1. 1
David Thurtell
Metals Research
Binnacle Capital Group
+203 742 1455
dthurtell@binncap.com
ETFs: Helping or Hurting?
ETFs’ impact on the availability of
long-term capital for mining companies
August 2012

2. 2
Overview
 Investors have increased their allocations to pure commodity plays over the past
decade.
 The form of investment has varied: some has been short term (read
‘speculative’) while some has been longer term.
 ETFs have enjoyed a significant share of this fund inflow. However, precious
metals and energy have dominated these inflows. Base metal ETF holdings tiny.
 (Gold) ETF investors appear to be much stronger ‘longs’ than futures investors,
and hence seem closer to equity investors on the investor spectrum.
 It appears that ETFs have acted to deprive gold miners of a modest amount of
investor funds.
 Miners have no choice but to take the good (the beneficial impact on commodity
prices of investors’ money and a more stable shareholder base) with the bad (a
slightly lower availability of long term capital).

3. 3
Investors Have Pushed In To The Pure Commodity Space
Investors have entered the pure commodity space in the past decade. Index
investment (such as the GSCI and DJUBS Indices) and ETFs have enjoyed the
bulk of the allocation. Most of the new investment has been in gold, oil, PGMs
and copper. Investors have been attracted by:
 Increased accessability (ETFs and Commodity Indices) and potentially
higher returns (with interest rates at multi-decade lows);
 the ‘China’ factor,
 portfolio-diversification considerations.
INVESTMENT FUND FLOWS
Source: Bloomberg, CFTC, ETF Securities, Citi Investment Research and Analysis
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US$bn InvestmentIndex Non-commercialFutures MetalETFs

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Investors Have Helped Raise Metal Prices
 The ‘China’ factor, rising costs and rising investor participation have boosted the
price-stocks trade off. LME financing (using cheap bank funding) and
warehouse plays have also raised prices across the base metal complex.
 Miners’ profitability has benefited from higher prices, induced partly by
increased investor participation. These higher profits have been used to
finance new investment, reducing the call on investors for new funds.

5. 5
Gold ETFs Have Helped Push The Gold Price Higher
 Along with USD weakness, de-hedging,
petro-dollar recycling, emerging market
demand and a reversal in central bank
behaviour, gold ETFs have made a major
contribution to the rise in the gold price that
has occurred since 2000.

6. 6
ETF Holders Are Much Stronger Longs
 (Gold) ETF investors appear to be longer term investors – commodity futures
‘investment’ is much more speculative and hence much less stable.
 In this sense, they more closely resemble mining equity investors.

7. 7
Have ETFs ‘Stolen’ Equity Investors?
 Deflating the market cap of gold miners for the move in the gold price – using the
existing price as an imperfect proxy for the long term price – shows that, since
2007, the total market capitalization of gold miners has declined in trend terms.
 But the variation in market cap is much larger than can be accounted for by ETFs.
So ETFs have deprived miners of long-term capital, but one suspects the direct
ETF impact has been small, and indirect benefits have been a significant offset.

8. 8
Conclusions
 ETFs have enjoyed a significant inflow of money into the pure commodity space,
though it has been mainly in energy and precious metals, rather than base
metals.
 (Gold) ETF investors appear to be much stronger longs than futures investors,
and hence seem closer to equity investors.
 It appears that ETFs have acted to deprive gold miners of a modest amount of
investor funds.
 Miners have to take the good (the impact on prices of increased investor funds
and a more stable investor base) with the bad (slightly lower availability of long
term capital).
 Mining companies need to improve their marketing story and not fret too much
about ETFs. Miners need to remind investors that ETFs are a very passive
investment: they can’t make fresh mineral discoveries nor use their expertise and
balance sheet to takeover cheap, good prospects.