, as a source of growth

Contribution to global GDP growth

Sources: IMF and Vale

Emerging Asia EM economies

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Contribution to global consum ption grow th 2000-2008

Sources: Vale, WBMS and World Steel Association

Asian markets have been the drivers of global consumption growth of minerals and metals

Sources: Vale and Tex Report

5% 95% China Rest of the world

Contribution to grow th in iron ore seaborne trade 2000-2008

24.4% 17.9%

• 14.7%

0.4% 75.6% 82.1% 114.7% 99.6% 62.8% 65.9% 91.7% 108.5%

Steel Aluminum Copper Nickel RoW Asia China

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10 20 30 40 50 60 70 10,000 20,000 30,000 40,000 50,000

GDP per capita³ Consumption intensity¹

China was key in the dynamics of demand increase, given the resource-intensiveness of its growth process, similar to the US economy in the past

200 400 600 800 1,000 1,200 10,000 20,000 30,000 40,000 50,000

GDP per capita³ Consumption intensity²

Copper consumption intensity - 2007

US 2 0 0 7 US 1 9 1 3 4

10 20 30 40 50 60 70 10,000 20,000 30,000 40,000 50,000

GDP per capita³ Consumption intensity²

Nickel consumption intensity - 2007

500 1,000 1,500 2,000 10,000 20,000 30,000 40,000 50,000

GDP per capita³ Consumption intensity²

Aluminum consumption intensity - 2007 Steel consumption intensity - 2006

US China US 2 0 0 7 China US 1 9 5 0 4 US 2 0 0 7 China US 1 9 7 3 4 ¹ Consumption in metric tons per USD million; ² Consumption in metric tons per USD billion; ³ in PPP; 4 peak level Sources: Vale, WBMS, IISI, IMF, USGS and Angus Maddison “Contours of the World Economy”, Oxford University Press, USA, 2007 China

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The disequilibrium stemming from fast demand growth and slow supply response produced substantial price pressures

Given the long lead times between discovery and

production start-up, the supply response was not sufficient to cope with the rapid demand increase.

In addition, geological and institutional limitations

contributed to a slower supply increase.

Prices of minerals, metals and freight experienced high

upward volatility and reached peak levels

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20 40 60 80 100 120 140 160 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 US$ cents/ fe-dm t 100 200 300 400 500 600 700 800 900 Mt I ron ore price Seaborne

I ron ore prices and seaborne m arket

Source: Vale

Iron ore prices

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500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000

1 9 7 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 2 2 2 4 2 6 2 8

LMEX index¹

¹ LME base metals prices index, includes: copper, aluminum, nickel, zinc, tin and lead Sources: Vale and Reuters Ecowin

37 16 20 50 28 15 26 38 58 15 50 18 13 78 144% 154% 323%

Base metal prices

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Baltic Dry index¹

¹ Monthly average prices Sources: Vale and The Baltic Exchange

Freight prices for dry bulk cargo

2,000 4,000 6,000 8,000 10,000 12,000 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 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 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9

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Iron ore: high-cost, low-quality and high-waste Nickel: nickel pig iron => high-cost, low-quality, high

energy consumption and negative environmental impact

Alumina: increasing dependency on imported bauxite

The Chinese response to rising prices was not efficient

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Chinese iron im ports million metric tons CAGR 1999-2008= 23.7%

¹ Share of Chinese domestic consumption of iron ore met by imported iron ore Sources: Vale and Bloomberg

Despite Chinese efforts to boost domestic iron

• re output, dependency on imports rose to 58%

in 2008 from 28% in 1998¹

5 10 15 20 25 30 35 40 45 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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Shares of global output

Notwithstanding the low endowment of natural resources, huge investments made Asia responsible for a major share of metals production

24.1% 56.4% 12.0% 44.3% 15.3% 42.6% 25.9% 25.3% 5.2% 37.6% 2.2% 33.3% 2.9% 20.4% 4.3% 14.0%

1980 2008 1980 2008 1980 2008 1980 2008

Asia China

Crude Steel Prim ary Alum inum Refined Copper Refined Nickel

Sources: IISI, WBMS and Vale

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As a consequence of structural changes, China has become a global leader in consumption and production of metals

Source: Vale, World Steel Association and CRU

Global Global consumption Rank production Rank Crude steel 33.0 #1 37.6 #1 Refined nickel 26.0 #1 14.0 #2 Refined copper 29.0 #1 20.4 #1 Primary aluminum 34.0 #1 33.3 #1 Chinese share 2008 in %

