back to square one: looking for value after market correction · 6 april equity 2018 extract from a...

EQUITY

6 April 2018

Extract from a report

Metals & Mining Back to square one: looking for value after market correction Preferred stock

We are still constructive on the long-term sector outlook and raise some of

our commodity price assumptions, notably for copper and coal. However,

we see limited near-term upside in the commodity complex after a two-

year rally and now expect momentum in equities to slow. Seeking shelter

in value and rerating potential, we move from Hold to Buy on BHP (TP

£14.04=>£16.00), stick to Glencore as our top pick, and downgrade Anglo

American from Buy to Hold on price performance.

China slowdown vs global growth The synchronised expansion of the world economy

lends support to commodity markets, but China remains an overpowering influence on

demand and prices. China entered 2018 on a high note, but SG’s economist think this

strong start could prove to be a high-water mark with momentum slowing ahead. This

would weigh on commodities and leave the stock market short of positive drivers.

Cautious on near-term momentum We reiterate our positive long-term stance on the

base metal complex but see limited near-term upside as favourable conditions appear to

be largely discounted by the market. We think bulk commodities have peaked, with prices

likely to stay under pressure in the near term as China in particular cools. That said, given

positive demand momentum in emerging markets, we are now more constructive on coal as

opposed to iron ore in view of low inventories and constrained supply.

Top picks Metals & Mining has materially outperformed the commodity complex over the

last two years, a rare divergence. As such, M&M stocks could face headwinds as the

commodities rally starts to cool. We therefore shift our emphasis to relative value and

rerating potential.

Key recommendations We reiterate Glencore as our top pick (Buy, £4.70=>£4.20), with

the lower TP reflecting GBP appreciation and an extra discount to account for DRC risks.

We downgrade Anglo American to Hold (£16.50=>£17.50) on share price growth, with the

stock being one of the best performers in the sector. We upgrade BHP Billiton to Buy

(£14.04=>£16.00) on stronger profit outlook and dividend potential. We prefer BHP

(19.5% TSR) to Anglo (13.6%) and Rio (Buy, £44.00=>£40.50, 16.7% TSR). We also

upgrade the TP of Vale ($4.86=>$13.50), reflecting the progress in deleveraging, strong

FCF and organic growth potential, but leave the Hold rating unchanged given the share

price gains.

MT NA, GLEN LN

Least preferred stock

VALE US

SG strategy team sector weighting

Overweight

Equity analyst

Sergey Donskoy +44 20 7762 4594 [email protected]

Equity analyst

Christian Georges +44 20 7762 5969 [email protected]

Key recommendations

Company Curr Reco Price Target 12m 12m Adj FCF Comments

(5/4/18) price f’cast div TSR yield 19e

Anglo American £ Hold 16.45 17.50 1.18 13.6% 9.2% Still undervalued vs SOP but rerating potential nearly exhausted

BHP Billiton £ Buy 14.1 16.00 0.85 19.5% 8.4% Stronger FCF yields vs RIO, more attractive commodity mix

Glencore £ Buy 3.59 4.20 0.18 22.2% 13.6% Undervalued; highest FCF yield and positive earnings momentum

Rio Tinto £ Buy 36.46 40.50 2.05 16.7% 6.8% Low-beta name to hold into volatility, but triggers are lacking

Vale $ Hold 13.07 13.50 0.88 11.0% 9.6% Falling debt, strong FCF despite high iron ore exposure

Societe Generale (“SG”) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware

that SG 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. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE ANALYST(S) CERTIFICATION(S),

IMPORTANT DISCLOSURES AND DISCLAIMERS. ALTERNATIVELY, VISIT OUR GLOBAL RESEARCH DISCLOSURE WEBSITE

This document, published on 6-Apr-2018 at 6:20 PM CET, is being provided for the exclusive use of NIALL O'SULLIVAN (MERCER)

https://doc.sgmarkets.com/en/3/0/0/215253.html?sid=ef82363e18d92cdf12f00e43abf975eb

https://www.sgmarkets.com/#Equity/Compliance

Metals & Mining

6 April 2018 2

Page left intentionally blank


Metals & Mining

6 April 2018 3

Contents

Investment summary .................................................................................................................... 4

Will commodities continue to rally in 2018? .................................................................................. 7

Equities: the momentum trade needs a rest ................................................................................. 7

Sector valuation ........................................................................................................................... 9

Commodity markets ................................................................................................................... 11

Iron ore and coal: not all bulks are alike ...................................................................................... 11

Base metals: bumping against the glass ceiling .......................................................................... 16

Anglo American.......................................................................................................................... 25

BHP Billiton plc .......................................................................................................................... 33

Glencore .................................................................................................................................... 48

Rio Tinto .................................................................................................................................... 57

Vale ........................................................................................................................................... 66


Metals & Mining

6 April 2018 4

Investment summary

We maintain a positive long-term outlook for the Metals and Mining sector as fundamentals

remain favourable for miners. The key positives are: 1) reduced ‘hard-landing’ risks in China as

a result of supply-side reforms, 2) solid demand growth for base metals (along with some

other commodities) and 3) the dearth of shovel-ready projects to fill the possible

supply-demand gap beyond the 3/4-year horizon.

We increase the LT price for copper by $500/t to $7,500/t to reflect the growing optimism

about incremental demand from electric vehicles and renewable energy. We also increase the

target for Australian coal (for thermal from $75/t to $80/t, for coking from $130/t to $150/t) in

recognition of the tight balance that could last longer than we previously thought given the

Chinese coal market reform and lack of new supply.

Against that, we stick to our view (outlined in our previous sector update) that the share price

momentum is likely to slow this year. The rally in base metal prices should take a pause and

bulk commodities will likely correct after two years of almost uninterrupted recovery. More

recently, the near-term outlook has been clouded by the US-China trade spat that risks

escalating into a trade war with ramifications for the global economy.

The rollercoaster performance of commodities and equities in 1Q18 have justified the

additional risk discounts introduced in our November report to account for the risk of higher

price volatility in the commodity complex. In light of recent developments, we increase the

volatility band from 10% to 15%, leading to slightly bigger discounts. We also take into

account the stronger GBP (up 8%) and an increase in UST yields (up c.50bp for 10-year

treasuries).

Summary: risk-adjustment factors and TPs

Anglo

American

BHP Billiton Glencore Rio Tinto Vale

Adjusted beta* (1) 1.55 1.16 1.43 1.28 1.55

Correction in metals basket (2) -15% -15% -15% -15% -15%

Estimated downside risk (3)=(1)*(2) -23% -17% -21% -19% -23%

Assumed probability (4) 50% 50% 50% 50% 50%

Adjusting factor (5) = 1-(3)*(4) 0.88 0.91 0.89 0.90 0.88

Currency £ £ £ £ $

Valuation before adjustment (6) 19.85 17.54 4.71 44.95 15.34

TP** = (5)* (6) 17.50 16.00 4.20 40.50 13.50

12m dividend 1.18 0.85 0.18 2.05 0.88

Market price (5/4/18) 16.45 14.10 3.59 36.46 13.07

TSR 13.6% 19.5% 22.2% 16.7% 11.0%

Recommendation Hold Buy Buy Buy Hold

Source: SG Cross Asset Research/Equity *With respect to S&P Industrial Metals Index **Rounded

We downgrade Anglo American from Buy to Hold with the new price target of £17.50 (up from

£16.50). Anglo American remains undervalued relative to peers and its SOP, but the last leg of

rerating may be slower in coming given the jittery sentiment.

We reiterate a Buy for Glencore (£4.70=>£4.20), which remains our top pick despite a TP cut.

Our view reflects strong FCF yields and undemanding multiples that leave room for re-rating.


https://doc.sgmarkets.com/en/3/0/0/209001.html?sid=1da9d8b39b0e57b6b6728cac4c2ca13f

Metals & Mining

6 April 2018 5

The company is the only diversified miner in our universe to show positive earnings

momentum over 2018-20e thanks to organic growth and advantageous commodity exposure.

For the moment further rerating seems to be constrained by political and regulatory risks in

the DRC and investors’ concerns about the convertibility of FCF into dividends in the context

of the company’s active M&A. We expect management to use the interim results

announcement (8 August) to ‘top up’ the annual dividend and thus address the latter issue.

We maintain a Buy rating for Rio Tinto despite a TP cut (£44.00=>£40.50) and raise BHP

Billiton to Buy on the back of increased earnings expectations (mostly reflecting commodity

price adjustments) with the TP up from £14.04 to £16.00. We prefer BHP over Rio as a

defensive exposure to the mining sector. This reflects more attractive valuation multiples and

FCF yields, as well as stronger revenue diversification with more advantageous exposure to

bulk commodities and possibly a safer relative position in oil (especially in the context of the

planned shale divestment). In this context, our dividend estimates (at 80% of FCF in the

future) translate into a more attractive yield.

We increase our TP for Vale significantly ($4.86=>$13.5) after a thorough review of the

valuation model but maintain the stock at Hold since last year’s strong share price

performance is already discounting much of the improved conditions in our view. Consensus

may fail to discount the potential for stronger dividends (now that the official dividend policy is

a minimum 30% of EBITDA), but we believe this is largely offset by significant share overhang

from a potential reduction of some core shareholder positions. We think that the iron ore price

average should remain around $60/t, but momentum is negative near term. Hence, although

we believe that Vale shares will ultimately deserve undiscounted valuation multiples relative to

leading peers, it remains our least favourite stock for the time being.

Diversified miners – SG target prices relative to the market Diversified miners – adjusted FCF yields in 2019e

Source: SG Cross Asset Research/Equity *Unadjusted valuation = new TP before valuation

discount to reflect near-term risks

Source: SG Cross Asset Research/Equity

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

Anglo American

BHP Glencore Rio Tinto Vale

12m range Market price Unadjusted v aluation* TP

0%

2%

4%

6%

8%

10%

12%

14%

16%

Anglo American

BHP Glencore Rio Tinto Vale

Base case Spot prices


Metals & Mining

6 April 2018 6

Metals & Mining sector peer group valuation

Bbg Ticker Market cap P/E EV/EBITDA Net debt/

EBITDA

$m 2018e 2019e 2018e 2019e 2017e

Diversified miners

BHP Billiton* BLT LN 112,208 13.1 13.6 5.4 5.5 0.6

Rio Tinto* RIO LN 90,934 11.2 12.7 5.7 6.2 0.2

Glencore* GLEN LN 72,417 10.9 9.9 5.8 5.2 0.7

Anglo American* AAL LN 29,749 8.3 10.3 4.4 5.0 0.5

Vale* VALE US 68,434 9.4 10.0 5.2 5.4 1.2

Teck Resources TECK US 15,288 7.3 9.4 3.9 4.3 0.4

South32 S32 LN 13,103 11.6 12.7 4.7 4.7 (0.9)

Average diversified 10.3 11.2 5.0 5.2 0.4

Copper

Antofagasta ANTO LN 12,841 15.2 14.5 5.6 5.2 0.1

KGHM KGH PW 5,261 6.1 6.0 3.8 3.6 0.9

Freeport-Mcmoran FCX US 26,220 8.5 13.8 4.3 5.7 0.6

Southern Copper SCCO US 43,359 21.6 20.2 11.3 10.5 1.0

First Quantum FM CN 9,711 15.2 10.9 8.1 5.8 2.7

Average copper 13.3 13.1 6.6 6.2 1.1

Aluminium

UC RUSAL* 486 HK 9,001 4.9 4.6 5.6 5.1 2.8

Norsk Hydro NHY NO 13,558 11.2 10.0 5.1 4.5 0.2

Alcoa AA US 11,186 13.3 12.5 4.2 4.1 0.0

Century Aluminium CENX US 1,579 18.4 7.9 7.1 3.8 0.6

Hindalco Industries HNDL IN 14,516 9.3 8.5 6.0 5.4 3.4

Chalco 2600 HK 25,147 48.4 18.2 9.4 4.7 5.4

Egypt Aluminium EGAL EY 822 8.7 10.2 6.1 6.2 (1.1)

Average aluminium 16.3 10.3 6.2 4.8 1.6

PGM

Anglo American Platinum AMS SJ 7,140 18.5 13.5 7.4 5.9 (0.0)

Impala Platinum IMP SJ 1,430 nm nm 4.7 2.9 0.7

Northam Platinum NHM SJ 1,477 neg neg 10.7 7.3 1.2

Average PGM 18.5 13.5 7.6 5.4 0.6

Iron ore

Kumba Iron Ore KIO SJ 7,394 11.1 12.4 5.4 6.0 (0.7)

Ferrexpo FXPO LN 1,963 6.8 7.6 4.9 5.0 0.2

Fortescue Metals FMG AU 10,315 8.5 8.6 3.7 3.7 0.7

CAP CAP CI 1,671 11.6 14.8 6.0 6.7 0.4

Cleveland Cliffs CLF US 2,144 5.8 7.7 5.8 6.9 2.2

Average iron ore 8.8 10.2 5.2 5.7 0.5

Coal

Exxaro Resources EXX SJ 3,336 6.9 7.7 6.2 6.8 0.7

Whitehaven Coal WHC AU 3,367 9.0 11.0 4.9 5.5 (0.3)

New Hope NHC AU 1,294 8.0 10.2 3.2 3.9 (1.2)

Adaro Energy ADRO IJ 4,712 8.4 8.5 3.6 3.4 (0.1)

Banpu BANPU TB 3,283 7.9 8.8 7.7 8.2 3.4

Warrior Coal HCC US 1,517 4.1 9.9 2.9 4.2 (0.0)

Average coal 7.4 9.4 4.7 5.3 0.4

Diamonds

Petra Diamonds PDL LN 502 12.2 5.0 4.2 3.0 2.1

Lucara Diamond Corp LUC CN 641 12.4 9.2 6.0 3.9 (0.6)

Alrosa ALRS RX 11,577 8.1 7.3 5.5 5.2 (0.3)

Stornoway Diamond Corp SWY CN 366 nm nm 6.2 6.1 2.0

Average diamonds 10.9 7.2 5.5 4.6 0.8

Source: Bloomberg, SG Cross Asset Research/Equity *Based on SG estimates; for Glencore net debt is adjusted for the value of RMI


Metals & Mining

6 April 2018 7

Will commodities continue to rally in 2018?

After two years of almost uninterrupted recovery in commodity prices, we expected to see

more volatility going into 2018 (see our November M&M sector report). Now that 1Q18 is

behind us, these expectations have been confirmed: the December rally in the S&P GSCI

Industrial Metals Index was followed by rollercoaster trading ending recently in a sharp

correction. As of today, the index sits at about the same levels we saw in early November,

although we note that equities have outperformed.

There is a whole range of opinions about the near-term price outlook for the base metal

complex. These include some forecasts for the rally to extend into 2018 drawing strength from

the synchronised momentum across the world’s biggest economies. However, we assume a

more cautious stance with our eyes fixed on China as it is still the main driving force behind

commodity demand.

We agree that commodities are supported by robust global macro but, at the same time, we

are not convinced that higher prices are on the cards on a 12-month horizon. We appreciate

the popular argument that the Fed’s rate-tightening cycles typically favour commodity prices,

but it is important to realise that this is not a cause-and-effect relationship. By the same token,

we do not see the weak dollar as a sure-fire prop to prices; instead, it could simply squeeze

miners’ profit margins.

Base metals vs Fed cycle Base metals vs US dollar

Source: Bloomberg, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity

In the near term, we assume that the base metal complex will stabilise near spot levels. We

see the possibility of upside risks prevailing after the recent correction but with the recovery

potential capped. We do not quite rule out gains in bulk raw materials, but we think that prices

are more likely to stay under pressure. That said, coal is more likely to surprise on the upside

with prices staying ‘stronger for longer’ on the back of low inventories and limited supply

growth in the environment of still-robust demand.

Equities: the momentum trade needs a rest

One observation in the wake of the recent market volatility is that the M&M sector has fared

much better than one might have expected. Key sector indices have printed practically in line

with the broader market benchmarks. This is remarkable given the long-established

perception of the sector as a high-beta play, which would normally mean a deeper sell-off.

Such a departure from the historical ‘norm’ reflects the progress made by miners in

0%

2%

4%

6%

8%

10%

100

200

300

400

500

600

Dec ’90 Dec ’95 Dec ’00 Dec ’05 Dec ’10 Dec ’15

S&P GSCI Index Federal f unds rate (%, rhs)

70

75

80

85

90

95

100

105

110

100

150

200

250

300

350

400

450

500

Dec ’10 Dec ’11 Dec ’12 Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17

S&P GSCI Index USD v s basket of currencies (rhs)



Metals & Mining

6 April 2018 8

deleveraging their balance sheets and a substantial recovery in cash flows, together with the

improved long-term commodity price visibility.

Taking a long-term view, we are still more inclined to view the market situation as a ‘glass half

full’. The lower risk of a Chinese hard landing and the solid demand fundamentals (at least so

far as the base metals complex is concerned) reduce the probability of a serious correction.

The environment thus remains broadly favourable for M&M names, especially in the context of

rising dividend expectations that provide a cushion against market volatility (hence the drop in

market beta mentioned above).

We expect rising dividends to be a key supportive factor for the share prices of diversified

miners. Invariably, management remains focused on returning cash to shareholders which are

keen to obtain a reward for past support. In light of the solid long-term fundamentals, this

should bolster the confidence of yield-seeking investors to reinvest in the sector on a longer-

term horizon. As mentioned earlier, we believe that BHP Billiton could be the best vehicle for

this at present given the sector-low market beta.

On the other hand, we are not supporters of share buyback programmes, which we believe fail

to impact investor return in equal measure to dividends – especially now that share prices

have recovered from past trough levels. Rio’s recent programme finds some justification in the

accompanying assets’ sales, which impacted underlying asset value. Looking forward,

however, we support aggressive dividend payments at c.80% of free cash flow generation.

Metals & mining sector vs industrial metals Price performance to date: M&M sector vs industrial metals

Source: Bloomberg, SG Cross Asset Research/Equity *In US dollars Source: Bloomberg, SG Cross Asset Research/Equity *In US dollars

Still, caution is warranted in our view. Crucially, the sector has rarely performed strongly in the

absence of meaningful momentum in commodity prices – something we are not convinced of

on a 12m horizon. Taking the S&P GSCI industrial metals index as a yardstick, we note that

equities have already outperformed the commodity complex over the last two years (chart

above right). Although stocks may still have the potential to outperform, it is possibly the time

to turn more selective and look for names with greater re-rating potential.

100

150

200

250

300

350

400

450

500

550

600

0

100

200

300

400

500

600

700

800

900

1,000

2010 2011 2012 2013 2014 2015 2016 2017

Euro STOXX 600 Basic Resources* S&P Industrial Metals (rhs)

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

12m 24m 36m 48m 60m

Euro STOXX 600 Basic Resources* S&P Industrial Metals (rhs)


Metals & Mining

6 April 2018 9

Sector valuation

Our base-case forecasts indicate almost no upside risk to 2018e EBITDA consensus. There is

more to the upside if commodity prices (especially those for bulk raw materials) remain near

spot levels for the next nine months; in that event, two companies would beat the EBITDA

consensus noticeably: BHP by 7% and Vale by 9%, although this is not exactly breathtaking

either. For us to see a bigger surprise, commodity prices need to bounce again and stabilise

at higher levels for the rest of the year.

2018e EBITDA outlook: SG vs consensus ($bn) Price performance: base metals vs bulk commodities

Source: Bloomberg, SG Cross Asset Research/Equity *Adjusted for difference between financial

and calendar year

Source: Bloomberg, SG Cross Asset Research/Equity *S&P GSCI industrial metals **ANZ Bank

China bulk commodities

Unlike the previous two cycles that ended in 2007-08 and 2010-11, this time the recovery is

not quite synchronised across the commodity space. While some of the base metals still have

room to appreciate over the long term (especially copper and aluminium), bulk commodities

are more likely to go south. We expect that the majority of diversified miners will see earnings

momentum stall this year, although some will fare better depending on their positioning within

the commodity space.

Metals & Mining sector: historical valuations* P/E ratio expansion: M&M sector vs broader market

Source: Bloomberg, SG Cross Asset Research/Equity *STOXX Europe 600 Basic Resources Source: Bloomberg, SG Cross Asset Research/Equity *STOXX Europe 600 Basic Resources

**Euro STOXX 50 ***S&P 5000

0

5

10

15

20

25

30

Anglo American

BHP Billiton* Glencore Rio Tinto Vale

SGe - Base case SGe - Spot Bloomberg consensus

0%

50%

100%

150%

200%

250%

300%

2005 2007 2009 2011 2013 2015 2017

Base metals* Bulk commodities**

0

200

400

600

800

1,000

1,200

0

5

10

15

20

25

30

2005 2007 2009 2011 2013 2015 2017

P/E Last price ($, rhs)

+12%

+9%

+12%

0

2

4

6

8

10

12

14

16

18

SXPP* SX5E** SPX***

2006-07 Current


Metals & Mining

6 April 2018 10

When it comes to financial multiples, we would do well to remember their countercyclical

nature: they top out when commodity markets bottom and reach nadir when commodities are

about to peak. The sector is currently trading at a P/E of 11-12x (depending on the index and

the consensus used, which is not low in an historical context: the ratio averaged 10.6x and

8.9x in 2006-07 and 2010-11, respectively. One could argue that significant multiple

expansion is characteristic of the current bull market, but even in this context, the M&M sector

has been doing well (chart above right).

Diversified miners’ commodity exposure (2018e EBITDA) Diversified miners: FCF yield outlook*

Source: SG Cross Asset Research/Equity *Adjusted for difference between financial and

calendar year

Source: SG Cross Asset Research/Equity *2017 estimates based on average mkt cap for the year

These considerations do not necessarily mean that the rally in mining equities is over.

However, we think it could be taking a pause after two years of exceptional returns. Our view

is supported, in particular, by the risks to bulk raw materials that account for a high proportion

of earnings for most of the sector heavyweights (chart above left). Strong cash flow yields and

dividends should provide a cushion of sorts, making the sector less sensitive to volatility in

commodity markets. Nevertheless, we think it is the right time to take a more cautious stance

and focus on relative value.

0%

20%

40%

60%

80%

100%

Anglo American


Iron ore Coal Oil Base metals Other

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Anglo American


2017 2018e 2019e


Metals & Mining

6 April 2018 11

Commodity markets

Main changes to SG commodity price assumptions ($/t)

2017 Spot 2018e 2019e 2020e 2021e 2022e

Base metals

Copper 6,172 6,691 6,839 7,000 7,300 7,500 7,500

Old 6,500 6,500 6,800 7,000 7,000

Change (%) 5% 8% 7% 7% 7%

Aluminium 1,968 1,969 2,076 2,100 2,150 2,175 2,200

Old 2,000 2,000 2,100 2,200 2,200

Change (%) 4% 5% 2% -1% 0%

Zinc 2,891 3,263 3,252 3,200 3,000 2,900 2,800

Old 3,500 3,300 3,000 2,800 2,800

Change (%) -7% -3% 0% 4% 0%

Nickel 10,414 13,100 13,441 14,000 15,000 16,000 16,000

Old 12,000 13,000 14,000 15,000 15,000

Change (%) 12% 8% 7% 7% 7%

Cobalt 55,826 89,050 74,211 55,000 50,000 50,000 50,000

Old 38,000 38,000 38,000 38,000 38,000

Change (%) 95% 45% 32% 32% 32%

Bulk raw materials

Iron ore (62% IODEX) 71 62 64 60 60 60 60

Old 60 60 60 60 60

Change (%) 6% 0% 0% 0% 0%

Thermal coal (Newcastle) 88 94 89 80 80 80 80

Old 78 75 75 75 75

Change (%) 15% 7% 7% 7% 7%

Hard coking coal (Australia) 189 199 196 150 150 150 150

Old 140 130 130 130 130

Change (%) 40% 15% 15% 15% 15%

Precious metals

Gold ($/oz) 1,258 1,329 1,343 1,350 1,350 1,350 1,350

Old 1,250 1,250 1,250 1,250 1,250

Change (%) 7% 8% 8% 8% 8%

Platinum ($/oz) 948 915 983 1,000 1,000 1,000 1,000

Old 920 920 920 920 920

Change (%) 7% 9% 9% 9% 9%

Palladium ($/0z) 870 935 1,009 1,150 1,200 1,250 1,300

Old 1,020 1,120 1,170 1,220 1,220

Change (%) -1% 3% 3% 2% 7%

Source: Bloomberg, SG Cross Asset Research/Equity

Iron ore and coal: not all bulks are alike

Although iron ore and coal prices both outperformed our expectations in recent months, we

reiterate our view that they are likely to go south from here. That said, taking a short-term

view, we prefer coal (especially thermal) over iron ore, reflecting stronger fundamentals that

we believe point to a higher risk of upside price surprise.

Coal: a glorious decline?

Coal markets delivered a major surprise last year with the average prices of Australian thermal

and coking benchmarks rising 33-34% to finish December near five-year highs. Three months

into 2018, we still do not see prices collapsing: even after the recent correction, they remain

high enough to incentivise some investment activity and M&A. The bigger correction in coking


Metals & Mining

6 April 2018 12

coal (down c.25% from its January peak, chart below left) was only enough to bring the

coking/thermal ratio in line with the last 12m average.

Australian coal benchmarks ($/t FOB) Australian coking coal exports (kt)


Last year, the rally in coking coal unfolded against the backdrop of weather-induced supply

disruption in Australia in 1H17. This led to an 18mt drop in exports, only partly offset by higher

supply from the US and Russia. Demand was buoyed by the strong momentum in world pig

iron output, mainly driven by China (+4.6% yoy). The latter increased imports by 10mt,

reflecting limited availability of domestic coals in the wake of capacity cuts over 2016-17. This

was nothing short of a perfect storm and we expect the situation to normalise only gradually

over 2018.

The rally in thermal coal was more surprising given the meaningful yoy increase in seaborne

supply, which we estimate in the ballpark of 25-30mt (i.e. 3% of the market). As it happens,

however, demand turned out to be much stronger than many observers expected at the

beginning of the year. This was driven by leading Asian economies including South Korea,

Japan, Taiwan and China, which collectively ratcheted up purchases by around 30mt, with an

additional support from emerging market economies.

Going into 2018, demand momentum ex-China is likely to weaken but in all likelihood to

remain positive in the context of the sustained growth in emerging markets. The same is true

of supply although realistically, we think it is unlikely to increase by more than c.15mt. The

outlook therefore mainly depends on China, which suffered from the poor availability of

domestic coals during the last heating season when the situation was exacerbated by the cold

snap. As a result, inventories at the power stations of the six major coastal utilities fell to just

10 days of consumption in early February.

50%

100%

150%

200%

250%

300%

350%

400%

0

50

100

150

200

250

300

350

Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17

Thermal Coking Coking/Thermal (%, rhs)

6

8

10

12

14

16

18

20

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2014 2015 2016 2017


Metals & Mining

6 April 2018 13

China: apparent consumption of thermal coal* (mt) China: coal inventories (mt)

Source: NBS, Customs General Office, SG Cross Asset Research/Equity *3m moving average Source: SG Cross Asset Research/Equity *Including coking coal **Annualised

Although stock levels at utilities normalised in March, it is probably too soon to say that the

crunch is over. After two years of country-wide mine closures totalling c.400mt (10+% of 2015

output) and with hardly any new capacity commissioned, the industry must be operating close

to its limits in the situation of still growing demand. We believe that, in the worst case, it is

possible that China will increase imports by 25-30mt, bringing them back to 2014 levels,

which would keep the seaborne market tight through the year. In fact, even a modest increase

of 5-10mt could be enough to support prices near their current levels.

To be fair, we are not speaking of a sustained shortage that will last for years on end. There

will ultimately be a supply response, either from China or from elsewhere (or both). In parallel

to this, we will likely start to see coal-fired power capacity give way to renewable sources,

nuclear power and natural gas.

That said, it is possible that coal will be saved by its very ‘ugliness’: given the widespread

market perception of coal mines as potential ‘stranded assets’, practically no new ones are

being built in key exporting countries such as Australia and South Africa (with Indonesia being

increasingly inward-looking). Given the typical mine life of 20-25 years, half of the mines

currently in existence will likely face depletion risks within a decade. In some cases, closures

can be avoided by carrying mining activities over to an adjacent parcel of land at little cost.

However, for many mines such a solution will unlikely to be available.

We doubt that coal consumption will fall off the cliff so quickly. There is therefore a risk that

underinvestment in mining operations in the coming years will lead to a shortage of coal,

making its twilight years a comfortable period for miners, in contrast to popular perception.

Indeed, even in the (unlikely) ‘sustainable development’ scenario, the International Energy

Agency expects world trade in thermal coal to decline by only c.30% over 2016-25. Glencore

estimates that in the absence of investment in new capacity, seaborne supply could drop by

as much over the same period (charts below).

0

5

10

15

20

25

30

0

50

100

150

200

250

300

Dec '13 Dec '14 Dec '15 Dec '16 Dec '17

Domestic Import (rhs)

0

50

100

150

200

250

300

350

400


Total inv entories* Thermal coal imports**


Metals & Mining

6 April 2018 14

IEA thermal coal trade outlook Seaborne coal supply outlook without further investment (mt)

Source: IEA, SG Cross Asset Research/Equity Source: Glencore

In view of these considerations and taking into account the recent price resilience, we raise

our 2018 forecast for thermal coal (6,000kcal/kg FOB Australia) from $78/t to $89/t (almost flat

yoy) and increase our long-term target (starting from 2019) from $75/t to $80/t. We also

increase assumptions for hard coking coal to $196/t in 2018 and $150/t from $140/t and

$130/t respectively, largely based on the historical price correlation between the two

commodities. We note that even at these higher prices, investment in greenfield capacity may

remain problematic (especially in Australia).

Iron ore: rising stockpiles finally sent prices lower

For many years, rising inventories in Chinese ports had failed to quench the optimism of iron

ore traders, with the benchmark 62% ore price rising above $75/t in February before finally

correcting recently. One consideration that might explain this resilience is that, while growing

in absolute terms, inventories had until recently remained below records measured in weeks of

consumption as import volumes swelled. At the same time, strong profitability in steelmaking

has spurred demand for higher-quality ore (62+% iron content, low impurities) with

lower-grade material reportedly representing a growing share of the port-side stockpiles.

Principal iron ore benchmarks ($/t CFR China) Chinese port-side iron ore stocks

Source: Platts, SG Cross Asset Research/Equity Source: Steelhome, SG Cross Asset Research/Equity

0%

20%

40%

60%

80%

100%

120%

140%

160%

New policies Current policies Sustainable dev elopment

2016 2025 2040

20

40

60

80

100

120

140

160


62% Fe 65% Fe 58% Fe low alumina

4

5

6

7

8

9

10

11

12

20

40

60

80

100

120

140

160

180

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total (mt) Weeks of consumption (rhs)


Metals & Mining

6 April 2018 15

That said, we think that going forward it will be increasingly difficult for prices to resist gravity.

For one thing, inventories are finally beginning to loom large even in relative terms. This should

be seen in the context of rising seaborne supply, with January imports into China setting a

new record of 100mt. Taking into account the seasonality in shipments, we estimate that

Chinese imports could total 1,130mt this year, or c.55mt up yoy. Assuming stable domestic

mine output, we estimate that it would take about 765mt of pig iron output to absorb so much

supply, an increase of c.50mt yoy. We find this unlikely.

On the other hand, we believe profit margins in steelmaking (especially in China) can hardly

get much higher than they are already, while any meaningful decline (e.g. triggered by

weakening demand, especially from the construction sector) would put pressure on premiums

for higher-grade ore and eventually weigh on prices. With this in mind, we believe that the

balance of probabilities is in favour of iron ore prices staying low after contracting to almost

$60/t in recent weeks.

Steel inventories held by Chinese traders* (mt) China: steel price/raw materials cost spread

Source: Steelhome, SG Cross Asset Research/Equity *Largest urban centres Source: Platts, SG Cross Asset Research/Equity

On the other hand, we believe there is a low risk of the price falling through a certain

acceptable level for a prolonged period of time. This is due to the degree of supply-side

consolidation of the seaborne market and the increasing adoption of the ‘value over volume’

principle by the management of the leading producers. Based on historical trends, we

estimate such a level to be in the region of BRL130-140/t on an FOB basis (chart below right)

which would translate into c.$55/t in the current FX and freight rate environment.

World iron ore supply ex China (2017e) Iron ore price: Vale perspective (BRL/t)

Source: Worldsteel, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity

6

8

10

12

14

16

18

20


2018 2017 2016 2015

0

500

1,000

1,500

2,000

2,500

3,000


HRC, CNY/t Rebar, CNY/t

23%

24%

18%

11%

24%Vale

Rio Tinto

BHP Billiton

Fortescue

Other

100

150

200

250

300

350

Dec ’11 Dec ’12 Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17

CFR China FOB Brazil


Metals & Mining

6 April 2018 16

We adjust our 2018 forecast, increasing the price to $64/t (from $60/t) reflecting the recent

strength, but we leave our forecast beyond the current year unchanged at $60/t.

Base metals: bumping against the glass ceiling

After two years of price gains, the base metal complex has largely recovered the ground lost

during the correction of 2015. Some metals, most notably zinc of the majors, are trading near

multi-year highs with even miners in the 4th quartile enjoying decent profitability. The recovery

looks even more impressive if we take into account US dollar depreciation, which has been

one of the key drivers for commodity prices. Viewed in Australian dollars, copper is now

trading just a tad below the previous cyclical highs of 2007-08 and 2010-11 (chart below

right).

