Leucadia National - Annual Meeting – May 13, 2008

IC = Ian Cumming
JS = Joe Steinberg

How do you protect against political risk in Argentina (referring to recent export taxes)?
IC: They’ve had a successful run in Argentina. A long time ago, we privatized the national insurance company, successfully got out before the dip. It’s never ending. It’s not politically correct, but the old joke is that Argentina is a country with wonderful natural resources, the problem is that it is full of Argentines. We don’t have a great answer, just pray. We paid a cheap enough price, think we will do just fine.

JS: There are two outcomes. The export taxes go away over time or it all blows up and the country slides off into the ocean.

Origins of Fortescue investment? How quickly will that ramp up? What do you think about China investing in Fortescue?
The deal came from Jefferies. We noodled on it, waited for awhile, then came back to look at it seriously. We worked on it for awhile. We have an old miner who works for us, guy used to run Kennecott Copper, we went over there and walked the site and took iron ore samples and it tested like they said it would. Andrew Forrest is a difficult guy, hyperactive, visionary, great at what we does. We laughed at our calculations when we did them, but we’re now at those numbers.

The ramp up will happen more quickly than we know. They get things done expeditiously over there.

We get the information on what China is going to do from the same place you do. We have no idea what they are going to do. Joe is on the Board and I am the alternate. We are going over to Shanghai in a bit to meet the iron ore poo-bahs over there.
Fortescue has been a very successful investment; a career maker.

(Question that I did not catch on whether Leucadia took additional shares in a rights offering of a company. Answer was yes).

Jefferies Investment:
IC: We have known them for a great long time and have partnered very successfully.
We entered because the stock was bedridden and moribund, below book value.

JS: No, it was at book value.

IC: At book value. They were not harmed by the tumult of the past year. They were hurt in Q1 by the markets going all haywire, but they didn’t make any really foolish investments. They have been cooperative with us as directors. We are trying to change how things are done over there. I am more optimistic about this than Joe.

You have made money in the past with Jefferies as a partner in deals, but do you want to own the company, given their practice of paying lots of the revenue out to employees?
IC: Both of us HATE dilution. HATE.

On real estate, last year you made the comment that you were “not yet seeing blood in the water”. Please comment on real estate.
JS: There has been a huge unwinding of leverage in single-family homes. We haven’t seen good opportunities yet. Most homebuilders have written down land to levels far from what they paid. All markdowns of this land are likely to continue. We don’t see how they can make money building homes on the land at these prices. We are looking.
Myrtle Beach – that is doing well, healthy project.
Panama City – we bought the old airport. The money is in escrow and won’t be paid for 3 years. We are planning a large development.
Real estate is strictly opportunistic for us. We don’t consider it a core line of business.
Homefed – it’s just cash and completed lots, and a program on the road to entitlement.

Americredit investment?
IC: It is an interesting company. Americredit is a leading provider of subprime auto loans. This country is one-story. You may not realize it in New York, but that is how it is. People need cars to go about their lives. Americredit was writing $7-8b per year, has shrunk that down a great deal. You can’t run the country without cars.
They have superb platform. We know about the business because we used to run a $700m subprime auto book of our own before the big banks came in and drove down pricing and we liquidated. We are working hard to get them forward. They just got an egregious loan from an international bank with an incredible rate. We are very comfortable with the investment even though a recession is coming.

JS: And it was cheap.

Succession plan?
IC: Both of us have been working on this. We have both signed up for 10 years, until we are 75, at which point we’ll sign up for another 10 years. We are working hard to develop strategies and people who we think can take over. We are trying to find people who think the same way we do about investing and risk. We have avoided all kinds of foolishness in the past 31 years, going back to the pre-Milken days.

JS: We may have a lump.

IC: Yes, a lump. We could buy a business that is producing $500m a year in profit, and then we are just doing the investing on the side.

JS: We could liquidate, not the first choice. (Cumming points finger as gun to head and pulls trigger).

IC: Oh right, we can’t liquidate, because of the tax loss.

Where do you look for good investments relating to fallout from subprime?
IC: From Wall Street to the top of Manhattan.

Pershing Square LP investment?
IC: Saw the opportunity, it hasn’t paid off. It is Bill’s black box. He is extremely smart, but impulsive sometimes.

Do you invest in it blindly?
IC: No, we don’t do anything blindly. We have made a lot of money with Bill over time.

