Australian coal - MacquarieThis would allow loss-making mines to close, and possibly create a circuit breaker in falling commodity markets. We see this working for above rail and port

Please refer to page 12 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

AUSTRALIA

Recommendations Outperform Glencore Rio Tinto Underperform Anglo American BHP Billiton New Hope Coal South32 Whitehaven Coal

22 March 2016

Australian coal Producers ignoring the fundamentals Event

We step back and examine the coal market’s current position and how

producers and providers alike are ignoring the fundamental reality of a market

in decline and implementing strategies that we believe will ultimately lengthen

and possibly exacerbate the low price environment.

Impact

Ignoring the now... As referenced in our commodities comment, Glencore,

the world’s largest thermal coal exporter, are currently attempting to secure a

$60/t Newcastle FOB price for JFY16 (Macq $58/t). This offer seems out of

touch with reality where spot prices for Newcastle thermal have averaged

~$50/t YTD. We estimate that roughly 40Mt is covered under the headline

contract price, but less than 20Mt actually achieves this price premium. Any

changes to earnings are highly variable as producers do not disclose how

much volume achieves this price, but we believe NHC would likely be the

biggest beneficiary due to its sole commodity focus and could achieve a 3%

uplift to earnings.

…and pushing the problem down the road. Aurizon stated at their H1FY16

result that no out of cycle negotiations were being conducted, and then re-

negotiated the 2020 BHP Mt Arthur contract to 2028. Our infrastructure

analyst believes that all coal contracts until 2022 (~62Mt) are likely classified

as “in cycle” negotiations. However, the Mt Arthur extension is of particular

concern given BHP CEO Andrew Mackenzie’s comment that Mt Arthur was

“touch and go,” and in the same boat as NickelWest and Cerro Colorado. As

we highlighted in our note “Is take-or-pay coming to an end?,” the

implementation of this strategy could mean a lower coal price for longer.

More projects possible despite dire conditions. We believe four additional

Australian projects, one greenfield and three brownfield, are either going

ahead or being seriously considered despite lacklustre market conditions;

Salim Group’s Mt Pleasant (8Mt), WHC’s Maules Creek expansion (4Mt),

NHC’s New Acland Stage 3 (2Mt), and Yancoal’s Moolarben Underground

Stage Two (8Mt). We could see more than 20Mtpa, 10% of Australia’s thermal

coal exports, added in the next three years into an already oversupplied

market and further depressing prices.

Peabody decision looms large. Peabody have flagged that their current

structure is unmanageable and after skipping US$71m in interest payments, it

seems more and more a question of when opposed to if they will go into

Chapter 11 bankruptcy. They currently produce ~16Mt of EBITDA negative

met coal and ~20Mt of EBITDA positive thermal coal. Depending on the

structure of the agreements and how Chapter 11 is managed we could see

closures in the unprofitable met coal business.

Outlook

We maintain our negative outlook for coal, particularly thermal. With

infrastructure contracts being extended for marginal assets, producers trying

to achieve prices of yesteryear and more projects being considered we see a

commodity that has a long road ahead. We prefer RIO over BHP and S32,

and see further possible negatives to S32, NHC and WHC based on A$

moves.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management Australian coal

22 March 2016 2

Ignoring the now...

As referenced in our commodities comment, Glencore (GLEN LN, £1.61, Outperform, TP: £1.80,

Alon Olsha), the world’s largest thermal coal exporter, are currently attempting to secure a $60/t

Newcastle FOB price for JFY16 (Macq $58/t). This offer seems out of touch with current reality where

spot prices for Newcastle thermal have averaged ~$50/t YTD, and could leave them vulnerable to

having a repeat of 2015 where their holding out for higher prices resulted in Rio Tinto (RIO AU,

A$44.10, Outperform, TP: A$48.00, Hayden Bairstow) concluding the first pivotal negotiation with

Japanese utilities. We estimate that roughly 40Mt is covered under the headline contract price, but

less than 20Mt actually achieves this price premium. Any changes to earnings are highly variable as

producers do not disclose how much volume achieves this price, but we believe New Hope (NHC

AU, A$1.23, Underperform, TP: A$1.00, Andrew Hodge) would likely be the biggest beneficiary due

its sole commodity focus and could achieve a 3% uplift to earnings.

Fig 1 Impact to FY16 group EBITDA based on differing JFY16 contract prices

Group EBITDA (US$m)

Base case ($57.5/t)

$50/t $55/t $60/t

Glencore 8,588 8,441 8,539 8,636

Rio Tinto 11,971 11,877 11,940 12,004

NHC 87 83 85 90

WHC 208 208 208 208

Source: Macquarie Research, March 2016

We believe that Whitehaven Coal (WHC AU, A$0.77, Underperform, TP: A$0.30, Andrew Hodge) are

not currently selling into this market, despite their desire to do so. If they are able to crack this market

with tonnes from Maules Creek we could see an earnings increase, but due to the lack of current

volumes we see no gain for WHC.

Though the spot Newcastle coal price has risen in recent weeks, this has happened almost every

contract negotiation period, and has been preceded by a sharp subsequent fall in coal prices. We

believe it is part of a traditional bargaining tactic employed by producers to influence prices leading

up to the negotiations and gain some pricing leverage.

This year in particular the increased prices look distinctly out of place. There has actually been

increased production coming from Australian and Indian producers with no corresponding rise in

demand and yet thermal prices have risen from their lows of ~$48/t in January. However, we note

that after taking into consideration a rising A$, thermal prices in A$ are actually fairly similar to their

lows in January.

Fig 2 Historical and forecast thermal coal prices


0

20

40

60

80

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120

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JFY contract Newcastle 6000kcal thermal

Macq JFY forecast Macq thermal forecast


22 March 2016 3

…and pushing the problem down the road.