Base metals complex price performance since 2013 LME copper price: different currencies


At the very least, this picture demands a closer examination before one can confidently

reiterate a bullish stance. To make things more complicated, there is little similarity between

different parts of the base metal complex – each has its own specific drivers, although lack of

new supply has emerged as one common theme. In the following paragraphs, we take a brief

look at the main moving parts, starting with the one overriding factor: Chinese demand

outlook.

China: ‘hard landing’ odds are falling but so is growth momentum

The multitude of policy measures introduced by Chinese authorities over the past two years

has significantly reduced the risk of a meltdown. For this reason, the ‘hard landing’ has been

virtually taken off the table as a serious near-term threat. Capital controls have helped stabilise

the official FX reserves and boost the yuan exchange rate, currently up c.10% from the

December 2016 bottom. At the same time, long-delayed supply-side reforms helped arrest

capex growth and shore up company finances in critical sectors thus opening the doors to

long-overdue deleveraging of the corporate sector (including SOEs).

75

80

85

90

95

100

105

110

150

200

250

300

350

400

450

500


S&P GSCI Index USD v s major currencies (rhs)

0

2,000

4,000

6,000

8,000

10,000

12,000

Dec' 00 Dec' 05 Dec' 10 Dec' 15

USD per tonne AUD per tonne


Metals & Mining

6 April 2018 17

China currency and FX reserves dynamics Chinese industrial companies: capex and net debt* (CNYbn)

Source: Bloomberg, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity. *Top 50 member companies of Shanghai

Stock Exchange Industry Index since 2008; last reported net debt and 12m trailing capex.

As we explained in our previous report, a critically important aspect of the favourable

economic situation observed today is the degree of destocking achieved across a number of

sectors (e.g. steel, coalmining). Most importantly, the real estate market is one of the areas

where inventories remain near their lowest levels since 2010 and practically 50% down from

the 2014 peak. This seriously diminishes the risk of a sudden meltdown, making it easier for

authorities to adjust the policy mix.

The broad economic recovery has been reflected in a prolonged stretch of above-50 PMI

readings and a strong rebound in industrial profits, which surged 9.3% yoy to a record of

CNY7.5tn as illustrated in the charts below. Importantly, however, these very charts also point

at possible cracks in the ongoing recovery. One of the cautionary indicators is the recent

volatility in the new order components of manufacturing PMI despite the encouraging March

readings (chart below left).

China industrial PMI China: official and Caixin/Markit PMIs

Source: Bloomberg, SG Cross Asset Research Source: Bloomberg, SG Cross Asset Research/Equity

There was also a notable divergence between the official PMI and the alternative Caixin/Markit

survey, the latter falling to a four-month low (and falling short of the economist consensus) in

contrast to the recovery posted by the official metric. Such a divergence is not unprecedented

and does not necessarily mean that the official PMI is giving an overly glossy picture.

2,300

2,700

3,100

3,500

3,900

4,3006.0

6.2

6.4

6.6

6.8

7.0

2009 2010 2011 2012 2013 2014 2015 2016 2017

CNY/$ FX reserv es ($bn, rhs)

0

400

800

1,200

1,600

2,000

0

200

400

600

800

1,000

2009 2010 2011 2012 2013 2014 2015 2016

Capex Net debt

44

46

48

50

52

54

56

2010 2011 2012 2013 2014 2015 2016 2017

Composite Domestic orders Export orders

47

48

49

50

51

52

53


Federation of Logistics Caixin (rhs)



Metals & Mining

6 April 2018 18

However, it does mean elevated uncertainty and, as a result, a risk of further volatility in

economic data series, which could dampen sentiment.

One key area requiring close attention is the real estate market. Fortunately, there has been no

inventory build-up observed here so far. In fact, inventories of unsold housing in top urban

areas remain c.50% down from the 2014 peak. This should allay concerns about an imminent

threat of a slowdown in construction. That said, the Chinese real estate market entered 2018

with ebbing sales momentum and with apartment prices flat-lining after two years of growth

(chart below right). On balance, the near-term outlook for the construction sector is blurred: it

does not pose obvious risks, but likewise is unlikely to prove a growth driver.

China: housing inventory and sales China real estate market: key indicators

Source: NBS, China Real Estate Information, SG Cross Asset Research/Equity *Top urban areas,

m sqm **Nationwide, 3m moving average

Source: NBS, China Real Estate Information, SG Cross Asset Research/Equity *1st Tier cities,

newly built housing

It is not clear whether infrastructure investment will provide sufficient support to demand for

materials if residential construction slows. Last year, investments in the electric grid and

railway system plateaued. Furthermore, according to a recent statement from the China

Railway Corp., railways are going to receive even less money this year (no target for the grid

investment has yet been announced to the best of our knowledge). Given the increased focus

on fiscal discipline and lowering systemic financial risks, we are cautious about the

contribution to demand growth from government spending.

Aluminium: front-loaded rally may be out of steam for now

Before the latest correction, aluminium had been one of the best-performing base metals over

the past four years. It gained almost 30% from 2013 to end-2017 on falling inventories and the

optimism about structural reforms in the Chinese aluminium industry, along the same lines as

those carried out in other sectors.

Sentiment was strengthened by declining growth in Chinese aluminium exports, which after

rising for three consecutive years to 2015, have largely stabilised since (chart below right).

Although not nearly as impressive as the c.50% contraction in steel exports that occurred

over the same period, this was nonetheless a positive development, especially viewed through

the prism of c.3% annual growth in demand ex-China.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

10

20

30

40

50

60

70

80

90

2009 2010 2011 2012 2013 2014 2015 2016 2017

Real estate inv entory * Residential property sold y oy ** (rhs)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2010 2011 2012 2013 2014 2015 2016 2017

Housing starts Residential space sold Prices*


Metals & Mining

6 April 2018 19

LME aluminium price vs visible inventories Chinese exports: aluminium vs steel* (mt)

Source: Bloomberg, SG Cross Asset Research/Equity Source: Customs general administration, SG Cross Asset Research/Equity *6m moving average,

annualised

The resulting market tightening is manifesting itself in rising regional premiums (the recent

surge in the US reflects the imposition of import duties under Section 232 of the Trade

Expansion Act of 1962) and an elevated price spread between the LME and Shanghai, which

hit the multi-year high of $300/t in February before contracting recently on the back of the

broad derisking move across commodity markets (chart below right). The steady build-up of

inventories on SFE (+0.87mt since end-2016) is a cautionary indicator, although the warning

loses some of its potency in view of the depletion of LME warehouses.

Aluminium: regional premiums ($/t) Aluminium prices: LME vs Shanghai ($/t)


Despite the positive long-term outlook, we think that the recent correction was not unjustified

and lower prices could be here to stay for some time. After all, the optimism about production

curtailments in China is about to be put to the test now that winter capacity restrictions are

being phased out. These were apparently of questionable efficiency anyway, given the steady

rise in inventories.

On the other hand, the squeeze in profitability of Chinese smelters (chart below left) suggests

that growth in stocks is not driven by traders’ optimism; rather it seems that the market is

having difficulty coping with the current level of supply. Unless demand growth picks up,

further accumulation of stockpiles could therefore lead to a bigger outpour of metal to export

markets. At the same time, higher prices stimulate restarts of the latent capacity outside China

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

0

1

2

3

4

5

6

7

Dec '13 Dec '14 Dec '15 Dec '16 Dec '17

LME (mt) SFE (mt) LME price ($/t, rhs)

0

20

40

60

80

100

120

140

0

1

2

3

4

5

6

7

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Aluminium exports* Steel exports* (rhs)

0

50

100

150

200

250

300

350

400

450

Dec' 15 Jun' 16 Dec' 16 Jun' 17 Dec' 17

Europe Japan US (rhs)

From blizzard to Trump...

1,200

1,400

1,600

1,800

2,000

2,200

2,400

Dec' 13 Dec' 14 Dec' 15 Dec' 16 Dec' 17

LME SHE (ex VAT)


Metals & Mining

6 April 2018 20

(with the US producers being especially active in the wake of the new tariff protection) with the

risk of too much supply arriving too soon.

China: aluminium prices and smelter profitability (CNY/t) China: primary aluminium apparent demand


With this in mind, we think that the $2,200+/t prices we saw in 1Q18 set the high-water mark

for the year. We expect prices to consolidate slightly above the spot levels in the coming

months averaging c.$2,075/t for the full year (a 5% increase yoy).

Copper: risk of supply disruptions to support prices

The main supporting factor for copper prices this year is the wave of labour contract

negotiations, primarily in Chile, with nearly 25% of world mine capacity exposed to the risk of

disruptions. To be fair, various companies have different track records for dealing with labour

disputes. The bulk of the capacity in question (2.2mt or 10-11% of the world total) is owned

by Chilean producers Codelco and Antofagasta (table below), which we think may be better

positioned to avoid serious disruptions. More serious risks may loom elsewhere, however, in

particular at Escondida (6% of world capacity), which last year witnessed one of the longest

strikes in the history of the industry, resulting in no agreement.

Copper: labour contract expiries in mines in 2018

Source: Industry reports, Company Sources, Metal Bulletin, Reuters, SG Cross Asset Research/Equity *Italics represent mines with multiple wage

negotiations in 2018

2,000

3,000

4,000

5,000

6,000

7,000

8,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000


SFE spot SFE less cost of coal, alumina (rhs)

-5%

0%

5%

10%

15%

20%

25%

30%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Dec ’14 Jun ’15 Dec ’15 Jun ’16 Dec ’16 Jun ’17 Dec ’17

kt y oy


Metals & Mining

6 April 2018 21

Although we expect growth in mine output to overtake growth in demand this year, we cannot

rule out unforeseen developments on the supply side, which could tilt the market balance

towards a deficit. This should be seen in the context of the positive long-term demand outlook

(with vehicle electrification and a secular shift towards renewable sources of energy as key

drivers) and the relatively empty project pipeline with only a few significant mines under

construction or at the planning stage. This should prevent copper prices from sinking too low,

especially in 1H18, even if the demand does not impress.

On the other hand, the upside looks limited as well. Even taking into account the possibility of

disruptions, there is hardly any real risk of shortage of refined copper in 2018-19 (chart below

left). It is not only that mine capacity is expanding: the demand side does not look very

promising either. With China and the US drawing closer to a cyclical slowdown, means

demand momentum is likely to weaken this year and further into 2019 (chart below left).

Needless to say, China has an outsized importance here: from 2010 to 2017 the country

accounted for c.90% of the increase in global apparent demand (chart below right).

Copper market outlook to 2021 World refined copper demand 2010-17 (mt)

Source: Companies, ICSG, SG Cross Asset Research/Equity Source: ICSG, SG Cross Asset Research/Equity

As we already mentioned, we do not see serious near-term risks to the Chinese

macroeconomic outlook, not of the sort that would flare up fears of the ‘hard landing’ again.

Given China’s success in implementing the key supply-side reforms and taming currency

outflows, the government has breathing room to tackle structural issues even though long-

term success is not assured. However, this very task is likely to limit China’s ability to resort to

stimulating growth via fixed asset investment and residential construction. We expect Chinese

demand growth to slow from 2.6% last year towards 2% in 2018.

On the other hand, higher prices observed in January and February were likely approaching

levels sufficient to incentivise investment activity, which we see at c.$7,500/t, in the current FX

setting. Although this leaves meaningful room for prices to go higher, we do not think it likely

that prices will solidify above $7,000/t again this year. With this in mind, we expect copper

prices to average $6,800-6,850/t this year (minor upside to the spot levels) with volatility on

both sides. At the same time, we increase our long-term target price to $7,500/t from $7,000/t,

mainly reflecting the US dollar depreciation.

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2011 2012 2013 2014 2015 2016 2017e2018e2019e2020e2021e

Ref ined demand (y oy , %) Ref ined supply (y oy , %)

Forecast

0 5 10 15 20 25

2010

China

Asia ex China

N America

Europe

Other

2017


Metals & Mining

6 April 2018 22

Zinc: risks of substitution, supply response are rising

On the face of it, zinc has the strongest fundamentals that fully justify its strong performance

to date. The forward curve remains in backwardation – in contrast to other principal metals –

indicating a continued shortage of physical metal. Such a conclusion is corroborated both by

the plummeting reported inventories standing at their lowest level since November 2008 (chart

below left) and the Chinese foreign trade data with a 0.48mt increase in zinc imports reported

last year (unwrought metal and zinc in concentrates).

Zinc inventories and prices China net imports of zinc (mt)

Source: Bloomberg, SG Cross Asset Research/Equity Source: Customs general office, SG Cross Asset Research/Equity

The situation is a boon for miners. The question is whether things could improve much from

here without risks piling up. One is that of zinc rationing by galvanizers which are tempted to

increase the usage of alloys with aluminium and/or magnesium allowing them to reduce the

thickness of coatings by half. Another is that of supply response, which has so far been muted

at best – reflecting some high-profile mine closures in recent years, including deliberate output

cuts by Glencore – but which can be back with vengeance if prices stay too high for too long.

World zinc mine supply (2016) China zinc ore output (kt)

Source: USGS, SG Cross Asset Research/Equity Source: WBMS, SG Cross Asset Research/Equity

The critical unknown is the situation in China, which accounts for nearly 40% of world mine

production (chart above left). Chinese zinc producers have struggled to keep pace with the

demand in recent years, initially because of the low metal prices and more recently as a result

of increasingly stringent pollution controls, which hit a large number of small-scale mines.

However, it would probably be optimistic to expect Chinese supply to stay inert forever,

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6


LME (mt) SFE (mt) LME price ($/t, rhs)

0.0

0.5

1.0

1.5

2.0

2.5

2010 2011 2012 2013 2014 2015 2016 2017

Unwrought metal Zinc in concentrate

38%

11%8%

6%

6%

5%

26%

China

Peru

Australia

US

Mexico

India

Other0

100

200

300

400

500

600

700


2014 2015 2016 2017


Metals & Mining

6 April 2018 23

especially in the very benign commodity price environment (Zinc prices at SFE are up c.70%

from the 2013 average).

According to the World Bureau of Metal Statistics (WBMS), Chinese mine output returned to

growth in 4Q17, rising 7% yoy after largely stagnating during the previous nine months. The

November reading was the highest since June 2014 and even though growth slowed

considerably in December (chart above right), it is more likely than not that we are going to

see positive momentum this year.

To be clear, we believe that the long-term price outlook for zinc remains favourable given the

lack of significant projects in the pipeline to augment supply ex-China beyond 2018 and the

steady demand growth of c.2% over 2018-22 (Wood Mackenzie analysis). For the moment,

however, we assume a cautious stance in anticipation of further supply developments,

assuming LME zinc prices will stabilise around $3,200/t for the rest of 2018 after touching

multi-year highs of $3,600/t at end-February 2018.

Nickel: upside for believers

Nickel beat our expectations YTD, reaching new highs in February with the LME price briefly

surpassing $14,000/t. Sentiment towards the metal continues to be supported by the

optimism about the battery sector and more recently by the weakening of the US dollar, which

has lost c.10% vs a basket of currencies since 2016. It is the latter consideration that leads us

to increase our price forecast for 2018-22, including the long-term target, to $16,000/t from

$15,000/t. In doing so, we remain on the cautious side, given that these price levels are far

from the highs achieved in 2010-11, let alone from the 2007 peak of $50,000+/t.

Can it be that we are too cautious? Nickel is trading some 10-15% below end-2014 levels,

while other major base metals have long surpassed them, suggesting room for a catch-up. On

the other hand, the long-term demand outlook, which is historically determined by the trends

in stainless steel consumption, has recently assumed a more exciting aspect with the

emergence of electric vehicles and expectations of explosive demand growth from battery

producers. According to some estimates (Vale, Glencore), incremental demand from the

battery sector could surpass 1mt by 2030, i.e. 50% of current global consumption.

Nickel price (LME) and inventories Nickel demand for the battery market (kt)

Source: Bloomberg, SG Cross Asset Research/Equity Source: Vale

0

5,000

10,000

15,000

20,000

25,000

30,000

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Dec' 13 Dec' 14 Dec' 15 Dec' 16 Dec' 17

LME (mt) SFE (mt) Price ($/t, rhs)


Metals & Mining

6 April 2018 24

However, there are three reasons why we remain cautious:

First, nickel inventories are still plentiful with the combined LME and SFE stocks of c.360kt

or 17% of global demand. It is true that these stocks dropped by c.150kt from the highs

reached in early 2016, and they continue to decline at an annualised pace of about 250kt.

Nevertheless, their existence allays concerns about possible near-term shortages.

Second, supply may prove to be more elastic than we think. Although it will probably take

prices of $25,000+/t to justify investments in greenfield HPAL capacity, we believe that new

NPI plants could be economical to build with nickel above $10,000/t. The regulatory

environment in Indonesia and the Philippines poses risks to NPI as a long-term solution, but

given the political will, it could be a serious deflationary factor.

Finally, expectations of booming nickel demand are based on state-of-the-art battery

technologies, which will not necessarily stand the test of time as more money is spent on R&D

every year. With the phase of exceptional demand growth still being some years away, the

outlook for nickel may change substantially with one breakthrough discovery.

Given the above, we believe that our price forecast is reasonably optimistic, possibly with

upside risks prevailing at the back end of our forecast period. However, for the time being a

more bullish view does not seem fundamentally justified to us.


Metals & Mining

6 April 2018 25

Mining Rating downgrade United Kingdom @ Go to SG website

Anglo American Downgrading to Hold on share price performance despite SA optimism

Hold (from Buy) We raise our TP to £17.50 from £16.50 on the back of a lower cost of

capital and higher target multiple to capture improved sentiment on South

Africa. We nevertheless lower our earnings and FCF estimates beyond

2018. The stock having been one of the strongest gainers in the sector

over 2016-17, we see little room for continued outperformance; hence we

downgrade to Hold from Buy on valuation grounds.

FY17 results: earnings, leverage and dividends Underlying earnings missed SGe by

11%, but the company surprised on deleveraging with net debt $1.6bn below SGe on the

back of a $0.9bn WC reduction and a $0.6bn deferral in tax payments. Cash returns were

underwhelming, strictly in line with the dividend policy and significantly below SGe. We think,

however, that, barring a serious worsening of the commodity markets outlook, Anglo

American will be compelled to be more generous this year.

South Africa: staying put Management appears rather enthusiastic about recent changes

in South African politics, which we think renders the probability of Anglo American exiting the

country nil in the foreseeable future. Although financial markets largely share the optimism

today, a decision to stay would go against the wisdom of "selling on the trumpets", i.e.

pulling out when the going is good, and we think that investors may come to regret the

company’s decision not to dispose of the assets.

Still cheap but less alluring The stock looks cheap vs a synthetic valuation based on

peer multiples and the market prices of its listed subsidiaries. However, this observation

should be treated with more caution than before given the somewhat stretched valuation

multiples of Amplats and Kumba. Anglo American trades at a c.1% premium to BHP

Billiton on 2019e FCF yield, which does not offer much relative value, in our view.

South Africa optimism vs lower earnings Our TP is a 50:50 mix of an NPV and target

EV/EBITDA valuations, adjusted for a 12% risk discount (reflecting a 15% correction in the

commodity index on a 12m horizon). We lower our cost of capital assumption and

increase our target multiple to reflect positive developments in South African politics,

which more than offset the cut in our financial expectations beyond 2018. As a result, we

upgrade our TP by 6% but given a TSR of <15%, we downgrade to Hold.

Price 05/04/18 1,644.8p

12m target 1,750.0p

Upside to TP 6.4%

12m f'cast div 118p

12m TSR 13.6%

Main changes since last report Target (p) 1750.0 (1650.0)

EPS 18e ($) 2.73 (2.33) +17.2%

EPS 19e ($) 2.24 (2.33) -4.0%

EPS 20e ($) 2.43 nc new vs (old) nc: no change

Preferred stock

MT NA, GLEN LN


VALE US


Overweight

Share price performance

Source: SG Cross Asset Research/Equity Perf. (%) 1m 3m 12m ytd

Share -2.5 2.5 32.8 6.2

Rel. index* -2.4 6.9 30.2 8.9

Rel. sector** -0.9 12.8 27.8 14.2

* MSCI World ($) ** MSCI World Metals & Mining ($)

RIC AAL.L, Bloom AAL LN

52-week range 1,843-959

EV 18 ($m) 32,455

Mkt cap. (£m) 20,971

Free float (%) 85.5

No. shares o/s (m) 1275

Avg vol. 3m (No. shares) 5,678,046

Equity analyst


Equity analyst


Financial data 12/17 12/18e 12/19e 12/20e Ratios 12/17 12/18e 12/19e 12/20e

Revenues ($bn) 26.2 27.1 25.8 26.5 P/E (x) 7.0 8.5 10.4 9.5

Rev. yoy growth (%) 22.8 3.3 -4.8 2.6 FCF yield (/EV) (%) 18.7 10.2 9.8 10.6

EBIT margin (%) 23.8 23.5 20.8 21.6 Dividend yield (%) 5.7 7.2 5.9 6.4

Rep. net inc. ($bn) 3.17 3.53 2.89 3.14 Price/book value (x) 1.00 1.17 1.13 1.06

EPS (adj.) ($) 2.53 2.73 2.24 2.43 EV/revenues (x) 1.04 1.20 1.23 1.15

EPS yoy growth (%) 48.9 7.9 -18.1 8.5 EV/EBIT (x) 4.36 5.10 5.90 5.34

Dividend/share ($) 1.02 1.66 1.36 1.48 EV/IC (x) 0.7 0.9 0.8 0.8

Dividend yoy growth (%) NA 62.9 -18.1 8.5 ROIC/WACC (x) 1.6 1.6 1.3 1.4

Payout (%) 40 61 61 61 Net Debt/EBITDA (x) 0.47 0.30 0.23 0.089

9

11

13

15

17

19

Apr Jun Aug Oct Dec Feb

Price


https://insight.sgmarkets.com/#/equity/AAL.L

Metals & Mining

6 April 2018 26

Investment summary

Summary changes

(Hold, £17.50) vs (Buy, £16.50) 2018e 2019e

New Old % ch. Cons. SG vs cons. New Old % ch. Cons. SG vs cons.

Revenue ($m) 27,108 24,194 12% 26,630 2% 25,796 22,957 12% 25,618 1%

EBITDA ($m) 8,880 8,193 8% 9,022 -2% 7,905 8,006 -1% 7,843 1%

Underlying EPS ($) 2.73 2.33 17% 2.58 6% 2.24 2.33 -4% 2.12 5%

DPS ($) 1.66 1.41 18% 1.05 58% 1.36 1.65 -17% 0.97 41%


Main changes

We upgrade our profit forecast for 2018 on the back of higher commodity price assumptions,

especially for iron ore and coal, with 7% and 15% increases in EBITDA and underlying

earnings, respectively. On the other hand, we lower our forecasts for 2019 and following

periods as we expect higher operating costs (reflecting the miss in 2017 results as well as the

weak US dollar, especially vs ZAR) to outweigh a stronger top line.

We also increase our capex forecast (+19% in 2018 and +33% in 2019) aligning it with the

latest management guidance, although our expectations remain below the middle of the range

beyond 2018. As a result, our FCF forecast for 2018 remains unchanged but we downgrade

expectations for 2019 and later years. However, we believe that the company will strengthen

its balance sheet vs our previous expectations on the back of the progress achieved last year.

Despite the downward adjustments to our profit and FCF forecasts beyond 2018 and a

strengthening GBP, we increase our TP to £17.50 from £16.50 reflecting the bigger-than-

expected debt reduction achieved last year and changes to the valuation methodology

discussed below (higher target EV/EBITDA, lower cost of capital). Nevertheless, with a TSR of

less than 15% (including 12m dividend of $1.7) we downgrade our recommendation to Hold.

Anglo American – changes to financial forecast

$m 2018e 2019e 2020e

New Old % ch. New Old % ch. New Old % ch.

Revenue 27,108 24,194 12% 25,796 22,957 12% 26,464 23,517 13%

EBITDA 8,880 8,193 8% 7,905 8,006 -1% 8,289 8,309 0%

Underlying earnings 3,531 3,027 17% 2,892 3,034 -5% 3,138 3,215 -2%

Capex 2,718 2,290 19% 2,773 2,084 33% 2,770 2,162 28%

FCF* 3,162 3,066 3% 2,728 3,113 -12% 2,848 3,218 -11%

Net debt** 2,933 5,048 -42% 2,105 3,591 -41% 1,037 2,539 -59%

DPS ($) 1.66 1.41 18% 1.36 1.65 -17% 1.48 1.75 -15%

Source: SG Cross Asset Research/Equity *Excluding WC changes, **Including derivatives

Main arguments for our recommendation

SG Equity Research view

The stock has been one of the best performing names in the sector over the past 12 months,

as well as since our previous sector update on 8 November. Nevertheless, it still appears

cheap compared to its synthetic SOP valuation based on peers’ multiples for Copper, Coal

and Diamond segments and market valuations for its listed subsidiaries Amplats and Kumba

(chart below right).


Metals & Mining

6 April 2018 27

That said, we are less convinced by this observation than before given the stretched

valuations of Amplats and (to a lesser extent) Kumba, especially in the context of the latest

ZAR appreciation. Indeed, we estimate that both names offer 2019 FCF yields of 3-4% (with

little if any organic growth), which look inconsistent with the relatively elevated P/E and

EV/EBITDA multiples.

Share price performance (last 12 months) Anglo American – valuation vs peer group

Source: Bloomberg, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity *Amplats **Kumba Iron Ore

The discount to the SOP can be seen as supportive of the idea that breaking up Anglo American

would potentially be a way to create value for shareholders (possibly by exploiting market

aberrations) but it does not necessarily mean that the stock is fundamentally undervalued.

In this light, a comparison with other diversified miners looks more relevant. We estimate that

after adjusting for the fair value of non-controlling interests, Anglo American is trading at a

2019e EV/EBITDA of 4.9x and P/E of 10.5x, representing respectively 10% and 14%

discounts to BHP Billiton (we assume prices of bulk commodities normalising next year and

hence prefer 2019 over 2018 for relative value analysis).

In FCF terms, which we increasingly prefer over other metrics, Anglo American offers a 1.6%

premium over BHP Billiton in 2018e but 0.9-1.0% in 2019-20e, which must be considered in

the context of the remaining difference in the credit quality of the two companies.

Anglo American vs Rio Tinto – current year EV/EBITDA* Anglo American vs Rio Tinto – FCF yield (%)

Source: SG Cross Asset Research/Equity *Historical multiples are based on average market cap

for the given year

Source: SG Cross Asset Research/Equity *Historical yields are based on average market cap for

the given year

-40%

-20%

0%

20%

40%

60%

80%

Apr ’17 Jun ’17 Aug ’17 Oct ’17 Dec ’17 Feb ’18 Apr ’18

AAL RIO BLT GLEN VALE

Weighted average

5

7

9

11

13

15

17

19

21

3 4 5 6 7 8

2018e P

/E

2018e EV/EBITDA

Anglo American

PGM*

Iron ore**

Copper

Coal

Diamonds

0

2

4

6

8

10

12

2012 2013 2014 2015 2016 2017 2018e 2019e

Anglo American (adjusted) BHP Billiton Rio Tinto

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2017 2018e 2019e 2020e 2021e 2022e

Anglo American BHP Billiton Rio Tinto


Metals & Mining

6 April 2018 28

Given higher country risks and somewhat lower asset quality, we do not think that such

discounts/spreads are sufficiently big for Anglo American to be genuinely attractive in relative

terms. That said, we admit that the stock could still be moving towards parity with Rio Tinto

on the back of improved sentiment towards South Africa in the wake of the recent political

changes in the country.

Dividends – The wrong type of caution

While the company’s 2017 results were largely in line with the consensus, they missed our

expectations by 4% and 11% on EBITDA and underlying earnings levels, respectively.

Unimpressive dividends were a bigger disappointment, however. Contrary to our

expectations, Anglo American declared a final dividend of only $0.54 per share, bringing the

total for the year to $1.02. This amounted to a 40% payout from the underlying earnings, in

strict keeping with the dividend policy but significantly below our forecasts (table below).

Anglo American – 2017 results vs expectations

$m 2017A 2017C A/C 2017SG A/SG

Revenue 28,650 27,189 5% 27,635 4%

EBITDA 8,823 8,794 0% 9,168 -4%

Platinum 866 633 37% 680 27%

Diamonds 1,435 1,374 4% 1,481 -3%

Copper 1,508 1,568 -4% 1,338 13%

Nickel 81 68 19% 65 24%

Iron ore 2,357 2,414 -2% 2,659 -11%

Coal 2,868 2,955 -3% 3,121 -8%

Other (292) (218) 34% (176) 66%

Underlying earnings 3,272 3,335 -2% 3,664 -11%

Underlying EPS ($) 2.57 2.58 0% 2.82 -9%

DPS ($) 1.02 1.05 -3% 1.70 -40%

Net debt 4,501 5,508 -18% 6,122 -26%

Source: Company, SG Cross Asset Research/Equity

This results in a rather unexciting dividend yield of 4% (based on the current share price),

which pales in comparison with the 12% FCF yield. Such frugality looks out of place given an

almost 50% reduction in net debt over the year (a positive surprise) and 0.5x net debt/EBITDA

ratio at end-December, in line with other major miners. The market seems to have shared our

disappointment, the share price correcting upon the announcement despite otherwise solid

results (although the stock regained the lost ground in later trading).

We believe that Anglo American will be more generous next time, possibly when 1H18 results

are announced on 26 July and almost certainly when the full-year financials are released next

year. Given the strong cash flows generated by the group (even taking into account the likely

correction in iron ore and coal prices), we believe that it can safely return at least 60% of the

underlying earnings – which would translate into a 6-7% dividend yield over 2018-22e – with

c.$1bn per year remaining for growth capex and/or share buybacks.


Metals & Mining

6 April 2018 29

Anglo American – 2018 FCF bridge ($bn) Anglo American – FCF generation and dividends ($bn)

Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity *Excluding WC changes **Paid during the year

Bulky profits – The biggest coal play among diversified miners

Coal is the single biggest contributor to the company’s earnings with a 45+% share in 2018e,

followed by iron ore with a 20+% share. Even though we expect bulk commodities to

depreciate on a 12m horizon, they will in all likelihood remain the biggest revenue/profit drivers

for years to come (chart below left). Anglo American has arguably the strongest leverage to

coal among major diversified miners: a simultaneous 10% increase in LT prices for thermal

and coking coal means a c.10% increase in our NPV (chart below right), even more than for

Glencore and BHP – the world’s biggest producers of thermal and coking coal.

Anglo American – underlying earnings’ commodity exposure NPV sensitivity to a 10% variance in commodity prices

Source: Company, SG Cross Asset Research/Equity Source: Company, SG Cross Asset Research/Equity

South Africa – Staying put

Management seems enthusiastic about recent changes in South African politics, with Cyril

Ramaphosa taking the helm from Jacob Zuma. To be fair, Anglo American has never

demonstrated a clear intention to exit the country, even though it conceded that various

options had been studied in response to adverse developments under the previous

government. One of the main takeaways from the February analyst briefing is that the

company has seemingly made up its mind to stay.

The move goes against old wisdom to "buy on the cannons, sell on the trumpets", i.e. pulling

out when the going is good, and we think that investors may come to regret the company’s

0 2 4 6 8 10

EBITDA

Income of associates

Div idends f rom associates

Tax paid

Interest paid

Capex

Non-controlling interests

Other

FCF

-8%

-4%

0%

4%

8%

12%

16%

20%

-4

-2

0

2

4

6

8

10

2016 2017 2018e 2019e 2020e 2021e 2022e

FCF* Div idends** Net debt FCF y ield (%, rhs)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2016 2018e 2019e 2020e 2021e

Diamonds PGM Base metals Iron ore Coal

0% 2% 4% 6% 8%

Iron ore

Coking coal

Copper

Thermal coal

Diamonds

PGM

Nickel


Metals & Mining

6 April 2018 30

decision not to dispose of the assets. To say that Zuma's controversial presidency was the

principal cause of the country's economic malaise could be oversimplification; in a way, it was

possibly its consequence as well.

Regardless of the efforts made by the new president and his team, it will probably take years

(if not decades) for any reforms to yield palpable and lasting results. Their long-term success

is not assured and there is always a risk that the next electoral cycle will give the power back

to populists, with destructive implications for business sentiment. The only undeniable near-

term consequence of Ramaphosa’s victory is the stronger rand (up 13% since 1Q17), which

miners in fact need the least. We estimate that a 10% appreciation of ZAR may result in 9%

hit in the company’s equity value (chart below right).

Anglo American – EBITDA exposure to Africa Anglo American – NPV sensitivity to 10% FX variance

Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity

Valuation summary

Given the favourable political developments in South Africa, which have been met with an

enthusiastic response from financial markets, we adjust our TP calculation, eliminating the

100bp equity risk premium in the NPV-based estimate (which brings the WACC from 9.1% to

8.7%, despite an upward move in US treasury yields) and increasing the target EV/EBITDA

from 5.5x to 6.0x (thus aligning it with Rio Tinto). The resulting valuations are summarised in

the tables below.

The average of the two estimates is £19.84, to which we to which we apply an adjusting factor

of 0.88 (based on 1.6x adjusted beta vs S&P Industrial Metals index and an assumption of

15% commodity price downside) to obtain our new TP of £17.50 (after minor rounding, a 6%

increase from £16.50). Excluding the effect of a stronger GBP, our TP would increase by 14%.

