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Deutsche Bank Markets Research
Europe
United Kingdom
Metals & Mining
Industry
European-Listed Miners
Date
6 July 2016
Recommendation Change
3Q16 Outlook: Singin' in the rain
The Miners are beating the market's Brexit Blues
________________________________________________________________________________________________________________
Deutsche Bank AG/London
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.
Anna Mulholland, CFA
Research Analyst
(+44) 20 754-18172
Franck Nganou
Research Associate
(+44) 20 754-18161
Paul Young
Research Analyst
(+61) 2 8258-2587
Rene Kleyweg
Research Analyst
(+44) 20 754-18178
Key Changes
Company Target Price Rating
ACAA.L 470.00 to 500.00(GBP)
-
ANTO.L 470.00 to 585.00(GBP)
-
BLT.L 880.00 to 1,250.00(GBP)
-
BOL.ST 165.00 to 174.00(SEK)
-
FRES.L 970.00 to 1,020.00(GBP)
-
FXPO.L 105.00 to 115.00(GBP)
-
KAZ.L 170.00 to 163.00(GBP)
-
LMI.L 105.00 to 106.00(GBP)
-
NHY.OL 31.00 to 34.80(NOK)
-
NORDNq.L 4.60 to 4.90(USD) -
NYR.BR 9.80 to 10.18(EUR)
-
POLYP.L 780.00 to 820.00(GBP)
-
RIO.L 2,800.00 to 3,175.00(GBP)
-
RRS.L 6,700.00 to 7,100.00(GBP)
-
S32.L 74.00 to 100.00(GBP)
-
VED.L 375.00 to 615.00(GBP)
Hold to Buy
Source: Deutsche Bank
Top picks
Acacia Mining plc (ACAA.L),GBP497.60 Buy
Boliden AB (BOL.ST),SEK164.70 Buy
Rio Tinto (RIO.L),GBP2,326.50 Buy
Source: Deutsche Bank
The FTSE Miners are up 42% ytd, driven by a weakening USD, Chinese economic stimulus, speculative trading in commodities, and post-Brexit anticipation of global government stimulus and a flight to safety in terms of gold. The stocks have run ahead of the underlying commodities and the sector has re-rated to 0.96x NPV in line with its pre-2011 history. Despite this, FCF is healthy and growing and there is still value to be had: we like Rio Tinto (0.74x NPV, 3.5% 2016e divi yield), Acacia (7% 2017e FCF yield) and Vedanta (0.4x NPV). The outlook for commodity demand remains fragile for 2017 but we expect the sector to hold onto its gains this year.
2H16 potential stimulus but a lid on commodity prices throughout 2017 Whilst Brexit is supportive for gold (and other precious metals on its coat-tails), for the broader commodities we see a more balanced impact as the modest risks to global growth from reduced investment are offset by shallower revisions to the Fed Funds rate path, and hence, less potential for USD strength than we might otherwise have expected. We expect underlying commodity demand to stay strong in China throughout 3Q16 but for the credit cycle to roll over thereafter. This, coupled with our forecast strengthening of the USD into the end of the year and beyond, plus few further supply curtailments, will likely keep a lid of commodity prices on a 12 month view.
Commodity price forecast changes: up for 2016, down for 2017 Our commodity team has generally increased its forecasts for 2016: the main changes are oil and nat gas (+7%), iron ore and zinc (+12%), gold (+7%) and silver (+13%), offset by stronger-than-expected currencies (ZAR, NOK and SEK). For 2017, it’s more of a mixed bag: our forecasts move up for oil (+2%), nat gas (+14%), zinc (+13%), gold (+8%) and silver (+15%), but down for iron ore (-8%), aluminum (-4%), copper (-5%), nickel (-2%) and palladium (-8%).
Miners’ earnings changes: Up, not down! We have raised our 2016E and 2017E EBITDA across the sector by 8% and 1% respectively. Our NPV valuations has also increased, by 8% on average, and for GBP Target Prices we have moved our GBP/USD rate to reflect the post-Brexit level of 1.30, boosting those 12-month targets by 18% on average.
FCF healthy and improving, and some good dividend yields to be found What a difference a year makes: every stock under our coverage, except Lonmin, is generating FCF after sustaining capex this year. FCF yields for the sector now average 14% and 16% this year and next respectively. We highlight our top picks Rio Tinto, Acacia, Nordgold, plus Vedanta as yielding above 10% in 2017. Earnings cover of forecast 2016 dividends is now a healthy 2.7x and the weighted average 2016e divi yield is 2.7%. Rio tops the league with 3.5%.
We have upgraded Vedanta from Hold to Buy; top pick remains Rio Tinto We like Vedanta’s improving FCF through exposure to oil, zinc and silver. This report changes recommendations, TPs and estimates - see page 21 for details.
Transfer of coverage With this report we transfer coverage of the following stocks from Anna Mulholland to Franck Nganou with immediate effect: ACAA.L, NYR.BR, NORDNq.L, and POLYP.L; and coverage of LMI.L to Patrick Mann.
Distributed on: 07/06/2016 04:46:06GMT
6 July 2016
Metals & Mining
European-Listed Miners
Page 2 Deutsche Bank AG/London
Table Of Contents
Stimulus support for now .................................................... 3 Commodities rebound: Upgrading our valuations by 7% .................................... 3
Commodity review .............................................................. 8 Executive summary: No Brexit Blues ................................................................... 8 Energy: oil, nat gas, thermal coal ......................................................................... 9 Steel and steel-making commodities: steel, iron ore, coking coal .................... 11 Base metals: copper, nickel, aluminium, zinc, lead ........................................... 12 Precious metals: gold, silver, PGMs ................................................................... 15
Investment views and earnings estimates ........................ 21 Earnings changes ............................................................................................... 21
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 3
Stimulus support for now
Commodities rebound: Raising our valuations by 7%
Moving on from 1H16 commodity recovery, the fundamentals are OK for now
The FTSE Mining index rose 42% in the first half of the year, including a post-
“Brexit” boost of 16%, outperforming the overall market – the FTSE 250 is
down 6% - and the underlying commodities – gold is up 25%, iron ore 23%,
and the base metals index up 6%.
The mining equities’ outperformance was driven by a heady cocktail of:
(i) a weakening USD: the dollar went down 5% until 4 May;
(ii) Chinese economic stimulus: Total Social Financing was up 55%
year on year in 1Q16;
(iii) Trading and speculation in commodities: net shorts in copper on
the Comex reduced to zero by the end of March; and
(iv) Post-Brexit speculation of further global government stimulus, and
a flight to safety in terms of gold.
This in turn saw covering of short positions in some of the UK-listed mining
stocks as company cash flows were buoyed by the commodity price recovery.
Some miners felt flush enough to buy back their own bonds, whilst others
were successful in re-financing credit facilities. Four asset sales were
announced: Glencore is selling 49.9% of its Agricultural division, Anglo is
selling its Niobium and Phosphates business, Freeport agreed to sell its Tenke
copper mine stake, and Boliden bought the Kevitsa mine from First Quantum.
So, the mining stocks are up 42%, with a range of up 122% (Acacia) to down
7% (Norsk Hydro), for all the reasons listed above. But what about the
fundamentals? We have all become used to daily share price volatility but is
the rebound from the lows now cemented? We think yes, although the outlook
for commodity demand remains fragile on a 12-month view.
Our more positive view is supported by:
(i) our upgrade to earnings and
(ii) valuations,
(iii) our top picks offering good value in terms of free cash flow yield,
P/NPV and
(iv) in some cases dividend yields.
Taking each of these factors in turn:
6 July 2016
Metals & Mining
European-Listed Miners
Page 4 Deutsche Bank AG/London
We are raising our earnings estimates…
In this Commodity Review and Sector update, we are raising our 2016 and
2017 EBITDA across the sector by 8% and 1% on average.
In 2016 this is due to:
Upgrading oil and nat gas (7%), thermal (1%) and met coal (4%), iron
ore (12%), zinc (12%), gold (7%) and silver (13%) prices, plus a 3%
weaker forecast for the Australian dollar;
Offset by cutting our palladium (-4%) forecast, plus assuming a
stronger South African Rand (-3%), Swedish Kroner (-17%) and
Norweigan Kroner (-10%).
In 2017, our sector EBITDA increase is due to:
Upgrading oil (2%), nat gas (14%), met coal (2%), zinc (13%), gold (8%),
silver (15%), and platinum (13%) prices, and a 4% weaker Australian
dollar;
Offset by cutting our iron ore (-8%), aluminum (-4%), copper (-5%),
nickel (-2%) and palladium (-8%) forecasts, plus assuming a stronger
South African Rand (-6%), Swedish Kroner (-10%) and Norweigan
Kroner (-13%).
…And our valuations and Target Prices
We have increased our US$ NPV valuations across the sector by an average of
8% due to the commodity price and FX changes described - as shown in the
chart and table below.
Factoring in a weaker GBP/USD rate post-Brexit (1.30 compared to 1.60 used
previously), gives an extra boost to our GBP Target Prices – which are up an
average of 18%.
Figure 1: Average 8% uplift in NPVs; GBP target prices up 18% on average
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70% % chg in US$ NPV % chg in GBP TP
Source: Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 5
Figure 2: Detailed changes to our NPVs and Target Prices
NPV in US$ per share TP in GBP per share* Comments for TPs
Old New % chg Old New % chg
ACAA 5.76 6.11 6.1% 4.7 5.0 6.4% GBP/USD changed 28 June
ANTO 8.62 9.03 4.8% 4.7 5.9 24.5%
BHP 14.09 16.26 15.4% 8.8 12.5 42.0%
BOL 14.09 16.26 15.4% 160 174 8.7% In SEK
FRES 10.07 10.62 5.5% 9.7 10.2 5.2% GBP/USD changed 28 June
LMI 1.46 1.22 -16.4% 1.1 1.1 1.2%
KAZX 3.49 2.75 -21.2% 1.7 1.6 -4.1%
NHY 43.52 47.44 9.0% 31.0 34.8 12.3% In NOK
NORD 7.54 7.66 1.6% 4.6 4.9 6.5% In USD
NYR 8.82 10.18 15.4% 9.8 10.2 3.9% In EUR
POLYP 10.09 10.68 5.8% 780.0 820.0 5.1% GBP/USD changed 28 June
RIO 42.40 41.28 -2.6% 28.0 31.8 13.4%
RRS 72.20 77.00 6.6% 67.0 71.0 6.0% GBP/USD changed 28 June
S32 1.18 1.30 10.2% 0.7 1.0 35.1%
VED 8.73 13.71 57.0% 3.8 6.2 64.0% Source: Deutsche Bank estimates; *Unless stated
FCF generation continues to improve: 16% average FCF yield for 2017e
What a difference a year makes – every stock under our coverage, except
Lonmin this year, is generating Free Cash Flow after sustaining capex this year.
Free cash flow yields now average 14% and 16% this year and next
respectively.
In the chart below, we would highlight increasing FCF year on year at Boliden,
Norsk Hydro, Vedanta, South32, Nyrstar, Kaz Minerals and all the precious
metals miners under our coverage.
In terms of attractive FCF yields, that are above 10% in 2017e, we would
highlight our top picks Rio Tinto, Acacia Mining, Nordgold, and Vedanta – all
Buy rated – plus BHP Billiton, South32, Polymetal, Kaz Minerals and Nyrstar.
Figure 3: FCF generation and FCF yields, 2016 and 2017e
-15
-10
-5
0
5
10
15
20
25
30
35
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
%US$m
2016 FCF 2017 FCF 2016 FCF Yield (RHS) 2017 FCF Yield (RHS)
Source: Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 6 Deutsche Bank AG/London
Sector has re-rated strongly but we still see value in selective names
The sector is now trading on a P/NPV of 0.96x, having re-rated throughout the
first quarter commodity price recovery and again post-Brexit. Today’s level is
well above the average since the 2011 European (PIGS) crisis sell-off, and is
more in line with the historical average from 2000 to pre-China:
Figure 4: Sector has re-rated towards historical averages of 1x NPV
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Jan00 Jan02 Jan04 Jan06 Jan08 Jan10 Jan12 Jan14 Jan16
P/NPV Average +σ -σ +2σ -2σ
Source: Deutsche Bank estimates
The valuation of each stock is set out in the table below. All of the stocks
under our coverage are trading at par or at a discount to NPV, with the
exception of some precious metals stocks: Acacia, Fresnillo, Lonmin,
Polymetal and Randgold; and Boliden.
Figure 5: European metals & mining valuation table (Calendar year)
MCap P/E EV/EBITDA FCF Yield Div Yld P/NPV
Company Rec Price Target US$mn 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2016E Current
Acacia Mining plc Buy 464 500 2,554 nm 16.4 13.8 8.4 6.3 5.2 nm 3.8 7.2 1.0 1.11
Antofagasta PLC Hold 470 585 6,215 nm 51.4 24.4 13.7 7.6 6.4 nm nm 3.8 0.7 0.68
BHP Billiton Hold 940 1250 69,722 14.0 35.1 40.9 7.5 17.0 16.2 6.2 6.7 9.0 3.7 0.75
Boliden AB Buy 167.1 174 5,422 16.2 18.5 11.7 6.7 7.6 5.7 6.0 nm 6.4 1.8 1.15
Ferrexpo Plc Buy 34 115 260 3.5 1.8 6.8 4.0 2.7 4.3 22.0 78.7 29.3 0.0 0.21
Fresnillo PLC Sell 1760 1020 17,214 157.6 68.1 44.9 15.1 19.5 15.1 0.9 0.7 2.5 0.7 2.15
KAZ Minerals PLC Hold 132 163 792 nm 11.5 7.4 13.8 12.4 6.5 nm nm nm 0.0 0.65
Lonmin Plc Sell 211 106 700 nm nm nm nm nm 3.5 nm nm nm 0.0 2.29
Nordgold N.V. Buy 3.49 4.90 1,311 5.8 10.4 8.5 3.1 4.0 2.7 18.8 nm 17.7 3.2 0.45
Norsk Hydro ASA Hold 31.59 34.8 7,718 10.8 20.5 23.4 4.3 4.9 4.6 12.7 nm 4.7 2.4 0.84
Nyrstar NV Hold 8.76 10.18 1,291 nm 77.4 4.3 22.9 5.8 2.3 nm nm 38.6 0.0 0.59
Polymetal International Hold 1059 820 5,971 14.8 13.6 12.3 7.2 8.5 6.8 8.1 4.8 13.3 2.2 1.68
Randgold Resources Hold 8775 7100 11,005 34.0 42.5 31.2 18.8 21.0 16.0 2.1 2.0 2.2 0.6 1.48
Rio Tinto PLC Buy 2345 3175 56,159 16.0 15.7 16.9 7.6 6.4 6.5 3.3 10.2 5.9 3.5 0.74
South32 Hold 90 100 6,360 nm 43.2 52.4 nm 5.3 5.3 nm 10.6 8.4 0.2 0.90
Vedanta Resources PLC Buy 433 615 1,585 nm nm nm 6.6 9.0 8.0 NM NM 37.5 4.6 0.42
Weighted Average 196,516 27.7 31.5 29.8 8.8 12.3 11.1 4.4 6.1 7.2 2.7 1.00 Source: Deutsche Bank, Company data, Priced 03th JUL 2016
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 7
Brexit Bonus for 2H16: dividend yields boosted
As shown in the table below, we forecast the majority of the companies we
cover to generate free cash flow post paying dividends in 2016 (the outliers are
spending on completing projects or paying for assets in the case of Boliden).
And in 2017, all of the companies we cover should generate free cash flow in
2017 post dividends excepting KAZ Minerals.
Figure 6: Gearing and cash positions for the miners
Gearing - ND/(ND+E) EBITDA/ND FCF (USD mn) FCF - post Div (USD mn)
2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017
Acacia Mining -0.06 -0.12 -0.22 -1.66 -1.64 -0.99 -37 96 183 -54 79 158
Antofagasta 0.06 0.07 0.05 1.67 1.71 2.96 -734 -149 231 -941 -151 222
Boliden 0.16 0.28 0.21 1.50 0.72 1.18 2589 -3874 2927 1974 -4626 2106
BHP Billiton 0.26 0.27 0.23 0.76 0.16 0.67 7671 5144 6757 1173 1024 5406
Ferrexpo 0.78 0.65 0.60 0.36 0.45 0.29 107 205 76 29 205 76
Fresnillo 0.15 0.13 0.03 1.24 2.40 14.21 74 123 425 37 57 277
KAZ Minerals 0.87 0.88 0.86 0.09 0.08 0.16 -1255 -586 -303 -1255 -586 -307
Lonmin 0.11 -0.06 -0.08 -0.28 -0.92 -0.70 -148 -83 28 -167 -83 28
Norsk Hydro -0.07 -0.04 -0.06 -2.59 -3.84 -2.33 9241 -1535 3009 6871 -3577 1477
Nyrstar 0.54 0.31 0.12 0.35 0.71 3.23 -502 -11 317 -502 -10 317
Nordgold 0.36 0.40 0.29 1.04 0.69 1.27 191 -6 232 132 -88 189
Polymetal 0.75 0.59 0.29 0.46 0.71 1.92 285 289 793 -15 173 654
Randgold -0.07 -0.10 -0.14 -1.59 -1.49 -1.37 134 212 243 85 127 144
Rio Tinto 0.24 0.20 0.18 0.83 0.99 1.07 2366 5709 3308 -1710 3047 1264
South32 0.04 -0.01 -0.06 4.60 -13.59 -2.23 1209 466 598 1209 466 531
Vedanta 0.41 0.52 0.42 0.44 0.32 0.43 -124 1203 443 -635 766 6
Source: Deutsche Bank…. *FCF values for NHY, NYR & BOL in NOK m, EUR m & SEK m respectively
With smaller companies having abandoned dividends in the downturn, and the
“Big 4” Miners having cut or rebased to payout policies, earnings cover of
forecast 2016 dividends is now a healthy 2.7x and the weighted average 2016e
yield is 2.7%. We highlight Rio as our top pick with a 3.5% yield:
Figure 7:Average 2016e dividend yield of 2.7% and earnings cover of 2.7x
3.5
3.2
2.5 2.4
2.1
1.8
0.90.7 0.7 0.6
0.4
0.0 0.0
2.7
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2016e Dividend cover (LHS) 2016e % divi yield (RHS)
Source: Deutsche Bank estimares
6 July 2016
Metals & Mining
European-Listed Miners
Page 8 Deutsche Bank AG/London
Commodity review
Our commodity strategists have released their 3Q16 Commodity Update this
morning (“Sniffing out the Stimulus”, Sporre, Hsueh, 6 July 2016). The changes
to our commodity and FX forecasts are summarised in Figure 8 to Figure 12
below.
Executive summary: No Brexit Blues
Brexit has struck a blow to confidence in the market’s ability to price political risks insofar as the pound sterling moved from 50-50 odds to nearly 100% certainty in a Remain vote just prior to the results (using a 1.30-1.50 notional range), with similar moves in the FTSE.
Among commodities the impact is likely to be the strongest for gold as equity and rates markets price lower, the dollar sees a less constructive monetary policy climate, and fund inflows stand at the highest annualized rate on record (since 2004).
For the broader commodities sector as a whole we see a more balanced effect as the modest risks to global growth from reduced investment (with 2017 marked down from 3.6% to 3.4%) are offset by shallower revisions to the Fed Funds rate path, and hence, less potential for dollar strength than we might otherwise have expected.
We expect the crude oil market to remain near US tight oil breakevens through next year, holding US production unchanged in 2017 as world inventories begin to draw down. The steady process of fundamental tightening is well underway with 32% lower global upstream capex since 2014 driving a slower pace of commissioning in Brazil, lower contractor budgets in Iraq, less enhanced oil recovery in China, and growing risks in Venezuela. In addition, the current year’s balance is considerably helped along numerous unplanned outages, US oil production down by 1 mmb/d from the peak, and higher revised demand in the US and India.
A pronounced slowdown in US natural gas production and heightened utility demand will bring inventories fully in line with historical averages by early next year, in our view. Although we see a modest deficit next year, pipeline project completions in 2018 threaten to unlock a large volume of Northeast production which is economic near USD 3/mmBtu, limiting price gains much beyond that level.
Thermal coal is seeing the first glimmerings of a recovery on the back of Chinese policy pushing domestic raw coal production 13% lower. An incipient surge to domestic Chinese coal prices will mean an improving backdrop for seaborne imports which now stand unchanged yoy and will likely grow in H2. The duration of this policy may well determine whether the longer-term global demand challenge remains for this market
Michael Hsueh, (44) 20 754 78015 [email protected]
Grant Sporre, (44) 20 754 58170 [email protected]
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 9
On each of the main commodities, our summary views are as follows:
Energy: oil, nat gas, thermal coal
Crude oil: Smaller surpluses
Crude oil markets are showing smaller surpluses and drawing close to a
midpoint in a multi-year period of adjustment. We also see 2018 as the
year when marginal non-OPEC sources of production are once again called
upon to deliver new volume growth, with prices rising towards the
incentive cost of marginal offshore projects at US$70/bbl Brent. Versus our
previous model we now see 2017-18 balances tighter by ~300 kb/d.
We believe a US$55/bbl Brent average is consistent with 2017 non-OPEC
supply declining by -130 kb/d led by the US (-150 kb/d), Mexico (-100 kb/d),
the North Sea (-70 kb/d) and China (-40 kb/d) offset by growth in Canada
(+180 kb/d) and Russia (+70 kb/d). This follows a much larger-than-
expected decline in China this year of -230 kb/d as a result of lower
spending which raises the non-OPEC decline to -880 kb/d this year.
Our view of OPEC production in 2017 is unchanged at 33.1 mmb/d, which
would represent annual growth of +500 kb/d over H1-16 and +375 kb/d
over the 2016 annual average. We see limits to Iranian growth much above
3.8 mmb/d, lower budgets in Iraq and faltering production in Venezuela
balanced by an eventual recovery in Nigeria in 2017 and modest growth in
Saudi Arabia with new projects.
Versus the start of the year we see significantly improved demand growth
this year from the US owing to strong growth in miles traveled lifting
gasoline demand, thereby raising our demand growth expectation from
zero at the start of the year to +214 kb/d.
We still expect China to drive the largest share of global oil demand
growth this year with at least +350 kb/d on the basis of continued vehicle
sales growth, a boost in construction activity, and recovering chemicals
production. While Indian apparent demand has recovered after a weak
January with vehicle sales averaging 11% growth ytd, surpassing last
year’s 4% growth, risks to our +300 kb/d assumption are to the downside.
Our 2017 supply-demand outlook includes US production declining by -
150 kb/d in 2017 composed of a tight oil decline of -480 kb/d offsetting
GoM growth of +90 kb/d and NGL growth of +240 kb/d as ethane demand
and prices rise. We expect that US tight oil producers will take a measured
approach to investment programs in the rising but still uncertain price
environment as they strive for a better balance between capex and cash
flow and focus on higher quality assets.
The depth of upstream spending cuts is on par with that experienced in the
decade after 1977. With an average lead time of at least two years
between first spend and production, a prolonged period of reduced
investment raises the possibility of a supply gap in future years. Over and
above known probable projects we estimate other new sanctioned
developments will need to contribute a further 8 mmb/d of supply by 2023.
Risks over the next twelve months include the possibility that the US dollar
may become a headwind as the medium-term dollar up-cycle makes a final
leg higher, although this now appears less likely following the Brexit
referendum. In the event that the Fed funds rate reaches 1% or above in
2017 the USD will become a high-yielding currency which has been
associated with significant dollar rallies, according to DB FX research.
6 July 2016
Metals & Mining
European-Listed Miners
Page 10 Deutsche Bank AG/London
US natural gas: Strong burn
The US natural gas market is well on its way towards eliminating what
began as a very difficult situation at the start of this year with a storage
surplus versus the five year average peaking at 17.1% in late March.
Summer storage builds have been slower than normal, with the last
week’s data running below our expectations owing to an increase in utility
demand. As of 24 June the surplus had declined to 9.6%, propelling spot
Henry Hub from US$1.94/mmBtu at the end of March to US$2.88/mmBtu.
The progress of storage normalization is on a par with the 2012 precedent,
implying some further upside to prices over the balance of the year as a
tighter-than-expected supply picture continues through the end of the year.