Aurizon stated at their H1FY16 result that no out of cycle negotiations were being conducted, and

then re-negotiated the 2020 BHP Mt Arthur contract to 2028. Our infrastructure analyst believes that

all coal contracts until 2022 (~62Mt) are likely classified as “in cycle” negotiations. However, the Mt

Arthur extension is of particular concern given BHP CEO Andrew Mackenzie’s comment that Mt

Arthur was “touch and go,” and in the same boat as NickelWest and Cerro Colorado. As we

highlighted in our note “Is take-or-pay coming to an end?,” the implementation of this strategy could

mean a lower coal price for longer.

We had previously believed that infrastructure providers were the final component of miners cost

structure that has not moved. Within this, we saw that infrastructure providers could choose one of

two paths:

Choice 1: Allow miners to exit take-or-pay contracts paying only a portion of the contract owed.

This would allow loss-making mines to close, and possibly create a circuit breaker in falling commodity markets. We see this working for above rail and port infrastructure operators, as there would be no alternative users, and some below rail systems. However, where below rail is a revenue regulated system, mine closures would just socialise the lost income to other miners, thereby lifting the costs for the remaining operators.

Choice 2: Cut rates and extend the contract, or cut rates in the short term and backload the

contract such that they are NPV neutral. Either of these would likely worsen the current commodity

markets and allow mines that are unlikely to survive to continue operating for a little longer. However,

it would ensure revenue for the infrastructure players, albeit at a lower level.

With their BHP deal it would appear that Aurizon Holdings (AZJ AU, A$3.97, Outperform, TP: A$4.11, Ian Myles) have chosen Choice 2. And with another ~62Mt up for “in cycle” negotiations we see this as overall negative for the coal sector.

However, it seems as though some producers are attempting to force Choice 1 onto AZJ. In October

2015 the users of the WICET infrastructure system first approached AZJ about fee relief, and several

days ago AZJ announced they were taking the coal miners to the Queensland Supreme Court after

failing to resolve a financial dispute.

Fig 3 WICET owners/infrastructure users

WICET owner Status

Aquila Resources Project undeveloped Bandanna Energy In administration Caledon Coal Unknown Cockatoo Coal In administration Glencore Some capacity loss-making New Hope Group Capacity unused Wesfarmers Curragh Loss making Yancoal Some capacity loss-making


To put the situation in perspective, two of WICET’s eight miner consortium have already gone into

administration lifting the costs of all other owners, others are not producing, others still losing money,

and the vast majority of the costs are being borne by Glencore. We see a risk that the socialisation of

costs cannot continue as with each producer that closes, the rest are placed under increasing

amounts of stress.

More projects possible despite dire conditions.

We believe four additional Australian projects, one greenfield and three brownfield, are either going

ahead or being seriously considered despite lacklustre market conditions; Salim Group’s Mt Pleasant

(8Mt), WHC’s Maules Creek expansion (4Mt), NHC’s New Acland Stage 3 (2Mt), and Yancoal’s

Moolarben Underground Stage Two (8Mt). Though we believe 1-2Mt of Moolarben is replacement

tonnes from Abel they have on take or pay agreements, we could see more than 20Mtpa, 10% of

Australia’s thermal coal exports, added in the next three years into an already oversupplied market

and further depressing prices.


22 March 2016 4

Fig 4 Macquarie thermal coal supply forecast


Despite what seems like a relatively small volume, this possible 20Mt addition is simply another

reason we see coal continuing to struggle.

Peabody decision looms large.

Peabody have flagged that their current structure is unmanageable and after skipping US$71m in

interest payments, it seems more and more a question of when opposed to if they will go into

Chapter 11 bankruptcy. They currently produce ~16Mt of EBITDA negative met coal and ~20Mt of

EBITDA positive thermal coal. Depending on the structure of the agreements and how Chapter 11 is

managed we could see closures in the unprofitable met coal business.

Whilst we are still waiting to see the outcome of Peabody Energy (BTU US, US$2.50, Underperform,

TP: US$2.40, Anthony Young) and its possible Chapter 11 bankruptcy, the most obvious issue for

the Australian assets is the loss-making met coal assets. These assets have lost cash each year for

the past few years, despite the cost cutting measures we have seen across the industry. If these

assets do close, the removal of 16Mt could be material as Australia exports ~200Mt, and loss of

almost 10% of this volume could lift met prices.

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Australia Indonesia South Africa Colombia Russia USA Other


22 March 2016 5

Fig 5 NHC summary model

Source: NHC, Macquarie Research, March 2016

New Hope Coal

ASX: NHC Price: (A$ps) 1.48 Year end: Jun Rating: Underperform Up/dn TSR

Mkt cap: (A$m) 1,229 Diluted shares (m) 830.6 Target: 1.00 -32% -26%

ASSUMPTIONS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e ATTRIBUTABLE MINE OUTPUT FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e

Exchange Rate A$/US$ 1.01 0.91 0.84 0.71 0.64 0.64 0.68 0.74 Coal Production (NHC equity share)

Semi-soft Coking Coal US$/t 126.3 101.0 86.0 69.8 66.0 69.6 76.0 84.0 ROM coal Mt 11.4 11.0 11.1 12.3 15.7 15.7 15.7 4.1

HV PCI Coal US$/t 126.3 101.0 86.0 69.8 66.0 69.6 76.0 84.0 Saleable coal Mt 5.8 5.6 5.7 6.6 9.3 9.3 9.3 3.4

Export Thermal Coal Spot US$/t 89.2 78.4 64.4 52.8 45.4 43.0 45.5 48.5 Export thermal coal sales Mt 5.7 5.8 5.7 6.6 9.1 9.1 9.1 3.4

Export Thermal Coal Reference US$/t 110.2 91.7 78.3 65.2 55.9 51.0 51.8 54.8 Domestic thermal coal sales Mt 0.3 0.2 0.0 0.2 0.2 0.2 0.2 0.0

Domestic Thermal Coal (A$/t) 79.3 77.3 69.5 66.5 63.7 60.3 60.1 59.0 Total coal sales Mt 6.0 6.0 5.7 6.8 9.3 9.3 9.3 3.4

RATIO ANALYSIS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Unit Cash Cost A$/t 66.0 63.1 59.8 56.3 50.7 50.7 51.3 44.2