Taking into account the expected 12m dividend of $1.7 (approx. £1.2) we arrive at a TSR of

<15% and downgrade to Hold.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2016 2017e 2018e 2019e 2020e 2021e

South Af rica Other Af rica Other regions0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

ZAR CLP AUD BRL


Metals & Mining

6 April 2018 31

Anglo American – Sum-of-the-parts NPV valuation

$m NPV EV/EBITDA (x)

2018e 2019e 2020e 2021e 2022e

PGM 5,304 7.6 6.5 5.8 5.8 5.5

Diamonds 7,133 5.0 5.8 6.1 5.8 5.7

Copper 11,661 6.6 6.4 5.8 6.0 6.2

Nickel 2,002 9.1 8.2 6.9 6.0 6.0

Iron ore & manganese 10,700 5.6 6.0 5.6 5.3 5.3

Coal 13,567 4.4 6.1 6.1 6.1 6.1

Overheads (3,966)

Total 46,399 5.2 5.9 5.6 5.5 5.5

Net debt (2,933)

Minority interest (8,388)

Equity 35,077

Equity ($) 27.13

Equity (£) 19.35


Anglo American – Target multiple valuation

$m Average 2018e 2019e 2020e 2021e 2022e

EBITDA* 7,905 8,289 8,445 8,454 8,419

Target EV/EBITDA (x) 6.0 6.0 6.0 6.0 6.0

EV 47,429 49,733 50,667 50,724 50,516

Net debt (2,933) (2,105) (1,037) 137 1,232

Minority interest* (7,257) (8,146) (8,186) (7,992) (7,858)

Equity 37,238 39,482 41,445 42,869 43,890

Discount factor 1.00 1.10 1.22 1.34 1.48

Target equity ($) 28.80 30.54 32.05 33.15 33.94

PV of target equity ($) 28.80 27.68 26.34 24.70 22.92

Dividends ($) - 1.56 1.40 1.50 1.55

PV of dividends ($) - 1.41 1.15 1.12 1.04

Equity + cumulative dividends ($) 28.80 29.09 28.90 28.38 27.64

Equity + cumulative dividends (£) 20.33 20.54 20.75 20.61 20.24 19.71

Source: SG Cross Asset Research/Equity *Following period


Metals & Mining

6 April 2018 32

Anglo American Sales/division 17

EBIT/division 17

Sales/region 17

Major shareholders (%)

Public Investment Corp. 14.5

Valuation ($m) 12/13 12/14 12/15 12/16 12/17 12/18e 12/19e 12/20e

No. of shares basic year end/outstanding 1,278 1,280 1,285 1,288 1,275 1,275 1,275 1,275

Share price: avg (hist. yrs) or current (p) 1,579 1,447 849 751 1,265 1,645 1,645 1,645

Average market cap. (SG adjusted) (1) 31,559 30,489 16,661 13,054 20,769 29,522 29,522 29,522

Restated net debt (-)/cash (+) (2) -10,652 -12,871 -12,910 -8,487 -4,520 -2,933 -2,105 -1,037

Value of minorities (3) NA NA NA NA NA NA NA NA

Value of financial investments (4)

Other adjustment (5)

EV = (1) - (2) + (3) - (4) + (5) 42,211 43,360 29,571 21,541 27,228 32,455 31,627 30,559

P/E (x) 11.9 13.8 20.3 6.0 7.0 8.5 10.4 9.5

Price/cash flow (x) 4.9 5.5 4.9 2.7 3.0 4.6 4.8 4.7

Price/free cash flow (x) 78.7 NM NM 5.36 4.12 7.70 8.37 8.29

Price/book value (x) 1.00 1.16 1.01 0.69 1.00 1.17 1.13 1.06

EV/revenues (x) 1.44 1.60 1.45 1.01 1.04 1.20 1.23 1.15

EV/EBITDA (x) 4.3 5.5 6.1 3.5 3.1 3.7 4.0 3.7

Dividend yield (%) 3.4 3.6 2.5 0.0 5.7 7.2 5.9 6.4

Per share data ($)

SG EPS (adj.) 2.08 1.72 0.64 1.70 2.53 2.73 2.24 2.43

Cash flow 5.08 4.29 2.62 3.75 6.01 5.07 4.87 4.90

Book value 24.6 20.5 12.8 14.6 17.8 19.8 20.6 21.8

Dividend 0.85 0.85 0.32 0.00 1.02 1.66 1.36 1.48

Income statement ($m)

Revenues 29,342 27,073 20,455 21,378 26,243 27,108 25,796 26,464

Gross income NA NA NA NA NA NA NA NA

EBITDA 9,106 7,104 4,419 5,469 7,632 7,698 7,058 7,442

Depreciation and amortisation NA NA NA NA NA NA NA NA

EBIT 6,620 4,933 2,223 3,766 6,247 6,367 5,362 5,727

Impairment losses NA NA NA NA NA NA NA NA

Net interest income -313 -320 -371 -229 -525 -347 -305 -272

Exceptional & non-operating items -3,634 -4,730 -6,451 -616 -106 0.00 0.00 0.00

Taxation -1,274 -1,265 -388 -698 -1,446 -1,409 -1,234 -1,346

Minority interests -1,387 -989 218 -332 -893 -695 -665 -705

Reported net income -961 -2,513 -5,624 1,594 3,166 3,531 2,892 3,138

SG adjusted net income 2,673 2,217 827 2,210 3,272 3,531 2,892 3,138

Cash flow statement ($m)

EBITDA 9,106 7,104 4,419 5,469 7,632 7,698 7,058 7,442

Change in working capital -1,121 9 25 391 879 -152 108 -55

Other operating cash movements -1,863 -1,918 -1,360 -1,335 -1,097 -1,351 -1,227 -1,415

Cash flow from operating activities 6,524 5,535 3,386 4,873 7,774 6,556 6,299 6,332

Net capital expenditure -6,121 -6,060 -4,223 -2,417 -2,186 -2,668 -2,722 -2,719

Free cash flow 403 -525 -837 2,456 5,588 3,887 3,578 3,613

Cash flow from investing activities 440 -58 1,545 1,627 180 27 51 51

Cash flow from financing activities -2,078 -258 -292 -4,989 -4,219 -4,340 -2,800 -2,597

Net change in cash resulting from CF -1,596 -955 142 -845 1,748 -425 829 1,068

Balance sheet ($m)

Total long-term assets 55,006 51,702 38,216 37,700 39,828 40,218 40,484 40,840

of which intangible 1,415 1,359 1,224 1,047 1,153 1,153 1,153 1,153

Working capital 3,771 3,773 3,281 2,575 2,076 2,228 2,120 2,175

Employee benefit obligations NA NA NA NA NA NA NA NA

Shareholders' equity 31,671 26,417 16,569 19,016 22,972 25,563 26,592 28,146

Minority interests 5,693 5,760 4,773 5,309 5,910 5,537 5,495 5,419

Provisions

Net debt (-)/cash (+) -10,144 -11,787 -11,072 -7,118 -4,171 -2,633 -1,805 -737

Accounting ratios

ROIC (%) 9.7 7.9 4.2 8.2 13.7 13.6 11.3 12.0

ROE (%) -2.8 -8.7 -26.2 9.0 15.1 14.6 11.1 11.5

Gross income/revenues (%) NA NA NA NA NA NA NA NA

EBITDA margin (%) 31.0 26.2 21.6 25.6 29.1 28.4 27.4 28.1

EBIT margin (%) 22.6 18.2 10.9 17.6 23.8 23.5 20.8 21.6

Revenue yoy growth (%) 2.3 -7.7 -24.4 4.5 22.8 3.3 -4.8 2.6

Rev. organic growth (%) 2.3 -7.7 -24.4 4.5 22.8 3.3 -4.8 2.6

EBITDA yoy growth (%) 15.7 -22.0 -37.8 23.8 39.6 0.9 -8.3 5.4

EBIT yoy growth (%) 5.9 -25.5 -54.9 69.4 65.9 1.9 -15.8 6.8

EPS (adj.) yoy growth (%) -8.0 -17.3 -62.8 165.6 48.9 7.9 -18.1 8.5

Dividend growth (%) 0.0 0.0 -62.4 -100.0 NA 62.9 -18.1 8.5

Cash conversion (%) -9.6 -27.4 nm 44.8 75.7 55.7 51.3 51.6

Net debt/equity (%) 27 37 52 29 14 8 6 2

FFO/net debt (%) 70.6 42.9 28.4 53.5 125.2 202.6 262.2 NM

Dividend paid/FCF (%) 270.2 NM NM NM 23.3 54.5 48.5 52.1


Coal 25.2%

Diamonds 20.4%

Iron ore and Manganese 20.4%

Platinum 17.7%

Copper 14.8%

Nickel 1.6%

Coal 36.4%

Iron ore and Manganese 31.7%

Copper 14.8%

Diamonds 14.0%

Platinum 8.2%

Corporate & other -5.0%

China 22.5%

Other Asia 19.2%

Europe 17.7%

India 12.7%

Other regions 12.2%

Japan 9.2%

South Africa 6.5%


Metals & Mining

6 April 2018 33

Mining Rating upgrade United Kingdom @ Go to SG website

BHP Billiton plc The mining benchmark once again

Buy (from Hold) BHP Billiton shares should once again be considered the benchmark for

diversified miners on superior relative dividend yield and product mix.

A superior relative product mix with exposure to the electrification theme Iron ore

and coal (bulk products) should represent c.45% of EBITDA ex-shale oil in 2019 (to

end-June) vs c.60% at Rio Tinto, on our estimates, while copper earnings should

represent c.30% of EBITDA, vs less than 15% at Rio Tinto. Hence, at c.30% of NAV

(2019e), the copper division lessens the impact of weakening bulk prices on our

estimates, as our copper estimates are supportive thanks in part to the expectation of

higher demand for batteries (auto and energy storage). Overall, c.48% of the group’s NAV

is exposed to resilient underlying SGe prices (nickel, copper and oil), which contrasts in the

sector with the weaker price environment in the bulk products (iron ore and coal, on SGe).

Favourable oil conditions support a final exit from non-core shale Improving oil

fundamentals lead us to raise our long-term oil price assumption by 19% to c.$65/bbl (in line

with SG oil estimates), which supports BHP’s core conventional oil assets valuation (c.14%

of NAV). This also suggests that near-term divestment of the non-core shale operations is

increasingly likely, which could generate up to c.$10bn in cash (SGe c.135p per share),

equivalent to a c.10% yield. This could lead to a special dividend or a share buyback,

although management may consider a swap with conventional oil assets over cash. An exit

from the shale operations would also lower projected capex by c.15%.

Increased estimates and attractive dividend yield We are raising our EBITDA

estimates by 17% for 2018 (end-June) and 14% for 2019 to reflect higher commodities

price estimates, equivalent to +5% this year (2H18 fiscal) and +8% next year on a group

NAV-weighted base. Our EPS estimates are roughly in line with consensus data, but our

DPS expectations are c.59% ahead of consensus for 2019 at 138p, representing a c.7%

dividend yield (c.6% in 2018e). We assume an 80% FCF payout, consistent with our net

debt estimate of c.$11bn for end-June 2018, within management’s $15-10bn target.

TP +14% to £16, 20% TSR. Upgrade to Buy We still value the shares on an equally

weighted: 1) sum of divisional NPVs; and 2) 6.2x EV/EBITDA on the average of our 2019-

21 estimates plus the non-core onshore US operations at c.$10bn and minus a 9% risk

discount to reflect the potential impact of a 15% (was 10% previously) ‘black swan’

decline in the value of the group’s metals basket.

Price 05/04/18 1,410.0p

12m target 1,600.0p

Upside to TP 13.5%

12m f'cast div 85.2p

12m TSR 19.5%


EPS 18e ($) 1.73 (1.19) +45.2%

EPS 19e ($) 1.48 (1.00) +48.4%

EPS 20e ($) 1.60 (1.09) +47.1% new vs (old) nc: no change

Preferred stock

MT NA, GLEN LN


VALE US


Overweight



Share -0.2 -9.7 12.3 -7.4

Rel. index* 0.8 -5.0 11.1 -4.1

Rel. sector** 2.4 0.3 9.1 0.5


RIC BLT.L, Bloom BLT LN

52-week range 1,660-1,117

EV 18 ($m) 116,747

Mkt cap. (£m) 75,266

Free float (%) 100.0



Equity analyst


Equity analyst



Revenues ($bn) 38.3 46.3 44.0 45.3 P/E (x) 12.5 11.5 13.4 12.4





EPS yoy growth (%) NM 41.3 -14.1 8.1 EV/EBIT (x) 7.90 6.99 8.08 7.38


Dividend yoy growth (%) 81.5 22.4 15.1 4.3 ROIC/WACC (x) 1.0 1.6 1.4 1.6


10.6

11.7

12.8

13.9

15

16.1

17.2


Price


https://insight.sgmarkets.com/#/equity/BLT.L

Metals & Mining

6 April 2018 34

Earnings revisions and investment conclusion

Sharp earnings revisions…

We are raising our EBITDA estimates for BHP Billiton by 17% for 2018 and 14% for 2019

(year-end June) to reflect higher commodities price estimates near term (iron ore and copper

both +3%) and medium term (copper +8%; oil +19%). We update our commodities views in

the sector part of this report.

Our EPS estimates rise more markedly, by 45% and 48%, respectively, due to a lower

normalised tax rate, reduced from 35% to 30%, and somewhat lower interest costs. Hence,

alongside our increased EBITDA forecast, we lower our net debt expectations by 10% and

20% in 2018e and 2019e – including a delayed $1.3bn corporate tax payment in Australia in

the first financial half year.

BHP – Estimate changes and consensus* (to 30 June, $m)

6/2018e 6/2019e

New Old % ch. Cons.

SG vs

cons. New Old % ch. Cons.

SG vs

cons.

Revenue 46,306 41,392 12% 44,400 1% 44,025 40,389 9% 43,181 2%

EBITDA 24,987 21,270 17% 23,893 5% 22,317 19,640 14% 22,732 -2%

EPS ($) 1.73 1.19 45% 1.71 1% 1.48 1.00 48% 1.46 2%

DPS ($) 1.20 0.89 35% 1.08 11% 1.38 0.87 59% 0.95 45%

Net debt (11,090) (12,272) -10% (12,330) -10% (8,257) (10,303) -20% (8,009) 3%

Source: SG Cross Asset Research/Equity; * Bloomberg consensus estimates

In this context, we also lift our dividend estimates by 35% for the current year, to $1.20,

equivalent to a 2018e FCF c.65% payout. We raise this FCF payout to c.80% for 2019e (DPS

+59%) and thereafter (capped at 100% of EPS). Our new EBITDA estimates are 5% ahead of

consensus this year and marginally lower next year, but our dividends are more optimistic,

notably in 2019 (+45%). Our net debt expectation is slightly higher than the consensus for

2019, mostly due to the higher dividend.

… reflect increased raw material price estimates

The table below highlights the main changes to our expectations relative to our previous

review, notably with regard to iron ore and copper prices, which are the biggest contributors

to BHP’s earnings (see sensitivity calculations page 9). Our variations are equivalent to a 5%

and 8% increase in BHP’s NAV-weighted prices vs our previous forecast.

Vale – Key commodities estimates (SGe) and changes vs Bloomberg forward price* ($/t)

2H 2017/18e FY 2018/19e

New Old % ch.

Fwd

curve *

SG vs fwd

curve New Old % ch.

Fwd

curve *

SG vs fwd

curve

Iron ore** 67.2 65.0 3% 66.2 1% 60.0 60.0 0% 60.0 0%

Copper 6,979 6,750 3% 6,810 2% 7,000 6,500 8% 6,786 3%

Coking coal*** 224 200 12% 207 8% 145 130 12% 183 -21%

Thermal coal**** 89.6 80.0 12% 95.2 -6% 80.0 75.0 7% 87.1 -8%

Brent ($/bbl) 66.0 62.5 6% 67.0 -2% 65.5 55.0 19% 64.8 1%

NAV-weighted

5%

2%

8%

-2%

* Bloomberg; ** 62% Fe CFR China; *** Australia FOB; **** Newcastle 6,000kcal/kg FOB


We compare our new materials estimates with their respective Bloomberg forward curves in

order to provide an up-to-date relative stance for our estimates. But note that this should not

be perceived as consensus, which is also available on Bloomberg, but is in our view not

reliable enough due to an insufficient number of regular contributions.


Metals & Mining

6 April 2018 35

Investment conclusion

Regaining the diversified mining benchmark status

In our view, BHP shares lost their reference status to Rio Tinto for diversified miners post the

end of the progressive dividend policy in early 2016 and the Samarco disaster (Brazil JV) at

the end of 2015. Hence, for the past two years Rio Tinto shares have outperformed BHP by

c.25% – although part of this may be due to the South32 spin-off.

We believe that a large number of factors support a resumption of BHP’s benchmark status

over Rio Tinto in the future due to: 1) reduced relative exposure to falling bulk products prices

(iron ore and coal), 2) superior relative exposure to firm pricing of electrification-exposed

metals (copper and nickel), with both these issues translating into 3) an attractive c.9% FCF

yield average over 2018-20e (10% in 2018e) vs c.7% at Rio Tinto, allowing 4) an attractive

dividend yield of c.7% over 2018-20e (6% in 2018e), superior to that of Rio Tinto at c.5.7%.

Supportive exposure to electrification theme

Iron ore and coal (bulk products) should represent c.45% of EBITDA ex-shale oil in 2019 (end-

June) vs c.60% at Rio Tinto on our estimates, while copper earnings should represent c.35%

of EBITDA vs c.15% at Rio Tinto. Hence, at c.30% of NAV (2019e), the copper division

lessens the impact of weakening bulk prices on our estimates, as our copper estimates are

supportive thanks in part to expected higher demand for batteries (auto and energy storage).

Favourable oil conditions

Improving oil fundamentals lead us to raise our price expectations by 6% short term and 19%

long term to c.$65/bbl (in line with SG oil estimates), which is supportive of the core conventional

oil assets representing most of the NAV balance at c.14%. When including nickel and copper,

c.48% of the group’s NAV is exposed to improving underlying prices, with a weaker environment

in bulk products. Meanwhile, these supportive oil price conditions suggest that a near-term

divestment of the non-core shale operations is increasingly likely. This could generate up to

c.$10bn in cash (c.134p per share) on our estimates, equivalent to a c.10% yield over the current

share price, keeping in mind that management may consider a swap with conventional oil

assets. An exit from the shale operations would also lower projected capex by c.15%.

Ahead of consensus on dividend expectations

We increase our EBITDA estimates by 17% for 2018 (to end-June) and 14% for 2019 to reflect

higher commodities price estimates, equivalent to +5% this year (2H18 fiscal) and +8% next

year on a group NAV-weighted base. Our EPS estimates are up c.45% on average over 2018

and 2019 due to the further supportive impact of lower interest expenses and taxes, but

roughly in line with Bloomberg consensus data. However, our DPS expectations are more

aggressive, notably for 2019, at 138p, c.59% ahead of consensus, for a c.7% dividend yield

(c.6% in 2018 fiscal). We assume an 80% FCF payout, consistent with our net debt estimate

at c.$11bn for end-June 2018, within management’s $15-10bn target.

Recommendation upgrade reflects supportive valuation

We apply our new estimates to our valuation, which equally weights: 1) a sum of divisional NPVs;

and 2) the group’s 2010-17 average EV/EBITDA of 6.2x on our 2019-21 estimates average. We

value the onshore US operations separately on a mix of NPV, peers and acreage multiples. We

also include a 9% risk discount to reflect the potential impact of a 15% (was 10% previously)

‘black swan’ decline in the value of the group’s metals basket. Our new TP of £16 is a 14%

increase over our earlier target, equivalent to a 14% share price upside and a 20% TSR. Buy.


Metals & Mining

6 April 2018 36

Share price performance and valuation

Solid 12m performance, but near-term headwinds

BHP shares have performed in line with peer Rio Tinto over the past 12 months at c.+10%,

ahead of the FTSE index and material peers in the STOXX Europe 600 at respectively -2% and

+7% (see table below). Both Rio and BHP are down 7% YTD, in line with the FTSE, in our

view due to rising risk aversion on worries of a trade war materialising between China and the

US and damaging the global growth outlook.

BHP – Performance relative to indices (%)

BHP Rio Tinto FTSE100 STOXX Europe 600

Materials

1m (3) (1) 1 1

YTD (7) (7) (6) (4)

12m 10 12 (2) 7

Since June 2015 * 4 29 4 12

Source: SG Cross Asset Research/Equity; * South32 flotation

Renewed correlation with Rio Tinto shares

The split of some of BHP operations in May 2015 and the establishment of South32 in the

process renders an analysis of the group’s shares relative performance to peers, notably Rio

Tinto, somewhat confusing. The disaster at Samarco (Brazil) at the end of 2015 is another

source of distortion. Looking at the table above and the graphs below suggests that the Rio

Tinto outperformed BHP by c.25% since June 2015, post the South32 flotation. The graph

below right suggests that much of South32’s relative value adjustment to RioTinto took place

in 2014 and that the Samarco disaster was responsible for a c.15% relative negative impact.

BHP – Share price vs Rio Tinto & FTSE100 (index Jan 2015) BHP – Performance vs Rio Tinto (index Jan 2012)

Source: SG Cross Asset Research/Equity; Bloomberg Source: SG Cross Asset Research/Equity; Bloomberg

The two graphs below highlight the shares’ correlation with their respective sales-weighted

raw material price variations. Interestingly, both indices are down 20% since January 2012,

but whereas correlation appears constant at BHP, the Rio Tinto shares appear to have

outperformed their own index by c.20% since January 2017. To us, this suggests that the Rio

Tinto shares have been privileged over BHP’s by investors returning to the sector seeking

higher dividend yields associated with the completion of visible balance sheet strengthening.

50

60

70

80

90

100

110

120

130

140

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

BHP Rio Tinto Ftse100

60

70

80

90

100

110

120

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Relativ e share price Relativ e EV (inc. South 32 f rom May 2015)


Metals & Mining

6 April 2018 37

BHP – Share price performance vs materials (index) Rio Tinto – Share price performance vs materials (index)


Indeed, Rio Tinto’s deleveraging focus started earlier and completed almost one year ahead of

that of BHP. Therefore RioTinto’s management was able to resume paying attractive

dividends in 2016, in contrast with BHP’s management, which had to abandon its long-

standing progressive dividend policy at the time. In our view, this is when BHP lost its

benchmark status for diversified miners.

Relative yields render BHP more attractive

Dividend yields have been converging again through 2017 and BHP shares are set to offer a

more attractive c.6% yield this year when considering the calendar schedule (i.e. dividends for

2H18 to June and 1H19 to December 2018). The dividend for 1H18 was paid on 27 March,

equivalent to 73% payout vs the new minimum 50% target (of EPS). We set our payout

forecast at 80% of FCF (ex-working capital) for the future since the net debt target range

should be reached by June this year.

BHP & Rio Tinto – Dividend yield* BHP & Rio Tinto – FCF yield**

Source: SG Cross Asset Research/Equity; * BHP dividend yield over calendar (not fiscal) year Source: SG Cross Asset Research/Equity; * y/e June; ** excl. working capital vs market cap

In our view, the relative superiority of both its dividend and FCF yields (average 2018-21 yield

premium of c.25%; graph above right) suggest that BHP should be reinstated as the

benchmark for diversified miners – not least because of its exposure to diverse superior

relative materials; e.g. BHP’s exposure to a likely weakening of iron ore prices is less critical

as iron ore accounts for c.35% of EBITDA vs c.55% at Rio Tinto (and this is rising with recent

coal sales).

0

20

40

60

80

100

120

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Sales weighted raw materials * BHP

-

20

40

60

80

100

120

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Sales weighted raw materials * Rio Tinto

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

BHP* Rio Tinto

-10.0%

-7.5%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e

BHP* Rio Tinto Vale


Metals & Mining

6 April 2018 38

EV/EBITDA a more relevant measure than P/E

BHP’s P/E ratio has increased markedly over the decade, from c.10x on average in the first

five years and a c.30% discount to the FTSE100, to c.15x since 2015 and in line with the

FTSE100 (graph below right). The elimination of this historical discount to the FTSE is mirrors

a similar development for the STOXX 600 Materials index as a whole. This is consistent with

the improved outlook for metals in general, reflecting reduced exploration capex over the

decade vs likely high demand for automotive electrification materials.

Over the period from the financial crisis (2008) to 2016, an average c.20% premium to Rio

Tinto shares was the norm and this is again the case today – based on Bloomberg’s 24-month

forward consensus data. Over past years, this may have been a reflection of BHP’s June year-

end, recognising lower relative earnings, reflecting falling material prices. More recently, we

wonder whether this is instead a reflection of differing depreciation methods, notably for the

iron ore assets in the context of the market valuation moving away from P/E to favour

EV/EBITDA. We note that the relative dividend yield, with a higher dividend yield for BHP

(graph above left), confuses further the relative P/E picture.

Looking to EV/EBITDA, Rio Tinto and BHP Billiton have traded at respective historical

averages of 5.8x and 6.2x since January 2010 (graph below left), or a c.7% premium for BHP.

This premium is consistent with our perception of BHP as the historical benchmark for

diversified miners. At its current share price, BHP trades at a small discount to Rio Tinto

shares, or 5.5x vs 5.6x.

BHP – EV/EBITDA (12m) relative to Rio average BHP – P/E (24m forward blended) vs Rio & peers (3m rolling)

Source: SG Cross Asset Research/Equity; Bloomberg historical & consensus data Source: SG Cross Asset Research/Equity; Bloomberg

End of dual listing is a side-show

With regard to activist investors’ requests, we note that management has agreed to divest the

group’s shale operations but remains unconvinced that terminating the dual UK-Australia

listing would add value to shareholders. We do not believe that this issue is an overhang for

the shares, with the UK share price currently back to its long-term c.15% average discount

relative to the Australian listing (differential reflects mostly the franking credits available to

Australian shareholders).

Note that there is little to learn in our view from the current cancellation of Unilever’s dual UK-

Holland listing due to differing tax issues and strategic content (e.g. Unilever is seeking to

improve its ability to fight off hostile bids).

-10%

-5%

0%

5%

10%

15%

20%

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

BHP BHP av erage 2010-17 (6.2x) Dif f . vs Rio (rhs)

-10%

0%

10%

20%

30%

-

5.0

10.0

15.0

20.0

25.0

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

BHP Ftse100 Premium to Rio Tinto (rhs)


Metals & Mining

6 April 2018 39

Upgrading from Hold to Buy (TP £16; TSR 20%)

We are raising our target price to £16, a 14% increase over our earlier target, equivalent to

13.5% share price upside and a 19.5% TSR at the current share price. In our view, this new

TP is consistent with the BHP shares recovering their benchmark status for diversified miners on

both superior FCF yield and favourable material risk dispersion.

BHP – Target price calculation (£m)

Value (£m) Per share value (p) Weight Total (p)

EV/EBITDA multiple since 2010 * 88,751 1,663 50% 831

Divisional NPVs * 84,155 1,577 50% 788

Average, excl. US onshore 86,453 1,620 100% 1,620

US onshore (£m) 7,198 135 100% 135

Unadjusted share price target 93,651 1,754

Near-term risk discount** (8,429) -9.0% (158)

Share price target 85,222 1,600

Share price upside 13%

Dividend yield (fiscal 2018e) 6%

TSR 20%

* excludes US onshore assets; ** reflects the potential impact of a 15% decline of the metal basket post the LME price surge

Source: SG Cross Asset Research/Equity;

We apply our new estimates to our valuation, which equally weights: 1) a sum of divisional NPVs;

and 2) the group’s 2010-17 average EV/EBITDA of 6.2x (see graph above left) on our 2019-21e

estimates’ average (table below). We exclude the onshore US operations, which we value

separately on a mix of NPV, peers and acreage multiples (see next paragraph).

We also include a 9% risk discount (which we introduced at the end of last year) to reflect the

potential impact of a 15% ‘black swan’ decline (10% in our earlier valuation) in the value of

metals basket in the wake of the LME price surge over the past three to four months. We do

this by using the estimated beta of BHP vs the S&P Industrial Metals index, assuming a 50%

probability of such a correction occurring (See mining report).


Metals & Mining

6 April 2018 40

BHP – Historical EV/EBITDA valuation ($m)

2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e

EBITDA* 24,404 21,520 22,394 22,560 22,523 22,384 22,695 23,117 23,228 23,286 23,286 23,287 23,290

Target EV/EBITDA (x) 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2

EV 151,302 133,425 138,840 139,874 139,643 138,781 140,707 143,323 144,015 144,376 144,375 144,381 144,395

Net debt (11,090) (8,257) (6,023) (4,371) (2,245) 437 2,738 5,546 7,953 10,319 12,596 14,889 17,200

Pension liabilities (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625)

Minority interest (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468)

Associates 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448

Equity 135,568 120,523 128,172 130,858 132,753 134,573 138,800 144,223 147,324 150,051 152,326 154,625 156,950

No. shares (m) 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338

Discount factor 1.00 1.09 1.20 1.31 1.43 1.57 1.72 1.88 2.06 2.25 2.46 2.69 2.95

Target equity ($) 25.40 22.58 24.01 24.51 24.87 25.21 26.00 27.02 27.60 28.11 28.54 28.97 29.40

PV of target equity ($) 25.40 20.63 20.05 18.71 17.34 16.07 15.14 14.38 13.42 12.49 11.59 10.75 9.97

Dividends** ($) 1.20 1.24 1.41 1.42 1.42 1.50 1.58 1.65 1.71 1.73 1.74 1.74 1.74

PV of dividends ($) 1.20 1.13 1.18 1.08 0.99 0.96 0.92 0.88 0.83 0.77 0.71 0.65 0.59

Equity + cumulative dividends ($) 26.60 22.97 23.56 23.30 22.93 22.61 22.60 22.72 22.59 22.43 22.24 22.04 21.86

Equity + cumulative dividends (£p) 1,900 1,640 1,683 1,664 1,638 1,615 1,615 1,623 1,614 1,602 1,588 1,575 1,561

Average 2019-21e (£p) 1,663

Source: SG Cross Asset Research/Equity; * y/e June, excludes US onshore and pension costs; ** announced in fiscal year

Our dividend assumptions discount an 80% FCF payout from 2019, which reflects the group’s

net debt falling to c.$11bn by June 2018, at the low-end of management $10-15bn target

range ($15.4bn in December 2017).

BHP – Historical NPV valuation (WACC 8.4%)

Divisions NPVs Implied NPV/EBITDA

2018e 2019e 2020e 2021e 2022e 2023e

Iron ore 44,568 4.9 6.2 6.0 6.0 6.0 6.0

Western Australia 44,568 - - - - - -

Samarco* - - - - - - -

Coal 21,250 4.6 7.2 7.1 7.0 7.0 7.0

Queensland 16,666 - - - - - -

Thermal coal 4,583 - - - - - -

Copper 39,022 6.8 6.7 6.1 5.8 5.7 5.5

Escondida 20,107 - - - - - -

Antamina 5,109 - - - - - -

Olympic Dam 9,347 - - - - - -

Other copper 4,459 - - - - - -

Oil 18,138 5.2 4.5 4.7 5.1 5.5 6.0

US on-shore** - - - - - -

Conventional 18,138 5.2 4.5 4.7 5.1 5.5 6.0

Nickel 3,932 18.7 12.8 9.6 7.8 7.8 7.8

Overheads (864) - - - - - -

Total NPVs 126,045 5.3 5.9 5.7 5.7 5.7 5.8

Net Debt (end 2019e) (8,257)

Pensions (1,625)

Minorities (ex-Escondida) (795)

Investments 2,448

Total value ($m) 117,817

NPV value (£m) 84,155

Value per share (p) 1,577

Source: SG Cross Asset Research/Equity; * assumes no restart of these operations; ** valued separately


Metals & Mining

6 April 2018 41

Key ratios

Comments on key ratio forecasts: 1) the NAV of bulk products (iron ore and coal) is c.52% vs

metals (copper & nickel) at 34% of total for 2019e; 2) R/NAV for bulk falls in 2019e due to

lower price estimates; 3) average FCF is over $8bn per annum from 2018e, and FCF yield is

c.9% on average over the same period; 4) copper is almost as critical to TP as iron ore.

BHP – Divisional NAV breakdown, 2019e BHP – Divisional R/NAV, 2018-19e


BHP – FCF generation vs dividends & net debt, 2012-21e (m) BHP – FCF yield & net debt/EBITDA, 2012-21e

Source: SG Cross Asset Research/Equity; * excl. dividends to associates Source: SG Cross Asset Research/Equity; * excl. change in working capital

BHP – Capex by division, 2012-20e ($m) BHP – EBITDA and TP sensitivity to 10% material price var.

Source: SG Cross Asset Research/Equity; * division being divested Source: SG Cross Asset Research/Equity; * not included in our valuation method

Iron ore35%

Coal17%

Copper31%

Oil (conv entional)14%

Nickel3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Iron ore Coal Copper Oil (conv entional) Nickel

2018e 2019e

(30,000)

(25,000)

(20,000)

(15,000)

(10,000)

(5,000)

0(8,000)

(6,000)

(4,000)

(2,000)

0

2,000

4,000

6,000

8,000

10,000

12,000

2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e

Free cash f low Div idends paid *

Net (debt) / cash (rhs)

0.0

0.5

1.0

1.5

2.0

2.5

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e

FCF * y ield (v s. Market cap) Net debt / EBITDA (x; rhs)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

20,000

2012 2013 2014 2015 2016 2017 2018e 2019e 2020e

Iron ore CoalCopper Onshore oil *Conv entional oil Other (inc. nickel and potash)Capex / depreciation (x)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Iron ore Copper Australia $ Coking coal

Oil / NGLs Chilean Peso

Thermal coal

Natural gas

Nickel

on SG Target price on SOP (selected peers EV/EBITDA)*


Metals & Mining

6 April 2018 42

Non core US onshore – Update

We value the US onshore shale assets on an average of NPV, a peer average and acreage

value detailed below. More details on these calculations are available in a report we published

last year (BHP report, see pages13-15).

