Q. T. Rowe Price is one of the

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1 PRICE PERSPECTIVE August 2016 In-depth analysis and insights to inform your decision-making. Natural Resources TAPPING GLOBAL RESEARCH TO EXPLOIT OPPORTUNITIES AMID COMMODITY DOWNTURN EXECUTIVE SUMMARY T. Rowe Price has been investing in natural resource equities for almost a half century. The firm overall now manages about USD $50 billion in energy and other natural resource stocks globally. It has developed the experience and resources to anticipate changing trends and take advantage of opportunities even during challenging environments. Shawn Driscoll Portfolio Manager, New Era Fund In this Price Perspective, Shawn Driscoll, portfolio manager of the T. Rowe Price New Era Fund, explains why he believes the commodity downcycle may have another decade or more to run, notwithstanding this year s rally in energy prices and stocks. He also discusses how the firm s extensive experience and disciplined approach to investing in natural resource stocks is helping uncover attractive opportunities amid the challenging period and offers insight as to how this sector has historically provided investors with a hedge against inflation and important portfolio diversification benefits. Q. T. Rowe Price is one of the oldest and largest investors in a wide array of natural resource sectors, including energy, metals and mining, agriculture, chemicals, and forest products companies. What have you learned over that time in terms of how you approach resource investing? As a team, we have invested through several commodity cycles and understand how different commodities perform depending on industry and macro trends. It helps to understand what has happened in prior cycles and why it s different this time or not different. We have the commitment and resources to do extensive research. We spend a lot of time, for example, testing our assumptions about what the prices of commodities should be and how the cost curve might change. We also have that continuity of research over almost five decades. Our analysts today have directly benefited from the experience and insights of those who managed the strategy before us and from those who continue to support the strategy. They also benefit from the firm s expansive global research platform as the industries we invest in are global in scope. For example, our credit analysts provide valuable insights on energy and metals and mining companies in particular. We encourage independent thinking and analysis. The result is a robust and disciplined process, resulting in better answers and higher conviction. We are committed to our bottomup stock selection process and our approach to buying and holding a diverse selection of fundamentally sound natural resource companies with solid balance sheets and talented management. We maintain a welldiversified portfolio across natural resource industries in an effort to achieve a more consistent return profile with lower volatility.

2 ...while inflation is expected to remain low for now, investing in natural resources has historically provided an effective hedge against inflation and deflation for that matter so it s an insurance policy in that sense. Q. In a low-inflation, sluggish global growth environment, why should investors consider a natural resources strategy for part of their portfolio? First, there are always opportunities to invest in quality companies benefiting from broader commodity trends even in a depressed era for commodities. Also, while inflation is expected to remain low for now, investing in natural resources has historically provided an effective hedge against inflation and deflation for that matter so it s an insurance policy in that sense. Also, natural resource equity performance historically has run somewhat counter to overall equity performance, so the sector can be a hedge against secular weak performance in overall global equities, providing portfolio diversification. Commodities also have had a negative correlation with the dollar, providing currency diversification as well. When the dollar is rising, commodities tend to really struggle, but when it s falling, commodities can do extraordinarily well. And even when natural resources lag the overall market, you can still get attractive performance. We don t expect the energy sector, for example, to outperform broader equity markets for a sustained period, but there are times, like we have seen recently, where energy prices and stocks surge due to any number of catalysts. For instance, even in the challenging 1986 to 1999 period, there were four commodity price rallies ranging from 50% to 100%. So it makes sense to keep some allocation to resources for their diversification benefits. Q. The U.S. dollar price per barrel for oil hit about USD $108 