Diluted share capital m 831 831 831 831 831 831 831 831 FOB Cash Cost A$/t 72.7 69.1 65.1 61.8 56.0 55.8 56.3 49.8

EPS (diluted and pre sig. items) A¢ 15.0 5.0 6.2 5.2 7.2 4.4 3.3 6.0 Notional Cash Margin A$/t 14.9 16.6 11.9 12.7 15.4 11.9 10.9 15.8

P/E x 9.8x 29.7x 23.8x 28.6x 20.6x 33.9x 44.7x 24.5x AISC cash cost A$/t 85.7 74.8 69.3 193.2 60.5 59.9 60.6 54.2

CFPS A¢ 11.1 2.9 0.9 14.8 19.7 16.3 16.9 16.3

P/CF x 13.3x 51.0x 169.6x 10.0x 7.5x 9.1x 8.8x 9.1x

DPS A¢ 16.0 11.5 10.0 5.9 6.8 4.9 3.5 5.3 OPERATIONAL OUTLOOK (NHC share)

Dividend yield % 10.8% 7.8% 6.8% 4.0% 4.6% 3.3% 2.4% 3.6%

Franking Level % 100% 100% 100% 100% 100% 100% 100% 100%

Book value per share x 2.43 2.38 2.23 2.19 2.20 2.18 2.18 2.20

P/Book value x 0.6x 0.6x 0.7x 0.7x 0.7x 0.7x 0.7x 0.7x

R.O.E. (pre sig items) % 6% 2% 3% 2% 3% 2% 2% 4%

R.O.A. (pre sig items) % 4% 1% 0% 1% 3% 2% 1% 2%

Interest Cover x -1.5x -0.6x -0.2x -0.5x -7.9x -2.1x -1.0x -2.1x

EBITDA per share A$ps 0.17 0.11 0.09 0.10 0.21 0.17 0.16 0.11

EV/EBITDA x -0.2x 1.2x 2.3x 11.7x 5.4x 6.3x 6.1x 8.0x

P&L FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e

Sales Revenue A$m 586 504 464 515 709 675 674 276

Other Revenue A$m 5 4 6 0 0 0 0 0

Total Revenue A$m 592 508 470 515 709 675 674 276

Operating Costs A$m (424) (389) (374) (414) (522) (520) (525) (169)

Operational EBITDA A$m 168 119 96 101 187 155 149 107

Exploration Expense/Write-offs A$m (13) (18) (16) (6) (4) (4) (4) (4) RESERVES AND RESOURCES (ATTRIBUTABLE)

Corporate & Other Costs A$m (13) (12) (8) (8) (8) (8) (9) (9) Coal Reserves Proved Probable Saleable

EBITDA A$m 141 88 72 87 175 143 136 94 Project Mt Mt Mt

D&A A$m (51) (63) (66) (68) (99) (108) (117) (46) New Acland/West Moreton 289 121 410

EBIT A$m 91 25 7 19 76 35 19 48 Lenton 21 31 52

Net finance expense A$m 61 41 35 42 10 17 20 23 Elimatta 96 29 125

Profit Before Tax A$m 151 66 42 62 85 52 39 72 Maryborough 0 11 11

Tax Expense (excl abn'ls) A$m (26) (25) 10 (18) (26) (16) (12) (22) Bengalla 163 131 294

Minorities A$m 0 0 0 0 0 0 0 0 Total 569 323 892

Adjusted NPAT A$m 125 41 52 43 60 36 27 74 Coal Resources Measured Indicated Inferred Total

Significant Items (post tax) A$m (51) 17 (74) 0 0 0 0 0 Project Mt Mt Mt Mt

Reported NPAT A$m 74 58 (22) 43 60 36 27 74 New Acland 423.0 220.0 56.0 699.0

Lenton 83.0 134.0 524.0 741.0

CASHFLOW FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Elimatta 108.0 105.0 73.0 286.0

Net Profit A$m 125 41 52 43 60 36 27 50 Yamala 14.0 39.0 187.0 240.0

Interest/Tax/D&A A$m 27 46 12 96 106 98 113 55 Maryborough 0.0 16.0 60.0 76.0

Working Capital/other A$m (60) (63) (56) (16) (2) 2 (0) 30 Collingwood 43.0 139.0 94.0 276.0

Net Operating Cashflow A$m 92 24 7 123 164 136 140 135 Taroom 158.0 149.0 126.0 433.0

PP&E A$m (89) (58) (20) (37) (41) (39) (40) (15) Woori 84.0 0.0 0.0 84.0

Investments A$m (38) 14 9 (865) 0 0 0 0 Ashford 0.0 8.0 5.0 13.0

Sale of PPE and Other A$m 0 0 0 0 0 0 0 0 Bengalla 57.0 49.0 80.0 186.0

Free cash flow A$m (35) (20) (3) (779) 123 97 100 120 Total Resources 1,829 859 1,205 3,034

Dividends Paid A$m (257) (133) (79) (77) (47) (53) (33) (33)

Debt A$m 26 26 23 0 200 0 (50) 0

Equity Issuance A$m 1 0 0 0 0 0 0 0 EQUITY DCF VALUATION

Other A$m 0 0 0 0 0 0 0 0 Projects A$m A$ps

Net Financing Cashflow A$m (231) (107) (56) (77) 153 (53) (83) (33) New Acland/West Moreton 75 0.09

Net change in cash A$m (266) (127) (59) (856) 275 44 17 87 Maryborough 0 0.00

Elimatta 0 0.00

BALANCE SHEET FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Bengalla 416 0.50

Cash A$m 1,251 1,124 1,065 209 484 528 545 632 QBH Port 176 0.21

PP&E & Mine Development A$m 764 785 502 1,336 1,279 1,210 1,133 1,103 Bridgeport Energy (10) (0.01)

Exploration A$m 77 105 377 377 377 377 377 377 Forwards (12) (0.01)

Total Assets A$m 2,269 2,186 2,075 2,091 2,337 2,310 2,251 2,192 Corporate (66) (0.08)