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1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 t t + 6 t + 12 t + 18 t + 24 t + 30 t + 36 t + 42 I ndex ¹ , base= t China Singapore Taiwan South Korea Japan I ndia

Source: IMF and Vale ¹ logarithmic scale, t = year when growth started to accelerate

1978-2007 1975-2007 1965-2007 1970-2007 1952-2007

Asian growth has been strong and has shown a similar pattern among the various countries

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US Japan Germ any China Mexico Em erging Asia Brazil 4 8 12 16 20 24 2 4 6 8 10 12

GDP grow th 1 9 8 0-20 0 7 Share of w orld GDP 2 0 07

Sources: Vale and IMF

Share of w orld GDP and GDP grow th

Emerging Asia is the fastest growing region in the world. It remains fundamentally sound and is expected to resume high growth in the future

19 Given their metal intensiveness, infrastructure spending, urbanization

and industrialization are the main underlying forces of demand growth for minerals and metals.

The UN estimates that EM population in urban areas will increase by

1.2 billion over the next twenty years.¹

The urbanization move will require significant investment in

infrastructure in EM economies.

In addition, EM economies are expected to increase in infrastructure

spending to pursue productivity gains and to fight poverty.

Per capita income growth in EM will continue to generate demand

growth for consumer durables, another driver of the expansion of metals consumption.

The global recession is not expected to cause a disruption of long-term fundamentals of mineral and metals

¹ Source: UN Department of Economics and Social Affairs

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Urbanization is expected to remain a major source of demand growth for natural

• resources. China’s current urbanization rate is

equal to Brazil’s in the late 50’s

0% 10% 20% 30% 40% 50% 60% 70% 1977 1983 1989 1995 2001 2007

Chinese urban population % of total population

....

Sources: Vale, CEIC and UN 1 8 % 6 0 % 7 3 % 4 6 %

....

2030E 2050E

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The urbanization trend: China and India have a rising share in global urban population, 36% of the estimated increase between 2005 and 2025

China 17% Other 73% India 10%

Source: UN Population Division

China 18% Other 70% India 12%

2 0 0 5 w orld urban population 3 .1 6 billion 2 0 2 5 w orld urban population 4 .5 8 billion

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Finance and m ining

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Financial conditions supported the supply expansion

• f minerals and metals

At the same time, they facilitated efficiency gains and

better risk management at the high-end and greater competition at the low-end of the mining industry.

Liquid global financial markets have contributed to reshape the mining industry

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Mid-sized monoline companies across the globe were the

main targets of M&A transactions.

Several mid-sized mining companies have been acquired

• ver the last 10 years by large mining companies:

Brazil - Caemi, Samitri, Ferteco; Canada - Inco, Falconbridge, Noranda, Alcan,

Canico;

US - Phelps Dodge, Asarco, Cyprus, Stillwater,

Reynolds Metals;

Europe - Alusuisse, Pechiney, OMX; Australia - North, Comalco, MIM, WMC, Jubilee.

Consolidation took place

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3 4 . 7 % 7 2 . 6 % 6 6 . 3 % Dec 31, 1997 Dec 31, 2007 Dec 31, 2008

A small group of large diversified mining companies has become the dominant force

Share of diversified companies in mining industry market capitalization

Sources: Vale and Bloomberg

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A strong demand for IPOs fueled the creation and

expansion of small mining companies.

Junior mining companies led the recent boom in

global mineral exploration.

New entrants with new projects.

At the low-end, we have seen the emergence of new competitors

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The panic of 1907 led to the creation of the Federal

Reserve Bank.

Reaction to the Great Depression resulted in the creation

• f the FDIC and SEC and the enactment of the Glass-

Steagall act.

Corporate governance problems of 2000-01 gave rise to

the Sarbanes-Oxley law.

Changes in the regulatory framework, new institutions

with new roles and lower risk tolerance are expected to take place on a worldwide base.

Reforms followed major US financial crises with implications well beyond the financial services industry

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Major financial crises also tend to be followed by major increases in public debt, crowding out private savings

Alongside a substantial increase in global financial assets and cross

border investments there was a declining trend in public debt.

Public debt share in global financial assets decreased to 15.6% in

2006 from 19.0% in 1996, leaving more room for private sector investments¹.

The downward trend is expected to be reverted. Historical evidence

shows that after a major financial crisis there is a significant rise in government debt².

On other hand, the big wealth losses make the expected supply of

funds much smaller than in the recent past.