per barrel in mid-2014 and fell as low as USD $26 per barrel in mid-february this year before suddenly rebounding. The global price (Brent crude) declined from USD $115 to USD $26 during that time before also recovering. At the end of July, oil prices retreated to below USD $42 per barrel. Given your expectation for further productivity gains and lower costs of production, what is your outlook for oil prices now? The surge in U.S. oil production and productivity due to shale drilling and the response of Saudi Arabia and other major OPEC countries to that surge wanting to maintain global market share are the primary reasons for the calamity in global oil prices. A surge in oil exports by Iran was expected with the lifting of nuclear sanctions. While demand has been strong, we ve been in a global oversupply market for some time, driven by the resilience of U.S. shale production even amid lower prices. U.S. exploration and drilling activities have slowed considerably along with steep cutbacks in capital expenditures this year, but oil prices remain above operating costs for many U.S. shale producers, giving them an economic incentive to maintain production. The rebound in oil prices this year from February to June was partly due to financial speculation by some investors, as well as supply disruptions, such as militant attacks in Nigeria, wildfires in Canada, and unrest in Venezuela. Also, we saw the dollar weakening, rising demand from India and China, and a generally more positive view of the global economy since early in the year. For the time being, U.S. oil production is fading and the rig count has fallen sharply, generating a less worse phenomenon in the oil markets. By midyear, the market was pricing over USD $60/bbl oil into oil stocks, above the long-term oil futures curve and north of where we think long-term oil prices will settle. We think West Texas Intermediate (WTI) prices will ultimately average in the USD $45/bbl to USD $50/bbl range over the next decade, while near-term fundamentals imply a more appropriate price below that given high inventories and oversupply. We don t expect the energy sector, for example, to outperform broader equity markets for a sustained period, but there are times, like we have seen recently, where energy prices and stocks surge due to any number of catalysts. 2

3 FIGURE 1: A STEEP DECLINE IN OIL PRICES As of July 2016 Price Per Barrel (USD) $ Jan 2014 Mar 2014 May 2014 Jul 2014 Sep 2014 Nov 2014 Jan 2015 This USD $45 to USD $50 per barrel range ultimately depends on the degree to which technological innovation in shale continues to compress drilling breakeven costs. But when you look at a chart of real oil prices over the past century, prices above USD $40 per barrel (in 2014 dollars) are considered unusual. While nominal prices below USD $40 per barrel are probably unsustainable for many producers, the all-in breakeven costs of the lowest-cost producers are in the USD $50 per barrel range and falling, so the supply destruction needed for a sustained oil price recovery will not be U.S. WTI Spot Price (Dollars per Barrel) Europe Brent Spot Price U.S. (Dollars per Barrel) Mar 2015 May 2015 Jul 2015 Sep 2015 Nov 2015 Jan 2016 Mar 2016 May 2016 Note: West Texas Intermediate (WTI) reflects the U.S. price for oil, and Brent crude reflects the global oil price. Both have declined sharply in recent years. Source: Strategas Research Partners. FIGURE 2: THE REAL PRICE OF OIL OVER THE LAST 150 YEARS As of July 2016 Real Price of Crude Oil (2014 US$/bbl) $ Oil Production 2 Million Barrels 1862 U.S. Civil War Begins 1861 Texas Oil Boom Begins 1893 World War I Ends 1918 Oil Production 330 Million Barrels 1910 World War II Ends 1945 Iran/Iraq War 1980 Emerging Markets 25% of Global Oil Demand 1965 Sources: BP Statistical Review, Ned Davis Research, and T. Rowe Price. Emerging Markets 50% of Global Oil Demand 2014 Oil Production 28.4 Billion Barrels 2000 Asian Contagion 1998 Jul 2016 July easily achieved. In the last oil crash in the mid-1980s, prices fell more than 50% in just two years and remained relatively low for much of the 1990s before surging over the next 10 to 15 years due to scarce supply and fading productivity. We believe that the current scenario for oil/commodity prices resembles the 20-year bear cycle in the 1980s/1990s. Again, this is due in large part to the emergence of short-cycle, low-risk, non- OPEC production of North American shale. And we re only recovering less than 10% of the oil in place. We have a long way to go. As energy prices go up, it will surprise the market how quickly the U.S. industry can mobilize and bring rigs back into production and knock prices down given low and falling breakeven costs. The cost curve is also collapsing on a global scale with many new deepwater, offshore projects