US onshore valuation ($m)

Valuations

NPV 7,983

Peers 7,804

Acreage 14,445

Average ($m) 10,077

Average (£m) 7,198


Crude oil & natural prices since 2004 BHP – US onshore implied value and operating control

Source: SG Cross Asset Research/Equity; Bloomberg

The improved NPV value reflects our raised long-term oil price of $65/boe, in line with the SG

Commodities team’s estimates. This is offset by a lower peer valuation, reflecting somewhat

reduced share prices vs improved earnings estimates.

Much of our confidence with regard to the oil price outlook is derived from continued

production restraint by key OPEC members and assumes a limited impact on trade from

expected growing tariff rhetoric between the US and China in coming weeks.

These favourable price conditions should increase the likelihood of a successful sale near our

c.$10bn target, a level which has been mentioned in various Reuters and Bloomberg articles

over the past few months and which would not lead to any write-downs, in our view. Note that

the Concho Resources deal last week ($9.5bn for 640k net acres) does not provide a positive

guideline. Located mostly in the higher-value Permian basin, it in fact suggests that the upper

end of our range ($14bn) is probably excessive.

Management has highlighted that it would be prepared to accept some swaps with assets in

conventional oil, suggesting that a deal may not necessarily include cash. Our $10bn estimate

converts into 134p, or a c.10% dividend yield, should full cash proceeds be returned to

shareholders. A share buyback programme is also a clear possibility, emulating recent

decisions by Rio Tinto in the process.

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

-

20

40

60

80

100

120

140

160

Crude oil (Brent; $/bl) Crude 15Y av erage

Natural gas (Henry Hub; $/mmbtu; rhs) Gas 15Y av erage (rhs)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-

5.0

10.0

15.0

20.0

25.0

30.0

Eagle Ford Permian Hay nesv ille Fay ettev ille Av erage

Implied price per acre $ 000' BHP operator (rhs)


https://doc.sgmarkets.com/en/3/0/0/209004.html?sid=9d387cb54b3d9ee409d07bc61c21728a

Metals & Mining

6 April 2018 43

Divisional data

BHP – Iron ore division ($m)

Iron ore (ex-Samarco) 2015 2016 2017 2018e 2019e 2020e 1H17 2H17 1H18 2H18e

Iron ore price FOB Australia ($/tonne dry) 65 47 63 60 53 53 59 68 60 60

% change -43% -28% 36% -5% -12% 0% 30% 42% 2% -12%

Australian Iron Ore Lumps ($/tonne FOB dry) 76 54 71 72 63 63 69 73 74 71

% change -39% -29% 30% 3% -13% 0% 34% 27% 8% -3%

Lump premium 18% 17% 11% 21% 19% 19% 17% 7% 24% 17%

Realised price FOB ($/tonne dry) 61 44 59 57 49 49 55 62 57 58

% change -41% -29% 34% -2% -14% 0% 28% 41% 4% -7%

Total production (100% basis) 253,507 257,318 268,305 279,404 287,949 291,524 136,413 131,893 135,899 143,505

% change 12% 2% 4% 4% 3% 1% 4% 5% 0% 9%

Shipments (wet k tonne) 222,588 221,578 231,208 239,487 249,250 252,649 116,008 115,200 115,543 123,944

% change 17% 0% 4% 4% 4% 1% 3% 6% 0% 8%

Revenue ($m) 14,438 10,333 14,395 14,721 13,100 13,279 6,808 7,587 7,117 7,604

% change -31% -28% 39% 2% -10% 1% 30% 49% 5% 0%

EBITDA 8,297 5,492 9,001 8,987 7,211 7,345 4,117 4,884 4,265 4,722

EBITDA margin 57.5% 53.2% 62.5% 61.0% 55.0% 55.3% 60.5% 64.4% 59.9% 62.1%

Cash cost per tonne ($) 18.5 15.1 14.6 14.4 14.1 14.0 15.1 14.1 14.9 14.0

% change -32% -18% -3% -1% -2% -1% -1% -5% -1% -1%

% change A$ -24% -7% -6% -4% -1% -1% -5% -8% -4% -4%

Depreciation 1,716 1,859 1,880 1,830 1,955 2,005 932 948 877 953

Capex 1,930 1,061 805 1,141 1,998 2,021 929 944 873 950

Capex/depreciation 112% 57% 43% 62% 102% 101% 100% 100% 100% 100%



Metals & Mining

6 April 2018 44

BHP – Coal division ($m)

Coal 2015 2016 2017 2018e 2019e 2020e 1H17 2H17 1H18 2H18e

Newcastle spot thermal ($/tonne) 64 53 81 96 80 80 80 81 95 96

% change -18% -16% 51% 19% -16% 0% 44% 58% 19% 19%

Met coal contract ($/tonne) 116 87 193 202 150 150 146 239 181 224

% change -17% -25% 122% 5% -26% 0% 61% 190% 24% -7%

Realised price (implied; $) 70 58 111 126 99 99 113 109 118 134

% change -15% -17% 91% 14% -22% 0% 92% -4% 9% 13%

Total production (kt) 83,633 76,558 69,356 72,605 74,190 74,190 35,124 34,232 34,251 38,354

% change 4% -8% -9% 5% 2% 0% -13% -6% -2% 12%

Queensland coal 42,621 42,311 39,770 42,534 43,904 43,904 21,142 18,628 20,252 22,282

NSW coal 19,698 17,101 18,176 19,302 19,302 19,302 7,803 10,373 8,618 10,684

Other 21,314 17,146 11,410 10,769 10,984 10,984 6,179 5,231 5,381 5,388

Shipments (kt) 83,797 77,725 68,239 72,409 73,751 73,751 34,615 33,624 34,260 38,149

% change 6% -7% -12% 6% 2% 0% -16% -9% -1% 13%

Coking coal 42,289 42,809 38,846 42,353 43,465 43,465 20,716 18,130 20,516 21,837

% change 13% 1% -9% 9% 3% 0% -1% -17% -1% 20%

Thermal coal 41,508 34,916 29,393 30,056 30,286 30,286 13,899 15,494 13,744 16,313

% change -1% -16% -16% 2% 1% 0% -32% 3% -1% 5%

Coking coal / shipments 50% 55% 57% 58% 59% 59% 60% 54% 60% 57%

Revenue ($m) 5,885 4,518 7,578 9,154 7,272 7,272 3,927 3,651 4,047 5,107

% change -10% -23% 68% 21% -21% 0% 68% 67% 3% 40%

Queensland (BMA) 4,221 3,351 6,316 7,480 5,868 5,868 3,381 2,935 3,350 4,130

New South Wales 1,225 914 1,351 1,776 1,486 1,486 584 767 750 1,026

Other 439 253 (89) (102) (82) (82) (38) (51) (53) (49)

EBITDA 1,242 635 3,784 4,665 2,960 3,014 2,011 1,773 1,790 2,875

Queensland (BMA) 1,006 584 3,256 3,798 2,350 2,378 1,823 1,433 1,504 2,294

New South Wales 303 133 525 794 499 525 187 338 304 475

Other (67) (82) 3 72 111 111 1 2 (18) 90

EBITDA margin 21.1% 14.1% 49.9% 51.0% 40.7% 41.4% 51.2% 48.6% 44.2% 56.3%

Queensland (BMA) 23.8% 17.4% 51.6% 50.8% 40.0% 40.5% 53.9% 48.8% 44.9% 55.6%

New South Wales 24.7% 14.6% 38.9% 44.7% 33.6% 35.3% 32.0% 44.1% 40.5% 47.8%

Cash costs per tonne ($)

Queensland (BMA) 65.1 55.2 59.7 66.5 64.4 63.8 56.4 63.4 71.2 62.1

% change -23% -15% 8% 12% -3% -1% -5% 22% 26% -2%

% change (A$) -15% -3% 4% 8% -2% -1% -8% 19% 22% -5%

New South Wales n/a 41.0 41.0 46.5 45.5 44.1 46.0 36.0 48.0 45.3

% change n/a n/a 0% 13% -2% -3% n/a n/a 4% 26%

% change (A$) n/a n/a -3% 10% -1% -3% n/a n/a 1% 22%

Depreciation 893 899 734 723 765 765 383 351 354 369

Capital expenditure 729 298 246 312 368 426 103 143 185 127




Metals & Mining

6 April 2018 45

BHP – Copper division ($m)

Base metals 2015 2016 2017 2018e 2019e 2020e 1H17 2H17 1H18 2H18e

Copper ($/tonne) 6,380 4,896 5,390 6,786 7,000 7,300 5,029 5,750 6,593 6,979

Copper (lb/t) 2.89 2.22 2.44 3.08 3.18 3.31 2.28 2.61 2.99 3.17

% change -9% -23% 10% 26% 3% 4% -1% 22% 31% 21%

Implied price ($/Cu-eq. lb) 2.80 2.14 2.54 3.31 3.16 3.32 2.40 2.70 3.18 3.42

% change -11% -24% 19% 30% -4% 5% 14% 25% 32% 27%

Implied price premium -3% -4% 4% 7% 0% 0% 5% 3% 6% 8%

US$/CLP 605 688 662 619 600 600 664 660 638 600

% change (inverted) -12% -12% 4% 7% 3% 0% 4% 4% 4% 10%

Copper production (kt) 1,708 1,580 1,326 1,731 1,872 1,930 712 614 848 883

% change -1% -8% -16% 31% 8% 3% -7% -25% 19% 44%

Shipments (total in t eq.cu) 1,854 1,752 1,486 1,872 2,059 2,122 794 693 909 963

% change 1% -6% -15% 26% 10% 3% -5% -24% 15% 39%

Copper 1,724 1,577 1,317 1,709 1,872 1,930 702 615 825 883

% change 1% -8% -17% 30% 8% 3% -7% -25% 18% 44%

Other metals (t eq.cu) 131 175 169 163 187 192 92 79 84 79

Other metals in % of shipments 7% 10% 11% 9% 9% 9% 12% 11% 9% 8%

Revenue ($m) 11,453 8,249 8,335 13,640 14,537 15,517 4,209 4,126 6,381 7,259

% change -10% -28% 1% 64% 5% 8% 8% -5% 52% 76%

Escondida 7,819 4,881 4,544 9,169 9,116 9,803 2,467 2,077 4,322 4,847

Pampa Norte 1,437 1,098 1,401 1,753 1,802 1,834 624 777 860 893

Olympic Dam 1,244 1,432 1,287 1,114 2,012 2,346 611 676 479 635

Other / third party 953 838 1,103 1,604 1,427 1,534 507 596 720 884

EBITDA 5,205 2,619 3,545 6,907 6,907 7,681 1,744 1,801 3,195 3,712

Escondida 4,064 1,743 2,397 5,362 4,956 5,538 1,257 1,140 2,518 2,844

Pampa Norte 762 401 620 923 1,019 1,070 255 365 428 495

Olympic Dam 280 385 284 191 572 730 123 161 27 164

Other / third party 99 90 244 432 360 343 109 135 222 210

EBITDA margin 45.4% 31.7% 42.5% 50.6% 48.1% 49.5% 41.4% 43.7% 50.1% 51.1%

Escondida 52.0% 35.7% 52.8% 58.5% 54.4% 56.5% 51.0% 54.9% 58.3% 58.7%

Pampa Norte 53.0% 36.5% 44.3% 52.6% 56.5% 58.3% 40.9% 47.0% 49.8% 55.4%

Olympic Dam 22.5% 26.9% 22.1% 17.1% 28.4% 31.1% 20.1% 23.8% 5.6% 25.8%

Cash costs per lb ($) 1.28 1.35 1.31 1.35 1.43 1.44 1.26 1.37 1.33 1.37

Escondida 1.03 1.15 0.93 1.10 1.13 1.12 0.89 0.98 1.06 1.14

% change -2% 12% -19% 18% 3% -1% -42% 18% 19% 15%

% change CLP 11% 27% -22% 11% 0% -1% -44% 13% 15% 5%

Pampa Norte 1.19 1.26 1.40 1.37 1.38 1.38 1.48 1.33 1.33 1.39

% change -39% 7% 11% -3% 1% 0% 41% -10% -10% 4%

% change CLP -31% 21% 7% -9% -2% 0% 36% -14% -14% -5%

Olympic Dam 3.43 2.34 2.78 3.01 3.01 3.07 2.81 2.75 3.67 2.92

% change -7% -32% 19% 8% 0% 2% 17% 21% 30% 6%

% change A$ 3% -22% 15% 5% 1% 2% 13% 18% 26% 3%

Depreciation 1,852 1,577 1,539 1,926 1,733 1,789 830 709 1,143 783

Capex 3,822 2,786 1,479 2,078 2,200 2,350 830 649 991 1,084




Metals & Mining

6 April 2018 46

BHP – Petroleum division ($m)

Petroleum 2015 2016 2017 2018e 2019e 2020e 1H17 2H17 1H18 2H18e

Crude Oil WTI Cushing ($/barrel) 69.3 41.9 48.5 56.2 62.2 62.2 47.0 49.9 51.7 60.7

% change -32% -40% 16% 16% 11% 0% 6% 26% 10% 22%

Crude Oil Brent ($/barrel) 73.5 43.5 49.7 61.4 65.5 65.5 47.7 51.7 56.8 66.0

% change -33% -41% 14% 23% 7% 0% 1% 29% 19% 28%

Natural Gas Henry Hub ($/mmbtu) 3.32 2.24 2.98 2.89 3.11 3.11 2.93 3.02 2.90 2.88

% change -22% -33% 33% -3% 8% 0% 21% 47% -1% -5%

WTI / Brent 94% 96% 98% 92% 95% 95% 99% 97% 91% 92%

Total petroleum production ('000 boe) 255,678 240,155 208,379 190,094 187,655 184,144 105,925 102,454 98,678 91,416

% change 4% -6% -13% -9% -1% -2% -15% -11% -7% -11%

Conventional (‘000 boe) 130,019 131,225 128,175 123,067 117,277 110,247 65,877 62,298 63,859 59,208

% change -6% 1% -2% -4% -5% -6% -1% -4% -3% -5%

Liquid 68,952 67,858 62,708 59,472 56,862 52,852 31,727 30,981 29,959 29,513

Gas 61,067 63,367 65,467 63,595 60,416 57,395 34,150 31,317 33,900 29,695

Shale (‘000 boe) 125,659 108,930 80,204 67,026 70,378 73,897 40,048 40,157 34,819 32,208

% change 16% -13% -26% -16% 5% 5% -31% -21% -13% -20%

Liquid 55,626 48,180 34,371 28,386 29,805 31,295 16,431 17,940 14,502 13,884

Gas 70,033 60,750 45,833 38,641 40,573 42,602 23,617 22,217 20,317 18,324

Shale in % of total 49% 45% 38% 35% 38% 40% 38% 39% 35% 35%

Revenue ($m) 11,447 6,894 6,872 7,414 7,947 7,783 3,302 3,570 3,583 3,831

% change -23% -40% 0% 8% 7% -2% -13% 15% 9% 7%

Crude oil / Condensate & NGL 7,257 3,949 4,067 4,508 4,916 4,828 1,909 2,158 2,147 2,361

% change -24% -46% 3% 11% 9% -2% -14% 24% 12% 9%

Natural gas / LNG 3,855 2,625 2,654 2,728 2,826 2,753 1,311 1,343 1,343 1,385

% change -19% -32% 1% 3% 4% -3% -7% 11% 2% 3%

Other 335 320 151 178 205 202 82 69 93 85

Conventional (implied) 7,272 4,581 4,729 5,459 5,767 5,494 2,291 2,438 2,591 2,868

% change -31% -37% 3% 15% 6% -5% -7% 15% 13% 18%

Shale 4,175 2,313 2,143 1,955 2,179 2,288 1,011 1,132 992 963

% change -2% -45% -7% -9% 11% 5% -24% 16% -2% -15%

Shale in % of total revenue 36% 34% 31% 26% 27% 29% 31% 32% 28% 25%

EBITDA 7,201 3,658 4,063 4,456 5,217 5,095 2,000 2,063 2,035 2,421

% change -25% -49% 11% 10% 17% -2% -10% 43% 2% 17%

Conventional (implied) 5,165 2,966 3,059 3,502 4,067 3,867 1,552 1,507 1,568 1,934

Shale 2,036 692 1,004 954 1,150 1,229 448 556 467 487

EBITDA margin 62.9% 53.1% 59.1% 60.1% 65.7% 65.5% 60.6% 57.8% 56.8% 63.2%

Conventional (implied) 71.0% 64.7% 64.7% 64.1% 70.5% 70.4% - - - -

Shale 48.8% 29.9% 46.9% 48.8% 52.7% 53.7% - - - -

Conventional cash costs per boe 12.5 10.2 9.3 10.2 10.2 10.2 7.3 11.5 12.8 7.5

% change -35% -18% -9% 10% 0% 0% -20% 1% 76% -35%

Shale cash costs per boe 17.0 14.9 14.2 14.9 14.6 14.3 14.1 14.3 15.1 14.8

% change -8% -13% -5% 5% -2% -2% -4% -5% 7% 3%

Depreciation 5,215 4,195 3,497 3,580 3,517 3,316 1,640 1,857 1,847 1,733

Capex including acquisition 5,023 2,517 1,472 1,902 2,163 2,027 845 627 612 1,290




Metals & Mining

6 April 2018 47

BHP Billiton plc Sales/division 17

EBIT/division 17

Sales/region 17


Blackrock 6.6

Vanguard 4.1

Elliott 1.8

Standard Life Aberdeen 1.1

Valuation ($m) 6/13 6/14 6/15 6/16 6/17 6/18e 6/19e 6/20e


Share price: avg (hist. yrs) or current (p) 1,961 1,873 1,610 909 1,208 1,410 1,410 1,410






EV = (1) - (2) + (3) - (4) + (5) 191,077 187,730 159,072 97,773 97,847 116,747 113,914 111,680

P/E (x) 12.5 12.0 23.8 80.3 12.5 11.5 13.4 12.4

Price/cash flow (x) 7.6 7.5 7.5 7.7 5.4 5.7 6.4 6.3

Price/free cash flow (x) 554 26.7 22.4 34.6 7.67 8.44 11.5 11.0


EV/revenues (x) 2.90 3.31 3.56 3.16 2.56 2.52 2.59 2.47

EV/EBITDA (x) 6.3 6.2 7.3 7.9 4.8 4.7 5.1 4.8

Dividend yield (%) 3.8 4.0 3.1 4.0 6.4 6.0 7.0 7.3

Per share data ($)

SG EPS (adj.) 2.46 2.54 1.06 0.17 1.22 1.73 1.48 1.60

Cash flow 4.06 4.05 3.40 1.76 2.86 3.49 3.08 3.17

Book value 13.2 14.8 12.1 10.2 10.7 11.1 11.4 11.6

Dividend 1.16 1.21 0.78 0.54 0.98 1.20 1.38 1.44


Revenues 65,953 56,762 44,636 30,912 38,285 46,306 44,025 45,285

Gross income 31,529 31,019 22,522 12,770 20,908 24,987 23,066 24,030

EBITDA 30,503 30,321 21,852 12,340 20,296 24,987 22,317 23,260

Depreciation and amortisation -7,185 -7,809 -9,986 -8,871 -7,907 -8,289 -8,216 -8,122

EBIT 23,318 22,512 11,866 3,469 12,389 16,699 14,102 15,138

Impairment losses -2,253 -478 -2,368 -7,184 -5.00 0.00 0.00 0.00

Net interest income -2,199 -1,428 -1,518 -1,269 -1,598 -1,249 -1,027 -915

Exceptional & non-operating items -245 884 -2,340 -2,520 -631 -2,038 0.00 0.00

Taxation -5,801 -6,266 -2,762 1,297 -3,933 -5,045 -4,017 -4,363

Minority interests -1,597 -1,392 -968 -178 -332 -1,181 -1,138 -1,301

Reported net income 11,223 13,832 1,910 -6,385 5,890 7,187 7,920 8,559

SG adjusted net income 13,123 13,536 5,671 893 6,526 9,225 7,920 8,559


EBITDA 30,503 30,321 21,852 12,340 20,296 24,987 22,317 23,260

Change in working capital -519 -1,338 592 580 -27 -311 62 -35




Free cash flow 296 6,085 6,015 2,072 10,661 12,556 9,235 9,601

Cash flow from investing activities 3,260 -526 146 -4 681 407 0 0

Cash flow from financing activities -7,527 -3,825 -4,792 -3,753 -1,561 -7,731 -6,403 -7,366

Net change in cash resulting from CF -3,971 1,734 1,369 -1,685 9,781 5,231 2,833 2,234

Balance sheet ($m)


of which intangible 0 0 0 0 0 0 0 0

Working capital 607 2,195 1,640 1,473 -1,263 -1,939 -2,269 -2,494

Employee benefit obligations 0 0 1,917 1,514 1,625 1,625 1,625 1,625



Provisions 10,550 12,395 7,065 8,632 8,779 8,779 8,779 8,779

Net debt (-)/cash (+) -27,520 -25,786 -24,417 -26,102 -16,321 -11,090 -8,257 -6,023

Accounting ratios

ROIC (%) 17.6 14.9 8.9 2.9 9.0 14.3 12.5 13.6

ROE (%) 16.4 18.5 2.7 -10.7 10.6 12.3 13.2 14.0

Gross income/revenues (%) 47.8 54.6 50.5 41.3 54.6 54.0 52.4 53.1

EBITDA margin (%) 46.2 53.4 49.0 39.9 53.0 54.0 50.7 51.4

EBIT margin (%) 35.4 39.7 26.6 11.2 32.4 36.1 32.0 33.4

Revenue yoy growth (%) -8.7 -13.9 -21.4 -30.7 23.9 21.0 -4.9 2.9

Rev. organic growth (%) -8.7 -13.9 -21.4 -30.7 23.9 21.0 -4.9 2.9

EBITDA yoy growth (%) -9.6 -0.6 -27.9 -43.5 64.5 23.1 -10.7 4.2

EBIT yoy growth (%) -14.4 -3.5 -47.3 -70.8 NM 34.8 -15.6 7.3

EPS (adj.) yoy growth (%) -27.2 3.2 -58.1 -84.2 NM 41.3 -14.1 8.1

Dividend growth (%) 3.6 4.3 -35.5 -30.8 81.5 22.4 15.1 4.3

Cash conversion (%) 36.8 59.8 87.2 nm 126.4 111.3 107.4 105.2

Net debt/equity (%) 37 30 35 43 26 17 12 9

FFO/net debt (%) 81.8 87.7 72.0 47.4 90.5 168.6 209.2 298.6

Dividend paid/FCF (%) 2083.4 105.0 108.0 199.3 27.4 41.7 69.3 76.7


Iron Ore 38.2%

Copper 21.8%

Coal 19.8%

Petroleum 17.9%

Group and unallocated 2.3%

Iron Ore 56.3%

Coal 23.9%

Copper 15.7%

Petroleum 4.4%

Group and unallocated -0.3%

China 42.6%

Others 20.8%

North. America 14.5%

Japan 9.5%

Autralia/NZ 6.0%

Europe 3.8%

Latin America 2.9%


Metals & Mining

6 April 2018 48

Mining 12m target downgrade United Kingdom @ Go to SG website

Glencore Buy rating reiterated despite increased DRC risks

Buy We are trimming our target price to £4.20 from £4.70 on the stronger GBP,

higher cost of capital and risk of higher commodity price volatility, as our

now-higher coal and copper price assumptions are offset by political and

regulatory risks in the DRC. However, the stock remains our favourite in

the sector, reflecting attractive commodity exposure and strong cash flow

yields, which we think are still not adequately discounted by the market.

More constructive on coal and copper We are increasing our long-term price

assumptions for coal and copper, the two commodities that matter most at Glencore

(44% and 17% of 2019e EBITDA). We now also incorporate higher capex guidance for

2018-19, and a more cautious view on taxes (reflecting 2017 results) and cost of debt

(reflecting rising yields). As a result, we lower our expectations for net income and FCF in

2018-19, but raise them for later periods. Our forecasts remain above consensus.

Dividend story in the making We estimate that Glencore offers some of the strongest

FCF yields in the sector (12% in 2018, 13+% in 2019-22) with positive momentum into

2019e, in contrast to peers. The company’s FY17 dividends exceeded the minimum

level, as per the dividend policy, and we think Glencore could further increase cash

returns with 1H18 results. Our 2018 dividend forecast is c.40% above consensus.

Three themes for 2018 The key themes for the stock this year are the political and

regulatory uncertainty in the Democratic Republic of the Congo (DRC: home to the

Katanga and Mutanda mines, i.e., c.30% of the Industrial department NPV); thermal coal

price volatility (as Chinese authorities’ seek to strike a balance between adequate coal

supply and healthy profitability in coalmining); and M&A, which will be a constraining factor

for cash returns.

TP lowered on GBP strength and rising interest rates The cut in our TP reflects a

stronger GBP and rising UST yields. We are introducing a 15% discount for the NPV of

African Copper and trimming our target EV/EBITDA assumption for the Industrial department

from 6.0x to 5.5x to reflect increased risks in the DRC. Without DRC-related adjustments, our

TP would be around £4.40-4.50, implying c.30% TSR. GLEN is trading at a 2018 P/E of less

than 10x (adjusted for overstated depreciation) vs 11.1x for Rio Tinto and 13.1x for BHP

Billiton, while it offers superior FCF yields and stronger earnings momentum.

Price 05/04/18 358.8p

12m target 420.0p

Upside to TP 17.1%

12m f'cast div 18.4p

12m TSR 22.2%


EPS 18e ($) 0.462 (0.493) -6.3%

EPS 19e ($) 0.505 (0.541) -6.7%


Preferred stock

MT NA, GLEN LN


VALE US


Overweight



Share -1.6 -8.2 12.1 -8.0

Rel. index* 4.7 12.5 20.3 5.6

Rel. sector** 4.0 4.7 19.4 4.6


RIC GLEN.L, Bloom GLEN LN

52-week range 415.0-276.6

EV 18 ($m) 98,318

Mkt cap. (£m) 51,182

Free float (%) 70.0



Equity analyst


Equity analyst



Revenues ($bn) 205 218 219 222 P/E (x) 11.4 10.9 10.0 9.3

Rev. yoy growth (%) 34.3 6.2 0.2 1.4 FCF yield (/EV) (%) 1.5 8.3 8.7 10.6




EPS yoy growth (%) 318.0 14.0 9.3 7.9 EV/EBIT (x) 11.4 8.59 7.87 7.21


Dividend yoy growth (%) NM 47.6 15.6 14.0 ROIC/WACC (x) 1.0 1.3 1.4 1.4


2.6

2.9

3.2

3.5

3.8

4.1

4.4


Price

P

R

E

M

I

U

M

L

I

S

T


https://insight.sgmarkets.com/#/equity/GLEN.L

Metals & Mining

6 April 2018 49

Investment summary

Summary changes

(Buy, £4.20) vs (Buy, £4.70) 2018e 2019e

New Old Chg Cons. SG vs cons. New Old Chg Cons. SG vs cons.

Revenue ($m) 218,121 190,566 14% 220,100 -1% 218,509 199,231 10% 225,721 -3%

EBITDA ($m) 18,012 17,802 1% 18,120 -1% 19,110 18,697 2% 17,882 7%

EPS ($) 0.46 0.49 -6% 0.47 -2% 0.50 0.54 -7% 0.44 15%

DPS ($) 0.30 0.34 -13% 0.20 48% 0.34 0.38 -9% 0.22 58%


Main changes

We are increasing our 2018-19 revenue and to a much lesser extent, our EBITDA forecasts to

reflect primarily higher price assumptions for thermal coal and copper, as well as the strong

financial performance demonstrated by the marketing department in 2017, which we think can

be sustained in the coming years.

At the same time, we are trimming our 2018-19 forecasts at the net income level as positive

changes above the operating income level are offset by a higher effective tax rate (reflecting

2017 results) and a higher cost of debt on the back of rising interest rates and higher readily

marketable inventories (“RMI”) in the Marketing department (largely reflecting higher

commodity prices).

We also incorporate the increased medium-term capex guidance leading to a cut in FCF and

dividend forecasts in 2018-19, although our expectations remain above the consensus and

imply a 6-7% dividend yield (assuming a 50% payout of the Industrial FCF).

At the same time, our capex forecast beyond 2019 does not change that much, which,

together with a stronger earnings outlook, leads to higher FCF and dividends in the longer

term, as illustrated in the table below.

Glencore: Changes to our financial forecasts

$m 2018e 2019e 2020e 2021e 2022e

EBITDA 18,012 19,110 19,679 20,076 19,705

o/w Marketing 3,062 3,043 3,090 3,133 3,145

o/w Industrial 14,950 16,067 16,589 16,943 16,561

EBIT 11,449 11,873 12,187 12,443 12,060

Net income 6,590 7,203 7,769 8,336 8,513

EPS ($) 0.46 0.50 0.54 0.58 0.60

Capex 4,986 4,921 4,365 4,276 4,284

FCF* 8,424 9,738 11,097 11,883 12,045

DPS ($) 0.30 0.34 0.39 0.42 0.42

Changes (%)

EBITDA 1% 2% 4% 7% 11%

o/w Marketing 5% 4% 4% 4% 4%

o/w Industrial 0% 2% 4% 7% 13%

EBIT 3% 2% 4% 7% 14%

Net income -6% -6% -4% 0% 6%

EPS ($) -6% -7% -5% -1% 6%

Capex 23% 20% 7% -5% 7%

FCF -13% -9% -1% 7% 8%

DPS ($) -13% -9% -1% 7% 8%

Source: SG Cross Asset Research/Equity *Excluding WC changes, M&A and disposals


Metals & Mining

6 April 2018 50

We are trimming our TP from £4.70 to £4.20 per share (-10.6%) to reflect GBP appreciation, a

higher cost of capital on the back of rising US treasury yields (up c.50bp for 10y UST since

early November) and the risk of higher commodity price volatility. Perhaps more importantly,

we take into consideration increased political and tax risks in the DRC, which represents (on

our analysis) c.30% of the unadjusted NPV of the Industrial department. Without the DRC-

related discount, our TP would be in the £4.40-4.50 range. Taking into account our revised

12m dividend estimate ($0.26), and following the recent market correction, we now see a TSR

of c.20%, which supports our constructive stance and our Buy rating.

Main reasons for our recommendation


Glencore remains our favourite name in the mining sector reflecting the company’s strong

cashflow generation with a FCF yield of 12% in 2018 and 13-17% over 2019-22, and

favourable positioning in the commodity space with prevalent exposure to base metals and

thermal coal (respectively c.80% and c.20% of 2019e Industrial EBITDA). Although thermal

coal prices are probably not sustainable at current levels, we think they are more likely to

surprise by staying ‘stronger for longer’ than iron ore or coking coal prices.

Diversified miners’ EBITDA exposure (2018e) Glencore FCF outlook ($bn)

Source: SG Cross Asset Research/Equity Source: Company, SG Cross Asset Research/Equity *Based on historical market cap until 2018

The marketing department remains the company’s unique advantage as it is still not fully

discounted in the share price, in our view. We expect marketing activities to generate $3.0-

3.1bn in EBITDA over 2018-22e while requiring very light capex ($0.2bn p.a.). We note that

Glencore has now practically completed its deleveraging with end-2017 Net debt/EBITDA of

0.7x. The company is therefore logically in a position to exceed the minimum cash returns as

per its dividend policy ($1bn from Marketing plus 25% of Industrial FCF) and has the potential

to become the most exciting dividend story in the M&M sector.

Valuation summary

Our TP is a 50:50 combination of NPV (using a 7.8% WACC) and target multiple-based

estimates of respectively £4.42 and £5.00 (the latter is based on a 15.0x target P/E multiple for

the marketing operations and a 5.5x EV/EBITDA multiple for the industrial operations). The

NPV valuation includes a 15% discount to the NPV of African Copper reflecting the increased

political and regulatory risks, which is also the reason for our lower target EV/EBITDA

assumption (previously 6.0x).

22%

59%

17%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GLEN AAL BLT RIO VALE

Iron ore Coal Base metals PGM

Diamonds Oil Other Marketing

-3%

0%

3%

6%

9%

12%

15%

18%

21%

-2

0

2

4

6

8

10

12

14

2015 2016 2017e 2018e 2019e 2020e 2021e 2022e

Marketing Industrial FCF y ield* (%, rhs)


Metals & Mining

6 April 2018 51

The average of the two yields a valuation of £4.70, to which we apply an adjusting factor of

0.90 (based on 1.40x adjusted beta vs S&P Industrial Metals and assumption of a 15%

correction in the base metals index) to obtain our TP of £4.20. Excluding the effect of GBP

appreciation, our TP would be cut by about 3%. We expect a 12m dividend of $0.26, resulting

in 12m TSR of c.20%; hence our Buy recommendation (unchanged).

