3Q16 Outlook: Singin' in the...

Deutsche Bank Markets Research

Europe

United Kingdom

Metals & Mining

Industry

European-Listed Miners

Date

6 July 2016

Recommendation Change

3Q16 Outlook: Singin' in the rain

The Miners are beating the market's Brexit Blues

________________________________________________________________________________________________________________

Deutsche Bank AG/London

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.

Anna Mulholland, CFA

Research Analyst

(+44) 20 754-18172

[email protected]

Franck Nganou

Research Associate

(+44) 20 754-18161

[email protected]

Paul Young

Research Analyst

(+61) 2 8258-2587

[email protected]

Rene Kleyweg

Research Analyst

(+44) 20 754-18178

[email protected]

Key Changes

Company Target Price Rating

ACAA.L 470.00 to 500.00(GBP)

-

ANTO.L 470.00 to 585.00(GBP)

-

BLT.L 880.00 to 1,250.00(GBP)

-

BOL.ST 165.00 to 174.00(SEK)

-

FRES.L 970.00 to 1,020.00(GBP)

-

FXPO.L 105.00 to 115.00(GBP)

-

KAZ.L 170.00 to 163.00(GBP)

-

LMI.L 105.00 to 106.00(GBP)

-

NHY.OL 31.00 to 34.80(NOK)

-

NORDNq.L 4.60 to 4.90(USD) -

NYR.BR 9.80 to 10.18(EUR)

-

POLYP.L 780.00 to 820.00(GBP)

-

RIO.L 2,800.00 to 3,175.00(GBP)

-

RRS.L 6,700.00 to 7,100.00(GBP)

-

S32.L 74.00 to 100.00(GBP)

-

VED.L 375.00 to 615.00(GBP)

Hold to Buy

Source: Deutsche Bank

Top picks

Acacia Mining plc (ACAA.L),GBP497.60 Buy

Boliden AB (BOL.ST),SEK164.70 Buy

Rio Tinto (RIO.L),GBP2,326.50 Buy


The FTSE Miners are up 42% ytd, driven by a weakening USD, Chinese economic stimulus, speculative trading in commodities, and post-Brexit anticipation of global government stimulus and a flight to safety in terms of gold. The stocks have run ahead of the underlying commodities and the sector has re-rated to 0.96x NPV in line with its pre-2011 history. Despite this, FCF is healthy and growing and there is still value to be had: we like Rio Tinto (0.74x NPV, 3.5% 2016e divi yield), Acacia (7% 2017e FCF yield) and Vedanta (0.4x NPV). The outlook for commodity demand remains fragile for 2017 but we expect the sector to hold onto its gains this year.

2H16 potential stimulus but a lid on commodity prices throughout 2017 Whilst Brexit is supportive for gold (and other precious metals on its coat-tails), for the broader commodities we see a more balanced impact as the modest risks to global growth from reduced investment are offset by shallower revisions to the Fed Funds rate path, and hence, less potential for USD strength than we might otherwise have expected. We expect underlying commodity demand to stay strong in China throughout 3Q16 but for the credit cycle to roll over thereafter. This, coupled with our forecast strengthening of the USD into the end of the year and beyond, plus few further supply curtailments, will likely keep a lid of commodity prices on a 12 month view.

Commodity price forecast changes: up for 2016, down for 2017 Our commodity team has generally increased its forecasts for 2016: the main changes are oil and nat gas (+7%), iron ore and zinc (+12%), gold (+7%) and silver (+13%), offset by stronger-than-expected currencies (ZAR, NOK and SEK). For 2017, it’s more of a mixed bag: our forecasts move up for oil (+2%), nat gas (+14%), zinc (+13%), gold (+8%) and silver (+15%), but down for iron ore (-8%), aluminum (-4%), copper (-5%), nickel (-2%) and palladium (-8%).

Miners’ earnings changes: Up, not down! We have raised our 2016E and 2017E EBITDA across the sector by 8% and 1% respectively. Our NPV valuations has also increased, by 8% on average, and for GBP Target Prices we have moved our GBP/USD rate to reflect the post-Brexit level of 1.30, boosting those 12-month targets by 18% on average.

FCF healthy and improving, and some good dividend yields to be found What a difference a year makes: every stock under our coverage, except Lonmin, is generating FCF after sustaining capex this year. FCF yields for the sector now average 14% and 16% this year and next respectively. We highlight our top picks Rio Tinto, Acacia, Nordgold, plus Vedanta as yielding above 10% in 2017. Earnings cover of forecast 2016 dividends is now a healthy 2.7x and the weighted average 2016e divi yield is 2.7%. Rio tops the league with 3.5%.

We have upgraded Vedanta from Hold to Buy; top pick remains Rio Tinto We like Vedanta’s improving FCF through exposure to oil, zinc and silver. This report changes recommendations, TPs and estimates - see page 21 for details.

Transfer of coverage With this report we transfer coverage of the following stocks from Anna Mulholland to Franck Nganou with immediate effect: ACAA.L, NYR.BR, NORDNq.L, and POLYP.L; and coverage of LMI.L to Patrick Mann.

Distributed on: 07/06/2016 04:46:06GMT

6 July 2016

Metals & Mining



Table Of Contents

Stimulus support for now .................................................... 3 Commodities rebound: Upgrading our valuations by 7% .................................... 3

Commodity review .............................................................. 8 Executive summary: No Brexit Blues ................................................................... 8 Energy: oil, nat gas, thermal coal ......................................................................... 9 Steel and steel-making commodities: steel, iron ore, coking coal .................... 11 Base metals: copper, nickel, aluminium, zinc, lead ........................................... 12 Precious metals: gold, silver, PGMs ................................................................... 15

Investment views and earnings estimates ........................ 21 Earnings changes ............................................................................................... 21

6 July 2016

Metals & Mining



Stimulus support for now

Commodities rebound: Raising our valuations by 7%

Moving on from 1H16 commodity recovery, the fundamentals are OK for now

The FTSE Mining index rose 42% in the first half of the year, including a post-

“Brexit” boost of 16%, outperforming the overall market – the FTSE 250 is

down 6% - and the underlying commodities – gold is up 25%, iron ore 23%,

and the base metals index up 6%.

The mining equities’ outperformance was driven by a heady cocktail of:

(i) a weakening USD: the dollar went down 5% until 4 May;

(ii) Chinese economic stimulus: Total Social Financing was up 55%

year on year in 1Q16;

(iii) Trading and speculation in commodities: net shorts in copper on

the Comex reduced to zero by the end of March; and

(iv) Post-Brexit speculation of further global government stimulus, and

a flight to safety in terms of gold.

This in turn saw covering of short positions in some of the UK-listed mining

stocks as company cash flows were buoyed by the commodity price recovery.

Some miners felt flush enough to buy back their own bonds, whilst others

were successful in re-financing credit facilities. Four asset sales were

announced: Glencore is selling 49.9% of its Agricultural division, Anglo is

selling its Niobium and Phosphates business, Freeport agreed to sell its Tenke

copper mine stake, and Boliden bought the Kevitsa mine from First Quantum.

So, the mining stocks are up 42%, with a range of up 122% (Acacia) to down

7% (Norsk Hydro), for all the reasons listed above. But what about the

fundamentals? We have all become used to daily share price volatility but is

the rebound from the lows now cemented? We think yes, although the outlook

for commodity demand remains fragile on a 12-month view.

Our more positive view is supported by:

(i) our upgrade to earnings and

(ii) valuations,

(iii) our top picks offering good value in terms of free cash flow yield,

P/NPV and

(iv) in some cases dividend yields.

Taking each of these factors in turn:

6 July 2016

Metals & Mining



We are raising our earnings estimates…

In this Commodity Review and Sector update, we are raising our 2016 and

2017 EBITDA across the sector by 8% and 1% on average.

In 2016 this is due to:

Upgrading oil and nat gas (7%), thermal (1%) and met coal (4%), iron

ore (12%), zinc (12%), gold (7%) and silver (13%) prices, plus a 3%

weaker forecast for the Australian dollar;

Offset by cutting our palladium (-4%) forecast, plus assuming a

stronger South African Rand (-3%), Swedish Kroner (-17%) and

Norweigan Kroner (-10%).

In 2017, our sector EBITDA increase is due to:

Upgrading oil (2%), nat gas (14%), met coal (2%), zinc (13%), gold (8%),

silver (15%), and platinum (13%) prices, and a 4% weaker Australian

dollar;

Offset by cutting our iron ore (-8%), aluminum (-4%), copper (-5%),

nickel (-2%) and palladium (-8%) forecasts, plus assuming a stronger

South African Rand (-6%), Swedish Kroner (-10%) and Norweigan

Kroner (-13%).

…And our valuations and Target Prices

We have increased our US$ NPV valuations across the sector by an average of

8% due to the commodity price and FX changes described - as shown in the

chart and table below.

Factoring in a weaker GBP/USD rate post-Brexit (1.30 compared to 1.60 used

previously), gives an extra boost to our GBP Target Prices – which are up an

average of 18%.

Figure 1: Average 8% uplift in NPVs; GBP target prices up 18% on average

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70% % chg in US$ NPV % chg in GBP TP

Source: Deutsche Bank estimates

6 July 2016

Metals & Mining



Figure 2: Detailed changes to our NPVs and Target Prices

NPV in US$ per share TP in GBP per share* Comments for TPs

Old New % chg Old New % chg

ACAA 5.76 6.11 6.1% 4.7 5.0 6.4% GBP/USD changed 28 June

ANTO 8.62 9.03 4.8% 4.7 5.9 24.5%

BHP 14.09 16.26 15.4% 8.8 12.5 42.0%

BOL 14.09 16.26 15.4% 160 174 8.7% In SEK

FRES 10.07 10.62 5.5% 9.7 10.2 5.2% GBP/USD changed 28 June

LMI 1.46 1.22 -16.4% 1.1 1.1 1.2%

KAZX 3.49 2.75 -21.2% 1.7 1.6 -4.1%

NHY 43.52 47.44 9.0% 31.0 34.8 12.3% In NOK

NORD 7.54 7.66 1.6% 4.6 4.9 6.5% In USD

NYR 8.82 10.18 15.4% 9.8 10.2 3.9% In EUR

POLYP 10.09 10.68 5.8% 780.0 820.0 5.1% GBP/USD changed 28 June

RIO 42.40 41.28 -2.6% 28.0 31.8 13.4%

RRS 72.20 77.00 6.6% 67.0 71.0 6.0% GBP/USD changed 28 June

S32 1.18 1.30 10.2% 0.7 1.0 35.1%

VED 8.73 13.71 57.0% 3.8 6.2 64.0% Source: Deutsche Bank estimates; *Unless stated

FCF generation continues to improve: 16% average FCF yield for 2017e

What a difference a year makes – every stock under our coverage, except

Lonmin this year, is generating Free Cash Flow after sustaining capex this year.

Free cash flow yields now average 14% and 16% this year and next

respectively.

In the chart below, we would highlight increasing FCF year on year at Boliden,

Norsk Hydro, Vedanta, South32, Nyrstar, Kaz Minerals and all the precious

metals miners under our coverage.

In terms of attractive FCF yields, that are above 10% in 2017e, we would

highlight our top picks Rio Tinto, Acacia Mining, Nordgold, and Vedanta – all

Buy rated – plus BHP Billiton, South32, Polymetal, Kaz Minerals and Nyrstar.

Figure 3: FCF generation and FCF yields, 2016 and 2017e

-15

-10

-5

0

5

10

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20

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35

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0

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%US$m

2016 FCF 2017 FCF 2016 FCF Yield (RHS) 2017 FCF Yield (RHS)


6 July 2016

Metals & Mining



Sector has re-rated strongly but we still see value in selective names

The sector is now trading on a P/NPV of 0.96x, having re-rated throughout the

first quarter commodity price recovery and again post-Brexit. Today’s level is

well above the average since the 2011 European (PIGS) crisis sell-off, and is

more in line with the historical average from 2000 to pre-China:

Figure 4: Sector has re-rated towards historical averages of 1x NPV

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Jan00 Jan02 Jan04 Jan06 Jan08 Jan10 Jan12 Jan14 Jan16

P/NPV Average +σ -σ +2σ -2σ


The valuation of each stock is set out in the table below. All of the stocks

under our coverage are trading at par or at a discount to NPV, with the

exception of some precious metals stocks: Acacia, Fresnillo, Lonmin,

Polymetal and Randgold; and Boliden.

Figure 5: European metals & mining valuation table (Calendar year)

MCap P/E EV/EBITDA FCF Yield Div Yld P/NPV

Company Rec Price Target US$mn 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2016E Current

Acacia Mining plc Buy 464 500 2,554 nm 16.4 13.8 8.4 6.3 5.2 nm 3.8 7.2 1.0 1.11

Antofagasta PLC Hold 470 585 6,215 nm 51.4 24.4 13.7 7.6 6.4 nm nm 3.8 0.7 0.68

BHP Billiton Hold 940 1250 69,722 14.0 35.1 40.9 7.5 17.0 16.2 6.2 6.7 9.0 3.7 0.75

Boliden AB Buy 167.1 174 5,422 16.2 18.5 11.7 6.7 7.6 5.7 6.0 nm 6.4 1.8 1.15

Ferrexpo Plc Buy 34 115 260 3.5 1.8 6.8 4.0 2.7 4.3 22.0 78.7 29.3 0.0 0.21

Fresnillo PLC Sell 1760 1020 17,214 157.6 68.1 44.9 15.1 19.5 15.1 0.9 0.7 2.5 0.7 2.15

KAZ Minerals PLC Hold 132 163 792 nm 11.5 7.4 13.8 12.4 6.5 nm nm nm 0.0 0.65

Lonmin Plc Sell 211 106 700 nm nm nm nm nm 3.5 nm nm nm 0.0 2.29

Nordgold N.V. Buy 3.49 4.90 1,311 5.8 10.4 8.5 3.1 4.0 2.7 18.8 nm 17.7 3.2 0.45

Norsk Hydro ASA Hold 31.59 34.8 7,718 10.8 20.5 23.4 4.3 4.9 4.6 12.7 nm 4.7 2.4 0.84

Nyrstar NV Hold 8.76 10.18 1,291 nm 77.4 4.3 22.9 5.8 2.3 nm nm 38.6 0.0 0.59

Polymetal International Hold 1059 820 5,971 14.8 13.6 12.3 7.2 8.5 6.8 8.1 4.8 13.3 2.2 1.68

Randgold Resources Hold 8775 7100 11,005 34.0 42.5 31.2 18.8 21.0 16.0 2.1 2.0 2.2 0.6 1.48

Rio Tinto PLC Buy 2345 3175 56,159 16.0 15.7 16.9 7.6 6.4 6.5 3.3 10.2 5.9 3.5 0.74

South32 Hold 90 100 6,360 nm 43.2 52.4 nm 5.3 5.3 nm 10.6 8.4 0.2 0.90

Vedanta Resources PLC Buy 433 615 1,585 nm nm nm 6.6 9.0 8.0 NM NM 37.5 4.6 0.42

Weighted Average 196,516 27.7 31.5 29.8 8.8 12.3 11.1 4.4 6.1 7.2 2.7 1.00 Source: Deutsche Bank, Company data, Priced 03th JUL 2016

6 July 2016

Metals & Mining



Brexit Bonus for 2H16: dividend yields boosted

As shown in the table below, we forecast the majority of the companies we

cover to generate free cash flow post paying dividends in 2016 (the outliers are

spending on completing projects or paying for assets in the case of Boliden).

And in 2017, all of the companies we cover should generate free cash flow in

2017 post dividends excepting KAZ Minerals.

Figure 6: Gearing and cash positions for the miners

Gearing - ND/(ND+E) EBITDA/ND FCF (USD mn) FCF - post Div (USD mn)

2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017

Acacia Mining -0.06 -0.12 -0.22 -1.66 -1.64 -0.99 -37 96 183 -54 79 158

Antofagasta 0.06 0.07 0.05 1.67 1.71 2.96 -734 -149 231 -941 -151 222

Boliden 0.16 0.28 0.21 1.50 0.72 1.18 2589 -3874 2927 1974 -4626 2106

BHP Billiton 0.26 0.27 0.23 0.76 0.16 0.67 7671 5144 6757 1173 1024 5406

Ferrexpo 0.78 0.65 0.60 0.36 0.45 0.29 107 205 76 29 205 76

Fresnillo 0.15 0.13 0.03 1.24 2.40 14.21 74 123 425 37 57 277

KAZ Minerals 0.87 0.88 0.86 0.09 0.08 0.16 -1255 -586 -303 -1255 -586 -307

Lonmin 0.11 -0.06 -0.08 -0.28 -0.92 -0.70 -148 -83 28 -167 -83 28

Norsk Hydro -0.07 -0.04 -0.06 -2.59 -3.84 -2.33 9241 -1535 3009 6871 -3577 1477

Nyrstar 0.54 0.31 0.12 0.35 0.71 3.23 -502 -11 317 -502 -10 317

Nordgold 0.36 0.40 0.29 1.04 0.69 1.27 191 -6 232 132 -88 189

Polymetal 0.75 0.59 0.29 0.46 0.71 1.92 285 289 793 -15 173 654

Randgold -0.07 -0.10 -0.14 -1.59 -1.49 -1.37 134 212 243 85 127 144

Rio Tinto 0.24 0.20 0.18 0.83 0.99 1.07 2366 5709 3308 -1710 3047 1264

South32 0.04 -0.01 -0.06 4.60 -13.59 -2.23 1209 466 598 1209 466 531

Vedanta 0.41 0.52 0.42 0.44 0.32 0.43 -124 1203 443 -635 766 6

Source: Deutsche Bank…. *FCF values for NHY, NYR & BOL in NOK m, EUR m & SEK m respectively

With smaller companies having abandoned dividends in the downturn, and the

“Big 4” Miners having cut or rebased to payout policies, earnings cover of

forecast 2016 dividends is now a healthy 2.7x and the weighted average 2016e

yield is 2.7%. We highlight Rio as our top pick with a 3.5% yield:

Figure 7:Average 2016e dividend yield of 2.7% and earnings cover of 2.7x

3.5

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2.5 2.4

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1.8

0.90.7 0.7 0.6

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2016e Dividend cover (LHS) 2016e % divi yield (RHS)

Source: Deutsche Bank estimares

6 July 2016

Metals & Mining



Commodity review

Our commodity strategists have released their 3Q16 Commodity Update this

morning (“Sniffing out the Stimulus”, Sporre, Hsueh, 6 July 2016). The changes

to our commodity and FX forecasts are summarised in Figure 8 to Figure 12

below.

Executive summary: No Brexit Blues

Brexit has struck a blow to confidence in the market’s ability to price political risks insofar as the pound sterling moved from 50-50 odds to nearly 100% certainty in a Remain vote just prior to the results (using a 1.30-1.50 notional range), with similar moves in the FTSE.

Among commodities the impact is likely to be the strongest for gold as equity and rates markets price lower, the dollar sees a less constructive monetary policy climate, and fund inflows stand at the highest annualized rate on record (since 2004).

For the broader commodities sector as a whole we see a more balanced effect as the modest risks to global growth from reduced investment (with 2017 marked down from 3.6% to 3.4%) are offset by shallower revisions to the Fed Funds rate path, and hence, less potential for dollar strength than we might otherwise have expected.

We expect the crude oil market to remain near US tight oil breakevens through next year, holding US production unchanged in 2017 as world inventories begin to draw down. The steady process of fundamental tightening is well underway with 32% lower global upstream capex since 2014 driving a slower pace of commissioning in Brazil, lower contractor budgets in Iraq, less enhanced oil recovery in China, and growing risks in Venezuela. In addition, the current year’s balance is considerably helped along numerous unplanned outages, US oil production down by 1 mmb/d from the peak, and higher revised demand in the US and India.

A pronounced slowdown in US natural gas production and heightened utility demand will bring inventories fully in line with historical averages by early next year, in our view. Although we see a modest deficit next year, pipeline project completions in 2018 threaten to unlock a large volume of Northeast production which is economic near USD 3/mmBtu, limiting price gains much beyond that level.

Thermal coal is seeing the first glimmerings of a recovery on the back of Chinese policy pushing domestic raw coal production 13% lower. An incipient surge to domestic Chinese coal prices will mean an improving backdrop for seaborne imports which now stand unchanged yoy and will likely grow in H2. The duration of this policy may well determine whether the longer-term global demand challenge remains for this market

Michael Hsueh, (44) 20 754 78015 [email protected]

Grant Sporre, (44) 20 754 58170 [email protected]

6 July 2016

Metals & Mining



On each of the main commodities, our summary views are as follows:

Energy: oil, nat gas, thermal coal

Crude oil: Smaller surpluses

Crude oil markets are showing smaller surpluses and drawing close to a

midpoint in a multi-year period of adjustment. We also see 2018 as the

year when marginal non-OPEC sources of production are once again called

upon to deliver new volume growth, with prices rising towards the

incentive cost of marginal offshore projects at US$70/bbl Brent. Versus our

previous model we now see 2017-18 balances tighter by ~300 kb/d.

We believe a US$55/bbl Brent average is consistent with 2017 non-OPEC

supply declining by -130 kb/d led by the US (-150 kb/d), Mexico (-100 kb/d),

the North Sea (-70 kb/d) and China (-40 kb/d) offset by growth in Canada

(+180 kb/d) and Russia (+70 kb/d). This follows a much larger-than-

expected decline in China this year of -230 kb/d as a result of lower

spending which raises the non-OPEC decline to -880 kb/d this year.

Our view of OPEC production in 2017 is unchanged at 33.1 mmb/d, which

would represent annual growth of +500 kb/d over H1-16 and +375 kb/d

over the 2016 annual average. We see limits to Iranian growth much above

3.8 mmb/d, lower budgets in Iraq and faltering production in Venezuela

balanced by an eventual recovery in Nigeria in 2017 and modest growth in

Saudi Arabia with new projects.