Debt A$m 0 0 0 0 200 200 150 150 Cash 190 0.23

Total Liabilities A$m 252 212 223 272 506 496 443 367 Debt 0 0.00

Total Net Assets / Equity A$m 2,016 1,974 1,853 1,818 1,831 1,814 1,808 1,825 Net equity value at 8% WACC 769 0.93

Net Debt / (Cash) A$m (1,251) (1,124) (1,065) (209) (284) (328) (395) (482) Target price 1.00

Gearing (net debt/(nd + equity)) % (163%) (132%) (135%) (13%) (18%) (22%) (28%) (36%)

Gearing (net debt/equity) % (62%) (57%) (58%) (11%) (16%) (18%) (22%) (26%)

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FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e

ROM coal Saleable coal Yield (%)Mt


22 March 2016 6

Fig 6 BHP summary financials

Source: BHP, Macquarie Research, March 2016

BHP Billiton

ASX: BHP Price: (A$ps) 18.17 Year end: Jun Rating: Underperform Up/dn TSR

LSE: BLT Price: (£ps) 8.23 Diluted shares (m) 5,323 ASX Target: 15.00 -17% -16%

JSE: BIL Price: (ZARps) 185.47 LSE Target: 7.00 -15% -13%

Mkt cap: (US$m) 69,390 JSE Target: 157.00 -15% -14%

ASSUMPTIONS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e ASSUMPTIONS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e

Exchange Rate A$/US$ 1.01 0.91 0.84 0.71 0.64 0.64 0.68 0.74 Commodity prices

Exchange Rate USDBRL 2.08 2.26 2.74 3.92 4.87 4.87 4.50 4.50 Iron-ore (US$/t) 127 122 71 51 48 50 58 60

Exchange Rate USDZAR 8.92 10.30 11.67 14.32 15.29 14.61 14.14 14.50 Hard coking coal (US$/t) 183 140 116 87 83 87 95 105

RATIO ANALYSIS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Thermal coal (US$/t) 89 78 64 53 45 43 46 49

Diluted share capital m 5,340 5,338 5,333 5,323 5,323 5,323 5,323 5,323 Copper (US$/lb) 3.48 3.18 2.89 2.25 2.36 2.31 2.08 2.24

EPS (diluted and pre sig. items) US¢ 208.0 259.9 35.9 13.3 54.5 79.6 94.4 94.8 Nickel (US$/lb) 7.43 6.91 7.00 4.38 5.10 5.90 6.58 7.03

P/E x 8.7x 5.3x 38.5x 103.7x 25.3x 17.3x 14.6x 14.5x Brent Crude (US$/bbl) 109 110 74 44 54 65 72 76

CFPS US¢ 372.3 475.2 361.8 173.7 174.9 195.9 221.7 245.0 West Texas (US$/bbl) 92 101 69 40 51 59 66 70

P/CF x 4.9x 3.8x 5.0x 10.5x 10.4x 9.3x 8.2x 7.4x Henry Hub (US$/mmbu) 3.45 4.29 3.32 2.33 2.84 3.25 3.25 3.24

DPS US¢ 116.0 121.0 124.0 22.0 28.0 40.0 47.0 47.0

Dividend yield % 6.4% 8.8% 9.0% 1.6% 2.0% 2.9% 3.4% 3.4% Production by commodity

Franking Level % 100% 100% 100% 100% 100% 100% 100% 100% Iron-ore

Book value per share US$ps 13.91 16.00 13.23 11.58 12.03 12.57 13.13 13.72 WAIO (mt) - 100% 187 225 254 260 271 275 279 280

P/Book value x nm 0.9x 1.0x 1.2x 1.1x 1.1x 1.1x 1.0x WAIO (mt) - BHP share 159 193 218 224 233 237 241 243

R.O.E. (pre sig items) % nm 18% 6% -9% 5% 7% 8% 7% Samarco (mt) - BHP share 11 11 15 5 4 13 15 15

R.O.A. (pre sig items) % nm 15% 10% 2% 5% 7% 7% 7% Total Iron-ore (mt) - BHP share 170 204 233 229 237 250 257 258

Interest Cover x 18.0x 19.4x 19.3x 2.5x 5.3x 6.9x 8.0x 8.6x Coal

EBITDA per share US$ps 5.60 6.06 4.10 2.11 2.64 3.01 3.30 4.71 Coking coal (mt) - 100% 60.3 74.3 83.7 71.5 72.0 72.0 72.0 72.0

EV/EBITDA x 0.9x 2.9x 4.3x 8.5x 6.6x 5.7x 5.0x 3.4x Coking coal (mt) 37.7 45.1 49.8 40.2 41.0 41.0 41.0 41.0

FCF Yield % 3.9% 16.4% 8.9% 2.7% 6.2% 5.3% 7.9% 8.9% Thermal coal (mt) 72.9 73.5 41.0 40.0 31.3 31.3 31.3 31.3

EARNINGS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Copper (kt)

Revenue US$m 65,953 67,206 44,636 30,085 31,686 34,183 37,147 38,692 Escondida - (100%) 1,161 1,164 1,247 940 1,114 1,108 1,100 1,092

Operating Costs US$m (36,079) (35,638) (22,868) (17,498) (17,446) (18,053) (19,487) (20,111) Cerro Colorado 72 80 78 71 65 65 65 65

Operational EBITDA US$m 29,874 31,568 21,768 12,587 14,240 16,130 17,660 18,581 Spence 161 153 171 179 134 123 111 102

Associates US$m 1,142 1,195 548 (872) 287 406 448 497 Olympic Dam 166 184 125 197 185 204 220 229

Corporate & Other Costs US$m (708) (404) (464) (481) (491) (504) (517) (531) Antamina 140 144 108 135 125 128 131 131

Underlying Ebitda US$m 30,308 32,359 21,852 11,234 14,036 16,032 17,590 18,548 Total Copper (kt) 1,699 1,725 1,729 1,521 1,623 1,629 1,629 1,620