Versus our Q1 expectation, 2016 supply-demand may be tighter by 0.2
bcf/d as much higher utility demand and falling dry gas production offset
slower-than-expected growth in the industrial sector.
Northeast infrastructure expansions from Dec ’16 to April ‘17 will facilitate
only modest production increase from the region given pipeline delays,
despite a broad swath of supply economic at and just below USD
3/mmBtu. Declines in the Eagle Ford and in associated gas output will
likely leave the market slightly short of sufficient new supply in 2017.
Utility demand is benefiting from (i) gas-fired powerplant commissioning
and coal-fired powerplant shutdowns, (ii) improved economics compared
to coal, and (iii) hotter than normal summer weather, partly making up for
the loss of residential and commercial demand from last winter.
However, next year’s utility demand may be harmed by a narrowing of the
gas-coal generation spread which we believe could weaken utility demand
even as additional new gas-fired capacity comes online, resulting in utility
demand contraction of -0.7 bcf/d.
We still expect 2017 demand to grow overall by +1.4 bcf/d as industrial
capacity expands by +0.5 bcf/d for ethylene and methanol production,
Sabine Pass Trains 3 & 4 are commissioned and Trains 1 & 2 produce for a
full year, and residential and commercial demand recover from a below-
normal year.
We raise Q3/Q4 Henry Hub by 16% to US$2.73/2.88/mmBtu to reflect
faster storage normalisation and 2017 by 14% to USD 3.13/mmBtu as
production may lag demand. Following Josh Silverstein’s FITT report (“A
Circular Reference”) however, we note a supply wave in 2018 appears
likely based on pipeline completion schedules. Although we believe further
regulatory and environmental delays are likely, the potential exists for
excess supply growth and market surpluses. Therefore we lower our 2018
forecast to USD 3.01/mmBtu.
Thermal Coal: Climbing out of a hole? Thermal coal prices have risen substantially beyond what might be
regarded as a typical post-winter restocking cycle, driven by Chinese policy to reduce domestic output and a higher Indian appetite for both South African and Colombian exports.
The threat of Chinese government efforts to rationalize coal supply now appears both more real and quantifiable as April/May production has fallen by 33mt/month compared to April/May averages in the previous three years.
Higher China domestic coal prices later this year will mean that seaborne exports from Indonesia and Russia would gain a greater advantage for delivery to Guangzhou over domestic coal from Qinhuangdao. This raises our forecast for Chinese imports from 117mt to 162mt as well as the Newcastle benchmark to US$55/t in Q3-16 and US$57/t in Q4-16. We see
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Richards Bay being much less advantaged but still higher than previously forecast at US$51/t in Q3-16 and US$55/t in Q4-16.
We expect that prices approaching RMB c.500/t towards the end of the year would result in both a measurable policy success as well as industry pressure on the government to relax restrictions. This leaves our 2017 forecasts only modestly higher.
Indian imports rose in April recovering from earlier declines, as Coal India production fell seasonally and warmer-than-normal weather drove electricity demand higher, raising March-May generation by 10.2% yoy. Although domestic production tends to remain low through the monsoon, the Q3 lift in hydro output (particularly in the event of a shift to La Niña) may alleviate the import surge.
Indian policy now requires competitive bidding for coal linkage supplies to non-power consumers. This change along with a 10-day July maintenance window for the Transnet rail line feeding Richards Bay Coal Terminal may explain the higher South African premium to Newcastle.
The longer term outlook for Chinese seaborne coal imports remains weak owing to slower headline economic growth, a lower coal-demand multiplier as growth is driven less by power-intensive manufacturing, and more by interior provinces where seaborne coal is at a transport disadvantage, particularly after rail rate reductions. We also note efficiency improvements in generation and distribution infrastructure.
Japan, Korea, Taiwan and Southeast Asian markets will provide the incremental seaborne demand tonne for the foreseeable future but may struggle to offset further contraction in China and Europe.
Steel and steel-making commodities: steel, iron ore, coking coal
Steel: As good as it gets? Global steel output is down 2.2% year on year for the first five months of
the year. This makes our forecast of +1.2% for the full year look somewhat optimistic. However, May’s data did show some signs of encouragement with Europe, the US, and India all picking up by 3 – 8% month on month. The key region remains China, where we have upgraded our production forecasts to +1.7% on the back of better property starts, and strong momentum in infrastructure spending. We forecast the Chinese credit impulse to ease into the second half of the year, but for now credit creation remains strong, especially when government bonds are included in the total social financing (TSF) number. However, as the credit impulse turns negative in H2’16, we expect the property market sales to move into negative territory and for new starts to follow. Infrastructure spend is unlike to register another year of growth, and hence we expect global steel output to turn negative in 2017.
Iron ore: A challenging outlook for 2017 Iron ore prices have stabilized in the low US$50/t range, and given the six
month historical lag between the peak in the credit cycle and iron ore prices combined with the recovery in steel prices, we think that iron ore may hold onto these levels for another quarter at least. However, capacity restarts from the “non-traditional” suppliers, especially India as highlighted by the latest China import stats, will start to weigh on prices by year end. The ramp up of new capacity from the big producers continues in earnest in 2017, which will displace higher cost output in 2017. This will only happen if prices fall to the low US$40/t’s for an extended period in our view.
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Coking coal: China 276-day policy dominates Coking Coal prices have responded not only to the improving steel outlook
in China, but also to the 276-day working policy imposed on the Chinese coal industry. So far, the policy is being imposed across all mines, both low and high cost ones indiscriminately, which is likely to cut Chinese coking coal output by 10 – 15%. We think this policy is unsustainable, and will ultimately make way for a more long lasting solution to “supply side reforms”. As a result of this policy, we expect Chinese coking coal imports to increase back to 2014 levels, an additional 18 – 20mt over 2015. However, new supply and restarts in Australia and elsewhere could make up some of the deficit, hence our base case pricing scenario is for gradually rising prices. We acknowledge however, that if the policy is enforced for an extended period of time, there are short term upside risks to our forecasts.
Base metals: copper, nickel, aluminium, zinc, lead
Copper: Oversupply persists…for now
Not a lot is going well for copper at the moment. Just when you need
“unplanned outages” as we have in the oil market, the mining industry
gets its act together. We are on track to register one of the lowest
disruption allowances over the past ten years. The Chinese grid is nearly
20% of global copper demand, making it the largest single component.
Although we think grid spend will be up this year, the focus remains on
the UHV transmission and rural distribution which has a lower copper
intensity than the average grid investment dollar. As a result, we estimate
two more years of significant surpluses, with prices remaining under
pressure.
Mined supply has been surprisingly strong this year with limited
disruptions. We estimate that the disruptions year to date are running at
225kt, or just under 500kt on an annualized basis, which is well below the
average of 900–1000kt. As a result, we have downgraded our disruption
allowance from 800kt to 600kt for 2016, whilst maintaining our 2017
disruption allowance at 1.1Mt. Over and above the lower than expected
disruption allowance, the copper market still has two years of supply
momentum with the tail end of the GFC disrupted capex cycle, playing out
over 2016 and 2017. There are four mines that add 900–1000kt of copper
into the market in 2016.
Refined copper imports into China have started the year at a blistering
pace, translating into an apparent demand of 14% YTD. This is well ahead
of any reasonable demand growth rate and looks like an extended
restocking cycle to us. The risk for the second half of the year is that China
may start a destocking cycle. Over the next two years, Chinese grid spend
is more focused on the UHV transmission projects and rural distribution,
which are more aluminium focused. Copper demand from the rise in EVs is
unlikely to be a game-changer, and we estimate c.600ktpa additional
copper demand from 2025 onwards, although we concede that estimating
additional grid capacity is challenging.
Although the current focus of the Chinese grid spend is on the UHV grid
and rural infrastructure, 2016/17 is likely to be the peak years, thereafter
the focus turns back to distribution and the urban areas. The upturn in
copper spending on the grid will in our view ensure that Chinese copper
demand and hence global demand stays in positive territory. Likewise the
lack of capex investment should see limited mined supply growth post the
2017 time horizon. The combination of positive demand growth and
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limited new supply results in growing defect from 2018 onward, but is
dependent on having Chinese demand growth at +2% pa.
Nickel: Stalemate
Nickel prices have recovered by 20% since the lows in February, and yet
60% of the industry remains under water. Even if we adjust for the
potential that Chinese NPI producers have a cost benefit not captured by
the cost curve analysis, by being integrated with the stainless steel
production, at least a third of the industry remains loss-making. Still, the
barriers to exit remain high, which puts the industry at a bit of a stalemate.
Ultimately we think that there will need to be more closures. Stricter
mining policies in the Philippines could be a catalyst, but we would look
for declining NPI output even in the face of rising prices to confirm that the
Philippine ore availability is indeed a constraint.
Chinese stainless steel production has picked up and is on course to be up
c.6 – 7% for H1. The increase is output is only part driven by improving
demand. A fair proportion of the increase is due to restocking and the
emergence of new entrants. We forecast Chinese stainless steel to be up
4% in 2016E, which still implies a slowdown in H2. The increase in
Chinese stainless steel has been accompanied by an increase in NPI output,
with April’s output up 16% month on month, in a repeat of last year’s
pattern. The sharp decline in Philippine ore exports has had no effect on
output, which is unsurprising given that ore stocks remain above critical
levels. We continue to forecast NPI output to be down in 2016; however
output will have to fall in H2 to meet this forecast.
We continue to forecast deficits in the nickel market over the next three
years, but given the combination of latent capacity, especially in Chinese
NPI, and the large visible inventories, price rallies may be short lived.
Inventories will be drawn down over time, which should see prices
squeeze higher, but for now we forecast Nickel prices will ease above
US$10,000/t, rising to an average of US$10,500/t in Q4 which is when we
see the probability of further closures rising.
Aluminium: Overcapacity is tough to shift China is likely to remain a net exporter of aluminium to the rest of the
world. In part this is justified by the technological and efficiency gains the country has made over the past ten years. However, power is now abundant after years of capacity expansion to the extent that energy is now being exported in the form of aluminium. This is not permanent but whilst local governments continue to provide subsidized power, Chinese latent capacity will continue to keep a lid on prices. In our assessment this will keep the market modestly oversupplied in the medium term. A weakening RMB simply makes the Chinese industry even more competitive, and is a key downside risk to LME prices.
The demand outlook remains decent for aluminium. Yes, demand growth is likely to slow from current levels, as China transitions away from the FAI heavy growth model. Demand growth from 2000 to 2015 was 5.3% CAGR, with growth likely to slow to 3.2% CAGR over the next 10 years. Although growth is slower, this is better than the 2.8% CAGR from 1985 to 2000, and certainly beats demand growth in the other metals. The regions contributing to strong demand are India, China and the US. In China, UHV and rural electrification projects, combined with strong Auto output is the main driver over a two year period. However, a temporary resurgence in the building and construction sector should push 2016 demand growth above that of 2015.
As we have learnt from both the Chinese steel and aluminium industry, when there are profits to be made, reform is quickly pushed aside. After
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the domestic price recovery, most of the Chinese aluminium industry is now profitable. We estimate that at least quarter of the capacity that was shut during late 2015 (1 – 1.2Mtpa) is likely to be restarted by the end of 2016. That’s not including new, low cost and efficient capacity which will continue being added over the course of 2016 (another 3 – 3.2Mtpa). We forecast the flexible latent capacity in China to keep the market in a surplus, capping the upside on the Chinese domestic price, and ultimately the LME price through increasing semi’s exports.
The willingness of local governments to subsidize power for domestic smelters, combined with a trough in coal and alumina pricing means that the aluminium market remains in the throes of deflation. We expect these deflation pressures to ease, but given the continual efficiency gains there is always going to be a deflationary bias to the metal. The tipping point for restarts seems to be around RMB11,500/t which equates to an LME price of c.1,575/t at the current RMB exchange rate. However an RMB closer to 7, could drag the equivalent price down below US$1,500/t.
Zinc: Long positioning reflects the fundamentals
Zinc’s fundamentals certainly warrant the price performance or rather
price recovery this year. We forecast another deficit year in the order of
400kt. Furthermore this will be the 5th year of oversupply, with the
estimated deficits now equaling 1.8Mt versus the 2.8Mt of accumulated
surpluses from 2008 to 2011. There are undoubtedly “hidden” stocks, but
not to the same extent as some of the other base metals.
Spot TC terms have tightened up, and ongoing contract negotiations all
point to a tighter concentrate market. However the tightness in the refined
metal market may take a quarter or two to manifest itself, with signs of
tightness in the metal market less convincing. Regional premiums have
eased higher, although not convincingly so. Likewise visible inventories
have been relatively stable over Q1, with the sudden inflow on the LME in
mid 2015 now fully reversed. After a brief period of backwardation the
spot to 3-month spread has slipped back into contango. Until such time as
the metals signs become more convincing, the metal may still be held
hostage to the fortunes of investor sentiment.
We forecast an improving demand growth picture in 2016 onwards,
recovering from the low of 0.7% in 2015. Improving Chinese demand and
a rebound in US demand should see demand growth rebound to 2.5% in
2016E and 2.2% in 2017. This is below trend of the past few years, but
simply put, we think it unlikely that demand growth in Zinc can outstrip
the demand growth forecasts from the other base metals by a big margin,
given the overlapping demand drivers. As a consequence, we think it is
unlikely that zinc will outperform the other base metals much more than
the current 15 – 20% in our view, and thus we remain skeptical that there
will be an extended period of prices above US$2,500/t.
The second key risk to zinc’s bull case is Chinese mined supply. Official
statistics would suggest that Chinese mined supply has contracted by 9%
in 2015, due to a combination of depleting reserves, environmental
scrutiny and price induced shuts. The recent recovery in pricing may spur
some restarts, but we think this is unlikely. We forecast a conservative
increase in production of 3.8% in 2016 and 4.9% 2017E. Visibility on the
price sensitivity for restarts or the acceleration of projects is limited,
especially when compared to aluminium. However, we expect an increase
in Chinese mined supply, the longer prices remain above RMB16,000/t.
Lead: Weighed down by the lightest of metals Ironically, lead’s performance has been weighed down by one of the
lightest of the periodic table’s metals, lithium. Lead has lagged the other
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base metals so far this year, down by 5% year to date, in contrast to sister metal zinc which is up by 27%. Despite having decent fundamentals in the form of the same supply squeeze as zinc and decent demand, lead has de-rated versus zinc. Lead was trading above zinc in Q1 2016, but currently the Pb/Zn ratio has hit a low of 0.82.
Lead fundamentals remain supportive, with modest deficits (100kt) over the next two to three years. Although US, European and Chinese auto sales remains robust, the slowdown of Chinese battery demand from the maturing e-bike market has continued to weigh on demand. Adoption of alternate, cleaner and more efficient battery technologies (Li-ion in EV and ebikes) is a threat to lead’s long term fundamentals. It is this longer term trend that has weighed on sentiment leading to the significant under performance. Slowing mine production from China, Europe and Australia will however keep a balanced to slight deficit in the near-term, and as a result we think lead looks oversold in the near term.
Precious metals: gold, silver, PGMs
Gold: another step in favour of gold Brexit has struck a blow to confidence in the market’s ability to price risks,
political and otherwise, insofar as the pound sterling moved from pricing in 50-50 odds to nearly 100% certainty of a Remain vote just prior to the results (using a 1.30-1.50 notional range), with similar moves in the FTSE.
Precious metals are likely to derive the strongest benefits from this change to the outlook for financial markets as equity and rates markets incorporate more uncertainty, the dollar sees a less constructive monetary policy climate, and fund inflows stand at the highest annualized rate on record (since 2004).
Stagnant trend GDP growth in the US is largely a function of lower productivity growth compared to previous business cycles. This, together with an aging population which could further weaken employment per capita, and likely investor demand on the long-end of the curve in the event of data disappointments, leads to our lower 10Y Treasury rate forecast to average 1.25% over H2-16, down from 1.75%.
This runs in line with dovish tendencies at the Fed, which has moderated its forward rate expectations through 2018 by 40 bps while leaving economic projections of GDP growth and inflation unchanged, i.e., softening the Fed’s reaction function.
A lack of policy response to Brexit to mitigate downside risks suggests that the next >5% move in the S&P is more likely to be down than up, according to DB US Equity Strategy, and we lower our end-2016 and 2017 S&P targets by 50 points to 2,150 and 2,350.
All of this translates into falling real rates and a rising equity risk premium, both strong financial drivers for a constructive precious metals environment. We raise our gold price expectations for 2016 and 2017 by 7% and 8% to reflect the likelihood of a stalled normalization of US monetary policy as well as a turn in investor sentiment reflected in the first year of positive ETF inflows since 2012 when the Fed’s last round of quantitative easing began.
Risks to the outlook stem from the possibility that even at a shallower Fed funds rate path below the central policy projection, the US dollar could become a high-yielding currency by the end of 2017. This is a condition which is reliably associated with dollar rallies.
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Silver: The re-rating versus gold has further upside The conditions for silver to continue its current momentum and continue
its “rerating” path versus gold remain favourable. The expectation of easier monetary conditions for longer, as central banks try to mitigate the impact of a Brexit vote is good news for non yielding assets such as gold and silver. As a late cycle precious metal play, the more comfortable investors become in holding gold, the more likely silver will continue to outperform.
The June US ISM at 53.2, hit its highest level since February last year, also making it the sixth month in a row for an improvement. Due to silver’s relatively high proportion of industrial demand, the expectation of improving growth is a favorable environment for silver to rerate versus gold.
Even at the current silver price of USD20.3/oz, the gold : silver ratio of 66x, is still at the average during the period from 1983 – 2003, a bear market for precious metals. At the more recent average ratio of 61x (from 2003 onwards, a gold price of USD1,350/oz would imply a silver price of USD22.10/oz. For silver to continue performing, we would need to see the US ISM maintain its momentum. A faltering US economy is the main risk to silver continuing to rerate.
PGMs: The demand pull is just not strong enough…… and Brexit is unhelpful
We retain our view that platinum fundamentals (especially the demand
side of the equation) are not strong enough to pull clear of the influence of
the South African Rand, and gold. What’s changed post the Brexit vote?
Prior to the Brexit vote, we thought that the fundamentals were improving,
with robust European vehicle sales and increasing safety related stoppages
in the South African mining industry resulting in a modest deficit market
(pre any inventory changes to account for investor buying). We thought
that platinum could re-rate versus gold, possibly clawing back some of the
discount.
The Brexit vote has, in our view, limited any chance of a platinum re-rating. Firstly, the rising uncertainty may impact future European vehicle sales, and as a significant trading partner to South Africa, a weaker Euro may lead to a weaker Rand, both negatives for platinum. On the opposite end of the spectrum, buying of gold as a safe haven will keep some upward tension in platinum prices. Our view is that platinum prices may not fall that much from current levels, but the price discount between gold and platinum will certainly be stretched.
We expect the Rand-PGM basket price to continue to track marginal costs of production until 2021 as we see the market as relatively well-supplied/balanced until then. We also believe the current price is not low enough to force production curtailments. The producers are managing the production base to be cash-flow positive, in our view, and most production is marginally (0-10%) cash flow positive after SIB capex. We believe that unit cost increases at the top-end of the cost curve will remain below mining-inflation until 2019-2020, owing to the strategy of the two significant high-cost producers - Impala Lease which will continue to develop two new shafts and lower unit cash costs, and Lonmin, which in our view is surviving through unsustainably low capex.
On the face of it, palladium should be performing a lot better than it has year to date given our forecast deficit of 1.3moz. However, there are a number of headwinds impacting the metal over the near to medium term. The latest of these headwinds is the Brexit vote where palladium’s exposure to Europe is nearly as high as platinum. A plateau in US Auto sales looks likely and, whilst we do not forecast a sharp decline, the potential for lower US Auto sales remains an overhang. China remains a key demand driver, and here too the spectre of an accelerated uptake of
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electric vehicles has dampened sentiment. Palladium is currently being considered as an industrial metal and, unlike silver where the gold : silver ratio is well above the average, the palladium : platinum ratio is well below the average. Investor positioning reflects these headwinds in our view, and we think there is good value in the metal below US$550/oz.