Versus the start of the year we see significantly improved demand growth

this year from the US owing to strong growth in miles traveled lifting

gasoline demand, thereby raising our demand growth expectation from

zero at the start of the year to +214 kb/d.

We still expect China to drive the largest share of global oil demand

growth this year with at least +350 kb/d on the basis of continued vehicle

sales growth, a boost in construction activity, and recovering chemicals

production. While Indian apparent demand has recovered after a weak

January with vehicle sales averaging 11% growth ytd, surpassing last

year’s 4% growth, risks to our +300 kb/d assumption are to the downside.

Our 2017 supply-demand outlook includes US production declining by -

150 kb/d in 2017 composed of a tight oil decline of -480 kb/d offsetting

GoM growth of +90 kb/d and NGL growth of +240 kb/d as ethane demand

and prices rise. We expect that US tight oil producers will take a measured

approach to investment programs in the rising but still uncertain price

environment as they strive for a better balance between capex and cash

flow and focus on higher quality assets.

The depth of upstream spending cuts is on par with that experienced in the

decade after 1977. With an average lead time of at least two years

between first spend and production, a prolonged period of reduced

investment raises the possibility of a supply gap in future years. Over and

above known probable projects we estimate other new sanctioned

developments will need to contribute a further 8 mmb/d of supply by 2023.

Risks over the next twelve months include the possibility that the US dollar

may become a headwind as the medium-term dollar up-cycle makes a final

leg higher, although this now appears less likely following the Brexit

referendum. In the event that the Fed funds rate reaches 1% or above in

2017 the USD will become a high-yielding currency which has been

associated with significant dollar rallies, according to DB FX research.

6 July 2016

Metals & Mining



US natural gas: Strong burn

The US natural gas market is well on its way towards eliminating what

began as a very difficult situation at the start of this year with a storage

surplus versus the five year average peaking at 17.1% in late March.

Summer storage builds have been slower than normal, with the last

week’s data running below our expectations owing to an increase in utility

demand. As of 24 June the surplus had declined to 9.6%, propelling spot

Henry Hub from US$1.94/mmBtu at the end of March to US$2.88/mmBtu.

The progress of storage normalization is on a par with the 2012 precedent,

implying some further upside to prices over the balance of the year as a

tighter-than-expected supply picture continues through the end of the year.

Versus our Q1 expectation, 2016 supply-demand may be tighter by 0.2

bcf/d as much higher utility demand and falling dry gas production offset

slower-than-expected growth in the industrial sector.

Northeast infrastructure expansions from Dec ’16 to April ‘17 will facilitate

only modest production increase from the region given pipeline delays,

despite a broad swath of supply economic at and just below USD

3/mmBtu. Declines in the Eagle Ford and in associated gas output will

likely leave the market slightly short of sufficient new supply in 2017.

Utility demand is benefiting from (i) gas-fired powerplant commissioning

and coal-fired powerplant shutdowns, (ii) improved economics compared

to coal, and (iii) hotter than normal summer weather, partly making up for

the loss of residential and commercial demand from last winter.

However, next year’s utility demand may be harmed by a narrowing of the

gas-coal generation spread which we believe could weaken utility demand

even as additional new gas-fired capacity comes online, resulting in utility

demand contraction of -0.7 bcf/d.

We still expect 2017 demand to grow overall by +1.4 bcf/d as industrial

capacity expands by +0.5 bcf/d for ethylene and methanol production,

Sabine Pass Trains 3 & 4 are commissioned and Trains 1 & 2 produce for a

full year, and residential and commercial demand recover from a below-

normal year.

We raise Q3/Q4 Henry Hub by 16% to US$2.73/2.88/mmBtu to reflect

faster storage normalisation and 2017 by 14% to USD 3.13/mmBtu as

production may lag demand. Following Josh Silverstein’s FITT report (“A

Circular Reference”) however, we note a supply wave in 2018 appears

likely based on pipeline completion schedules. Although we believe further

regulatory and environmental delays are likely, the potential exists for

excess supply growth and market surpluses. Therefore we lower our 2018

forecast to USD 3.01/mmBtu.

Thermal Coal: Climbing out of a hole? Thermal coal prices have risen substantially beyond what might be

regarded as a typical post-winter restocking cycle, driven by Chinese policy to reduce domestic output and a higher Indian appetite for both South African and Colombian exports.

The threat of Chinese government efforts to rationalize coal supply now appears both more real and quantifiable as April/May production has fallen by 33mt/month compared to April/May averages in the previous three years.

Higher China domestic coal prices later this year will mean that seaborne exports from Indonesia and Russia would gain a greater advantage for delivery to Guangzhou over domestic coal from Qinhuangdao. This raises our forecast for Chinese imports from 117mt to 162mt as well as the Newcastle benchmark to US$55/t in Q3-16 and US$57/t in Q4-16. We see

6 July 2016

Metals & Mining



Richards Bay being much less advantaged but still higher than previously forecast at US$51/t in Q3-16 and US$55/t in Q4-16.

We expect that prices approaching RMB c.500/t towards the end of the year would result in both a measurable policy success as well as industry pressure on the government to relax restrictions. This leaves our 2017 forecasts only modestly higher.

Indian imports rose in April recovering from earlier declines, as Coal India production fell seasonally and warmer-than-normal weather drove electricity demand higher, raising March-May generation by 10.2% yoy. Although domestic production tends to remain low through the monsoon, the Q3 lift in hydro output (particularly in the event of a shift to La Niña) may alleviate the import surge.

Indian policy now requires competitive bidding for coal linkage supplies to non-power consumers. This change along with a 10-day July maintenance window for the Transnet rail line feeding Richards Bay Coal Terminal may explain the higher South African premium to Newcastle.

The longer term outlook for Chinese seaborne coal imports remains weak owing to slower headline economic growth, a lower coal-demand multiplier as growth is driven less by power-intensive manufacturing, and more by interior provinces where seaborne coal is at a transport disadvantage, particularly after rail rate reductions. We also note efficiency improvements in generation and distribution infrastructure.

Japan, Korea, Taiwan and Southeast Asian markets will provide the incremental seaborne demand tonne for the foreseeable future but may struggle to offset further contraction in China and Europe.

Steel and steel-making commodities: steel, iron ore, coking coal

Steel: As good as it gets? Global steel output is down 2.2% year on year for the first five months of

the year. This makes our forecast of +1.2% for the full year look somewhat optimistic. However, May’s data did show some signs of encouragement with Europe, the US, and India all picking up by 3 – 8% month on month. The key region remains China, where we have upgraded our production forecasts to +1.7% on the back of better property starts, and strong momentum in infrastructure spending. We forecast the Chinese credit impulse to ease into the second half of the year, but for now credit creation remains strong, especially when government bonds are included in the total social financing (TSF) number. However, as the credit impulse turns negative in H2’16, we expect the property market sales to move into negative territory and for new starts to follow. Infrastructure spend is unlike to register another year of growth, and hence we expect global steel output to turn negative in 2017.

Iron ore: A challenging outlook for 2017 Iron ore prices have stabilized in the low US$50/t range, and given the six

month historical lag between the peak in the credit cycle and iron ore prices combined with the recovery in steel prices, we think that iron ore may hold onto these levels for another quarter at least. However, capacity restarts from the “non-traditional” suppliers, especially India as highlighted by the latest China import stats, will start to weigh on prices by year end. The ramp up of new capacity from the big producers continues in earnest in 2017, which will displace higher cost output in 2017. This will only happen if prices fall to the low US$40/t’s for an extended period in our view.

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Coking coal: China 276-day policy dominates Coking Coal prices have responded not only to the improving steel outlook

in China, but also to the 276-day working policy imposed on the Chinese coal industry. So far, the policy is being imposed across all mines, both low and high cost ones indiscriminately, which is likely to cut Chinese coking coal output by 10 – 15%. We think this policy is unsustainable, and will ultimately make way for a more long lasting solution to “supply side reforms”. As a result of this policy, we expect Chinese coking coal imports to increase back to 2014 levels, an additional 18 – 20mt over 2015. However, new supply and restarts in Australia and elsewhere could make up some of the deficit, hence our base case pricing scenario is for gradually rising prices. We acknowledge however, that if the policy is enforced for an extended period of time, there are short term upside risks to our forecasts.

Base metals: copper, nickel, aluminium, zinc, lead

Copper: Oversupply persists…for now

Not a lot is going well for copper at the moment. Just when you need

“unplanned outages” as we have in the oil market, the mining industry

gets its act together. We are on track to register one of the lowest

disruption allowances over the past ten years. The Chinese grid is nearly

20% of global copper demand, making it the largest single component.

Although we think grid spend will be up this year, the focus remains on

the UHV transmission and rural distribution which has a lower copper

intensity than the average grid investment dollar. As a result, we estimate

two more years of significant surpluses, with prices remaining under

pressure.

Mined supply has been surprisingly strong this year with limited

disruptions. We estimate that the disruptions year to date are running at

225kt, or just under 500kt on an annualized basis, which is well below the

average of 900–1000kt. As a result, we have downgraded our disruption

allowance from 800kt to 600kt for 2016, whilst maintaining our 2017

disruption allowance at 1.1Mt. Over and above the lower than expected

disruption allowance, the copper market still has two years of supply

momentum with the tail end of the GFC disrupted capex cycle, playing out

over 2016 and 2017. There are four mines that add 900–1000kt of copper

into the market in 2016.

Refined copper imports into China have started the year at a blistering

pace, translating into an apparent demand of 14% YTD. This is well ahead

of any reasonable demand growth rate and looks like an extended

restocking cycle to us. The risk for the second half of the year is that China

may start a destocking cycle. Over the next two years, Chinese grid spend

is more focused on the UHV transmission projects and rural distribution,

which are more aluminium focused. Copper demand from the rise in EVs is

unlikely to be a game-changer, and we estimate c.600ktpa additional

copper demand from 2025 onwards, although we concede that estimating

additional grid capacity is challenging.

Although the current focus of the Chinese grid spend is on the UHV grid

and rural infrastructure, 2016/17 is likely to be the peak years, thereafter

the focus turns back to distribution and the urban areas. The upturn in

copper spending on the grid will in our view ensure that Chinese copper

demand and hence global demand stays in positive territory. Likewise the

lack of capex investment should see limited mined supply growth post the

2017 time horizon. The combination of positive demand growth and

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limited new supply results in growing defect from 2018 onward, but is

dependent on having Chinese demand growth at +2% pa.

Nickel: Stalemate

Nickel prices have recovered by 20% since the lows in February, and yet

60% of the industry remains under water. Even if we adjust for the

potential that Chinese NPI producers have a cost benefit not captured by

the cost curve analysis, by being integrated with the stainless steel

production, at least a third of the industry remains loss-making. Still, the

barriers to exit remain high, which puts the industry at a bit of a stalemate.

Ultimately we think that there will need to be more closures. Stricter

mining policies in the Philippines could be a catalyst, but we would look

for declining NPI output even in the face of rising prices to confirm that the

Philippine ore availability is indeed a constraint.

Chinese stainless steel production has picked up and is on course to be up

c.6 – 7% for H1. The increase is output is only part driven by improving

demand. A fair proportion of the increase is due to restocking and the

emergence of new entrants. We forecast Chinese stainless steel to be up

4% in 2016E, which still implies a slowdown in H2. The increase in

Chinese stainless steel has been accompanied by an increase in NPI output,

with April’s output up 16% month on month, in a repeat of last year’s

pattern. The sharp decline in Philippine ore exports has had no effect on

output, which is unsurprising given that ore stocks remain above critical

levels. We continue to forecast NPI output to be down in 2016; however

output will have to fall in H2 to meet this forecast.

We continue to forecast deficits in the nickel market over the next three

years, but given the combination of latent capacity, especially in Chinese

NPI, and the large visible inventories, price rallies may be short lived.

Inventories will be drawn down over time, which should see prices

squeeze higher, but for now we forecast Nickel prices will ease above

US$10,000/t, rising to an average of US$10,500/t in Q4 which is when we

see the probability of further closures rising.

Aluminium: Overcapacity is tough to shift China is likely to remain a net exporter of aluminium to the rest of the

world. In part this is justified by the technological and efficiency gains the country has made over the past ten years. However, power is now abundant after years of capacity expansion to the extent that energy is now being exported in the form of aluminium. This is not permanent but whilst local governments continue to provide subsidized power, Chinese latent capacity will continue to keep a lid on prices. In our assessment this will keep the market modestly oversupplied in the medium term. A weakening RMB simply makes the Chinese industry even more competitive, and is a key downside risk to LME prices.

The demand outlook remains decent for aluminium. Yes, demand growth is likely to slow from current levels, as China transitions away from the FAI heavy growth model. Demand growth from 2000 to 2015 was 5.3% CAGR, with growth likely to slow to 3.2% CAGR over the next 10 years. Although growth is slower, this is better than the 2.8% CAGR from 1985 to 2000, and certainly beats demand growth in the other metals. The regions contributing to strong demand are India, China and the US. In China, UHV and rural electrification projects, combined with strong Auto output is the main driver over a two year period. However, a temporary resurgence in the building and construction sector should push 2016 demand growth above that of 2015.

As we have learnt from both the Chinese steel and aluminium industry, when there are profits to be made, reform is quickly pushed aside. After

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the domestic price recovery, most of the Chinese aluminium industry is now profitable. We estimate that at least quarter of the capacity that was shut during late 2015 (1 – 1.2Mtpa) is likely to be restarted by the end of 2016. That’s not including new, low cost and efficient capacity which will continue being added over the course of 2016 (another 3 – 3.2Mtpa). We forecast the flexible latent capacity in China to keep the market in a surplus, capping the upside on the Chinese domestic price, and ultimately the LME price through increasing semi’s exports.

The willingness of local governments to subsidize power for domestic smelters, combined with a trough in coal and alumina pricing means that the aluminium market remains in the throes of deflation. We expect these deflation pressures to ease, but given the continual efficiency gains there is always going to be a deflationary bias to the metal. The tipping point for restarts seems to be around RMB11,500/t which equates to an LME price of c.1,575/t at the current RMB exchange rate. However an RMB closer to 7, could drag the equivalent price down below US$1,500/t.

Zinc: Long positioning reflects the fundamentals

Zinc’s fundamentals certainly warrant the price performance or rather

price recovery this year. We forecast another deficit year in the order of

400kt. Furthermore this will be the 5th year of oversupply, with the

estimated deficits now equaling 1.8Mt versus the 2.8Mt of accumulated

surpluses from 2008 to 2011. There are undoubtedly “hidden” stocks, but

not to the same extent as some of the other base metals.

Spot TC terms have tightened up, and ongoing contract negotiations all

point to a tighter concentrate market. However the tightness in the refined

metal market may take a quarter or two to manifest itself, with signs of

tightness in the metal market less convincing. Regional premiums have

eased higher, although not convincingly so. Likewise visible inventories

have been relatively stable over Q1, with the sudden inflow on the LME in

mid 2015 now fully reversed. After a brief period of backwardation the

spot to 3-month spread has slipped back into contango. Until such time as

the metals signs become more convincing, the metal may still be held

hostage to the fortunes of investor sentiment.

We forecast an improving demand growth picture in 2016 onwards,

recovering from the low of 0.7% in 2015. Improving Chinese demand and

a rebound in US demand should see demand growth rebound to 2.5% in

2016E and 2.2% in 2017. This is below trend of the past few years, but

simply put, we think it unlikely that demand growth in Zinc can outstrip

the demand growth forecasts from the other base metals by a big margin,

given the overlapping demand drivers. As a consequence, we think it is

unlikely that zinc will outperform the other base metals much more than

the current 15 – 20% in our view, and thus we remain skeptical that there

will be an extended period of prices above US$2,500/t.

The second key risk to zinc’s bull case is Chinese mined supply. Official

statistics would suggest that Chinese mined supply has contracted by 9%

in 2015, due to a combination of depleting reserves, environmental

scrutiny and price induced shuts. The recent recovery in pricing may spur

some restarts, but we think this is unlikely. We forecast a conservative

increase in production of 3.8% in 2016 and 4.9% 2017E. Visibility on the

price sensitivity for restarts or the acceleration of projects is limited,

especially when compared to aluminium. However, we expect an increase

in Chinese mined supply, the longer prices remain above RMB16,000/t.

Lead: Weighed down by the lightest of metals Ironically, lead’s performance has been weighed down by one of the

lightest of the periodic table’s metals, lithium. Lead has lagged the other

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base metals so far this year, down by 5% year to date, in contrast to sister metal zinc which is up by 27%. Despite having decent fundamentals in the form of the same supply squeeze as zinc and decent demand, lead has de-rated versus zinc. Lead was trading above zinc in Q1 2016, but currently the Pb/Zn ratio has hit a low of 0.82.

Lead fundamentals remain supportive, with modest deficits (100kt) over the next two to three years. Although US, European and Chinese auto sales remains robust, the slowdown of Chinese battery demand from the maturing e-bike market has continued to weigh on demand. Adoption of alternate, cleaner and more efficient battery technologies (Li-ion in EV and ebikes) is a threat to lead’s long term fundamentals. It is this longer term trend that has weighed on sentiment leading to the significant under performance. Slowing mine production from China, Europe and Australia will however keep a balanced to slight deficit in the near-term, and as a result we think lead looks oversold in the near term.

Precious metals: gold, silver, PGMs

Gold: another step in favour of gold Brexit has struck a blow to confidence in the market’s ability to price risks,

political and otherwise, insofar as the pound sterling moved from pricing in 50-50 odds to nearly 100% certainty of a Remain vote just prior to the results (using a 1.30-1.50 notional range), with similar moves in the FTSE.

Precious metals are likely to derive the strongest benefits from this change to the outlook for financial markets as equity and rates markets incorporate more uncertainty, the dollar sees a less constructive monetary policy climate, and fund inflows stand at the highest annualized rate on record (since 2004).

Stagnant trend GDP growth in the US is largely a function of lower productivity growth compared to previous business cycles. This, together with an aging population which could further weaken employment per capita, and likely investor demand on the long-end of the curve in the event of data disappointments, leads to our lower 10Y Treasury rate forecast to average 1.25% over H2-16, down from 1.75%.

This runs in line with dovish tendencies at the Fed, which has moderated its forward rate expectations through 2018 by 40 bps while leaving economic projections of GDP growth and inflation unchanged, i.e., softening the Fed’s reaction function.

A lack of policy response to Brexit to mitigate downside risks suggests that the next >5% move in the S&P is more likely to be down than up, according to DB US Equity Strategy, and we lower our end-2016 and 2017 S&P targets by 50 points to 2,150 and 2,350.

All of this translates into falling real rates and a rising equity risk premium, both strong financial drivers for a constructive precious metals environment. We raise our gold price expectations for 2016 and 2017 by 7% and 8% to reflect the likelihood of a stalled normalization of US monetary policy as well as a turn in investor sentiment reflected in the first year of positive ETF inflows since 2012 when the Fed’s last round of quantitative easing began.

Risks to the outlook stem from the possibility that even at a shallower Fed funds rate path below the central policy projection, the US dollar could become a high-yielding currency by the end of 2017. This is a condition which is reliably associated with dollar rallies.

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Silver: The re-rating versus gold has further upside The conditions for silver to continue its current momentum and continue

its “rerating” path versus gold remain favourable. The expectation of easier monetary conditions for longer, as central banks try to mitigate the impact of a Brexit vote is good news for non yielding assets such as gold and silver. As a late cycle precious metal play, the more comfortable investors become in holding gold, the more likely silver will continue to outperform.

The June US ISM at 53.2, hit its highest level since February last year, also making it the sixth month in a row for an improvement. Due to silver’s relatively high proportion of industrial demand, the expectation of improving growth is a favorable environment for silver to rerate versus gold.

Even at the current silver price of USD20.3/oz, the gold : silver ratio of 66x, is still at the average during the period from 1983 – 2003, a bear market for precious metals. At the more recent average ratio of 61x (from 2003 onwards, a gold price of USD1,350/oz would imply a silver price of USD22.10/oz. For silver to continue performing, we would need to see the US ISM maintain its momentum. A faltering US economy is the main risk to silver continuing to rerate.

PGMs: The demand pull is just not strong enough…… and Brexit is unhelpful

We retain our view that platinum fundamentals (especially the demand

side of the equation) are not strong enough to pull clear of the influence of

the South African Rand, and gold. What’s changed post the Brexit vote?

Prior to the Brexit vote, we thought that the fundamentals were improving,

with robust European vehicle sales and increasing safety related stoppages

in the South African mining industry resulting in a modest deficit market

(pre any inventory changes to account for investor buying). We thought

that platinum could re-rate versus gold, possibly clawing back some of the

discount.

The Brexit vote has, in our view, limited any chance of a platinum re-rating. Firstly, the rising uncertainty may impact future European vehicle sales, and as a significant trading partner to South Africa, a weaker Euro may lead to a weaker Rand, both negatives for platinum. On the opposite end of the spectrum, buying of gold as a safe haven will keep some upward tension in platinum prices. Our view is that platinum prices may not fall that much from current levels, but the price discount between gold and platinum will certainly be stretched.

We expect the Rand-PGM basket price to continue to track marginal costs of production until 2021 as we see the market as relatively well-supplied/balanced until then. We also believe the current price is not low enough to force production curtailments. The producers are managing the production base to be cash-flow positive, in our view, and most production is marginally (0-10%) cash flow positive after SIB capex. We believe that unit cost increases at the top-end of the cost curve will remain below mining-inflation until 2019-2020, owing to the strategy of the two significant high-cost producers - Impala Lease which will continue to develop two new shafts and lower unit cash costs, and Lonmin, which in our view is surviving through unsustainably low capex.