becoming economical even at lower prices, such as the Johan Sverdrup oil field just off Norway, which is expected to start producing in And by the way, I think we re going to see the same sort of shale discovery in the Middle East and Russia eventually. It s inevitable that there s a shale phenomenon in these conventional oilproducing countries as well. Q. In the 1980s oil bust, profit margins in the oil service industry fell below zero and almost a third of publicly traded oil service and exploration and production companies went out of business. We haven t seen failures of that magnitude in this cycle. Do you expect to see more? We have spent a lot of time looking at that commodity bear cycle in the 1980s and, frankly, equity performance since 2011 across the commodity complex has actually been worse than in the 80s and 90s. It s not just a supply/demand problem. It s a debt buildup problem resulting from ultra-loose monetary policy of central banks globally and the pervasive belief that USD $100 per barrel oil was here to stay. So we expect to see a greater percentage of failures in this cycle than in the 80s. There s just too much leverage on the balance sheets of not just energy companies, but across the commodity space. However, there is a lot of capital, particularly from private-equity firms, waiting on the sidelines ready to rescue some of these companies expecting a turnaround. That could keep them operating longer than they otherwise would and longer than I d like, really. Past performance cannot guarantee future results. 3

4 However, it s also constructive to look at what worked in the last commodity bear market. We expect the 1980s and 1990s may be a road map for returns over the next decade. Specialty chemical companies and some low-cost, underlevered exploration and production (E&P) companies outperformed the broader market. Q. Energy and other commodity stocks have significantly underperformed in recent years as commodity prices have collapsed. The Goldman Sachs Commodity Index declined by 50% for the five-year period ended December 31, 2015, compared with a gain of almost 63% for the S&P 500 Index and 38% for the MSCI All Country World Index. But the energy and materials sectors led the global markets in the first half of this year. Do you remain pessimistic about the outlook for commodity prices? Yes, longer term. We believe the commodity supercycle that started in 2000 ended in 2011 and that we are still in the initial years of a secular downcycle in commodities. Commodity cycles historically run about 15 to 20 years, and the shortest downcycle was the 13-year period in the 1920s leading into the Great Depression. Within those periods, you can have short-term trading rallies due to cyclical dislocations. But that doesn t change the longer-term fundamental outlook. A lot of capital and technological innovation have been brought to bear in energy production, for example, so the gains in productivity keep deflating the cost curve for oil production. We don t see that ending soon. Oil fundamentals and market prices are suffering a fate similar to that experienced in the 1980s. In the late 1970s and 1980s, the oil supply picture changed with increased production from new offshore sources. In the 1980s, oil prices fell from USD $40 per barrel to USD $10 per barrel in only six years, and they...there are always opportunities to invest in quality companies benefiting from broader commodity trends even in a depressed era for commodities....and even when natural resources lag the overall market, you can still get attractive performance. FIGURE 3: COMMODITY SUPERCYCLE ENDED IN 2011 CAUSING SEVERE UNDERPERFORMANCE FOR NATURAL RESOURCES Total Return Indexed to 100 as of December 31, 1999 As of June S&P Total Return Commodities ACWI Total Return Note: Chart reflects performance of S&P 500 Index, the MSCI All Country World Index (ACWI), and the S&P Goldman Sachs Commodity Index since MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Source: Strategas Research Partners. FIGURE 4: ENERGY SECTOR LEADING GLOBAL EQUITY PERFORMANCE IN 2016 MSCI All Country World Index Sector Performance December 31, 2015, to July 31, 2016 Materials Energy Utilities Telecom SVC Consumer Staples Industrials Information Tech. ACWI Health Care Consumer Discr. Financials % Source: Strategas Research Partners. Past performance cannot guarantee future results. 4