The changes to our commodity and FX assumptions are summarised in the
tables below:
Figure 8: New price estimates – Base metals & Precious metals
Unit 1Q16 2Q16 3Q16 4Q16 2016 2017 2018 2019 2020 2021
Base Metals
Aluminium USc/lb 68.7 71.2 69.4 70.3 69.9 69.6 71.2 77.5 83.7 90.0
Copper USc/lb 212.3 213.2 199.6 208.7 208.5 203.0 227.9 252.8 277.7 302.6
Lead USc/lb 78.9 78.5 79.4 78.9 78.9 78.9 74.9 76.0 77.1 78.3
Nickel USc/lb 386.0 397.0 408.3 453.7 411.3 453.7 499.1 579.0 658.8 738.7
Tin USc/lb 703.3 771.3 748.6 748.6 743.0 782.7 794.8 807.0 819.1 831.3
Zinc USc/lb 76.5 86.2 90.7 99.8 88.3 93.0 95.3 100.2 105.1 110.0
Base Metals
Aluminium USD/t 1515 1570 1530 1550 1541 1535 1570 1708 1846 1983
Copper USD/t 4678 4700 4400 4600 4595 4475 5023 5572 6120 6668
Lead USD/t 1740 1730 1750 1740 1740 1740 1650 1675 1700 1725
Nickel USD/t 8508 8750 9000 10000 9064 10000 11000 12760 14521 16281
Tin USD/t 15500 17000 16500 16500 16375 17250 17518 17785 18053 18321
Zinc USD/t 1685 1900 2000 2200 1946 2050 2100 2208 2316 2423
Precious metals
Gold USD/oz 1184 1255 1330 1350 1280 1328 1310 1340 1370 1400
Silver USD/oz 14.9 16.6 18.3 18.7 17.1 18.2 18.0 18.5 19.0 20.5
Platinum USD/oz 917 1000 980 1020 979 1003 1050 1200 1250 1420
Palladium USD/oz 527 568 550 580 556 605 700 750 800 850
Rhodium USD/oz 672 700 650 720 686 724 750 850 900 1100
Ruthenium USD/oz 42 42 42 42 42 50 70 80 90 100
Source: Deutsche Bank
Figure 9: New price estimates – Steel making raw materials
Unit 1Q16 2Q16 3Q16 4Q16 2016 2017 2018 2019 2020 2021
Iron ore
CIF China fine ore USD/t 48.7 55.0 50.0 44.0 49.4 42.0 45.0 49.3 53.7 58.0
Coking Coal
Premium hard coking USD/t 81.0 84.0 92.5 90.0 86.9 89.3 95.0 106.0 116.9 127.9
Standard hard coking USD/t 70.8 73.4 80.9 78.7 75.9 78.0 83.0 92.6 102.2 111.8
Semi soft coking USD/t 66.0 76.0 73.0 69.0 71.0 74.1 77.7 87.2 96.7 106.3
Other Bulks
Chrome Ore USD/t 230.00 230.00 230.00 230.00 230.0 230.0 230.0 230.0 233.5 237.0
Ferro-chrome USc/lb 125.0 125.0 125.0 125.0 125.0 120.0 115.0 110.0 111.7 113.3
Manganese ore USc/dmtu 2.4 3.8 3.0 3.0 3.1 2.8 2.9 3.0 3.1 3.2
Ferro-manganese USD/t 964 964 979 979 971 1,001 1,037 1,026 1,012 1,036
Source: Deutsche Bank
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Figure 10: New price estimates – Minor metals, Energy & Fx
Unit 1Q16 2Q16 3Q16 4Q16 2016 2017 2018 2019 2020 2021
Minor metals
Cobalt (99.3%) USD/lb 13.0 13.0 12.5 12.0 12.6 12.0 13.0 11.8 10.6 10.8
Molybdenum USD/lb 5.42 6.90 6.80 6.50 6.40 6.58 6.80 7.28 7.75 8.23
Energy
Oil West Tex USD/bbl 33.6 45.8 47.0 48.0 43.6 53.0 65.0 65.0 66.0 67.0
Japanese thermal coal USD/t 67.8 61.6 61.6 61.6 63.2 58.9 58.0 60.0 62.0 58.8
Uranium (U3O8) USD/lb 55.00 58.00 58.00 58.00 57.25 59.49 62.05 64.22 64.54 66.00
Foreign Exchange
Euro USD/EUR 1.10 1.13 1.09 1.07 1.10 0.98 0.95 1.05 1.10 1.10
Australia USD/AUD 0.723 0.746 0.729 0.714 0.728 0.686 0.675 0.696 0.718 0.739
South Africa ZAR/USD 15.62 15.13 15.56 15.51 15.46 15.77 14.92 13.41 13.21 14.75
Source: Deutsche Bank
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Figure 11: Changes from previous forecast
1Q16 2Q16 3Q16 4Q16 2016 2017 2018 2019 2020 2021
Base Metals
Aluminium -1.6% 0.6% 0.0% 2.0% 0.2% -3.8% -7.7% -5.4% -3.4% -1.6%
Copper 0.1% -4.1% -2.2% 4.5% -0.5% -5.3% -3.8% -2.6% -1.6% -0.7%
Lead -0.6% -3.9% 1.7% 0.6% -0.6% -3.7% -14.9% -19.0% -22.7% -26.0%
Nickel -2.2% 2.9% 2.3% -2.4% 0.0% -2.4% -6.8% -4.5% -2.7% -1.2%
Tin 0.0% 0.0% 0.0% 3.1% 0.8% 7.8% 6.1% 4.4% 2.8% 1.4%
Zinc 0.0% 6.7% 14.3% 27.9% 12.3% 13.1% 7.3% 5.1% 3.2% 1.5%
Precious metals
Gold -3.7% 9.1% 13.7% 9.8% 7.1% 7.8% 2.7% 1.8% 0.9% 0.0%
Silver -4.1% 10.7% 22.8% 23.0% 13.0% 15.4% 9.1% 5.7% 2.7% 2.5%
Platinum -0.8% 8.7% 2.1% 7.4% 4.3% 12.6% 1.9% -4.0% -10.1% -2.1%
Palladium 0.3% 3.3% -8.3% -10.8% -4.3% -8.0% -6.7% -16.7% -13.0% -9.6%
Rhodium 0.3% 0.0% -9.7% 0.0% -2.4% 0.0% 0.0% 0.0% 0.0% 0.0%
Ruthenium 0.0% 0.0% 0.0% 0.0% 0.0% -16.7% -12.5% -20.0% -10.0% 0.0%
Steel making raw materials
Iron ore
CIF China fine ore -2.7% 25.0% 25.0% 2.3% 11.7% -8.2% -8.3% -5.8% -3.6% -1.7%
Coking Coal
Premium hard coking 0.0% 1.2% 8.8% 5.9% 4.0% 1.7% -3.0% -2.1% -1.3% -0.6%
Standard hard coking 0.0% 1.2% 8.8% 5.9% 4.0% 1.7% -3.0% -2.1% -1.3% -0.6%
Semi soft coking 8.6% 22.1% 14.5% 8.2% 13.4% 12.6% 5.7% 7.4% 8.9% 10.1%
Other Bulks
Chrome Ore 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Ferro-chrome 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Manganese ore 6.0% 53.4% 15.4% 15.4% 22.7% 8.8% 9.6% 10.7% 4.6% -0.1%
Ferro-manganese 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.00% 0.00%
Minor metals
Cobalt (99.3%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Molybdenum -1.47% 14.94% 13.33% 8.33% 9.00% 1.15% -2.86% -2.02% -1.27% -0.60%
Energy
Oil West Tex 1.90% 14.38% 9.30% 2.13% 6.98% 1.92% 0.00% 0.00% 0.00% 0.00%
Japanese thermal coal 0.00% 6.21% 6.21% 6.21% 4.47% 10.09% 7.41% 7.89% 8.34% 0.00%
Uranium (U3O8) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Foreign Exchange
Euro (USD/EUR) 0.34% 5.75% 8.17% 9.79% 5.85% 8.17% 2.70% 0.00% 0.00% 0.00%
Australia (USD/AUD) 1.54% 2.46% 4.01% 5.06% 3.24% 3.52% 0.73% 0.01% 0.01% 0.00%
South Africa (ZAR/USD) -2.18% -2.29% -2.29% -5.14% -3.00% -5.96% -2.98% 0.40% 0.77% 0.77%
Source: Deutsche Bank
6 July 2016
Metals & Mining
European-Listed Miners
Page 20 Deutsche Bank AG/London
Figure 12: Changes from previous period
1Q16 2Q16 3Q16 4Q16 2016 2017 2018 2019 2020 2021
Base Metals
Aluminium 1.4% 3.6% -2.5% 1.3% -7.4% -0.4% 2.3% 8.8% 8.1% 7.5%
Copper -4.3% 0.5% -6.4% 4.5% -16.6% -2.6% 12.3% 10.9% 9.8% 9.0%
Lead 3.4% -0.5% 1.2% -0.6% -2.6% 0.0% -5.2% 1.5% 1.5% 1.5%
Nickel -9.8% 2.8% 2.9% 11.1% -23.6% 10.3% 10.0% 16.0% 13.8% 12.1%
Tin 2.7% 9.7% -2.9% 0.0% 2.0% 5.3% 1.6% 1.5% 1.5% 1.5%
Zinc 4.4% 12.8% 5.3% 10.0% 0.8% 5.3% 2.4% 5.1% 4.9% 4.7%
Precious metals
Gold 7.3% 6.0% 6.0% 1.5% 10.3% 3.7% -1.3% 2.3% 2.3% 2.2%
Silver 0.7% 11.6% 10.2% 2.2% 8.9% 6.2% -1.0% 2.8% 2.7% 7.9%
Platinum 1.0% 9.0% -2.0% 4.1% -7.2% 2.4% 4.7% 14.3% 4.2% 13.6%
Palladium -13.0% 7.9% -3.2% 5.5% -19.6% 8.8% 15.7% 7.1% 6.7% 6.3%
Rhodium -7.9% 4.1% -7.1% 10.8% -28.0% 5.6% 3.6% 13.3% 5.9% 22.2%
Ruthenium 0.0% 0.0% 0.0% 0.0% -10.2% 19.0% 40.0% 14.3% 12.5% 11.1%
Steel making raw materials
Iron ore
CIF China fine ore 4.1% 13.1% -9.1% -12.0% -11.2% -15.0% 7.1% 9.6% 8.8% 8.1%
Coking Coal
Premium hard coking -9.0% 3.7% 10.1% -2.7% -15.0% 2.7% 6.4% 11.5% 10.3% 9.4%
Standard hard coking -9.0% 3.7% 10.1% -2.7% -15.0% 2.7% 6.4% 11.5% 10.3% 9.4%
Semi soft coking -1.1% 15.2% -3.9% -5.5% -6.4% 4.4% 4.8% 12.3% 10.9% 9.9%
Other Bulks
Chrome Ore 2.2% 0.0% 0.0% 0.0% 2.2% 0.0% 0.0% 0.0% 1.5% 1.5%
Ferro-chrome 0.0% 0.0% 0.0% 0.0% 0.0% -4.0% -4.2% -4.3% 1.5% 1.5%
Manganese ore -19.1% 58.0% -21.8% 0.0% -2.7% -9.5% 5.4% 2.6% 3.3% 3.9%
Ferro-manganese 1.5% 0.0% 1.5% 0.0% 2.3% 3.0% 3.6% -1.0% -1.4% 2.4%
Minor metals
Cobalt (99.3%) 0.0% 0.0% -3.8% -4.0% -4.4% -5.0% 8.3% -9.2% -10.1% 1.5%
Molybdenum 9.7% 27.3% -1.4% -4.4% -6.2% 2.7% 3.4% 7.0% 6.5% 6.1%
Energy
Oil West Tex -22.8% 36.1% 2.7% 2.1% -11.4% 21.6% 22.6% 0.0% 1.5% 1.5%
Japanese thermal coal 0.0% -9.1% 0.0% 0.0% -11.5% -6.7% -1.5% 3.4% 3.3% -5.1%
Uranium (U3O8) 0.0% 5.5% 0.0% 0.0% 8.6% 3.9% 4.3% 3.5% 0.5% 2.3%
Foreign Exchange
Euro (USD/EUR) 0.9% 2.4% -3.2% -2.5% -1.3% -11.0% -2.7% 10.5% 4.8% 0.0%
Australia (USD/AUD) 0.4% 3.1% -2.2% -2.1% -3.4% -5.7% -1.7% 3.2% 3.1% 3.0%
South Africa (ZAR/USD) 9.7% -3.1% 2.8% -0.3% 20.3% 2.0% -5.4% -10.1% -1.5% 11.6%
Source: Deutsche Bank
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 21
Investment views and earnings estimates
Earnings changes
Figure 13: European miner financial year earnings estimates and target price revisions
Rec Target (GBp*) 2015 2016E 2017E 2018E
Acacia Mining (US¢) Prev Buy 470 -2 27 35 35
New Buy 500 -2 38 45 38
% change 6.4% 0.0% 39.3% 27.4% 6.8%
Antofagasta (US¢) Prev Hold 470 1 11 34 57
New Hold 585 1 12 26 51
% change 24.5% 0.0% 8.1% -25.4% -10.4%
BHP Billiton (US¢) Prev Hold 880 162 16 35 91
New Hold 1250 162 23 46 81
% change 42.0% 0.0% 41.1% 31.7% -11.3%
Boliden (SEK) Prev Buy 165 9.7 11.2 18.4 17.2
New Buy 174 9.7 9.0 14.3 12.4
% change 5.5% 0.0% -19.2% -22.0% -27.9%
Ferrexpo (US¢) Prev Buy 105 24 18 18 21
New Buy 115 24 24 7 10
% change 9.5% 0.0% 33.9% -63.6% -54.3%
Fresnillo (US¢) Prev Sell 970 7 21 35 41
New Sell 1020 7 34 52 51
% change 5.2% 0.0% 62.2% 47.3% 23.7%
Kaz Minerals (US¢) Prev Hold 170 -2 11 30 19
New Hold 163 -2 15 24 12
% change -4.1% 0.0% 32.4% -20.2% -38.1%
Lonmin (US¢) Prev Sell 105 -16 -1 1 11
New Sell 106 -16 -2 -5 1
% change -1.0% 0.0% 60.6% -270.1% -51.1%
Nordgold (US¢) Prev Buy 4.60 47 28 42 52
New Buy 4.90 47 34 41 50
% change 6.5% 0.0% 18.0% -1.9% -5.3%
Norsk Hydro (NOK) Prev Hold 31.0 3.3 1.90 2.36 4.91
New Hold 34.8 3.3 1.54 1.35 2.97
% change 12.3% 0.0% -18.7% -42.7% -39.6%
Nyrstar (€) Prev Hold 9.80 -0.07 0.00 1.72 1.85
New Hold 10.18 -0.07 0.11 2.02 2.22
% change 3.9% 0.0% 23278.3% 17.6% 19.8%
Polymetal (US¢) Prev Hold 780 56 81 93 122
New Hold 820 56 103 115 135
% change 5.1% 0.0% 27.5% 23.5% 11.1%
Randgold (US¢) Prev Hold 6700 201 182 284 371
New Hold 7100 201 274 373 412
% change 6.0% 0.0% 50.0% 31.5% 11.2%
Rio Tinto (US¢) Prev Buy 2800 250 156 245 251
New Buy 3175 250 198 184 197
% change 13.4% 0.0% 27.3% -24.9% -21.5%
South32 (US¢) Prev Hold 74 11 2 4 7
New Hold 100 11 2 4 3
% change 35.1% 0.0% 5.1% -3.0% -51.9%
Vedanta (US¢) Prev Hold 375 -14 -132 -101 -103
New Buy 615 -14 -132 -26 -60
% change Rating Changed 64.0% 0.0% 0.0% 74.6% 41.6% Source : Deutsche Bank, Company data; *Target price for Boliden is in SEK, for Norsk Hydro is in NOK, for Nyrstar is in EUR, and for Nordgold is in USD
6 July 2016
Metals & Mining
European-Listed Miners
Page 22 Deutsche Bank AG/London
Acacia Mining Buy Reuters: ACAAL.L Exchange: LSE Ticker: ACA LN
Gearing to the gold price and a cost turn-around story
Price target (GBP) 500
FTSE 100 INDEX 6,504
Our investment thesis
Acacia's management has delivered a significant turnaround in productivity and cost
control at the group’s mines over the past two years. The key to a sustained reduction
in production costs and therefore improving cash margins is to continue with the
improvement at the flagship mine Bulyanhulu and to maintain the strong performance
at North Mara. At Bulyanhulu, Acacia aims to mine at the reserve grades of 9g/t,
driving down costs, at a steady state output of 350koz per year. We forecast
Bulyanhulu’s production at 295koz in 2016. We also expect Acacia's all-in costs to
move steadily down towards US$950/oz by 2017, offering positive operational
leverage in the supportive gold price environment we foresee. Acacia's robust balance
sheet, with a net cash position, provides the group with flexibility to manage periods
of more muted gold price performance.
Impact of our gold price forecasts revision:
With an annual increase of 4% in our gold price forecasts on average from 2016 to
2020, we have revised our target price up 6% to £5.00 from £4.70. Our 2016 and 2017
EPS estimates have moved 41% and 29% respectively due to an 11.7% revision in our
gold price forecast in 2H16 and a 7.8% revision in our 2017 gold price forecast.
Next catalysts 2Q16 and 1H16 financial results
Bulyanhulu at or above 9g/t: Any positive development at Bulyanhulu resulting in grade delivered at or above 9g/t sustainably will be a key catalyst for the shares.
Gold price and operating currencies: Upward movements in the gold price and downward movements in the group’s operating currencies will have a positive impact on Acacia’s cash flows. The group’s cost base is split 80/20 US Dollar/Tanzanian Shilling.
Court cases in Tanzania: The outcome of the pending cases involving Acacia with the Tanzanian revenue authority may or may not trigger further cash outflows.
Dates: 2Q16 and 1H16 financial results: 22 July 2016
Valuation and risks: Our 12-month price target is based on 1.2x our 2016e NAV. Our NAV is based on
a life of mine discounted cash flows, with a WACC of 5% and a long-run gold price assumption of US$1300/oz. Our WACC of 5% is based on a risk-free rate of 4%, a market risk premium of 6%, a beta of 0.3x and a 30% target gearing. We apply the 20% premium to our NPV to derive our target price -this reflects the ranking we assign to Acacia within our coverage universe. Our rankings are derived from debt reduction, P/E valuation, near-term earnings growth, and management actions to control cash flows.
Key downside risks include lower than expected gold prices, higher than expected costs and volatility in the US Dollar and the Tanzanian Shilling. The failure to deliver cost and capex cuts as planned, plus the failure to improve grades especially at the Bulyanhulu mine, are two key downside risks. There is a risk of an overhang in the shares from any further sell-down of Barrick Gold's 64% majority stake in Acacia Mining.
Franck Nganou (+44) 207 541 8161
Anna Mulholland (+44) 207 541 8172
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 23
Model updated:03 July 2016
Running the numbers
Europe
United Kingdom
Gold
Acacia Mining plc Reuters: ACAA.L Bloomberg: ACA LN
Buy Price (5 Jul 16) GBP 497.60
Target Price GBP 500.00
52 Week range GBP 156.60 - 497.60
Market Cap (m) GBPm 2,041
USDm 2,663
Company Profile
Acacia Mining is a gold exploration and mining company with three operating mines in Tanzania, producing c.800 koz of gold p.a. The company was spun out of parent company Barrick Gold, which is the world's largest gold producer. Acacia aims to grow production to over 1Moz of gold p.a. through a series of brownfield expansions at its existing mines, potential Greenfield projects in Burkina Faso and Kenya, plus potential M&A.
Price Performance
0
100
200
300
400
500
600
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Acacia Mining plc FTSE 100 INDEX (Rebased)
Margin Trends
-120
-80
-40
0
40
80
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
-40
-30
-20
-10
0
10
20
-15-10-505
101520
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
10
20
30
40
-25
-20
-15
-10
-5
0
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) 0.30 0.22 -0.02 0.38 0.45 0.38
Reported EPS (USD) -1.86 0.22 -0.48 0.38 0.45 0.38
DPS (USD) 0.03 0.04 0.04 0.06 0.12 0.14
BVPS (USD) 4.7 4.9 4.4 5.0 5.6 5.9
Weighted average shares (m) 410 410 410 410 410 410
Average market cap (USDm) 1,189 1,573 1,575 2,663 2,663 2,663
Enterprise value (USDm) 1,053 1,426 1,469 2,441 2,252 2,131
Valuation Metrics P/E (DB) (x) 9.7 17.4 nm 17.3 14.5 17.3
P/E (Reported) (x) nm 17.5 nm 17.3 14.5 17.3
P/BV (x) 0.65 0.82 0.61 1.30 1.17 1.10
FCF Yield (%) nm 2.0 nm 3.6 6.9 5.0
Dividend Yield (%) 1.0 1.1 1.1 0.9 1.9 2.2
EV/Sales (x) 1.1 1.5 1.7 2.4 2.3 2.4
EV/EBITDA (x) 4.1 5.7 8.4 6.7 5.6 5.9
EV/EBIT (x) nm 11.5 nm 10.7 8.4 9.4
Income Statement (USDm)
Sales revenue 959 930 868 1,017 970 896
Gross profit 372 370 276 432 474 429
EBITDA 257 252 175 364 405 360
Depreciation 158 128 142 136 136 133
Amortisation 1,061 0 146 0 0 0
EBIT -962 124 -113 228 269 227
Net interest income(expense) -8 -9 -11 -8 -7 -7
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax -970 115 -124 221 262 220
Income tax expense -188 26 73 66 79 66
Minorities -17 0 0 0 0 0
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit -765 90 -197 154 183 154
DB adjustments (including dilution) 887 1 190 0 0 0
DB Net profit 123 90 -7 154 183 154
Cash Flow (USDm)
Cash flow from operations 187 290 156 278 386 311
Net Capex -375 -258 -193 -182 -203 -177
Free cash flow -187 31 -37 96 183 134
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -55 -14 -17 -17 -25 -51
Net inc/(dec) in borrowings 142 0 -14 -28 -28 -28
Other investing/financing cash flows -19 -6 7 11 11 11
Net cash flow -119 12 -61 62 141 66
Change in working capital 0 0 0 0 0 0
Balance Sheet (USDm)
Cash and other liquid assets 282 294 233 293 425 489
Tangible fixed assets 1,281 1,425 1,391 1,437 1,505 1,549
Goodwill/intangible assets 211 211 211 211 211 211
Associates/investments 0 0 0 0 0 0
Other assets 658 653 495 571 533 507
Total assets 2,432 2,583 2,330 2,512 2,675 2,756
Interest bearing debt 142 142 128 71 14 -43
Other liabilities 363 439 415 388 376 372
Total liabilities 505 581 543 459 390 329
Shareholders' equity 1,922 1,997 1,787 2,053 2,284 2,427
Minorities 5 5 0 0 0 0
Total shareholders' equity 1,927 2,002 1,787 2,053 2,284 2,427
Net debt -140 -152 -105 -222 -411 -532
Key Company Metrics
Sales growth (%) -11.8 -3.0 -6.7 17.2 -4.6 -7.7
DB EPS growth (%) 31.2 -26.3 na na 18.8 -15.9
EBITDA Margin (%) 26.8 27.1 20.2 35.8 41.7 40.2
EBIT Margin (%) -100.3 13.3 -13.0 22.5 27.7 25.4
Payout ratio (%) nm 19.2 nm 15.9 27.8 37.6
ROE (%) -32.7 4.6 -10.4 8.0 8.5 6.5
Capex/sales (%) 39.1 26.5 22.2 17.9 20.9 19.7
Capex/depreciation (x) 2.4 1.9 1.4 1.3 1.5 1.3
Net debt/equity (%) -7.3 -7.6 -5.9 -10.8 -18.0 -21.9
Net interest cover (x) nm 14.2 nm 29.0 36.4 33.4
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 24 Deutsche Bank AG/London
Antofagasta Hold Reuters: Anto.L Exchange: LSE Ticker: Anto
A welcome kicker from gold offsetting stagnant copper price
Price target (GBP) 585
FTSE 100 INDEX 6,504
Our Investment Thesis:
We think the key issues for Antofagasta shares on a 12 month view are: (i) successful
delivery of new volume from Antucoya and Zaldivar;(ii) continued cost-cutting,
boosted by Peso weakness, and also driven by delivery of synergies from the Zaldivar
acquisition; and (iii) a drive to improve free cash flow. We see a balanced risk/reward
profile for the shares and have a Hold recommendation.
Changes made on copper, gold, molybdenum and Chilean peso:
The average 3% per annum downgrade to our copper price forecasts for 2016 to 2018
is somewhat offset by our 6% average upgrade to our gold price forecasts for the
same period given Antofagasta’s gold by-product credits. The Chilean Peso was
stronger in the second quarter by 1.6% however, relative to our expectation of a
weakening. Overall, our EPS for 2016 increases 9% to US$0.12 due to higher gold and
moly prices, but we cut 2017E EPS by 24% to US$0.26 and our 2018 EPS by 11% to
US$0.51. Our NPV on a US$ basis moves up 4.8%. We have reflected a 1.30 GBP/USD
rate on a 12-month view which increases our target price by 25% to £5.85.
Next catalysts: 2Q16 production results: We expect an improvement quarter on quarter in copper
output, up 11% on 1Q15 to 174kt, driven by the continued ramp up of Antucoya
and Zaldivar and a stabilization of Los Pelambres. We expect Centinela weakness
to continue on lower grades year on year, albeit with improvements quarter on
quarter. We expect a 5% drop in cash costs to USc164/lb.
1H16 financial results: We forecast EBITDA to drop 6% year on year to US$527m,
as royalties kick in on higher prices. As a result of operational gearing and
Antofagasta’s low level of earnings, we have headline EPS falling 57% year on
year to USc3.8c. Capex should be down around 2% at US$455m and we forecast
Antofagasta will declare an interim dividend in line with its policy of paying out
35% of earnings.
Dates: 2Q16 production results: 27 July 2016
1H16 financial results: 16 August 2016
Valuation and risks: Our 12-month price target is set at 10% premium to our DCF valuation to reflect
the ranking we assign to Antofagasta within our coverage universe. Our rankings
are derived from debt reduction, P/E valuation, near-term earnings growth, and
management action taken to control cash flow. We use a WACC of 10.5%
(reflects a cost of equity (Beta 1.2) of 11.2%, cost of debt (post tax) of 6.2%, long-
term gearing of 10% and a tax rate of 25%.
Key risks include higher- or lower-than-expected copper, gold, and molybdenum
prices than our estimates, and a weaker-or stronger-than expected Chilean Peso
than we currently forecast. Grades may be significantly higher or lower than we
assume at the main Los Pelambres mine, and cost savings may be higher or lower
than guided.