On the face of it, palladium should be performing a lot better than it has year to date given our forecast deficit of 1.3moz. However, there are a number of headwinds impacting the metal over the near to medium term. The latest of these headwinds is the Brexit vote where palladium’s exposure to Europe is nearly as high as platinum. A plateau in US Auto sales looks likely and, whilst we do not forecast a sharp decline, the potential for lower US Auto sales remains an overhang. China remains a key demand driver, and here too the spectre of an accelerated uptake of

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electric vehicles has dampened sentiment. Palladium is currently being considered as an industrial metal and, unlike silver where the gold : silver ratio is well above the average, the palladium : platinum ratio is well below the average. Investor positioning reflects these headwinds in our view, and we think there is good value in the metal below US$550/oz.

The changes to our commodity and FX assumptions are summarised in the

tables below:

Figure 8: New price estimates – Base metals & Precious metals

Unit 1Q16 2Q16 3Q16 4Q16 2016 2017 2018 2019 2020 2021

Base Metals

Aluminium USc/lb 68.7 71.2 69.4 70.3 69.9 69.6 71.2 77.5 83.7 90.0

Copper USc/lb 212.3 213.2 199.6 208.7 208.5 203.0 227.9 252.8 277.7 302.6

Lead USc/lb 78.9 78.5 79.4 78.9 78.9 78.9 74.9 76.0 77.1 78.3

Nickel USc/lb 386.0 397.0 408.3 453.7 411.3 453.7 499.1 579.0 658.8 738.7

Tin USc/lb 703.3 771.3 748.6 748.6 743.0 782.7 794.8 807.0 819.1 831.3

Zinc USc/lb 76.5 86.2 90.7 99.8 88.3 93.0 95.3 100.2 105.1 110.0

Base Metals

Aluminium USD/t 1515 1570 1530 1550 1541 1535 1570 1708 1846 1983

Copper USD/t 4678 4700 4400 4600 4595 4475 5023 5572 6120 6668

Lead USD/t 1740 1730 1750 1740 1740 1740 1650 1675 1700 1725

Nickel USD/t 8508 8750 9000 10000 9064 10000 11000 12760 14521 16281

Tin USD/t 15500 17000 16500 16500 16375 17250 17518 17785 18053 18321

Zinc USD/t 1685 1900 2000 2200 1946 2050 2100 2208 2316 2423

Precious metals

Gold USD/oz 1184 1255 1330 1350 1280 1328 1310 1340 1370 1400

Silver USD/oz 14.9 16.6 18.3 18.7 17.1 18.2 18.0 18.5 19.0 20.5

Platinum USD/oz 917 1000 980 1020 979 1003 1050 1200 1250 1420

Palladium USD/oz 527 568 550 580 556 605 700 750 800 850

Rhodium USD/oz 672 700 650 720 686 724 750 850 900 1100

Ruthenium USD/oz 42 42 42 42 42 50 70 80 90 100


Figure 9: New price estimates – Steel making raw materials

Unit 1Q16 2Q16 3Q16 4Q16 2016 2017 2018 2019 2020 2021

Iron ore

CIF China fine ore USD/t 48.7 55.0 50.0 44.0 49.4 42.0 45.0 49.3 53.7 58.0

Coking Coal

Premium hard coking USD/t 81.0 84.0 92.5 90.0 86.9 89.3 95.0 106.0 116.9 127.9

Standard hard coking USD/t 70.8 73.4 80.9 78.7 75.9 78.0 83.0 92.6 102.2 111.8

Semi soft coking USD/t 66.0 76.0 73.0 69.0 71.0 74.1 77.7 87.2 96.7 106.3

Other Bulks

Chrome Ore USD/t 230.00 230.00 230.00 230.00 230.0 230.0 230.0 230.0 233.5 237.0

Ferro-chrome USc/lb 125.0 125.0 125.0 125.0 125.0 120.0 115.0 110.0 111.7 113.3

Manganese ore USc/dmtu 2.4 3.8 3.0 3.0 3.1 2.8 2.9 3.0 3.1 3.2

Ferro-manganese USD/t 964 964 979 979 971 1,001 1,037 1,026 1,012 1,036


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Figure 10: New price estimates – Minor metals, Energy & Fx

Unit 1Q16 2Q16 3Q16 4Q16 2016 2017 2018 2019 2020 2021

Minor metals

Cobalt (99.3%) USD/lb 13.0 13.0 12.5 12.0 12.6 12.0 13.0 11.8 10.6 10.8

Molybdenum USD/lb 5.42 6.90 6.80 6.50 6.40 6.58 6.80 7.28 7.75 8.23

Energy

Oil West Tex USD/bbl 33.6 45.8 47.0 48.0 43.6 53.0 65.0 65.0 66.0 67.0

Japanese thermal coal USD/t 67.8 61.6 61.6 61.6 63.2 58.9 58.0 60.0 62.0 58.8

Uranium (U3O8) USD/lb 55.00 58.00 58.00 58.00 57.25 59.49 62.05 64.22 64.54 66.00

Foreign Exchange

Euro USD/EUR 1.10 1.13 1.09 1.07 1.10 0.98 0.95 1.05 1.10 1.10

Australia USD/AUD 0.723 0.746 0.729 0.714 0.728 0.686 0.675 0.696 0.718 0.739

South Africa ZAR/USD 15.62 15.13 15.56 15.51 15.46 15.77 14.92 13.41 13.21 14.75


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Figure 11: Changes from previous forecast

1Q16 2Q16 3Q16 4Q16 2016 2017 2018 2019 2020 2021

Base Metals

Aluminium -1.6% 0.6% 0.0% 2.0% 0.2% -3.8% -7.7% -5.4% -3.4% -1.6%

Copper 0.1% -4.1% -2.2% 4.5% -0.5% -5.3% -3.8% -2.6% -1.6% -0.7%

Lead -0.6% -3.9% 1.7% 0.6% -0.6% -3.7% -14.9% -19.0% -22.7% -26.0%

Nickel -2.2% 2.9% 2.3% -2.4% 0.0% -2.4% -6.8% -4.5% -2.7% -1.2%

Tin 0.0% 0.0% 0.0% 3.1% 0.8% 7.8% 6.1% 4.4% 2.8% 1.4%

Zinc 0.0% 6.7% 14.3% 27.9% 12.3% 13.1% 7.3% 5.1% 3.2% 1.5%

Precious metals

Gold -3.7% 9.1% 13.7% 9.8% 7.1% 7.8% 2.7% 1.8% 0.9% 0.0%

Silver -4.1% 10.7% 22.8% 23.0% 13.0% 15.4% 9.1% 5.7% 2.7% 2.5%

Platinum -0.8% 8.7% 2.1% 7.4% 4.3% 12.6% 1.9% -4.0% -10.1% -2.1%

Palladium 0.3% 3.3% -8.3% -10.8% -4.3% -8.0% -6.7% -16.7% -13.0% -9.6%

Rhodium 0.3% 0.0% -9.7% 0.0% -2.4% 0.0% 0.0% 0.0% 0.0% 0.0%

Ruthenium 0.0% 0.0% 0.0% 0.0% 0.0% -16.7% -12.5% -20.0% -10.0% 0.0%

Steel making raw materials

Iron ore

CIF China fine ore -2.7% 25.0% 25.0% 2.3% 11.7% -8.2% -8.3% -5.8% -3.6% -1.7%

Coking Coal

Premium hard coking 0.0% 1.2% 8.8% 5.9% 4.0% 1.7% -3.0% -2.1% -1.3% -0.6%

Standard hard coking 0.0% 1.2% 8.8% 5.9% 4.0% 1.7% -3.0% -2.1% -1.3% -0.6%

Semi soft coking 8.6% 22.1% 14.5% 8.2% 13.4% 12.6% 5.7% 7.4% 8.9% 10.1%

Other Bulks

Chrome Ore 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Ferro-chrome 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Manganese ore 6.0% 53.4% 15.4% 15.4% 22.7% 8.8% 9.6% 10.7% 4.6% -0.1%

Ferro-manganese 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.00% 0.00%

Minor metals

Cobalt (99.3%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Molybdenum -1.47% 14.94% 13.33% 8.33% 9.00% 1.15% -2.86% -2.02% -1.27% -0.60%

Energy

Oil West Tex 1.90% 14.38% 9.30% 2.13% 6.98% 1.92% 0.00% 0.00% 0.00% 0.00%

Japanese thermal coal 0.00% 6.21% 6.21% 6.21% 4.47% 10.09% 7.41% 7.89% 8.34% 0.00%

Uranium (U3O8) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Foreign Exchange

Euro (USD/EUR) 0.34% 5.75% 8.17% 9.79% 5.85% 8.17% 2.70% 0.00% 0.00% 0.00%

Australia (USD/AUD) 1.54% 2.46% 4.01% 5.06% 3.24% 3.52% 0.73% 0.01% 0.01% 0.00%

South Africa (ZAR/USD) -2.18% -2.29% -2.29% -5.14% -3.00% -5.96% -2.98% 0.40% 0.77% 0.77%


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Figure 12: Changes from previous period

1Q16 2Q16 3Q16 4Q16 2016 2017 2018 2019 2020 2021

Base Metals

Aluminium 1.4% 3.6% -2.5% 1.3% -7.4% -0.4% 2.3% 8.8% 8.1% 7.5%

Copper -4.3% 0.5% -6.4% 4.5% -16.6% -2.6% 12.3% 10.9% 9.8% 9.0%

Lead 3.4% -0.5% 1.2% -0.6% -2.6% 0.0% -5.2% 1.5% 1.5% 1.5%

Nickel -9.8% 2.8% 2.9% 11.1% -23.6% 10.3% 10.0% 16.0% 13.8% 12.1%

Tin 2.7% 9.7% -2.9% 0.0% 2.0% 5.3% 1.6% 1.5% 1.5% 1.5%

Zinc 4.4% 12.8% 5.3% 10.0% 0.8% 5.3% 2.4% 5.1% 4.9% 4.7%

Precious metals

Gold 7.3% 6.0% 6.0% 1.5% 10.3% 3.7% -1.3% 2.3% 2.3% 2.2%

Silver 0.7% 11.6% 10.2% 2.2% 8.9% 6.2% -1.0% 2.8% 2.7% 7.9%

Platinum 1.0% 9.0% -2.0% 4.1% -7.2% 2.4% 4.7% 14.3% 4.2% 13.6%

Palladium -13.0% 7.9% -3.2% 5.5% -19.6% 8.8% 15.7% 7.1% 6.7% 6.3%

Rhodium -7.9% 4.1% -7.1% 10.8% -28.0% 5.6% 3.6% 13.3% 5.9% 22.2%

Ruthenium 0.0% 0.0% 0.0% 0.0% -10.2% 19.0% 40.0% 14.3% 12.5% 11.1%

Steel making raw materials

Iron ore

CIF China fine ore 4.1% 13.1% -9.1% -12.0% -11.2% -15.0% 7.1% 9.6% 8.8% 8.1%

Coking Coal

Premium hard coking -9.0% 3.7% 10.1% -2.7% -15.0% 2.7% 6.4% 11.5% 10.3% 9.4%

Standard hard coking -9.0% 3.7% 10.1% -2.7% -15.0% 2.7% 6.4% 11.5% 10.3% 9.4%

Semi soft coking -1.1% 15.2% -3.9% -5.5% -6.4% 4.4% 4.8% 12.3% 10.9% 9.9%

Other Bulks

Chrome Ore 2.2% 0.0% 0.0% 0.0% 2.2% 0.0% 0.0% 0.0% 1.5% 1.5%

Ferro-chrome 0.0% 0.0% 0.0% 0.0% 0.0% -4.0% -4.2% -4.3% 1.5% 1.5%

Manganese ore -19.1% 58.0% -21.8% 0.0% -2.7% -9.5% 5.4% 2.6% 3.3% 3.9%

Ferro-manganese 1.5% 0.0% 1.5% 0.0% 2.3% 3.0% 3.6% -1.0% -1.4% 2.4%

Minor metals

Cobalt (99.3%) 0.0% 0.0% -3.8% -4.0% -4.4% -5.0% 8.3% -9.2% -10.1% 1.5%

Molybdenum 9.7% 27.3% -1.4% -4.4% -6.2% 2.7% 3.4% 7.0% 6.5% 6.1%

Energy

Oil West Tex -22.8% 36.1% 2.7% 2.1% -11.4% 21.6% 22.6% 0.0% 1.5% 1.5%

Japanese thermal coal 0.0% -9.1% 0.0% 0.0% -11.5% -6.7% -1.5% 3.4% 3.3% -5.1%

Uranium (U3O8) 0.0% 5.5% 0.0% 0.0% 8.6% 3.9% 4.3% 3.5% 0.5% 2.3%

Foreign Exchange

Euro (USD/EUR) 0.9% 2.4% -3.2% -2.5% -1.3% -11.0% -2.7% 10.5% 4.8% 0.0%

Australia (USD/AUD) 0.4% 3.1% -2.2% -2.1% -3.4% -5.7% -1.7% 3.2% 3.1% 3.0%

South Africa (ZAR/USD) 9.7% -3.1% 2.8% -0.3% 20.3% 2.0% -5.4% -10.1% -1.5% 11.6%


6 July 2016

Metals & Mining



Investment views and earnings estimates

Earnings changes

Figure 13: European miner financial year earnings estimates and target price revisions

Rec Target (GBp*) 2015 2016E 2017E 2018E

Acacia Mining (US¢) Prev Buy 470 -2 27 35 35

New Buy 500 -2 38 45 38

% change 6.4% 0.0% 39.3% 27.4% 6.8%

Antofagasta (US¢) Prev Hold 470 1 11 34 57

New Hold 585 1 12 26 51

% change 24.5% 0.0% 8.1% -25.4% -10.4%

BHP Billiton (US¢) Prev Hold 880 162 16 35 91

New Hold 1250 162 23 46 81

% change 42.0% 0.0% 41.1% 31.7% -11.3%

Boliden (SEK) Prev Buy 165 9.7 11.2 18.4 17.2

New Buy 174 9.7 9.0 14.3 12.4

% change 5.5% 0.0% -19.2% -22.0% -27.9%

Ferrexpo (US¢) Prev Buy 105 24 18 18 21

New Buy 115 24 24 7 10

% change 9.5% 0.0% 33.9% -63.6% -54.3%

Fresnillo (US¢) Prev Sell 970 7 21 35 41

New Sell 1020 7 34 52 51

% change 5.2% 0.0% 62.2% 47.3% 23.7%

Kaz Minerals (US¢) Prev Hold 170 -2 11 30 19

New Hold 163 -2 15 24 12

% change -4.1% 0.0% 32.4% -20.2% -38.1%

Lonmin (US¢) Prev Sell 105 -16 -1 1 11

New Sell 106 -16 -2 -5 1

% change -1.0% 0.0% 60.6% -270.1% -51.1%

Nordgold (US¢) Prev Buy 4.60 47 28 42 52

New Buy 4.90 47 34 41 50

% change 6.5% 0.0% 18.0% -1.9% -5.3%

Norsk Hydro (NOK) Prev Hold 31.0 3.3 1.90 2.36 4.91

New Hold 34.8 3.3 1.54 1.35 2.97

% change 12.3% 0.0% -18.7% -42.7% -39.6%

Nyrstar (€) Prev Hold 9.80 -0.07 0.00 1.72 1.85

New Hold 10.18 -0.07 0.11 2.02 2.22

% change 3.9% 0.0% 23278.3% 17.6% 19.8%

Polymetal (US¢) Prev Hold 780 56 81 93 122

New Hold 820 56 103 115 135

% change 5.1% 0.0% 27.5% 23.5% 11.1%

Randgold (US¢) Prev Hold 6700 201 182 284 371

New Hold 7100 201 274 373 412

% change 6.0% 0.0% 50.0% 31.5% 11.2%

Rio Tinto (US¢) Prev Buy 2800 250 156 245 251

New Buy 3175 250 198 184 197

% change 13.4% 0.0% 27.3% -24.9% -21.5%

South32 (US¢) Prev Hold 74 11 2 4 7

New Hold 100 11 2 4 3

% change 35.1% 0.0% 5.1% -3.0% -51.9%

Vedanta (US¢) Prev Hold 375 -14 -132 -101 -103

New Buy 615 -14 -132 -26 -60

% change Rating Changed 64.0% 0.0% 0.0% 74.6% 41.6% Source : Deutsche Bank, Company data; *Target price for Boliden is in SEK, for Norsk Hydro is in NOK, for Nyrstar is in EUR, and for Nordgold is in USD

6 July 2016

Metals & Mining



Acacia Mining Buy Reuters: ACAAL.L Exchange: LSE Ticker: ACA LN

Gearing to the gold price and a cost turn-around story

Price target (GBP) 500

FTSE 100 INDEX 6,504

Our investment thesis

Acacia's management has delivered a significant turnaround in productivity and cost

control at the group’s mines over the past two years. The key to a sustained reduction

in production costs and therefore improving cash margins is to continue with the

improvement at the flagship mine Bulyanhulu and to maintain the strong performance

at North Mara. At Bulyanhulu, Acacia aims to mine at the reserve grades of 9g/t,

driving down costs, at a steady state output of 350koz per year. We forecast

Bulyanhulu’s production at 295koz in 2016. We also expect Acacia's all-in costs to

move steadily down towards US$950/oz by 2017, offering positive operational

leverage in the supportive gold price environment we foresee. Acacia's robust balance

sheet, with a net cash position, provides the group with flexibility to manage periods

of more muted gold price performance.

Impact of our gold price forecasts revision:

With an annual increase of 4% in our gold price forecasts on average from 2016 to

2020, we have revised our target price up 6% to £5.00 from £4.70. Our 2016 and 2017

EPS estimates have moved 41% and 29% respectively due to an 11.7% revision in our

gold price forecast in 2H16 and a 7.8% revision in our 2017 gold price forecast.

Next catalysts 2Q16 and 1H16 financial results

Bulyanhulu at or above 9g/t: Any positive development at Bulyanhulu resulting in grade delivered at or above 9g/t sustainably will be a key catalyst for the shares.

Gold price and operating currencies: Upward movements in the gold price and downward movements in the group’s operating currencies will have a positive impact on Acacia’s cash flows. The group’s cost base is split 80/20 US Dollar/Tanzanian Shilling.

Court cases in Tanzania: The outcome of the pending cases involving Acacia with the Tanzanian revenue authority may or may not trigger further cash outflows.

Dates: 2Q16 and 1H16 financial results: 22 July 2016

Valuation and risks: Our 12-month price target is based on 1.2x our 2016e NAV. Our NAV is based on

a life of mine discounted cash flows, with a WACC of 5% and a long-run gold price assumption of US$1300/oz. Our WACC of 5% is based on a risk-free rate of 4%, a market risk premium of 6%, a beta of 0.3x and a 30% target gearing. We apply the 20% premium to our NPV to derive our target price -this reflects the ranking we assign to Acacia within our coverage universe. Our rankings are derived from debt reduction, P/E valuation, near-term earnings growth, and management actions to control cash flows.

Key downside risks include lower than expected gold prices, higher than expected costs and volatility in the US Dollar and the Tanzanian Shilling. The failure to deliver cost and capex cuts as planned, plus the failure to improve grades especially at the Bulyanhulu mine, are two key downside risks. There is a risk of an overhang in the shares from any further sell-down of Barrick Gold's 64% majority stake in Acacia Mining.

Franck Nganou (+44) 207 541 8161

[email protected]

Anna Mulholland (+44) 207 541 8172

[email protected]

6 July 2016

Metals & Mining



Model updated:03 July 2016

Running the numbers

Europe

United Kingdom

Gold

Acacia Mining plc Reuters: ACAA.L Bloomberg: ACA LN

Buy Price (5 Jul 16) GBP 497.60

Target Price GBP 500.00

52 Week range GBP 156.60 - 497.60

Market Cap (m) GBPm 2,041

USDm 2,663

Company Profile

Acacia Mining is a gold exploration and mining company with three operating mines in Tanzania, producing c.800 koz of gold p.a. The company was spun out of parent company Barrick Gold, which is the world's largest gold producer. Acacia aims to grow production to over 1Moz of gold p.a. through a series of brownfield expansions at its existing mines, potential Greenfield projects in Burkina Faso and Kenya, plus potential M&A.

