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  1. 1. CPM Group COMMODITY PRICE RISK MANAGEMENT CPM Group 30 Broad Street 37th Floor New York, NY 10004 Phone: 212-785-8320 Fax: 212-785-8325 E-mail:
  2. 2. TABLE OF CONTENTS Executive Summary 3 Key Team Members 4 About Price Risk Management 5 Risk Management Advisory Services 6 Structuring and Execution 8 Selected Strategies 10 Value Added 11 Increased Assurance on Hedges at Inception 12 Maximizing Benefits and Flexibility for Clients 13 Selected Experience 14 Case Study: Fortuna Silver 16 CPM Group – Research Driven Financial Services 18 CPM Group
  3. 3. EXECUTIVE SUMMARY CPM Group brings clients independent, expert advice and market intelligence based on experience in the commodities markets extending back to 1986. As a non-dealer market participant, CPM Group aligns its interests with those of clients. CPM’s advisory role is to seek to secure for clients the most effective and reasonable transactions to mitigate their commodity price risk exposure. Volatile commodity prices require detailed scenario planning to implement risk management programs. CPM structures unique methods to reduce exposure to commodity price fluctuations, typically with the risk involved minimized and pre-determined at the outset of the hedge. CPM Group’s risk management advisory services serve a variety of commodity producers, processors, and consumers in many markets. Risk management services provided by CPM Group are delivered without limiting or tying client companies to a specific financial institution, an important distinction between CPM Group and other market participants. CPM Group’s commodity price risk management team works closely with our investment banking and corporate advisory team, which possesses extensive experience negotiating credit facilities, trading lines, and banking relationships. 3 CPM Group
  4. 4. KEY TEAM MEMBERS Commodity Price Risk Management Investment Banking and Corporate Advisory Mark Hansen, Director Douglas Sherrod, Managing Director Experience in structuring and execution of complex Investment banking and structured finance background. commodity derivative transactions across multiple commodity Originated and executed financing transactions and advisory markets for investors, consumers and producers. mandates for clients in the commodities and natural resources Expertise covers exchange traded commodity markets, OTC sectors over the past 20+ years. transactions and execution, counterparty relationship Transactional expertise spans equity & debt capital markets, management and client risk management. loan markets, risk management and corporate financial Trading, market operations, and research background working advisory. on the buy-side in commodity markets as well as supporting Among his recent assignments at CPM, Doug is advising on hedgers in their transactions. project financing for a greenfield molybdenum project in North Recently completed a major hedging program for a mining America and is advising several precious metal producers on company using compound OTC options and analyzed off hedging. exchange metals markets for hedging by a major metals consumer. Jeffrey Christian, Managing Director Alec Kushnir, Director One of the foremost authorities on the markets for gold, silver, Investment banking and project finance background. and the platinum group metals, Mr. Christian also is considered 10+ years transaction experience across the spectrum of energy one of the premier experts on commodities’ derivatives. and natural resources debt and equity capital markets Written extensively about the precious metals markets, financings, project finance, and mergers and acquisitions. commodities, and world financial and economic conditions Currently advising a Canadian junior mining company on its since the late 1970’s and has been involved in much of the bid to acquire gold assets in Peru and has arranged acquisition pioneering work applying economic analysis and econometric and development financing for coal companies in the US. studies to the platinum group metals markets. Founded CPM Group in 1986. CPM Group
  5. 5. ABOUT PRICE RISK MANAGEMENT WHY USE PRICE RISK MANAGEMENT? Commodity prices recently scaled new peaks and are extremely volatile. Uncertainty over supplies and global competition necessitates early planning. Proper hedging provides more stability and financial certainty, yielding positive results for credit relationships and shareholders. Properly constructed hedges need not burden a company with contingent liabilities or restrict participation in favorable price movements. CPM Group specializes in creating compound options strategies, which greatly reduce and can even eliminate the credit liabilities of a hedge. There are strategies that minimize credit risk and allow participants to take advantage of favorable price movements after a transaction is initiated if the original hedge is structured properly to provide this flexibility. WHY DOESN’T EVERY COMPANY OR GROUP WITH EXPOSURE TO A COMMODITY DO THIS? Various factors have led to some derivative and hedging problems in the last fifteen years; most were the result of improper management or poor advice. Price risk management tools are sophisticated financial products that require a comprehensive understanding to be utilized to their optimal benefit. Independent advice is a necessity because of the inherent conflicts of interest many commodity traders and banks face when proposing hedging strategies to clients. 5 CPM Group
