New York copper dropped the most in three weeks on Wednesday, following a number of consecutive record closings and after gaining some 10% since the beginning of December. The potential downgrade of Spain’s credit rating, which rekindled concern that Europe’s sovereign debt problems will become more severe, hindering global economic growth and copper demand, was the key development driving the correction. Europe’s renewed woes have reduced financial market risk appetite, driving investors into the liquid U.S. dollar and away from equities and commodities. Nonetheless, copper fundamentals remain very supportive for 2011 and BMO Research continues to have a bullish price outlook. The copper market is expected to generate a deficit of 387kt next year, as demand growth of +6.2% outpaces the projected supply increase of +4.2%. BMO Research’s current deficit projection is nearly double the June deficit forecast, when copper traded below US$3.00/lb. China’s economic growth engine and constrains on the supply side remain the driving force behind copper’s success, as was apparent after the release of several benchmark economic and commodity import numbers last week. Fundamentals Supportive of Copper Price The planned launch of physically backed copper ETFs ought to further increase demand for the metal, as investors gain an additional venue to increase physical exposure. The amount of available metal in the market indicates the risk is to the upside and that copper could reach new record price levels some time in 2011—US$5.00/lb is a real possibility in BMO Research’s view. LME inventories fell 32% since April through last Friday, when a newly launched physically backed copper ETF began trading in London. Copper currently held in LME warehouses would be sufficient to meet just seven days of global demand. Days of available supply could fall even further, as the newly introduced ETF locks metal off the xchange and in investors’ accounts. The last time LME days of available supply collapsed (2005), copper rallied 175% from a low US$1.40/lb to over US$3.85/lb in a very rapid succession. The introduction of physical copper ETFs along with the reports speculating that a single entity controls as much as 90% of LME warehouse stocks via exchange warrants indicates the amount of copper available to the market could fall sharply should investors rapidly purchase the ETF or if the single entity controlling 90% of inventory takes a physical delivery, which at today’s price would cost about US$2.9 billion. Whilst it is unlikely a single holder managed to singlehandedly garner dominant control of the LME copper market; it is likely, however, that a single entity built a large position on behalf of many accounts. Either way a squeeze is possible. It is possible that a strong inflow of speculative news into the copper market in recent days is indicative of the price no longer reacting to the fundamental news flow, but to sentiment. As such, it is quite possible for copper to experience a period of increased market volatility. However, BMO Research believes a correction in the market would most likely be short lived as the price remains underpinned by very strong fundamentals. IMPORTANT DISCLOSURES Analyst’s Certification I, Bart Melek, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.

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