Price Performance

0

100

200

300

400

500

600

Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16

Acacia Mining plc FTSE 100 INDEX (Rebased)

Margin Trends

-120

-80

-40

0

40

80

13 14 15 16E 17E 18E

EBITDA Margin EBIT Margin

Growth & Profitability

-40

-30

-20

-10

0

10

20

-15-10-505

101520

13 14 15 16E 17E 18E

Sales growth (LHS) ROE (RHS)

Solvency

0

10

20

30

40

-25

-20

-15

-10

-5

0

13 14 15 16E 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)


+44 20 754-18172 [email protected]

Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E

Financial Summary

DB EPS (USD) 0.30 0.22 -0.02 0.38 0.45 0.38

Reported EPS (USD) -1.86 0.22 -0.48 0.38 0.45 0.38

DPS (USD) 0.03 0.04 0.04 0.06 0.12 0.14

BVPS (USD) 4.7 4.9 4.4 5.0 5.6 5.9

Weighted average shares (m) 410 410 410 410 410 410

Average market cap (USDm) 1,189 1,573 1,575 2,663 2,663 2,663

Enterprise value (USDm) 1,053 1,426 1,469 2,441 2,252 2,131

Valuation Metrics P/E (DB) (x) 9.7 17.4 nm 17.3 14.5 17.3

P/E (Reported) (x) nm 17.5 nm 17.3 14.5 17.3

P/BV (x) 0.65 0.82 0.61 1.30 1.17 1.10

FCF Yield (%) nm 2.0 nm 3.6 6.9 5.0

Dividend Yield (%) 1.0 1.1 1.1 0.9 1.9 2.2

EV/Sales (x) 1.1 1.5 1.7 2.4 2.3 2.4

EV/EBITDA (x) 4.1 5.7 8.4 6.7 5.6 5.9

EV/EBIT (x) nm 11.5 nm 10.7 8.4 9.4

Income Statement (USDm)

Sales revenue 959 930 868 1,017 970 896

Gross profit 372 370 276 432 474 429

EBITDA 257 252 175 364 405 360

Depreciation 158 128 142 136 136 133

Amortisation 1,061 0 146 0 0 0

EBIT -962 124 -113 228 269 227

Net interest income(expense) -8 -9 -11 -8 -7 -7

Associates/affiliates 0 0 0 0 0 0

Exceptionals/extraordinaries 0 0 0 0 0 0

Other pre-tax income/(expense) 0 0 0 0 0 0

Profit before tax -970 115 -124 221 262 220

Income tax expense -188 26 73 66 79 66

Minorities -17 0 0 0 0 0

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit -765 90 -197 154 183 154

DB adjustments (including dilution) 887 1 190 0 0 0

DB Net profit 123 90 -7 154 183 154

Cash Flow (USDm)

Cash flow from operations 187 290 156 278 386 311

Net Capex -375 -258 -193 -182 -203 -177

Free cash flow -187 31 -37 96 183 134

Equity raised/(bought back) 0 0 0 0 0 0

Dividends paid -55 -14 -17 -17 -25 -51

Net inc/(dec) in borrowings 142 0 -14 -28 -28 -28

Other investing/financing cash flows -19 -6 7 11 11 11

Net cash flow -119 12 -61 62 141 66

Change in working capital 0 0 0 0 0 0

Balance Sheet (USDm)

Cash and other liquid assets 282 294 233 293 425 489

Tangible fixed assets 1,281 1,425 1,391 1,437 1,505 1,549

Goodwill/intangible assets 211 211 211 211 211 211

Associates/investments 0 0 0 0 0 0

Other assets 658 653 495 571 533 507

Total assets 2,432 2,583 2,330 2,512 2,675 2,756

Interest bearing debt 142 142 128 71 14 -43

Other liabilities 363 439 415 388 376 372

Total liabilities 505 581 543 459 390 329

Shareholders' equity 1,922 1,997 1,787 2,053 2,284 2,427

Minorities 5 5 0 0 0 0

Total shareholders' equity 1,927 2,002 1,787 2,053 2,284 2,427

Net debt -140 -152 -105 -222 -411 -532

Key Company Metrics

Sales growth (%) -11.8 -3.0 -6.7 17.2 -4.6 -7.7

DB EPS growth (%) 31.2 -26.3 na na 18.8 -15.9

EBITDA Margin (%) 26.8 27.1 20.2 35.8 41.7 40.2

EBIT Margin (%) -100.3 13.3 -13.0 22.5 27.7 25.4

Payout ratio (%) nm 19.2 nm 15.9 27.8 37.6

ROE (%) -32.7 4.6 -10.4 8.0 8.5 6.5

Capex/sales (%) 39.1 26.5 22.2 17.9 20.9 19.7

Capex/depreciation (x) 2.4 1.9 1.4 1.3 1.5 1.3

Net debt/equity (%) -7.3 -7.6 -5.9 -10.8 -18.0 -21.9

Net interest cover (x) nm 14.2 nm 29.0 36.4 33.4

Source: Company data, Deutsche Bank estimates

6 July 2016

Metals & Mining



Antofagasta Hold Reuters: Anto.L Exchange: LSE Ticker: Anto

A welcome kicker from gold offsetting stagnant copper price



Our Investment Thesis:

We think the key issues for Antofagasta shares on a 12 month view are: (i) successful

delivery of new volume from Antucoya and Zaldivar;(ii) continued cost-cutting,

boosted by Peso weakness, and also driven by delivery of synergies from the Zaldivar

acquisition; and (iii) a drive to improve free cash flow. We see a balanced risk/reward

profile for the shares and have a Hold recommendation.

Changes made on copper, gold, molybdenum and Chilean peso:

The average 3% per annum downgrade to our copper price forecasts for 2016 to 2018

is somewhat offset by our 6% average upgrade to our gold price forecasts for the

same period given Antofagasta’s gold by-product credits. The Chilean Peso was

stronger in the second quarter by 1.6% however, relative to our expectation of a

weakening. Overall, our EPS for 2016 increases 9% to US$0.12 due to higher gold and

moly prices, but we cut 2017E EPS by 24% to US$0.26 and our 2018 EPS by 11% to

US$0.51. Our NPV on a US$ basis moves up 4.8%. We have reflected a 1.30 GBP/USD

rate on a 12-month view which increases our target price by 25% to £5.85.

Next catalysts: 2Q16 production results: We expect an improvement quarter on quarter in copper

output, up 11% on 1Q15 to 174kt, driven by the continued ramp up of Antucoya

and Zaldivar and a stabilization of Los Pelambres. We expect Centinela weakness

to continue on lower grades year on year, albeit with improvements quarter on

quarter. We expect a 5% drop in cash costs to USc164/lb.

1H16 financial results: We forecast EBITDA to drop 6% year on year to US$527m,

as royalties kick in on higher prices. As a result of operational gearing and

Antofagasta’s low level of earnings, we have headline EPS falling 57% year on

year to USc3.8c. Capex should be down around 2% at US$455m and we forecast

Antofagasta will declare an interim dividend in line with its policy of paying out

35% of earnings.

Dates: 2Q16 production results: 27 July 2016

1H16 financial results: 16 August 2016

Valuation and risks: Our 12-month price target is set at 10% premium to our DCF valuation to reflect

the ranking we assign to Antofagasta within our coverage universe. Our rankings

are derived from debt reduction, P/E valuation, near-term earnings growth, and

management action taken to control cash flow. We use a WACC of 10.5%

(reflects a cost of equity (Beta 1.2) of 11.2%, cost of debt (post tax) of 6.2%, long-

term gearing of 10% and a tax rate of 25%.

Key risks include higher- or lower-than-expected copper, gold, and molybdenum

prices than our estimates, and a weaker-or stronger-than expected Chilean Peso

than we currently forecast. Grades may be significantly higher or lower than we

assume at the main Los Pelambres mine, and cost savings may be higher or lower

than guided.


[email protected]

Franck Nganou (+44) 207 541 8161

[email protected]

6 July 2016

Metals & Mining



Model updated:29 June 2016

Running the numbers

Europe

United Kingdom

Metals & Mining

Antofagasta PLC Reuters: ANTO.L Bloomberg: ANTO LN

Hold Price (5 Jul 16) GBP 461.50


52 Week range GBP 346.10 - 669.00


USDm 5,937

Company Profile

Antofagasta plc is one of the world's top ten copper producers with operations centered in Chile. The company also has diversified holdings in the transport, port energy and water industries, all as a way of hedging input costs. The Group's mining operations however represent the core of earnings (c.90%) and specialise in copper, via their Los Pelambres, El Tesoro, Esperanza and Michilla mines. Their transport operations encompass an extensive rail network, which serves the mining region of Northern Chile. The company has an extensive portfolio of early stage exploration and development projects across the globe. Price Performance

300

450

600

750

900

1050


Antofagasta PLC FTSE 100 INDEX (Rebased)

Margin Trends

0

10

20

30

40

50

13 14 15 16E 17E 18E



0

2

4

6

8

10

12

-40

-30

-20

-10

0

10

20

13 14 15 16E 17E 18E


Solvency

05101520253035

-20

-15

-10

-5

0

5

10

13 14 15 16E 17E 18E





Financial Summary

DB EPS (USD) 0.67 0.47 0.01 0.12 0.26 0.51

Reported EPS (USD) 0.67 0.47 0.62 0.12 0.26 0.51

DPS (USD) 0.95 0.22 0.03 0.04 0.09 0.18

BVPS (USD) 6.8 6.3 6.7 6.8 7.0 7.4





P/E (Reported) (x) 22.0 27.9 15.9 49.6 23.5 11.9

P/BV (x) 2.00 1.88 1.03 0.88 0.86 0.82

FCF Yield (%) 2.2 1.7 nm nm 3.9 5.1

Dividend Yield (%) 6.4 1.7 0.3 0.7 1.5 3.0

EV/Sales (x) 2.5 2.7 3.5 2.6 2.3 2.0

EV/EBITDA (x) 5.6 6.4 13.7 7.4 6.2 4.2

EV/EBIT (x) 6.9 8.8 39.6 16.5 12.1 7.1


Sales revenue 5,972 5,290 3,395 3,363 3,787 4,369

Gross profit 2,702 2,222 891 1,105 1,308 1,848

EBITDA 2,690 2,246 881 1,168 1,385 2,066

Depreciation 518 606 576 581 592 612

Amortisation 0 0 0 0 0 0

EBIT 2,172 1,640 304 524 715 1,237


Associates/affiliates -14 -4 -6 -47 -5 61



Profit before tax 2,084 1,573 259 404 638 1,227

Income tax expense 844 723 160 152 212 434

Minorities 580 391 94 133 174 292


Net profit 660 460 608 120 252 501

DB adjustments (including dilution) 0 0 -603 0 0 0

DB Net profit 660 460 6 120 252 501

Cash Flow (USDm)

Cash flow from operations 1,763 1,804 393 761 981 1,380

Net Capex -1,450 -1,585 -1,127 -910 -750 -1,075

Free cash flow 313 219 -734 -149 231 305


Dividends paid -1,437 -1,377 -207 -2 -10 -56

Net inc/(dec) in borrowings -528 1,000 438 0 0 0

Other investing/financing cash flows 345 419 451 -5 -5 -5

Net cash flow -1,198 262 -38 -156 217 244

Change in working capital -43 140 253 -84 -40 -13


Cash and other liquid assets 2,685 2,375 1,732 1,575 1,792 2,036



Associates/investments 453 808 1,833 1,833 1,833 1,833

Other assets 1,694 1,287 1,222 1,583 1,688 1,721

Total assets 12,390 12,815 13,537 14,070 14,548 15,285

Interest bearing debt 1,212 2,059 2,257 2,257 2,257 2,257

Other liabilities 2,514 2,721 2,580 2,880 2,946 2,966

Total liabilities 3,726 4,780 4,837 5,137 5,203 5,223


Minorities 1,939 1,861 1,873 2,038 2,258 2,608


Net debt -1,473 -315 525 682 465 221

Key Company Metrics

Sales growth (%) -11.4 -11.4 -35.8 -0.9 12.6 15.4

DB EPS growth (%) -52.6 -30.3 -98.8 2,073.4 110.9 98.5

EBITDA Margin (%) 45.0 42.4 25.9 34.7 36.6 47.3

EBIT Margin (%) 36.4 31.0 9.0 15.6 18.9 28.3

Payout ratio (%) 142.0 46.2 5.0 35.0 35.0 35.0

ROE (%) 9.5 7.1 9.5 1.8 3.7 7.1

Capex/sales (%) 24.3 30.0 33.2 27.1 19.8 24.6


Net debt/equity (%) -17.0 -3.9 6.2 7.8 5.1 2.2

Net interest cover (x) 29.3 26.4 7.8 7.1 9.9 17.5


6 July 2016

Metals & Mining



BHP Billiton Plc Hold Reuters: BLT.L Exchange: LSE Ticker: BLT

Pursuing Buy over Build?




We think the long-term BHP Billiton story is: 1. Production, earnings and cash flow

growth from its low cost mining and oil projects through brownfields expansions, 2.

Portfolio simplification by selling and/or demerging non-core assets, and 3. Growth

through approving more high returning projects and adding more projects to the

portfolio. The company's capital allocation strategy remains: 1. Balance sheet

management (maintaining the A credit rating), 2. Paying out at least 50% of underlying

earnings through the cycle, 3.and investing counter-cyclically in organic growth and/or

M&A. BHP Billiton's assets are long life, low operating cost, and in low to moderate

risk countries and overall are considered premium quality relative to peers. We rate

BHP a Hold on valuation. Despite trading below our NPV we highlight that the

company's Cu Eq growth outlook is flat as oil production has peaked and minerals

growth projects are long-dated.

Changes made on copper, nickel, iron ore, coal and nat gas:

Our FY16 and FY17 EPS estimates rise 44% and 29% respectively due to a

combination of increases to our nat gas (+7%, +14%), iron ore (+12%, -8%), met coal

(+4%, +2%) and WTI (+7%, 0%) forecasts, all offset by a 3% cut to our copper and

nickel price forecasts. Our FY18 EPS forecast drops 11% as we cut our 2018 nat gas,

iron ore and met coal prices by 9%, 8% and 3% respectively. Our NPV on a US$ basis

moves up 15%, including an 11% uplift from rolling our calculation to June 2017. We

have reflected a 1.30 GBP/USD rate on a 12-month view which increases our target

price by 42% to £12.50.

Next catalysts: Final 2016 results: We expect the focus to be on use of cash flow after BHP cut its

dividend in February and adopted a 50% payout, amounting to a reduction in

yearly cash outlay of US$4bn. Capex guidance may be raised especially for US

Onshore oil given the rebound in prices year to date.

Acquisition: BHP has said this year that it is looking for copper and oil potential

acquisitions. Whilst it has opened the door on potentially acquiring companies, we

believe the focus at this stage remains firmly on asset acquisitions. A price tag of

US$3-5bn is most likely on our estimates. We think BHP would be comfortable

with a downgrade of its credit rating from A to A- to implement a deal of this size.

Key events: 4Q16 operational results: 20 July 2016; FY16 results: 16 August 2016

Valuation and risks: We value BHP using life-of-mine cash flows with a WACC of 9.3%. Our price

target is set at a 10% discount to our NPV valuation to reflect the ranking we

assign to BHP Billiton within our coverage universe.

Key risks include variance in commodity prices and exchange rates vs. our

estimates. Downside risks include delivery risk on longer-dated growth

projects. Sustained higher US onshore oil volumes could limit upside in both

the oil price and US nat gas price. Upside risks include increased volumes and

higher cost cuts than we have forecast.


[email protected]

Paul Young (+61) 2 8258-2587

[email protected]

Franck Nganou (+44)207 541 8161

[email protected]

6 July 2016

Metals & Mining




Running the numbers

Europe

United Kingdom

Metals & Mining

BHP Billiton Plc Reuters: BLT.L Bloomberg: BLT LN


Target Price GBP 1,250.00

52 Week range GBP 580.90 - 1,253.00


USDm 64,950

Company Profile

BHP Billiton Plc is an international resources company. The company's principal business lines are mineral and petroleum production, including coal (thermal and coking), iron ore, aluminium, manganese, nickel, copper concentrate and cathode, diamonds, and oil & gas (conventional and unconventional, LNG).

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Financial Summary

DB EPS (USD) 2.29 2.47 1.62 0.23 0.46 0.81

Reported EPS (USD) 2.10 2.54 0.64 -0.91 0.46 0.81

DPS (USD) 1.16 1.21 1.24 0.30 0.23 0.41

BVPS (USD) 13.3 14.9 12.2 10.6 10.9 10.8

Weighted average shares (m) 5,321 5,321 5,318 5,321 5,321 5,321



Valuation Metrics P/E (DB) (x) 13.4 12.3 15.7 53.4 26.6 15.1

P/E (Reported) (x) 14.6 12.0 39.5 nm 26.6 15.1

P/BV (x) 1.93 2.17 1.61 1.18 1.12 1.13

FCF Yield (%) 0.2 6.8 5.7 7.9 10.4 9.9

Dividend Yield (%) 3.8 4.0 4.9 2.5 1.9 3.3

EV/Sales (x) 2.9 3.4 3.6 3.0 2.9 2.5

EV/EBITDA (x) 6.8 6.3 8.7 25.0 6.9 5.4

EV/EBIT (x) 9.2 8.5 18.7 nm 18.5 10.6


Sales revenue 65,953 56,762 44,636 30,834 30,653 33,664

Gross profit 24,433 29,140 18,160 3,412 12,699 15,504

EBITDA 28,380 30,365 18,656 3,663 12,699 15,504

Depreciation 7,378 7,716 9,986 8,878 7,989 7,590


EBIT 21,002 22,649 8,670 -5,216 4,710 7,914

Net interest income(expense) -1,276 -914 -614 -772 -622 -505



Other pre-tax income/(expense) 0 0 0 -59 -147 -366

Profit before tax 19,726 21,735 8,056 -6,047 3,941 7,044

Income tax expense 6,906 6,780 3,666 -1,232 1,340 2,395

Minorities 1,597 1,392 968 47 153 322


Net profit 11,223 13,563 3,422 -4,862 2,448 4,327

DB adjustments (including dilution) 985 -385 5,199 6,081 0 0

DB Net profit 12,208 13,178 8,621 1,219 2,448 4,327

Cash Flow (USDm)

Cash flow from operations 20,154 25,364 19,296 12,227 11,723 11,880

Net Capex -19,905 -14,346 -11,625 -7,083 -4,966 -5,418

Free cash flow 249 11,018 7,671 5,144 6,757 6,462


Dividends paid -6,167 -6,387 -6,498 -4,120 -1,351 -1,476

Net inc/(dec) in borrowings 7,157 -1,011 -728 7,007 1,988 -800

Other investing/financing cash flows -364 224 -649 -740 -805 -1,025

Net cash flow 896 3,858 -195 7,291 6,589 3,160

Change in working capital -7,514 116 -187 1,723 235 -1,898




Goodwill/intangible assets 5,496 5,439 4,292 4,358 4,646 4,949

Associates/investments 1,880 2,436 2,944 2,652 2,652 2,652

Other assets 25,560 25,948 16,519 14,493 14,414 15,124

Total assets 139,178 151,413 124,580 120,004 123,779 125,779





Minorities 4,624 6,239 5,777 5,870 6,167 6,793


Net debt 27,510 25,786 24,417 23,497 18,897 14,937

Key Company Metrics

Sales growth (%) -8.7 -13.9 -21.4 -30.9 -0.6 9.8

DB EPS growth (%) -28.6 7.9 -34.5 -85.9 100.9 76.7

EBITDA Margin (%) 43.0 53.5 41.8 11.9 41.4 46.1

EBIT Margin (%) 31.8 39.9 19.4 -16.9 15.4 23.5

Payout ratio (%) 55.0 47.5 192.7 nm 49.9 49.9

ROE (%) 16.4 18.1 4.8 -8.0 4.3 7.5

Capex/sales (%) 33.7 26.8 26.8 23.4 16.2 16.1


Net debt/equity (%) 36.5 30.2 34.6 37.6 29.5 23.2

Net interest cover (x) 16.5 24.8 14.1 nm 7.6 15.7


6 July 2016

Metals & Mining



Boliden AB Buy Reuters: BOL.ST Exchange: STO Ticker: BOL

A sound strategy in place

Price target (SEK) 174

OMX Stockholm Index 1,324


Boliden has one of the best delivery track records amongst our coverage. The group’s

strategy is to create value by developing large-scale ore bodies into big mines.

Boliden’s copper equivalent production is split 60% copper, 30% zinc, and the

remainder nickel, silver, gold and PGM by-products. With the acquisition of the

Kevitsa copper/nickel/gold and PGM mine, completed in June 2016, Boliden has

further diversified its product mix and the company is set to benefit when copper and

nickel prices turn. The company’s hedging policies are sensible, and it has also

delivered solid growth at the Garpenberg zinc mine. It also intends to enhance

production at Aitik with a double surface crusher to be commissioned in 2018.

Impact of treatment charges and changes in our copper, gold and zinc price forecasts: We have reduced our 2016 and 2017 earnings expectations down 18% and 22%

respectively on i) the downward revision in our commodity price expectations (mainly copper and nickel), ii) stronger Norwegian and Swedish Krona, and iii) the effects of lower benchmark treatment charges in 2016, which kick in in the second quarter of 2016. Our better zinc and gold price forecasts somewhat offset the magnitude of the strengthening operating currencies and the treatment charges decline.

We have increased our NPV and target price by 5.5% due to our expectation of declining net debt on the rising gold price, zinc price, and treatment charges post 2017.

Next catalysts:

2Q16 financial results: Boliden’s three largest smelters (Kokkola, Harjavalta, and Ronskar) are under maintenance and this will have an estimated SEK165m impact on EBIT in 2Q16. We forecast 2Q16 EBIT at SEK567m, down from SEK888m in 1Q16.

Update on Kevitsa potential: Kevitsa will be consolidated as part of the group’s activities but only from June 2016 onward. The current annualized output of Kevitsa is below previous owner First quantum annual guidance for 2016. Any development provided by Boliden on improving the outlook at Kevitsa will be a catalyst for the shares.

Net debt reduction plans: Boliden has increased its gearing post Kevitsa and we estimate the net debt to equity ratio at 40% in 2016 from 22% in 2015.

Dates: 2Q16 financial results: 19 July 2016

Valuation and risks: Our SEK174ps TP is based on our DCF-derived NPV (WACC of 8.0% based on cost

of equity 11.3%, cost of debt 6.5%, tax rate of 28% and target gearing 40%). We apply a 20% premium to our NPV in setting the price target to reflect the relative performance Boliden in our coverage universe.

Risks include varied metal prices from expectations. Movements in the SEK, the NOK and the Euro relative to our expectations. From an operational perspective, lower volumes from the Aitik expansion is a key downside risk.


[email protected]

Franck Nganou (+44) 207 541 8161

[email protected]

6 July 2016

Metals & Mining




Running the numbers

Europe

Sweden

Metals & Mining

Boliden AB Reuters: BOL.ST Bloomberg: BOL SS

Buy Price (5 Jul 16) SEK 164.70

Target Price SEK 174.00

52 Week range SEK 102.90 - 175.70

Market Cap (m) SEKm 45,047

USDm 5,299

Company Profile

Boliden is an international mining and smelting company which mines, smelts and refines zinc and copper. By-products include lead, gold, silver, among others. The group operations in five countries Sweden, Finland, Norway, Ireland and Netherlands.