5 FIGURE 5: T. ROWE PRICE NEW ERA FUND: SECTOR SNAPSHOT As of June 30, 2016 Exploration and Production Integrateds Chemicals Energy Services and Processors Utilities Energy Industrials Metals and Mining Other Agriculture % Sources: IBES, MSCI, and T. Rowe Price. FIGURE 6: NEW ERA FUND Top 10 Holdings as of June 30, 2016 Total Exxon Mobil Corporation Royal Dutch Shell Occidental Petroleum Cimarex Energy RPM Concho Resources Vulcan Materials Baker Hughes did not stage a sustained recovery until the 2000s. During those two decades, the cost to find, drill, and produce wells declined by more than half. Fast forward to 2006 when the Shale Era of horizontal drilling and hydraulic fracturing really got underway. Since then, productivity (measured by gross barrels produced per rig) has improved at an exceptional rate about 38% annually in the major U.S. shale regions, according to the Energy Information Administration. New shale formations, such as those in North Dakota, Texas, and New Mexico, now account for a significant amount of incremental global supply annually. In fact, the United States now rivals Saudi Arabia and Russia as a leader in total global oil/liquids production. While OPEC accounts for about 40% of total global oil production, the U.S. has provided over 50% of incremental global oil supply since 2008, based on research by BP Statistical Review and T. Rowe Price. We saw similar shale development in U.S. natural gas before that. Although we ve seen some cutback in U.S. oil production recently, we expect that it will continue to surprise investors and that the oil cost curve will continue to deflate. U.S. shale exploration and drilling costs are already down more than 30% from their peak, based on T. Rowe Price research. So we may be in a chronic oversupply condition for years. On top of that, the Brexit vote could result in slower economic growth at least in Europe which could result in a generally stronger dollar and reduced demand, neither of which is good on the margin for cyclical supply/demand for oil or any commodity. Even if that outcome is avoided, it would not change our intermediate- to longer-term expectations for oil and the energy sector. Q. So looking ahead, where do you find opportunities when navigating through a secular commodity bear market? There are still attractive opportunities as we expect to see a wide dispersion in returns among industries and companies. While we have been underweight commodity producers and those that benefit from higher commodity prices, there are some areas of natural resources that benefit from lower energy/commodity costs such as specialty chemicals. In the 1980s and 1990s there were 15 specialty chemical stocks that rose over 1,000%, based on data compiled by FactSet and T. Rowe Price. These companies sell products directly to the U.S. and European consumer, so they should see expanding margins and returns. We own specialty chemicals pervasively throughout the T. Rowe Price platform, and it is one of the most significant overweights in our natural Air Products & Chemicals resource portfolios. Some paper and forest products and construction material companies have also benefited from lower oil prices. We also find opportunities among E&P companies that have strong balance sheets, low costs, and productive assets and are on the bleeding edge of the productivity revolution, such as some of the North American shale producers especially those operating in the Permian Basin in Texas. This includes some of our top 10 holdings, such as Concho and Cimarex both long-term holdings. We are optimistic about Total, our largest holding, which has new management and has adopted a strategy for cutting costs and improved allocation of capital. RPM is also a large position that is particularly well-managed and has a unique acquisition strategy. It also has the distinction of having raised its dividend for more than 40 consecutive years. We have also been overweight utilities stocks, which benefit from low natural gas prices, and we do not see inflation as a mediumterm threat given the high debt loads of Western economies. 5

6 T. Rowe Price focuses on delivering investment management excellence that investors can rely on now and over the long term. To learn more, please visit troweprice.com. Important Information Call to request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are those of the authors as of August 2016 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates. Because of the cyclical nature of nature resources companies, their stock prices and rates of earnings growth may follow an irregular path. Factors such as natural disasters, declining currencies, market illiquidity, or political instability in commodity-rich nations could also have a negative impact. As of June 30, 2016, Concho, Cimarex, Total and RPM accounted for 11.2% of the total net assets of the T. Rowe Price New Era Fund. This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision. Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Past performance cannot guarantee future results. All investments involve risk. All charts and tables are shown for illustrative purposes only. T. Rowe Price Investment Services, Inc., Distributor. C1EK8N8DZ 8/ US-25411