Glencore – Sum-of-the-parts NPV valuation

$m EV/ EV/EBITDA (x)

Equity 2018e 2019e 2020e 2021e 2022e

Industrial activities

Copper 45,557 6.8 5.5 5.3 5.3 5.3

Zinc 12,120 4.1 3.9 3.9 3.8 3.9

Nickel 6,815 7.1 6.8 5.5 4.8 6.2

Alloys 4,233 6.9 7.3 6.5 5.9 5.9

Coal 21,380 5.5 6.6 6.6 6.6 6.6

Oil 778 4.2 3.7 3.3 3.1 3.1

Overheads (2,853)

EV - Industrial 88,031 5.9 5.5 5.3 5.2 5.3

Net funding (13,861)

Minority interest (6,518)

Equity value - Industrial 67,651

Equity value - Marketing 18,932

Total equity w/o investments 86,583

Investments 1,789

Total equity value 88,372

Equity ($) 6.2

Equity (£) 4.42


Glencore – Target multiple valuation

Average 2018e 2019e 2020e 2021e 2022e

Industrial activities

Industrial EBITDA* 16,067 16,589 16,943 16,561 16,148

Target EV/EBITDA (x) 5.5 5.5 5.5 5.5 5.5

EV of industrial activities 88,371 91,241 93,186 91,084 88,813

Net funding (13,861) (8,883) (3,080) 2,920 8,861

Minority interest (6,518) (6,451) (6,273) (6,027) (5,768)

Equity value - Industrial 67,991 75,907 83,833 87,977 91,905

Marketing activities

Marketing net income* 1,993 2,034 2,066 2,073 2,084

Target P/E for marketing 15.0 15.0 15.0 15.0 15.0

Equity value - Marketing 29,891 30,507 30,985 31,090 31,267

Consolidated

Total equity ex investments 97,882 106,414 114,818 119,067 123,172

Investments 1,789 1,789 1,789 1,789 1,789

Equity value at end of period 99,670 108,203 116,607 120,856 124,961

Discount factor 1.00 1.11 1.24 1.38 1.53

Target equity ($) 7.0 7.6 8.2 8.5 8.8

PV of target equity ($) 7.0 6.8 6.6 6.2 5.7

Dividends ($) 0.3 0.4 0.4 0.4

PV of dividends ($) 0.3 0.3 0.3 0.3

Equity + cumulative dividends ($) 7.0 7.1 7.2 7.0 6.8

Equity + cumulative dividends (£) 5.00 4.98 5.06 5.11 4.99 4.87

Source: SG Cross Asset Research/Equity *Following period **Payable during calendar year


Metals & Mining

6 April 2018 52

Key themes for 2018

DRC: peace and a smooth transition is more important than regulation

The DRC is a very important place for Glencore as it represents c.30% of the NPV of the

Industrial department on our estimates (before risk adjustments). Not only are the Katanga and

Mutanda mines among the biggest in the company’s copper portfolio, but with cobalt prices

soaring they are very likely also by far the most profitable (in the future tense in Katanga’s

case, as the mine is currently in a ramp-up phase following a two-year refurbishment).

Furthermore, we believe that, including revenue from cobalt, both mines should have negative

cash costs.

This value is now under threat from two developments. One is the new Mining Code awaiting

President Kabila’s signature after passing the senate. The Code is likely to significantly

increase GLEN’s tax burden, ratcheting up the royalties on copper and cobalt from 2%

currently to 3.5% and 10%, respectively, and introducing a 50% tax on ‘super profits’ defined

as operating income earned when commodity prices exceed the levels assumed in the

bankable feasibility study by 25%.

In our view, the higher royalty rates alone do not pose a great threat to Glencore’s profitability.

Even after the increase, the royalty rate paid for copper should remain below the level in

neighbouring Zambia. And even though the 10% royalty on cobalt looks extreme it should be

viewed in the context of the c.240% price rally over the past two years. What poses a bigger

risk (and where we think a compromise could be sought by miners) is the taxation of ‘super

profits’, which looks to be not only draconian but also unfair as it penalises companies with

long-life assets and those making investment decisions based on conservative commodity

price assumptions.

Glencore: Industrial department NPV breakdown Copper: World mine production (2017)

Source: SG Cross Asset Research/Equity *Before additional political & regulatory

discount

Source: USGS, SG Cross Asset Research/Equity

Another threat is the risk of a violent change in the political leadership, with President Joseph

Kabila’s popularity in decline. The situation in parts of the country is reportedly unstable, with

local militia vying for influence with pro-government forces. In a worst case scenario, further

escalation of the conflict could lead to another civil war (the previous one lasted five years,

ending in 2003, and was one of the bloodiest on the continent). Even if the worst is avoided,

Kabila’s displacement could lead to a review of the existing license agreements and

ownership rights, with unpredictable results.

31%

23%13%

8%

23%

2% Af rican copper*

Other copper

Zinc

Nickel

Coal

Other ops and ov erheads

27%

12%

9%7%

5%4%

36%

Chile

Peru

China

US

Australia

DRC

Other


Metals & Mining

6 April 2018 53

It is difficult to say to what extent these risks are already discounted in the share price. For our

own part we reflect them by applying an additional 15% discount to the NPV of African

copper and lowering the target EV/EBITDA for the Industrial department from 6.0x to 5.5x.

However, we note that any serious disruptions in the supply of copper caused by political

instability or regulatory changes (the DRC accounts for c.4% of the world mine supply) would

lend support to commodity prices and boost the profits of Glencore’s other copper mines.

Nevertheless, given the importance of the DRC operations for the group, any serious risk to

the ownership rights or stability of production would probably be a net negative for its

valuation.

Coal - The biggest swing factor

Coal market performance over the past two years has been one of the most remarkable

comeback stories in the commodities universe. Entering 2018 with the Newcastle benchmark

above $100/t, we estimate that Glencore’s coal division should currently be enjoying c.40%

EBITDA margins and strong cash flows. Whatever happens in the next nine months will be of

high significance for 2018 financial results: with 130+mt of consolidated production, we

calculate that each $10/t shift in coal prices means a 6% change in EBITDA and an 8%

change in FCF.

We expect coal prices to correct by $10-15/t by the end of 2018e (with Newcastle declining to

$80/t on SGe from $90-95/t today), but what matters is not just the magnitude of the move but

equally the trajectory. Given the low inventory levels in late 2017 and extreme temperatures

affecting large parts of Europe, China and North America, we think that without a meaningful

supply increase prices will remain well bid.

Glencore: NPV sensitivity to 10% change in LT prices World thermal coal market: imports (bt)


China to play a crucial role

After shutting down about 450mt of coalmining capacity over the past two years the Chinese

authorities are still determined to bring the number up to 500mt (most likely by the end of this

year) but we expect further reductions to be partly or fully offset by new capacity. The

resulting balance will matter a great deal for the seaborne market, in our view, given China’s

role as the world’s biggest importer, with a 19% share in 2017.

We believe that over the medium term coal prices are likely to find support at around $80/t

FOB Australia, which by our estimates corresponds to a Chinese FOB benchmark of

0%

1%

2%

3%

4%

5%

6%

7%

8%

Coal Copper Nickel & cobalt

Nickel Cobalt Zinc Precious metals

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2011 2012 2013 2014 2015 2016 2017e

China Taipei India Japan Korea Other Asia Europe Other


Metals & Mining

6 April 2018 54

CNY540/t, the middle of the CNY500-580/t ‘comfort range’ sought by Chinese authorities

(price high enough to ensure healthy profitability of domestic coal producers, but not too high

to hurt utilities). That said, prices could be prone to significant swings over short periods and

we see thermal coal as possibly the biggest swing factor for 2018 earnings.

M&A - A careful balancing act

Glencore has been more active in the M&A field in the last two years than any other diversified

miner. Given the positive long-term consensus view of the base metal universe and favourable

trading conditions for energy commodities in the near to medium term, we think it is probably

still on the lookout for opportunities. In view of the strong financial outlook (2018 is likely to be

a record year for Glencore in terms of cash flows) management may find it especially difficult

to pass up any attractive opportunities.

This is the area in which a careful balance is required in view of investors' cautious attitude to

inorganic growth (not entirely unjustified given Glencore's track record) and expectations of

strong cash returns. Given the dearth of quality assets for sale in the base metals universe, the

chances are that Glencore will continue to strengthen its coal mining arm. This is something

that may not be readily appreciated by all investors. The 'right' valuation will therefore be more

important than ever.

Hail Creek The first deal (announced 20 March 2018) was not long in coming. The $1.7bn

acquisition of an 82% interest in the Hail Creek coal mine from Rio Tinto was an obvious

possibility. Hail Creek has a production capacity of 9-10mt producing a 60:40 mix of hard

coking and thermal coal. The mine has reserve life of c.15 years but, based on known

resources, we estimate that it could remain in operation for c.60 years. In addition, Glencore is

also acquiring 71.2% in untapped Valeria coal deposits with resources of 762mt.

The market did not seem very pleased with the deal, with Rio Tinto outperforming Glencore on

the day of the announcement. We think the acquisition could in fact be value accretive for

Glencore, however. Based on our long-term price assumptions, we estimate that Glencore is

paying normalised EV/EBITDA of about 6.0x, which lies within the valuation range of listed

peers even leaving Valeria out of consideration. The price also translates into normalised P/E

of 9.0x compared with Glencore’s own (adjusted) 2019e P/E of 9.2x.

Drummond Colombia: key financials and shipments Colombian coal exports (2017e)

Source: SG Cross Asset Research/Equity Source: McCloskey, SG Cross Asset Research/Equity *Joint operation of Anglo American, BHP

Billiton and Glencore **100% Glencore

0

5

10

15

20

25

30

35

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2014 2015 2016 2017e 2018e 2019e

EBITDA ($bn) Rev enue ($bn) Sales (mt, rhs)

40%

19%

41% Cerrejon*

Prodeco**

Drummond


Metals & Mining

6 April 2018 55

Drummond Another possible target is Drummond's Colombian coal business (20%-co-

owned by Itochu), one of the world's biggest coalmining complexes with annual production of

32-33mt. According to media reports (e.g. McCloskey) Drummond is “exploring investment

options” for the assets and has already been approached by potential suitors. We estimate

that in spot economics the mine could generate EBITDA of c.$800m and possibly fetch a

valuation of $3.0-4.0bn. Such an acquisition (even excluding Itochu’s stake) could be too big

for Glencore to go it alone, so in that event it may need to look for a partner.

Bunge Yet another possibility, which has already received (possibly too) much attention, is a

possible takeover of agri group Bunge. In May 2017, Glencore ‘made an informal approach’ to

its rival ‘regarding a possible consensual business combination’, which was reportedly

rejected at the time by Bunge’s management. However, we believe that Glencore remains

interested in expanding the agricultural side of its marketing business, which currently

represents just c.10% of the department’s EBITDA.

That said, we are not convinced that a full-blown takeover is what Glencore has in mind.

Bunge’s financial performance in the past three years has been disappointing, with EBITDA

falling 35% since 2014. It is largely thanks to recurring takeover speculation that the share

price has not been seriously hurt. The company has been struggling to deliver a turnaround,

which recently pushed it towards merger talks with rival ADM (talks have reportedly stalled,

however). Meanwhile, the US grain market (to which Glencore is keen to gain exposure)

accounts for less than one-third of Bunge’s operating income (see left-hand chart below).

Bunge EBIT by segment (2017) Bunge EBITDA and share performance

Source: Company, SG Cross Asset Research/Equity Source: Company, SG Cross Asset Research/Equity

In view of the above, we think that Glencore could prefer to build a consortium with a view to

splitting up Bunge and retaining only select parts rather than the entire business, which at

today’s market valuation of more than $10bn (before any takeover premium) would make it

difficult for Glencore to digest alone.

37%

20%

39%

1%3%

Oilseeds

Grains

Food & ingredients

Sugar & bioenergy

Fertilizer

0

20

40

60

80

100

0.0

0.5

1.0

1.5

2.0

2.5

Dec' 10 Dec' 11 Dec' 12 Dec' 13 Dec' 14 Dec' 15 Dec' 16 Dec' 17

12m trailing EBITDA Share price ($, rhs)


Metals & Mining

6 April 2018 56

Glencore Sales/division 16

EBIT/division 16

Sales/region 16


Management and employees 30.0

Valuation ($m) 12/13 12/14 12/15 12/16 12/17 12/18e 12/19e 12/20e


Share price: avg (hist. yrs) or current (p) 332 330 210 176 329 359 359 359






EV = (1) - (2) + (3) - (4) + (5) 120,375 120,370 87,003 64,517 97,896 98,318 93,395 87,858

P/E (x) 15.7 31.0 NM 24.5 11.4 10.9 10.0 9.3

Price/cash flow (x) 5.9 7.7 3.2 6.0 11.2 5.3 5.3 5.0

Price/free cash flow (x) 142 174 5.31 12.4 25.5 7.62 7.60 6.71


EV/revenues (x) 0.52 0.54 0.51 0.42 0.48 0.45 0.43 0.40

EV/EBITDA (x) 11.5 9.4 10.0 6.3 6.6 5.5 4.9 4.5

Dividend yield (%) 3.2 3.3 1.9 2.9 4.3 5.8 6.8 7.7

Per share data ($)

SG EPS (adj.) 0.33 0.18 -0.37 0.097 0.41 0.46 0.50 0.54

Cash flow 0.88 0.70 1.01 0.40 0.41 0.95 0.95 1.00

Book value 4.45 3.69 3.10 3.11 3.49 3.69 3.89 4.09

Dividend 0.17 0.18 0.060 0.070 0.20 0.30 0.34 0.39


Revenues 232,694 221,073 170,497 152,948 205,476 218,121 218,509 221,649

Gross income 11,672 14,068 9,965 11,370 16,072 19,322 20,420 20,989

EBITDA 10,466 12,764 8,694 10,268 14,762 18,012 19,110 19,679


EBIT 4,829 6,706 2,172 3,930 8,552 11,449 11,873 12,187


Net interest income -1,388 -1,471 -1,394 -1,533 -1,451 -1,397 -1,035 -673

Exceptional & non-operating items NA NA NA NA NA NA NA NA

Taxation -254 -1,809 -98.0 -638 -1,759 -2,446 -2,606 -2,707

Minority interests -104 -136 3,150 443 615 -215 -224 -230

Reported net income -7,402 2,308 -4,964 1,379 5,777 6,590 7,203 7,769

SG adjusted net income 3,666 2,308 -4,964 1,379 5,777 6,590 7,203 7,769


EBITDA 10,466 12,764 8,694 10,268 14,762 18,012 19,110 19,679

Change in working capital 2,599 -703 7,525 -1,201 -4,965 1,030 -264 -358




Free cash flow 406 411 8,054 2,731 2,594 9,454 9,474 10,739

Cash flow from investing activities 2,083 3,694 -113 5,699 -310 -67 -67 -67


Net change in cash resulting from CF 67 -25 -1,132 3,401 -381 4,587 4,865 5,680

Balance sheet ($m)



Working capital 26,542 18,422 9,697 7,557 12,590 11,455 11,605 11,840



Minority interests 3,368 2,938 89 -462 -300 -85 139 369

Provisions 8,064 7,555 5,923 5,931 7,094 7,094 7,094 7,094

Net debt (-)/cash (+) -52,288 -49,838 -41,303 -30,700 -31,810 -26,267 -21,343 -15,806

Accounting ratios

ROIC (%) 4.9 5.1 3.0 4.1 8.0 10.1 10.7 11.3

ROE (%) -18.4 4.7 -11.1 3.2 12.3 12.9 13.3 13.7


EBITDA margin (%) 4.5 5.8 5.1 6.7 7.2 8.3 8.7 8.9

EBIT margin (%) 2.1 3.0 1.3 2.6 4.2 5.2 5.4 5.5

Revenue yoy growth (%) 8.5 -5.0 -22.9 -10.3 34.3 6.2 0.2 1.4

Rev. organic growth (%) 8.5 -5.0 -22.9 -10.3 34.3 6.2 0.2 1.4

EBITDA yoy growth (%) 76.1 22.0 -31.9 18.1 43.8 22.0 6.1 3.0

EBIT yoy growth (%) 8.0 38.9 -67.6 80.9 NM 33.9 3.7 2.6

EPS (adj.) yoy growth (%) 130.0 -46.9 -312.4 126.0 318.0 14.0 9.3 7.9

Dividend growth (%) 4.8 9.1 -66.7 16.7 NM 47.6 15.6 14.0

Cash conversion (%) 40.3 21.2 nm 95.3 42.1 106.1 101.2 106.4

Net debt/equity (%) 99 97 100 70 64 50 38 27

FFO/net debt (%) 16.9 19.0 17.4 26.4 36.3 53.9 72.5 103.1



Mining 12m target downgrade United Kingdom @ Go to SG website

Energy products 49.3%

Metals & Minerals 36.8%

Agricultural products 13.7%

Corporate 0.1%

Metals & Minerals 72.5%

Agricultural products 24.7%

Energy products 22.4%

Corporate -19.6%

Asia 39.2%

Europe 31.9%

Americas 21.4%

Oceania 3.8%

Africa 3.7%


https://insight.sgmarkets.com/#/equity/RIO.L

Metals & Mining

6 April 2018 57

Rio Tinto Price correction brings back value

Buy We raise our earnings estimates on higher commodity price assumptions

and also incorporate higher capex guidance. We see Rio Tinto generating a

7-8% FCF yield in 2018-21e, with 2018-19e EV/EBITDA close to the

historical average. In terms of valuation, positive changes to earnings

forecast are wiped out by the strengthening GBP, a higher cost of capital

and higher capex, leading to an 8% cut in our TP from £44.00 to £40.50.

However, we maintain our Buy rating following the recent price correction.

FY17 results support SG view Rio’s FY results did not surprise much apart from a major

drop in net debt due to a $1.2bn tax deferral. Our adjustments to financial forecasts thus

reflect an improved view of the commodity price outlook (stronger iron ore near term,

stronger copper long term) as well as higher capex as per management’s updated

guidance. These changes do not alter our view of Rio Tinto generating $6bn+ of FCF in a

$60/t iron ore environment, which translates into a 7-8% FCF yield over 2018-21.

A low-beta name for turbulent times We expect the commodity complex to lose much

of its price momentum this year with base metals range-bound near spot levels and bulk

commodities under pressure. While such an environment does not favour mining stocks,

we think that Rio Tinto is one of the safer investments in the sector given its balance

sheet strength, excellent operating track record and low market beta vs peers.

More asset disposals on the cards We expect Rio Tinto to continue slimming down its

asset portfolio with the possible divestment of Grasberg and Pacific Aluminium. Together

with other disposals announced YTD, we estimate proceeds could reach $8bn, much of

which we would expect to go to further buybacks. That said, divesting Grasberg would

seriously erode the group’s growth outlook, which could prompt the company to take a

more constructive stance on M&A.

Factoring in a stronger GBP and higher rates Our TP is a 50:50 mix of an NPV and a

target EV/EBITDA valuation, adjusted for a 10% risk discount (reflecting a 15%

correction in the commodity index on a 12m horizon). The combination of a stronger

GBP and an upward move in UST yields offsets higher profit expectations, leading to an

8% cut in the TP. However, following the recent share price correction, the stock

remains in 15%+ TSR territory, which means that it is still at a Buy rating.

Price 05/04/18 3,645.5p

12m target 4,050.0p

Upside to TP 11.1%

12m f'cast div 205p

12m TSR 16.7%


EPS 18e ($) 4.77 (4.03) +18.4%

EPS 19e ($) 4.29 (3.90) +10.0%


Preferred stock

MT NA, GLEN LN


VALE US


Overweight



Share 0.2 -8.6 11.7 -7.5

Rel. index* 0.8 -4.1 10.1 -4.6

Rel. sector** 2.4 1.2 8.0 0.0


RIC RIO.L, Bloom RIO LN

52-week range 4,172-2,910

EV 18 ($m) 96,320

Mkt cap. (£m) 67,315

Free float (%) 91.0



Equity analyst


Equity analyst



Revenues ($bn) 41.9 42.7 41.6 42.4 P/E (x) 10.0 10.8 12.0 11.4





EPS yoy growth (%) 70.0 -0.5 -10.1 4.5 EV/EBIT (x) 6.38 6.84 7.46 7.14


Dividend yoy growth (%) 70.6 -0.6 -10.1 4.5 ROIC/WACC (x) 1.5 1.5 1.3 1.3


27

30

33

36

39

42


Price


Metals & Mining

6 April 2018 58

Investment summary

Summary changes

(Buy, £40.50) vs (Buy, £44.00) 2018e 2019e

New Old Chg Cons. SG vs cons. New Old Chg Cons. SG vs cons.

Revenue ($m) 42,720 40,436 6% 38,978 10% 41,576 40,268 3% 38,456 8%

EBITDA ($m) 18,620 16,576 12% 18,304 2% 17,344 16,116 8% 17,160 1%

EPS ($) 4.81 4.06 19% 4.86 -1% 4.33 3.92 10% 4.48 -3%

DPS ($) 2.89 2.43 19% 2.94 -2% 2.60 2.35 10% 2.62 -1%


Main changes

We upgrade our 2018 estimates on the back of a more constructive commodity prices stance,

in particular for iron ore (+5%, reflecting the robust 1Q18) and copper (+5%, as we expect

$6,500/t to be a support level on LME). Our forecast still includes the contribution from

divested aluminium and coal assets as we wait for the deals to be completed. This translates

into a 12% upgrade in EBITDA and an 18% upgrade in underlying earnings. As we leave our

iron ore price forecast unchanged beyond this year, the upgrade in 2019 estimates is less

significant (+8% to EBITDA and +9% to underlying earnings).

We adjust our capex forecast, aligning it with management’s guidance, resulting in a modest

increase in 2018 (+4%) and more significant in 2019 (+10%). As a result, we slightly increase

our FCF forecast for this year (+5%) but expect weaker FCF in 2019 (-8%). A higher net debt

forecast (+$2.0bn in 2018) reflects a combination of higher dividends, an additional $1bn

share buyback announced in February and $1.2bn of Australian tax carryover from the

previous year, which more than offset a slight increase in FCF. Apart from what was

mentioned above, proceeds from asset disposals are not yet included in our model. Even so,

the net debt/EBITDA ratio is likely to remain very low (0.4x at end-2018).

We raise our dividend expectations largely in line with EPS as we expect Rio Tinto to maintain

the payout ratio at the maximum level (60%).

Rio Tinto – changes to financial forecasts

$m 2018e 2019e 2020e

New Old Chg (%) New Old Chg (%) New Old Chg (%)

Revenue 42,720 40,436 6% 41,576 40,268 3% 42,414 41,398 2%

EBITDA 18,620 16,576 12% 17,344 16,116 8% 17,683 16,626 6%

Underlying earnings 8,295 7,043 18% 7,335 6,745 9% 7,667 7,190 7%

Capex 5,503 5,281 4% 5,926 5,377 10% 5,932 5,162 15%

FCF* 7,493 7,157 5% 6,246 6,574 -5% 6,472 7,136 -9%

Net debt** 6,477 4,425 46% 4,952 2,064 140% 3,051 (813) na

DPS ($) 2.89 2.43 19% 2.60 2.35 10% 2.71 2.51 8%

Source: SG Cross Asset Research/Equity *Excluding WC changes **Excluding pensions

On the back of these changes we reduce our TP by 8%, from £44.00 to £40.50, mainly

reflecting GBP strengthening since our previous update, a higher cost of capital (as a result of

the upward move in US treasury yields) and higher capex as mentioned above. Excluding the

FX adjustment, this amounts to a minor 1% TP cut. Now that the share price has dropped

below where it was in early November, and with a higher 12m dividend ($2.9 vs $2.5), 12m

TSR remains in the 15%+ zone, so our Buy recommendation remains unchanged.


Metals & Mining

6 April 2018 59

Main arguments for our recommendation


Following the latest share price correction, Rio Tinto again offers relatively inexpensive and

high-quality exposure to the M&M sector. The average of 2018-19 EV/EBITDA multiples is

largely in line with the historical average, while the company’s strong balance sheet does not

stand out as peers are all making strides towards deleveraging. On the other hand, worth

noting is the organic growth in copper and upside to base metal prices.

Our FCF forecast (excl. WC changes and disposals) translates into an 8% yield for 2018 and

7% for the medium term, with yields of 10%+ beyond a five-year horizon (mainly on the back

of the Oyu Tolgoi ramp-up and a recovery in aluminium and copper prices). We believe that

higher yields in the longer term look attractive for a low-beta name, although relatively low

yields in the near term (vs peers) make the stock more sensitive to increased market volatility.

Over 2016-17, Rio Tinto generated FCF of $19.2bn (excl. WCR), including $15.3bn from

operations and $3.9bn from asset disposals. At the same time it repaid $7.7bn of debt (net of

new borrowings), declared dividends of $8.2bn and announced buybacks totalling $5.0bn.

This is tantamount to returning to shareholders 100% of FCF after financing, which we think

will remain the company’s policy going forward.

Rio Tinto: cash generation and uses in 2016-17* ($bn) Rio Tinto: EBITDA composition*

Source: Company. SG Cross Asset Research/Equity *Incl. dividend payments and buybacks to

be completed in 2018

Source: Company, SG Cross Asset Research/Equity *Incl. Grasberg

Iron ore remains the company’s single biggest earnings driver, although its relative

contribution is declining on the back of the price recovery in the base metals complex. We

expect the share of iron ore in 2018 EBITDA to drop to 57% from 66% last year (chart above

right). Realistically, however, Rio Tinto needs more growth in other areas – organic or not – to

become a truly diversified company, especially in light of the likely disposal of Grasberg

(10%+ of FCF starting from 2024 in our financial model).

Trump’s war on aluminium imports: a blessing in disguise?

On the face of it Rio Tinto is one of the main targets of Trump’s attack on aluminium imports: if

the US administration goes ahead with the blanket 10% tariff on foreign metal, the measure

could affect as much as 60% of the company’s sales (on a pro forma basis, excl. Dunkerque

and ISAL). Importantly, it will affect Rio’s most profitable Canadian smelters, which we think

generated more than 40% of 2017 EBITDA at the entire Aluminium segment.

0

5

10

15

20

25

FCF* Cash returns and debt repay ment

Operations Disposals Debt reduction Div idends Buy backs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2014 2016 2018e 2020e 2022e 2024e 2026e

Iron ore Aluminium Copper Other


Metals & Mining

6 April 2018 60

In reality the fallout may be much less damaging than one would think as the cost of it will be

shared (if not fully absorbed) by US consumers. We believe that the US has mothballed

smelter capacity in the ballpark of 1mt, of which perhaps 50-70% could realistically be

restarted over the next two years. This will still leave the economy heavily dependent on

imported metal and not upset the global supply-demand balance too much given the growth

in ex-China consumption of primary aluminium of c.1mt per annum.

Canadian aluminium industry in 2017 (kt) Aluminium: geographic premiums in key markets ($/t)

Source: Company, USGS, SG Cross Asset Research/Equity Source: Bloomberg, USGS, SG Cross Asset Research/Equity

Meanwhile, US premiums are soaring, up c.$200/t since December: initially buoyed by

inclement weather, they are being lately spurred by pre-emptive stockpiling as traders and

consumers are scrambling to use their chance before tariffs are imposed. Moreover, the surge

in demand is sucking in metal from other markets as far as Japan, leading to a knock-on

increase in premiums around the world. Although likely a temporary phenomenon, this rally

should (ironically) help non-US aluminium producers’ performance.

Valuation summary

Our TP is based on a 50:50 combination of: 1) a £45.36 SOP NPV valuation inputting an 8.1%

WACC, covering the mine lives of the existing operations and projects; 2) an EV/EBITDA-

based valuation with a 6.1x target multiple applied to 2023e EBITDA, resulting in equity value

plus accrued dividends discounted to end-2018e using 9.3% CoE, which yields £44.39.

As explained in the accompanying sector report, we then apply an adjusting factor of 0.90

(1.30x adjusted beta vs S&P Industrial Metals and 15% commodity price downside) to

account for the risk of a technical correction in commodity prices on a 12m horizon. After

minor rounding, this yields us our £40.50 TP, representing an 8% decrease.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Output Exports to US US imports (net)

Rio Tinto Other producers

0

50

100

150

200

250

300

350

400

450

Dec' 15 Jun' 16 Dec' 16 Jun' 17 Dec' 17

Europe Japan US (rhs)

From blizzard to Trump...


Metals & Mining

6 April 2018 61

Rio Tinto – Sum-of-the-parts NPV valuation

$m NPV EV/EBITDA (x)

2017 2018e 2019e 2020e 2021e

Iron ore 63,316 5.2 6.0 6.3 6.3 6.3

Aluminium 32,318 9.4 7.9 8.1 7.4 7.2

Copper 23,763 14.7 9.8 10.1 10.3 8.5

Diamonds and Minerals 6,642 6.1 5.2 5.8 5.9 6.2

Energy 4,359 3.5 4.0 6.3 6.1 5.8

Overheads (6,195)

Total 124,202 6.7 6.7 7.2 7.0 6.8

Net debt (6,477)

Pension liabilities (2,160)

Minorities (3,944)

Equity 111,621

Equity ($) 63.62

Equity (£) 45.36

Source: SG Cross Asset Research/Equity *Coal portfolio valuation based on agreed disposal prices

Rio Tinto – Target multiple valuation

$m 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e

EBITDA* 16,744 17,083 17,691 19,467 21,010 22,133 22,421 22,718 22,585

Less assets for sale (1,085) (1,122) (1,235) (1,874) (2,412) (2,950) (2,991) (2,991) (2,991)

EBITDA of core operations 15,659 15,960 16,456 17,593 18,598 19,183 19,430 19,726 19,594

Target EV/EBITDA (x) 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1

EV 95,519 97,358 100,383 107,318 113,448 117,014 118,524 120,331 119,522

Net debt (6,477) (4,952) (3,051) (1,164) 1,927 5,615 9,515 13,534 17,894

Pension liabilities (2,160) (1,821) (1,482) (1,143) (804) (465) (126) - -

Minority interest (6,438) (6,543) (6,511) (6,474) (6,708) (6,990) (7,298) (7,600) (8,066)

Equity 80,443 84,041 89,339 98,537 107,863 115,174 120,615 126,266 129,350

Discount factor 1.00 1.09 1.19 1.31 1.43 1.56 1.71 1.86 2.04

Target equity ($) 47.39 49.51 52.63 58.05 63.55 67.85 71.06 74.39 76.21

PV of target equity ($) 47.39 45.30 44.05 44.45 44.52 43.49 41.67 39.90 37.40

Dividends** ($) 2.80 2.64 2.75 2.89 3.09 3.28 3.40 3.42

PV of dividends ($) 2.56 2.21 2.10 2.02 1.98 1.92 1.83 1.68

Equity + cumulative dividends ($) 47.39 47.86 48.82 51.32 53.41 54.36 54.46 54.53 53.70

Equity + cumulative dividends (£) 33.79 34.12 34.81 36.59 38.08 38.76 38.83 38.88 38.29

Assets for sale ($) 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63

Total equity (£) 39.42 39.75 40.44 42.22 43.71 44.39 44.46 44.50 43.91

Source: SG Cross Asset Research/Equity *Following period **Payable during calendar year

Strategy: will there be more growth?

More asset disposals on the cards...

The company continues to slim down its asset portfolio after having reaped more than $3.4bn

from disposals over 2016-17. There are a number of deals that have varying probabilities of

being concluded this year, including three where binding offers have already been received:

Aluminium Dunkerque. Liberty House (which already purchased Rio’s Lochaber smelter in

2016) made a $500m offer for the 280kt French smelter, powered by nuclear energy supplied

by EDF.


Metals & Mining

6 April 2018 62

ISAL, Aluchemie and Alufluor. A binding offer of $345m submitted by Norsk Hydro for the

portfolio, including Rio’s wholly owned ISAL smelter (210kt), a 53.3% interest in Aluchemie

anode plant and a 50% interest in Alufluor fluoride plant.

Subject to consultations with the employees and other stakeholders, both transactions are

expected to be completed in 2Q18.

Rising energy costs are the principal reason for Rio Tinto to seek to offload the aluminium

assets. Based on our understanding, ISAL is currently enjoying a competitive price in the

ballpark of $35-36/MWh under a 25-year contract signed in 2010 with Landsvirkjun. However,

the tariff is linked to the US consumer price index, which means that by 2035 it could be more

than 40% higher than today (assuming 2% CPI), potentially adding $200/t to production

costs.

Although we do not know the power tariff paid by the Dunkerque smelter, given that its 25-

year long supply agreement with EDF expired in 2016, one may assume that the resulting

increase in power costs last year was quite substantial. This should be considered in the

context of the relatively low energy efficiency of the plant constructed in 1991 (Rio’s state-of-

the-art AP60 technology requiring c.10% less electricity per tonne of aluminium).

This explains the relatively low price offered by Liberty House (and accepted by Rio Tinto),

translating into slightly less than $1,800 per tonne, compared with the capital cost of new

capacity ex-China, which we see in the ballpark of $5,000/t. We believe that in the current

price environment, the Dunkerque smelter could be generating EBITDA of $70-100m, which

would imply EV/EBITDA of 5-7x, largely in line with multiples of listed aluminium producers.

Australian coal. Rio Tinto has signed binding offers for the disposal of the remaining bits of

its Australian coal portfolio:

With Glencore in respect of an 82% interest in Hail Creek (2017 output of 9.4mt, 55:45 mix

of coking and thermal coal, c.15 year reserve life), together with a 71.2% interest in Valeria

coal resource (762mt of thermal coal). The price was agreed at $1.7bn.