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Financial Summary

DB EPS (SEK) 4.72 6.95 9.66 9.03 14.32 12.40

Reported EPS (SEK) 4.72 6.95 9.66 9.03 14.32 12.40

DPS (SEK) 1.75 2.25 3.25 3.00 5.00 4.00

BVPS (SEK) 84.4 87.7 94.4 97.0 108.3 115.7


Average market cap (SEKm) 27,295 29,169 42,865 45,047 45,047 45,047

Enterprise value (SEKm) 35,463 36,234 47,984 54,792 52,686 49,577


P/E (Reported) (x) 21.1 15.4 16.2 18.2 11.5 13.3

P/BV (x) 1.17 1.43 1.51 1.70 1.52 1.42

FCF Yield (%) nm 5.4 6.0 nm 6.5 9.9

Dividend Yield (%) 1.8 2.1 2.1 1.8 3.0 2.4

EV/Sales (x) 1.0 1.0 1.2 1.4 1.2 1.2

EV/EBITDA (x) 7.7 6.0 6.7 7.5 5.6 5.7

EV/EBIT (x) 19.7 13.1 13.4 15.1 9.2 10.1

Income Statement (SEKm)

Sales revenue 34,408 36,890 40,243 38,324 42,594 42,488

Gross profit 4,634 6,035 7,113 7,262 9,433 8,672

EBITDA 4,634 6,035 7,113 7,262 9,433 8,672

Depreciation 2,831 3,276 3,522 3,628 3,730 3,752


EBIT 1,803 2,759 3,591 3,634 5,703 4,920





Profit before tax 1,582 2,472 3,357 3,162 5,021 4,347

Income tax expense 287 572 714 692 1,105 956



Net profit 1,292 1,900 2,643 2,470 3,916 3,391


DB Net profit 1,292 1,900 2,643 2,470 3,916 3,391

Cash Flow (SEKm)


Net Capex -4,971 -4,209 -3,646 -9,678 -4,248 -2,992

Free cash flow -1,467 1,579 2,589 -3,874 2,927 4,477


Dividends paid -1,094 -479 -615 -752 -821 -1,368

Net inc/(dec) in borrowings 2,154 -876 -1,887 12,620 -4,000 0

Other investing/financing cash flows -1 2 -23 1 0 0

Net cash flow -408 226 64 7,995 -1,894 3,109

Change in working capital -546 489 -728 -169 -471 326

Balance Sheet (SEKm)

Cash and other liquid assets 611 865 923 8,207 6,313 9,423




Other assets 10,719 10,817 10,313 10,570 11,855 10,965

Total assets 41,841 43,866 43,022 56,929 56,838 58,298







Net debt 7,696 6,818 4,754 10,112 8,006 4,896

Key Company Metrics

Sales growth (%) -14.0 7.2 9.1 -4.8 11.1 -0.2

DB EPS growth (%) -60.5 47.1 39.1 -6.6 58.6 -13.4

EBITDA Margin (%) 13.5 16.4 17.7 18.9 22.1 20.4

EBIT Margin (%) 5.2 7.5 8.9 9.5 13.4 11.6

Payout ratio (%) 37.1 32.4 33.6 33.2 34.9 32.3

ROE (%) 5.6 8.1 10.6 9.4 13.9 11.1

Capex/sales (%) 14.4 11.4 9.1 25.3 10.0 7.0


Net debt/equity (%) 33.4 28.4 18.4 38.1 27.0 15.5



6 July 2016

Metals & Mining



Ferrexpo Plc Buy Reuters: FXPO.L Exchange: LSE Ticker: FXPO

Generating cash and working on the balance sheet



Our investment case:

Ferrexpo is sitting on very significant iron ore resources that could support both

significant expansions and significant mine lives. The company has very methodically

and strategically upgraded its product mix quality and adjusted its customer base to

supply the high end of the market. With China moving to a consumer led economy,

we expect demand will drive the requirement for higher quality steels and therefore

higher quality feed and this provides achieved pricing upside for FXPO. Growth

projects are currently on hold while both the markets and the country are experiencing

a period of volatility. The surprising recent loss of US$174m that was kept in its local

bank that moved into administration has left the company with a liquidity hole over

the next few years and the company needs to restructure its debt. A successful

restructuring would result in significant equity value while an unsuccessful one could

result in little. The company has demonstrated that the operations can continue to

operate with an off shore facility and our view is that the restructuring will be

successful (but not without risk); Buy.

Changes made:

The main changes to our EBITDA estimates reflect our changes to iron ore pricing, but

also some modest adjustments to freight rates and pellet premiums. We have not

made any material changes to our operating assumptions. The key for FXPO remains

getting debt down in order to facilitate the refinancing of its its bond maturities in

2018/19. We would expect the company to try and extend its debt maturity profile

within the next 12 months. The current PXF (pre export facility) will start maturing over

eight quarterly installments from 4Q16 and a new PXF facility is also targeted. The

higher near term price environment should in our opinion allow net debt to decline by

over US$200m in 2016 to around US$675m by year end on the back of close to

US$300m in EBITDA. However, whilst we continue to see material debt reduction in

2017/18 (despite EBITDA declining to US$170-180m in 2017/18 on lower iron ore

prices), net debt to EBITDA ratio remains high at above 3x.

Next catalysts for the stock:

At around 0.2x P/NPV, FXPO offers excellent value for those comfortable with the

continued political risk in Ukraine and the leverage to the iron ore price. The expected

improvement in the balance sheet should act as a catalyst for the name and we

maintain our Buy recommendation.

Valuation and risks:

We value the operating cash flow at US$2.0bn (13.9% WACC-COE16.2%, COD 10%,

gearing 30%). Securing additional debt facilities with regards to its maturing bonds in

2018/19 and its PXF facilities following strong cash generation in 1H16 would result in

significant value for equity investors. Non extension could leave the company with a

significant liquidity issue that could result in significant dilution for existing

shareholders. Our £1.15 PT is based on a 0.7x multiple to the equity participation in

the $2bn NPV of the operating cash flows. Downside risks include sensitivity to iron

ore prices, FX and inflation and potential disruption from political unrest in the

country. Additional financial risks include an inability to restructure its debt payments.

Volatile inflation outcomes post the devaluation of the Hyrvnia are likely and we

expect will cause earnings forecast volatility.

Rene Kleyweg (+44) 207 541 8178

[email protected]

6 July 2016

Metals & Mining




Running the numbers

Europe

United Kingdom

Metals & Mining

Ferrexpo Plc Reuters: FXPO.L Bloomberg: FXPO LN



52 Week range GBP 14.00 - 70.00

Market Cap (m) GBPm 187

USDm 244

Company Profile

Ferrexpo is a Top 12 global pellet producer, enjoys close proximity to customers in Europe. Ferrexpo is principally involved in the production and export of iron ore pellets to Ukraine, European and Asian steel industries. The principal asset of Ferrexpo is Ferrexpo Poltava GOK Corporation which operates an open-pit iron ore mine, concentrating and pelletising operations situated in central Ukraine, on the banks of the river Dnipro.

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Financial Summary

DB EPS (USD) 0.50 0.49 0.24 0.24 0.07 0.10

Reported EPS (USD) 0.45 0.30 0.06 0.25 0.07 0.10

DPS (USD) 0.13 0.13 0.03 0.00 0.00 0.00

BVPS (USD) 2.9 1.2 0.4 0.6 0.7 0.8


Average market cap (USDm) 1,755 1,229 484 244 244 244

Enterprise value (USDm) 2,220 1,807 1,242 799 723 672


P/E (Reported) (x) 6.7 6.9 14.6 1.7 5.8 4.1

P/BV (x) 1.08 0.68 0.76 0.68 0.62 0.56

FCF Yield (%) nm 5.0 22.0 83.9 31.3 21.3

Dividend Yield (%) 4.4 6.3 4.0 0.0 0.0 0.0

EV/Sales (x) 1.4 1.3 1.3 0.9 0.9 0.9

EV/EBITDA (x) 4.4 3.6 4.0 2.7 4.2 3.8

EV/EBIT (x) 6.2 5.7 11.0 3.4 6.5 5.8


Sales revenue 1,581 1,388 961 867 765 785

Gross profit 506 496 313 297 171 176

EBITDA 506 496 313 297 171 176

Depreciation 100 82 57 58 57 56


EBIT 359 318 112 236 111 117



Exceptionals/extraordinaries 10 -15 -18 4 4 4


Profit before tax 305 254 25 173 50 71

Income tax expense 42 70 -6 26 8 11

Minorities 2 6 -2 2 0 1


Net profit 262 178 33 145 42 60

DB adjustments (including dilution) 32 108 107 -4 -4 -4

DB Net profit 294 286 140 141 38 56

Cash Flow (USDm)


Net Capex -277 -229 -23 -35 -35 -60

Free cash flow -42 62 107 205 76 52


Dividends paid -78 -77 -78 0 0 0

Net inc/(dec) in borrowings 7 274 -394 -168 -84 -111

Other investing/financing cash flows -93 -22 -226 0 0 0

Net cash flow -206 236 -591 36 -7 -59

Change in working capital -103 -15 -77 36 13 -3



Tangible fixed assets 1,534 926 654 606 575 571



Other assets 695 413 387 345 333 336

Total assets 2,932 2,135 1,226 1,169 1,118 1,057

Interest bearing debt 1,029 1,305 904 735 651 540


Total liabilities 1,197 1,417 982 808 725 615

Shareholders' equity 1,713 709 245 361 391 440


Total shareholders' equity 1,735 718 244 361 393 442

Net debt 639 678 868 663 587 535

Key Company Metrics

Sales growth (%) 11.0 -12.2 -30.8 -9.8 -11.8 2.7

DB EPS growth (%) 36.0 -2.8 -51.1 1.0 -72.9 45.7

EBITDA Margin (%) 32.0 35.7 32.5 34.3 22.4 22.4

EBIT Margin (%) 22.7 22.9 11.7 27.2 14.6 14.8

Payout ratio (%) 29.5 43.3 58.5 0.0 0.0 0.0

ROE (%) 16.2 14.7 6.9 48.0 11.2 14.3

Capex/sales (%) 17.6 16.9 6.8 4.0 4.6 7.6


Net debt/equity (%) 36.8 94.5 356.0 183.5 149.5 121.0



6 July 2016

Metals & Mining



Fresnillo Sell Reuters: FRES.L Exchange: LSE Ticker: FRES

Running well ahead of fair value: we reiterate Sell




We believe Fresnillo is in a good position to successively grow volumes through the

addition of three new mines and a series of brownfield expansions over the next four

to five years. Growth in the next two years is more muted, however, as grades

decrease at four of its five mines. In addition, Fresnillo shares are up strongly year to

date, boosted by a combination of the gold and silver price rallies and an oil and FX

tailwind for costs and cash flow. We find the shares relatively expensive and believe

there are better value opportunities elsewhere in our gold mining coverage. With 40%

potential downside to our target price, our recommendation is Sell.

Changes made on higher gold and silver:

We make significant changes to our 2016-2018 earnings given the uplift of an average

6% per annum to our gold price forecasts and average 12.5% uplift to our silver price

forecasts over the same time period. Our 2016 EPS estimate increases 62% to USc34,

our 2017 estimate is up 49% to USc52 and our 2018 estimate up 24% to USc51. Our

NPV on a US$ basis moves up 5.5%. On 28 June, we published a new target price for

Fresnillo using a 1.30 GBP/USD rate on a 12-month view – in this report we bring the

GBP target prices for the other stocks under our coverage in line with this

methodology.

Next catalysts: 2Q16 production report: We expect silver production to be flat quarter on quarter

at 11moz and gold production to go down 22% with less ore processed at

Nochebuena.

1H16 financials: Despite the flat to down production, received gold and silver

prices will provide a clear boost to EBITDA – we forecast a 22% year on year rise

to US$385m for the first half. This should drop through to a 30% increase in

earnings – we estimate EPS of USc13 vs USc10 in 1H15. Cash flow should be

strong due to a US$95m inflow into working capital offsetting a US$54m increase

in capex year on year. As a result, we expect Fresnillo to double its (small)

dividend from USc3 per share (the 2015 final) to USc6 for this period.

Key events: 2Q16 production report: 20 July 2016

1H16 financial results: 2 August 2016

Valuation and risks: Our price target is set at a 20% premium to our NPV valuation, in line with the

other gold miners under our coverage. Our NPV is based on life-of-mine cash

flows, using a long-term gold price of US$1,300/oz and a silver price of US$20/oz.

The WACC of 6.4% is based on a risk-free rate of 4%, a market risk premium of

6%, a Beta of 0.4, and 0% gearing.

A key upside risk is higher than expected silver and gold prices. A sustained

weakening of the Mexican Peso is also an upside risk. The company has an

excellent exploration track record and could surprise on the upside by discovering

significant resources of silver and gold, leading to an upgrade in future production

expectations or improving grades at the large Fresnillo mine. The company has an

extensive project pipeline over the medium term - there is an upside risk to our

target price if this is brought to production quicker than we forecast. On a 12

month time frame, outperformance of silver versus gold is an upside risk.


[email protected]

Franck Nganou (+44) 207 541 8161

[email protected]

6 July 2016

Metals & Mining




Running the numbers

Europe

United Kingdom

Gold

Fresnillo Reuters: FRES.L Bloomberg: FRES LN

Sell Price (5 Jul 16) GBP 1,893.00


52 Week range GBP 588.00 - 1,895.00


USDm 18,203

Company Profile

Fresnillo is the world's largest primary silver producer and a significant gold producer. All its operations are currently based in the highly prospective gold and silver belts of Mexico. The group currently has five operating mines, two advanced stage development and four medium-term growth projects, as well as significant land holdings in Mexico. Fresnillo's goal is to double production silver and gold by 2018, equating to 65Moz of silver and over 400koz of gold.

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Financial Summary

DB EPS (USD) 0.38 0.07 0.07 0.34 0.52 0.51

Reported EPS (USD) 0.33 0.15 0.10 0.34 0.52 0.51

DPS (USD) 0.34 0.08 0.05 0.17 0.26 0.25

BVPS (USD) 3.1 3.1 3.2 3.3 3.6 3.9





P/E (Reported) (x) 56.0 93.7 114.3 72.0 47.4 48.8

P/BV (x) 3.99 3.87 3.30 7.55 6.82 6.39

FCF Yield (%) nm nm 0.9 0.7 2.3 2.7

Dividend Yield (%) 1.9 0.6 0.5 0.7 1.1 1.0

EV/Sales (x) 8.0 7.3 5.6 10.3 9.2 9.0

EV/EBITDA (x) 17.9 19.0 15.1 20.6 16.0 15.8

EV/EBIT (x) 26.7 42.1 40.2 36.4 25.0 25.4


Sales revenue 1,615 1,413 1,444 1,756 1,947 1,970

Gross profit 1,000 803 751 1,062 1,299 1,294

EBITDA 727 541 532 880 1,120 1,116

Depreciation 239 296 331 382 403 422


EBIT 488 245 200 499 717 694

Net interest income(expense) -9 -47 20 -35 -33 -27


Exceptionals/extraordinaries -54 77 28 0 0 0

Other pre-tax income/(expense) -6 -24 -36 -75 -94 -94





Net profit 240 108 71 253 384 373

DB adjustments (including dilution) 38 -54 -19 0 0 0

DB Net profit 278 54 51 253 384 373

Cash Flow (USDm)


Net Capex -560 -411 -469 -566 -385 -322

Free cash flow -114 -289 74 123 425 496

Equity raised/(bought back) 346 -451 0 0 0 0

Dividends paid -505 -88 -38 -66 -148 -190

Net inc/(dec) in borrowings 830 0 0 0 0 0

Other investing/financing cash flows 81 -270 190 6 11 16

Net cash flow 638 -1,098 227 63 288 321



Cash and other liquid assets 1,252 154 381 445 733 1,054




Other assets 558 1,140 881 739 763 766

Total assets 4,084 3,742 3,858 3,922 4,172 4,353

Interest bearing debt 836 796 797 797 797 797




Minorities 399 27 30 30 30 30


Net debt -415 642 416 352 64 -257

Key Company Metrics

Sales growth (%) -25.1 -12.5 2.2 21.6 10.9 1.2

DB EPS growth (%) -58.5 -80.5 -5.5 394.6 51.7 -2.8

EBITDA Margin (%) 45.0 38.3 36.8 50.1 57.5 56.7

EBIT Margin (%) 30.2 17.3 13.9 28.4 36.8 35.2

Payout ratio (%) 104.6 54.6 56.9 50.0 50.0 50.0

ROE (%) 10.7 4.8 3.1 10.6 15.1 13.5

Capex/sales (%) 35.4 30.1 32.9 32.2 19.8 16.3


Net debt/equity (%) -15.5 27.9 17.5 14.4 2.4 -8.9

Net interest cover (x) 54.5 5.2 nm 14.3 22.0 25.8


6 July 2016

Metals & Mining



KAZ Minerals Hold Reuters: KAZ.L Exchange: LSE Ticker: KAZ

Doubling copper cathode production by 2017



Our investment thesis:

KAZ Minerals is undertaking its plan to convert from a high-cost copper producer to a

low-cost copper producer post the commissioning of its two Greenfield projects,

Bozshakol and Aktogay. The projects are set to double the group’s copper cathode

production by 2017. We estimate KAZ Minerals’ copper cathode equivalent production

at 147kt in 2016. With 2016 net debt to EBITDA at 12 times going down to 6 times in

2017 on our estimates, the company has taken on higher debt to fund the two growth

projects, provided via a funding arrangement with the China Development Bank. The

debt is payable over an extended period. The weakening of the Kazakhstan Tenge

constitutes a tailwind for the company while the challenging outlook for copper is less

supportive.

Impact of the changes made to our copper and gold price forecasts: Our 2016 EPS has increased 36% on higher copper and zinc and gold by-products

price forecasts in the second half of the year. However, we have cut our copper price forecasts for 2017 by 5% and therefore revised our 2017 earnings estimate down 20%.

Our NPV on a US$ basis moved down 21%. We have however reflected a 1.30 GBP/USD rate on a 12-month view, in determining our GBP target price, which decreases by only 3% to £1.63.

Next catalysts:

1H16 interim financial results

Aktogay and Bozshakol: Demonstrated successful delivery of the two growth

projects will be key milestones for the company and the market is likely to start

reacting to these when they near completion and all capital commitments have

been made.

Copper prices and Tenge: Kaz Minerals is currently the archetypal leveraged

copper play and as such will be highly influenced by the copper price in Tenge.

Dates: 2Q16 quarterly production results: 28 July

1H16 interim financial results: 18 August

Valuation and risks: We value KAZ Minerals on a DCF-derived net asset valuation (NAV) and our target

price is set at 0.77x of our NAV. This assumes a WACC of 10.6% on post-tax cash flow and assumes 15% gearing (CoE 11.8%, CoD 6.5%, tax rate of 20%). We use life of mine cash flow analysis to arrive at our DCF valuation.

Key risks include weaker copper and zinc prices compared with our forecasts, lower production of copper and zinc and a stronger local operating currency (Tenge). Other risks include corporate governance, domestic economic and political developments and acquisitions. Last but not least for KAZ Minerals, project delivery is a key risk. While the group is moving through the development of its two large projects, its gearing will increase substantially and pose an extra risk in the event of commodity price declines.


[email protected]

Franck Nganou (+44) 207 541 8161

[email protected]

6 July 2016

Metals & Mining




Running the numbers

Europe

United Kingdom

Metals & Mining

KAZ Minerals Reuters: KAZ.L Bloomberg: KAZ LN



52 Week range GBP 72.70 - 201.20


USDm 738

Company Profile

Kazakhmys is a Top 10 global copper producer, Top 5 in silver, an expanding zinc producer, enjoys bottom quartile costs, has expansion and acquisition potential and close proximity to key end-consumer, China. Kazakhmys listed in London recently and entered the FTSE 100 index. Its assets are all located in Kazakstan.