Goober Drilling?
IC: I am an advocate of peaking oil. Oil products will go up over time and natural gas will follow. They are disjointed, but not completely. (Gave some numbers on supply/demand of rigs in U.S. over time). It’s amazing, now you can drill 10,000 feet down with a big pipe and then go a mile sideways. Read the CHK annual report if you want to get a sense of our view on natural gas. Aubrey Mcclendon is a wild man in his own right. With Goober, we bought 26 rigs that were paid off within confines of the 3 year fixed-price contracts we had. Of course, with these kinds of things everyone goes around happy as hell and then, boom, it falls off a cliff. We hope to avoid falling off the cliff.

Why the split between oil and natural gas price?
IC: Baffles me.

Medical investments
IC: Investing is like a bell curve. These investments are at one end. Friviolous things. With Sangart, the story is that 3 people have tried this and ended up killing people, and we haven’t killed anyone yet. Maybe we will make lots of money. The eye investment thing is small.

JS: It is a cute investment.

LNG plant?
IC: Most local stuff accomplished. We are 1 year from the FERC certification process. Then we will revisit. It scares me. If it really is peak oil, it should scare the hell out of everyone. If I was the head of a country with natural gas, I might decide to keep it for domestic industry instead of shipping it off to the U.S.
If it gets licensed and ready to go, it will have a high current market value and we might do a valet maneuver and get off stage.

JS: The only spending we have been doing is on forms. It is just an option. Things change a lot over 10 year periods. In 1995, when we bought the Cruces copper mine in Spain, it was just a long-term option on copper prices. Having options on things that could become valuable down the road is very good. We have lots of those imbedded in Leucadia right now.

Accounting for Fortescue royalty deal? Are you comfortable with the concentration risk?
IC: We have it on our books for $200m. They have it on theirs for $1.6b. The difference is due to accounting. How much is the royalty interest worth? Do the arithmetic. 100m tons of iron ore at 4% royalty at $100/ton. We have half our net worth in Australia. We continue to watch the value go up. They hit a “project completion” milestone after they have taken out 2m tons over a 4 week period.

JS: The way it works for us in terms of this showing up on our balance sheet is that it will turn into net income and go through that way. Eventually, we will get paid back the $100m it cost us.

Cresud (Argentine farming investing)?
We watch it carefully. Even if they mess with the taxes, nothing bad happens to the land.

FX risk in Argentina? How handle?
IC: We are not going to do anything.

JS: I think the Argentine peso is likely to appreciate vs. the USD.

Casino in Biloxi?
IC: It was rebuilt and opened and didn’t do as well as we had hoped. We changed management and things have been doing better.

Gasification plants?
IC: There are three plants in various stages. We are producing 40bcf of synthetic natural gas. They are in Mississippi & Louisiana. Basically, we are trying to create a riskless bond. Match 20 year contracts with long-term financing with the help of the state. We will eventually put in a big slug of equity and we will make rich returns on that.

Corn investment? Brazil sugar investment?
A year ago we were besieged with proposals to invest in corn ethanol. We look at it and thought the energy balance went the wrong way. It was stupid. We don’t just go down to Brazil and hang out a sugar investing shingle. That’s not how we invest.

Plans to produce synthetic natural gas at Lake Charles?
LUK energy guy: Natural gas is at $11.50 and would have to fall below $5 for the project to be uneconomical. We make the big profits on the sale of hydrogen and sulfuric acid. Everyone in the Gulf is switching to heavy sour crude and the pricing of petroleum coke is coming down, from $60 now to eventually $30, which helps us.

Dearth of opportunities?
IC: The competition hasn’t really gone away. Prices are heading down in the right direction, but people aren’t jumping out of windows yet.

JS: There is still a huge amount of hedge fund money. After the subprime and leveraged loans crises, you would have thought there would be better opportunities. It’s not like 1981, when we had no money. Interest rates are so low. There are lots of hedge funds. It’s horrible.

Deal to buy refinery from Valero?
IC: It’s over. Done.

STi prepaid cards business?
IC: Going well.

What do you think about iron ore and commodity prices being in a long-term bubble?
IC: We have noe idea.

Investments in LP interests of hedge funds?
IC: It was a mistake, not worth the time or trouble.

When will you pay dividends?
IC: We wait until the end of the year, see if we are still standing, then sit down with the board and decide. That’s how we have always done it.

What are EPS looking like for rest of the year?
IC: We struggle to create wealth. We don’t pay any attention to reported income results. There is a trend in accounting where you have to mark to market your investments or do a lot of complicated stuff that we don’t want to do, so we mark it to market. Things will be reported as more volatile as a result. Financial statements these days are almost meaningless. It is impossible to figure them out outside of those who practice.