¹ Source of data: McKinsey Global Institute ² please see “The aftermath of financial crisis”, K. Rogoff and C. Reinhart, NBER Working Paper, January 2009

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Sovereign wealth funds: a new player in global finance

The profile of SWFs has risen since 2007, as the financial crisis

highlighted the growing role of capital investment by foreign governments amidst scarcer liquidity.

Their assets under management have been increasing at a fast pace

in recent years to reach an estimated US$ 3.9 trillion in 2008¹

They are still small relatively to the size of more traditional

institutional investors estimated to manage US$ 70 trillion at the end

• f 2008².

However, SWFs a potential source of funding to the mining industry. ¹ IFSL Research, sovereign wealth funds 2008 ² Pension, mutual and insurance funds.

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Metals and mining is still unexploited by the SWFs

Source: Deutsche Bank, Dealogic.

SW F investm ents

Middle East 34.0% Asia 65.1% Nort h America 0.7% Ot her 0.2% Real est at e 9% Finance 62% Ot her 11% Energy 7% Services 6% Technology 5%

Source Destination

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Mineral exploration and project development in Africa Acquisition of small mining companies in Australia Strategic alliances and co-investment with state-owned

• il companies in Africa and Asia

Acquisition of a significant stake in a major mining

company and stakes in some of its core assets

China is starting to use its SWFs to fund

• verseas investment in natural resources

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Japanese trading companies acquired stakes in mining

assets across the globe.

Japanese official financial institutions provided funding for

project development.

Apparently, the Chinese are willing to replicate the

Japanese experience to guarantee a steady supply of raw materials.

In the past, in a less liquid world, Japan played the dual role of being the demand driver and the financier of mining

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Many mining projects have already been cancelled or

postponed.

Higher risk aversion and higher public debt – increasingly

crowding out private savings – will make the supply of capital more scarce.

Cost of capital is expected to be higher and access to

capital more limited.

Expansion of small and financially weak companies

severely constrained by financial conditions. Despite the expected growing role of foreign governments, a structural change is underway: financial conditions shift from a supportive to a restrictive role

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2.5 2.9 3.5 4.6 5.2 3.7 2.8 2.6 2.2 1.9 2.4 3.8 5.1 7.5 10.0 13.2

1 993 1 994 1 995 1 996 1 997 1 998 1 999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Global exploration investment likely to suffer a major decrease

US$ billion

Source: Metal Economics Group

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A US$200 billion shortfall in mining investment is estimated to take place

• ver the next five years

US$ billion

10 20 30 40 50 60 70 80 90 100 110 1992 1994 1996 1998 2000 2002 2004 2006 2008E 2010E 2012E 2014E

Planned Estimated

Source: Credit Suisse

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Vale: grow th and value creation

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Capex

in US$ billion

1 . 4 1 1 . 2 . 1 5 . 2 . 6

2004 2005 2006 2007 2008

Acquisitions Maintenance, R&D and project development

Average ROI C¹ 2 0 0 3 -0 8 4 9 .2 %

¹ pre-tax

Vale invested US$ 49.1 billion between 2004 and 2008

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Adjusted EBI TDA

CAGR= 50.3% in US$ billion

Net earnings

CAGR= 50.6%

2.573 4.841 7.260 11.825 13.218¹ 2004 2005 2006 2007 2008 3.722 6.540 11.451 15.774 19.018 2004 2005 2006 2007 2008

¹ After a non-cash exceptional charge of US$ 950 million resulting from impairment of goodwill

Investment and discipline in capital allocation spearheaded excellence in financial performance

39 R I O T I N T O A N G L O A L C O A A L C A N V A L E A L U S U I S S E F R E E P O R T M C M O R A N B H P B I L L I T O N D E B E E R S

10 20 30

Fast growth and significant shareholder value creation consolidated our position as the world’s second largest mining company

December 31, 1997

BHPB RI O TI NTO GOLDCORP ANGLO FREEPORT SOUTHERN COPPER NMDC BARRI CK NEWMONT VALE

30 60 90 1 20 1 50

March 18, 2009 US$ 7 0 .5 billion

Market capitalization

US$ 7 .4 billion

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Financial strength: large cash holdings, availability of

medium and long-term credit lines, strong balance sheet, long average debt maturity.

World-class, low-cost, long-lived assets. An excellent track record of delivery: 29 major projects

concluded over the last six years.

A wealth of growth options: current pipeline under

development comprises 23 major projects.

134 mineral exploration projects across the globe to

support long-term growth.

Vale is uniquely positioned to create shareholder value across the cycles

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www.vale.com

rio@vale.com

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