  6. 6. RISK MANAGEMENT ADVISORY SERVICES CPM Group works with producers, consumers, institutional investors, governments, and international organizations to manage commodity price risks. Our independence affords clients an unbiased assessment of hedging structures and terms. HEDGING ADVISOR OR MANAGER Analyze a company’s commodity price exposures. Structure and execute strategies to manage price risks. Use hedging to optimize financial leverage. Provide price protection while preserving exposure to higher prices for producers, or lower prices for consumers. Analyze and modify existing hedge books. MATERIALS MANAGEMENT CONSULTANT Solve complex problems related to commodity price risks. Evaluate proposals presented by counterparties. Act as agent to maintain anonymity and obtain optimal price discovery. ONGOING PROCESS Offer advice on an on-going basis. Train and educate company professionals on mechanics of hedging. Provide market research as well as on-going access to consult with analysts. 6 CPM Group
  7. 7. RISK MANAGEMENT ADVISORY SERVICES (CONT.) Precious Metals: Monthly Historical Price Volatilities WHY HIRE A HEDGING ADVISOR? Gold Platinum Silver 90% 90% 80% 80% Provides the opportunity to analyze and 70% 60% 70% 60% review multiple hedging structures with an 50% 50% 40% 40% independent advisory group that is not 30% 30% 20% 20% seeking to take the other side of the 10% 10% 0% 0% transaction. J-00 S-00 M-01 J-02 S-02 M-03 J-04 S-04 M-05 J-06 S-06 M-07 J-08 S-08 Base Metals: Monthly Historical Price Volatilities Enhances corporate resources by providing Aluminum Copper Zinc 70% 70% expertise that would be too expensive to have 60% 60% in-house. Creates “outsourced hedging and 50% 50% 40% trading department” allowing senior 40% 30% 30% management to focus on core responsibilities. 20% 20% 10% 10% 0% 0% -10% Creates the opportunity for additional J-00 S-00 M-01 J-02 S-02 M-03 J-04 S-04 M-05 J-06 S-06 M-07 J-08 S-08 counterparty introductions, while having a Energy: Monthly Historical Price Volatilities guide through the process of establishing Crude Oil Natural Gas 120% 120% trading lines. 100% 100% 80% 80% Creates an orderly auction process to aide in 60% 60% price discovery and obtain better pricing. 40% 40% 20% 20% 0% 0% Establishes an ongoing advisory partnership J-00 S-00 M-01 J-02 S-02 M-03 J-04 S-04 M-05 J-06 S-06 M-07 J-08 S-08 to assist in management of long-term Commodity prices rise and fall substantially in short periods of time. financial planning and price risk Volatility has increased markedly since 2000 for most commodities. management. 7 CPM Group
  8. 8. STRUCTURING AND EXECUTION HOW DOES THE PROCESS WORK? Every client has different needs. Developing proper commodity risk management programs consists of analyzing strategy, counterparty evaluation, impact on finances, proper price discovery, execution and implementation, and ongoing management. CPM Group is able to evaluate, structure, and execute strategies for clients: Spot sales Forwards Futures Simple Options Compound Options including participatory strategies Swaps Deferred Contracts Commodity Loans Back to back agreements between producers and consumers Direct options between producers and consumers CPM Group can either present suitable strategies to clients for their review and manage the entire process, or can evaluate the suitability of hedges proposed by dealers and trading firms. 8 CPM Group
  9. 9. STRUCTURING AND EXECUTION (CONT.) WHAT MAKES A HEDGE SUITABLE? Does it achieve client goals? Are the financial implications suitable for a client? Does the timing of the transaction match the client’s business needs? CPM Group seeks to minimize financial liability for its clients and to present the most shareholder friendly strategies to achieve the end goal. CPM has extensive experience in dealing with commodity dealer markets and the listed exchanges. Geography is not an issue – CPM works with counterparties in New York, London, Sydney, and Mumbai – to name a few. CPM views hedging as an ongoing process and remains engaged with clients for the long- term. 9 CPM Group
  10. 10. SELECTED STRATEGIES TRADITIONAL REVENUE STREAMS CAN BE MADE MORE DYNAMIC: Typical Revenue Profile Participatory Options 30 35 Spot Sales Spot Sales 25 30 Forwards Participatory Options 20 25 Revenue Revenue 20 15 15 10 10 5 5 0 0 0 3 6 9 12 15 18 21 24 27 30 0 3 6 9 12 15 18 21 24 27 30 Prices Prices A revenue stream can be turned into a more CPM Group structures alternative strategies dynamic and effective revenue profile than such as participatory options which present traditionally available, most importantly effective solutions that protect end users or while simultaneously reducing credit producers from negative revenue or cost exposure. exposures and credit risks while still allowing for participation in favorable price movements. 10 CPM Group