How do you value Leucadia?
JS: Look at the investments, mark them to market, then the difference is the value you think Ian and I will add over time.

Do you think there will be opportunities in the Jefferies partnership that invests in high-yield debt?
IC: Oh yes.

Do you know of any smaller companies that are similar in how they are run to Leucadia?
IC: No. If you see them, shoot them. There is a paucity of deals, and we don’t need people looking in the same briar patch. That is not something I have spent much time thinking about.

Do you prefer to invest 100% in companies vs. taking equity positions?
IC: Yes. These were tactical investments where we thought stuff was very, very cheap. Unfortunately, due to Leucadia groupies who follow what we buy, they don’t usually stay cheap after we start buying.

Leucadia National – Annual Meeting – May 15, 2007

IC = Ian Cumming
JS = Joe Steinberg

Opening:
IC: Not much to say, everything we wanted to say about the year we put in the annual report.
http://www.leucadia.com/TOC%20C&P%20Letters.htm
One thing to note, Fortescue (Australian iron-ore mining investment) book cost is now $711 million, a $500 million gain (I think he may have meant to say “market value is now $711 million). Inmet (mining company) book cost of $78 million now has a market value of $360 million, a $280 million gain.

Former head of Kennecott Copper (guy was sitting in crowd – Kennecott is an enormous mine right outside of Salt Lake City, where IC and JS are based) is our advisor. He has been helping us with the business of scraping the ground.

This is a record turnout. I wish I knew why – it makes me a little nervous (laughter).

Prospects for Sangart? (medical product development company that Leucadia has invested $85 million in)
JS – I know a guy named Bob Winslow, a scientist, worked for the U.S. Army. He is the most renowned blood expert in the U.S., one of the top scientists. I ran into him 5 or 6 years ago in San Diego when I was selling our condo units. He told me about this artificial blood he was developing. We declined to invest. We met the next year and decided to invest. The product is now in a Phase 3 test in Europe. Ian went to medical school, he should talk about it.

IC – The Phase 3 test had 900 patients who took 1 to 2 units in hip surgery and other orthopedic surgeries. During Phase 1 and 2, there were no adverse effects. We are hoping to slog along and eventually have a product. It’s actually a fortunate outcome of the tech bubble bursting – we were able to get a factory in San Diego with almost all the equipment we needed for 250k units of production for very cheaply. We don’t know the retail price, it will depend on what they finally put on the label – it will likely be anywhere from $200 - $500/unit. It could be a substantial business based out of that little factory.

JS – Like all venture capital, in for a dime, in for a dollar. The original investment was $5 million, and we are now up to $85 million. We own 85%. Maybe it will be a big zero, it’s high risk. I’m in love with it and drinking the Kool-Aid, or “taking the blood”. Winslow is a gifted scientist and a wonderful person.

IC – It is still two years away form commercial production. We will move along to do a Phase 3 trial in the U.S.

Fortescue – seemed like a dicey investment. Any indication of production and amount of royalties? (The Fortescue investment was for 26.4 million common shares, 9.9% of shares outstanding, and a 13 year, $100m note, where interest is 4% of revenue from iron ore production, net of government royalties).

JS: I am leaving tonight for Australia for a meeting on Monday and Tuesday. Building on the railroads and port is coming along, almost on schedule and on budget. There were 3 cyclones that cost $100 million AUD in repairs and caused a 1 month delay. Iron ore demand continues. India just put on a $7/ton export tax. Most of the iron ore in China is inland near the old steel mills. The new mills are on the coast and ready to take in seaboard iron ore. The current investment is planned to produce 45 million tons/year, which should be $1 billion revenue. We are studying an expansion to 120 million tons/year, which would cost $2 billion. We have expected the price of iron ore to level off, but we have been wrong so far. The conventional wisdom is that prices will rise when they are set in a few months. We have a good strategic relationship with Chinese steel mills, we hope to have a long-term relationship with them and to develop similar relationship in Taiwan and Korea. This is a development company with no revenue yet. Things could go wrong.

IC: The worry is that iron ore prices revert to the mean.

Jefferies High-Yield bond fund – area is frothy and spreads are tight. Expectations? (Leucadia has a JV with Jefferies where they invest in and broker high-yield bond spreads. They have historically earned 20% annually on the deal and just reupped the deal at a $600 million investment).