D&A & Impairments US$m (7,378) (9,498) (9,986) (8,637) (7,620) (7,700) (8,352) (9,259) Petroleum (mmboe)

Underlying Ebit US$m 22,930 22,861 11,866 2,596 6,416 8,332 9,239 9,289 Conventional production 136.5 137.9 130.1 128.0 128.0 127.5 120.3 114.1

Adjustments US$m (1,928) 551 (3,196) (8,372) 0 0 0 0 Unconventional Production 99.2 108.1 125.7 109.1 76.9 74.9 87.1 111.3

Profit from Operations US$m 21,002 23,412 8,670 (5,776) 6,416 8,332 9,239 9,289 Total 235.7 246.0 255.7 237.1 204.9 202.4 207.4 225.3

Net Interest US$m (1,276) (1,176) (614) (1,047) (1,217) (1,201) (1,159) (1,076)

Profit Before Tax US$m 19,726 22,236 8,056 (6,822) 5,200 7,131 8,080 8,213 EBITDA BY COMMODITY

Tax Expense US$m (6,906) (7,012) (3,666) 1,503 (1,820) (2,496) (2,828) (2,875)

Net Earnings US$m 12,820 15,224 4,390 (5,319) 3,380 4,635 5,252 5,339

Discontinued operations US$m 0 0 (1,512) 0 0 0 0 0

Minority interests US$m (1,597) (1,392) (968) (54) (477) (396) (227) (294)

Attributable Profit US$m 11,223 13,832 1,910 (5,373) 2,903 4,239 5,025 5,045

Adjustments US$m 985 (385) 5,199 6,081 0 0 0 0

Underlying Profit US$m 12,208 13,447 7,109 708 2,903 4,239 5,025 5,045

CASHFLOW FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e

Net Earnings US$m 12,820 15,224 4,390 (5,319) 3,380 4,635 5,252 5,339

Interest/Tax/D&A US$m 7,792 9,034 11,720 13,858 6,143 6,143 6,789 7,772

Working Capital/other US$m (458) 1,106 3,186 709 (213) (349) (240) (71)

Net Operating Cashflow US$m 20,154 25,364 19,296 9,248 9,310 10,429 11,801 13,040

Capital Expenditure (cash basis) US$m (22,291) (15,181) (11,581) (6,991) (5,010) (6,770) (6,305) (6,888)

Acquisitions/(Disposals) US$m 4,780 1,882 0 0 0 0 0 0

Other US$m 88 (713) (1,573) (407) (0) 0 0 0

Free cash flow US$m 2,731 11,352 6,142 1,850 4,300 3,659 5,496 6,151

Dividends US$m (6,167) (6,387) (6,498) (4,120) (1,011) (1,703) (2,395) (2,608)

Minority dividends & payments US$m (837) 1,183 (501) (187) (477) (396) (227) (294)

New Equity US$m (424) (354) (346) (69) 0 0 0 0

Debt Drawdown/(Repayment) US$m 7,172 (910) (931) 6,142 0 1,200 0 (1,200)

Net Financing Cashflow US$m (256) (6,468) (8,276) 1,766 (1,488) (900) (2,622) (4,102)

Net change in cash US$m 2,475 4,884 (2,134) 3,615 2,812 2,760 2,874 2,049

VALUATION

BALANCE SHEET FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Projects US$m US$ A$m A$/sh GBPm GBP ZARm ZAR

Cash US$m 5,677 8,803 6,753 10,281 13,093 15,853 18,727 20,776 Petroleum 13,508 2.54 18,011 3.38 8,443 1.59 189,116 35.53

Other current assets US$m 13,276 13,493 9,616 7,096 7,688 8,658 9,326 9,524 Iron-ore 52,921 9.94 70,561 13.26 33,076 6.21 740,892 139.19

Property, Plant & Equipments US$m 100,565 108,787 94,072 85,023 82,854 81,923 82,876 84,506 Copper 14,852 2.79 19,803 3.72 9,283 1.74 207,928 39.06

Other Non-current assets US$m 19,660 20,330 14,139 16,723 17,866 19,016 19,830 20,330 Coal 9,753 1.83 13,005 2.44 6,096 1.15 136,548 25.65

Total Assets US$m 139,178 151,413 124,580 119,123 121,501 125,450 130,759 135,136 Nickel West (1,566) (0.29) (2,089) (0.39) (979) (0.18) (21,930) (4.12)

Debt US$m 33,187 34,589 31,170 36,547 36,547 37,747 37,747 36,547 Group and unallocated (3,080) (0.58) (4,106) (0.77) (1,925) (0.36) (43,114) (8.10)

Payables US$m 11,146 10,258 7,418 5,214 5,649 6,362 6,853 6,999 Other 0 0.00 0 0.00 0 0.00 0 0.00

Other liabilities US$m 19,554 21,184 15,447 15,719 15,296 14,431 16,271 18,571 Cash 9,905 1.86 13,207 2.48 6,191 1.16 138,671 26.05

Total Net Assets / Equity US$m 75,291 85,382 70,545 61,643 64,009 66,911 69,888 73,019 Debt (36,547) (6.87) (48,729) (9.15) (22,842) (4.29) (511,658) (96.13)

Net Debt / (Cash) US$m 27,510 25,786 24,417 26,266 23,454 21,894 19,020 15,771 Net Equity Value (WACC 10.0% Nom) 59,747 11.22 79,662 14.97 37,342 7.02 836,454 157.15

Gearing (net debt/(nd + equity)) % 27% 23% 26% 30% 27% 25% 21% 18% Price Target AUD 15.00 GBP 7.00 ZAR 157.00

Gearing (net debt/equity) % 37% 30% 35% 43% 37% 33% 27% 22%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY13a FY14a FY15a FY16e FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e

Petroleum (US$bn) Copper (US$bn) Iron-ore (US$bn) Coal (US$bn). Other (US$bn)


