South African investors’ approach to precious metals Are ETFs a substitute for or a hedge against mining equities? Dr Vladimir Nedeljkovic Absa CIB

The LBMA/LPPM Precious Metals Conference 2013 Unrestricted distribution

Synopsis  South African commodity ETFs – two success stories (one significantly so…)  NewGold and NewPlat ETFs – the context: – SA ETF space – Stats – Investors  ETFs vs. ETNs – Regulatory context  Commodity ETFs vs. mining equities  Going forward

2 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

4% 1%

South African ETF space

1%

0%

SA ETF market – market share (% AUM)

5% 26%

8%

 Currently 40 ETFs listed, with approximately ZAR 51.6bn (USD5.1bn) in AUM  Two main ETF providers – Absa and Satrix (81% market share)  Two commodity ETFs – NewGold and NewPlat - 54% of total AUM (USD1.83bn and USD940m, respectively)

55%

Satrix

Absa Capital

db x-trackers

Investec (Zshares)

 Regulatory framework

0%

0%

RMB (BIPS)

Nedbank (BettaBeta)

0%

34%

– Most ETFs structured as collective investment scheme (mutual fund) portfolios

54%

– Exchange controls – limits on “offshore assets” – Prudential limits (on pension funds and collective investment schemes)

Grindrod

SA ETF market – asset classes breakdown (% AUM)

– Only physically backed ETFs allowed – No UCITS III compliant funds allowed

Stanlib

8%

1%

3%

Domestic Equity

International equity

Fixed income

Property

Commodity

Preference shares

Cash

Multi - asset

Source: Absa Capital, ETF issuers, Bloomberg 3 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

SA commodity ETFs Relative gold and platinum ETF holdings – SA vs US

 NewGold ETF – – –

Listed in Nov 2004, third gold ETF in the world (after Australia and UK)

100%

Largest ETF in SA (and Africa) – USD1.83bn; gold holdings 41.9 tonnes

90%

Secondary listings: Botswana, Nigeria, Ghana, Mauritius

70%

 NewPlat ETF

560koz

80%

60% 50%

US SA

–

Listed in April 2013

40%

–

Second largest ETF in SA, largest platinum ETF globally

30%

53%

20%

–

Assets (as of 17 Sep): 640koz, ~20 tonnes, ~USD940m

 Structure

640koz

10% 4%

0% Platinum

–

Debentures issued by NewGold Issuer Limited, a SA public company. Originated by Absa

–

Fully backed by allocated metal, of SA origin, held in custody by Barclays in London. Metal insured and cannot be lent out

–

Fees – 0.4% p.a.

4 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

29.4moz

1.35moz

Gold

Source: Absa, Macquarie Commodities Research, exchangetradedgold.com

Millions

Stats - global platinum ETF holdings (oz) 2.5

2

1.5

1

NewPlat listing

0.5

0 15/09/2008

15/09/2009

15/09/2010

15/09/2011

15/09/2012 Source: Bloomberg

5 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

Stats - NewPlat vs. other platinum ETFs – oz held 700,000 ETFS UK

ETFS US

Absa NewPlat

ZKB

600,000

500,000

400,000

300,000

200,000

100,000

0 Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

Apr-13

Source: Macquarie Commodities Research

6 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

Stats - NewPlat ETF vs. other platinum ETFs – rapidity of assets accumulation 700,000 ETFS UK

ETFS US

Absa NewPlat

ZKB

600,000

500,000

400,000

300,000

200,000

100,000

0

30

60

90

120

Days from launch

Source: Macquarie Commodities Research

7 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

Where is this demand coming from? NewPlat investor analysis  As of 30 Aug – 58,000,000 debentures in issue (NAV ZAR9.063bn)  Total number of debenture holders 2,442  Predominantly institutional – asset managers, pension funds, insurance companies Portion of total number of NewPlat holders (%)