Anna Mulholland (+44) 207 541 8172
Franck Nganou (+44) 207 541 8161
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 25
Model updated:29 June 2016
Running the numbers
Europe
United Kingdom
Metals & Mining
Antofagasta PLC Reuters: ANTO.L Bloomberg: ANTO LN
Hold Price (5 Jul 16) GBP 461.50
Target Price GBP 585.00
52 Week range GBP 346.10 - 669.00
Market Cap (m) GBPm 4,550
USDm 5,937
Company Profile
Antofagasta plc is one of the world's top ten copper producers with operations centered in Chile. The company also has diversified holdings in the transport, port energy and water industries, all as a way of hedging input costs. The Group's mining operations however represent the core of earnings (c.90%) and specialise in copper, via their Los Pelambres, El Tesoro, Esperanza and Michilla mines. Their transport operations encompass an extensive rail network, which serves the mining region of Northern Chile. The company has an extensive portfolio of early stage exploration and development projects across the globe. Price Performance
300
450
600
750
900
1050
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Antofagasta PLC FTSE 100 INDEX (Rebased)
Margin Trends
0
10
20
30
40
50
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
0
2
4
6
8
10
12
-40
-30
-20
-10
0
10
20
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
05101520253035
-20
-15
-10
-5
0
5
10
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) 0.67 0.47 0.01 0.12 0.26 0.51
Reported EPS (USD) 0.67 0.47 0.62 0.12 0.26 0.51
DPS (USD) 0.95 0.22 0.03 0.04 0.09 0.18
BVPS (USD) 6.8 6.3 6.7 6.8 7.0 7.4
Weighted average shares (m) 986 986 986 986 986 986
Average market cap (USDm) 14,525 12,813 9,645 5,937 5,937 5,937
Enterprise value (USDm) 14,991 14,359 12,044 8,642 8,646 8,752
Valuation Metrics P/E (DB) (x) 22.0 27.9 nm 49.6 23.5 11.9
P/E (Reported) (x) 22.0 27.9 15.9 49.6 23.5 11.9
P/BV (x) 2.00 1.88 1.03 0.88 0.86 0.82
FCF Yield (%) 2.2 1.7 nm nm 3.9 5.1
Dividend Yield (%) 6.4 1.7 0.3 0.7 1.5 3.0
EV/Sales (x) 2.5 2.7 3.5 2.6 2.3 2.0
EV/EBITDA (x) 5.6 6.4 13.7 7.4 6.2 4.2
EV/EBIT (x) 6.9 8.8 39.6 16.5 12.1 7.1
Income Statement (USDm)
Sales revenue 5,972 5,290 3,395 3,363 3,787 4,369
Gross profit 2,702 2,222 891 1,105 1,308 1,848
EBITDA 2,690 2,246 881 1,168 1,385 2,066
Depreciation 518 606 576 581 592 612
Amortisation 0 0 0 0 0 0
EBIT 2,172 1,640 304 524 715 1,237
Net interest income(expense) -74 -62 -39 -73 -72 -71
Associates/affiliates -14 -4 -6 -47 -5 61
Exceptionals/extraordinaries 0 0 603 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax 2,084 1,573 259 404 638 1,227
Income tax expense 844 723 160 152 212 434
Minorities 580 391 94 133 174 292
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 660 460 608 120 252 501
DB adjustments (including dilution) 0 0 -603 0 0 0
DB Net profit 660 460 6 120 252 501
Cash Flow (USDm)
Cash flow from operations 1,763 1,804 393 761 981 1,380
Net Capex -1,450 -1,585 -1,127 -910 -750 -1,075
Free cash flow 313 219 -734 -149 231 305
Equity raised/(bought back) 110 0 15 0 0 0
Dividends paid -1,437 -1,377 -207 -2 -10 -56
Net inc/(dec) in borrowings -528 1,000 438 0 0 0
Other investing/financing cash flows 345 419 451 -5 -5 -5
Net cash flow -1,198 262 -38 -156 217 244
Change in working capital -43 140 253 -84 -40 -13
Balance Sheet (USDm)
Cash and other liquid assets 2,685 2,375 1,732 1,575 1,792 2,036
Tangible fixed assets 7,425 8,227 8,601 8,930 9,085 9,545
Goodwill/intangible assets 133 119 150 150 150 150
Associates/investments 453 808 1,833 1,833 1,833 1,833
Other assets 1,694 1,287 1,222 1,583 1,688 1,721
Total assets 12,390 12,815 13,537 14,070 14,548 15,285
Interest bearing debt 1,212 2,059 2,257 2,257 2,257 2,257
Other liabilities 2,514 2,721 2,580 2,880 2,946 2,966
Total liabilities 3,726 4,780 4,837 5,137 5,203 5,223
Shareholders' equity 6,725 6,174 6,646 6,714 6,907 7,274
Minorities 1,939 1,861 1,873 2,038 2,258 2,608
Total shareholders' equity 8,664 8,035 8,519 8,752 9,164 9,881
Net debt -1,473 -315 525 682 465 221
Key Company Metrics
Sales growth (%) -11.4 -11.4 -35.8 -0.9 12.6 15.4
DB EPS growth (%) -52.6 -30.3 -98.8 2,073.4 110.9 98.5
EBITDA Margin (%) 45.0 42.4 25.9 34.7 36.6 47.3
EBIT Margin (%) 36.4 31.0 9.0 15.6 18.9 28.3
Payout ratio (%) 142.0 46.2 5.0 35.0 35.0 35.0
ROE (%) 9.5 7.1 9.5 1.8 3.7 7.1
Capex/sales (%) 24.3 30.0 33.2 27.1 19.8 24.6
Capex/depreciation (x) 2.8 2.6 2.0 1.6 1.3 1.8
Net debt/equity (%) -17.0 -3.9 6.2 7.8 5.1 2.2
Net interest cover (x) 29.3 26.4 7.8 7.1 9.9 17.5
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 26 Deutsche Bank AG/London
BHP Billiton Plc Hold Reuters: BLT.L Exchange: LSE Ticker: BLT
Pursuing Buy over Build?
Price target (GBP) 1250
FTSE 100 INDEX 6,504
Our Investment Thesis:
We think the long-term BHP Billiton story is: 1. Production, earnings and cash flow
growth from its low cost mining and oil projects through brownfields expansions, 2.
Portfolio simplification by selling and/or demerging non-core assets, and 3. Growth
through approving more high returning projects and adding more projects to the
portfolio. The company's capital allocation strategy remains: 1. Balance sheet
management (maintaining the A credit rating), 2. Paying out at least 50% of underlying
earnings through the cycle, 3.and investing counter-cyclically in organic growth and/or
M&A. BHP Billiton's assets are long life, low operating cost, and in low to moderate
risk countries and overall are considered premium quality relative to peers. We rate
BHP a Hold on valuation. Despite trading below our NPV we highlight that the
company's Cu Eq growth outlook is flat as oil production has peaked and minerals
growth projects are long-dated.
Changes made on copper, nickel, iron ore, coal and nat gas:
Our FY16 and FY17 EPS estimates rise 44% and 29% respectively due to a
combination of increases to our nat gas (+7%, +14%), iron ore (+12%, -8%), met coal
(+4%, +2%) and WTI (+7%, 0%) forecasts, all offset by a 3% cut to our copper and
nickel price forecasts. Our FY18 EPS forecast drops 11% as we cut our 2018 nat gas,
iron ore and met coal prices by 9%, 8% and 3% respectively. Our NPV on a US$ basis
moves up 15%, including an 11% uplift from rolling our calculation to June 2017. We
have reflected a 1.30 GBP/USD rate on a 12-month view which increases our target
price by 42% to £12.50.
Next catalysts: Final 2016 results: We expect the focus to be on use of cash flow after BHP cut its
dividend in February and adopted a 50% payout, amounting to a reduction in
yearly cash outlay of US$4bn. Capex guidance may be raised especially for US
Onshore oil given the rebound in prices year to date.
Acquisition: BHP has said this year that it is looking for copper and oil potential
acquisitions. Whilst it has opened the door on potentially acquiring companies, we
believe the focus at this stage remains firmly on asset acquisitions. A price tag of
US$3-5bn is most likely on our estimates. We think BHP would be comfortable
with a downgrade of its credit rating from A to A- to implement a deal of this size.
Key events: 4Q16 operational results: 20 July 2016; FY16 results: 16 August 2016
Valuation and risks: We value BHP using life-of-mine cash flows with a WACC of 9.3%. Our price
target is set at a 10% discount to our NPV valuation to reflect the ranking we
assign to BHP Billiton within our coverage universe.
Key risks include variance in commodity prices and exchange rates vs. our
estimates. Downside risks include delivery risk on longer-dated growth
projects. Sustained higher US onshore oil volumes could limit upside in both
the oil price and US nat gas price. Upside risks include increased volumes and
higher cost cuts than we have forecast.
Anna Mulholland (+44) 207 541 8172
Paul Young (+61) 2 8258-2587
Franck Nganou (+44)207 541 8161
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 27
Model updated:04 July 2016
Running the numbers
Europe
United Kingdom
Metals & Mining
BHP Billiton Plc Reuters: BLT.L Bloomberg: BLT LN
Hold Price (5 Jul 16) GBP 935.40
Target Price GBP 1,250.00
52 Week range GBP 580.90 - 1,253.00
Market Cap (m) GBPm 49,774
USDm 64,950
Company Profile
BHP Billiton Plc is an international resources company. The company's principal business lines are mineral and petroleum production, including coal (thermal and coking), iron ore, aluminium, manganese, nickel, copper concentrate and cathode, diamonds, and oil & gas (conventional and unconventional, LNG).
Price Performance
400
800
1200
1600
2000
2400
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
BHP Billiton Plc FTSE 100 INDEX (Rebased)
Margin Trends
-30-15
015304560
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
-10
-5
0
5
10
15
20
-40
-30
-20
-10
0
10
20
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
5
10
15
20
25
30
0
10
20
30
40
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 30-Jun 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) 2.29 2.47 1.62 0.23 0.46 0.81
Reported EPS (USD) 2.10 2.54 0.64 -0.91 0.46 0.81
DPS (USD) 1.16 1.21 1.24 0.30 0.23 0.41
BVPS (USD) 13.3 14.9 12.2 10.6 10.9 10.8
Weighted average shares (m) 5,321 5,321 5,318 5,321 5,321 5,321
Average market cap (USDm) 163,671 162,159 134,883 64,950 64,950 64,950
Enterprise value (USDm) 193,925 191,748 162,133 91,666 87,362 84,027
Valuation Metrics P/E (DB) (x) 13.4 12.3 15.7 53.4 26.6 15.1
P/E (Reported) (x) 14.6 12.0 39.5 nm 26.6 15.1
P/BV (x) 1.93 2.17 1.61 1.18 1.12 1.13
FCF Yield (%) 0.2 6.8 5.7 7.9 10.4 9.9
Dividend Yield (%) 3.8 4.0 4.9 2.5 1.9 3.3
EV/Sales (x) 2.9 3.4 3.6 3.0 2.9 2.5
EV/EBITDA (x) 6.8 6.3 8.7 25.0 6.9 5.4
EV/EBIT (x) 9.2 8.5 18.7 nm 18.5 10.6
Income Statement (USDm)
Sales revenue 65,953 56,762 44,636 30,834 30,653 33,664
Gross profit 24,433 29,140 18,160 3,412 12,699 15,504
EBITDA 28,380 30,365 18,656 3,663 12,699 15,504
Depreciation 7,378 7,716 9,986 8,878 7,989 7,590
Amortisation 0 0 0 0 0 0
EBIT 21,002 22,649 8,670 -5,216 4,710 7,914
Net interest income(expense) -1,276 -914 -614 -772 -622 -505
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 0 0 0 -59 -147 -366
Profit before tax 19,726 21,735 8,056 -6,047 3,941 7,044
Income tax expense 6,906 6,780 3,666 -1,232 1,340 2,395
Minorities 1,597 1,392 968 47 153 322
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 11,223 13,563 3,422 -4,862 2,448 4,327
DB adjustments (including dilution) 985 -385 5,199 6,081 0 0
DB Net profit 12,208 13,178 8,621 1,219 2,448 4,327
Cash Flow (USDm)
Cash flow from operations 20,154 25,364 19,296 12,227 11,723 11,880
Net Capex -19,905 -14,346 -11,625 -7,083 -4,966 -5,418
Free cash flow 249 11,018 7,671 5,144 6,757 6,462
Equity raised/(bought back) 21 14 9 0 0 0
Dividends paid -6,167 -6,387 -6,498 -4,120 -1,351 -1,476
Net inc/(dec) in borrowings 7,157 -1,011 -728 7,007 1,988 -800
Other investing/financing cash flows -364 224 -649 -740 -805 -1,025
Net cash flow 896 3,858 -195 7,291 6,589 3,160
Change in working capital -7,514 116 -187 1,723 235 -1,898
Balance Sheet (USDm)
Cash and other liquid assets 5,677 8,803 6,753 14,044 20,632 23,792
Tangible fixed assets 100,565 108,787 94,072 84,457 81,434 79,263
Goodwill/intangible assets 5,496 5,439 4,292 4,358 4,646 4,949
Associates/investments 1,880 2,436 2,944 2,652 2,652 2,652
Other assets 25,560 25,948 16,519 14,493 14,414 15,124
Total assets 139,178 151,413 124,580 120,004 123,779 125,779
Interest bearing debt 33,187 34,589 31,170 37,541 39,529 38,729
Other liabilities 30,700 31,442 22,865 20,050 20,224 22,557
Total liabilities 63,887 66,031 54,035 57,591 59,753 61,286
Shareholders' equity 70,667 79,143 64,768 56,543 57,860 57,701
Minorities 4,624 6,239 5,777 5,870 6,167 6,793
Total shareholders' equity 75,291 85,382 70,545 62,413 64,027 64,493
Net debt 27,510 25,786 24,417 23,497 18,897 14,937
Key Company Metrics
Sales growth (%) -8.7 -13.9 -21.4 -30.9 -0.6 9.8
DB EPS growth (%) -28.6 7.9 -34.5 -85.9 100.9 76.7
EBITDA Margin (%) 43.0 53.5 41.8 11.9 41.4 46.1
EBIT Margin (%) 31.8 39.9 19.4 -16.9 15.4 23.5
Payout ratio (%) 55.0 47.5 192.7 nm 49.9 49.9
ROE (%) 16.4 18.1 4.8 -8.0 4.3 7.5
Capex/sales (%) 33.7 26.8 26.8 23.4 16.2 16.1
Capex/depreciation (x) 3.0 2.0 1.2 0.8 0.6 0.7
Net debt/equity (%) 36.5 30.2 34.6 37.6 29.5 23.2
Net interest cover (x) 16.5 24.8 14.1 nm 7.6 15.7
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 28 Deutsche Bank AG/London
Boliden AB Buy Reuters: BOL.ST Exchange: STO Ticker: BOL
A sound strategy in place
Price target (SEK) 174
OMX Stockholm Index 1,324
Our investment thesis
Boliden has one of the best delivery track records amongst our coverage. The group’s
strategy is to create value by developing large-scale ore bodies into big mines.
Boliden’s copper equivalent production is split 60% copper, 30% zinc, and the
remainder nickel, silver, gold and PGM by-products. With the acquisition of the
Kevitsa copper/nickel/gold and PGM mine, completed in June 2016, Boliden has
further diversified its product mix and the company is set to benefit when copper and
nickel prices turn. The company’s hedging policies are sensible, and it has also
delivered solid growth at the Garpenberg zinc mine. It also intends to enhance
production at Aitik with a double surface crusher to be commissioned in 2018.
Impact of treatment charges and changes in our copper, gold and zinc price forecasts: We have reduced our 2016 and 2017 earnings expectations down 18% and 22%
respectively on i) the downward revision in our commodity price expectations (mainly copper and nickel), ii) stronger Norwegian and Swedish Krona, and iii) the effects of lower benchmark treatment charges in 2016, which kick in in the second quarter of 2016. Our better zinc and gold price forecasts somewhat offset the magnitude of the strengthening operating currencies and the treatment charges decline.
We have increased our NPV and target price by 5.5% due to our expectation of declining net debt on the rising gold price, zinc price, and treatment charges post 2017.
Next catalysts:
2Q16 financial results: Boliden’s three largest smelters (Kokkola, Harjavalta, and Ronskar) are under maintenance and this will have an estimated SEK165m impact on EBIT in 2Q16. We forecast 2Q16 EBIT at SEK567m, down from SEK888m in 1Q16.
Update on Kevitsa potential: Kevitsa will be consolidated as part of the group’s activities but only from June 2016 onward. The current annualized output of Kevitsa is below previous owner First quantum annual guidance for 2016. Any development provided by Boliden on improving the outlook at Kevitsa will be a catalyst for the shares.
Net debt reduction plans: Boliden has increased its gearing post Kevitsa and we estimate the net debt to equity ratio at 40% in 2016 from 22% in 2015.
Dates: 2Q16 financial results: 19 July 2016
Valuation and risks: Our SEK174ps TP is based on our DCF-derived NPV (WACC of 8.0% based on cost
of equity 11.3%, cost of debt 6.5%, tax rate of 28% and target gearing 40%). We apply a 20% premium to our NPV in setting the price target to reflect the relative performance Boliden in our coverage universe.
Risks include varied metal prices from expectations. Movements in the SEK, the NOK and the Euro relative to our expectations. From an operational perspective, lower volumes from the Aitik expansion is a key downside risk.
Anna Mulholland (+44) 207 541 8172
Franck Nganou (+44) 207 541 8161
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 29
Model updated:05 July 2016
Running the numbers
Europe
Sweden
Metals & Mining
Boliden AB Reuters: BOL.ST Bloomberg: BOL SS
Buy Price (5 Jul 16) SEK 164.70
Target Price SEK 174.00
52 Week range SEK 102.90 - 175.70
Market Cap (m) SEKm 45,047
USDm 5,299
Company Profile
Boliden is an international mining and smelting company which mines, smelts and refines zinc and copper. By-products include lead, gold, silver, among others. The group operations in five countries Sweden, Finland, Norway, Ireland and Netherlands.
Price Performance
40
80
120
160
200
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Boliden AB OMX Stockholm Index (Rebased)
Margin Trends
4
8
12
16
20
24
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
0
5
10
15
-20-15-10-505
1015
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
5
10
15
20
0
10
20
30
40
50
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (SEK) 4.72 6.95 9.66 9.03 14.32 12.40
Reported EPS (SEK) 4.72 6.95 9.66 9.03 14.32 12.40
DPS (SEK) 1.75 2.25 3.25 3.00 5.00 4.00
BVPS (SEK) 84.4 87.7 94.4 97.0 108.3 115.7
Weighted average shares (m) 274 274 274 274 274 274
Average market cap (SEKm) 27,295 29,169 42,865 45,047 45,047 45,047
Enterprise value (SEKm) 35,463 36,234 47,984 54,792 52,686 49,577
Valuation Metrics P/E (DB) (x) 21.1 15.4 16.2 18.2 11.5 13.3
P/E (Reported) (x) 21.1 15.4 16.2 18.2 11.5 13.3
P/BV (x) 1.17 1.43 1.51 1.70 1.52 1.42
FCF Yield (%) nm 5.4 6.0 nm 6.5 9.9
Dividend Yield (%) 1.8 2.1 2.1 1.8 3.0 2.4
EV/Sales (x) 1.0 1.0 1.2 1.4 1.2 1.2
EV/EBITDA (x) 7.7 6.0 6.7 7.5 5.6 5.7
EV/EBIT (x) 19.7 13.1 13.4 15.1 9.2 10.1
Income Statement (SEKm)
Sales revenue 34,408 36,890 40,243 38,324 42,594 42,488
Gross profit 4,634 6,035 7,113 7,262 9,433 8,672
EBITDA 4,634 6,035 7,113 7,262 9,433 8,672
Depreciation 2,831 3,276 3,522 3,628 3,730 3,752
Amortisation 0 0 0 0 0 0
EBIT 1,803 2,759 3,591 3,634 5,703 4,920
Net interest income(expense) -221 -287 -234 -473 -683 -573
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax 1,582 2,472 3,357 3,162 5,021 4,347
Income tax expense 287 572 714 692 1,105 956
Minorities 3 0 0 0 0 0
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 1,292 1,900 2,643 2,470 3,916 3,391
DB adjustments (including dilution) 0 0 0 0 0 0
DB Net profit 1,292 1,900 2,643 2,470 3,916 3,391
Cash Flow (SEKm)
Cash flow from operations 3,504 5,788 6,235 5,804 7,175 7,469
Net Capex -4,971 -4,209 -3,646 -9,678 -4,248 -2,992
Free cash flow -1,467 1,579 2,589 -3,874 2,927 4,477
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -1,094 -479 -615 -752 -821 -1,368
Net inc/(dec) in borrowings 2,154 -876 -1,887 12,620 -4,000 0
Other investing/financing cash flows -1 2 -23 1 0 0
Net cash flow -408 226 64 7,995 -1,894 3,109
Change in working capital -546 489 -728 -169 -471 326
Balance Sheet (SEKm)
Cash and other liquid assets 611 865 923 8,207 6,313 9,423
Tangible fixed assets 27,348 28,623 28,372 34,705 35,224 34,464
Goodwill/intangible assets 3,130 3,516 3,366 3,398 3,398 3,398
Associates/investments 33 45 48 48 48 48
Other assets 10,719 10,817 10,313 10,570 11,855 10,965
Total assets 41,841 43,866 43,022 56,929 56,838 58,298
Interest bearing debt 8,307 7,683 5,677 18,319 14,319 14,319
Other liabilities 10,459 12,208 11,537 12,083 12,897 12,333
Total liabilities 18,766 19,891 17,214 30,401 27,215 26,651
Shareholders' equity 23,075 23,975 25,808 26,527 29,623 31,646
Minorities 0 0 0 0 0 0
Total shareholders' equity 23,075 23,975 25,808 26,527 29,623 31,646
Net debt 7,696 6,818 4,754 10,112 8,006 4,896
Key Company Metrics
Sales growth (%) -14.0 7.2 9.1 -4.8 11.1 -0.2
DB EPS growth (%) -60.5 47.1 39.1 -6.6 58.6 -13.4
EBITDA Margin (%) 13.5 16.4 17.7 18.9 22.1 20.4
EBIT Margin (%) 5.2 7.5 8.9 9.5 13.4 11.6
Payout ratio (%) 37.1 32.4 33.6 33.2 34.9 32.3
ROE (%) 5.6 8.1 10.6 9.4 13.9 11.1
Capex/sales (%) 14.4 11.4 9.1 25.3 10.0 7.0
Capex/depreciation (x) 1.8 1.3 1.0 2.7 1.1 0.8
Net debt/equity (%) 33.4 28.4 18.4 38.1 27.0 15.5
Net interest cover (x) 8.2 9.6 15.3 7.7 8.4 8.6
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 30 Deutsche Bank AG/London
Ferrexpo Plc Buy Reuters: FXPO.L Exchange: LSE Ticker: FXPO
Generating cash and working on the balance sheet
Price target (GBP) 115
FTSE 100 INDEX 6,504
Our investment case:
Ferrexpo is sitting on very significant iron ore resources that could support both
significant expansions and significant mine lives. The company has very methodically
and strategically upgraded its product mix quality and adjusted its customer base to
supply the high end of the market. With China moving to a consumer led economy,
we expect demand will drive the requirement for higher quality steels and therefore
higher quality feed and this provides achieved pricing upside for FXPO. Growth
projects are currently on hold while both the markets and the country are experiencing
a period of volatility. The surprising recent loss of US$174m that was kept in its local
bank that moved into administration has left the company with a liquidity hole over
the next few years and the company needs to restructure its debt. A successful
restructuring would result in significant equity value while an unsuccessful one could
result in little. The company has demonstrated that the operations can continue to
operate with an off shore facility and our view is that the restructuring will be
successful (but not without risk); Buy.
Changes made:
The main changes to our EBITDA estimates reflect our changes to iron ore pricing, but
also some modest adjustments to freight rates and pellet premiums. We have not
made any material changes to our operating assumptions. The key for FXPO remains
getting debt down in order to facilitate the refinancing of its its bond maturities in
2018/19. We would expect the company to try and extend its debt maturity profile
within the next 12 months. The current PXF (pre export facility) will start maturing over
eight quarterly installments from 4Q16 and a new PXF facility is also targeted. The
higher near term price environment should in our opinion allow net debt to decline by
over US$200m in 2016 to around US$675m by year end on the back of close to
US$300m in EBITDA. However, whilst we continue to see material debt reduction in
2017/18 (despite EBITDA declining to US$170-180m in 2017/18 on lower iron ore
prices), net debt to EBITDA ratio remains high at above 3x.
Next catalysts for the stock:
At around 0.2x P/NPV, FXPO offers excellent value for those comfortable with the
continued political risk in Ukraine and the leverage to the iron ore price. The expected
improvement in the balance sheet should act as a catalyst for the name and we
maintain our Buy recommendation.
Valuation and risks:
We value the operating cash flow at US$2.0bn (13.9% WACC-COE16.2%, COD 10%,
gearing 30%). Securing additional debt facilities with regards to its maturing bonds in
2018/19 and its PXF facilities following strong cash generation in 1H16 would result in
significant value for equity investors. Non extension could leave the company with a
significant liquidity issue that could result in significant dilution for existing
shareholders. Our £1.15 PT is based on a 0.7x multiple to the equity participation in
the $2bn NPV of the operating cash flows. Downside risks include sensitivity to iron
ore prices, FX and inflation and potential disruption from political unrest in the
country. Additional financial risks include an inability to restructure its debt payments.