With Whitehaven Coal in respect of Winchester South, an undeveloped coal deposit (mineral

resources of 356mt, a mix of coking and thermal blends) amenable to open-pit mining with

potential output of 3.5-7.5mt. The price has been set at $200m.

With a consortium of Adaro and EMR with respect to an 80% interest in Kestrel (80% equity

interest, 2017 output of 5.1mt of mostly hard coking coal). The price was agreed at $2.25bn.

Together these disposals will generate cash proceeds of $4.15bn before taxes of $0.5bn

according to the company’s preliminary estimates. Subject to regulatory approvals the deals

are supposed to be completed in 2H18.

This is not all that Rio Tinto could unload however. In fact, some of the biggest non-core

assets are still waiting for buyers to snap them up:

Pacific Aluminium. The unloved part of the aluminium business has been up for sale for

some time. Surging electricity costs in Australia (spot prices up more than 100% since 2015)

are the main rationale for Rio Tinto to dispose of the division comprising four smelters with

combined output of more than 1.0mt. We estimate that at spot aluminium prices, the division

could generate EBITDA in the ballpark of $400m and possibly fetch a price tag of $2-2.5bn.

Grasberg. Rio Tinto is getting increasingly frustrated with the long-lasting saga surrounding

one of the world’s most challenging copper mines in which it has an unenviable role of a


Metals & Mining

6 April 2018 63

supernumerary. Rio’s exit via the sale of its interest to Indonesia would be a boon for its

partner Freeport-McMoRan, which as a result would be able to retain its equity in the mine

almost unchanged. We estimate Grasberg’s fair value in the ballpark of $7.5-8bn but assume

that Rio Tinto will only be able to monetise c.50% of it, i.e. $3.5-4.0bn.

Iron Ore Company of Canada. Last but not least, Rio Tinto has ‘unfinished business’ with

IOC, which is in respect to the company’s world-class Pilbara operations about the same as

Pacific Aluminium is to the excellent Canadian smelters. The management team has always

been cautious about the probability of selling IOC, which we think is not high on the

company’s list of priorities. We estimate the value of Rio’s 58.7% interest in the miner in the

ballpark of $2.0bn.

There have been media reports (e.g. Bloomberg on 11 February) speculating that Rio Tinto

might consider an IPO of Pacific Aluminium rather than an outright sale of the division,

although such deliberations are allegedly at an early stage. We do not see much logic in such

a move, especially given that Rio Tinto has hitherto eschewed such a route and continue to

see a disposal as the most likely outcome.

Rio Tinto: possible proceeds from asset sales ($bn) Rio Tinto EBITDA pro forma (2019e)

Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity *No contribution to EBITDA in 2019

Assuming that the already announced deals are likely to be completed, Rio Tinto could raise

anything from $4.5bn to $12-13bn (pre tax), comparable to its EBITDA in 2015-16. In reality

we think that Grasberg has the highest probability to be sold, with Pacific Aluminium coming

second. We therefore put the expected proceeds from asset disposals for 2018 at c.$8bn, still

an impressive number in any way.

... but more share buybacks would not help the share price

Asset sales often attract more attention and cause more excitement than they deserve. It is

important not to forget that unless the buyer is overpaying, no value is being created as a

result of disposals: all value was created when the assets were built or purchased (if at the

right price). There is therefore scarcely a debate about the use of proceeds: with share price

being the key determinant of management's decisions, the company usually has little choice

but to shrink the share capital to align it with the reduced asset base.

For the same reason, it would be optimistic to expect such buybacks to have an impact on the

valuation: their real purpose is to prevent the share price from going down, which would be

the case if proceeds were distributed in the form of dividends. Grasberg may be an exception

0 2 4 6 8 10 12 14

Dunkerque

ISAL

Australian Coal

Grasberg

Pacif ic Aluminium

Iron Ore of Canada

Total

Disposals agreed YTD

2%

4%

2%3%

89%

Dunkerque and ISAL

Coal

Pacif ic Aluminium

Grasberg*

IOC

Core operations


Metals & Mining

6 April 2018 64

to the rule: with the mine contributing almost nothing to Rio’s EBITDA but consuming capex of

about $170m per annum, its value may indeed be overlooked by the market.

Alternatively the company could redeploy the cash received from disposals in other areas. In

fact the idea of investing in growth, organic or otherwise, no longer seems to cause

consternation among investors in view of the improving demand outlook for base metals as

well as more exotic commodities such as lithium and graphite. This is especially relevant for

Rio Tinto given that the likely divestment of Grasberg will significantly weaken the growth

dimension of investment case. In our base-case scenario the mine accounts for 40%+ of

incremental EBITDA over 2017-26 (chart below left).

There are not many obvious growth opportunities within Rio’s existing asset portfolio. One is

the third phase of the Alouette aluminium smelter (600kt) where Rio Tinto owns a 40% stake

(other significant holders being Norsk Hydro and AMAG, each with a 20% interest). The long-

delayed project would add 400kt of capacity (using the state-of-the-art AP60 pot technology)

at a capital cost of $2-3bn, which we think means $400m+ of incremental EBITDA on a 100%

basis in today’s economics. However, such expansion could be problematic given the risk of

US tariffs, not to mention questions about its viability at spot aluminium prices.

Rio Tinto EBITDA: contribution from growth projects ($bn) Rio Tinto: NPV sensitivity to 10% var. in LT commodity prices

Source: Company, SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity

Otherwise Rio Tinto will probably have to overcome its aversion to inorganic growth and look

around for early-stage projects that could be acquired at a reasonable cost, or possibly some

operating mines in need of investment. Copper and diamonds are the most obvious areas,

although we would not be entirely surprised to see Rio Tinto venture into gold mining as well.

In any case, with Amrun on track to start production just about a year from now, pressure

must be mounting on the management team to come up with the ‘next big thing’.

Persisting with share buybacks may not help boost investors’ confidence in the stock very

much. Although we do see the negative volatility in iron ore prices mitigated by pro-active

supply management on the part of leading producers (in particular Vale), Rio Tinto’s reliance

on iron ore for the bulk of its free cash flow (c.65% in 2018 as per our analysis) is leaving the

company overly exposed to the risk of unfavourable changes in the Chinese macro

environment (especially construction) and hobbling growth.

0

5

10

15

20

25

2017 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e

Other operations Amrun Oy u Tolgoi Grasberg

0% 2% 4% 6% 8% 10% 12%

Iron ore

Aluminium

Copper

Titanium


Metals & Mining

6 April 2018 65

Rio Tinto Sales/division 17

EBIT/division 17

Sales/region 17


Chinalco 9.0

Valuation ($m) 12/13 12/14 12/15 12/16 12/17 12/18e 12/19e 12/20e


Share price: avg (hist. yrs) or current (p) 3,147 3,195 2,615 2,317 3,412 3,646 3,646 3,646






EV = (1) - (2) + (3) - (4) + (5) 113,499 111,565 86,318 68,460 90,599 96,320 94,795 92,893

P/E (x) 8.9 10.5 16.0 11.1 10.0 10.8 12.0 11.4

Price/cash flow (x) 6.1 6.8 7.8 6.7 6.2 7.7 7.1 7.1

Price/free cash flow (x) 42.1 14.2 15.2 9.72 9.08 14.4 13.6 13.3


EV/revenues (x) 2.08 2.23 2.35 1.94 2.16 2.25 2.28 2.19

EV/EBITDA (x) 5.3 5.7 6.8 5.1 4.9 5.2 5.5 5.3

Dividend yield (%) 3.9 4.1 5.4 5.4 6.0 5.6 5.1 5.3

Per share data ($)

SG EPS (adj.) 5.50 5.01 2.49 2.82 4.79 4.77 4.29 4.48

Cash flow 8.12 7.69 5.15 4.68 7.72 6.64 7.19 7.26

Book value 24.7 24.9 20.5 21.7 24.8 25.9 27.8 29.7

Dividend 1.92 2.15 2.15 1.70 2.90 2.88 2.59 2.71


Revenues 54,575 50,041 36,784 35,318 41,857 42,720 41,576 42,414

Gross income NA NA NA NA NA NA NA NA

EBITDA 21,509 19,665 12,621 13,510 18,580 18,620 17,344 17,683


EBIT 16,718 14,805 7,976 8,716 14,205 14,075 12,707 13,009


Net interest income -425 -585 -698 -718 -527 -218 -231 -234

Exceptional & non-operating items NA NA NA NA NA NA NA NA

Taxation NA NA NA NA NA NA NA NA

Minority interests NA NA NA NA NA NA NA NA

Reported net income 3,665 6,527 -866 4,617 8,762 8,295 7,335 7,667

SG adjusted net income 10,217 9,305 4,540 5,100 8,627 8,295 7,335 7,667


EBITDA 21,509 19,665 12,621 13,510 18,580 18,620 17,344 17,683

Change in working capital 557 1,519 1,499 -273 -199 -249 115 2




Free cash flow 2,171 6,865 4,797 5,819 9,522 6,202 6,464 6,585

Cash flow from investing activities 1,961 918 -14 542 1,989 300 100 100

Cash flow from financing activities -934 -5,436 -7,670 -7,491 -9,141 -10,184 -5,985 -4,532

Net change in cash resulting from CF 2,937 2,191 -3,046 -1,165 2,358 -3,682 579 2,153

Balance sheet ($m)



Working capital 621 -1,194 -1,485 -1,593 -1,823 -374 -489 -491




Provisions 12,343 13,303 11,876 12,479 13,367 13,028 12,689 12,350

Net debt (-)/cash (+) -18,335 -12,796 -14,258 -10,191 -5,502 -7,353 -5,828 -3,927

Accounting ratios

ROIC (%) 11.2 10.7 6.4 7.7 12.6 12.1 10.7 10.8

ROE (%) 7.9 14.2 -2.1 12.0 20.9 18.5 15.9 15.6

Gross income/revenues (%) NA NA NA NA NA NA NA NA

EBITDA margin (%) 39.4 39.3 34.3 38.3 44.4 43.6 41.7 41.7

EBIT margin (%) 30.6 29.6 21.7 24.7 33.9 32.9 30.6 30.7

Revenue yoy growth (%) -1.8 -8.3 -26.5 -4.0 18.5 2.1 -2.7 2.0

Rev. organic growth (%) 0.4 -6.9 -26.9 -3.0 18.5 0.6 -2.5 1.9


EBIT yoy growth (%) 14.3 -11.4 -46.1 9.3 63.0 -0.9 -9.7 2.4

EPS (adj.) yoy growth (%) 9.7 -9.0 -50.3 13.2 70.0 -0.5 -10.1 4.5

Dividend growth (%) 15.0 12.0 0.0 -20.9 70.6 -0.6 -10.1 4.5

Cash conversion (%) 54.8 93.0 119.5 121.5 98.7 92.6 91.6 91.2

Net debt/equity (%) 34 23 32 22 11 14 11 7

FFO/net debt (%) 115.0 149.1 83.6 125.5 328.1 250.3 293.6 444.4



Iron Ore 48.0%

Aluminium 26.3%

Copper 9.9%

Energy 8.7%

Other 7.0%

Iron Ore 73.8%

Aluminium 15.7%

Energy 7.4%

Copper 2.1%

Other 1.0%

China 44.2%

North. America 17.1%

Other Asia 12.8%

Japan 11.7%

Europe 8.6%

Other 5.6%


Metals & Mining

6 April 2018 66

Mining 12m target upgrade Brazil @ Go to SG website

Vale Reclaiming past leadership

Hold Vale shares have performed strongly over the past 12 months and now

trade deservedly close to the leading mining peers.

The leading iron ore name once again The ongoing ramp-up of low-cost iron ore is

set to restore Vale’s global leadership over Australian peers, even excluding an

additional 50Mt of mothballed production capacity readily available from 2019 onwards.

In parallel, the build-up of appropriately blended shipments should maximise the group’s

high concentration ore value in the current high-quality premium context. It also brings a

unique ability to slow or accelerate ore supply to the market in order to ensure that the

iron ore price remains in a $60-70/t range, which CEO Schwartzman sees as ideal to

ensure that the group reduces debt and pays a satisfactory dividend.

EBITDA c.25% exposed to electrification theme (Cu & Ni) The benefit of ongoing cost

rationalisation across the group’s nickel operations (after the cancellation of planned

capacity expansion) should help improve profitability further in the coming quarters. We

expect copper and nickel production – critical to current leading battery technologies – to

account for c.25% of EBITDA by 2020e, vs management’s target of 30% by 2019. This

does not include spare production capacity available at a relatively low cost should

supply/demand conditions tighten on a surge in demand for battery materials.

Sharp TP increase now an 11% TSR with overhang risk Bulk materials and nickel

prices have proven to be a lot stronger than SGe over the past 12 months, translating

into a strong share price increase of c.35% over this period. Accordingly, we increase

our EBITDA estimates by 87% for 2018 and 19% for 2019, marginally ahead of the

Bloomberg consensus. With the Group’s deleveraging now close to completion, our

valuation now includes a DCF over 2019-30e at 50% weight in order to mitigate the

impact of near-term multiples in our existing SOP (now 50% weight also) using peer

EV/EBITDA multiples per division for our 2018-19 estimates average. Our TP jumps to

$13.50 (from $4.86), which is consistent with our view that the shares should trade near

par with leading Australian diversified miners, or c.5.5x FY EBITDA at present. This

implies a 12m TSR of 11%, leading us to maintain our Hold rating.

We expect net debt to drop near management’s target of $10m by 2019, allowing for

strong dividend growth, which we think the consensus underestimates. However, in our

view, this positive factor is offset by a potential share overhang equivalent to c.17% of

the capital base as a consequence of last year’s elimination of preferred shares.

Price 05/04/18 $13.0

12m target $13.5

Upside to TP 4.2%

12m f'cast div $0.88

12m TSR 11.0%

Main changes since last report Target ($) 13.5 (4.86)

EPS 18e ($) 1.38 (0.512) +169.7%

EPS 19e ($) 1.30 nc


Preferred stock

MT NA, GLEN LN


VALE US


Overweight



Share -3.3 0.9 31.3 5.9

Rel. index* -4.2 2.5 15.1 5.5

Rel. sector** -2.7 8.2 13.0 10.7


RIC VALE.N, Bloom VALE US

52-week range 14.7-7.77

EV 18 ($m) 83,239

Mkt cap. ($m) 68,434

Free float (%) 58.7



Equity analyst


Equity analyst



Revenues ($bn) 34.0 35.8 35.5 36.3 P/E (x) 6.7 9.4 10.0 9.1





EPS yoy growth (%) 0.5 -5.4 -5.9 9.0 EV/EBIT (x) 6.26 7.05 7.41 6.79


Dividend yoy growth (%) -17.8 NM -4.5 31.0 ROIC/WACC (x) 1.8 1.4 1.3 1.4


7.3

8.6

9.9

11.2

12.5

13.8

15.1


Price


https://insight.sgmarkets.com/#/equity/VALE.N

Metals & Mining

6 April 2018 67

Earnings revisions and investment conclusion

Sharp earnings revisions

In this report, we update our estimates for Vale after a 12m lag during which time both iron ore

and nickel prices recovered to a higher level and for a longer period than we had been

anticipating in early 2017.

As a consequence, we lift our 2018 sales and EBITDA estimates materially (44% and 87%,

respectively), which translates into a 171% EPS estimate increase and a much higher dividend

for the year at 88c, versus 10c earlier. Our 2019 estimates increase to a lesser degree, with our

sales forecast rising 51%, EBITDA 19% and EPS 30% (dividend 84c, vs 25c before).

Vale – Estimates changes and consensus* (to 31 December; $m)

2018e 2019e

new old %chg. Cons. SG vs

cons.

new old %chg. Cons. SG vs

cons.

Revenue 35,776 24,786 44% 34,530 4% 35,467 23,550 51% 34,090 4%

EBITDA 15,711 8,383 87% 15,340 2% 14,930 12,500 19% 14,500 3%

EPS 1.38 0.51 171% 1.37 1% 1.30 1.00 30% 1.30 0%

DPS** 0.88 0.10 780% 0.43 105% 0.84 0.25 236% 0.66 27%

Net debt (11,535) (18,145) -36% (10,000) 16% (9,493) (10,000) -5% (8,175) 16%

Source: SG Cross Asset Research/Equity; * Bloomberg consensus estimates; **reflects 2 payments in September Y and March Y+1

Our revised EBITDA estimates are marginally ahead of consensus in 2018 and 2019 (+2% and

+3%) and our EPS estimates are in line. But we are significantly ahead of consensus with our

DPS estimates, which are 105% and 27% ahead of consensus in 2018 and 2019,

respectively, equivalent to 75% and 67% of corresponding SGe free cash flows. This is

equivalent to 30% of respective EBITDA as per the Group’s new policy of a minimum 30%.

Note that the group pays two dividends per annum (March and September as per the new

policy), which we think brings a degree of inaccuracy to consensus data (depending on

analysts’ accounting methods). Looking at the two dividends payments for calendar years, our

DPS for 2018 and 2019 would be 61c and 84c (rather than 88c and 84c on a fiscal basis).

Vale – Key commodities estimates (SGe) and changes vs Bloomberg forward price* ($/t)

2018e 2019e

new old % chg Fwd

curve *

SG vs fwd

curve

new old % chg Fwd

curve *

SG vs fwd

curve

Iron ore ** 63.1 60.0 5% 64.7 -2% 60.0 60.0 0% 58.2 3%

Nickel 13,450 12,000 12% 13,209 2% 14,000 13,000 8% 13,360 5%

Copper 6,856 6,500 5% 6,802 1% 7,000 7,000 0% 6,835 2%

Coking coal*** 196 140 40% 202 -3% 150 125 20% 173 -14%

Thermal coal**** 89.4 80.0 12% 93.4 -4% 80.0 75.0 7% 82.6 -3%

Source: SG Cross Asset Research/Equity; * not consensus; ** 62% Fe CFR China; *** Australia FOB; **** Newcastle 6,000kcal/kg FOB

The table above highlights the main changes to our expectations relative to our previous

company review, notably with regards to iron ore and nickel prices (+5% and +12% in 2018),

which are the largest contributors to earnings.

We compare our new materials estimates with their respective Bloomberg forward curves in

order to provide an up-to-date investment stance relative to our estimates, rather than versus

consensus data, which we do not find reliable enough (insufficient number of contributions).


Metals & Mining

6 April 2018 68

Investment conclusion

Reviewing Vale business after 12 months

Having kept a neutral stance on the shares, we are looking back at Vale roughly one year after

the arrival of new CEO Fabio Schwartzman (ex-CEO of Klabin), who inherited the benefits of

the rationalisation of Vale preferred shares into one single class of common shares, providing

an improved guarantee of independence, notably from government influence. Over the period,

bulk materials prices (iron ore and coal) have proven a lot more resilient than we were

anticipating last summer, and the nickel price has recovered in excess of our expectations,

translating into a strong 12m share price performance for Vale at c.+35%, versus the S&P

Europe 600 Materials at +6%.

The leading iron ore play once again

The ongoing ramp-up of low-cost iron ore in northern Brazil (Carajas) is set to restore Vale’s

global leadership over Australian peers, not just in terms of seaborne ore market share, but

also in terms of additional production capacity readily available to market, equivalent to

c.50Mt mothballed from 2019 onwards. In parallel, the ongoing build-up of appropriately

blended ore (c.100Mt by 2019) provides a much improved realisation of the group’s superior

ore concentration in the current high-quality price premium context. It also brings a unique

ability to slow or accelerate ore supply to the market in order to ensure that the iron ore price

remains in a $60-70/t range, which CEO Schwartzman sees as ideal to ensure that the group

reduces debt and pays a satisfactory dividend, while keeping new competing projects at bay.

Relevant exposure to electrification, with c.25% of EBITDA in nickel and copper

The benefit of ongoing cost rationalisation across the group’s nickel operations (Vale is the

largest ferronickel producer with a c.14% market share) was evident in 2H17, notably in New

Caledonia. Given the current nickel price recovery and CEO Schwartzman’s cancellation of the

planned capacity expansion, profitability should improve further in the coming quarters. We

expect nickel and copper – both critical to current leading battery technologies – to account for

c.25% of EBITDA by 2020e, vs management’s target of 30% by 2019. This does not include

spare production capacity in both nickel and copper, which is available at a relatively low cost,

should supply/demand conditions tighten on a surge in demand for battery materials.

Hold maintained: Vale shares now trade close to diversified mining peers

We increase our EBITDA estimates by 87% for 2018 and 19% for 2019 to reflect these much

improved conditions since our last review, which positions us marginally ahead of the

Bloomberg consensus in both years. Our valuation method now includes a DCF over 2019-

30e at 50% weight, alongside our existing SOP valuation using peer EV/EBITDA multiples per

division on our 2018-19 estimates. Our TP jumps to $13.5 (from $4.9) on this basis, which is

consistent with our view that the shares should trade close to leading Australian diversified

miners at c.5.5x FY EBITDA. Our new TP implies an upside of 7% only (TSR 11%), which

leads us to maintain our Hold recommendation.

Negative iron ore price momentum offsets potential dividend surprise, in our view

Based on our estimates, the group’s FCF yield jumps to c.11% over the next three to four years,

with net debt falling near management’s target of $10bn by end-2019e, allowing for strong

dividend growth (30% EBITDA payout as per the new guidance), which we think the consensus

underestimates. However, we think this favourable factor is offset by the iron ore price’s negative

momentum in the current context of a Chinese marginal slowdown and rising trade war-related

uncertainties. As such, we keep Vale as our least preferred stock for the time being.


Metals & Mining

6 April 2018 69

Share price performance and valuation

Solid 12m performance

Vale shares have performed roughly in line with the Brazilian stock index over the past 12

months, and have significantly outperformed both the S&P 500 and the Europe 600 STOXX

Material index over this period (table below).

Vale – Performance relative to indices (%)

Vale Ibovespa S&P

500

STOXX Europe

600 Materials

1m (4) (1) (2) 1

Ytd 3 8 (1) (4)

12m 34 30 12 7

5y (27) 53 69 16


Although the share price has increased c.3% ytd, it is still some 15% below its ytd peak,

primarily due to weakness in the iron ore price in recent weeks. That said, the close correlation

to the iron ore price appears to be increasingly mitigated by the recovery of both nickel and

copper (graph below right). We also note that the shares have outperformed peer Rio Tinto

since January 2016, as well as Fortescue, to which it was more closely correlated over the

preceding period (graph below left).

Vale – Share price vs Australian peers (indexed Jan 2014) Vale – Share price vs key materials (indexed Jan 2014)


Persistent, but now unwarranted, discount to peers

Vale shares have dropped to a c.5% discount to their 5y P/E average of c.10.4x, whereas peers

are currently at a c.5% relative average premium, based on Bloomberg’s blended 24m forward

estimates, which we think best reflects best the group’s improving debt and costs conditions

(graph below right). The current P/E discount to peers is c.25% (c.15% vs Rio alone).

On EV/EBITDA, Rio Tinto and BHP Billiton are trading at an average of 5.5x, vs Vale at 5.3x, or

a 4% discount versus respective averages since January 2010 of 6.0x and 5.5x. To us, this

suggests limited additional upside for Vale shares.

0

20

40

60

80

100

120

Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18

VALE US Equity RIO US Equity

Fortescue (in $) BHP US Equity

0

20

40

60

80

100

120

Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18

VALE US Equity Iron ore 62% Fe, CFR

Nickel LME (3mo) Copper LME (3mo)


Metals & Mining

6 April 2018 70

Vale – EV/EBITDA relative to Rio-BHP average Vale – P/E (24m forward blended) vs peers (3m rolling)

Source: SG Cross Asset Research/Equity; Bloomberg historical & consensus data Source: SG Cross Asset Research/Equity; Bloomberg (5Y average in parenthesis)

Vale – Relative valuation details (x)

Vale Average

Rio-BHP

Rio Rinto BHP Billiton Anglo American

P/E * current 10.2 12.9 11.5 14.2 11.0

Vale (discount)/premium - -21% -12% -28% -8%

P/E * avg since March 2013 (5y) 10.4 12.4 11.4 13.4 10.0

Vale (discount)/premium - -16% -8% -22% 4%

EV/EBITDA current 5.3 5.5 5.6 5.5 4.4


EV/EBITDA avg since Jan 2010 5.5 6.0 5.8 6.2 5.0


Source: SG Cross Asset Research/Equity; Bloomberg; * 24mo forward blended consensus earnings

Hold maintained ($13.5; TSR 11%)

We raise our TP to $13.50 from $4.86 through most of last year, which did not discount the

sustained iron ore and coal prices over the period, nor the sharp nickel price recovery of more

recent months.

In our view, the 6% potential upside we calculate (11% TSR) is consistent with a rating close to

peers Rio and BHP at 5.5x EV/EBITDA on average, versus c.5.3x. As per our investment

conclusions above, we believe this is consistent with the group’s attractive underlying growth

potential, favourable exposure to the increasingly supportive electrification theme (batteries) and

superlative FCF generation, allowing for large dividend payments under a newfound independent

model (preferred shares eliminated last year).

Note that our dividend assumption reflects an aggressive payout of c.80% of FCF in 2020

(37% of EBITDA versus minimum 30% guidance) – since the $10bn net debt target is reached

in 2019 in our estimates – or $1.10 per share, equivalent to a c.9% dividend yield.

For 2019e, a transitional 67% FCF payout translates into 84c, which is c.27% ahead of

consensus and equivalent to a 6.6% yield. We are more aggressive on 2018e at 88c (yield

6.9%; roughly twice consensus).

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Vale Vale av erage 2010-18 (5.5x) Av erage Rio-BHP (unweighted; 6.0x av ge 2010-18)

6

8

10

12

14

16

18

20

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Vale (av ge 10.4x) Rio Tinto (av ge 11.4x)

BHP (av ge 13.4x) Anglo American (av ge 10.0x)


Metals & Mining

6 April 2018 71

Valuation details

We apply our new estimates to our new valuation method, which equally weights a DCF

calculation from 2019 to 2030, and peer consensus EV/EBITDA average multiples per key

divisions (iron ore, nickel/copper and coal) for our 2018-19 estimates. We previous relied solely

on the SOP method, but we have added the DCF valuation method to mitigate near-term

multiples. The two tables on page 7 provide details of our SOP calculation and the list of relevant

peers used for each division. The table on page 8 gives the details of our DCF valuation, notably

post-tax WACC at 8.7% and terminal growth at 0%.

Our target price calculation, illustrated in the table below, includes the value of a 9.7% stake in

Mosaic (part of last year’s fertilisers sale) and a risk discount, which we apply to all our mining

stocks, in this case equivalent to c.12% of gross value.

This risk discount (which we introduced at the end of last year) reflects the potential impact of

a 15% ‘black swan’ decline in the value of metals basket in the wake of the LME price surge

over the past 3-4 months. We do this by using the estimated beta of Vale vs the S&P Industrial

Metals index, assuming a 50% probability of such a correction occurring.

Vale – Target price calculation

SOP DCF Weighted average

Implied value ($m) 84,589 93,400 88,995

Net debt, 2019e (9,498) (9,498) (9,498)

Pensions, 2016a (2,437) (2,437) (2,437)

Net minorities/investments, 2017p 1,714 1,714 1,714

Gross value (GV) 74,368 83,180 78,774

Mosaic 9.7% stake 800 800 800

Net value per share ($) 14.5 16.2 15.3

SG risk discount (12% GV) * (8,924) (9,982) (9,453)

SG adj. net value 66,244 73,998 70,121

Number of shares (m)*** 5,187 5,187 5,187

Equity value / target price ($)** 12.8 14.3 13.5

Weighting 50% 50% -

Upside 1% 12% 6%

TSR - - 11%

Source: SG Cross Asset Research/Equity; Source: SG Cross Asset Research/Equity; * both SOP and DCF reflect estimates in or from 2019; ** reflects

the potential impact of a 15% decline of the metal basket post the LME price surge of the past 3-4 months (equity value is $16.7 otherwise); *** excl.

treasury stocks

Vale – Share price sensitivity to iron ore and metcoal prices ($)

Coal (v, $/t) /

iron ore (h, $/t)

45 50 55 60 65 70 75

120 7.4 9.3 11.2 13.1 15.0 16.9 18.9

135 7.6 9.5 11.4 13.3 15.2 17.2 19.1

150 7.8 9.7 11.6 13.5 15.4 17.4 19.3

165 8.0 9.9 11.8 13.7 15.7 17.6 19.5

180 8.2 10.1 12.0 13.9 15.9 17.8 19.8


Vale – Share price sensitivity to copper and nickel prices ($)

Copper (v, $/t) /

Nickel (h, $/t)

9,500 11,000 12,500 14,000 15,500 17,000 18,500

5,500 11.3 11.9 12.5 13.1 13.7 14.3 14.8

6,250 11.5 12.1 12.7 13.3 13.9 14.5 15.1

7,000 11.8 12.3 12.9 13.5 14.1 14.7 15.3

7,750 12.0 12.6 13.1 13.7 14.3 14.9 15.5

8,500 12.2 12.8 13.4 14.0 14.5 15.1 15.7



Metals & Mining

6 April 2018 72

Vale – Comparative valuation table (Bloomberg consensus)

Market cap. P/E EV/EBITDA EV/sales P/BV Net debt/

EBITDA

Net yield

($m) 2018e 2019e 2018e 2019e 2018e 2019e 2018e 2018e 2018e

New Hope 1,325 7.6 9.2 3.1 3.5 128% 134% 71% 0% 5.0%

Exxaro 3,381 7.2 8.1 6.0 6.5 175% 170% 8% 0% 4.9%

Whitehaven Coal 3,358 9.9 12.1 5.1 5.9 188% 188% 102% 0% 7.9%

Coal average 2,688 8.2 9.8 4.7 5.3 164% 164% 61% 0% 6.0%

Cliffs 2,040 5.5 7.3 5.6 6.7 142% 159% 0% 260% 0.0%

Ferrexpo 1,955 5.8 6.7 4.3 4.9 180% 188% 328% 39% 3.7%

Fortescue 10,110 8.0 8.7 3.6 3.7 176% 170% 104% 75% 6.9%

Kumba 7,537 11.6 13.1 5.4 6.0 201% 200% 260% -60% 5.8%

Rio Tinto 89,359 10.3 12.0 5.7 5.8 268% 265% 200% 29% 5.8%

Iron ore average * 22,200 8.2 9.6 5.1 5.8 198% 203% 197% 67% 3.8%

Antofagasta 12,910 15.3 14.5 5.7 5.3 306% 283% 176% 14% 2.8%

First Quantum 10,266 11.6 8.3 6.0 406% 309% 115% 271% 0.0%

Freeport McMoran 25,108 8.1 13.2 4.2 179% 205% 315% 64% 1.2%

KAZ Minerals 5,485 8.2 5.6 5.1 325% 298% 394% 213% 0.0%

Copper average 19,334 11.7 11.9 6.0 5.5 304% 274% 250% 140% 1.0%

Norilsk 31,857 13.4 9.8 7.0 7.1 347% 351% 351% 130% 8.0%

Sherritt Intl 274 - - 5.6 5.8 158% 156% 156% 44% 5.3%

Nickel average 31,857 13.4 9.8 6.3 6.5 253% 254% 254% 87% 6.6%

Nickel -copper average 12.5 10.8 6.1 5.9 278% 264% 252% 114% 3.8%

NAV weighted average ** 9.2 9.9 5.4 5.9 214% 215% 204% 75% 3.9%

Vale (SGe) 66,748 8.8 9.7 5.2 5.4 222% 219% 148% 65% 4.0%

Differential -4% -2% -4% -8% 4% 2%

Source: SG Cross Asset Research/Equity; Bloomberg; * excludes Fortescue; ** Iron ore 74%; Nickel/copper 22%; Coal 4%

Vale – SOP valuation (2018-19e EBITDA-based)

2018e 2019e Average 18-19e

Iron Ore 12,403 11,598 11,598

Coal 697 448 448

Nickel/Copper 2,931 3,209 3,209

Other (320) (325) (325)

Multiples (x)

Iron Ore 5.1 5.8 5.6

Coal 4.7 5.3 6.3

Nickel/Copper 6.1 5.9 5.7

Other 5.3 5.6 5.4

Value ($m)

Iron Ore 63,707 66,713 65,210

Coal 3,293 2,361 2,827

Nickel/Copper 17,772 18,862 18,317

Other (1,699) (1,831) (1,765)

Gross value ($m) 83,074 86,104 84,589

Net debt at end-2019e (9,498)

Net Minorities/Investments 1,714

Pensions at end-2016 (2,437)

Implied value 74,368

Value per share ($) 14.3



Metals & Mining

6 April 2018 73

Vale – DCF valuation details, 2019-30e ($m)

WACC 8.7% Risk-free rate (10y UST) 2.8%

Terminal growth 0.0% EM risk premium 0.0%

Equity-risk premium 5.7%

NPVs sum (12y) 60,682 Levered beta 1.4

Terminal value (TV) 32,718

TV as % of total value 35% Inflation-adjusted cost of equity 9.1%

Net debt at end 2019e (9,498) After-tax cost of debt 5.2%

Net minorities/investments 1,714 Equity 87%

Pensions at end-2016 (2,437) Debt 13%

Total value 83,180 WACC 8.7%

Implied value per share ($) 16.0 *

Source: SG Cross Asset Research/Equity; * $16.2 inc. Mosaic stake

Near-term c.17% overhang for improved liquidity

Under the group’s new governance, initiated by the previous management, a new shareholder

agreement has been introduced with Valepar (a group of stable shareholders), which

eliminates past control blocks and authorised the conversion of preferred shares into the

existing single class of commons shares in 2H17.