IC: The record of high-yield spread is up and down like a ping pong ball over time. Look at the paper and prices you see for assets. If you don’t predict that something will unwind in the next few years, you are crazy. The cycles are caused by human nature, you see the herd run back and forth like a bunch of lemmings. Jeffries is a great business. They issue the credit, watch them all blow up, run in and rescue them, and then issue new great. It’s a great business!

JS: If we held our breath waiting for the correction, we’d be dead. Jeffries is a liquidity business. It’s a pretty good business. We hope to make a decent return while waiting for a correction. We could lose money holding inventory when spreads widen 200 bps some day, but that will be a big opportunity for us.

Telco acquisition – STi (prepaid calling cards business). IDT has struggled in this business. What intrigues you? (I am not sure this is accurate – IDT’s prepaid calling segment has done very well – it has lost money on other side ventures).
IC: The spreads. It’s a very profitable business. There is a great irony in the lawsuit in this area, the pot calling the kettle black. Look at the plaintiff’s record.

JS: We have a high regard for the guy who runs it. We structured the deal in a way to protect Leucadia.

IC: We are very sensitive to accusations that will explode that customers in this business have been overcharged. We took great pains to go in and clean that up.

Sangart – why double down on investment?
IC: To simplify, in phase 3, we injected units into a few hundred skinny Swedes and they all survived. That’s not true of other companies who have tested similar products in the past. The way the science works is that the molecule that attaches to hemoglobin is very big. It causes more oxygen to get delivered to the capillaries than the normal molecule. We don’t know why. That is potentially very exciting and good for soldiers who are injured in the field. Getting doctors to change patterns is very hard. If it turns out that you can freeze-dry this stuff and reconstitute it with saline solution, the armies of the world will be all over it. This is high-risk stuff. There might be side effects that could turn up only after long periods of time, like Vioxx.

Update on gasification business? (Leucadia has expensed $15 million over the past few years looking at developing a gasification business to produce clean energy?)
IC: The technology is out there. We are looking for finance opportunities for the gasification process.

Can you comment on the carrying value on investments vs. the market value?

IC: No. Do the digging yourself.

Costs of mining copper?
JS: This was a tactical investment, not a strategic investment. We invest because there are specific opportunities. We bought this mine 9 years ago and expect to start production in March, 2008. Cost is 0.40 Euro cents/pound.

IC: This is a bet on copper prices, period. Prices were at $0.60/pound when we invested and are at $3.60/pound now. This is a lesson you should all pay attention to closely; it is better to be lucky than smart.

China?
IC: Here is my take on it. Along came CNN, people around the world got television sets and everyone saw the U.S. and wanted some of it. The U.S. is financing the growth of China. They are building a vast infrastructure. It is hard to fathom unless you have been there. There is an arc of development from Korea to the ‘Stans. I was just in Vietnam. It is seething with development. They are the most capitalist Communists you can imagine. There is a major shift of wealth from the U.S. to Asia because the labor rates are so low. It is nothing magical. Vietnam with their latest “5 year plan” is planning on building a fast railway the length of the country, 900 miles or so, along with a 4 lane highway. This will cost a fortune.

JS: The way economists oversimplify it is by saying that the U.S. consumes 25% of everything and China is on its way to equal that. There is a change in the supply/demand curve. Also, there are long waves of growth in commodity prices if you look back several hundred years. They go up for long periods of time. We may be in the midst of that right now (this sounds very similar to Jim Rogers’ argument.) Of course, long trends from 200 years ago may not repeat. History has a way of doing that. I think we are in a long-term boom now due to the growth from China, India, Vietnam, and Korea.

IC: Ladies and gentlemen, you have just seen something I have not seen in 30 years, Joe is optimistic.

JS: No, I am not optimistic for us, I am optimistic for the Chinese.

10 years ago you were sitting up there with a Pepsi can on the lectern talking about how excited you were about Russia? (Laughs from board)
IC: That can of Pepsi cost us $60 million (argument between JS and IC over whether it cost $40million or $60 million).

JS: These investments are scary! We could lose all our money!

IC: The only thing dictators do well is make the trains run on time, because if they don’t, the engineers will kill them! Vietnam is still Communist. They call each other comrade.

Asset price bubble?
IC: (Referring to securitizations – he was talking about process of slicing and dicing securities) We don’t know how this works over a long period of time.