22 March 2016 7

Fig 7 RIO summary model

Source: RIO, Macquarie Research, March 2016

Rio Tinto

ASX: RIO Price: (A$ps) 44.15 Year end: Dec Rating: Outperform Up/dn TSR

LSE: RIO Price: (£ps) 20.15 Diluted shares (m) 1,828 ASX Target: 48.00 9% 12%

Mkt cap: (US$m) 54,584 LSE Target: 22.00 9% 13%

ASSUMPTIONS CY12 CY13 CY14 CY15 CY16e CY17e CY18e ASSUMPTIONS CY12 CY13 CY14 CY15 CY16e CY17e CY18e

Exchange Rate A$/US$ 1.04 0.95 0.90 0.75 0.68 0.63 0.66 Commodity prices

Exchange Rate C$/US$ 1.01 0.97 0.90 0.78 0.69 0.62 0.64 Iron-ore (US$/t) 130 135 97 56 50 45 55

Exchange Rate USDZAR 8.17 9.77 11.00 12.68 15.30 14.95 14.30 Hard coking coal (US$/t) 210 159 126 102 82 84 90

RATIO ANALYSIS CY12 CY13 CY14 CY15 CY16e CY17e CY18e Thermal coal (US$/t) 119 100 85 71 60 53 51

Diluted share capital m 1,849 1,858 1,859 1,828 1,828 1,828 1,828 Copper (US$/lb) 3.61 3.32 3.11 2.50 2.26 2.39 2.15

EPS (underlying, undiluted) US¢ 501.3 553.1 503.4 249.8 186.9 151.2 221.7 Alumina (US$/t) 319 327 330 301 225 220 233

P/E x 6.5x 5.9x 6.5x 13.1x 17.5x 21.6x 14.7x Aluminium (US$/lb) 0.92 0.84 0.85 0.75 0.65 0.62 0.62

CFPS US¢ 510.0 811.6 768.6 513.4 458.0 432.7 482.6

P/CF x 6.4x 4.0x 4.2x 6.4x 7.1x 7.5x 6.8x Production by commodity

DPS US¢ 167.0 193.0 215.0 215.0 110.2 75.0 111.0 Iron-ore (100% Basis)

Dividend yield % 5.1% 5.9% 6.6% 6.6% 3.4% 2.3% 3.4% Pilbara (mt) 239.4 250.6 280.6 309.9 332.3 335.0 341.0

Franking Level % 100% 100% 100% 100% 100% 100% 100% Iron Ore Company of Canada (mt) 14.1 15.4 14.8 17.7 17.8 22.5 23.0

Book value per share US$ps 30.14 28.80 29.37 24.14 24.53 24.94 26.22 Iron-ore (100%) 253.5 266.0 295.4 327.6 350.0 357.5 364.0

P/Book value x nm 1.1x 1.1x 1.4x 1.3x 1.3x 1.2x Iron-ore (RIO Reported Share)

R.O.E. (pre sig items) % nm 2% 12% -4% 8% 6% 8% Pilbara (mt) 190.6 199.9 224.9 252.7 272.4 275.2 281.2

R.O.A. (pre sig items) % nm 15% 14% 9% 8% 7% 8% Iron Ore Company of Canada (mt) 8.3 9.0 8.7 10.4 10.4 13.2 13.5

Interest Cover x 82.6x 39.3x 25.3x 11.4x 9.2x 7.8x 10.5x Iron-ore (RIO Reported Share) 198.9 209.0 233.6 263.0 282.8 288.4 294.7

EBITDA per share US$ps 10.04 11.58 10.58 6.91 6.55 6.17 7.04 Aluminium (RIO Share)

EV/EBITDA x 4.0x 3.4x 3.4x 5.5x 5.6x 5.7x 4.9x Bauxite (mt) 39.4 43.2 41.9 43.7 45.0 45.0 45.0

Alumina (mt) 10.0 9.3 8.1 7.8 7.8 7.8 7.8

EARNINGS CY12 CY13 CY14 CY15 CY16e CY17e CY18e Aluminium (mt) 3.2 3.1 3.4 3.3 3.6 3.6 3.6

Revenue US$m 50,942 51,171 47,664 34,829 30,974 29,724 32,293 Copper (RIO Share)

Operating Costs US$m (36,321) (33,090) (30,376) (24,164) (21,438) (21,055) (21,862) Mined Copper (kt) 548.7 632.8 603.3 504.3 618.5 645.0 542.8

Operational EBITDA US$m 14,621 18,081 17,288 10,665 9,535 8,669 10,431 Refined Copper (kt) 279.4 300.1 294.7 213.0 241.5 266.9 262.6

Corporate Costs & EAU Adjustments US$m 4,624 3,428 2,377 1,956 2,436 2,613 2,441 Total Copper (mt) 828.1 932.9 898.0 717.3 860.0 911.9 805.4

Underlying Ebitda US$m 19,245 21,509 19,665 12,621 11,971 11,282 12,873 Coal (RIO Reported Share)

Depreciation & Amortisation US$m (4,624) (4,791) (4,860) (4,646) (4,835) (5,187) (4,710) Thermal coal (mt) 20.7 23.0 21.9 18.6 16.8 16.9 16.9

Operational Ebit US$m 14,621 16,718 14,805 7,975 7,136 6,095 8,162 Semi-soft Coking Coal (mt) 3.5 4.4 3.6 3.6 3.6 2.9 2.9

Impairments US$m (16,227) (7,531) (473) (2,791) 0 0 0 Hard Coking Coal (mt) 7.9 7.7 7.1 7.9 7.9 8.6 8.6

Share of EAU Profit/(Loss) US$m 1,056 698 625 361 339 423 269 Total Coal (mt) 32.0 35.0 32.6 30.1 28.3 28.4 28.4

Adjustments US$m (1,845) (1,973) (2,397) (1,569) (1,409) (1,447) (1,494) Other (RIO Share)

Profit from Operations US$m (2,395) 7,912 12,560 3,976 6,066 5,071 6,937 Diamonds (kcts) 13,122 16,026 13,872 17,394 20,848 28,545 28,137