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Financial Summary

DB EPS (USD) 0.37 0.19 -0.02 0.15 0.24 0.12

Reported EPS (USD) -3.96 -5.28 -0.03 0.15 0.24 0.12

DPS (USD) 0.00 0.00 0.00 0.00 0.02 0.01

BVPS (USD) 9.4 4.7 0.7 0.9 1.1 1.2


Average market cap (USDm) 3,050 1,919 1,244 738 738 738



P/E (Reported) (x) nm nm nm 10.9 7.0 14.2

P/BV (x) 0.38 0.86 2.12 1.86 1.49 1.36

FCF Yield (%) nm nm nm nm nm nm

Dividend Yield (%) 0.0 0.0 0.0 0.0 1.1 0.6

EV/Sales (x) 0.7 2.4 4.2 4.5 2.2 1.8

EV/EBITDA (x) 3.2 5.7 13.8 12.2 6.4 4.6

EV/EBIT (x) nm 21.2 31.0 23.7 12.2 12.3


Sales revenue 3,099 847 666 641 1,466 1,822

Gross profit 722 356 202 234 497 709

EBITDA 722 356 202 234 497 709

Depreciation 288 43 52 55 116 317

Amortisation 1,036 218 60 58 120 128

EBIT -602 95 90 121 260 263


Associates/affiliates -1,224 -2,128 0 0 0 0



Profit before tax -681 -168 12 83 129 64




Net profit -2,032 -2,361 -12 68 105 52

DB adjustments (including dilution) 2,222 2,448 2 0 0 0

DB Net profit 190 87 -10 68 105 52

Cash Flow (USDm)

Cash flow from operations 293 214 -175 123 312 373

Net Capex -1,271 -1,209 -1,080 -709 -614 -445

Free cash flow -978 -995 -1,255 -586 -303 -72


Dividends paid -42 0 0 0 -4 -6

Net inc/(dec) in borrowings 683 -26 409 -12 188 38

Other investing/financing cash flows 802 1,036 -33 0 0 0

Net cash flow 465 15 -879 -598 -119 -41

Change in working capital -13 21 -62 0 86 9


Cash and other liquid assets 1,715 1,730 851 253 134 92



Associates/investments 1,293 871 715 715 715 715

Other assets 2,247 366 192 284 740 788

Total assets 8,619 5,718 4,158 4,306 5,140 5,276


Other liabilities 1,287 522 332 414 964 1,014


Shareholders' equity 4,217 2,101 319 397 494 542


Total shareholders' equity 4,221 2,104 322 400 497 545

Net debt 1,396 1,362 2,653 3,239 3,546 3,625

Key Company Metrics

Sales growth (%) -7.6 -72.7 -21.4 -3.7 128.9 24.3

DB EPS growth (%) -60.5 -47.4 na na 55.0 -50.5

EBITDA Margin (%) 23.3 42.0 30.4 36.6 33.9 38.9

EBIT Margin (%) -19.4 11.2 13.5 18.9 17.7 14.5

Payout ratio (%) nm nm nm 0.0 8.0 8.0

ROE (%) -38.8 -74.7 -1.0 19.0 23.7 10.1

Capex/sales (%) 41.0 142.8 162.3 110.7 41.9 24.4


Net debt/equity (%) 33.1 64.7 823.9 809.5 713.3 665.0

Net interest cover (x) nm 0.4 1.1 3.2 2.0 1.3


6 July 2016

Metals & Mining



Lonmin Plc Sell Reuters: LMI.L Exchange: LSE Ticker: LMI

Solid free cash flow, as long as capex remains minimal




As a marginal producer, our price forecasts (based on marginal costs) leave Lonmin

leaking cash slowly but steadily over time. We believe higher-than-forecast prices (i.e.

above marginal cost) are unlikely in the medium term given the well-supplied PGM

metals market; and alternative sources of metal for end-users from recycling and

above-ground stocks. Lonmin has performed operationally, assisted by its high ore

reserve availability, and has no further obvious levers to pull in our view. Management

has already made the tough decision to lower production: output from the Marikana

complex will reduce by 100koz to 650kozpa over FY16 and FY17 as the Hossy and

Newman Shafts are closed and some of the smaller, contractor-operated mines are

put onto care-and-maintenance. We see a concentration of downside risks to being

exposed to the high-cost producer in an industry under pressure, and with low-prices

expected to persist for the medium term we have a Sell recommendation.

Changes made: platinum up but Rand stronger and palladium down

On our revised forecasts, Lonmin should report a net loss for FY16 and FY17 before

generating a small profit in FY18. The changes we made are due to increasing our

platinum prices by an average 6% each year for 2016 to 2018 but dropping our

palladium forecasts by the same percentage. We have strengthened our ZAR/USD

forecasts over the same period by 3%, 6% and 3% respectively. EBITDA covers capex

in FY16 and FY17 on our forecasts, with US$20m each year to spare, but the company

will return to burning cash in FY18 on our numbers, generating US$128m in EBITDA

but needing to spend US$142m in capex at that point. Our NPV on a US$ basis moves

down 16% but we have reflected a 1.30 GBP/USD rate on a 12-month view which

offsets all of the NPV cut, increasing our target price by 1% to £1.06.

Next catalysts: 3Q16 production report: We forecast improved production for Lonmin in the

quarter to June, with PGMs in concentrate up 18% quarter on quarter, and refined

and sold PGMs of 346koz, up 3% on 2Q16.

Key events: 3Q16 production report: 1 August 2016

Valuation and risks: Our price target is based on life-of-mine cash flows discounted at a WACC of

10.0%, Beta 1.4, ERP 6%. Risks include a weaker-than-expected rand and/or

higher-than-expected PGM prices leading to stronger than forecast cash flow,

taking pressure off the balance sheet. Additional risks include corporate action or

an approach for Lonmin given its distressed position; better-than-expected

production as a result of unexpected improvements in productivity; grades;

recoveries or a combination of the above.

6 July 2016

Metals & Mining




Running the numbers

Sub-Saharan Africa

South Africa

Platinum

Lonmin Plc Reuters: LMI.L Bloomberg: LMI LN

Sell Price (5 Jul 16) GBP 221.25


52 Week range GBP 36.75 - 1,284.81


USDm 721

Company Profile

Lonmin specialises in the mining of PGMs (platinum group metals). The group operates a number of platinum mines, concentrators, smelters and a refinery in its core Marikana operations, all situated in the Bushveld Igneous Complex of South Africa. The company's target is to produce 700koz in FY16, and 650kozpa in the two years thereafter.

Price Performance

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Lonmin Plc FTSE 100 INDEX (Rebased)

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Fiscal year end 30-Sep 2013 2014 2015 2016E 2017E 2018E

Financial Summary

DB EPS (USD) 0.20 0.05 -0.16 -0.02 -0.05 0.01

Reported EPS (USD) 0.31 -0.33 -2.86 -0.01 -0.05 0.01

DPS (USD) 0.00 0.00 0.00 0.00 0.00 0.00

BVPS (USD) 6.4 5.7 2.8 8.0 7.1 7.1


Average market cap (USDm) 30,197 31,510 13,854 721 721 721

Enterprise value (USDm) 29,731 31,296 13,783 359 330 357

Valuation Metrics P/E (DB) (x) 278.1 nm nm nm nm 207.6

P/E (Reported) (x) 182.6 nm nm nm nm 207.6

P/BV (x) 9.73 6.40 1.06 0.36 0.41 0.41

FCF Yield (%) nm nm nm nm 3.4 nm

Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0 0.0

EV/Sales (x) 19.6 32.4 10.7 0.3 0.3 0.3

EV/EBITDA (x) 97.8 nm nm 3.5 3.3 2.8

EV/EBIT (x) 202.2 nm nm nm nm 24.1


Sales revenue 1,520 965 1,293 1,045 999 1,030

Gross profit 304 -113 -52 103 98 128

EBITDA 304 -113 -52 103 98 128

Depreciation 157 142 1,966 111 110 113


EBIT 147 -255 -2,018 -8 -12 15


Associates/affiliates 4 -6 -5 -2 0 0


Other pre-tax income/(expense) -2 -1 0 0 0 0

Profit before tax 140 -326 -2,262 -20 -21 6

Income tax expense -58 -123 -363 -15 -6 2

Minorities 32 -15 -238 -2 -2 1


Net profit 166 -188 -1,661 -3 -13 4

DB adjustments (including dilution) -57 219 1,567 -3 0 0

DB Net profit 109 31 -94 -6 -13 4

Cash Flow (USDm)

Cash flow from operations 16 -116 -12 -2 98 115

Net Capex -159 -93 -136 -80 -71 -142

Free cash flow -143 -209 -148 -83 28 -27


Dividends paid -11 -37 -19 0 0 0

Net inc/(dec) in borrowings -742 175 331 -355 0 0

Other investing/financing cash flows -42 12 10 -15 0 0

Net cash flow -114 -58 177 -58 28 -27

Change in working capital -223 32 60 -47 9 -3






Other assets 539 451 391 376 360 363

Total assets 4,616 4,365 2,429 2,319 2,291 2,296


Other liabilities 1,006 811 404 273 266 266

Total liabilities 1,006 983 909 423 416 416


Minorities 201 149 -109 -111 -113 -112


Net debt -201 29 185 -112 -140 -113

Key Company Metrics

Sales growth (%) nm -36.5 34.0 -19.2 -4.4 3.1

DB EPS growth (%) na -73.6 na 84.8 -90.5 na

EBITDA Margin (%) 20.0 -11.7 -4.0 9.9 9.9 12.4

EBIT Margin (%) 9.7 -26.4 -156.1 -0.7 -1.2 1.4

Payout ratio (%) 0.0 nm nm nm nm 0.0

ROE (%) 12.4 -14.1 -124.0 -0.2 -1.0 0.3

Capex/sales (%) 10.5 9.6 10.5 7.7 7.1 13.8


Net debt/equity (%) -5.6 0.9 12.2 -5.9 -7.4 -6.0

Net interest cover (x) 16.3 nm nm nm nm 1.7


6 July 2016

Metals & Mining



Nordgold Buy Reuters: NORDNq.L Exchange: LSE Ticker: NORD

Growth and efficiency plans deployed

Price target (USD) 4.9



Nordgold has a diversified portfolio of eight gold mines in West Africa, Russia and

Kazakhstan, and two projects in execution: Bouly in Burkina Faso and Gross in Russia.

We estimate the company will grow production beyond 1moz per annum, with the

new Bouly mine commencing production in the second half of 2016. Nordgold offers a

resilient business model with a healthy growth pipeline. We expect the group to

benefit from a stronger gold price, weaker operating currencies and cost efficiencies in

the next 12 months. The main drag remains the low liquidity of the shares but with the

recent redomiciliation of Nordgold to the UK, the first step for a premium listing in

London, we believe this is a move in the right direction, and the shares appear

undervalued relative to our target price.

Changes made to our copper and gold price forecasts:

With the upward revision in our gold price forecasts, our 2016 and 2017 earnings

estimates have moved up 18% and 8% respectively. We have also updated our

inflation forecasts in Russia and Kazakhstan, reflecting the latest available change in

producers’ prices. Our target price has increased 4.3% to US$4.90 from US$4.60.

Next catalysts:

2Q16 and 1H16 financial results during the last week of July 2016 (exact date not confirmed yet).

Roadmap for the premium listing in London which requires a 25% free float (Nordgold’s free float is currently at 9%) and will boost liquidity in the shares.

Potential use of free cash flow: will management consider a third share buyback?

Delivery of first production from Bouly on budget and schedule. Nordgold expects Bouly to start producing in 3Q16. The mine should account for circa 10% of both group’s revenue and EBITDA once ramped-up.

Movements in the gold price and the operating currencies which should help generate more cash flows

Valuation and risks: We value Nordgold using a sum-of-the-parts of life of mine DCF models. We apply

an NPV multiple of 0.7x to reflect the ranking we assign to Nordgold within our coverage universe. Our rankings are derived from debt reduction, P/E valuation, near-term earnings growth, and management action taken to control cash flow. We value the group's longer-dated growth options at US$134m or US$0.36/GDR. We use a WACC of 8.36% and a long-term (real) gold price of US$1,300/oz.

Key downside risks include lower-than-expected gold prices, higher-than-expected

costs and a stronger-than-expected Rouble, Tenge, Guinean franc and West

African franc. Operational risks are concentrated around management's ability to

deliver on development projects and to sustain cost reduction

Franck Nganou George Buzhenitsa (+44) 207 548 8161 +(7) 495 933 9221

[email protected] [email protected]


[email protected]

6 July 2016

Metals & Mining




Running the numbers

Emerging Europe

Russia

Metals & Mining

Nordgold Reuters: NORDNq.L Bloomberg: NORD LI

Buy Price (5 Jul 16) USD 3.48

Target Price USD 4.90

52 Week range USD 2.50 - 3.49

Market Cap (m) EURm 1,179

USDm 1,309

Company Profile

Nordgold is a gold mining and exploration company with eight operating mines in Russia, Kazakhstan, Burkina Faso and Guinea. The company is a former subsidiary of Severstal Group, spun off in January 2012, when a portion of Nordgold's share capital was listed in the form of Global Depositary Receipts.

Price Performance

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Financial Summary

DB EPS (USD) -0.55 0.26 0.47 0.34 0.41 0.50

Reported EPS (USD) -0.58 0.26 0.47 0.24 0.34 0.50

DPS (USD) 0.08 0.10 0.16 0.11 0.14 0.17

BVPS (USD) 3.1 2.5 2.2 2.5 3.0 3.5


Average market cap (USDm) 973 602 1,015 1,309 1,309 1,309


Valuation Metrics P/E (DB) (x) nm 6.2 5.8 10.4 8.5 7.0

P/E (Reported) (x) nm 6.1 5.8 14.7 10.3 7.0

P/BV (x) 0.52 0.60 1.23 1.37 1.17 1.00

FCF Yield (%) 15.2 35.3 18.8 nm 17.7 22.2

Dividend Yield (%) 3.1 6.5 5.8 3.2 3.9 4.8

EV/Sales (x) 1.4 1.0 1.4 1.7 1.3 1.1

EV/EBITDA (x) 4.5 2.4 3.1 4.0 2.7 2.3

EV/EBIT (x) 10.4 4.0 5.0 8.6 5.7 4.0


Sales revenue 1,271 1,216 1,129 1,150 1,373 1,424

Gross profit 461 572 578 597 770 813

EBITDA 388 510 522 486 652 686

Depreciation 219 202 198 260 339 291


EBIT 168 308 324 225 313 396



Exceptionals/extraordinaries -386 -24 -15 0 0 0


Profit before tax -269 183 274 182 241 324

Income tax expense -70 60 86 71 86 104

Minorities 19 25 13 23 28 33


Net profit -218 98 176 89 127 186

DB adjustments (including dilution) 9 -1 0 38 27 0

DB Net profit -209 97 176 126 154 186

Cash Flow (USDm)


Net Capex -162 -115 -227 -365 -249 -219

Free cash flow 148 213 191 -6 232 291


Dividends paid -71 -40 -59 -83 -42 -52

Net inc/(dec) in borrowings 232 -21 -2 22 38 0

Other investing/financing cash flows -110 -268 24 47 0 0

Net cash flow 199 -115 154 -20 227 239

Change in working capital -199 116 -154 17 -227 -239



Tangible fixed assets 816 669 668 808 808 808



Other assets 646 498 352 359 398 391

Total assets 2,632 2,242 2,126 2,286 2,552 2,784

Interest bearing debt 968 944 946 967 1,005 1,005



Shareholders' equity 1,172 939 827 958 1,117 1,314

Minorities 78 59 71 94 122 155

Total shareholders' equity 1,251 998 898 1,052 1,239 1,468

Net debt 724 817 582 621 432 192

Key Company Metrics

Sales growth (%) nm -4.3 -7.1 1.9 19.4 3.7

DB EPS growth (%) na na 81.1 -28.0 22.2 20.8

EBITDA Margin (%) 30.5 41.9 46.2 42.2 47.5 48.2

EBIT Margin (%) 13.2 25.3 28.7 19.6 22.8 27.8

Payout ratio (%) nm 39.6 33.4 47.6 40.5 33.4

ROE (%) -15.7 9.3 19.9 9.9 12.3 15.3

Capex/sales (%) 12.8 9.5 20.1 31.8 18.1 15.3


Net debt/equity (%) 57.9 81.9 64.8 59.0 34.9 13.1



6 July 2016

Metals & Mining



Norsk Hydro Hold Reuters: NHY.OL Exchange: OSL Ticker: NHY

Buffeted by Kroner headwind

Price target (NOK) 34.8

Oslo All Share Index 666

Our investment case:

Hydro is a fully integrated aluminium producer with power generating, alumina

refining, aluminum smelting and aluminium processing operations. Its acquisition of

the Brazilian aluminium, alumina and bauxite assets from Vale has shifted its balance

from naturally short alumina (neutral when including long-term off take agreements)

to naturally long. The company is still in the process of integrating them into its

business. Once done, the bauxite and alumina assets offer significant growth options

to Hydro. We have a Hold recommendation on the stock.

Changes made: Aluminium prices down 2017 and 2018

We have cut our 2016-2018 EPS estimates by between 20% and 40% due to factoring

in a stronger Norwegian Kroner and cutting our aluminium forecasts. In terms of the

Kroner, we have cut out forecasts by 10%, 12.5% and 10% over the time period; and

for aluminium, we have cut our prices by 4% in 2017 and 8% in 2018. Our NPV on a

NOK basis moves up 9%, including the benefit of rolling our calculation to June 2017.

Our target price moves up 12%.

Next catalysts: 2Q16 results: We forecast a marginal, 2%, uptick in Hydro’s total production in

1H16 compared with 1H16. Whilst we forecast a 35% drop in EBITDA in 1H16 to

NOK5.4bn, due to higher costs given the strengthening of the Kroner, we also

expect Hydro’s tax rate to come down in the period to 17% compared with 30% in

1H15. This results in a 7% increase year on year in net income on our forecasts, to

NOK3.1bn.

Key events: 2Q16 results: 21 July 2016

Valuation and risks:

Our PT is set at 0.93x our NPV valuation for the company in line with its sector

performance – WACC 10.0%, CoE 12.4%, CoD 6.5%). Our target price is in line with

our valuation. Risks to valuation and price target include significant movements in our

aluminium price, exchange rate and cost assumptions. The key area of risk is NHY’s

ability or otherwise to negotiate the removal of the ICMS fuel charge.


[email protected]

Franck Nganou (+44) 207 548 8161

[email protected]

6 July 2016

Metals & Mining




Running the numbers

Europe

Norway

Metals & Mining

Norsk Hydro Reuters: NHY.OL Bloomberg: NHY NO

Hold Price (5 Jul 16) NOK 30.66

Target Price NOK 34.80

52 Week range NOK 26.00 - 36.05

Market Cap (m) NOKm 62,619

USDm 7,462

Company Profile

Hydro is a fully integrated aluminium producer with power generating, alumina refining, aluminum smelting and aluminium processing operations. Its recent acquisition of the Brazilian aluminium, alumina and bauxite assets from Vale has shifted its balance from naturally short alumina (neutral when including long-term offtake agreements) to naturally long. With the transfer of the assets only just complete, the company is in the process of integrating them into its business. Once done, the bauxite and alumina assets offer significant growth options to Hydro. The company is in the process of commissioning its major greenfield smelter in Qatar. Price Performance

2024283236404448


Norsk Hydro Oslo All-Share Index (Rebased)

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Financial Summary

DB EPS (NOK) 0.93 1.83 3.29 1.54 1.35 2.97

Reported EPS (NOK) -0.45 0.39 0.99 2.35 1.75 2.36

DPS (NOK) 0.75 1.00 1.00 0.75 0.75 1.19

BVPS (NOK) 34.3 36.3 36.3 38.6 41.6 45.2


Average market cap (NOKm) 52,775 69,384 72,620 62,619 62,619 62,619

Enterprise value (NOKm) 39,187 61,296 56,770 51,396 49,919 45,429


P/E (Reported) (x) nm 86.9 35.9 13.1 17.5 13.0

P/BV (x) 0.79 1.17 0.91 0.79 0.74 0.68

FCF Yield (%) 4.6 4.0 12.7 nm 4.8 9.6

Dividend Yield (%) 2.9 2.9 2.8 2.4 2.4 3.9

EV/Sales (x) 0.6 0.8 0.6 0.6 0.6 0.5

EV/EBITDA (x) 6.5 5.9 4.3 4.7 4.4 3.6

EV/EBIT (x) 23.4 10.8 6.9 8.7 8.3 6.3

Income Statement (NOKm)

Sales revenue 65,359 79,075 88,642 79,615 84,246 87,752

Gross profit 6,066 10,444 13,282 10,958 11,222 12,485

EBITDA 6,066 10,444 13,282 10,958 11,222 12,485

Depreciation 4,392 4,770 5,023 5,075 5,219 5,262


EBIT 1,674 5,674 8,259 5,882 6,003 7,224

Net interest income(expense) -2,550 -3,553 -4,833 580 -786 -88




Profit before tax -876 2,121 3,426 6,462 5,217 7,136

Income tax expense 153 892 1,092 1,438 1,501 1,997

Minorities 82 431 312 227 147 319


Net profit -922 798 2,022 4,796 3,569 4,819

DB adjustments (including dilution) 2,823 2,930 4,687 -1,650 -810 1,245

DB Net profit 1,901 3,728 6,709 3,146 2,759 6,065

Cash Flow (NOKm)


Net Capex -2,637 -3,181 -5,132 -7,968 -4,117 -3,605

Free cash flow 2,437 2,784 9,241 -1,535 3,009 6,022


Dividends paid -1,528 -1,943 -2,370 -2,042 -1,532 -1,532

Net inc/(dec) in borrowings -511 -1,346 -4,941 1,146 1,000 0

Other investing/financing cash flows 1,369 1,463 -4,296 -1,950 -2,312 -5,036

Net cash flow 1,823 979 -2,331 -4,371 165 -546


Balance Sheet (NOKm)





Other assets 29,906 35,472 33,430 34,395 37,098 38,167

Total assets 115,235 126,272 122,544 128,267 137,124 143,602





Minorities 5,283 5,911 5,159 5,224 5,224 5,224


Net debt -711 128 -5,138 -2,855 -4,817 -9,270

Key Company Metrics

Sales growth (%) 1.2 21.0 12.1 -10.2 5.8 4.2

DB EPS growth (%) 277.0 96.0 79.8 -53.1 -12.3 119.8

EBITDA Margin (%) 9.3 13.2 15.0 13.8 13.3 14.2

EBIT Margin (%) 2.6 7.2 9.3 7.4 7.1 8.2

Payout ratio (%) nm 255.5 100.9 31.9 42.9 50.3

ROE (%) -1.3 1.1 2.7 6.3 4.4 5.4

Capex/sales (%) 4.1 4.2 5.9 10.0 4.9 4.1


Net debt/equity (%) -0.9 0.2 -6.5 -3.4 -5.3 -9.5

Net interest cover (x) 0.7 1.6 1.7 nm 7.6 82.1


6 July 2016

Metals & Mining



Nyrstar NV Hold Reuters: NYR.BR Exchange: BRU Ticker: NYR

Selling the mines to re-focus on the smelters

Price target (EUR) 10.18

EURO (STOXXE) 2,865


Nyrstar is the largest producer of refined zinc in the world through its global zinc

smelter operations. The company’s unsuccessful push into mining has been halted

and Nyrstar intends to sell the entirety of its mining business to prevent further cash

burn and stretching of its balance sheet. In February 2016, Nyrstar launched a rights

issue to help cover the debt due to mature this year. With the EUR270m proceeds, the

company had cash on hand of EUR240m at the end of 1Q16. This, together with

committed credit lines of EUR450m, provided some liquidity sources to repay the 2016

EUR415m bond. In June, the company announced the sale of its third-largest mine, El

Toqui, for US$25m; a positive outcome. Nyrstar will now focus on its smelters which

sit in the middle of the cost curve. One of the key projects of the group is the Port Pirie

smelter enhancement project in Australia.