Under the new agreement, any holder of 25% of the shares has to make an offer for the

entirety of the capital, with the government retaining a golden share to oppose hostile

developments on the stock.

Additionally, Valepar shareholders will retain 20% of the capital over three years (until 2020)

and are allowed to divest the balance of their shareholding equivalent to a potential 16.72% of

the capital (excluding 1.67% treasury shares), or c.$11bn. This would translate into a free float

increase from c.59% (SGe) to up to c.76%.

Vale – Shareholder** breakdown February 2018 Vale – Shareholder* breakdown (overhang) February 2018

Source: SG Cross Asset Research/Equity; * part of Valepar agreement; ** excl. treasury stock Source: SG Cross Asset Research/Equity; * excl. treasury stock

Litel *21%

Bradespar *6%

BNDES *4%

Mitsui *6%

BNDES (Brazil Gov ernment)

4%

Current f ree f loat59%

Valepar - until 202020%

BNDES (Brazil Gv t)4%

Valepar - post lock-up period

17%

Capital 8%

Blackrock7%

Aberdeen3%

Other f ree f loat41%


Metals & Mining

6 April 2018 74

Key ratios

We highlight the following as regards our key ratio forecasts: 1) the NAV of base metals (nickel

and copper), at c.23% of the total in 2019e (unchanged 2018e), rather than the c.30%

management target; 2) lower average prices yoy for iron ore and coal impact R/NAV in 2019e;

3) average FCF is over $7bn per annum from 2018e, and the FCF yield is c.11% on average

over the same period; 4) dividends are 75% of 2018e FCF and 80% from 2020e.

Vale – Divisional NAV breakdown 2019e Vale – Divisional R/NAV 2018-19e


Vale – FCF generation vs dividends & net debt, 2012-21e ($m) Vale – FCF yield & net debt/EBITDA, 2012-21e

Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity; * exc. working capital

Vale – Capex by division, 2012-20e ($m) Vale – EBITDA and TP sensitivity to 10% material price var.


Iron ore 74%

Coal4%

Nickel/Copper22%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Iron ore Coal Nickel/Copper

2018e 2019e

(25,000)

(20,000)

(15,000)

(10,000)

(5,000)

0

5,000

10,000

15,000

20,000(8,000)

(6,000)

(4,000)

(2,000)

0

2,000

4,000

6,000

8,000

2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e

Free cash f low Div idends paid

Net (debt) / cash (rhs)

(0.5)

0.5

1.5

2.5

3.5

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e

FCF * y ield (v s. Market cap) Net debt / EBITDA (x; rhs)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

20,000

2012 2013 2014 2015 2016 2017 2018e 2019e 2020e

Iron ore Coal Metals Other Capex / depreciation (x)

0%

5%

10%

15%

20%

25%

Iron ore Coking coal Nickel Copper

On share price target On EBITDA (2018-19e av erage)


Metals & Mining

6 April 2018 75

Divisional updates

Iron ore update

Reclaiming the iron ore leadership

When the current ramp-up of the group’s northern Brazil mine (Carajas) is completed in 2019,

Vale should control roughly 25% of the global seaborne iron ore market (from c.23% at

present; graph below left). The target is to increase production from 365kt/y in 2017 to 400kt/y

by 2019 and maximise low-cost production (in the north) while keeping 50kt/y mothballed,

mostly in the relatively higher-cost Southern system (see graph below right).

In parallel, the group is building 100kt of blended inventories in 2018, from 75kt last year, in

order to provide appropriately priced products for customers (mostly 62% Fe content) rather

than high ore content at a discount, as was often the case in the past. This blended

production should represent c.35% of shipments in 2018, or c.135Mt, equivalent to a c.40Mt

increase over 2017 (graph below right) and c.10% of 2018e ore production.

Iron ore – Market shares ex-China (2017p) Vale – Iron ore fines production breakdown (%)

Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity; Vale strategy presentation (12/17)

With peers BHP and Rio Tinto both currently running near existing nominal capacity levels,

this suggests that Vale has become the key single supplier of additional ore tonnage in the

seaborne market, representing roughly 50% of overall additions to 2020e, we estimate.

The group is also lifting its iron ore pellet production capacity throughout 2018 in order to

offset the ongoing absence of production at Samarco by reopening of three idled pellet plants

in Brazil (Sao Luis & Tubarao 1-2; idled in 2012 due to low demand). This is consistent with the

particularly high demand for pellets (notably from Europe) and the need to reduce the pressure

on market supplies. Hence, the pellet premium to fine is currently c.$50/t, twice the $25/t

long-term average (65% Fe).

We do not include a restart of Samarco in our estimates due to ongoing uncertainty with

regards to the timing and likely subsequent re-idling of some of the current restarted capacity.

Critical pricing power

In this context, and assuming relatively steady demand in 2018 (we assume a c.1% yoy drop),

Vale has the flexibility to lift or reduce shipment intensity to manage the iron ore price, without

impacting the ramp-up of low-cost tonnage in north Brazil. We see potential for c.75Mt in

23%

24%

18%

11%

24%Vale

Rio Tinto

BHP Billiton

Fortescue

Other

5

14 25

35

25

2219

8

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017p 2018e

Carajas (North sy stem) Blended ore Southeastern sy stem South sy stem Other


Metals & Mining

6 April 2018 76

excess supply in 2018, which Vale could bring under control relatively easily without

excessively damaging our positive stance on the shares (see valuation).

CEO Schwartzman has confirmed in recent presentations that he would maintain the group’s

policy of reducing net debt to below $10bn ($18.2bn at end-December 2017) and providing

attractive dividends to shareholders. The iron ore price band that he suggested as reasonable

to achieve this goal is $60-70/t (based on USD/BRL at c.3.25 in 4Q17). This is the basis for our

$60/t long-term estimate, which we highlight in our sector review and provides the

background for our perceived relatively high price visibility.

To be clear, we expect management to slow volume flows into the seaborne market when prices

fall below $60/t and, conversely, raise shipments when the price passes $70/t. The lower end is

also consistent with an historical apparent price reaction around BRL140/t FOB Brazil, close to

our $60/t long-term price level at current FX and transport costs (graph below left).

Please see our sector report (link) produced alongside this review for more details on iron ore.

Iron ore price – Vale perspective (BRL/t) Principal iron ore benchmarks ($/t CFR China)


The upper price limit serves both to satisfy the Chinese authorities that the group is not taking

advantage of its strong position (with peers BHP and Rio) in the seaborne market while

ensuring that large new projects are kept at bay due to the prospects of unattractive returns.

The key project here is Samandou in Guinea, which offers both high-quality ore (equivalent to

Vale’s Carajas) and large reserves, but requires very substantial infrastructure investments in

railway and port facilities. The advantageous current premium conditions (i.e. 65% Fe content

premium over low-grade ores) and a $60/t iron ore price tag may provide sufficient IRR to

justify an investment. However, a number of factors suggest that we are not near any

investment decision at Simandou: 1) we are not certain that Rio Tinto has finalised the transfer

of full control of the assets (Simfer) to Chinalco; 2) we have seen no evidence that Chinalco

has been seeking to revive the project; and 3) we believe that the ongoing enquiries by both

the SFO in the UK and the US Justice Department on past alleged corruption should dissuade

the Chinese authorities from going ahead with any capital commitment.

100

150

200

250

300

350

Dec ’11 Dec ’12 Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17

CFR China FOB Brazil

20

40

60

80

100

120

140

160


62% Fe 65% Fe 58% Fe low alumina


Metals & Mining

6 April 2018 77

Increased relative competitiveness in Asia

The cost efficiency of Vale’s shipments in Asia has been improving steadily in recent quarters,

notably as a result of 1) rising low-cost production in Carajas (S11D system); 2) the ongoing

delivery of (increasingly efficient) 400kt Valemax ore carriers associated with favourable, very

long-term contracts with Chinese operators; and 3) the strong high-grade ore premium that

has predominated for the past 18 months or so (graph above right).

Many – including Vale’s management, BHP’s management and us – expect this premium to

persist (albeit perhaps at a lower level) due to the changing nature of Chinese steelmaking

with regards to furnaces’ ore quality requirements and availability (modern furnaces with

efficient port access), together with efficiency issues in terms of pollution and productivity.

The Valemax fleet of roughly 36 vessels thus far should increase by c.30 over the next two to

three years on 25y supply contracts (see here), suggesting that Vale’s transport cost efficiency

could improve further (depending in part on future bunker oil price conditions). Our estimates

assume a slightly lower cost per tonne in the future at 1H17 levels for iron ore fines, which

could prove too conservative.

Finally, we assume a slow, steady drop in cash costs to $14/t by 2020 for ore fines (2017

$14.8/t) and $17.5/t for pellets ($18.2/t in 2017, increasing slightly in 2018 to reflect capacity

restarts). These assumptions are well within management’s guidance at current FX levels (see

graphs below).

Vale – Iron ore fines cash cost targets ($/t) Vale – Iron ore pellets cash cost targets

Source: SG Cross Asset Research/Equity; Vale strategic presentation 12/17; 2. 3Q17; 3. Carajas

ex-S11D system; 4. S11D full ramp-up (BRL/$ at 3.35)

Source: SG Cross Asset Research/Equity; Vale strategic presentation 12/17; 1. vs 2017

On a relative basis to Australian peers, we note that the impact of the ore grade premium is

now visible against lower-grade producers, such as Fortescue (graph below left) or nearby

newcomer Roy Hill, which have been unable to benefit from the standard 62%Fe iron ore

price resilience of the past 12 months or so.


http://www.motorship.com/news101/ships-and-shipyards/debut-of-new-generation-ore-carrier

Metals & Mining

6 April 2018 78

Iron ore – Implied selling price ($/t) Iron ore – Implied EBITDA/t (ex-royalties & shipping; $/t)

Source: SG Cross Asset Research/Equity; * excl. iron ore pellets Source: SG Cross Asset Research/Equity; * excl. iron ore pellets

Both graphs above also suggest that Vale’s relative lag to key Australian peers’ profitability

has disappeared under the current market conditions and that a likely reduction in the

currently high ore premiums in the coming quarters should be steadily offset by lower cash

costs over the next two to three years.

Nickel & copper update

Renewed focus on nickel costs

One of the first decisions of CEO Schwartzman as head of Vale (early 2017) was to cancel

planned expansions across the group’s nickel (graph below left) production systems, order a

renewed focus on cost reduction targets, and appoint a new CEO of Base Metals, Eduardo de

Salles (an experienced member of Vale’s Board of Directors kept away from divisional

responsibility under previous CEO Ferreira).

We like this direction, which contrasts with the previous strategy based on hopes of improving

profitability of marginal additional production and rising nickel prices as high-cost producers

shut down.

Vale – Reduction of nickel production guidance (kt) Ferronickel – Key producers 2018e (volume)

Source: SG Cross Asset Research/Equity; Vale strategic presentation 12/17 Source: SG Cross Asset Research/Equity

The benefits of this renewed focus were evidenced in 4Q17 at high-cost nickel locations in

Brazil (Onca puma) and New Caledonia (VNC), where costs fell a respective 6% and 15%. In

fact, VNC was slightly cash positive for the first time in many quarters.

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

1H15 2H15 1H16 2H16 1H17 2H17

Vale* Fortescue BHP Billiton Rio Tinto

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

1H15 2H15 1H16 2H16 1H17 2H17

Vale* Fortescue BHP Billiton Rio Tinto

Vale14%

Norilsk*12%

Jinchuan7%

Glencore7%

BHP5%

Sherritt/Sumitomo**

4%

Eramet3%

Anglo 2%

Other46%


Metals & Mining

6 April 2018 79

More improvement on costs is needed in the coming quarters; otherwise, management has

indicated that the mine would be put under care and maintenance. Further investments should

only be carried out once a partner is found in the context of attractive future nickel demand

given the widely expected proliferation of electric vehicle batteries.

The potential favourable impact of such a development is becoming visible already, as we

explain in our mining report and in a recent Eramet report. Hence, inventories remain excessive

but have been falling steadily in recent weeks to under three months of ore-equivalent

production (graph below left). All this leads us to lift our price expectations for 2018 and 2019

(see page 2), with the long-term price forecast still $16,000/t for now.

Nickel inventories since 2010 (kt) Vale – Copper production projects

Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity; Vale strategic presentation 12/17

Electrification theme could account for over 25% of EBITDA in near term

Although production volumes are capped at c.265kt for nickel and c.430kt for copper for the

next three to four years, this division’s contribution to EBITDA should rise to c.25% by 2020,

we estimate (c.15% in 2017), which is more cautious than management’s target of c.30% or

more. This still suggests that the shares offer attractive exposure to the increasingly supported

electrification theme (i.e. exposure to materials involved in electric vehicle batteries).

In nickel, c.50kt/y of additional production is readily available for under $2bn of capex

equivalent, and the group also has the potential to expand in copper, notably in two key

projects in Brazil and Canada (chart above right) equivalent to c.100kt/y (the capex estimate is

not available, but we believe it should be a fraction of a standard copper mining project due to

existing investment in both cases).

Coal update

The group’s coal operations are now entirely located in Mozambique after it completed the

disengagement from Australia at end-2016, a decision which no longer looks very prudent,

given the improved price context. Peter Poppinga (head of iron ore) has taken over the

management of the Mozambique coal operations on the realistic view that open cast iron ore

and coal production techniques are comparable.

The ramp-up of both tranches of the Moatize mine is now well advanced and should reach

20Mt by 2021, vs 12Mt in 2016 and 16Mt in 2018e (guidance). Another 5Mtpa is potentially

50

60

70

80

90

100

110

120

-

100

200

300

400

500

600

700

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

LME Shanghai

Laterite China (@1.5% av erage Ni content) In day s of equiv alent global Ni production (rhs)


https://doc.sgmarkets.com/en/3/0/0/213195.html?sid=ea61329dc377bf050e3423d05c74db7d

Metals & Mining

6 April 2018 80

available, should a scenario of gradual global mine depletion and an absence of relevant

investment lead to coal shortages and accompanying price inflation.

Mitsui is a key partner in this operation with a 15% stake in the mine (Vale 80%; Mozambique

government 5%) and a 35% stake in the train line to the terminal port of Nacala (Vale 35%;

others, including Mozambique government, 30%). We expect this to produce roughly $3.5bn

in cash proceeds in 1H18, from a mix of project financing with Japanese banks and the last

payment from Mitsui.

Vale – Mozambique coal production costs Vale – Mozambique coal production costs

Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity; Vale strategic presentation 12/17; 1. Includes logistics

costs; 2. Includes Nacala corridor tariff

As a consequence, the group will be paying a fee to use the Nacala corridor, which

management estimates at c.$20/t, compared with cash costs at the mine of below $60/t by

2021e. EBITDA was $330m in 2017 (after c.$2bn in accumulated losses since 2012) at an

average implied coal price of $133/t.

Looking forward, we assume a long-term average price of c.$125/t, reflecting metcoal at $150/t

and thermal coal at $80/t on a 75:25 shipment ratio. As per our sector report published with this

review, we expect near-term price strength due to relatively low Chinese coal production, supply

interference in India (Coal India), and generally adverse seasonal weather in 1H18 in East

Australia (related to risks of further rail track maintenance problems). Ongoing control over

Chinese coal production levels, together with gradual mine depletion, leads us to turn more

positive with our long-term coal price estimates: $150/t for metcoal and $80/t for thermal coal,

compared with $125/t and $75/t previously). These forecasts remain below the 2019e forward

curve (see p.2), suggesting upside risk – albeit marginal given the division’s relative size.


Metals & Mining

6 April 2018 81

Financial data

Vale – Iron ore division ($m)

18Q1e 18Q2e 18Q3e 18Q4e FY15 FY16 FY17 FY18e FY19e FY20e FY21e FY22e

FX - BRL/USD 3.23 3.20 3.20 3.20 3.33 3.49 3.19 3.21 3.20 3.20 3.20 3.20

yoy 3% -1% 1% -2% 42% 5% -9% 0% 0% 0% 0% 0%

Iron ore fines

Turnover 5,276 4,244 4,505 4,644 12,493 15,824 18,562 18,669 18,493 18,727 18,727 18,727

yoy 9% 19% -12% -8% -36% 27% 17% 1% -1% 1% 0% 0%

Price -8% 9% -18% -12% -41% 25% 18% -8% -6% 0% 0% 0%

Volume 18% 10% 7% 5% 7% 2% -1% 10% 5% 1% 0% 0%

Shipments (kt) 77,080 76,000 82,450 84,150 288,662 293,436 291,329 319,680 335,750 340,000 340,000 340,000

Average Realised Price (US$/t) 68.5 55.8 54.6 55.2 43.3 53.9 63.7 58.4 55.1 55.1 55.1 55.1

Market price (IODEX 62% Fe) 72.5 60.0 60.0 60.0 55.1 58.6 71.4 63.1 60.0 60.0 60.0 60.0

IODEX premium 6% 7% 10% 9% 27% 9% 12% 8% 9% 9% 9% 9%

EBITDA costs ($/t) (30.1) (28.7) (28.4) (28.4) (29.0) (25.0) (29.2) (28.9) (28.3) (28.0) (27.8) (27.8)

yoy 14% -3% -3% -9% -32% -14% 17% -1% -2% -1% -1% 0%

Reported C1 costs (14.7) (14.9) (14.6) (14.6) n/a (13.0) (14.8) (14.7) (14.4) (14.1) (14.0) (14.0)

Royalty (1.7) (1.4) (1.4) (1.4) (1.2) (1.4) (1.5) (1.4) (1.4) (1.4) (1.4)

Other expenses (2.2) (2.2) (2.2) (2.2) (2.5) (2.0) (2.2) (2.2) (2.2) (2.2) (2.2)

Freight (11.7) (10.5) (10.5) (10.5) (8.3) (11.4) (10.8) (10.5) (10.5) (10.5) (10.5)

Adjustments 0.2 0.2 0.2 0.2 (0.0) 0.5 0.2 0.2 0.2 0.2 0.2

Reported Production 94,000 95,000 97,000 99,000 345,879 348,846 366,512 385,000 395,000 400,000 400,000 400,000

Shipments in % of production 82% 80% 85% 85% 83% 84% 79% 83% 85% 85% 85% 85%

EBITDA 2,955 2,062 2,164 2,280 4,157 8,486 10,089 9,462 9,023 9,235 9,283 9,283

Depreciation (300) (300) (300) (300) (1,116) (1,044) (1,093) (1,200) (1,230) (1,261) (1,261) (1,261)

EBIT 2,655 1,762 1,864 1,980 3,041 7,442 8,996 8,262 7,793 7,974 8,022 8,022

EBITDA Margin 56.0% 48.6% 48.0% 49.1% 33.3% 53.6% 54.4% 50.7% 48.8% 49.3% 49.6% 49.6%

Iron ore pellets

Turnover 1,610 1,397 1,429 1,449 3,717 3,828 5,653 5,886 5,736 5,784 5,784 5,784

Variation 10% 5% -1% 2% -31% 3% 48% 4% -3% 1% 0% 0%

Price 10% -1% -8% -8% -35% 0% 36% -2% -10% 0% 0% 0%

Volume 0% 6% 8% 11% 6% 3% 9% 6% 9% 1% 0% 0%

Volume Sold 12,597 13,181 14,150 15,096 46,284 47,709 51,775 55,024 59,750 60,250 60,250 60,250

Average Realised Price ($/t) 127.8 106.0 101.0 96.0 80.3 80.2 109.2 107.0 96.0 96.0 96.0 96.0

Premium over IODEX 76% 77% 68% 60% 46% 37% 53% 69% 60% 60% 60% 60%

EBITDA cash costs ($/t) (57.1) (54.4) (53.5) (52.8) (48.8) (43.0) (57.3) (54.5) (52.8) (51.8) (51.2) (50.7)

Production costs (45.1) (42.9) (42.5) (42.3) (44.0) (41.9) (51.2) (43.2) (42.3) (41.8) (41.7) (41.7)

C1, royalty & other opex (18.6) (18.4) (18.1) (18.1) (16.7) (16.7) (18.2) (18.3) (18.0) (17.7) (17.5) (17.5)

Implied freight (7.8) (6.0) (6.0) (6.0) (1.8) 0.1 (4.3) (6.5) (6.0) (6.0) (6.0) (6.0)

Implied pelletising cost (18.8) (18.4) (18.4) (18.2) (25.5) (25.3) (28.7) (18.4) (18.3) (18.1) (18.1) (18.1)

Other costs (12.0) (11.5) (11.0) (10.5) (4.8) (1.0) (6.1) (11.3) (10.5) (10.0) (9.5) (9.0)

EBITDA 792 651 587 591 1,685 1,880 2,767 2,622 2,274 2,351 2,390 2,420

Vale 792 601 587 561 1,460 1,767 2,686 2,542 2,224 2,301 2,340 2,370

Samarco & other pellet dividends 0 50 0 30 225 113 81 80 50 50 50 50

Depreciation (175) (175) (175) (175) (553) (572) (672) (700) (720) (734) (734) (734)

EBIT 617 476 412 416 1,132 1,308 2,095 1,922 1,554 1,617 1,655 1,685

EBITDA Margin 49.2% 43.0% 41.1% 38.7% 39.3% 46.2% 47.5% 43.2% 38.8% 39.8% 40.4% 41.0%



Metals & Mining

6 April 2018 82

Vale – Base metals division ($m)


Turnover 1,900 1,873 1,889 1,905 6,163 6,140 6,871 7,567 7,827 8,372 8,788 9,176

Nickel 891 871 904 937 3,412 3,051 3,139 3,604 3,750 4,015 4,280 4,603

Copper 692 690 670 650 1,728 1,915 2,530 2,702 2,773 2,962 3,044 3,044

Other 317 312 315 317 1,023 1,174 1,202 1,261 1,305 1,395 1,465 1,529

Nickel 17% 27% 20% 0% -24% -11% 3% 15% 4% 7% 7% 8%

Price 27% 36% 29% 20% -29% -16% 9% 27% 4% 7% 7% 0%

Volume -8% -7% -7% -17% 7% 7% -5% -10% 0% 0% 0% 8%

Copper 22% 29% -2% -13% -19% 11% 32% 7% 3% 7% 3% 0%

Price 22% 33% 8% -3% -28% 2% 34% 13% 2% 4% 3% 0%

Volume 0% -3% -9% -10% 13% 8% -1% -6% 0% 2% 0% 0%

Vale prices ($/t)

Nickel 13,450 13,150 13,650 14,150 11,725 9,810 10,673 13,600 14,150 15,150 16,150 16,150

Copper 6,925 6,900 6,700 6,500 4,353 4,453 5,971 6,756 6,900 7,200 7,400 7,400

Underlying prices ($/t)

Nickel 3mo 13,300 13,000 13,500 14,000 11,678 9,645 10,419 13,450 14,000 15,000 16,000 16,000

Copper 3mo 7,025 7,000 6,800 6,600 5,500 4,872 6,188 6,856 7,000 7,300 7,500 7,500

Nickel premium 1% 1% 1% 1% 0% 2% 2% 1% 1% 1% 1% 1%

Copper premium -1% -1% -1% -2% -21% -9% -4% -1% -1% -1% -1% -1%

Shipments 166 166 166 166 688 741 718 665 667 676 676 696

Nickel 66 66 66 66 291 311 294 265 265 265 265 285

Copper 100 100 100 100 397 430 424 400 402 411 411 411

EBITDA 699 732 730 771 1,158 1,698 2,171 2,931 3,209 3,679 4,026 4,200

Nickel 362 332 392 475 632 985 986 1,561 1,748 2,033 2,298 2,472

Copper 338 399 337 296 526 713 1,185 1,370 1,461 1,646 1,728 1,728

Depreciation (415) (415) (415) (415) (1,840) (1,658) (1,615) (1,660) (1,700) (1,725) (1,725) (1,725)

EBIT 284 317 315 356 (682) 40 556 1,271 1,509 1,954 2,301 2,475

EBITDA margin 36.8% 39.1% 38.6% 40.5% 18.8% 27.7% 31.6% 38.7% 41.0% 43.9% 45.8% 45.8%

Nickel 40.6% 38.1% 43.4% 50.7% 18.5% 32.3% 31.4% 43.3% 46.6% 50.6% 53.7% 53.7%

Copper 48.8% 57.9% 50.4% 45.5% 30.4% 37.2% 46.8% 50.7% 52.7% 55.6% 56.8% 56.8%

Implied cash costs ($/t) (7,225) (6,867) (6,975) (6,821) (7,275) (5,995) (6,548) (6,972) (6,925) (6,939) (7,041) (7,147)

Variation 8% 6% 5% 7% -12% -18% 9% 6% -1% 0% 1% 1%

Nickel (7,992) (8,134) (7,731) (6,974) (9,553) (6,643) (7,321) (7,708) (7,553) (7,478) (7,478) (7,478)

Variation 5% 5% 5% 5% 4% -30% 10% 5% -2% -1% 0% 0%

Copper (3,549) (2,905) (3,325) (3,544) (3,028) (2,795) (3,174) (3,331) (3,264) (3,199) (3,199) (3,199)

Variation 5% 5% 5% 5% -32% -8% 14% 5% -2% -2% 0% 0%



Metals & Mining

6 April 2018 83

Vale – Coal division ($m)


Turnover 558 563 672 650 526 838 1,567 2,443 2,248 2,248 2,498 2,498

Metcoal 466 477 586 569 479 586 1,240 2,098 1,924 1,924 2,138 2,138

Thermal Coal 92 86 86 81 47 252 327 346 324 324 360 360

Metcoal variation (yoy) 83% 15% 120% 86% -28% 22% 112% 69% -8% 0% 11% 0%

Price 25% -11% 23% -15% -18% 40% 45% 1% -18% 0% 0% 0%

Volume 46% 29% 79% 119% -11% -13% 46% 67% 13% 0% 11% 0%

Thermal coal variation (yoy) 32% 28% -8% -16% -39% 436% 30% 6% -6% 0% 11% 0%

Price 21% 21% 4% -8% -21% -12% 54% 8% -6% 0% 0% 0%

Volume 9% 6% -12% -8% -23% 513% -16% -2% 0% 0% 11% 0%

Vale prices

Metcoal 207 180 175 152 85 119 173 175 143 143 143 143

Thermal Coal 82.1 76.5 76.5 72.0 52.7 46.2 71.1 76.8 72.0 72.0 72.0 72.0

Underlying prices

Australia FOB Coking 230 200 190 165 90 142 187 196 150 150 150 150

Australia FOB Thermal 103 90 85 80 59 66 89 89 80 80 80 80

Metcoal premium -10% -10% -8% -8% -5% -16% -8% -11% -5% -5% -5% -5%

Thermal coal premium -20% -15% -10% -10% -10% -30% -20% -14% -10% -10% -10% -10%

Volume 3,375 3,775 4,475 4,875 6,505 10,364 11,780 16,500 18,000 18,000 20,000 20,000

Metcoal 2,250 2,650 3,350 3,750 5,614 4,906 7,178 12,000 13,500 13,500 15,000 15,000

Thermal Coal 1,125 1,125 1,125 1,125 891 5,458 4,602 4,500 4,500 4,500 5,000 5,000

EBITDA 187 155 202 153 (536) (54) 330 697 448 538 698 698

Depreciation (75) (75) (75) (75) (192) (190) (297) (300) (300) (300) (300) (300)

EBIT 112 80 127 78 (660) (244) 33 397 148 238 398 398

EBITDA Margin 33.5% 27.6% 30.0% 23.5% nm -6.4% 21.1% 28.5% 19.9% 23.9% 27.9% 27.9%

Implied Cash Costs ($/t) (110) (108) (105) (102) (163) (86) (105) (106) (100) (95) (90) (90)

yoy 7% 4% 5% -11% -13% -47% 22% 1% -6% -5% -5% 0%



Metals & Mining

6 April 2018 84

Vale – Divisional breakdown ($m)


Ferrous metals 7,112 5,855 6,142 6,299 16,562 20,351 25,129 25,408 25,037 25,304 25,308 25,312

Base Metals 1,900 1,873 1,889 1,905 6,163 6,140 6,871 7,567 7,827 8,372 8,788 9,176

Coal 558 563 672 650 526 838 1,567 2,443 2,248 2,248 2,498 2,498

Other (inc. discontinued) 97 84 88 89 133 159 400 358 355 363 370 374

Turnover 9,667 8,375 8,790 8,944 23,384 27,488 33,967 35,776 35,467 36,286 36,964 37,359

yoy 14% 16% -3% -2% -38% 18% 24% 5% -1% 2% 2% 1%

Ferrous metals 3,831 2,794 2,829 2,948 5,899 10,539 13,192 12,403 11,598 11,880 11,967 11,997

Base Metals 699 732 730 771 1,158 1,698 2,171 2,931 3,209 3,679 4,026 4,200

Coal 187 155 202 153 (536) (54) 330 697 448 538 698 698

Other (inc. discontinued) (80) (80) (80) (80) 330 (2) (323) (320) (325) (325) (325) (325)

EBITDA 4,637 3,601 3,680 3,792 6,851 12,181 15,370 15,711 14,930 15,772 16,366 16,569

yoy 7% 32% -12% -8% -49% 78% 26% 2% -5% 6% 4% 1%

Ferrous metals 53.9% 47.7% 46.1% 46.8% 35.6% 51.8% 52.5% 48.8% 46.3% 47.0% 47.3% 47.4%

Base Metals 36.8% 39.1% 38.6% 40.5% 18.8% 27.7% 31.6% 38.7% 41.0% 43.9% 45.8% 45.8%

Coal 33.5% 27.6% 30.0% 23.5% nm -6.4% 21.1% 28.5% 19.9% 23.9% 27.9% 27.9%

EBITDA Margin 48.0% 43.0% 41.9% 42.4% 29.3% 44.3% 45.2% 43.9% 42.1% 43.5% 44.3% 44.4%

Ferrous metals (475) (475) (475) (475) (1,669) (1,616) (1,765) (1,900) (1,950) (1,995) (1,995) (1,995)

Base Metals (415) (415) (415) (415) (1,840) (1,658) (1,615) (1,660) (1,700) (1,725) (1,725) (1,725)

Coal (75) (75) (75) (75) (192) (190) (297) (300) (300) (300) (300) (300)

Other (10) (10) (10) (10) (328) (24) (31) (40) (40) (40) (40) (40)

Depreciation (975) (975) (975) (975) (4,029) (3,488) (3,708) (3,900) (3,990) (4,060) (4,060) (4,060)

yoy 7% 8% 6% 0% -6% -13% 6% 5% 2% 2% 0% 0%

Ferrous metals 3,356 2,319 2,354 2,473 4,230 8,923 11,427 10,503 9,648 9,885 9,972 10,002

Base Metals 284 317 315 356 (682) 40 556 1,271 1,509 1,954 2,301 2,475

Coal 112 80 127 78 (728) (244) 33 397 148 238 398 398

Other (90) (90) (90) (90) 2 (26) (354) (360) (365) (365) (365) (365)

EBIT 3,662 2,626 2,705 2,817 2,822 8,693 11,662 11,811 10,940 11,712 12,306 12,509



Metals & Mining

6 April 2018 85

Vale Sales/division 17

EBIT/division 17

Sales/region 17


Litel 21.3

Capital 8.4

BNDESPAR 8.0

Blackrock 7.1

Bradespar 6.4

Mitsui 5.5

Aberdeen 3.1

Valuation ($m) 12/13 12/14 12/15 12/16 12/17 12/18e 12/19e 12/20e


Share price: avg (hist. yrs) or current 16.3 12.4 5.74 5.17 9.78 13.0 13.0 13.0



Value of minorities (3) 1,611 1,199 2,115 1,982 1,982 1,982 1,982 1,982


Other adjustment (5) 2,198 2,236 1,818 2,437 2,437 2,437 2,437 2,437

EV = (1) - (2) + (3) - (4) + (5) 111,705 92,276 58,748 56,097 72,974 83,239 81,094 79,527

P/E (x) 8.2 17.6 NM 3.6 6.7 9.4 10.0 9.1

Price/cash flow (x) 6.5 4.7 7.8 2.8 3.6 6.3 6.2 5.9

Price/free cash flow (x) 157 29.8 NM 7.59 5.37 9.45 9.02 8.17


EV/revenues (x) 2.39 2.46 2.29 2.04 2.15 2.33 2.29 2.19

EV/EBITDA (x) 5.0 6.9 8.6 4.6 4.7 5.3 5.4 5.0

Dividend yield (%) 5.2 4.9 1.7 6.5 2.8 6.8 6.5 8.5

Per share data ($)