Volatile inflation outcomes post the devaluation of the Hyrvnia are likely and we
expect will cause earnings forecast volatility.
Rene Kleyweg (+44) 207 541 8178
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 31
Model updated:05 July 2016
Running the numbers
Europe
United Kingdom
Metals & Mining
Ferrexpo Plc Reuters: FXPO.L Bloomberg: FXPO LN
Buy Price (5 Jul 16) GBP 32.00
Target Price GBP 115.00
52 Week range GBP 14.00 - 70.00
Market Cap (m) GBPm 187
USDm 244
Company Profile
Ferrexpo is a Top 12 global pellet producer, enjoys close proximity to customers in Europe. Ferrexpo is principally involved in the production and export of iron ore pellets to Ukraine, European and Asian steel industries. The principal asset of Ferrexpo is Ferrexpo Poltava GOK Corporation which operates an open-pit iron ore mine, concentrating and pelletising operations situated in central Ukraine, on the banks of the river Dnipro.
Price Performance
0
40
80
120
160
200
240
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Ferrexpo Plc FTSE 100 INDEX (Rebased)
Margin Trends
812162024283236
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
0
10
20
30
40
50
60
-40
-30
-20
-10
0
10
20
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
01234567
0
100
200
300
400
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Rene Kleyweg
+44 20 754-18178 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) 0.50 0.49 0.24 0.24 0.07 0.10
Reported EPS (USD) 0.45 0.30 0.06 0.25 0.07 0.10
DPS (USD) 0.13 0.13 0.03 0.00 0.00 0.00
BVPS (USD) 2.9 1.2 0.4 0.6 0.7 0.8
Weighted average shares (m) 585 585 585 585 585 585
Average market cap (USDm) 1,755 1,229 484 244 244 244
Enterprise value (USDm) 2,220 1,807 1,242 799 723 672
Valuation Metrics P/E (DB) (x) 6.0 4.3 3.5 1.7 6.4 4.4
P/E (Reported) (x) 6.7 6.9 14.6 1.7 5.8 4.1
P/BV (x) 1.08 0.68 0.76 0.68 0.62 0.56
FCF Yield (%) nm 5.0 22.0 83.9 31.3 21.3
Dividend Yield (%) 4.4 6.3 4.0 0.0 0.0 0.0
EV/Sales (x) 1.4 1.3 1.3 0.9 0.9 0.9
EV/EBITDA (x) 4.4 3.6 4.0 2.7 4.2 3.8
EV/EBIT (x) 6.2 5.7 11.0 3.4 6.5 5.8
Income Statement (USDm)
Sales revenue 1,581 1,388 961 867 765 785
Gross profit 506 496 313 297 171 176
EBITDA 506 496 313 297 171 176
Depreciation 100 82 57 58 57 56
Amortisation 47 96 144 3 3 3
EBIT 359 318 112 236 111 117
Net interest income(expense) -64 -49 -69 -67 -66 -50
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries 10 -15 -18 4 4 4
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax 305 254 25 173 50 71
Income tax expense 42 70 -6 26 8 11
Minorities 2 6 -2 2 0 1
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 262 178 33 145 42 60
DB adjustments (including dilution) 32 108 107 -4 -4 -4
DB Net profit 294 286 140 141 38 56
Cash Flow (USDm)
Cash flow from operations 235 291 130 240 111 112
Net Capex -277 -229 -23 -35 -35 -60
Free cash flow -42 62 107 205 76 52
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -78 -77 -78 0 0 0
Net inc/(dec) in borrowings 7 274 -394 -168 -84 -111
Other investing/financing cash flows -93 -22 -226 0 0 0
Net cash flow -206 236 -591 36 -7 -59
Change in working capital -103 -15 -77 36 13 -3
Balance Sheet (USDm)
Cash and other liquid assets 390 627 35 72 64 5
Tangible fixed assets 1,534 926 654 606 575 571
Goodwill/intangible assets 117 60 40 37 36 35
Associates/investments 196 109 109 109 109 109
Other assets 695 413 387 345 333 336
Total assets 2,932 2,135 1,226 1,169 1,118 1,057
Interest bearing debt 1,029 1,305 904 735 651 540
Other liabilities 168 113 78 73 74 74
Total liabilities 1,197 1,417 982 808 725 615
Shareholders' equity 1,713 709 245 361 391 440
Minorities 22 8 -1 1 1 2
Total shareholders' equity 1,735 718 244 361 393 442
Net debt 639 678 868 663 587 535
Key Company Metrics
Sales growth (%) 11.0 -12.2 -30.8 -9.8 -11.8 2.7
DB EPS growth (%) 36.0 -2.8 -51.1 1.0 -72.9 45.7
EBITDA Margin (%) 32.0 35.7 32.5 34.3 22.4 22.4
EBIT Margin (%) 22.7 22.9 11.7 27.2 14.6 14.8
Payout ratio (%) 29.5 43.3 58.5 0.0 0.0 0.0
ROE (%) 16.2 14.7 6.9 48.0 11.2 14.3
Capex/sales (%) 17.6 16.9 6.8 4.0 4.6 7.6
Capex/depreciation (x) 2.8 2.8 1.1 0.6 0.6 1.0
Net debt/equity (%) 36.8 94.5 356.0 183.5 149.5 121.0
Net interest cover (x) 5.6 6.5 1.6 3.5 1.7 2.3
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 32 Deutsche Bank AG/London
Fresnillo Sell Reuters: FRES.L Exchange: LSE Ticker: FRES
Running well ahead of fair value: we reiterate Sell
Price target (GBP) 1020
FTSE 100 INDEX 6,504
Our Investment Thesis:
We believe Fresnillo is in a good position to successively grow volumes through the
addition of three new mines and a series of brownfield expansions over the next four
to five years. Growth in the next two years is more muted, however, as grades
decrease at four of its five mines. In addition, Fresnillo shares are up strongly year to
date, boosted by a combination of the gold and silver price rallies and an oil and FX
tailwind for costs and cash flow. We find the shares relatively expensive and believe
there are better value opportunities elsewhere in our gold mining coverage. With 40%
potential downside to our target price, our recommendation is Sell.
Changes made on higher gold and silver:
We make significant changes to our 2016-2018 earnings given the uplift of an average
6% per annum to our gold price forecasts and average 12.5% uplift to our silver price
forecasts over the same time period. Our 2016 EPS estimate increases 62% to USc34,
our 2017 estimate is up 49% to USc52 and our 2018 estimate up 24% to USc51. Our
NPV on a US$ basis moves up 5.5%. On 28 June, we published a new target price for
Fresnillo using a 1.30 GBP/USD rate on a 12-month view – in this report we bring the
GBP target prices for the other stocks under our coverage in line with this
methodology.
Next catalysts: 2Q16 production report: We expect silver production to be flat quarter on quarter
at 11moz and gold production to go down 22% with less ore processed at
Nochebuena.
1H16 financials: Despite the flat to down production, received gold and silver
prices will provide a clear boost to EBITDA – we forecast a 22% year on year rise
to US$385m for the first half. This should drop through to a 30% increase in
earnings – we estimate EPS of USc13 vs USc10 in 1H15. Cash flow should be
strong due to a US$95m inflow into working capital offsetting a US$54m increase
in capex year on year. As a result, we expect Fresnillo to double its (small)
dividend from USc3 per share (the 2015 final) to USc6 for this period.
Key events: 2Q16 production report: 20 July 2016
1H16 financial results: 2 August 2016
Valuation and risks: Our price target is set at a 20% premium to our NPV valuation, in line with the
other gold miners under our coverage. Our NPV is based on life-of-mine cash
flows, using a long-term gold price of US$1,300/oz and a silver price of US$20/oz.
The WACC of 6.4% is based on a risk-free rate of 4%, a market risk premium of
6%, a Beta of 0.4, and 0% gearing.
A key upside risk is higher than expected silver and gold prices. A sustained
weakening of the Mexican Peso is also an upside risk. The company has an
excellent exploration track record and could surprise on the upside by discovering
significant resources of silver and gold, leading to an upgrade in future production
expectations or improving grades at the large Fresnillo mine. The company has an
extensive project pipeline over the medium term - there is an upside risk to our
target price if this is brought to production quicker than we forecast. On a 12
month time frame, outperformance of silver versus gold is an upside risk.
Anna Mulholland (+44) 207 541 8172
Franck Nganou (+44) 207 541 8161
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 33
Model updated:04 July 2016
Running the numbers
Europe
United Kingdom
Gold
Fresnillo Reuters: FRES.L Bloomberg: FRES LN
Sell Price (5 Jul 16) GBP 1,893.00
Target Price GBP 1,020.00
52 Week range GBP 588.00 - 1,895.00
Market Cap (m) GBPm 13,949
USDm 18,203
Company Profile
Fresnillo is the world's largest primary silver producer and a significant gold producer. All its operations are currently based in the highly prospective gold and silver belts of Mexico. The group currently has five operating mines, two advanced stage development and four medium-term growth projects, as well as significant land holdings in Mexico. Fresnillo's goal is to double production silver and gold by 2018, equating to 65Moz of silver and over 400koz of gold.
Price Performance
400
800
1200
1600
2000
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Fresnillo FTSE 100 INDEX (Rebased)
Margin Trends
10
20
30
40
50
60
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
0
5
10
15
20
-30
-20
-10
0
10
20
30
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
10
20
30
40
50
60
-20
-10
0
10
20
30
40
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) 0.38 0.07 0.07 0.34 0.52 0.51
Reported EPS (USD) 0.33 0.15 0.10 0.34 0.52 0.51
DPS (USD) 0.34 0.08 0.05 0.17 0.26 0.25
BVPS (USD) 3.1 3.1 3.2 3.3 3.6 3.9
Weighted average shares (m) 737 737 737 737 737 737
Average market cap (USDm) 13,455 10,122 8,059 18,203 18,203 18,203
Enterprise value (USDm) 13,002 10,312 8,048 18,170 17,925 17,646
Valuation Metrics P/E (DB) (x) 48.4 187.1 157.6 72.0 47.4 48.8
P/E (Reported) (x) 56.0 93.7 114.3 72.0 47.4 48.8
P/BV (x) 3.99 3.87 3.30 7.55 6.82 6.39
FCF Yield (%) nm nm 0.9 0.7 2.3 2.7
Dividend Yield (%) 1.9 0.6 0.5 0.7 1.1 1.0
EV/Sales (x) 8.0 7.3 5.6 10.3 9.2 9.0
EV/EBITDA (x) 17.9 19.0 15.1 20.6 16.0 15.8
EV/EBIT (x) 26.7 42.1 40.2 36.4 25.0 25.4
Income Statement (USDm)
Sales revenue 1,615 1,413 1,444 1,756 1,947 1,970
Gross profit 1,000 803 751 1,062 1,299 1,294
EBITDA 727 541 532 880 1,120 1,116
Depreciation 239 296 331 382 403 422
Amortisation 0 0 0 0 0 0
EBIT 488 245 200 499 717 694
Net interest income(expense) -9 -47 20 -35 -33 -27
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries -54 77 28 0 0 0
Other pre-tax income/(expense) -6 -24 -36 -75 -94 -94
Profit before tax 418 251 212 389 590 574
Income tax expense 158 134 143 136 207 201
Minorities 21 9 -1 0 0 0
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 240 108 71 253 384 373
DB adjustments (including dilution) 38 -54 -19 0 0 0
DB Net profit 278 54 51 253 384 373
Cash Flow (USDm)
Cash flow from operations 446 122 543 689 810 818
Net Capex -560 -411 -469 -566 -385 -322
Free cash flow -114 -289 74 123 425 496
Equity raised/(bought back) 346 -451 0 0 0 0
Dividends paid -505 -88 -38 -66 -148 -190
Net inc/(dec) in borrowings 830 0 0 0 0 0
Other investing/financing cash flows 81 -270 190 6 11 16
Net cash flow 638 -1,098 227 63 288 321
Change in working capital 0 0 0 0 0 0
Balance Sheet (USDm)
Cash and other liquid assets 1,252 154 381 445 733 1,054
Tangible fixed assets 1,838 1,969 2,139 2,323 2,304 2,204
Goodwill/intangible assets 0 0 0 0 0 0
Associates/investments 436 478 456 415 372 330
Other assets 558 1,140 881 739 763 766
Total assets 4,084 3,742 3,858 3,922 4,172 4,353
Interest bearing debt 836 796 797 797 797 797
Other liabilities 576 644 686 682 677 679
Total liabilities 1,412 1,440 1,483 1,479 1,474 1,476
Shareholders' equity 2,273 2,275 2,344 2,412 2,668 2,847
Minorities 399 27 30 30 30 30
Total shareholders' equity 2,672 2,302 2,374 2,442 2,698 2,877
Net debt -415 642 416 352 64 -257
Key Company Metrics
Sales growth (%) -25.1 -12.5 2.2 21.6 10.9 1.2
DB EPS growth (%) -58.5 -80.5 -5.5 394.6 51.7 -2.8
EBITDA Margin (%) 45.0 38.3 36.8 50.1 57.5 56.7
EBIT Margin (%) 30.2 17.3 13.9 28.4 36.8 35.2
Payout ratio (%) 104.6 54.6 56.9 50.0 50.0 50.0
ROE (%) 10.7 4.8 3.1 10.6 15.1 13.5
Capex/sales (%) 35.4 30.1 32.9 32.2 19.8 16.3
Capex/depreciation (x) 2.4 1.4 1.4 1.5 1.0 0.8
Net debt/equity (%) -15.5 27.9 17.5 14.4 2.4 -8.9
Net interest cover (x) 54.5 5.2 nm 14.3 22.0 25.8
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 34 Deutsche Bank AG/London
KAZ Minerals Hold Reuters: KAZ.L Exchange: LSE Ticker: KAZ
Doubling copper cathode production by 2017
Price target (GBP) 163
FTSE 100 INDEX 6,504
Our investment thesis:
KAZ Minerals is undertaking its plan to convert from a high-cost copper producer to a
low-cost copper producer post the commissioning of its two Greenfield projects,
Bozshakol and Aktogay. The projects are set to double the group’s copper cathode
production by 2017. We estimate KAZ Minerals’ copper cathode equivalent production
at 147kt in 2016. With 2016 net debt to EBITDA at 12 times going down to 6 times in
2017 on our estimates, the company has taken on higher debt to fund the two growth
projects, provided via a funding arrangement with the China Development Bank. The
debt is payable over an extended period. The weakening of the Kazakhstan Tenge
constitutes a tailwind for the company while the challenging outlook for copper is less
supportive.
Impact of the changes made to our copper and gold price forecasts: Our 2016 EPS has increased 36% on higher copper and zinc and gold by-products
price forecasts in the second half of the year. However, we have cut our copper price forecasts for 2017 by 5% and therefore revised our 2017 earnings estimate down 20%.
Our NPV on a US$ basis moved down 21%. We have however reflected a 1.30 GBP/USD rate on a 12-month view, in determining our GBP target price, which decreases by only 3% to £1.63.
Next catalysts:
1H16 interim financial results
Aktogay and Bozshakol: Demonstrated successful delivery of the two growth
projects will be key milestones for the company and the market is likely to start
reacting to these when they near completion and all capital commitments have
been made.
Copper prices and Tenge: Kaz Minerals is currently the archetypal leveraged
copper play and as such will be highly influenced by the copper price in Tenge.
Dates: 2Q16 quarterly production results: 28 July
1H16 interim financial results: 18 August
Valuation and risks: We value KAZ Minerals on a DCF-derived net asset valuation (NAV) and our target
price is set at 0.77x of our NAV. This assumes a WACC of 10.6% on post-tax cash flow and assumes 15% gearing (CoE 11.8%, CoD 6.5%, tax rate of 20%). We use life of mine cash flow analysis to arrive at our DCF valuation.
Key risks include weaker copper and zinc prices compared with our forecasts, lower production of copper and zinc and a stronger local operating currency (Tenge). Other risks include corporate governance, domestic economic and political developments and acquisitions. Last but not least for KAZ Minerals, project delivery is a key risk. While the group is moving through the development of its two large projects, its gearing will increase substantially and pose an extra risk in the event of commodity price declines.
Anna Mulholland (+44) 207 541 8172
Franck Nganou (+44) 207 541 8161
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 35
Model updated:04 July 2016
Running the numbers
Europe
United Kingdom
Metals & Mining
KAZ Minerals Reuters: KAZ.L Bloomberg: KAZ LN
Hold Price (5 Jul 16) GBP 126.60
Target Price GBP 163.00
52 Week range GBP 72.70 - 201.20
Market Cap (m) GBPm 566
USDm 738
Company Profile
Kazakhmys is a Top 10 global copper producer, Top 5 in silver, an expanding zinc producer, enjoys bottom quartile costs, has expansion and acquisition potential and close proximity to key end-consumer, China. Kazakhmys listed in London recently and entered the FTSE 100 index. Its assets are all located in Kazakstan.
Price Performance
0
100
200
300
400
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
KAZ Minerals FTSE 100 INDEX (Rebased)
Margin Trends
-30
-15
0
15
30
45
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
-80
-60
-40
-20
0
20
40
-100
-50
0
50
100
150
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
01122334
0
200
400
600
800
1000
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) 0.37 0.19 -0.02 0.15 0.24 0.12
Reported EPS (USD) -3.96 -5.28 -0.03 0.15 0.24 0.12
DPS (USD) 0.00 0.00 0.00 0.00 0.02 0.01
BVPS (USD) 9.4 4.7 0.7 0.9 1.1 1.2
Weighted average shares (m) 513 447 447 447 447 447
Average market cap (USDm) 3,050 1,919 1,244 738 738 738
Enterprise value (USDm) 2,296 2,013 2,785 2,865 3,172 3,251
Valuation Metrics P/E (DB) (x) 16.1 22.1 nm 10.9 7.0 14.2
P/E (Reported) (x) nm nm nm 10.9 7.0 14.2
P/BV (x) 0.38 0.86 2.12 1.86 1.49 1.36
FCF Yield (%) nm nm nm nm nm nm
Dividend Yield (%) 0.0 0.0 0.0 0.0 1.1 0.6
EV/Sales (x) 0.7 2.4 4.2 4.5 2.2 1.8
EV/EBITDA (x) 3.2 5.7 13.8 12.2 6.4 4.6
EV/EBIT (x) nm 21.2 31.0 23.7 12.2 12.3
Income Statement (USDm)
Sales revenue 3,099 847 666 641 1,466 1,822
Gross profit 722 356 202 234 497 709
EBITDA 722 356 202 234 497 709
Depreciation 288 43 52 55 116 317
Amortisation 1,036 218 60 58 120 128
EBIT -602 95 90 121 260 263
Net interest income(expense) -79 -263 -78 -38 -132 -200
Associates/affiliates -1,224 -2,128 0 0 0 0
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax -681 -168 12 83 129 64
Income tax expense 127 65 24 15 23 11
Minorities 0 0 0 0 0 0
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit -2,032 -2,361 -12 68 105 52
DB adjustments (including dilution) 2,222 2,448 2 0 0 0
DB Net profit 190 87 -10 68 105 52
Cash Flow (USDm)
Cash flow from operations 293 214 -175 123 312 373
Net Capex -1,271 -1,209 -1,080 -709 -614 -445
Free cash flow -978 -995 -1,255 -586 -303 -72
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -42 0 0 0 -4 -6
Net inc/(dec) in borrowings 683 -26 409 -12 188 38
Other investing/financing cash flows 802 1,036 -33 0 0 0
Net cash flow 465 15 -879 -598 -119 -41
Change in working capital -13 21 -62 0 86 9
Balance Sheet (USDm)
Cash and other liquid assets 1,715 1,730 851 253 134 92
Tangible fixed assets 3,312 2,740 2,393 3,047 3,545 3,673
Goodwill/intangible assets 52 11 7 7 7 7
Associates/investments 1,293 871 715 715 715 715
Other assets 2,247 366 192 284 740 788
Total assets 8,619 5,718 4,158 4,306 5,140 5,276
Interest bearing debt 3,111 3,092 3,504 3,492 3,679 3,717
Other liabilities 1,287 522 332 414 964 1,014
Total liabilities 4,398 3,614 3,836 3,906 4,643 4,731
Shareholders' equity 4,217 2,101 319 397 494 542
Minorities 4 3 3 3 3 3
Total shareholders' equity 4,221 2,104 322 400 497 545
Net debt 1,396 1,362 2,653 3,239 3,546 3,625
Key Company Metrics
Sales growth (%) -7.6 -72.7 -21.4 -3.7 128.9 24.3
DB EPS growth (%) -60.5 -47.4 na na 55.0 -50.5
EBITDA Margin (%) 23.3 42.0 30.4 36.6 33.9 38.9
EBIT Margin (%) -19.4 11.2 13.5 18.9 17.7 14.5
Payout ratio (%) nm nm nm 0.0 8.0 8.0
ROE (%) -38.8 -74.7 -1.0 19.0 23.7 10.1
Capex/sales (%) 41.0 142.8 162.3 110.7 41.9 24.4
Capex/depreciation (x) 4.4 28.1 20.8 12.8 5.3 1.4
Net debt/equity (%) 33.1 64.7 823.9 809.5 713.3 665.0
Net interest cover (x) nm 0.4 1.1 3.2 2.0 1.3
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 36 Deutsche Bank AG/London
Lonmin Plc Sell Reuters: LMI.L Exchange: LSE Ticker: LMI
Solid free cash flow, as long as capex remains minimal
Price target (GBP) 106
FTSE 100 INDEX 6,504
Our Investment Thesis:
As a marginal producer, our price forecasts (based on marginal costs) leave Lonmin
leaking cash slowly but steadily over time. We believe higher-than-forecast prices (i.e.
above marginal cost) are unlikely in the medium term given the well-supplied PGM
metals market; and alternative sources of metal for end-users from recycling and
above-ground stocks. Lonmin has performed operationally, assisted by its high ore
reserve availability, and has no further obvious levers to pull in our view. Management
has already made the tough decision to lower production: output from the Marikana
complex will reduce by 100koz to 650kozpa over FY16 and FY17 as the Hossy and
Newman Shafts are closed and some of the smaller, contractor-operated mines are
put onto care-and-maintenance. We see a concentration of downside risks to being
exposed to the high-cost producer in an industry under pressure, and with low-prices
expected to persist for the medium term we have a Sell recommendation.
Changes made: platinum up but Rand stronger and palladium down
On our revised forecasts, Lonmin should report a net loss for FY16 and FY17 before
generating a small profit in FY18. The changes we made are due to increasing our
platinum prices by an average 6% each year for 2016 to 2018 but dropping our
palladium forecasts by the same percentage. We have strengthened our ZAR/USD
forecasts over the same period by 3%, 6% and 3% respectively. EBITDA covers capex
in FY16 and FY17 on our forecasts, with US$20m each year to spare, but the company
will return to burning cash in FY18 on our numbers, generating US$128m in EBITDA
but needing to spend US$142m in capex at that point. Our NPV on a US$ basis moves
down 16% but we have reflected a 1.30 GBP/USD rate on a 12-month view which
offsets all of the NPV cut, increasing our target price by 1% to £1.06.
Next catalysts: 3Q16 production report: We forecast improved production for Lonmin in the
quarter to June, with PGMs in concentrate up 18% quarter on quarter, and refined
and sold PGMs of 346koz, up 3% on 2Q16.
Key events: 3Q16 production report: 1 August 2016
Valuation and risks: Our price target is based on life-of-mine cash flows discounted at a WACC of
10.0%, Beta 1.4, ERP 6%. Risks include a weaker-than-expected rand and/or
higher-than-expected PGM prices leading to stronger than forecast cash flow,
taking pressure off the balance sheet. Additional risks include corporate action or
an approach for Lonmin given its distressed position; better-than-expected
production as a result of unexpected improvements in productivity; grades;
recoveries or a combination of the above.