Changes made to our copper and gold price forecasts: With the upward revision to our zinc price forecasts and the sale of the El Toqui

mine, our 2016 earnings forecasts have moved to a positive EUR21m from a negative EUR5m. Our 2017 earnings have increased 17% on better zinc prices.

Our target price increased 4% to EUR10.2 per share on higher treatment charges beyond 2017 and higher zinc and gold prices, albeit somewhat offset by our lower lead price estimates.

Next catalysts:

2Q16 results

The cash generated by the sale of the mining business

EUR/USD movements. On our estimate, a 10% movement in our EUR/USD forecast translates into a 32% impact on EBITDA.

Port Pirie smelter enhancement project will be another catalyst for the shares. The company aims to increase annual EBITDA by EUR80m from the project. Port Pirie commissioning was expected to commence by the end of H1 2016 and ramp up to start by H2 2016.

Dates: 2Q16 /1H16 financial results: 8 August 2016

Valuation and risks: We value Nyrstar on a SOTP net present value (NPV) of mines and smelters, key

variables in our NPV estimate are beta 1.40, risk-free rate (10-year) 4.0%, equity risk premium 6%, credit risk premium 2.5%, and CAPM discount rate 12.4%. Our WACC of 10.0% reflects cost of equity (post tax) 12.4%, cost of debt (pre-tax) 6.5%, gearing target 30%, and effective tax rate 30%. Our price target is set at 0.73x our NPV in line with relative sector performance.

Nyrstar is highly leveraged to the zinc price and the Euro, consequently, differences in these values from our expectations are the biggest risk factors to our earnings and valuation expectations. The smelters are well operated, but are currently in the middle of a range of upgrade projects and risks relate to timing and capex. With a stretched balance sheet, the key risks pertain to cash flow generation this year and specifically include the successful sale or closure of the mines to stop the cash burn and the successful delivery of the smelter projects.

Franck Nganou Anna Mulholland (+44) 207 548 8161 (+44) 2017 541 8172


6 July 2016

Metals & Mining




Running the numbers

Europe

Belgium

Metals & Mining

Nyrstar NV Reuters: NYR.BR Bloomberg: NYR BB

Hold Price (5 Jul 16) EUR 9.09

Target Price EUR 10.18

52 Week range EUR 5.69 - 18.39

Market Cap (m) EURm 1,205

USDm 1,338

Company Profile

Nyrstar is the global leader in zinc smelting (~10% market share) with assets in Europe, Australia, the US and JVs in Asia. It also owns and operates a lead smelter in Australia, has a 50% interest in a lead recycling business in Australia and generates a small amount of its earnings from downstream zinc businesses in Asia and France. The company was formed in late 2007 through the combination of these assets from Zinifex (Australia) and Umicore (Belgium). The company's largest sensitivities in order are; the Eur/USD exchange rate, the LME zinc price and the Zinc treatment charge (the benchmark price is negotiated annually). Price Performance

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Nyrstar NV DJ (.STOXXE) (Rebased)

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Financial Summary

DB EPS (EUR) -1.29 -0.27 -0.07 0.11 2.02 2.22

Reported EPS (EUR) -1.29 -1.19 -1.19 0.11 2.02 2.22

DPS (EUR) 0.00 0.00 0.00 0.00 0.61 0.66

BVPS (EUR) 5.6 3.5 2.0 10.9 13.1 14.0


Average market cap (EURm) 2,380 3,089 5,167 1,205 1,205 1,205

Enterprise value (EURm) 3,274 3,753 6,174 1,908 1,619 1,453

Valuation Metrics P/E (DB) (x) nm nm nm 80.4 4.5 4.1

P/E (Reported) (x) nm nm nm 80.4 4.5 4.1

P/BV (x) 1.83 4.77 4.67 0.83 0.69 0.65

FCF Yield (%) 4.3 0.7 nm nm 37.2 31.5

Dividend Yield (%) 0.0 0.0 0.0 0.0 6.7 7.3

EV/Sales (x) 1.2 1.3 2.0 0.6 0.4 0.4

EV/EBITDA (x) 19.3 13.2 22.9 5.9 3.0 2.7

EV/EBIT (x) nm nm nm 26.2 5.5 4.6

Income Statement (EURm)

Sales revenue 2,824 2,799 3,139 3,009 4,009 4,114

Gross profit 117 284 270 323 546 533

EBITDA 170 284 270 323 546 533

Depreciation 220 259 251 250 252 215


EBIT -90 -236 -561 73 293 318





Profit before tax -189 -343 -677 21 251 284

Income tax expense 11 -57 -245 0 61 71

Minorities 0 0 0 -1 -1 -1


Net profit -200 -285 -432 21 191 215


DB Net profit -200 -63 -27 26 195 215

Cash Flow (EURm)

Cash flow from operations 295 314 -107 277 514 417

Net Capex -193 -292 -395 -288 -197 -144

Free cash flow 102 22 -502 -11 317 273


Dividends paid -24 0 0 1 1 -57

Net inc/(dec) in borrowings 21 -133 66 -315 -169 -69

Other investing/financing cash flows 0 0 0 0 0 0

Net cash flow 111 145 -414 -11 189 166

Change in working capital 206 103 -229 -36 29 -50

Balance Sheet (EURm)





Other assets 1,100 1,310 1,254 1,251 1,389 1,449

Total assets 3,220 3,784 3,014 3,037 3,308 3,464




Shareholders' equity 870 1,155 644 1,021 1,225 1,356


Total shareholders' equity 870 1,155 644 1,021 1,225 1,356

Net debt 670 438 761 457 169 3

Key Company Metrics

Sales growth (%) -8.0 -0.9 12.2 -4.2 33.2 2.6

DB EPS growth (%) -136.3 79.2 72.6 na 1,683.7 9.9

EBITDA Margin (%) 6.0 10.1 8.6 10.7 13.6 13.0

EBIT Margin (%) -3.2 -8.4 -17.9 2.4 7.3 7.7

Payout ratio (%) nm nm nm 0.0 30.0 29.5

ROE (%) -19.7 -27.5 -47.5 3.1 17.4 16.6

Capex/sales (%) 6.8 10.5 12.8 9.6 4.9 3.5


Net debt/equity (%) 77.0 37.9 118.3 44.8 13.8 0.2

Net interest cover (x) nm nm nm 1.4 7.0 9.6


6 July 2016

Metals & Mining



Polymetal Hold Reuters: POLYP.L Exchange: MICEX Ticker: POLY

Shares remain expensive despite ramping on higher gold and silver prices




Polymetal aims to grow gold equivalent production steadily to 1.8moz by 2020 from

1.26moz in 2015. The majority of the group’s mines sit at the bottom of the cost curve

and Polymetal’s cash flow generation is healthy given the supportive gold and silver

price environment. The group’s gold equivalent production is split 65% gold, 30%

silver, and the remainder is made of copper and other by-products. Polymetal has

acquired “3rd generation” assets: the Komarovskoye deposit near Varvara and the

Kapan mine in Armenia. These, together with the development of the large open-pit

Kyzyl project in Kazakhstan, indicate the group is set to open its next chapter of

growth. Polymetal will nonetheless need to deliver an extension to its reserve base

and this could carry some execution risk. We have a Hold rating as our valuation is

fully reflected at the current share price levels.

Positive impacts of our upward revision in our gold price forecasts We have increased our target price by 5% to 820p from 780p with the increase in

our gold and silver price forecasts and lower-than-expected inflation in Russia and Kazakhstan during the first half of the year. Our 2016 and 2017 earnings estimates have gone up 28% and 23% respectively.

Next catalysts:

2Q16 production results

Movements in the gold and silver prices and the operating currencies

Delivery of the first concentrate from the Komarovoskoye deposit on time to the Varvara Hub; Komarovskoye is expected to nearly double Varvara’s production by adding 70koz by 2017 (5% of group production).

Kyzyl ramp-up on time and on budget. Kyzyl’s construction is expected to have started in May.

Dates: 2Q16 production results: 19 July 2016

Valuation and risks: Our price target is set at a 20% premium to our DCF valuation, to reflect the

ranking we assign to Polymetal as a gold miner within our coverage universe. Our rankings are derived from debt reduction, P/E valuation, near-term earnings growth, and management action taken to control cash flow. We value Polymetal from a sum-of-the-parts life-of-mine DCF model. We apply a 9% WACC based on a targeted capital structure of 70% equity and 30% debt.

Key risks include silver and gold prices significantly higher/lower than our

expectations as well as Russian macroeconomic factors such as Rouble

appreciation/depreciation. Management risks are concentrated around its ability to

integrate newly acquired deposits. Other risks include changes in fiscal regimes

and/or mining legislation. 90% of Polymetal's assets are in Russia, with the 10% in

Kazakhstan and Armenia.

Franck Nganou George Buzhenitsa (+44) 207 548 8161 +(7) 495 933 9221



[email protected]

6 July 2016

Metals & Mining




Running the numbers

Emerging Europe

Russia

Metals & Mining

Polymetal Reuters: POLYP.L Bloomberg: POLY LN

Hold Price (5 Jul 16) GBP 1,083.00


52 Week range GBP 427.10 - 1,083.00


USDm 6,004

Company Profile

Polymetal International is the holding company of Polymetal, a leading Russian gold and silver miner. In 2010, Polymetal was the fourth largest gold producer in Russia by production volume and its largest silver producer, ranked eighth worldwide Polymetal produced 810koz of gold equivalent in 2011 at six operating assets and targets a 73% organic growth in gold equivalent output by 2014.

Price Performance

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Polymetal Russian RTS Index (Rebased)

Margin Trends

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Financial Summary

DB EPS (USD) 0.30 -0.61 0.56 1.03 1.15 1.35

Reported EPS (USD) -0.51 -0.53 0.52 1.03 1.15 1.35

DPS (USD) 0.09 0.36 0.51 0.31 0.34 0.40

BVPS (USD) 4.6 2.2 1.2 1.6 2.8 3.7




Valuation Metrics P/E (DB) (x) 37.8 nm 14.8 13.7 12.3 10.5

P/E (Reported) (x) nm nm 15.9 13.7 12.3 10.5

P/BV (x) 2.05 4.11 7.53 8.97 5.01 3.84

FCF Yield (%) 3.2 8.4 8.1 4.8 13.2 7.4

Dividend Yield (%) 0.8 3.9 6.1 2.2 2.4 2.9

EV/Sales (x) 3.2 2.8 3.3 4.3 3.5 3.1

EV/EBITDA (x) 9.0 6.9 7.2 8.6 6.8 5.9

EV/EBIT (x) 18.9 11.1 9.5 12.4 9.9 8.2


Sales revenue 1,707 1,690 1,441 1,696 1,833 1,991

Gross profit 829 929 829 1,075 1,173 1,280

EBITDA 601 693 662 845 938 1,045

Depreciation 238 260 156 260 292 292


EBIT 287 432 506 584 646 753


Associates/affiliates -2 -7 -4 0 0 0

Exceptionals/extraordinaries -310 35 -17 0 0 0

Other pre-tax income/(expense) -90 -558 -129 1 1 1

Profit before tax -158 -138 276 544 606 713




Net profit -198 -209 221 436 486 572

DB adjustments (including dilution) 315 -35 17 0 0 0

DB Net profit 117 -244 238 436 486 572

Cash Flow (USDm)

Cash flow from operations 462 515 490 610 1,115 659

Net Capex -319 -210 -205 -321 -322 -212

Free cash flow 142 305 285 289 793 446


Dividends paid -316 -65 -300 -116 -138 -159

Net inc/(dec) in borrowings 213 202 27 -84 -114 -30

Other investing/financing cash flows 8 -350 -117 -10 0 0

Net cash flow 47 92 -105 78 540 258

Change in working capital 0 -81 15 -87 337 -205


Cash and other liquid assets 66 157 52 263 963 1,175




Other assets 1,025 786 642 876 535 757

Total assets 3,255 2,997 2,081 2,587 2,977 3,331




Shareholders' equity 1,787 869 487 669 1,198 1,565


Total shareholders' equity 1,787 869 487 807 1,198 1,565

Net debt 1,046 1,165 1,298 1,117 416 175

Key Company Metrics

Sales growth (%) -8.0 -0.9 -14.7 17.7 8.1 8.6

DB EPS growth (%) -73.1 na na 83.2 11.3 17.7

EBITDA Margin (%) 35.2 41.0 45.9 49.8 51.2 52.5

EBIT Margin (%) 16.8 25.6 35.1 34.5 35.3 37.8

Payout ratio (%) nm nm 97.6 30.0 30.0 30.0

ROE (%) -10.1 -15.7 32.6 75.5 52.0 41.4

Capex/sales (%) 18.7 12.4 14.3 18.9 17.6 10.7


Net debt/equity (%) 58.5 134.0 266.7 138.5 34.8 11.2



6 July 2016

Metals & Mining



Randgold Resources Hold Reuters: RRS.L Exchange: LSE Ticker: RRS

Running well ahead of the gold price

Price target (GBP) 7,100


Our investment thesis:

Randgold has a strong exploration and operational track record in Africa. Group

production exceeded 1moz in 2014 and 1.2moz in 2015 but we expect it to plateau

around 1.2-3moz for the next three years. Cost control is excellent and capex should

decline during 2016. We expect this to result in solid free cash flow which we think

Randgold will build up to invest in its next mine. This is the current target of the

company's exploration efforts but we do not foresee any new production coming on-

stream until the back end of this decade. Dividends are growing 10% yearly but off a

low base and the relative yield is not compelling in our opinion. In the medium to long

term, we believe Randgold has a high-quality mix of assets. The portfolio of reserves is

stress-tested down to US$1,000/oz gold, for a 20% IRR. This should mean Randgold

can generate higher margins and return on capital than peers but the shares are

expensive for the muted growth profile in the shorter-term. We rate the shares Hold.

Changes made on higher gold prices:

We make significant changes to our 2016-2018E earnings given the uplift of an

average 6% per annum to our gold price forecasts over the same time period. Our

2016 EPS estimate increases 51% to US$2.74, our 2017 estimate is up 31% to

US$3.73 and our 2018 estimate is up 11% to US$4.12. Our NPV on a US$ basis moves

up 6.6%. On 28 June we published a new target price for Randgold using a 1.30

GBP/USD rate on a 12-month view – in this report we bring the GBP target prices for

the other stocks under our coverage in line with this methodology.

Next catalysts: 2Q16 results: We expect Randgold to report a small improvement in production

and therefore unit cash costs in 2Q16, having had a difficult start to 2016

operationally. We forecast production of 309koz in the second quarter, up 6 percent on the first quarter, and meaning production for the first six months of the

year should come in at 601koz, up 3.6 percent year on year. Despite the small improvement in production, we expect group cash costs to rise quarter on quarter

driven mainly by higher royalty payments due to the rise in the gold price. We estimate group total unit cash costs will be US$692/oz for 2Q16, up 7% on 1Q16,

but US$670/oz on average for the first half, down 4% year on year.

Key events: 2Q16/1H16 results: 4 August 2016

Valuation and risks: Our price target is set at a 20% premium our NPV, to reflect the ranking we assign

to Randgold within our coverage universe. Our rankings are derived from debt

reduction, P/E valuation, near-term earnings growth, and management action taken to control cash flow. We derive our NVP from a DCF model of life of mine

cash flows. We use a long-term gold price of US$1,300/oz and a WACC of 5% (based on a risk-free rate of 4%, a market risk premium of 6%, a beta of 0.3x and a

30% target gearing).

Key risks include higher or lower-than-expected gold prices, lower or higher-than-

expected costs, particularly due to labour inflation, and volatility in the Euro/Dollar exchange rate.


[email protected]

Franck Nganou (+44) 207 541 8161

[email protected]

6 July 2016

Metals & Mining



Model updated:29 June 2016

Running the numbers

Europe

United Kingdom

Gold

Randgold Reuters: RRS.L Bloomberg: RRS LN

Hold Price (5 Jul 16) GBP 9,310.00


52 Week range GBP 3,625.00 - 9,310.00


USDm 11,349

Company Profile

Randgold Resources is a gold exploration and mining company focusing on prospective regions in West Africa and the Congo Craton. The company currently has three operating mines and one low-grade stockpile processing facility in Mali and the Cote d'Ivoire, producing c.750koz of gold in 2011F. The company plans to ramp up its newly commissioned mines and grow the portfolio to five mines producing c.1.2Moz of gold by 2014.

Price Performance

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Randgold FTSE 100 INDEX (Rebased)

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Financial Summary

DB EPS (USD) 3.00 2.52 2.01 2.74 3.73 4.12

Reported EPS (USD) 3.00 2.52 2.01 2.74 3.73 4.12

DPS (USD) 0.50 0.60 0.66 0.68 0.70 0.72

BVPS (USD) 31.2 33.4 34.4 36.4 39.4 42.9





P/E (Reported) (x) 25.6 29.8 34.0 44.4 32.6 29.5

P/BV (x) 2.01 2.05 1.79 3.34 3.08 2.83

FCF Yield (%) nm 1.4 2.1 1.9 2.1 3.9

Dividend Yield (%) 0.7 0.8 1.0 0.6 0.6 0.6

EV/Sales (x) 6.3 6.5 6.4 9.5 8.3 8.0

EV/EBITDA (x) 14.9 16.6 18.8 21.9 16.7 15.7

EV/EBIT (x) 20.4 25.3 34.0 36.1 25.4 24.3


Sales revenue 1,145 1,087 1,001 1,185 1,344 1,375

Gross profit 536 462 374 567 726 751

EBITDA 485 426 339 515 672 698

Depreciation 131 147 151 203 232 248


EBIT 355 279 188 312 441 450







Minorities 47 36 24 51 71 78


Net profit 278 235 189 258 351 388


DB Net profit 278 235 189 258 351 388

Cash Flow (USDm)


Net Capex -728 -222 -218 -213 -359 -283

Free cash flow -283 96 134 212 243 437


Dividends paid -73 -53 -49 -85 -99 -105

Net inc/(dec) in borrowings 0 0 0 0 0 0

Other investing/financing cash flows 2 1 45 5 0 0

Net cash flow -353 45 130 133 144 332







Other assets 1,879 1,954 1,976 2,195 2,241 2,237

Total assets 3,377 3,533 3,737 4,094 4,412 4,775



Total liabilities 319 230 245 246 240 242


Minorities 179 205 219 266 337 416


Net debt -38 -83 -213 -346 -490 -823

Key Company Metrics

Sales growth (%) -13.1 -5.1 -7.9 18.4 13.4 2.3

DB EPS growth (%) -35.5 -16.0 -20.2 36.3 36.3 10.5

EBITDA Margin (%) 42.4 39.2 33.8 43.4 50.0 50.8

EBIT Margin (%) 31.0 25.7 18.7 26.3 32.8 32.8

Payout ratio (%) 16.6 23.7 32.6 24.7 18.6 17.3

ROE (%) 10.1 7.9 6.0 7.8 9.9 10.1

Capex/sales (%) 63.6 20.4 21.7 18.0 26.7 20.6


Net debt/equity (%) -1.2 -2.5 -6.2 -9.4 -12.2 -18.6



6 July 2016

Metals & Mining



Rio Tinto Buy Reuters: RIO.L Exchange: LSE Ticker: RIO

Incoming CEO to retain focus on cash returns

Price target (GBp) 3,175


Our investment thesis: Rio Tinto has a high-quality suite of assets that is generally low operating cost, long

life, expandable, and mostly located in low-risk countries, offering above-average

returns and operating margins. Rio is pushing ahead with a clear strategy under its

new CEO J-S Jacques to reduce costs (sustaining capex, operating costs, head office

and exploration expenditure), keep the best growth at the lowest capital intensity, and

pursue copper and bauxite growth, pay down debt (gearing is now at the bottom of

the 20-30% target range), and pay out between 40-60% of earnings in dividends each

year. We think the new strategy is a dramatic positive change for Rio Tinto and

management is delivering on its promises. We expect the stock to re-rate in 2016 and

2017 as commodity markets rebalance. We believe Rio Tinto is undervalued on most

metrics (P/E multiples, DCF valuation), and we rate the stock a Buy, trading at a

discount to our NPV.

Changes made: 2016 earnings estimates up on higher Fe, 2017-18 down

Our FY16 EPS forecast for Rio increases 27% due to a 12% and 4% increase in our

met coal and iron ore forecasts respectively, and our factoring in a 3% weaker

Australian Dollar compared with our previous forecast. Our FY17 and FY18 earnings

estimates fall however, by 25% and 22% respectively due to reducing our aluminium

prices by 4% in 2017 and 8% in 2018, cutting iron ore by 8% in both FY17 and FY18

and met coal by 3% in FY18. Our NPV on a US$ basis goes down 3%, including the

benefit of rolling our calculation to June 2017. We have reflected a 1.30 GBP/USD rate

on a 12-month view which increases our target price by 13% to £31.75.