SG EPS (adj.) 1.98 0.71 -0.73 1.45 1.46 1.38 1.30 1.42

Cash flow 2.50 2.62 0.74 1.85 2.71 2.07 2.10 2.21

Book value 12.3 10.7 6.52 7.58 8.29 8.87 9.33 9.64

Dividend 0.84 0.61 0.097 0.33 0.27 0.88 0.84 1.10


Revenues 46,767 37,539 25,609 27,488 33,967 35,776 35,467 36,286

Gross income 22,435 13,353 6,851 12,181 15,370 15,711 14,930 15,772

EBITDA 22,435 13,353 6,851 12,181 15,370 15,711 14,930 15,772


EBIT 18,285 9,065 2,822 8,693 11,662 11,811 10,940 11,712

Impairment losses -3,017 -1,633 -11,229 -2,294 -1,323 0.00 0.00 0.00

Net interest income -1,722 -2,535 -844 -2,507 -2,370 -1,344 -1,084 -973

Exceptional & non-operating items -12,445 -5,499 -9,887 3,893 187 0.00 0.00 0.00

Taxation -1,160 450 6,957 -2,682 -1,495 -3,170 -2,987 -3,252

Minority interests 178 304 491 6.00 -21.0 -100 -100 -100

Reported net income 586 657 -12,129 4,191 5,932 7,297 6,869 7,487

SG adjusted net income 10,216 3,637 -3,760 7,482 7,539 7,297 6,869 7,487


EBITDA 22,435 13,353 6,851 12,181 15,370 15,711 14,930 15,772

Change in working capital 1,262 2,634 1,783 -1,743 897 -455 25 -67




Free cash flow 532 2,156 -1,801 3,505 9,399 7,241 7,584 8,380

Cash flow from investing activities 3,930 1,246 3,315 1,087 922 3,500 0 0


Net change in cash resulting from CF 71 -564 -549 175 6,898 6,518 2,145 1,567

Balance sheet ($m)



Working capital 11,216 6,794 3,815 8,733 4,964 5,419 5,394 5,461

Employee benefit obligations 2,198 2,236 1,818 2,437 2,437 2,437 2,437 2,437



Provisions 10,331 10,378 7,292 8,272 8,188 7,688 7,188 6,688

Net debt (-)/cash (+) -24,121 -24,685 -25,234 -25,060 -18,161 -11,643 -9,498 -7,931

Accounting ratios

ROIC (%) 15.8 8.0 3.0 10.9 15.4 12.1 11.4 12.3

ROE (%) 0.9 1.1 -27.3 11.5 14.5 16.3 14.3 14.9


EBITDA margin (%) 48.0 35.6 26.8 44.3 45.2 43.9 42.1 43.5

EBIT margin (%) 39.1 24.1 11.0 31.6 34.3 33.0 30.8 32.3

Revenue yoy growth (%) 0.5 -19.7 -31.8 7.3 23.6 5.3 -0.9 2.3

Rev. organic growth (%) 0.5 -19.7 -31.8 7.3 23.6 5.3 -0.9 2.3


EBIT yoy growth (%) 31.2 -50.4 -68.9 NM 34.2 1.3 -7.4 7.1

EPS (adj.) yoy growth (%) -2.6 -64.4 -203.4 299.0 0.5 -5.4 -5.9 9.0

Dividend growth (%) -17.1 -28.1 -84.1 NM -17.8 NM -4.5 31.0

Cash conversion (%) 13.3 37.1 nm 67.1 106.5 93.6 100.1 101.6

Net debt/equity (%) 37 44 71 61 41 24 19 15

FFO/net debt (%) 81.1 45.6 51.4 27.9 63.4 96.2 114.3 145.6

Dividend paid/FCF (%) 845.9 194.8 NM 7.1 22.5 44.5 58.5 69.4


Iron ore 74.0%

Base Metals 20.2%

Coal 4.6%

Other 1.2%

Iron ore 85.8%

Base Metals 14.1%

Coal 2.1%

Other -2.1%

China 46.4%

Europe 16.9%

Others 10.5%

Rest of Asia 8.7%

Brazil 7.5%

Japan 6.3%

North America 3.7%


Metals & Mining

6 April 2018 86

Report completed on 6 Apr. 2018 17:15 CET

APPENDIX

COMPANIES MENTIONED

Actavis (ACT.N, No Reco)

African Copper Plc (ACU.L, No Reco)

Alcoa (AA US, No Reco)

Alrosa (ALRS RM, Sell)

Aluminum Corp of China (2600 HK, No Reco)

Amadeus IT Holding (AMS SM, No Reco)

Anglo American (AAL LN, Buy)

Antofagasta (ANTO LN, No Reco)

ArcelorMittal (MT NA, Buy)

Archer Daniels Midland (ADM.N, No Reco)

Australia and New Zealand Banking Group (, No Reco)

Banpu (, No Reco)

Bay Hotels & Leisure (, No Reco)

Bayer AG (BAYN GR, Hold)

BBG (, No Reco)

BHP Billiton plc (BLT LN, Hold)

BT Group (BT/A LN, Buy)

Bukit Asam Persero Tbk PT (PTBA IJ, No Reco)

Bunge Ltd (BG US, No Reco)

Century Aluminium (CENX.OQ, No Reco)

CHALCO (2600.HK, No Reco)

China Railway (, No Reco)

Choice Hotels International Inc (CHH US, No Reco)

Chunghwa Telecom Co Ltd (2412 TT, No Reco)

Cleveland Cliffs (, No Reco)

Cliffs Natural Resources Inc (CLF.N, No Reco)

COAL INDIA (, No Reco)

Concho Resources (CXO US, No Reco)

DRC (, No Reco)

EDF (EDF FP, Buy)

Egypt Aluminium (, No Reco)

Eramet (ERA FP, Buy)

Exxaro Resources (, No Reco)

Ferrexpo plc (FXPO.L, No Reco)

First Quantum Minerals Ltd (FM CN, No Reco)

Fortescue Metals Gp (, No Reco)

Freeport-McMoRan Copper & Gold (FCX US, No Reco)

Genomic Vision (GV FP, No reco)

Glencore (GLEN LN, Buy)

Global Telecom Holding SAE (GTHE EY, No Reco)

HALCON RESOURCES (XHK US, No Reco)

Hindalco (, No Reco)

Impala Platinum (IMPJ.J, No Reco)

Impress (1174Z NA, No Reco)

ITOCHU CORP (8001 JT, No Reco)

Kaz Minerals (, No Reco)

KGHM (KGH PW, No reco)

Klepierre (LI FP, Buy)

KT (, No Reco)

Kumba Iron Ore (, No Reco)

LEG Immobilien AG (LEG GR, Hold)

Lucara Diamond Corp (LUC.TO, No Reco)

Mahindra & Mahindra Ltd (MM IN, No Reco)

MetLife Inc (MET US, No Reco)

MITSUI (, No Reco)

Mitsui & Co (8031.T, No Reco)

Mosaic (MOS US, No Reco)

MSCI (, No Reco)

Neinor Homes (HOME SM, Hold)

New Hope (, No Reco)

Norilsk Nickel (MNOD LI, Hold)

Norsk Hydro (NHY NO, No Reco)

Northam Platinum (NHMJ.J, No Reco)

Petra Diamonds (PDL.L, No Reco)

Puma (PUM GR, No Reco)

Quintiles IMS Inc (, No Reco)

Rio Tinto (RIO LN, Buy)

Roy Hill (, No Reco)

Saga (, No Reco)

Samarco (, No Reco)

Semirara Mining & Pozer Corp (SCC PM, No Reco)

Shanghai Airport (, No Reco)

Siemens Gamesa RE (GAM SM, Buy)

South32 (S32 LN, Hold)

Southern Copper Corporation (SCCO US, No Reco)

Standard Life Aberdeen Plc (SLA LN, Buy)

Stornoway Diamond Corp (SWY.TO, No Reco)

Teck Resources Ltd (TECK/B CN, No Reco)

Telefonica Brasil SA (VIVT4 BZ, No Reco)

Thompson Creek Metals (TCM.TO, No Reco)

Thomson Reuters (TRIL LN, No Reco)

UC Rusal Plc (486 HK, Buy)

UniCredit SpA (UCG IM, Hold)

Unilever NV (UNA NA, Buy)

Vale (VALE US, Hold)

Varian (, No Reco)

Venture (, No Reco)

Warrior Coal (, No Reco)

Whitehaven Coal (WHC.AX, No Reco)

ANALYST CERTIFICATION

The following named research analyst(s) hereby certifies or certify that (i) the views expressed in the research report accurately reflect his or

her or their personal views about any and all of the subject securities or issuers and (ii) no part of his or her or their compensation was, is, or

will be related, directly or indirectly, to the specific recommendations or views expressed in this report: Sergey Donskoy

The analyst(s) who author research are employed by SG and its affiliates in locations, including but not limited to, Paris, London, New York,

Hong Kong, Tokyo, Bangalore, Frankfurt, Madrid, Milan, Geneva, Seoul, Warsaw and Moscow


Metals & Mining

6 April 2018 87

Historical Price: Anglo American (AAL.L) 2015/2016 Change 2017/2018 Change (Paris time)

02/01/15 New Rating: Sell 05/04/17 17:37 New Rating: Buy

02/01/15 New Target: 1300.0 05/04/17 17:37 New Target: 1550.0

27/01/15 New Rating: Buy 08/11/17 18:15 New Target: 1650.0

27/01/15 New Target: 1385.0

25/02/15 New Target: 1540.0

09/06/15 New Rating: Hold

09/06/15 New Target: 1090.0

17/07/15 New Target: 950.0

05/10/15 New Target: 530.0

16/12/15 New Rating: Sell

16/12/15 New Target: 250.0

18/02/16 New Target: 390.0

22/07/16 New analyst : Sergey

Donskoy


Historical Price: BHP Billiton plc (BLT.L) 2015/2016 Change 2017/2018 Change (Paris time)

02/01/15 New Rating: Hold 08/11/17 18:06 New Target: 1404.0

02/01/15 New Target: 1850.0

27/01/15 New Target: 1550.0

25/02/15 New Target: 1700.0

09/06/15 New Rating: Buy

09/06/15 New Target: 1600.0


05/10/15 New Target: 1050.0

26/11/15 New Target: 915.0

04/02/16 New Target: 700.0


Donskoy


Historical Price: Glencore (GLEN.L) 2015/2016 Change 2017/2018 Change (Paris time)




25/02/15 New Target: 310.0

12/05/15 New Target: 315.0

12/08/15 New Target: 190.0

21/08/15 New Target: 175.0

05/10/15 New Target: 130.0

16/12/15 New Target: 100.0


Donskoy


19/04/16 New Target: 160.0

01/08/16 21:38 New Rating: Buy

01/08/16 21:38 New Target: 230.0

14/09/16 07:04 New Target: 240.0

Source: SG Cross Asset Research/Equity 11/10/16 07:13 New Target: 275.0

02/12/16 07:41 New Rating: Hold

13/12/16 07:13 New Rating: Buy

13/12/16 07:13 New Target: 370.0

209

409

609

809

1009

1209

1409

1609

1809

01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18

Price Target MA100 Change Reco

551

751

951

1151

1351

1551

1751

01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18


65

115

165

215

265

315

365

415

465

01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18



Metals & Mining

6 April 2018 88

Historical Price: Rio Tinto (RIO.L) 2015/2016 Change 2017/2018 Change (Paris time)


02/01/15 New Target: 3600.0 08/11/17 18:12 New Rating: Buy


25/02/15 New Target: 4000.0


09/06/15 New Target: 3100.0


05/10/15 New Target: 2450.0

04/02/16 New Target: 1980.0

16/02/16 New Target: 2100.0


Donskoy

20/07/16 17:44 New Rating: Hold

20/07/16 17:44 New Target: 2500.0

18/11/16 17:41 New Target: 2900.0

24/11/16 17:24 New Target: 3000.0


Historical Price: Vale (VALE.N) 2015/2016 Change 2017/2018 Change (Paris time)

02/01/15 New Rating: No Reco


21/01/15 New Target: 11.8

25/02/15 New Target: 11.2

09/06/15 New Target: 8.0


09/05/16 New Target: 4.86


Donskoy


VALUATION METHODOLOGY AND RISKS TO RATING, RECOMMENDATION AND PRICE TARGET

Valuation Methodology Anglo American

Our TP is derived from a 50:50 combination of a sum-of-the-parts NPV valuation (inputting a 8.7% WACC, covering the mine lives of the

existing operations and projects) and a multiple-based valuation based on a 6.0x target EV/EBITDA and medium-term average EBITDA. The

figure is then adjusted for an 12% risk discount reflecting the likelihood of increased volatility in the commodity index on a 12m horizon.

Risks

Upside – 1) Stronger-for-longer prices for bulk commodities (we expect them to normalise in 2019). 2) Recurring speculation about Agarwal

playing a more active part in the company's strategy. 3) Further improvements in investor sentiment towards South Africa (represents 30-35%

of 2018e-21e EBITDA).

Downside – 1) Politics and regulations in South Africa. 2) Possibility of Agarwal's real motives conflicting with the interests of other

shareholders. 3) Higher capital expenditure than we forecast.

Currency volatility (especially ZAR) is the key swing factor.

Valuation Methodology BHP Billiton plc

Our TP is based on the equally weighted average of: 1/ a sum of NPVs by division; and 2/ the implied current average value of the group's

6.2x EV/EBITDA (weekly average since January 2010), which we apply to our 2019-21 average estimates. We subsequently apply a 9% risk

discount, reflecting a 15% correction risk in the commodity index on a 12m horizon. We exclude the non-core US onshore operations from

these calculations and value this business separately on an average of NPV, peer multiples and estimated acreage value.

Risks

Downside risks include: lower commodity prices than we expect (notably for iron ore and copper, which together account for c.65% of BHP’s

FY18e EBITDA); higher costs than we estimate; technical/operating setbacks, such as adverse weather conditions at Australian ports/mines

and personnel strikes, notably in South America.

1498

1998

2498

2998

3498

3998

4498

01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18


2

4

6

8

10

12

14

16

01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18



Metals & Mining

6 April 2018 89

Valuation Methodology Glencore

Our target price is a 50:50 combination of a sum-of-the-parts NPV (inputting a 7.8% real WACC, zero terminal growth plus an extra 15%

discount for African Copper), and an estimate based on target multiples in line with peers (15.0x P/E for marketing and 5.5x EV/EBITDA for

the group's mining operations). The number is subsequently adjusted for a 10% risk discount reflecting the likelihood of increased volatility in

the commodity index on a 12m horizon.

Risks

Downside: 1) failure to achieve the targeted deleveraging; 2) underperformance of the marketing division (Glencore expects 2018 EBIT of

$2.2-3.2bn vs SGe of $2.9bn); 3) project execution (African Copper, Zhairem); 4) cost inflation and/or currency appreciation in the absence of

a positive momentum in commodity prices; 5) renewed concerns about the China ‘hard landing’; 6) political instability, changes to tax regime

(especially in DRC).

Valuation Methodology Rio Tinto

Our TP is derived from a 50/50 combination of a sum-of-the-parts NPV valuation (inputting an 8.1% WACC, covering the mine lives of the

existing operations and projects) and an EV/EBITDA-based valuation (with a 6.1x target multiple applied to 2023e EBITDA, and with the

resulting equity value discounted to end-2018 using a 9.3% CoE). The number is subsequently adjusted for a 10% risk discount reflecting the

likelihood of increased volatility in the commodity index on a 12m horizon.

Risks

Downside - 1) Weaker commodity prices (especially iron ore) than we forecast as a result of a deteriorating demand outlook (China hard

landing, global growth slowdown) and/or excessive supply (iron ore, aluminium). 2) Disputes with authorities on taxation, licence agreements

etc. 3) Execution delays, capex overruns and start-up difficulties, especially with respect to Oyu Tolgoi (7% of the EV). 4) Higher operating

costs and capex than we estimate (we forecast capex at $5.5-6.0bn per year). 5) Legal risks in the context of fraud charges stemming from an

ill-fated investment in Mozambique coal assets.

Valuation Methodology Vale

Our TP is derived from an average of an SOP valuation based on average 2018-19e EV/EBITDA multiples for relevant sector peers applied to

key divisions (iron ore, nickel and copper, and coal) and a DCF over 2019-30e, using a post-tax WACC at 8.7% and terminal growth at 0%.

Risks

Downside: 1) general raw material price weakness, notably from China in a context of slowing economic growth affecting iron ore profitability;

2) excessive global nickel production pushing the nickel price back to recent trough level, again undermining profitability; 3) higher litigation

costs than we anticipate after the disaster at the 50% JV Samarco.

Upside: 1) rising iron ore demand in China in 2018, reflecting stronger economic conditions than we forecast and benefiting iron ore

profitability; 2) a significant surge in demand for nickel and copper leading to significantly higher prices than we estimate in the context of

rising electric battery development expectations and lifting our earnings outlook in the metals division.

SG EQUITY RESEARCH RATINGS on a 12 month period

BUY: absolute total shareholder return forecast of 15% or more

over a 12 month period.

HOLD: absolute total shareholder return forecast between 0%

and +15% over a 12 month period.

SELL: absolute total shareholder return forecast below 0% over a

12 month period.

Total shareholder return means forecast share price appreciation

plus all forecast cash dividend income, including income from

special dividends, paid during the 12 month period. Ratings are

determined by the ranges described above at the time of the

initiation of coverage or a change in rating (subject to limited

management discretion). At other times, ratings may fall outside of

these ranges because of market price movements and/or other

short term volatility or trading patterns. Such interim deviations

from specified ranges will be permitted but will become subject to

review by research management.

Sector Weighting Definition on a 12 month period:

The sector weightings are assigned by the SG Equity Research

Strategist and are distinct and separate from SG equity research

analyst ratings. They are based on the relevant MSCI.

OVERWEIGHT: sector expected to outperform the relevant broad

market benchmark over the next 12 months.

NEUTRAL: sector expected to perform in-line with the relevant

broad market benchmark over the next 12 months.

UNDERWEIGHT: sector expected to underperform the relevant

broad market benchmark over the next 12 months.

The Preferred and Least preferred stocks are selected by the

covering analyst based on the individual analyst’s coverage

universe and not by the SG Equity Research Strategist.

Equity rating and dispersion relationship


46%

41%

13%23%

16%

14%

0

50

100

150

200

250

300

Buy Hold Sell

Updated on 03/04/18

Companies Covered Cos. w/ Banking Relationship


Metals & Mining

6 April 2018 90

All pricing information included in this report is as of market close, unless otherwise stated.

MSCI DISCLAIMER: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without

prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or

used to create any financial products, including any indices. This information is provided on an “as is” basis. The user assumes the entire

risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the

information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular

purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any

third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan

Stanley Capital International and the MSCI indexes are service marks of MSCI and its affiliates or such similar language as may be

provided by or approved in advance by MSCI.

IMPORTANT DISCLOSURES

ArcelorMittal SG acted as joint bookrunner in ArcelorMittal's bond issue (EUR, 5yr).

BHP Billiton plc SG acted as joint dealer manager in BHP Billiton's bonds tender (XS0787785715; XS1224953452; XS0834386228;

XS1225004461; XS0787786440; XS0834399635; US055451AU28; US055451AQ16; US055451AL29).

BHP Billiton plc SG acted as co-manager in BHP Billiton's bond tender offer (US055451AH17, US055451AL29,US055451AQ16,

US055451AU28).

BT Group SG acted as Passive Joint Bookrunner in British Telecom's Bond issue (EUR& GBP; 7yr/14yr/30yr; RegS)

BT Group SG acted as passive bookrunner in BT's triple tranche bond issue (EUR 5y, 7y, 10y).

Bunge Ltd SG acted as co-manager on Bunge Ltd's bond issue (5y and 10y SEC sr).

CHALCO SG acted as joint bookrunner in Aluminum Corporation of China's bond issue (5yr, USD, RegS).

EDF SG acted as Financial advisor to EDF in the disposal of its stake in EDF Polska (exclusing Rybnik) and Zec

Kogeneracja.

EDF SG acted as financial advisor in the potential acquisition of Areva NP by EDF.

EDF SG acted as Joint Global Coordinator in EDF's right issue

Eramet SG acted as joint dealer manager and joint bookrunner on Eramet's tender offer (ISIN: FR0011615699) and new issue

(EUR, 7-6yr).

First Quantum

Minerals Ltd

SG acted as Joint Global Coordinator and Joint Bookrunner in First Quantum Minerals Ltd's high yield bond issue

(USD, 6y/8y, Senior, 144A/RegS)

Glencore SG acted as joint bookrunner in Glencore's bond issue (USD, 5-10yr)

Klepierre SG acted as dealer manager in Klepierre's debts tender

offer(FR0011321405,XS0896119384,FR0011019397,XS0864386825) and potential new bond issue

MetLife Inc SG acted as Co-manager in Metlife's new bond issue(SEC registered US$ benchmark $1000 par PerpNC10 fxd-to-flt

pfd).

Norilsk Nickel SG acted as Joint lead manager and Joint Bookrunner in Norilsk Nickel's Bond issue (USD;RegS;5y)

Norilsk Nickel SG acted as global coordinator and joint bookrunner in PJSC MMC Norilsk Nickel's bond issue (RegS, 6yr, USD)

Rio Tinto SG acted as dealer manager in Rio Tinto Finance USA's tender offer (XS0863129135;XS0863127279).

Standard Life

Aberdeen Plc

SG acted as joint bookrunner in Standard Life Aberdeen's bond issue (USD, RegS)

UniCredit SpA SG acted as Joint Bookrunner in Unicredit SpA's Bond issue (Senior;EUR;5yr)

UniCredit SpA SG acted as Joint Bookrunner in Unicredit's Bond issue (USD;RegS;15y)

During the past 12 months, SG and/or its affiliate(s) received compensation for products and services other than investment banking related

services, or had a non-investment banking, non-securities services related client relationship: Alcoa, Alrosa, Amadeus IT Holding,

ArcelorMittal, Archer Daniels Midland, BHP Billiton plc, BT Group, Bayer AG, Bunge Ltd, CHALCO, Concho Resources, EDF, Eramet,

Freeport-McMoRan Copper & Gold, Genomic Vision, Glencore, Impress, KGHM, Klepierre, LEG Immobilien AG, Mahindra & Mahindra Ltd,

MetLife Inc, Neinor Homes, Norilsk Nickel, Norsk Hydro, Rio Tinto, Siemens Gamesa RE, South32, Standard Life Aberdeen Plc, UC Rusal Plc,

Unilever NV, Vale.


services, or had a non-investment banking, non-securities services related client relationship: First Quantum Minerals LTD..


services, or had a non-investment banking, non-securities services related client relationship: THOMPSON CREEK METALS CO INC...

SG and its affiliates beneficially own 1% or more of any class of common equity of Bayer AG, Eramet.

SG and/or its affiliates act as market maker or liquidity provider in the debt securities of Anglo American, ArcelorMittal, Archer Daniels

Midland, BHP Billiton plc, BT Group, Bayer AG, Concho Resources, EDF, Eramet, Freeport-McMoRan Copper & Gold, Glencore, Impress,

Klepierre, LEG Immobilien AG, Norilsk Nickel, Rio Tinto, Siemens Gamesa RE, South32, Standard Life Aberdeen Plc.

SG and/or its affiliates act as market maker or liquidity provider in the equities securities of Amadeus IT Holding, Anglo American,

Antofagasta, ArcelorMittal, Archer Daniels Midland, BHP Billiton plc, BT Group, Bayer AG, EDF, Eramet, Glencore, Klepierre, LEG Immobilien

AG, MetLife Inc, Norsk Hydro, Rio Tinto, Siemens Gamesa RE, Standard Life Aberdeen Plc, UniCredit SpA, Unilever NV.

SG or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months from Bayer AG,

EDF, Glencore, Klepierre, Norilsk Nickel, UC Rusal Plc.

SG or its affiliates had an investment banking client relationship during the past 12 months with ArcelorMittal, BHP Billiton plc, BT Group,

Bunge Ltd, CHALCO, EDF, Eramet, Glencore, Klepierre, MetLife Inc, Norilsk Nickel, Rio Tinto, Standard Life Aberdeen Plc, UniCredit SpA.

SG or its affiliates had an investment banking client relationship during the past 12 months with First Quantum Minerals LTD..

SG or its affiliates have received compensation for investment banking services in the past 12 months from ArcelorMittal, BHP Billiton plc, BT

Group, Bunge Ltd, CHALCO, EDF, Eramet, Glencore, Klepierre, MetLife Inc, Norilsk Nickel, Rio Tinto, Standard Life Aberdeen Plc, UniCredit


Metals & Mining

6 April 2018 91

SpA.

SG or its affiliates have received compensation for investment banking services in the past 12 months from First Quantum Minerals LTD..

SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of ArcelorMittal, BHP Billiton plc, BT Group,

Bunge Ltd, CHALCO, EDF, Eramet, Glencore, Klepierre, MetLife Inc, Norilsk Nickel, Rio Tinto, Standard Life Aberdeen Plc, UniCredit SpA.

SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of First Quantum Minerals LTD..

FOR DISCLOSURES PERTAINING TO COMPENDIUM REPORTS OR RECOMMENDATIONS OR ESTIMATES MADE ON SECURITIES

OTHER THAN THE PRIMARY SUBJECT OF THIS RESEARCH REPORT, PLEASE VISIT OUR GLOBAL RESEARCH DISCLOSURE

WEBSITE AT https://www.sgmarkets.com/#equity/compliance or call +1 (212).278.6000 in the U.S.

European Specialty Sales

If a European specialist sales personnel is listed on the cover of research reports, these employees are in SG’s Global Markets division

responsible for the sales effort in their sector and are not part of SG’s Cross-Asset Research Department. Specialist Sales do not contribute

in any manner to the content of research reports in which their names appear.

SG has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are

based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. The analyst(s) responsible for

preparing this report receive compensation that is based on various factors including SG’s total revenues, a portion of which are generated by

investment banking activities.

Non-U.S. Analyst Disclosure: The name(s) of any non-U.S. analysts who contributed to this report and their SG legal entity are listed below.

U.S. analysts are employed by SG Americas Securities LLC. The non-U.S. analysts are not registered/qualified with FINRA, may not be

associated persons of SGAS and may not be subject to the FINRA restrictions on communications with a subject company, public

appearances and trading securities held in the research analyst(s)’ account(s): Sergey Donskoy Société Générale London, Christian Georges

Société Générale London

IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any

securities and has been obtained from, or is based upon, sources believed to be reliable but is not guaranteed as to accuracy or completeness.

Material contained in this report satisfies the regulatory provisions concerning independent investment research as defined in MiFID. Information

concerning conflicts of interest and SG’s management of such conflicts is contained in the SG’s Policies for Managing Conflicts of Interests in

Connection with Investment Research which is available at https://www.sgmarkets.com/#equity/compliance SG does, from time to time, deal,

trade in, profit from, hold, act as market-makers or advisers, brokers or bankers in relation to the securities, or derivatives thereof, of persons,

firms or entities mentioned in this document and may be represented on the board of such persons, firms or entities. SG does, from time to

time, act as a principal trader in equities or debt securities that may be referred to in this report and may hold equity or debt securities

positions or related derivatives. Employees of SG, or individuals connected to them, may from time to time have a position in or hold any of the

investments or related investments mentioned in this document. SG is under no obligation to disclose or take account of this document when

advising or dealing with or on behalf of customers. The views of SG reflected in this document may change without notice. In addition, SG

may issue other reports that are inconsistent with, and reach different conclusions from, the information presented in this report and is under

no obligation to ensure that such other reports are brought to the attention of any recipient of this report. To the maximum extent possible at

law, SG does not accept any liability whatsoever arising from the use of the material or information contained herein. This research document

is not intended for use by or targeted to retail customers. Should a retail customer obtain a copy of this report he/she should not base his/her

investment decisions solely on the basis of this document and must seek independent financial advice.

The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed decisions

and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

The value of securities and financial instruments is subject to currency exchange rate fluctuation that may have a positive or negative effect on

the price of such securities or financial instruments, and investors in securities such as ADRs effectively assume this risk. SG does not provide

any tax advice. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on

assumptions that may not be realized. Investments in general, and derivatives in particular, involve numerous risks, including, among others,

market, counterparty default and liquidity risk. Trading in options involves additional risks and is not suitable for all investors. An option may

become worthless by its expiration date, as it is a depreciating asset. Option ownership could result in significant loss or gain, especially for

options of unhedged positions. Prior to buying or selling an option, investors must review the "Characteristics and Risks of Standardized

Options" at http://www.optionsclearing.com/about/publications/character-risks.jsp or from your SG representative. Analysis of option trading

strategies does not consider the cost of commissions. Supporting documentation for options trading strategies is available upon request.

Notice to French Investors: This publication is issued in France by or through Société Générale ("SG") which is authorised and supervised

by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and regulated by the Autorité des Marchés Financiers (AMF).

Notice to U.K. Investors: Société Générale is a French credit institution (bank) authorised by the Autorité de Contrôle Prudentiel (the French

Prudential Control Authority) and the Prudential Regulation Authority and subject to limited regulation by the Financial Conduct Authority and

Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and

regulation by the Financial Conduct Authority are available from us on request.

Notice to Swiss Investors: This document is provided in Switzerland by or through Société Générale Paris, Zürich Branch, and is provided

only to qualified investors as defined in article 10 of the Swiss Collective Investment Scheme Act (“CISA”) and related provisions of the

Collective Investment Scheme Ordinance and in strict compliance with applicable Swiss law and regulations. The products mentioned in this

document may not be suitable for all types of investors. This document is based on the Directives on the Independence of Financial Research

issued by the Swiss Bankers Association (SBA) in January 2008.

Notice to Polish Investors: this document has been issued in Poland by Societe Generale S.A. Oddzial w Polsce (“the Branch”) with its

registered office in Warsaw (Poland) at 111 Marszałkowska St. The Branch is supervised by the Polish Financial Supervision Authority and the


https://www.sgmarkets.com/#equity/compliance

https://www.sgmarkets.com/#equity/compliance

http://www.optionsclearing.com/about/publications/character-risks.jsp

Metals & Mining

6 April 2018 92

French ”Autorité de Contrôle Prudentiel”. This report is addressed to financial institutions only, as defined in the Act on trading in financial

instruments. The Branch certifies that this document has been elaborated with due dilligence and care.

Notice to U.S. Investors: For purposes of SEC Rule 15a-6, SG Americas Securities LLC (“SGAS”) takes responsibility for this research report.

This report is intended for institutional investors only. Any U.S. person wishing to discuss this report or effect transactions in any security

discussed herein should do so with or through SGAS, a U.S. registered broker-dealer and futures commission merchant (FCM). SGAS is a

member of FINRA, NYSE and NFA. Its registered address at 245 Park Avenue, New York, NY, 10167. (212)-278-6000.

Notice to Canadian Investors: This document is for information purposes only and is intended for use by Permitted Clients, as defined under

National Instrument 31-103, Accredited Investors, as defined under National Instrument 45-106, Accredited Counterparties as defined under

the Derivatives Act (Québec) and "Qualified Parties" as defined under the ASC, BCSC, SFSC and NBSC Orders

Notice to Singapore Investors: This document is provided in Singapore by or through Société Générale ("SG"), Singapore Branch and is

provided only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the Securities and Futures Act,

Cap. 289. Recipients of this document are to contact Société Générale, Singapore Branch in respect of any matters arising from, or in

connection with, the document. If you are an accredited investor or expert investor, please be informed that in SG's dealings with you, SG is

relying on the following exemptions to the Financial Advisers Act, Cap. 110 (“FAA”): (1) the exemption in Regulation 33 of the Financial

Advisers Regulations (“FAR”), which exempts SG from complying with Section 25 of the FAA on disclosure of product information to clients;

(2) the exemption set out in Regulation 34 of the FAR, which exempts SG from complying with Section 27 of the FAA on recommendations;

and (3) the exemption set out in Regulation 35 of the FAR, which exempts SG from complying with Section 36 of the FAA on disclosure of

certain interests in securities.

Notice to Hong Kong Investors: This report is distributed or circulated in Hong Kong only to “professional investors” as defined in the

Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (“SFO”). Any such professional investor wishing to discuss this

report or take any action in connection with it should contact SG Securities (HK) Limited. This report does not constitute a solicitation or an

offer of securities or an invitation to the public within the meaning of the SFO.

Notice to Japanese Investors: This publication is distributed in Japan by Societe Generale Securities Japan Limited, which is regulated by

the Financial Services Agency of Japan. This document is intended only for the Specified Investors, as defined by the Financial Instruments

and Exchange Law in Japan and only for those people to whom it is sent directly by Societe Generale Securities Japan Limited, and under no

circumstances should it be forwarded to any third party. The products mentioned in this report may not be eligible for sale in Japan and they

may not be suitable for all types of investors.

Notice to Korean Investors: This report is distributed in Korea by SG Securities Korea Co., Ltd which is regulated by the Financial

Supervisory Service and the Financial Services Commission.

Notice to Australian Investors: Societe Generale is exempt from the requirement to hold an Australian financial services licence (AFSL) under

the Corporations Act 2001 (Cth) in respect of financial services, in reliance on ASIC Class Order 03/824, a copy of which may be obtained at

the web site of the Australian Securities and Investments Commission, http://www.asic.gov.au. The class order exempts financial services

providers with a limited connection to Australia from the requirement to hold an AFSL where they provide financial services only to wholesale

clients in Australia on certain conditions. Financial services provided by Societe Generale may be regulated under foreign laws and regulatory

requirements, which are different from the laws applying in Australia.

Notice to Indian Investors: Societe Generale Global Solution Center Pvt. Ltd (SG GSC) is a 100% owned subsidiary of Societe Generale, SA,

Paris. Societe Generale SA is authorised and supervised by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and regulated by the

Autorité des Marchés Financiers (AMF). Analysts employed by SG GSC do not produce research covering securities listed on any stock

exchange recognised by the Securities and Exchange Board of India (SEBI) and is not licensed by either SEBI or the Reserve Bank of India.

http://www.sgcib.com. Copyright: The Société Générale Group 2018. All rights reserved.

This publication may not be reproduced or redistributed in whole in part without the prior consent of SG or its affiliates.


http://www.sgcib.com/

back to square one: looking for value after market correction · 6 april equity 2018 extract from a...

Documents