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 37
Model updated:04 July 2016
Running the numbers
Sub-Saharan Africa
South Africa
Platinum
Lonmin Plc Reuters: LMI.L Bloomberg: LMI LN
Sell Price (5 Jul 16) GBP 221.25
Target Price GBP 106.00
52 Week range GBP 36.75 - 1,284.81
Market Cap (m) GBPm 552
USDm 721
Company Profile
Lonmin specialises in the mining of PGMs (platinum group metals). The group operates a number of platinum mines, concentrators, smelters and a refinery in its core Marikana operations, all situated in the Bushveld Igneous Complex of South Africa. The company's target is to produce 700koz in FY16, and 650kozpa in the two years thereafter.
Price Performance
0
10
20
30
40
Jul 14 Jan 15 Jul 15 Jan 16
Lonmin Plc FTSE 100 INDEX (Rebased)
Margin Trends
-160
-120
-80
-40
0
40
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
-150
-100
-50
0
50
-60
-40
-20
0
20
40
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
5
10
15
20
-10
-5
0
5
10
15
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 30-Sep 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) 0.20 0.05 -0.16 -0.02 -0.05 0.01
Reported EPS (USD) 0.31 -0.33 -2.86 -0.01 -0.05 0.01
DPS (USD) 0.00 0.00 0.00 0.00 0.00 0.00
BVPS (USD) 6.4 5.7 2.8 8.0 7.1 7.1
Weighted average shares (m) 532 570 582 250 282 282
Average market cap (USDm) 30,197 31,510 13,854 721 721 721
Enterprise value (USDm) 29,731 31,296 13,783 359 330 357
Valuation Metrics P/E (DB) (x) 278.1 nm nm nm nm 207.6
P/E (Reported) (x) 182.6 nm nm nm nm 207.6
P/BV (x) 9.73 6.40 1.06 0.36 0.41 0.41
FCF Yield (%) nm nm nm nm 3.4 nm
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0 0.0
EV/Sales (x) 19.6 32.4 10.7 0.3 0.3 0.3
EV/EBITDA (x) 97.8 nm nm 3.5 3.3 2.8
EV/EBIT (x) 202.2 nm nm nm nm 24.1
Income Statement (USDm)
Sales revenue 1,520 965 1,293 1,045 999 1,030
Gross profit 304 -113 -52 103 98 128
EBITDA 304 -113 -52 103 98 128
Depreciation 157 142 1,966 111 110 113
Amortisation 0 0 0 0 0 0
EBIT 147 -255 -2,018 -8 -12 15
Net interest income(expense) -9 -64 -239 -10 -9 -9
Associates/affiliates 4 -6 -5 -2 0 0
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) -2 -1 0 0 0 0
Profit before tax 140 -326 -2,262 -20 -21 6
Income tax expense -58 -123 -363 -15 -6 2
Minorities 32 -15 -238 -2 -2 1
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 166 -188 -1,661 -3 -13 4
DB adjustments (including dilution) -57 219 1,567 -3 0 0
DB Net profit 109 31 -94 -6 -13 4
Cash Flow (USDm)
Cash flow from operations 16 -116 -12 -2 98 115
Net Capex -159 -93 -136 -80 -71 -142
Free cash flow -143 -209 -148 -83 28 -27
Equity raised/(bought back) 824 1 3 395 0 0
Dividends paid -11 -37 -19 0 0 0
Net inc/(dec) in borrowings -742 175 331 -355 0 0
Other investing/financing cash flows -42 12 10 -15 0 0
Net cash flow -114 -58 177 -58 28 -27
Change in working capital -223 32 60 -47 9 -3
Balance Sheet (USDm)
Cash and other liquid assets 201 143 320 262 290 263
Tangible fixed assets 2,908 2,882 1,477 1,448 1,409 1,438
Goodwill/intangible assets 502 497 94 94 94 94
Associates/investments 466 392 147 138 138 138
Other assets 539 451 391 376 360 363
Total assets 4,616 4,365 2,429 2,319 2,291 2,296
Interest bearing debt 0 172 505 150 150 150
Other liabilities 1,006 811 404 273 266 266
Total liabilities 1,006 983 909 423 416 416
Shareholders' equity 3,409 3,233 1,629 2,007 1,994 1,998
Minorities 201 149 -109 -111 -113 -112
Total shareholders' equity 3,610 3,382 1,520 1,896 1,881 1,885
Net debt -201 29 185 -112 -140 -113
Key Company Metrics
Sales growth (%) nm -36.5 34.0 -19.2 -4.4 3.1
DB EPS growth (%) na -73.6 na 84.8 -90.5 na
EBITDA Margin (%) 20.0 -11.7 -4.0 9.9 9.9 12.4
EBIT Margin (%) 9.7 -26.4 -156.1 -0.7 -1.2 1.4
Payout ratio (%) 0.0 nm nm nm nm 0.0
ROE (%) 12.4 -14.1 -124.0 -0.2 -1.0 0.3
Capex/sales (%) 10.5 9.6 10.5 7.7 7.1 13.8
Capex/depreciation (x) 1.0 0.7 0.1 0.7 0.6 1.3
Net debt/equity (%) -5.6 0.9 12.2 -5.9 -7.4 -6.0
Net interest cover (x) 16.3 nm nm nm nm 1.7
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 38 Deutsche Bank AG/London
Nordgold Buy Reuters: NORDNq.L Exchange: LSE Ticker: NORD
Growth and efficiency plans deployed
Price target (USD) 4.9
FTSE 100 INDEX 6,504
Our investment thesis
Nordgold has a diversified portfolio of eight gold mines in West Africa, Russia and
Kazakhstan, and two projects in execution: Bouly in Burkina Faso and Gross in Russia.
We estimate the company will grow production beyond 1moz per annum, with the
new Bouly mine commencing production in the second half of 2016. Nordgold offers a
resilient business model with a healthy growth pipeline. We expect the group to
benefit from a stronger gold price, weaker operating currencies and cost efficiencies in
the next 12 months. The main drag remains the low liquidity of the shares but with the
recent redomiciliation of Nordgold to the UK, the first step for a premium listing in
London, we believe this is a move in the right direction, and the shares appear
undervalued relative to our target price.
Changes made to our copper and gold price forecasts:
With the upward revision in our gold price forecasts, our 2016 and 2017 earnings
estimates have moved up 18% and 8% respectively. We have also updated our
inflation forecasts in Russia and Kazakhstan, reflecting the latest available change in
producers’ prices. Our target price has increased 4.3% to US$4.90 from US$4.60.
Next catalysts:
2Q16 and 1H16 financial results during the last week of July 2016 (exact date not confirmed yet).
Roadmap for the premium listing in London which requires a 25% free float (Nordgold’s free float is currently at 9%) and will boost liquidity in the shares.
Potential use of free cash flow: will management consider a third share buyback?
Delivery of first production from Bouly on budget and schedule. Nordgold expects Bouly to start producing in 3Q16. The mine should account for circa 10% of both group’s revenue and EBITDA once ramped-up.
Movements in the gold price and the operating currencies which should help generate more cash flows
Valuation and risks: We value Nordgold using a sum-of-the-parts of life of mine DCF models. We apply
an NPV multiple of 0.7x to reflect the ranking we assign to Nordgold within our coverage universe. Our rankings are derived from debt reduction, P/E valuation, near-term earnings growth, and management action taken to control cash flow. We value the group's longer-dated growth options at US$134m or US$0.36/GDR. We use a WACC of 8.36% and a long-term (real) gold price of US$1,300/oz.
Key downside risks include lower-than-expected gold prices, higher-than-expected
costs and a stronger-than-expected Rouble, Tenge, Guinean franc and West
African franc. Operational risks are concentrated around management's ability to
deliver on development projects and to sustain cost reduction
Franck Nganou George Buzhenitsa (+44) 207 548 8161 +(7) 495 933 9221
[email protected] [email protected]
Anna Mulholland (+44) 2017 541 8172
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 39
Model updated:03 July 2016
Running the numbers
Emerging Europe
Russia
Metals & Mining
Nordgold Reuters: NORDNq.L Bloomberg: NORD LI
Buy Price (5 Jul 16) USD 3.48
Target Price USD 4.90
52 Week range USD 2.50 - 3.49
Market Cap (m) EURm 1,179
USDm 1,309
Company Profile
Nordgold is a gold mining and exploration company with eight operating mines in Russia, Kazakhstan, Burkina Faso and Guinea. The company is a former subsidiary of Severstal Group, spun off in January 2012, when a portion of Nordgold's share capital was listed in the form of Global Depositary Receipts.
Price Performance
0.0
1.0
2.0
3.0
4.0
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Nordgold Russian RTS Index (Rebased)
Margin Trends
10
20
30
40
50
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
-20
-10
0
10
20
30
-10-505
10152025
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
2
4
6
8
10
0
20
40
60
80
100
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) -0.55 0.26 0.47 0.34 0.41 0.50
Reported EPS (USD) -0.58 0.26 0.47 0.24 0.34 0.50
DPS (USD) 0.08 0.10 0.16 0.11 0.14 0.17
BVPS (USD) 3.1 2.5 2.2 2.5 3.0 3.5
Weighted average shares (m) 378 378 376 376 376 376
Average market cap (USDm) 973 602 1,015 1,309 1,309 1,309
Enterprise value (USDm) 1,756 1,238 1,609 1,947 1,785 1,579
Valuation Metrics P/E (DB) (x) nm 6.2 5.8 10.4 8.5 7.0
P/E (Reported) (x) nm 6.1 5.8 14.7 10.3 7.0
P/BV (x) 0.52 0.60 1.23 1.37 1.17 1.00
FCF Yield (%) 15.2 35.3 18.8 nm 17.7 22.2
Dividend Yield (%) 3.1 6.5 5.8 3.2 3.9 4.8
EV/Sales (x) 1.4 1.0 1.4 1.7 1.3 1.1
EV/EBITDA (x) 4.5 2.4 3.1 4.0 2.7 2.3
EV/EBIT (x) 10.4 4.0 5.0 8.6 5.7 4.0
Income Statement (USDm)
Sales revenue 1,271 1,216 1,129 1,150 1,373 1,424
Gross profit 461 572 578 597 770 813
EBITDA 388 510 522 486 652 686
Depreciation 219 202 198 260 339 291
Amortisation 0 0 0 0 0 0
EBIT 168 308 324 225 313 396
Net interest income(expense) -51 -101 -34 -43 -72 -72
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries -386 -24 -15 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax -269 183 274 182 241 324
Income tax expense -70 60 86 71 86 104
Minorities 19 25 13 23 28 33
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit -218 98 176 89 127 186
DB adjustments (including dilution) 9 -1 0 38 27 0
DB Net profit -209 97 176 126 154 186
Cash Flow (USDm)
Cash flow from operations 310 328 418 359 480 510
Net Capex -162 -115 -227 -365 -249 -219
Free cash flow 148 213 191 -6 232 291
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -71 -40 -59 -83 -42 -52
Net inc/(dec) in borrowings 232 -21 -2 22 38 0
Other investing/financing cash flows -110 -268 24 47 0 0
Net cash flow 199 -115 154 -20 227 239
Change in working capital -199 116 -154 17 -227 -239
Balance Sheet (USDm)
Cash and other liquid assets 244 128 364 346 573 813
Tangible fixed assets 816 669 668 808 808 808
Goodwill/intangible assets 906 708 683 695 695 695
Associates/investments 20 240 60 77 77 77
Other assets 646 498 352 359 398 391
Total assets 2,632 2,242 2,126 2,286 2,552 2,784
Interest bearing debt 968 944 946 967 1,005 1,005
Other liabilities 413 300 282 267 308 311
Total liabilities 1,381 1,245 1,228 1,234 1,313 1,316
Shareholders' equity 1,172 939 827 958 1,117 1,314
Minorities 78 59 71 94 122 155
Total shareholders' equity 1,251 998 898 1,052 1,239 1,468
Net debt 724 817 582 621 432 192
Key Company Metrics
Sales growth (%) nm -4.3 -7.1 1.9 19.4 3.7
DB EPS growth (%) na na 81.1 -28.0 22.2 20.8
EBITDA Margin (%) 30.5 41.9 46.2 42.2 47.5 48.2
EBIT Margin (%) 13.2 25.3 28.7 19.6 22.8 27.8
Payout ratio (%) nm 39.6 33.4 47.6 40.5 33.4
ROE (%) -15.7 9.3 19.9 9.9 12.3 15.3
Capex/sales (%) 12.8 9.5 20.1 31.8 18.1 15.3
Capex/depreciation (x) 0.7 0.6 1.1 1.4 0.7 0.8
Net debt/equity (%) 57.9 81.9 64.8 59.0 34.9 13.1
Net interest cover (x) 3.3 3.1 9.4 5.2 4.4 5.5
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 40 Deutsche Bank AG/London
Norsk Hydro Hold Reuters: NHY.OL Exchange: OSL Ticker: NHY
Buffeted by Kroner headwind
Price target (NOK) 34.8
Oslo All Share Index 666
Our investment case:
Hydro is a fully integrated aluminium producer with power generating, alumina
refining, aluminum smelting and aluminium processing operations. Its acquisition of
the Brazilian aluminium, alumina and bauxite assets from Vale has shifted its balance
from naturally short alumina (neutral when including long-term off take agreements)
to naturally long. The company is still in the process of integrating them into its
business. Once done, the bauxite and alumina assets offer significant growth options
to Hydro. We have a Hold recommendation on the stock.
Changes made: Aluminium prices down 2017 and 2018
We have cut our 2016-2018 EPS estimates by between 20% and 40% due to factoring
in a stronger Norwegian Kroner and cutting our aluminium forecasts. In terms of the
Kroner, we have cut out forecasts by 10%, 12.5% and 10% over the time period; and
for aluminium, we have cut our prices by 4% in 2017 and 8% in 2018. Our NPV on a
NOK basis moves up 9%, including the benefit of rolling our calculation to June 2017.
Our target price moves up 12%.
Next catalysts: 2Q16 results: We forecast a marginal, 2%, uptick in Hydro’s total production in
1H16 compared with 1H16. Whilst we forecast a 35% drop in EBITDA in 1H16 to
NOK5.4bn, due to higher costs given the strengthening of the Kroner, we also
expect Hydro’s tax rate to come down in the period to 17% compared with 30% in
1H15. This results in a 7% increase year on year in net income on our forecasts, to
NOK3.1bn.
Key events: 2Q16 results: 21 July 2016
Valuation and risks:
Our PT is set at 0.93x our NPV valuation for the company in line with its sector
performance – WACC 10.0%, CoE 12.4%, CoD 6.5%). Our target price is in line with
our valuation. Risks to valuation and price target include significant movements in our
aluminium price, exchange rate and cost assumptions. The key area of risk is NHY’s
ability or otherwise to negotiate the removal of the ICMS fuel charge.
Anna Mulholland (+44) 207 541 8172
Franck Nganou (+44) 207 548 8161
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 41
Model updated:04 July 2016
Running the numbers
Europe
Norway
Metals & Mining
Norsk Hydro Reuters: NHY.OL Bloomberg: NHY NO
Hold Price (5 Jul 16) NOK 30.66
Target Price NOK 34.80
52 Week range NOK 26.00 - 36.05
Market Cap (m) NOKm 62,619
USDm 7,462
Company Profile
Hydro is a fully integrated aluminium producer with power generating, alumina refining, aluminum smelting and aluminium processing operations. Its recent acquisition of the Brazilian aluminium, alumina and bauxite assets from Vale has shifted its balance from naturally short alumina (neutral when including long-term offtake agreements) to naturally long. With the transfer of the assets only just complete, the company is in the process of integrating them into its business. Once done, the bauxite and alumina assets offer significant growth options to Hydro. The company is in the process of commissioning its major greenfield smelter in Qatar. Price Performance
2024283236404448
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Norsk Hydro Oslo All-Share Index (Rebased)
Margin Trends
0
4
8
12
16
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
-2
0
2
4
6
8
-15-10-505
10152025
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
20
40
60
80
100
-10
-8
-6
-4
-2
0
2
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (NOK) 0.93 1.83 3.29 1.54 1.35 2.97
Reported EPS (NOK) -0.45 0.39 0.99 2.35 1.75 2.36
DPS (NOK) 0.75 1.00 1.00 0.75 0.75 1.19
BVPS (NOK) 34.3 36.3 36.3 38.6 41.6 45.2
Weighted average shares (m) 2,038 2,039 2,041 2,042 2,042 2,042
Average market cap (NOKm) 52,775 69,384 72,620 62,619 62,619 62,619
Enterprise value (NOKm) 39,187 61,296 56,770 51,396 49,919 45,429
Valuation Metrics P/E (DB) (x) 27.8 18.6 10.8 19.9 22.7 10.3
P/E (Reported) (x) nm 86.9 35.9 13.1 17.5 13.0
P/BV (x) 0.79 1.17 0.91 0.79 0.74 0.68
FCF Yield (%) 4.6 4.0 12.7 nm 4.8 9.6
Dividend Yield (%) 2.9 2.9 2.8 2.4 2.4 3.9
EV/Sales (x) 0.6 0.8 0.6 0.6 0.6 0.5
EV/EBITDA (x) 6.5 5.9 4.3 4.7 4.4 3.6
EV/EBIT (x) 23.4 10.8 6.9 8.7 8.3 6.3
Income Statement (NOKm)
Sales revenue 65,359 79,075 88,642 79,615 84,246 87,752
Gross profit 6,066 10,444 13,282 10,958 11,222 12,485
EBITDA 6,066 10,444 13,282 10,958 11,222 12,485
Depreciation 4,392 4,770 5,023 5,075 5,219 5,262
Amortisation 0 0 0 0 0 0
EBIT 1,674 5,674 8,259 5,882 6,003 7,224
Net interest income(expense) -2,550 -3,553 -4,833 580 -786 -88
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax -876 2,121 3,426 6,462 5,217 7,136
Income tax expense 153 892 1,092 1,438 1,501 1,997
Minorities 82 431 312 227 147 319
Other post-tax income/(expense) 189 0 0 0 0 0
Net profit -922 798 2,022 4,796 3,569 4,819
DB adjustments (including dilution) 2,823 2,930 4,687 -1,650 -810 1,245
DB Net profit 1,901 3,728 6,709 3,146 2,759 6,065
Cash Flow (NOKm)
Cash flow from operations 5,074 5,965 14,373 6,434 7,126 9,627
Net Capex -2,637 -3,181 -5,132 -7,968 -4,117 -3,605
Free cash flow 2,437 2,784 9,241 -1,535 3,009 6,022
Equity raised/(bought back) 56 21 35 10 0 0
Dividends paid -1,528 -1,943 -2,370 -2,042 -1,532 -1,532
Net inc/(dec) in borrowings -511 -1,346 -4,941 1,146 1,000 0
Other investing/financing cash flows 1,369 1,463 -4,296 -1,950 -2,312 -5,036
Net cash flow 1,823 979 -2,331 -4,371 165 -546
Change in working capital 0 0 0 0 0 0
Balance Sheet (NOKm)
Cash and other liquid assets 10,892 11,039 12,669 11,814 15,766 19,007
Tangible fixed assets 50,670 55,719 51,174 58,329 61,014 63,145
Goodwill/intangible assets 0 0 0 0 0 0
Associates/investments 23,767 24,042 25,271 23,730 23,246 23,282
Other assets 29,906 35,472 33,430 34,395 37,098 38,167
Total assets 115,235 126,272 122,544 128,267 137,124 143,602
Interest bearing debt 10,181 11,167 7,531 8,959 10,949 9,737
Other liabilities 29,790 35,164 35,683 35,172 36,066 36,363
Total liabilities 39,971 46,331 43,214 44,130 47,016 46,100
Shareholders' equity 69,981 74,030 74,171 78,913 84,884 92,278
Minorities 5,283 5,911 5,159 5,224 5,224 5,224
Total shareholders' equity 75,264 79,941 79,330 84,137 90,108 97,502
Net debt -711 128 -5,138 -2,855 -4,817 -9,270
Key Company Metrics
Sales growth (%) 1.2 21.0 12.1 -10.2 5.8 4.2
DB EPS growth (%) 277.0 96.0 79.8 -53.1 -12.3 119.8
EBITDA Margin (%) 9.3 13.2 15.0 13.8 13.3 14.2
EBIT Margin (%) 2.6 7.2 9.3 7.4 7.1 8.2
Payout ratio (%) nm 255.5 100.9 31.9 42.9 50.3
ROE (%) -1.3 1.1 2.7 6.3 4.4 5.4
Capex/sales (%) 4.1 4.2 5.9 10.0 4.9 4.1
Capex/depreciation (x) 0.6 0.7 1.0 1.6 0.8 0.7
Net debt/equity (%) -0.9 0.2 -6.5 -3.4 -5.3 -9.5
Net interest cover (x) 0.7 1.6 1.7 nm 7.6 82.1
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 42 Deutsche Bank AG/London
Nyrstar NV Hold Reuters: NYR.BR Exchange: BRU Ticker: NYR
Selling the mines to re-focus on the smelters
Price target (EUR) 10.18
EURO (STOXXE) 2,865
Our investment thesis
Nyrstar is the largest producer of refined zinc in the world through its global zinc
smelter operations. The company’s unsuccessful push into mining has been halted
and Nyrstar intends to sell the entirety of its mining business to prevent further cash
burn and stretching of its balance sheet. In February 2016, Nyrstar launched a rights
issue to help cover the debt due to mature this year. With the EUR270m proceeds, the
company had cash on hand of EUR240m at the end of 1Q16. This, together with
committed credit lines of EUR450m, provided some liquidity sources to repay the 2016
EUR415m bond. In June, the company announced the sale of its third-largest mine, El
Toqui, for US$25m; a positive outcome. Nyrstar will now focus on its smelters which
sit in the middle of the cost curve. One of the key projects of the group is the Port Pirie
smelter enhancement project in Australia.
Changes made to our copper and gold price forecasts: With the upward revision to our zinc price forecasts and the sale of the El Toqui
mine, our 2016 earnings forecasts have moved to a positive EUR21m from a negative EUR5m. Our 2017 earnings have increased 17% on better zinc prices.
Our target price increased 4% to EUR10.2 per share on higher treatment charges beyond 2017 and higher zinc and gold prices, albeit somewhat offset by our lower lead price estimates.
Next catalysts:
2Q16 results
The cash generated by the sale of the mining business
EUR/USD movements. On our estimate, a 10% movement in our EUR/USD forecast translates into a 32% impact on EBITDA.
Port Pirie smelter enhancement project will be another catalyst for the shares. The company aims to increase annual EBITDA by EUR80m from the project. Port Pirie commissioning was expected to commence by the end of H1 2016 and ramp up to start by H2 2016.
Dates: 2Q16 /1H16 financial results: 8 August 2016
Valuation and risks: We value Nyrstar on a SOTP net present value (NPV) of mines and smelters, key
variables in our NPV estimate are beta 1.40, risk-free rate (10-year) 4.0%, equity risk premium 6%, credit risk premium 2.5%, and CAPM discount rate 12.4%. Our WACC of 10.0% reflects cost of equity (post tax) 12.4%, cost of debt (pre-tax) 6.5%, gearing target 30%, and effective tax rate 30%. Our price target is set at 0.73x our NPV in line with relative sector performance.
Nyrstar is highly leveraged to the zinc price and the Euro, consequently, differences in these values from our expectations are the biggest risk factors to our earnings and valuation expectations. The smelters are well operated, but are currently in the middle of a range of upgrade projects and risks relate to timing and capex. With a stretched balance sheet, the key risks pertain to cash flow generation this year and specifically include the successful sale or closure of the mines to stop the cash burn and the successful delivery of the smelter projects.