Next catalysts: 2Q16 production: We expect a generally strong quarter with iron ore volumes

rebounding 5% and refined copper to be up strongly (+16%) also. Aluminium

products should be flat versus 1Q16 on our estimates.

1H16 financial results: We forecast softer EBIT year on year of US$3.1bn for the

half. We model underlying earnings down 38% to US$1.8b, or USc100 per share.

We expect Rio to declare an interim dividend of USc40 per share.

M&A? : With the balance sheet in hand, we expect the Rio Tinto Board to do what

quality Mining Boards should be doing at the bottom of the cycle – picking up

quality assets. To this end, we expect the new CEO’s mandate to include potential

M&A which, while positive for the longer term, could see Rio shares suffer the

usual criticism from the market in the first instance (“buyer’s curse”).

Key events: 2Q16 production results: 18 July 2016; 1H16 financial results: 3 August 2016

Valuation and risks: Our target price is set in line our DCF derived valuation in line with its relative sector

performance (9.3% WACC, CoE 10.5%, CoD 3.6%, RFR 3.0%, ERP 6%, beta 1.25). It

reflects the cash on the balance sheet as well as the lower costs. Downside risks

include weaker commodity prices and higher costs


[email protected]

Franck Nganou (+44) 207 541 8161

[email protected]

Paul Young (+61) 2 8258-2587

[email protected]

6 July 2016

Metals & Mining




Running the numbers

Europe

United Kingdom

Metals & Mining

Rio Tinto Reuters: RIO.L Bloomberg: RIO LN

Buy Price (5 Jul 16) GBP 2,326.50


52 Week range GBP 1,577.50 - 2,635.00


USDm 54,799

Company Profile

Rio Tinto is a global diversified mining company with interests in aluminum, borax, coal, copper, diamonds, gold, iron ore, titanium dioxide feedstock, uranium and zinc. Its key mining operations are located in Australia, New Zealand, South Africa, South America, the United States, Europe, and Canada. Rio Tinto's management structure is based primarily on six principal global products businesses Aluminium, Diamonds, Copper, Energy (coal and uranium), Industrial Minerals, and Iron Ore supported by worldwide exploration and technology groups. Price Performance

12001600200024002800320036004000


Rio Tinto FTSE 100 INDEX (Rebased)

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Financial Summary

DB EPS (USD) 5.50 5.02 2.50 1.98 1.84 1.97

Reported EPS (USD) 1.97 3.52 -0.48 1.98 1.84 1.97

DPS (USD) 1.92 2.15 2.15 1.10 0.92 0.98

BVPS (USD) 24.8 25.0 20.7 19.9 19.5 19.4





P/E (Reported) (x) 25.0 14.9 nm 15.3 16.5 15.4

P/BV (x) 2.27 1.88 1.42 1.52 1.55 1.56

FCF Yield (%) 2.6 6.5 3.3 10.4 6.0 5.6

Dividend Yield (%) 3.9 4.1 5.4 3.6 3.0 3.2

EV/Sales (x) 2.2 2.3 2.5 2.0 2.0 1.9

EV/EBITDA (x) 5.5 6.3 7.6 6.2 6.4 6.0

EV/EBIT (x) 14.0 8.9 21.9 11.1 12.2 11.3


Sales revenue 51,171 47,664 34,829 32,376 31,776 33,073

Gross profit 19,858 18,614 11,555 11,334 10,847 11,298

EBITDA 20,234 17,893 11,412 10,627 10,160 10,662

Depreciation 4,791 4,860 4,645 4,630 4,821 5,045

Amortisation 7,531 473 2,791 0 0 0

EBIT 7,912 12,560 3,976 5,998 5,339 5,617




Other pre-tax income/(expense) -3,982 -2,423 -4,004 -350 -350 -350

Profit before tax 3,505 9,552 -726 5,112 4,534 4,896

Income tax expense 2,426 3,053 993 1,585 1,405 1,518

Minorities -2,586 -28 -853 -54 -200 -178


Net profit 3,665 6,527 -866 3,581 3,328 3,556

DB adjustments (including dilution) 6,552 2,778 5,406 0 0 0

DB Net profit 10,217 9,305 4,540 3,581 3,328 3,556

Cash Flow (USDm)


Net Capex -12,720 -7,990 -4,723 -3,403 -4,757 -5,667

Free cash flow 2,358 6,296 2,366 5,709 3,308 3,046

Equity raised/(bought back) 0 0 -2,028 0 0 0

Dividends paid -3,322 -3,710 -4,076 -2,662 -2,044 -1,813

Net inc/(dec) in borrowings 2,122 -3,034 -1,681 -2,683 -1,740 -2,059

Other investing/financing cash flows 1,756 2,639 79 0 0 0

Net cash flow 2,914 2,191 -5,340 364 -476 -827

Change in working capital 557 1,519 1,499 135 40 143






Other assets 16,806 13,214 10,961 11,014 10,996 11,243

Total assets 111,025 107,827 91,564 90,404 89,496 89,189





Minorities 7,616 8,309 6,779 6,752 6,652 6,563


Net debt 18,055 12,495 13,783 10,736 9,472 8,240

Key Company Metrics

Sales growth (%) 0.4 -6.9 -26.9 -7.0 -1.9 4.1

DB EPS growth (%) 9.8 -8.7 -50.2 -20.7 -7.1 6.8

EBITDA Margin (%) 39.5 37.5 32.8 32.8 32.0 32.2

EBIT Margin (%) 15.5 26.4 11.4 18.5 16.8 17.0

Payout ratio (%) 97.0 61.1 nm 55.4 50.0 50.0

ROE (%) 7.9 14.2 -2.1 9.8 9.3 10.1

Capex/sales (%) 25.3 17.1 13.5 12.8 15.2 17.1


Net debt/equity (%) 33.7 22.9 31.2 25.1 22.6 19.8



6 July 2016

Metals & Mining



South32 Hold Reuters: S32.L Exchange: LSE Ticker: S32

The year to deliver cost cutting success



Investment thesis: South32 is a global mid-cap mining company with a strong balance sheet and

reasonable cash flow from what we think is a mixed asset base. We think the group's

three most valuable assets are the Worsley alumina refinery, the Hillside aluminium

smelter and the Alumar alumina refinery. We forecast South32's copper equivalent

production to fall around 3% per year, so commodity prices, fixed cost reductions

(over US$350m is the target; we think US$1bn of cost out can be achieved when

including uncontrollable costs) and currency depreciation are the key drivers of

earnings growth. The two areas of upside are cost-cutting and mine-life extensions -

we expect cost-cutting to be management's focus over the next 12 months. We are

positive on the outlook for alumina, aluminium and nickel over the medium term but

are cautious on manganese and coal. Despite strong FCF driven by structural cost out

and lower capex, and a strong balance, we rate South32 a Hold on valuation.

Changes made:

Our FY16 and FY17 earnings forecasts are unchanged but our FY18 earnings

estimates drop 19% at the EBITDA level and 57% at the net profit level due to the cut

in our aluminium prices by 8% in that year, our nickel forecasts which we cut 7% and

the 3% cut to our met coal forecasts. Despite the cut, our NPV increases 10% on a

US$ basis as we roll our calculation to June 2017. We have reflected a 1.30 GBP/USD

rate on a 12-month view which increases our target price by 35% to £1.00.

Next catalysts: 4Q16 quarterly report: Cannington and Worsley are likely to post a strong

finish to the year: we forecast a 5% increase quarter on quarter in alumina

production, and upticks in silver (12% on 3Q15), 11% in lead and 8% in zinc

output from Cannington. With Dendrobrium ramping up, met coal should also

be strong, up 28% in 4Q16. Thermal coal production is likely up 2% and nickel

is flat on our forecasts.

FY16 results: We forecast a 40% drop in EBITDA year on year to US$1.09bn

and a large drop in underlying NPAT to US$89m (from US$575m last year).

Despite the drop in profits, we think South32 will declare its maiden dividend,

paying out 40% of 2H16 earnings or USc48.

Key events: 4Q16 quarterly report: 21 July 2016; FY16 results: 25 August 2016

Valuation and risks: We derive our valuation for South32 from a sum-of-the-parts DCF model,

aggregating life of mine cash flows for each asset. We derive a group NPV

using a nominal WACC of 10% and set our target price in line with our NPV.

The key risks to our target price are:(i) more cost cutting than we currently

forecast, (ii) higher sustaining capex, particularly for the aluminium assets; (iii)

more severe grade declines, resulting in larger falls in copper equivalent

production; (iv) changes in BEE legislation in South Africa; (v) more severe

electricity price increases in South Africa; and (vi) higher or lower commodity

prices and stronger FX rates than we forecast.


[email protected]

Paul Young (+61) 2 8258-2587

[email protected]

Rene Kleyweg (+44) 207 541 8178

[email protected]

6 July 2016

Metals & Mining




Running the numbers

Europe

United Kingdom

Metals & Mining

South32 Reuters: S32.L Bloomberg: S32 LN



52 Week range GBP 42.50 - 92.00


USDm 6,374

Company Profile

South32 is a diversified miner whose assets were previously owned by BHP Billiton. The portfolio includes the Illawarra met coal complex, Cannington base metals mine, GEMCO manganese mine, the Worsley bauxite mine and alumina refinery all in Australia; Energy Coal mines and Samancor Manganese in South Africa, Mozal aluminium smelter in Mozambique, MRN bauxite mine in Brazil, Cerro Matoso nickel mine in Colombia.

Price Performance

40

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120

May 15 Nov 15 May 16

South32 FTSE 100 INDEX (Rebased)

Margin Trends

48

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14 15 16E 17E 18E



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Fiscal year end 30-Jun 2014 2015 2016E 2017E 2018E

Financial Summary

DB EPS (USD) 0.10 0.11 0.02 0.04 0.03

Reported EPS (USD) 0.10 0.11 0.02 0.04 0.03

DPS (USD) 0.00 0.00 0.00 0.01 0.01

BVPS (USD) 2.6 2.1 1.8 1.8 1.8

Weighted average shares (m) 5,321 5,324 5,324 5,324 5,324

Average market cap (USDm) na 8,681 6,374 6,374 6,374

Enterprise value (USDm) na 9,005 6,216 5,764 5,396

Valuation Metrics P/E (DB) (x) na 15.3 71.3 33.6 38.1

P/E (Reported) (x) na 15.3 71.3 33.6 38.1

P/BV (x) 0.00 0.65 0.70 0.67 0.66

FCF Yield (%) na 13.9 7.3 9.4 9.0

Dividend Yield (%) na 0.0 0.4 1.2 1.1

EV/Sales (x) nm 1.2 1.1 1.0 1.0

EV/EBITDA (x) nm 4.9 5.7 4.9 4.8

EV/EBIT (x) nm 9.0 19.1 13.0 13.7


Sales revenue 8,344 7,743 5,761 5,782 5,623

Gross profit 1,420 1,649 1,002 1,188 1,115

EBITDA 1,428 1,849 1,091 1,188 1,115

Depreciation 823 848 766 745 721

Amortisation 0 0 0 0 0

EBIT 605 1,001 326 443 394

Net interest income(expense) -187 -60 -113 -124 -108

Associates/affiliates 62 -6 0 0 0

Exceptionals/extraordinaries 343 547 1,775 0 0

Other pre-tax income/(expense) -268 -482 -1,728 0 0

Profit before tax 212 453 -1,515 319 286

Income tax expense 47 431 170 130 118

Minorities 0 0 0 0 0

Other post-tax income/(expense) 0 0 0 0 0

Net profit 508 569 89 189 167

DB adjustments (including dilution) 0 0 0 0 0

DB Net profit 508 569 89 189 167

Cash Flow (USDm)

Cash flow from operations 1,419 1,838 927 987 982

Net Capex -590 -629 -461 -389 -407

Free cash flow 829 1,209 466 598 574

Equity raised/(bought back) 0 0 0 0 0

Dividends paid 0 0 0 -67 -67

Net inc/(dec) in borrowings -205 0 -188 0 0

Other investing/financing cash flows -467 -658 -42 -79 -138

Net cash flow 157 551 236 451 369

Change in working capital 1,562 136 -679 0 0


Cash and other liquid assets 364 644 893 1,345 1,714

Tangible fixed assets 13,393 9,550 8,537 8,182 7,868

Goodwill/intangible assets 290 306 304 304 304

Associates/investments 107 77 77 77 77

Other assets 2,887 4,912 3,200 3,200 3,200

Total assets 17,041 15,489 13,011 13,107 13,162

Interest bearing debt 62 1,046 813 813 813

Other liabilities 2,904 3,408 2,840 2,745 2,657

Total liabilities 2,966 4,454 3,653 3,558 3,470

Shareholders' equity 14,075 11,036 9,359 9,550 9,693

Minorities 0 -1 -1 -1 -1

Total shareholders' equity 14,075 11,035 9,358 9,549 9,692

Net debt -302 402 -80 -532 -901

Key Company Metrics

Sales growth (%) nm -7.2 -25.6 0.4 -2.8

DB EPS growth (%) na 12.3 -84.3 112.0 -11.6

EBITDA Margin (%) 17.1 23.9 18.9 20.5 19.8

EBIT Margin (%) 7.3 12.9 5.7 7.7 7.0

Payout ratio (%) 0.0 0.0 28.4 40.0 40.0

ROE (%) 3.6 4.5 0.9 2.0 1.7

Capex/sales (%) 7.1 8.1 8.0 6.7 7.2

Capex/depreciation (x) 0.7 0.7 0.6 0.5 0.6

Net debt/equity (%) -2.1 3.6 -0.9 -5.6 -9.3

Net interest cover (x) 3.2 16.7 2.9 3.6 3.6


6 July 2016

Metals & Mining



Vedanta Resources Buy Reuters: VED.L Exchange: LSE Ticker: VED

Upgrade to Buy: Free cash boosted by zinc, silver and oil price tailwinds



Investment thesis:

Vedanta's commodity mix plays in its favour in the next twelve months, with its

exposure to increasing oil, zinc and silver prices in particular driving an improvement

in free cash flow. Oil and zinc together account for 72% of the 1-year forward EBITDA

we forecast for the group, and silver is a growing by-product of Vedanta's zinc

production. Management should be able to sustain capex at the low levels it has cut

to throughout the commodity downturn and free cash flow is therefore being used to

de-lever. On our forecasts, net debt to EBITDA continues to fall towards 1x by 2019.

There could be further balance sheet relief if the proposed merger of Cairn India and

Vedanta Ltd receives shareholder approval within the year. With improving FCF and

the shares trading well below our NPV valuation, we rate the shares Buy.

Changes made:

Our FY17 EBITDA forecast for Vedanta increases 26% due to a combination of

increases in our zinc and silver price forecasts (up 13% and 15% respectively) and our

assumption of continued good cost control by the company within its Aluminium

division, where we forecast an 8% drop in all-in costs at the Jharsuguda smelter and a

2% drop in all-in costs at the Korba smelter year on year. The changes take Vedanta’s

net loss per share down to US$(0.26) from US$(1.01) on our estimates. Free cash flow

improves dramatically from US$49m to US$443m and net debt drops 5% to US$6.9bn

at end March 2018. With a 13% increase in our EBITDA forecasts for FY18 and a 21%

uplift in our FCF forecasts for that period, net debt continues to decrease, reaching

US$5.7bn on our numbers by March 2019. Our changes lead to a significant uplift in

our NPV per share on a US$ basis, which improves 57% to US$13.7. Our target price

improves further, to £6.15, as we reflect a 1.30 GBP/USD rate on a 12-month view.

Next catalysts: 1Q17 production results: We are forecasting a 7% uplift in oil volumes, and

continued ramp-up of pot lines at the Jharsuguda-II and Korba-II aluminium

smelters. We expect zinc, iron ore and copper production to be flat quarter in

quarter for this period (three months to June 2016).

Key events: 1Q17 production results: 1 August 2016

Valuation and risks Our price target is set at a 40% discount to our DCF valuation, to reflect the

ranking we assign to Vedanta within our coverage universe. Our rankings are

derived from debt reduction, P/E valuation, near-term earnings growth, and

management action taken to control cash flow. Our DCF valuation (10.9% WACC -

cost of equity 13%, post-tax cost of debt 6.1% and target gearing 30%: RFR 4.0%,

ERP 6%) is calculated using life of mine cash flow analysis.

Downside risks include lower metal prices than we expect and a stronger Indian

Rupee. A further delay in the sale of the government's stake in Hindustan Zinc

would also be a downside risk. Slower execution of projects and the turnaround

plan for Copper Zambia is a downside risks, with additional downside risks from

continued power shortages and tariff increases in Copper Zambia.


[email protected]

Franck Nganou (+44) 207 541 8161

[email protected]

6 July 2016

Metals & Mining




Running the numbers

Europe

United Kingdom

Metals & Mining

Vedanta Resources Reuters: VED.L Bloomberg: VED LN



52 Week range GBP 205.80 - 603.50


USDm 1,531

Company Profile

Vedanta Resources Ltd. mines and processes a variety of metals (copper, zinc and aluminium), with its core operations being domiciled in India. Since its listing in London in late 2003, the company has diversified its exposure by both metal and geography mostly via acquisition; Iron ore, power and oil in India, copper in Zambia and zinc in Southern Africa and Ireland.

Price Performance

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Vedanta ResourcesFTSE 100 INDEX (Rebased)

Margin Trends

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30

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14 15 16 17E 18E 19E



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Fiscal year end 31-Mar 2014 2015 2016 2017E 2018E 2019E

Financial Summary

DB EPS (USD) 0.14 -0.14 -1.32 -0.26 -0.60 -0.03

Reported EPS (USD) -0.70 -6.55 -6.66 -0.26 -0.60 -0.03

DPS (USD) 0.61 0.63 0.30 0.00 0.00 0.00

BVPS (USD) 14.7 5.8 -2.6 4.6 4.0 4.0




Valuation Metrics P/E (DB) (x) 117.6 nm nm nm nm nm

P/E (Reported) (x) nm nm nm nm nm nm

P/BV (x) 1.03 1.27 nm 1.20 1.38 1.39

FCF Yield (%) 18.2 nm 66.3 28.9 77.7 90.1

Dividend Yield (%) 3.7 4.7 4.6 0.0 0.0 0.0

EV/Sales (x) 2.0 2.0 2.1 1.9 1.6 1.4

EV/EBITDA (x) 5.8 6.9 9.7 7.4 6.1 5.0

EV/EBIT (x) 11.4 14.8 25.8 15.5 13.5 9.3


Sales revenue 12,945 12,879 10,738 11,489 12,894 13,806

Gross profit 4,491 3,741 2,336 2,957 3,383 3,862

EBITDA 4,491 3,741 2,336 2,957 3,383 3,862

Depreciation 2,203 2,006 1,455 1,540 1,843 1,784


EBIT 2,288 1,736 882 1,416 1,540 2,078



Exceptionals/extraordinaries -418 -6,821 -5,283 0 0 0


Profit before tax 1,118 -5,640 -4,984 1,123 1,264 1,850

Income tax expense 129 -1,853 -1,482 310 443 686

Minorities 1,185 -1,989 -1,665 884 988 1,172


Net profit -197 -1,799 -1,837 -71 -166 -7

DB adjustments (including dilution) 236 1,760 1,473 0 0 0

DB Net profit 40 -39 -364 -71 -166 -7

Cash Flow (USDm)


Net Capex -2,187 -2,289 -872 -1,085 -1,163 -1,140

Free cash flow 828 -124 1,203 443 1,189 1,379

Equity raised/(bought back) -2,839 -819 -1,000 0 0 0

Dividends paid -508 -512 -437 -436 -395 -469

Net inc/(dec) in borrowings 298 231 -121 0 0 0

Other investing/financing cash flows -120 -795 -8 0 0 0

Net cash flow -2,341 -2,018 -362 6 794 910

Change in working capital 630 131 1,164 -394 77 35






Other assets 3,615 3,995 3,310 3,416 3,750 3,901

Total assets 45,374 36,989 30,319 30,285 31,123 32,004




Shareholders' equity 4,010 1,603 -714 1,276 1,110 1,102

Minorities 13,964 10,654 7,565 8,096 8,688 9,391


Net debt 7,933 8,458 7,327 6,884 5,695 4,316

Key Company Metrics

Sales growth (%) -13.6 -0.5 -16.6 7.0 12.2 7.1

DB EPS growth (%) -89.7 na -830.6 80.6 -135.6 95.6

EBITDA Margin (%) 34.7 29.0 21.8 25.7 26.2 28.0

EBIT Margin (%) 17.7 13.5 8.2 12.3 11.9 15.1

Payout ratio (%) nm nm nm nm nm nm

ROE (%) -4.7 -64.1 -413.0 -25.1 -13.9 -0.7

Capex/sales (%) 16.9 17.8 8.1 9.4 9.0 8.3


Net debt/equity (%) 44.1 69.0 106.9 73.5 58.1 41.1



6 July 2016

Metals & Mining



Research Contribution:

The authors of this report wish to acknowledge the contribution made by Ankit

Agarwal and Srivathsan M, employees of Irevna, a division of CRISIL Limited, a

third-party provider to Deutsche Bank of offshore research support services.

6 July 2016

Metals & Mining



Appendix 1

Important Disclosures

Additional information available upon request

*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Anna Mulholland

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

40 %

55 %

6 %

49 % 38 %

27 %0

50

100

150

200

250

300

350

Buy Hold Sell

European Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

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6 July 2016

Metals & Mining



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6 July 2016

Metals & Mining



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Metals & Mining



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David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Global Chief Operating Officer

Research

Michael Spencer Head of APAC Research

Global Head of Economics

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Anthony Klarman Global Head of Debt Research

Paul Reynolds Head of EMEA

Equity Research

Dave Clark Head of APAC

Equity Research

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Equity Derivatives Research

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Stuart Kirk Head of Thematic Research

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