Net Interest US$m (177) (425) (585) (698) (773) (783) (777) Uranium (mlbs) 9.76 7.99 4.09 4.91 5.50 0.00 0.00

Other Finance Costs US$m 141 (3,982) (2,423) (4,004) (400) (400) (400) TiO2 Feedstock (kt) 1,595 1,622 1,442 1,089 1,000 1,192 1,192

Profit Before Tax US$m (2,431) 3,505 9,552 (726) 4,893 3,888 5,760 Borates (kt) 463 496 509 475 500 500 500

Tax Expense US$m (589) (2,426) (3,053) (993) (1,468) (1,166) (1,728)

Net Earnings US$m (3,020) 1,079 6,499 (1,719) 3,425 2,722 4,032

Post-tax exceptionals US$m (7) 0 0 0 0 0 0 EBITDA BY COMMODITY

Minority Interests US$m (1) 2,586 28 853 (28) 26 (4)

Attributable Profit US$m (3,028) 3,665 6,527 (866) 3,397 2,747 4,028

Post-tax adjustments to underlying US$m 12,297 6,552 2,778 5,406 0 0 0

Underlying Profit US$m 9,269 10,217 9,305 4,540 3,397 2,747 4,028

CASHFLOW CY12 CY13 CY14 CY15 CY16e CY17e CY18e

Net Earnings US$m (3,020) 1,079 6,499 (1,719) 3,425 2,722 4,032

Interest/Tax/D&A US$m (1,420) 6,762 6,322 7,722 5,235 5,587 5,110

Working Capital/other US$m 13,870 7,237 1,465 3,380 (290) (401) (323)

Net Operating Cashflow US$m 9,430 15,078 14,286 9,383 8,370 7,908 8,820

Capital Expenditure US$m (17,595) (12,944) (7,418) (4,550) (4,085) (4,215) (5,342)

Disposals/(Acquisitions) US$m (20) (57) (744) (135) 747 58 0

Other US$m (628) 2,055 1,659 85 0 0 0

Free cash flow US$m (8,813) 4,132 7,783 4,783 5,033 3,751 3,478

Dividends US$m (3,038) (3,322) (3,710) (4,076) (2,721) (1,963) (1,708)

New Equity US$m 1,474 159 1,291 (1,925) 0 0 0

Debt Drawdown/(Repayment) US$m 7,887 2,122 (3,034) (1,681) 0 0 0

Other US$m 1 107 17 12 0 0 0

Net Financing Cashflow US$m 6,324 (934) (5,436) (7,670) (2,721) (1,963) (1,708)

FX Adjustment US$m (138) (117) (140) (170) 0 0 0

Net change in cash US$m (2,627) 3,081 2,207 (3,057) 2,312 1,788 1,770

BALANCE SHEET CY12 CY13 CY14 CY15 CY16e CY17e CY18e VALUATION

Cash US$m 7,135 10,216 12,423 9,366 11,678 13,466 15,236 Projects US$m US$/sh A$m A$/sh GBPm GBP/sh

Other current assets US$m 13,375 12,066 8,702 6,188 5,740 5,539 6,021 Iron Ore 57,062 31.22 76,082 41.63 35,664 19.51

Property, Plant & Equipments US$m 76,985 70,827 68,693 61,057 59,560 58,530 59,161 Copper & Coal 15,429 8.44 20,572 11.26 9,643 5.28

Other Non-current assets US$m 20,942 17,916 18,009 14,953 15,113 15,456 15,918 Diamonds & Minerals 2,306 1.26 3,074 1.68 1,441 0.79

Total Assets US$m 118,437 111,025 107,827 91,564 92,090 92,991 96,336 Aluminium 5,021 2.75 6,695 3.66 3,138 1.72

Debt US$m 26,904 28,551 25,219 23,624 23,624 23,624 23,624 Cash 10,948 5.99 14,597 7.99 6,843 3.74

Payables US$m 10,025 8,976 8,308 6,919 6,418 6,194 6,732 Debt (23,624) (12.93) (31,499) (17.23) (14,765) (8.08)

Other liabilities US$m 23,768 19,996 19,706 16,893 17,216 17,582 18,064 Group & Unallocated (1,705) (0.93) (2,273) (1.24) (1,065) (0.58)

Total Net Assets / Equity US$m 57,740 53,502 54,594 44,128 44,832 45,591 47,915 Net Equity Value (WACC 11% Nom) 65,437 35.80 87,249 47.74 40,898 22.38

Net Debt / (Cash) US$m 19,769 18,335 12,796 14,258 11,946 10,158 8,388 Price Target AUD 48.00 GBP 22.00

Gearing (net debt/(nd + equity)) % 26% 26% 19% 24% 21% 18% 15%

Gearing (net debt/equity) % 34% 34% 23% 32% 27% 22% 18%

0.00

5.00

10.00

15.00

20.00

25.00

CY13 CY14 CY15a CY16e CY17e CY21e CY22e CY23e CY24e CY25e

Iron Ore (US$bn) Aluminium (US$bn)

Copper & Coal (US$bn) Diamonds and Minerals (US$bn)

Other (US$bn)


22 March 2016 8

Fig 8 WHC summary model

Source: WHC, Macquarie Research, March 2016

Whitehaven Coal

ASX: WHC Price: (A$ps) 0.74 Year end: Jun Rating: Underperform Up/dn TSR

Mkt cap: (A$m) 759 Diluted shares (m) 1025.8 Target: 0.30 -59% -59%

ASSUMPTIONS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e ATTRIBUTABLE MINE OUTPUT FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e

Exchange Rate A$/US$ 1.01 0.91 0.84 0.71 0.64 0.64 0.68 0.74 Coal Production (WHC equity share)

Semi-soft Coking Coal US$/t 126.3 101.0 85.1 67.5 66.0 69.6 76.0 84.0 ROM coal Mt 7.7 9.8 12.5 15.4 17.8 19.9 20.7 20.7

HV PCI Coal US$/t 126.3 101.0 85.1 69.8 66.0 69.6 76.0 84.0 Saleable coal production Mt 6.9 8.9 11.6 15.2 16.5 18.4 19.3 19.3