  11. 11. VALUE ADDED WHAT SPECIFIC VALUE WILL CPM GROUP BRING TO AN ORGANIZATION? CPM Group adds value through its knowledge of the financial markets, which allows for the development of optimal risk management structures for clients. CPM Group can work with client management at each step to present the most favorable risk management options and assist in executing an optimal strategy. CPM Group provides: Complete independence in financial product selection. Experience with a range of clients from junior mining companies to multi-nationals. Intelligence on new derivative products and experience in evaluating proposals. Unbiased, impartial advice on structuring risk management tools. Unique ideas, structures, and price discovery on risk management of commodity prices. Assured client confidentiality and anonymity in the marketplace. 11 CPM Group
  12. 12. INCREASED ASSURANCE ON HEDGES AT INCEPTION PRE-DETERMINED, MINIMIZED RISKS COMPARATIVE ANALYSES Gold Producer Hedges: Participatory Options, Forwards, and Collars CPM Group’s preferred strategies for price hedging 24 November 2008 for December 2009 Sales Price provides consumers and producers with: 1200 1100 • Pre-determined maximum risks for the corporation 1000 that are determined and known before the initiation 900 Forward $829.90 800 of the hedge. Collar $800-$870 700 • Exposure to beneficial price developments. Participatory Options strategies allow producers 600 Option $700 to benefit from rising prices and • Protection against adverse price developments. 500 reduce their financial risks • Minimized contingent liabilities compared to open- 400 Spot Sales compared to hedging with forwards and collars. ended liabilities with forwards and collars. 300 300 400 500 600 700 800 900 1000 1100 1200 Market Price Comparative analysis Comparative Analysis of Hedge Strategies: Gold Producer 24 November 2008 for December 2009 Spot, December 2008 Gold Price: $819.50 • CPM Group typically will consider, study, and price December 2009 Gold Price: $829.90 alternative hedge strategies, providing its clients Price/ Profitability Profitability Profitability with a clear, concise comparative analysis of the Spot Comparable Comparable Participatory Comparable Sale Forward To Spot Collar To Spot Option To Spot revenue streams and/or cost profiles, and the risks inherent in several strategies, allowing clients to $300.00 $829.90 $529.90 $802.40 $502.40 $698.90 $398.90 understand the rewards and risks of alternate $400.00 $829.90 $429.90 $802.40 $402.40 $698.90 $298.90 $500.00 $829.90 $329.90 $802.40 $302.40 $698.90 $198.90 instruments and approaches to hedging before the $600.00 $829.90 $229.90 $802.40 $202.40 $698.90 $98.90 clients choose which hedge to use. $700.00 $829.90 $129.90 $802.40 $102.40 $698.90 -$1.10 $800.00 $829.90 $29.90 $802.40 $2.40 $698.90 -$101.10 • CPM Group typically provides clients with charts $900.00 $829.90 -$70.10 $872.40 -$27.60 $798.90 -$101.10 and tables that illustrate the revenue or cost $1,000.00 $829.90 -$170.10 $872.40 -$127.60 $898.90 -$101.10 consequences of comparable hedges under different $1,100.00 $829.90 -$170.10 $872.40 -$227.60 $998.90 -$101.10 price scenarios. 12 CPM Group
  13. 13. MAXIMIZING BENEFITS AND FLEXIBILITY FOR CLIENTS TAILORING HEDGES TO CLIENTS’ NEEDS COMPARATIVE ANALYSES Gold Producer Hedges: Participatory Options 24 November 2008 for December 2009 By having CPM Group on their team, assisting in Sales Price structuring , pricing, and executing hedges, clients can 1200 control the process to maximize their benefits and 1100 minimize their risks. 1000 900 Participatory Option $640 800 • Clients can choose the levels of risk and protection 700 Participatory Option $700 they want, or that they need. 600 Participatory • Some producers may choose lower floor prices and 500 Option $600 Producers can choose the level of protection they desire. preserve more of their exposure to higher prices, 400 Spot Sales while others may seek or require higher floor prices, 300 and be willing to give up more of the upside in 300 400 500 600 700 800 900 1000 1100 1200 Market Price exchange for the higher floor. • CPM Group helps clients structure hedges tailored to their financial needs and desires, without bias toward particular strategies, trading counterparts, or means of execution. 13 CPM Group
  14. 14. SELECTED EXPERIENCE WHAT SPECIFIC EXPERIENCE DOES CPM GROUP BRING TO CLIENTS? CPM Group has a wide range of experience in price risk management: Evaluation of effective strategies to control energy input costs for a major auto maker. Arranged pre-paid forward sales programs for leading precious metals recyclers. Structuring, presentation, and execution of a precious metals supply and management program for a major consumer of silver. Development, execution, and training of a hedge program sponsored by the International Cocoa Organization and the UN Common Fund for Commodities in the Ivory Coast using participatory options strategies to minimize credit risks and maintain favorable price exposure. Creation of metals leasing and recycling programs to significantly reduce the cost of production for a producer of a specialty technology product requiring a precious metal input. Conducted training seminars on options strategies for junior traders of major commodity trading banks. Authored comprehensive analysis of hedging for a major Japanese auto manufacturer. 14 CPM Group