Portion of total holding of NewPlat (%) 100% 25%

90% 80%

19.33%

20%

70% 60%

15%

50%

96.3%

40%

75.0%

10%

30% 48.6%

20% 10%

4.63%

5%

24.0%

0.41%

1.35%

0%

0% > 1m

> 400k

> 100k

> 10k

> 1m

> 400k

> 100k

> 10k

Source: STRATE, Absa Capital

8 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

Some questions  Why are commodity ETFs so popular in SA?  Why ETFs? – ETFs vs. ETNs – ETFs vs. equities

9 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

Data point 1: Commodity ETFs vs. other ETPsregulatory treatment  NewGold and NewPlat ETFs classified as a domestic investment (but have to source SA produced metal). As such, investment in this ETF does not affect the relative foreign exposure limits applicable to institutional investors and authorised dealers.  Other commodity-linked products treated as offshore assets (25% limit)  Pension funds - Regulation 28: 5% allocation to platinum, 10% to gold  FSB Notice 19: CIS (mutual funds) can invest up to 10% in gold and platinum ETFs/ETNs; maximum commodity exposure – 10% . But only physically backed Commodity ETNs: • Treated as foreign assets (offshore limits) • If futures-based, not allowed in CIS portfolios • Issuer risk 10 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

Data point 2: SA platinum equity vs. ZAR platinum 50%

Anglo Platinum Aquarius Eastern platinum Impala Lonmin Northam Group median ZAR Platinum

40%

30%

20%

10%

‐6m ‐8% 25% ‐19% 24% ‐26% 63% 8% 15%

‐1y ‐16% ‐63% ‐68% 0% ‐40% 27% ‐28% 24%

‐3y ‐42% ‐85% ‐79% ‐17% ‐68% ‐21% ‐55% 21%

‐5y ‐55% ‐90% ‐93% ‐29% ‐82% ‐5% ‐68% 1%

0%

-10%

-20%

-30%

2H 2012

1H 2012

2H 2011

1H 2011

2H 2010

1H 2010

2H 2009

1H 2009

2H 2008

1H 2008

2H 2007

1H 2007

2H 2006

1H 2006

-40%

Equity outperformance/(underperformance)

Source: Absa Capital Research

11 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

Why is platinum equity underperforming – on one slide c.50% of platinum is used in autocats, which have a lifespan of 10-15 years. Recycling up 400% from 2000

Platinum loadings declined in 2007 as platinum was substituted in TWC by lower cost palladium

Combination of higher recycling and lower net demand means prices are now “cost-push”

3.5

600

8,000 7,000

3.0

500 400

Demand index ed f rom 1985

300

6,000 5,000

2.5

4,000 2.0

3,000

200 100

1.5

0

1.0

2,000 1,000

Aut o dem and

Recycling

Rampant cost inflation in South Africa has seen production become marginalised… South Africa

Russia

North America

Pt loading (g/ vehicle)

Net platinum industrial demand (koz)

Pd loading (g/ vehicle)

… Resulting in EBITDA margin squeeze and negative cashflows 70%

250%

60%

200%

50%

150%

40%

100%

Source: Company data, Absa Capital

Sector EBITDA margin

12 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

2014E

2012

2013E

2011

2010

2009

2008

2007

2006

2005

0%

2004

10% 12% 14%

2003

8%

2002

6%

2001

4%

-50%

2000

2%

2012

0%

10%

CAGR unit cost inflation (2005-2013)

2010

50%

20%

0%

Investment demand (koz)

Which has seen platinum equities underperform both commodities and lower cost producers

30%

Recycling

2008

0

10 11 12 13 14 15

2006

9

2004

8

2002

7

2000

6

1998

5

1996

4

1994

3

1992

2

1990

1

SA PGM equity basket

PGM Stillwater Umicore Basket Performance since Jan 2009

JMAT

Source: Absa Capital Research – courtesy of Andrew Byrne

Going forward  Other commodity ETFs? (Palladium?)  Further exchange control relaxation and its potential impact?

13 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013

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14 | SA investors approach to precious metals | The LBMA/LPPM Precious Metals Conference 2013