Franck Nganou Anna Mulholland (+44) 207 548 8161 (+44) 2017 541 8172
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 43
Model updated:03 July 2016
Running the numbers
Europe
Belgium
Metals & Mining
Nyrstar NV Reuters: NYR.BR Bloomberg: NYR BB
Hold Price (5 Jul 16) EUR 9.09
Target Price EUR 10.18
52 Week range EUR 5.69 - 18.39
Market Cap (m) EURm 1,205
USDm 1,338
Company Profile
Nyrstar is the global leader in zinc smelting (~10% market share) with assets in Europe, Australia, the US and JVs in Asia. It also owns and operates a lead smelter in Australia, has a 50% interest in a lead recycling business in Australia and generates a small amount of its earnings from downstream zinc businesses in Asia and France. The company was formed in late 2007 through the combination of these assets from Zinifex (Australia) and Umicore (Belgium). The company's largest sensitivities in order are; the Eur/USD exchange rate, the LME zinc price and the Zinc treatment charge (the benchmark price is negotiated annually). Price Performance
4
8
12
16
20
24
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Nyrstar NV DJ (.STOXXE) (Rebased)
Margin Trends
-20
-10
0
10
20
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
-60
-40
-20
0
20
40
-20
-10
0
10
20
30
40
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
2
4
6
8
10
12
020406080
100120140
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (EUR) -1.29 -0.27 -0.07 0.11 2.02 2.22
Reported EPS (EUR) -1.29 -1.19 -1.19 0.11 2.02 2.22
DPS (EUR) 0.00 0.00 0.00 0.00 0.61 0.66
BVPS (EUR) 5.6 3.5 2.0 10.9 13.1 14.0
Weighted average shares (m) 154 235 327 133 94 95
Average market cap (EURm) 2,380 3,089 5,167 1,205 1,205 1,205
Enterprise value (EURm) 3,274 3,753 6,174 1,908 1,619 1,453
Valuation Metrics P/E (DB) (x) nm nm nm 80.4 4.5 4.1
P/E (Reported) (x) nm nm nm 80.4 4.5 4.1
P/BV (x) 1.83 4.77 4.67 0.83 0.69 0.65
FCF Yield (%) 4.3 0.7 nm nm 37.2 31.5
Dividend Yield (%) 0.0 0.0 0.0 0.0 6.7 7.3
EV/Sales (x) 1.2 1.3 2.0 0.6 0.4 0.4
EV/EBITDA (x) 19.3 13.2 22.9 5.9 3.0 2.7
EV/EBIT (x) nm nm nm 26.2 5.5 4.6
Income Statement (EURm)
Sales revenue 2,824 2,799 3,139 3,009 4,009 4,114
Gross profit 117 284 270 323 546 533
EBITDA 170 284 270 323 546 533
Depreciation 220 259 251 250 252 215
Amortisation 40 261 580 0 0 0
EBIT -90 -236 -561 73 293 318
Net interest income(expense) -99 -108 -115 -52 -42 -33
Associates/affiliates 1 0 0 0 0 0
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 0 1 0 0 0 0
Profit before tax -189 -343 -677 21 251 284
Income tax expense 11 -57 -245 0 61 71
Minorities 0 0 0 -1 -1 -1
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit -200 -285 -432 21 191 215
DB adjustments (including dilution) 0 222 405 5 5 0
DB Net profit -200 -63 -27 26 195 215
Cash Flow (EURm)
Cash flow from operations 295 314 -107 277 514 417
Net Capex -193 -292 -395 -288 -197 -144
Free cash flow 102 22 -502 -11 317 273
Equity raised/(bought back) 12 256 22 314 40 18
Dividends paid -24 0 0 1 1 -57
Net inc/(dec) in borrowings 21 -133 66 -315 -169 -69
Other investing/financing cash flows 0 0 0 0 0 0
Net cash flow 111 145 -414 -11 189 166
Change in working capital 206 103 -229 -36 29 -50
Balance Sheet (EURm)
Cash and other liquid assets 292 499 116 105 294 459
Tangible fixed assets 1,772 1,917 1,608 1,645 1,590 1,519
Goodwill/intangible assets 10 14 11 11 11 11
Associates/investments 46 44 24 24 24 24
Other assets 1,100 1,310 1,254 1,251 1,389 1,449
Total assets 3,220 3,784 3,014 3,037 3,308 3,464
Interest bearing debt 962 937 877 562 462 462
Other liabilities 1,388 1,692 1,493 1,454 1,620 1,645
Total liabilities 2,350 2,629 2,370 2,016 2,082 2,108
Shareholders' equity 870 1,155 644 1,021 1,225 1,356
Minorities 0 0 0 0 0 0
Total shareholders' equity 870 1,155 644 1,021 1,225 1,356
Net debt 670 438 761 457 169 3
Key Company Metrics
Sales growth (%) -8.0 -0.9 12.2 -4.2 33.2 2.6
DB EPS growth (%) -136.3 79.2 72.6 na 1,683.7 9.9
EBITDA Margin (%) 6.0 10.1 8.6 10.7 13.6 13.0
EBIT Margin (%) -3.2 -8.4 -17.9 2.4 7.3 7.7
Payout ratio (%) nm nm nm 0.0 30.0 29.5
ROE (%) -19.7 -27.5 -47.5 3.1 17.4 16.6
Capex/sales (%) 6.8 10.5 12.8 9.6 4.9 3.5
Capex/depreciation (x) 0.9 1.1 1.6 1.2 0.8 0.7
Net debt/equity (%) 77.0 37.9 118.3 44.8 13.8 0.2
Net interest cover (x) nm nm nm 1.4 7.0 9.6
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 44 Deutsche Bank AG/London
Polymetal Hold Reuters: POLYP.L Exchange: MICEX Ticker: POLY
Shares remain expensive despite ramping on higher gold and silver prices
Price target (GBP) 820
FTSE 100 INDEX 6,504
Our investment thesis
Polymetal aims to grow gold equivalent production steadily to 1.8moz by 2020 from
1.26moz in 2015. The majority of the group’s mines sit at the bottom of the cost curve
and Polymetal’s cash flow generation is healthy given the supportive gold and silver
price environment. The group’s gold equivalent production is split 65% gold, 30%
silver, and the remainder is made of copper and other by-products. Polymetal has
acquired “3rd generation” assets: the Komarovskoye deposit near Varvara and the
Kapan mine in Armenia. These, together with the development of the large open-pit
Kyzyl project in Kazakhstan, indicate the group is set to open its next chapter of
growth. Polymetal will nonetheless need to deliver an extension to its reserve base
and this could carry some execution risk. We have a Hold rating as our valuation is
fully reflected at the current share price levels.
Positive impacts of our upward revision in our gold price forecasts We have increased our target price by 5% to 820p from 780p with the increase in
our gold and silver price forecasts and lower-than-expected inflation in Russia and Kazakhstan during the first half of the year. Our 2016 and 2017 earnings estimates have gone up 28% and 23% respectively.
Next catalysts:
2Q16 production results
Movements in the gold and silver prices and the operating currencies
Delivery of the first concentrate from the Komarovoskoye deposit on time to the Varvara Hub; Komarovskoye is expected to nearly double Varvara’s production by adding 70koz by 2017 (5% of group production).
Kyzyl ramp-up on time and on budget. Kyzyl’s construction is expected to have started in May.
Dates: 2Q16 production results: 19 July 2016
Valuation and risks: Our price target is set at a 20% premium to our DCF valuation, to reflect the
ranking we assign to Polymetal as a gold miner within our coverage universe. Our rankings are derived from debt reduction, P/E valuation, near-term earnings growth, and management action taken to control cash flow. We value Polymetal from a sum-of-the-parts life-of-mine DCF model. We apply a 9% WACC based on a targeted capital structure of 70% equity and 30% debt.
Key risks include silver and gold prices significantly higher/lower than our
expectations as well as Russian macroeconomic factors such as Rouble
appreciation/depreciation. Management risks are concentrated around its ability to
integrate newly acquired deposits. Other risks include changes in fiscal regimes
and/or mining legislation. 90% of Polymetal's assets are in Russia, with the 10% in
Kazakhstan and Armenia.
Franck Nganou George Buzhenitsa (+44) 207 548 8161 +(7) 495 933 9221
[email protected] [email protected]
Anna Mulholland (+44) 2017 541 8172
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 45
Model updated:03 July 2016
Running the numbers
Emerging Europe
Russia
Metals & Mining
Polymetal Reuters: POLYP.L Bloomberg: POLY LN
Hold Price (5 Jul 16) GBP 1,083.00
Target Price GBP 820.00
52 Week range GBP 427.10 - 1,083.00
Market Cap (m) GBPm 4,601
USDm 6,004
Company Profile
Polymetal International is the holding company of Polymetal, a leading Russian gold and silver miner. In 2010, Polymetal was the fourth largest gold producer in Russia by production volume and its largest silver producer, ranked eighth worldwide Polymetal produced 810koz of gold equivalent in 2011 at six operating assets and targets a 73% organic growth in gold equivalent output by 2014.
Price Performance
200
400
600
800
1000
1200
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Polymetal Russian RTS Index (Rebased)
Margin Trends
10
20
30
40
50
60
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
-40-20020406080100
-20
-10
0
10
20
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
5
10
15
20
0
50
100
150
200
250
300
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) 0.30 -0.61 0.56 1.03 1.15 1.35
Reported EPS (USD) -0.51 -0.53 0.52 1.03 1.15 1.35
DPS (USD) 0.09 0.36 0.51 0.31 0.34 0.40
BVPS (USD) 4.6 2.2 1.2 1.6 2.8 3.7
Weighted average shares (m) 386 397 423 425 425 425
Average market cap (USDm) 4,420 3,645 3,512 6,004 6,004 6,004
Enterprise value (USDm) 5,427 4,796 4,795 7,243 6,405 6,164
Valuation Metrics P/E (DB) (x) 37.8 nm 14.8 13.7 12.3 10.5
P/E (Reported) (x) nm nm 15.9 13.7 12.3 10.5
P/BV (x) 2.05 4.11 7.53 8.97 5.01 3.84
FCF Yield (%) 3.2 8.4 8.1 4.8 13.2 7.4
Dividend Yield (%) 0.8 3.9 6.1 2.2 2.4 2.9
EV/Sales (x) 3.2 2.8 3.3 4.3 3.5 3.1
EV/EBITDA (x) 9.0 6.9 7.2 8.6 6.8 5.9
EV/EBIT (x) 18.9 11.1 9.5 12.4 9.9 8.2
Income Statement (USDm)
Sales revenue 1,707 1,690 1,441 1,696 1,833 1,991
Gross profit 829 929 829 1,075 1,173 1,280
EBITDA 601 693 662 845 938 1,045
Depreciation 238 260 156 260 292 292
Amortisation 76 0 0 0 0 0
EBIT 287 432 506 584 646 753
Net interest income(expense) -43 -41 -81 -41 -41 -40
Associates/affiliates -2 -7 -4 0 0 0
Exceptionals/extraordinaries -310 35 -17 0 0 0
Other pre-tax income/(expense) -90 -558 -129 1 1 1
Profit before tax -158 -138 276 544 606 713
Income tax expense 40 71 55 108 120 142
Minorities 0 0 0 0 0 0
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit -198 -209 221 436 486 572
DB adjustments (including dilution) 315 -35 17 0 0 0
DB Net profit 117 -244 238 436 486 572
Cash Flow (USDm)
Cash flow from operations 462 515 490 610 1,115 659
Net Capex -319 -210 -205 -321 -322 -212
Free cash flow 142 305 285 289 793 446
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -316 -65 -300 -116 -138 -159
Net inc/(dec) in borrowings 213 202 27 -84 -114 -30
Other investing/financing cash flows 8 -350 -117 -10 0 0
Net cash flow 47 92 -105 78 540 258
Change in working capital 0 -81 15 -87 337 -205
Balance Sheet (USDm)
Cash and other liquid assets 66 157 52 263 963 1,175
Tangible fixed assets 2,095 2,021 1,360 1,420 1,450 1,371
Goodwill/intangible assets 31 18 14 14 14 14
Associates/investments 39 15 14 14 14 14
Other assets 1,025 786 642 876 535 757
Total assets 3,255 2,997 2,081 2,587 2,977 3,331
Interest bearing debt 1,111 1,323 1,350 1,380 1,380 1,350
Other liabilities 356 805 245 393 390 407
Total liabilities 1,467 2,128 1,595 1,772 1,769 1,757
Shareholders' equity 1,787 869 487 669 1,198 1,565
Minorities 0 0 0 137 0 0
Total shareholders' equity 1,787 869 487 807 1,198 1,565
Net debt 1,046 1,165 1,298 1,117 416 175
Key Company Metrics
Sales growth (%) -8.0 -0.9 -14.7 17.7 8.1 8.6
DB EPS growth (%) -73.1 na na 83.2 11.3 17.7
EBITDA Margin (%) 35.2 41.0 45.9 49.8 51.2 52.5
EBIT Margin (%) 16.8 25.6 35.1 34.5 35.3 37.8
Payout ratio (%) nm nm 97.6 30.0 30.0 30.0
ROE (%) -10.1 -15.7 32.6 75.5 52.0 41.4
Capex/sales (%) 18.7 12.4 14.3 18.9 17.6 10.7
Capex/depreciation (x) 1.3 0.8 1.3 1.2 1.1 0.7
Net debt/equity (%) 58.5 134.0 266.7 138.5 34.8 11.2
Net interest cover (x) 6.7 10.6 6.3 14.2 15.6 18.6
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 46 Deutsche Bank AG/London
Randgold Resources Hold Reuters: RRS.L Exchange: LSE Ticker: RRS
Running well ahead of the gold price
Price target (GBP) 7,100
FTSE 100 INDEX 6,504
Our investment thesis:
Randgold has a strong exploration and operational track record in Africa. Group
production exceeded 1moz in 2014 and 1.2moz in 2015 but we expect it to plateau
around 1.2-3moz for the next three years. Cost control is excellent and capex should
decline during 2016. We expect this to result in solid free cash flow which we think
Randgold will build up to invest in its next mine. This is the current target of the
company's exploration efforts but we do not foresee any new production coming on-
stream until the back end of this decade. Dividends are growing 10% yearly but off a
low base and the relative yield is not compelling in our opinion. In the medium to long
term, we believe Randgold has a high-quality mix of assets. The portfolio of reserves is
stress-tested down to US$1,000/oz gold, for a 20% IRR. This should mean Randgold
can generate higher margins and return on capital than peers but the shares are
expensive for the muted growth profile in the shorter-term. We rate the shares Hold.
Changes made on higher gold prices:
We make significant changes to our 2016-2018E earnings given the uplift of an
average 6% per annum to our gold price forecasts over the same time period. Our
2016 EPS estimate increases 51% to US$2.74, our 2017 estimate is up 31% to
US$3.73 and our 2018 estimate is up 11% to US$4.12. Our NPV on a US$ basis moves
up 6.6%. On 28 June we published a new target price for Randgold using a 1.30
GBP/USD rate on a 12-month view – in this report we bring the GBP target prices for
the other stocks under our coverage in line with this methodology.
Next catalysts: 2Q16 results: We expect Randgold to report a small improvement in production
and therefore unit cash costs in 2Q16, having had a difficult start to 2016
operationally. We forecast production of 309koz in the second quarter, up 6 percent on the first quarter, and meaning production for the first six months of the
year should come in at 601koz, up 3.6 percent year on year. Despite the small improvement in production, we expect group cash costs to rise quarter on quarter
driven mainly by higher royalty payments due to the rise in the gold price. We estimate group total unit cash costs will be US$692/oz for 2Q16, up 7% on 1Q16,
but US$670/oz on average for the first half, down 4% year on year.
Key events: 2Q16/1H16 results: 4 August 2016
Valuation and risks: Our price target is set at a 20% premium our NPV, to reflect the ranking we assign
to Randgold within our coverage universe. Our rankings are derived from debt
reduction, P/E valuation, near-term earnings growth, and management action taken to control cash flow. We derive our NVP from a DCF model of life of mine
cash flows. We use a long-term gold price of US$1,300/oz and a WACC of 5% (based on a risk-free rate of 4%, a market risk premium of 6%, a beta of 0.3x and a
30% target gearing).
Key risks include higher or lower-than-expected gold prices, lower or higher-than-
expected costs, particularly due to labour inflation, and volatility in the Euro/Dollar exchange rate.
Anna Mulholland (+44) 207 541 8172
Franck Nganou (+44) 207 541 8161
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 47
Model updated:29 June 2016
Running the numbers
Europe
United Kingdom
Gold
Randgold Reuters: RRS.L Bloomberg: RRS LN
Hold Price (5 Jul 16) GBP 9,310.00
Target Price GBP 7,100.00
52 Week range GBP 3,625.00 - 9,310.00
Market Cap (m) GBPm 8,697
USDm 11,349
Company Profile
Randgold Resources is a gold exploration and mining company focusing on prospective regions in West Africa and the Congo Craton. The company currently has three operating mines and one low-grade stockpile processing facility in Mali and the Cote d'Ivoire, producing c.750koz of gold in 2011F. The company plans to ramp up its newly commissioned mines and grow the portfolio to five mines producing c.1.2Moz of gold by 2014.
Price Performance
3000
4500
6000
7500
9000
10500
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Randgold FTSE 100 INDEX (Rebased)
Margin Trends
10
20
30
40
50
60
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
0
2
4
6
8
10
12
-15-10-505
101520
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
20
40
60
80
100
-20
-15
-10
-5
0
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) 3.00 2.52 2.01 2.74 3.73 4.12
Reported EPS (USD) 3.00 2.52 2.01 2.74 3.73 4.12
DPS (USD) 0.50 0.60 0.66 0.68 0.70 0.72
BVPS (USD) 31.2 33.4 34.4 36.4 39.4 42.9
Weighted average shares (m) 92 93 93 93 93 93
Average market cap (USDm) 7,089 6,942 6,374 11,349 11,349 11,349
Enterprise value (USDm) 7,227 7,062 6,378 11,267 11,194 10,940
Valuation Metrics P/E (DB) (x) 25.6 29.8 34.0 44.4 32.6 29.5
P/E (Reported) (x) 25.6 29.8 34.0 44.4 32.6 29.5
P/BV (x) 2.01 2.05 1.79 3.34 3.08 2.83
FCF Yield (%) nm 1.4 2.1 1.9 2.1 3.9
Dividend Yield (%) 0.7 0.8 1.0 0.6 0.6 0.6
EV/Sales (x) 6.3 6.5 6.4 9.5 8.3 8.0
EV/EBITDA (x) 14.9 16.6 18.8 21.9 16.7 15.7
EV/EBIT (x) 20.4 25.3 34.0 36.1 25.4 24.3
Income Statement (USDm)
Sales revenue 1,145 1,087 1,001 1,185 1,344 1,375
Gross profit 536 462 374 567 726 751
EBITDA 485 426 339 515 672 698
Depreciation 131 147 151 203 232 248
Amortisation 0 0 0 0 0 0
EBIT 355 279 188 312 441 450
Net interest income(expense) -6 -4 -4 -7 -7 -5
Associates/affiliates 54 78 77 92 119 154
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax 403 353 261 398 552 600
Income tax expense 77 82 48 90 130 134
Minorities 47 36 24 51 71 78
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 278 235 189 258 351 388
DB adjustments (including dilution) 0 0 0 0 0 0
DB Net profit 278 235 189 258 351 388
Cash Flow (USDm)
Cash flow from operations 445 317 352 425 602 720
Net Capex -728 -222 -218 -213 -359 -283
Free cash flow -283 96 134 212 243 437
Equity raised/(bought back) 1 2 0 1 0 0
Dividends paid -73 -53 -49 -85 -99 -105
Net inc/(dec) in borrowings 0 0 0 0 0 0
Other investing/financing cash flows 2 1 45 5 0 0
Net cash flow -353 45 130 133 144 332
Change in working capital 0 0 0 0 0 0
Balance Sheet (USDm)
Cash and other liquid assets 38 83 213 346 490 823
Tangible fixed assets 1,458 1,495 1,547 1,551 1,679 1,714
Goodwill/intangible assets 0 0 0 0 0 0
Associates/investments 2 1 1 1 1 1
Other assets 1,879 1,954 1,976 2,195 2,241 2,237
Total assets 3,377 3,533 3,737 4,094 4,412 4,775
Interest bearing debt 0 0 0 0 0 0
Other liabilities 319 230 245 246 240 242
Total liabilities 319 230 245 246 240 242
Shareholders' equity 2,879 3,098 3,203 3,398 3,684 4,004
Minorities 179 205 219 266 337 416
Total shareholders' equity 3,058 3,303 3,422 3,664 4,021 4,420
Net debt -38 -83 -213 -346 -490 -823
Key Company Metrics
Sales growth (%) -13.1 -5.1 -7.9 18.4 13.4 2.3
DB EPS growth (%) -35.5 -16.0 -20.2 36.3 36.3 10.5
EBITDA Margin (%) 42.4 39.2 33.8 43.4 50.0 50.8
EBIT Margin (%) 31.0 25.7 18.7 26.3 32.8 32.8
Payout ratio (%) 16.6 23.7 32.6 24.7 18.6 17.3
ROE (%) 10.1 7.9 6.0 7.8 9.9 10.1
Capex/sales (%) 63.6 20.4 21.7 18.0 26.7 20.6
Capex/depreciation (x) 5.6 1.5 1.4 1.0 1.6 1.1
Net debt/equity (%) -1.2 -2.5 -6.2 -9.4 -12.2 -18.6
Net interest cover (x) 54.8 68.4 43.7 47.3 59.2 92.7
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 48 Deutsche Bank AG/London
Rio Tinto Buy Reuters: RIO.L Exchange: LSE Ticker: RIO
Incoming CEO to retain focus on cash returns
Price target (GBp) 3,175
FTSE 100 INDEX 6,504
Our investment thesis: Rio Tinto has a high-quality suite of assets that is generally low operating cost, long
life, expandable, and mostly located in low-risk countries, offering above-average
returns and operating margins. Rio is pushing ahead with a clear strategy under its
new CEO J-S Jacques to reduce costs (sustaining capex, operating costs, head office
and exploration expenditure), keep the best growth at the lowest capital intensity, and
pursue copper and bauxite growth, pay down debt (gearing is now at the bottom of
the 20-30% target range), and pay out between 40-60% of earnings in dividends each
year. We think the new strategy is a dramatic positive change for Rio Tinto and
management is delivering on its promises. We expect the stock to re-rate in 2016 and
2017 as commodity markets rebalance. We believe Rio Tinto is undervalued on most
metrics (P/E multiples, DCF valuation), and we rate the stock a Buy, trading at a
discount to our NPV.
Changes made: 2016 earnings estimates up on higher Fe, 2017-18 down
Our FY16 EPS forecast for Rio increases 27% due to a 12% and 4% increase in our
met coal and iron ore forecasts respectively, and our factoring in a 3% weaker
Australian Dollar compared with our previous forecast. Our FY17 and FY18 earnings
estimates fall however, by 25% and 22% respectively due to reducing our aluminium
prices by 4% in 2017 and 8% in 2018, cutting iron ore by 8% in both FY17 and FY18
and met coal by 3% in FY18. Our NPV on a US$ basis goes down 3%, including the
benefit of rolling our calculation to June 2017. We have reflected a 1.30 GBP/USD rate
on a 12-month view which increases our target price by 13% to £31.75.
Next catalysts: 2Q16 production: We expect a generally strong quarter with iron ore volumes
rebounding 5% and refined copper to be up strongly (+16%) also. Aluminium
products should be flat versus 1Q16 on our estimates.
1H16 financial results: We forecast softer EBIT year on year of US$3.1bn for the
half. We model underlying earnings down 38% to US$1.8b, or USc100 per share.
We expect Rio to declare an interim dividend of USc40 per share.
M&A? : With the balance sheet in hand, we expect the Rio Tinto Board to do what
quality Mining Boards should be doing at the bottom of the cycle – picking up
quality assets. To this end, we expect the new CEO’s mandate to include potential
M&A which, while positive for the longer term, could see Rio shares suffer the
usual criticism from the market in the first instance (“buyer’s curse”).