JS: We go to auctions all the time, we just hired a few new guys to do this. It is very frustrating. When we do win and are the most optimistic people in the room, it is because it is a cyclical business that can’t be leveraged or a screwy business with some quirk. It is difficult and discouraging.

IC: We have been in hundreds of meeting around the country where we tell someone what we are willing to pay and they look back blankly and say, “Private equity can pay more.” and we say, “Adieu.”

What do you two disagree on?
IC: Everything.

(Long question on Russia and Putin pursuing a “Dr. Evil” strategy.)
IC: You are more sophisticated than we are. No, we haven’t thought about that.

Japan?
IC: That question is floating towards a more strategic bent, although I guess our mining operations are kind of like that. Nothing in Japan is yummy.

JS: We invested in copper because we thought copper at $0.60/pound was cheap. That was basically the cash cost to get it out of the ground and we had the chance to buy a lush 6.6% rich copper vein. A year ago, I went to Japan with Bud Scruggs and we were looking for stuff. I think that to work in Japan, you need to open an office and hire native Japanese who speak English. It is a long-term strategic commitment. Maybe it makes sense, but we aren’t going to do it. When we don’t control companies, we want to trust the people who are running them, and there is a vast difference between how we look at companies and how many of the Japanese do.

Coal gasification project?
IC: This is a massive project. It would take $1.5 billion. We have several projects on the way, although something adverse could happen. We have a $130 million tax credit for a project with Eastman Chemical in Longview, Texas.


Why do you split the stock, unlike Buffett?
IC: I don’t know, it felt good. We usually split it when it gets to around $60/share. We are acquaintances with Warren, but we disagree about a lot of stuff, including the length of annual meetings. Of course, he is way smarter than us and has a lot more money, so maybe you should side with him.

Opportunities in subprime?
JS: We have looked a lot. It is interesting, the losses are spread so widely, no one person is taking a lot of heat. The brokers were in the business of generating paper for Wall Street. There is nothing to buy. As soon as things calm down, the guys who started New Century will come back and start over. Every Tom, Dick, and Harry hedge fund is looking to buy paper when it is 5 points down.

Are you generally seeing a lot of opportunities?
IC: Yes, we are seeing a lot of interesting things. They tend to be more entrepreneurial and less buying companies. We’re busy.

JS: Ian is correct. Instead of buying something cheap, we have to go in and do something.

IC: The opportunities in telco and Goober (said with heavy Texas accent) Drilling – we had to go in and restructure the back office, bring Sarbox to the poor people of the West.

Net Operating Losses?
CFO: There are two buckets. $500 million of losses can offset any income. $4.6 billion can offset income from certain areas of the company, areas where conveniently we have almost all of our assets. (A few members of the board snickered.).

Is size yet an impediment to returns? Is there a limit to the size of deal you would do? Are you looking for elephants?
IC: We are looking for small elephants. We are looking for value. If we saw it somewhere, we would finance anything. We have got friends in the world who have a lot more money than us who would help us.

Housing bubble?
IC: We pay cash when we buy real estate. If things go bad, we shut it off and pull the plug. Southern California has slowed down, and I think it should have slowed down more. It think there will be a crisis when the price of homes falls and people are underwater on their mortgages. This is a mysterious place that we live in. It has a remarkable capacity to absorb everything from ridiculous presidents to ridiculous financial stuff.

JS: If you buy a beautiful piece of real estate with cash, you will tend to do well. The properties we have in Maine are very high end, and the hedge fund types buying those have not seen any slowdown. I am very surprised that in the lower-end stuff, builders are still willing to buy lots of land for 10% less than they were paying last year. There doesn’t seem to be any sign of blood in the water.

Jeffries high-yield bond relationship?
IC: We go out to dinner with Richie all the time and scream at each other and air out our differences. There is another guy there, Andrew Whittaker, who is great. We have a very long and good relationship with them.

Vineyards? (Big laugh from one of the board members)
IC: Our former controller, after getting $5 million in Leucadia equity, immediately quit and went out and bought a vineyard. He is doing very well. We hope to replicate Archery Summit up in Washington state. It is very valuable. It’s amazing, Duckworth (another vineyard) is for sale for $300 million, and they are earning $5 million. Asset price in Napa Valley are the Easthampton of the San Francisco set. They are tired of getting really pretty women and now they are buying vineyards. Archery Summit is on allocation also, which is good, and we are upping the basis (didn’t understand this fully, but I think the way it is structured the tax basis of the investment is rising over time).

IC: In closing, we are both optimistic about the future.