  15. 15. SELECTED EXPERIENCE (CONT.) CPM GROUP EXPERIENCE • Provided hedging advisory services and developed strategies for small, medium, and large mining companies, including Anglogold Ashanti, Barrick, Newmont, Homestake, Gold Fields, Gencor, Rio Tinto, Freeport McMoRan, Phelps Dodge, Grupo Mexico, Luismin, Doe Run, Kennecott, BHP Billiton. • Created gold rolling forward sales programs for Freeport McMoran and Homestake Mining, a non-hedged program of capturing enhanced returns on gold mine production sales. • Developed for the U.S. Mint and Treasury procurement programs and hedging programs on silver, platinum, and base metals, implemented and managed the programs, and provided training on management of these programs. • Provided hedging advisory services and strategies to large and small silver using companies, including photographic manufacturers, electronics manufacturers, and others. • Developed and helped implement and manage metals leasing programs for major users of gold, silver, platinum, and rhodium. • Served as International Advisor on Commodities Price Risk Management for the World Bank and its International Task Force on Commodities Risk Management. Co-authored the initial paper for the World Bank on how developing countries agricultural producers and processors could hedge their price risk using established market instruments, intermediaries, and relationships. 15 CPM Group
  16. 16. CASE STUDY: FORTUNA SILVER HEDGING OF BASE METAL PRODUCTION: FORTUNA SILVER Fortuna Silver Mines Inc., a silver producer, engaged CPM Group to arrange a comprehensive price risk management program for its lead and zinc production. Fortuna wanted to hedge a portion of its base metal production, but was unsure of which hedge structure would achieve the highest sales price, while limiting its liability in the transaction, or which trading house would serve as the best counterparty. CPM Group assessed Fortuna’s needs and structured a compound OTC option program that provided Fortuna with a very competitive sales price for its metal, while still giving the company upside participation to market prices with limited liability. Once Fortuna was comfortable with the proposed structure, CPM Group took the company through the process of setting up trading lines with suitable counterparties and guided the company through the price discovery and execution process. 16 CPM Group
  17. 17. CASE STUDY: FORTUNA SILVER (CONT.) Forward Curve & Implied Hedge Floor Prices Hedging of Base Metal Production $ / MT Lead Forward Curve and Implied Hedge, 22 June 2007 3000 Forward Implied Forward prices Prices 2500 CPM Group’s Involvement 2000 Structured a limited risk, competitive hedge strategy 1500 for Fortuna that secured bi-product cash flows. Obtainable Minimum Floor Prices Using Participatory Options 1000 0 3 6 9 12 15 18 21 24 27 30 33 36 Managed the counterparty introduction, assessment, (Months) and credit approval process. $ / MT Zinc Forward Curve and Implied Hedge, 22 June 2007 Arranged price discovery and execution of the trades 4000 to place the hedge. Forward Prices 3500 Implied Forward Achieved attractive price floors for lead and zinc, Prices 3000 while maintaining upside exposure for Fortuna shareholders. 2500 2000 Outcome Obtainable Minimum Floor Prices Using Participatory Options 1500 1 2 3 4 5 6 7 8 9 10 11 12 13 Hedges successfully insured the company from a (Months) significant decline in base metals prices in 2008. 17 CPM Group
  18. 18. CPM GROUP - RESEARCH DRIVEN FINANCIAL SERVICES Producers Development Stage Consumers Companies Investment Consulting Banking Refiners Producers Smelters Refiners • Corporate financial •Short to long term advisory advisory services Financial Institutions • Risk management •Independent market consulting services Institutional • Debt and equity Investors fund raising services • Open consulting access to analysts on Hedge Funds Commodities exchange traded Research commodities and Private Clients specialty metals. Governments • Weekly Report International • Monthly Advisories Organizations • Annual Precious Metals Yearbooks Producers Institutional Commodities Asset Investors •Annual Precious Consumers Management Metals Long-Term Management Studies Hedge Funds Institutional Investors Private Clients • Principal advisor •Special Studies •CPM Fund and hedging manager International •Client Specific •Managed Accounts Organizations Research • Advisor to help management teams •Non-Exchange Governments choose or execute Traded Metals their actions Management •A strategic advisor, managing hedging on an ongoing basis 18 CPM Group