Key events: 2Q16 production results: 18 July 2016; 1H16 financial results: 3 August 2016
Valuation and risks: Our target price is set in line our DCF derived valuation in line with its relative sector
performance (9.3% WACC, CoE 10.5%, CoD 3.6%, RFR 3.0%, ERP 6%, beta 1.25). It
reflects the cash on the balance sheet as well as the lower costs. Downside risks
include weaker commodity prices and higher costs
Anna Mulholland (+44) 207 541 8172
Franck Nganou (+44) 207 541 8161
Paul Young (+61) 2 8258-2587
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 49
Model updated:04 July 2016
Running the numbers
Europe
United Kingdom
Metals & Mining
Rio Tinto Reuters: RIO.L Bloomberg: RIO LN
Buy Price (5 Jul 16) GBP 2,326.50
Target Price GBP 3,175.00
52 Week range GBP 1,577.50 - 2,635.00
Market Cap (m) GBPm 41,995
USDm 54,799
Company Profile
Rio Tinto is a global diversified mining company with interests in aluminum, borax, coal, copper, diamonds, gold, iron ore, titanium dioxide feedstock, uranium and zinc. Its key mining operations are located in Australia, New Zealand, South Africa, South America, the United States, Europe, and Canada. Rio Tinto's management structure is based primarily on six principal global products businesses Aluminium, Diamonds, Copper, Energy (coal and uranium), Industrial Minerals, and Iron Ore supported by worldwide exploration and technology groups. Price Performance
12001600200024002800320036004000
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Rio Tinto FTSE 100 INDEX (Rebased)
Margin Trends
10
20
30
40
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
-5
0
5
10
15
-30-25-20-15-10-505
10
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
5
10
15
20
25
0
10
20
30
40
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) 5.50 5.02 2.50 1.98 1.84 1.97
Reported EPS (USD) 1.97 3.52 -0.48 1.98 1.84 1.97
DPS (USD) 1.92 2.15 2.15 1.10 0.92 0.98
BVPS (USD) 24.8 25.0 20.7 19.9 19.5 19.4
Weighted average shares (m) 1,852 1,853 1,816 1,805 1,805 1,805
Average market cap (USDm) 91,212 97,549 72,555 54,799 54,799 54,799
Enterprise value (USDm) 110,477 111,964 87,165 66,336 64,972 63,650
Valuation Metrics P/E (DB) (x) 9.0 10.5 16.0 15.3 16.5 15.4
P/E (Reported) (x) 25.0 14.9 nm 15.3 16.5 15.4
P/BV (x) 2.27 1.88 1.42 1.52 1.55 1.56
FCF Yield (%) 2.6 6.5 3.3 10.4 6.0 5.6
Dividend Yield (%) 3.9 4.1 5.4 3.6 3.0 3.2
EV/Sales (x) 2.2 2.3 2.5 2.0 2.0 1.9
EV/EBITDA (x) 5.5 6.3 7.6 6.2 6.4 6.0
EV/EBIT (x) 14.0 8.9 21.9 11.1 12.2 11.3
Income Statement (USDm)
Sales revenue 51,171 47,664 34,829 32,376 31,776 33,073
Gross profit 19,858 18,614 11,555 11,334 10,847 11,298
EBITDA 20,234 17,893 11,412 10,627 10,160 10,662
Depreciation 4,791 4,860 4,645 4,630 4,821 5,045
Amortisation 7,531 473 2,791 0 0 0
EBIT 7,912 12,560 3,976 5,998 5,339 5,617
Net interest income(expense) -425 -585 -698 -535 -455 -371
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) -3,982 -2,423 -4,004 -350 -350 -350
Profit before tax 3,505 9,552 -726 5,112 4,534 4,896
Income tax expense 2,426 3,053 993 1,585 1,405 1,518
Minorities -2,586 -28 -853 -54 -200 -178
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 3,665 6,527 -866 3,581 3,328 3,556
DB adjustments (including dilution) 6,552 2,778 5,406 0 0 0
DB Net profit 10,217 9,305 4,540 3,581 3,328 3,556
Cash Flow (USDm)
Cash flow from operations 15,078 14,286 7,089 9,112 8,065 8,713
Net Capex -12,720 -7,990 -4,723 -3,403 -4,757 -5,667
Free cash flow 2,358 6,296 2,366 5,709 3,308 3,046
Equity raised/(bought back) 0 0 -2,028 0 0 0
Dividends paid -3,322 -3,710 -4,076 -2,662 -2,044 -1,813
Net inc/(dec) in borrowings 2,122 -3,034 -1,681 -2,683 -1,740 -2,059
Other investing/financing cash flows 1,756 2,639 79 0 0 0
Net cash flow 2,914 2,191 -5,340 364 -476 -827
Change in working capital 557 1,519 1,499 135 40 143
Balance Sheet (USDm)
Cash and other liquid assets 10,216 12,423 9,366 9,730 9,254 8,427
Tangible fixed assets 70,827 68,693 61,057 59,830 59,767 60,389
Goodwill/intangible assets 6,770 7,108 4,228 3,878 3,528 3,178
Associates/investments 6,406 6,389 5,952 5,952 5,952 5,952
Other assets 16,806 13,214 10,961 11,014 10,996 11,243
Total assets 111,025 107,827 91,564 90,404 89,496 89,189
Interest bearing debt 28,271 24,918 23,149 20,466 18,726 16,667
Other liabilities 29,425 28,315 24,373 27,228 28,831 30,918
Total liabilities 57,696 53,233 47,522 47,694 47,557 47,585
Shareholders' equity 45,886 46,285 37,349 35,958 35,287 35,041
Minorities 7,616 8,309 6,779 6,752 6,652 6,563
Total shareholders' equity 53,502 54,594 44,128 42,710 41,939 41,605
Net debt 18,055 12,495 13,783 10,736 9,472 8,240
Key Company Metrics
Sales growth (%) 0.4 -6.9 -26.9 -7.0 -1.9 4.1
DB EPS growth (%) 9.8 -8.7 -50.2 -20.7 -7.1 6.8
EBITDA Margin (%) 39.5 37.5 32.8 32.8 32.0 32.2
EBIT Margin (%) 15.5 26.4 11.4 18.5 16.8 17.0
Payout ratio (%) 97.0 61.1 nm 55.4 50.0 50.0
ROE (%) 7.9 14.2 -2.1 9.8 9.3 10.1
Capex/sales (%) 25.3 17.1 13.5 12.8 15.2 17.1
Capex/depreciation (x) 2.7 1.7 1.0 0.9 1.0 1.1
Net debt/equity (%) 33.7 22.9 31.2 25.1 22.6 19.8
Net interest cover (x) 18.6 21.5 5.7 11.2 11.7 15.1
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 50 Deutsche Bank AG/London
South32 Hold Reuters: S32.L Exchange: LSE Ticker: S32
The year to deliver cost cutting success
Price target (GBP) 100
FTSE 100 INDEX 6,504
Investment thesis: South32 is a global mid-cap mining company with a strong balance sheet and
reasonable cash flow from what we think is a mixed asset base. We think the group's
three most valuable assets are the Worsley alumina refinery, the Hillside aluminium
smelter and the Alumar alumina refinery. We forecast South32's copper equivalent
production to fall around 3% per year, so commodity prices, fixed cost reductions
(over US$350m is the target; we think US$1bn of cost out can be achieved when
including uncontrollable costs) and currency depreciation are the key drivers of
earnings growth. The two areas of upside are cost-cutting and mine-life extensions -
we expect cost-cutting to be management's focus over the next 12 months. We are
positive on the outlook for alumina, aluminium and nickel over the medium term but
are cautious on manganese and coal. Despite strong FCF driven by structural cost out
and lower capex, and a strong balance, we rate South32 a Hold on valuation.
Changes made:
Our FY16 and FY17 earnings forecasts are unchanged but our FY18 earnings
estimates drop 19% at the EBITDA level and 57% at the net profit level due to the cut
in our aluminium prices by 8% in that year, our nickel forecasts which we cut 7% and
the 3% cut to our met coal forecasts. Despite the cut, our NPV increases 10% on a
US$ basis as we roll our calculation to June 2017. We have reflected a 1.30 GBP/USD
rate on a 12-month view which increases our target price by 35% to £1.00.
Next catalysts: 4Q16 quarterly report: Cannington and Worsley are likely to post a strong
finish to the year: we forecast a 5% increase quarter on quarter in alumina
production, and upticks in silver (12% on 3Q15), 11% in lead and 8% in zinc
output from Cannington. With Dendrobrium ramping up, met coal should also
be strong, up 28% in 4Q16. Thermal coal production is likely up 2% and nickel
is flat on our forecasts.
FY16 results: We forecast a 40% drop in EBITDA year on year to US$1.09bn
and a large drop in underlying NPAT to US$89m (from US$575m last year).
Despite the drop in profits, we think South32 will declare its maiden dividend,
paying out 40% of 2H16 earnings or USc48.
Key events: 4Q16 quarterly report: 21 July 2016; FY16 results: 25 August 2016
Valuation and risks: We derive our valuation for South32 from a sum-of-the-parts DCF model,
aggregating life of mine cash flows for each asset. We derive a group NPV
using a nominal WACC of 10% and set our target price in line with our NPV.
The key risks to our target price are:(i) more cost cutting than we currently
forecast, (ii) higher sustaining capex, particularly for the aluminium assets; (iii)
more severe grade declines, resulting in larger falls in copper equivalent
production; (iv) changes in BEE legislation in South Africa; (v) more severe
electricity price increases in South Africa; and (vi) higher or lower commodity
prices and stronger FX rates than we forecast.
Anna Mulholland (+44) 207 541 8172
Paul Young (+61) 2 8258-2587
Rene Kleyweg (+44) 207 541 8178
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 51
Model updated:04 July 2016
Running the numbers
Europe
United Kingdom
Metals & Mining
South32 Reuters: S32.L Bloomberg: S32 LN
Hold Price (5 Jul 16) GBP 91.75
Target Price GBP 100.00
52 Week range GBP 42.50 - 92.00
Market Cap (m) GBPm 4,885
USDm 6,374
Company Profile
South32 is a diversified miner whose assets were previously owned by BHP Billiton. The portfolio includes the Illawarra met coal complex, Cannington base metals mine, GEMCO manganese mine, the Worsley bauxite mine and alumina refinery all in Australia; Energy Coal mines and Samancor Manganese in South Africa, Mozal aluminium smelter in Mozambique, MRN bauxite mine in Brazil, Cerro Matoso nickel mine in Colombia.
Price Performance
40
60
80
100
120
May 15 Nov 15 May 16
South32 FTSE 100 INDEX (Rebased)
Margin Trends
48
1216202428
14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
0
1
2
3
4
5
-30-25-20-15-10-505
14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
5
10
15
20
-10
-5
0
5
14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 30-Jun 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (USD) 0.10 0.11 0.02 0.04 0.03
Reported EPS (USD) 0.10 0.11 0.02 0.04 0.03
DPS (USD) 0.00 0.00 0.00 0.01 0.01
BVPS (USD) 2.6 2.1 1.8 1.8 1.8
Weighted average shares (m) 5,321 5,324 5,324 5,324 5,324
Average market cap (USDm) na 8,681 6,374 6,374 6,374
Enterprise value (USDm) na 9,005 6,216 5,764 5,396
Valuation Metrics P/E (DB) (x) na 15.3 71.3 33.6 38.1
P/E (Reported) (x) na 15.3 71.3 33.6 38.1
P/BV (x) 0.00 0.65 0.70 0.67 0.66
FCF Yield (%) na 13.9 7.3 9.4 9.0
Dividend Yield (%) na 0.0 0.4 1.2 1.1
EV/Sales (x) nm 1.2 1.1 1.0 1.0
EV/EBITDA (x) nm 4.9 5.7 4.9 4.8
EV/EBIT (x) nm 9.0 19.1 13.0 13.7
Income Statement (USDm)
Sales revenue 8,344 7,743 5,761 5,782 5,623
Gross profit 1,420 1,649 1,002 1,188 1,115
EBITDA 1,428 1,849 1,091 1,188 1,115
Depreciation 823 848 766 745 721
Amortisation 0 0 0 0 0
EBIT 605 1,001 326 443 394
Net interest income(expense) -187 -60 -113 -124 -108
Associates/affiliates 62 -6 0 0 0
Exceptionals/extraordinaries 343 547 1,775 0 0
Other pre-tax income/(expense) -268 -482 -1,728 0 0
Profit before tax 212 453 -1,515 319 286
Income tax expense 47 431 170 130 118
Minorities 0 0 0 0 0
Other post-tax income/(expense) 0 0 0 0 0
Net profit 508 569 89 189 167
DB adjustments (including dilution) 0 0 0 0 0
DB Net profit 508 569 89 189 167
Cash Flow (USDm)
Cash flow from operations 1,419 1,838 927 987 982
Net Capex -590 -629 -461 -389 -407
Free cash flow 829 1,209 466 598 574
Equity raised/(bought back) 0 0 0 0 0
Dividends paid 0 0 0 -67 -67
Net inc/(dec) in borrowings -205 0 -188 0 0
Other investing/financing cash flows -467 -658 -42 -79 -138
Net cash flow 157 551 236 451 369
Change in working capital 1,562 136 -679 0 0
Balance Sheet (USDm)
Cash and other liquid assets 364 644 893 1,345 1,714
Tangible fixed assets 13,393 9,550 8,537 8,182 7,868
Goodwill/intangible assets 290 306 304 304 304
Associates/investments 107 77 77 77 77
Other assets 2,887 4,912 3,200 3,200 3,200
Total assets 17,041 15,489 13,011 13,107 13,162
Interest bearing debt 62 1,046 813 813 813
Other liabilities 2,904 3,408 2,840 2,745 2,657
Total liabilities 2,966 4,454 3,653 3,558 3,470
Shareholders' equity 14,075 11,036 9,359 9,550 9,693
Minorities 0 -1 -1 -1 -1
Total shareholders' equity 14,075 11,035 9,358 9,549 9,692
Net debt -302 402 -80 -532 -901
Key Company Metrics
Sales growth (%) nm -7.2 -25.6 0.4 -2.8
DB EPS growth (%) na 12.3 -84.3 112.0 -11.6
EBITDA Margin (%) 17.1 23.9 18.9 20.5 19.8
EBIT Margin (%) 7.3 12.9 5.7 7.7 7.0
Payout ratio (%) 0.0 0.0 28.4 40.0 40.0
ROE (%) 3.6 4.5 0.9 2.0 1.7
Capex/sales (%) 7.1 8.1 8.0 6.7 7.2
Capex/depreciation (x) 0.7 0.7 0.6 0.5 0.6
Net debt/equity (%) -2.1 3.6 -0.9 -5.6 -9.3
Net interest cover (x) 3.2 16.7 2.9 3.6 3.6
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 52 Deutsche Bank AG/London
Vedanta Resources Buy Reuters: VED.L Exchange: LSE Ticker: VED
Upgrade to Buy: Free cash boosted by zinc, silver and oil price tailwinds
Price target (GBP) 615
FTSE 100 INDEX 6,504
Investment thesis:
Vedanta's commodity mix plays in its favour in the next twelve months, with its
exposure to increasing oil, zinc and silver prices in particular driving an improvement
in free cash flow. Oil and zinc together account for 72% of the 1-year forward EBITDA
we forecast for the group, and silver is a growing by-product of Vedanta's zinc
production. Management should be able to sustain capex at the low levels it has cut
to throughout the commodity downturn and free cash flow is therefore being used to
de-lever. On our forecasts, net debt to EBITDA continues to fall towards 1x by 2019.
There could be further balance sheet relief if the proposed merger of Cairn India and
Vedanta Ltd receives shareholder approval within the year. With improving FCF and
the shares trading well below our NPV valuation, we rate the shares Buy.
Changes made:
Our FY17 EBITDA forecast for Vedanta increases 26% due to a combination of
increases in our zinc and silver price forecasts (up 13% and 15% respectively) and our
assumption of continued good cost control by the company within its Aluminium
division, where we forecast an 8% drop in all-in costs at the Jharsuguda smelter and a
2% drop in all-in costs at the Korba smelter year on year. The changes take Vedanta’s
net loss per share down to US$(0.26) from US$(1.01) on our estimates. Free cash flow
improves dramatically from US$49m to US$443m and net debt drops 5% to US$6.9bn
at end March 2018. With a 13% increase in our EBITDA forecasts for FY18 and a 21%
uplift in our FCF forecasts for that period, net debt continues to decrease, reaching
US$5.7bn on our numbers by March 2019. Our changes lead to a significant uplift in
our NPV per share on a US$ basis, which improves 57% to US$13.7. Our target price
improves further, to £6.15, as we reflect a 1.30 GBP/USD rate on a 12-month view.
Next catalysts: 1Q17 production results: We are forecasting a 7% uplift in oil volumes, and
continued ramp-up of pot lines at the Jharsuguda-II and Korba-II aluminium
smelters. We expect zinc, iron ore and copper production to be flat quarter in
quarter for this period (three months to June 2016).
Key events: 1Q17 production results: 1 August 2016
Valuation and risks Our price target is set at a 40% discount to our DCF valuation, to reflect the
ranking we assign to Vedanta within our coverage universe. Our rankings are
derived from debt reduction, P/E valuation, near-term earnings growth, and
management action taken to control cash flow. Our DCF valuation (10.9% WACC -
cost of equity 13%, post-tax cost of debt 6.1% and target gearing 30%: RFR 4.0%,
ERP 6%) is calculated using life of mine cash flow analysis.
Downside risks include lower metal prices than we expect and a stronger Indian
Rupee. A further delay in the sale of the government's stake in Hindustan Zinc
would also be a downside risk. Slower execution of projects and the turnaround
plan for Copper Zambia is a downside risks, with additional downside risks from
continued power shortages and tariff increases in Copper Zambia.
Anna Mulholland (+44) 207 541 8172
Franck Nganou (+44) 207 541 8161
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 53
Model updated:04 July 2016
Running the numbers
Europe
United Kingdom
Metals & Mining
Vedanta Resources Reuters: VED.L Bloomberg: VED LN
Buy Price (5 Jul 16) GBP 425.00
Target Price GBP 615.00
52 Week range GBP 205.80 - 603.50
Market Cap (m) GBPm 1,173
USDm 1,531
Company Profile
Vedanta Resources Ltd. mines and processes a variety of metals (copper, zinc and aluminium), with its core operations being domiciled in India. Since its listing in London in late 2003, the company has diversified its exposure by both metal and geography mostly via acquisition; Iron ore, power and oil in India, copper in Zambia and zinc in Southern Africa and Ireland.
Price Performance
0
400
800
1200
1600
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
Vedanta ResourcesFTSE 100 INDEX (Rebased)
Margin Trends
0
10
20
30
40
14 15 16 17E 18E 19E
EBITDA Margin EBIT Margin
Growth & Profitability
-500
-400
-300
-200
-100
0
-20-15-10-505
1015
14 15 16 17E 18E 19E
Sales growth (LHS) ROE (RHS)
Solvency
0
2
4
6
8
10
0
20
40
60
80
100
120
14 15 16 17E 18E 19E
Net debt/equity (LHS) Net interest cover (RHS)
Anna Mulholland, CFA
+44 20 754-18172 [email protected]
Fiscal year end 31-Mar 2014 2015 2016 2017E 2018E 2019E
Financial Summary
DB EPS (USD) 0.14 -0.14 -1.32 -0.26 -0.60 -0.03
Reported EPS (USD) -0.70 -6.55 -6.66 -0.26 -0.60 -0.03
DPS (USD) 0.61 0.63 0.30 0.00 0.00 0.00
BVPS (USD) 14.7 5.8 -2.6 4.6 4.0 4.0
Weighted average shares (m) 274 275 276 276 276 276
Average market cap (USDm) 4,538 3,707 1,815 1,531 1,531 1,531
Enterprise value (USDm) 26,028 25,737 22,714 21,985 20,796 19,417
Valuation Metrics P/E (DB) (x) 117.6 nm nm nm nm nm
P/E (Reported) (x) nm nm nm nm nm nm
P/BV (x) 1.03 1.27 nm 1.20 1.38 1.39
FCF Yield (%) 18.2 nm 66.3 28.9 77.7 90.1
Dividend Yield (%) 3.7 4.7 4.6 0.0 0.0 0.0
EV/Sales (x) 2.0 2.0 2.1 1.9 1.6 1.4
EV/EBITDA (x) 5.8 6.9 9.7 7.4 6.1 5.0
EV/EBIT (x) 11.4 14.8 25.8 15.5 13.5 9.3
Income Statement (USDm)
Sales revenue 12,945 12,879 10,738 11,489 12,894 13,806
Gross profit 4,491 3,741 2,336 2,957 3,383 3,862
EBITDA 4,491 3,741 2,336 2,957 3,383 3,862
Depreciation 2,203 2,006 1,455 1,540 1,843 1,784
Amortisation 0 0 0 0 0 0
EBIT 2,288 1,736 882 1,416 1,540 2,078
Net interest income(expense) -752 -555 -583 -293 -275 -228
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries -418 -6,821 -5,283 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax 1,118 -5,640 -4,984 1,123 1,264 1,850
Income tax expense 129 -1,853 -1,482 310 443 686
Minorities 1,185 -1,989 -1,665 884 988 1,172
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit -197 -1,799 -1,837 -71 -166 -7
DB adjustments (including dilution) 236 1,760 1,473 0 0 0
DB Net profit 40 -39 -364 -71 -166 -7
Cash Flow (USDm)
Cash flow from operations 3,015 2,165 2,075 1,528 2,352 2,519
Net Capex -2,187 -2,289 -872 -1,085 -1,163 -1,140
Free cash flow 828 -124 1,203 443 1,189 1,379
Equity raised/(bought back) -2,839 -819 -1,000 0 0 0
Dividends paid -508 -512 -437 -436 -395 -469
Net inc/(dec) in borrowings 298 231 -121 0 0 0
Other investing/financing cash flows -120 -795 -8 0 0 0
Net cash flow -2,341 -2,018 -362 6 794 910
Change in working capital 630 131 1,164 -394 77 35
Balance Sheet (USDm)
Cash and other liquid assets 8,938 8,210 8,937 9,379 10,568 11,947
Tangible fixed assets 31,044 23,352 16,647 16,192 15,512 14,868
Goodwill/intangible assets 125 119 109 103 98 93
Associates/investments 1,653 1,314 1,317 1,194 1,194 1,194
Other assets 3,615 3,995 3,310 3,416 3,750 3,901
Total assets 45,374 36,989 30,319 30,285 31,123 32,004
Interest bearing debt 16,871 16,668 16,263 16,263 16,263 16,263
Other liabilities 10,528 8,064 7,204 4,651 5,061 5,247
Total liabilities 27,400 24,732 23,467 20,914 21,325 21,511
Shareholders' equity 4,010 1,603 -714 1,276 1,110 1,102
Minorities 13,964 10,654 7,565 8,096 8,688 9,391
Total shareholders' equity 17,975 12,257 6,852 9,371 9,798 10,493
Net debt 7,933 8,458 7,327 6,884 5,695 4,316
Key Company Metrics
Sales growth (%) -13.6 -0.5 -16.6 7.0 12.2 7.1
DB EPS growth (%) -89.7 na -830.6 80.6 -135.6 95.6
EBITDA Margin (%) 34.7 29.0 21.8 25.7 26.2 28.0
EBIT Margin (%) 17.7 13.5 8.2 12.3 11.9 15.1
Payout ratio (%) nm nm nm nm nm nm
ROE (%) -4.7 -64.1 -413.0 -25.1 -13.9 -0.7
Capex/sales (%) 16.9 17.8 8.1 9.4 9.0 8.3
Capex/depreciation (x) 1.0 1.1 0.6 0.7 0.6 0.6
Net debt/equity (%) 44.1 69.0 106.9 73.5 58.1 41.1
Net interest cover (x) 3.0 3.1 1.5 4.8 5.6 9.1
Source: Company data, Deutsche Bank estimates
6 July 2016
Metals & Mining
European-Listed Miners
Page 54 Deutsche Bank AG/London
Research Contribution:
The authors of this report wish to acknowledge the contribution made by Ankit
Agarwal and Srivathsan M, employees of Irevna, a division of CRISIL Limited, a
third-party provider to Deutsche Bank of offshore research support services.
6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 55
Appendix 1
Important Disclosures
Additional information available upon request
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Anna Mulholland
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock
Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.
Newly issued research recommendations and target prices supersede previously published research.
40 %
55 %
6 %
49 % 38 %
27 %0
50
100
150
200
250
300
350
Buy Hold Sell
European Universe
Companies Covered Cos. w/ Banking Relationship
Regulatory Disclosures
1.Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2.Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are
consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the
SOLAR link at http://gm.db.com.
6 July 2016
Metals & Mining
European-Listed Miners
Page 56 Deutsche Bank AG/London
Additional Information
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6 July 2016
Metals & Mining
European-Listed Miners
Deutsche Bank AG/London Page 57
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