Export Thermal Coal Spot US$/t 89.2 78.4 64.6 53.0 45.4 43.0 45.5 48.5 Export thermal coal sales Mt 7.3 8.9 10.0 12.1 12.3 13.8 14.2 13.7

Export Thermal Coal Reference US$/t 110.2 91.7 78.3 65.2 55.9 51.0 51.8 54.8 Domestic thermal coal sales Mt 0.4 0.3 0.0 0.0 0.0 0.0 0.0 0.0

PCI coal sales Mt 0.0 0.0 0.2 1.6 1.9 2.1 2.2 2.2

Semisoft coking sales Mt 0.0 0.0 0.8 1.7 2.3 2.6 2.9 3.4

RATIO ANALYSIS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Total coal sales Mt 7.7 9.2 10.9 15.4 16.5 18.4 19.3 19.3

Diluted share capital m 1,026 1,026 1,026 1,026 1,026 1,026 1,026 1,026

EPS (diluted and pre sig. items) A¢ -8.1 -3.7 -32.1 2.1 2.9 1.6 2.4 1.5 Unit Cash Cost A$/t 71.0 66.7 61.9 57.5 59.2 59.7 60.5 62.0

P/E x -9.2x -19.8x -2.3x nmf 25.8x 45.7x 30.9x 49.7x FOB Cash Cost A$/t 76.6 72.8 67.0 63.5 65.4 65.7 66.6 68.2

CFPS A¢ (5.7) 10.3 21.7 10.8 17.4 16.1 17.5 16.9 Notional Cash Margin A$/t 6.9 10.1 12.4 15.1 13.5 11.9 12.0 11.1

P/CF x -13.0x 7.2x 3.4x 6.8x 4.3x 4.6x 4.2x 4.4x AISC cash cost A$/t 92.2 85.1 103.2 68.0 69.7 70.4 70.6 71.9

DPS A¢ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Dividend yield % 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Franking Level % 0% 0% 0% 0% 0% 0% 0% 0% OPERATIONAL OUTLOOK (WHC share)

Book value per share x 3.25 3.21 2.87 2.89 2.92 2.94 2.96 2.98

P/Book value x 0.2x 0.2x 0.3x 0.3x 0.3x 0.3x 0.2x 0.2x

R.O.E. (pre sig items) % -2% -1% 0% 1% 1% 1% 1% 0%

R.O.A. (pre sig items) % -2% 0% 1% 2% 1% 1% 1% 1%

Interest Cover x -1.5x -0.1x 0.5x 1.6x 2.7x 2.0x 2.8x 2.5x

EBITDA per share A$ps -0.01 0.07 0.13 0.20 0.20 0.19 0.20 0.19

EV/EBITDA x nmf 19.2x 13.1x 7.9x 7.6x 7.4x 6.5x 6.6x

P&L FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e

Sales Revenue A$m 622 755 764 1,197 1,302 1,430 1,514 1,528

Other Revenue A$m 11 8 11 4 0 0 0 0

Total Revenue A$m 634 764 775 1,201 1,302 1,430 1,514 1,528

Operating Costs A$m (610) (657) (621) (971) (1,079) (1,212) (1,283) (1,314)

Operational EBITDA A$m 23 107 132 230 223 218 231 214

Exploration Expense/Write-offs A$m 0 0 0 0 0 0 0 0

Corporate & Other Costs A$m (34) (32) (25) (21) (21) (21) (22) (22)

EBITDA A$m (11) 75 129 208 202 197 209 192 RESERVES AND RESOURCES (ATTRIBUTABLE)

D&A A$m (59) (79) (98) (130) (135) (150) (155) (155) Coal Reserves Recoverable Saleable WHC Share

EBIT A$m (70) (4) 31 79 67 47 54 37 Project Mt Mt Yield (%) Mt

Net finance expense A$m (46) (52) (68) (48) (25) (23) (19) (15) Gunnedah Operations Proved 34.8 30.9 89% 25.5

Profit Before Tax A$m (115) (56) (37) 31 42 24 35 22 Probable 10.9 9.7 89% 7.9

Tax Expense (excl abn'ls) A$m 33 18 27 (10) (13) (7) (11) (7) Narrabri Proved 51.0 48 94% 35.7

Minorities A$m 0 0 (12) 0 0 0 0 0 Probable 179.0 156 87% 125.3

Adjusted NPAT A$m (82) (38) (10) 21 29 17 25 0 Werris Creek Proved 17.0 17 87% 156.0

Significant Items (post tax) A$m 0 0 (332) 0 0 0 0 0 Probable 1.0 1 100% 1.0

Reported NPAT A$m (82) (38) (342) 21 29 17 25 0 Maules Creek Proved 236.0 221 94% 165.8

Probable 145.0 128 88% 96.0

CASHFLOW FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Total 675 619 92% 613

Net Profit A$m (82) (38) (330) 21 29 17 25 15 Coal Resources Measured Indicated Inferred Total WHC

Interest/Tax/D&A A$m 29 80 106 96 147 156 165 161 Project Mt Mt Mt Mt

WHC

Share

Working Capital/other A$m (5) 64 447 (6) 2 (8) (9) (2) Vickery Opencut 230.0 165.0 110.0 505.0 505.0

Net Operating Cashflow A$m (58) 106 223 111 178 165 180 174 Rocglen Opencut 7.0 4.0 0.0 11.0 11.0

PP&E A$m (260) (311) (431) (75) (72) (86) (77) (71) Tarrawonga Opencut 48.0 18.0 13.0 79.0 79.0

Investments A$m (155) (6) (5) 0 0 0 0 0 Tarrawonga Underground 10.0 15.0 14.0 39.0 39.0

Sale of PPE and Other A$m 9 0 0 0 0 0 0 0 Gunnedah Opencut 7.0 47.0 89.0 143.0 143.0

Free cash flow A$m (464) (211) (213) 37 107 79 103 102 Gunnedah Underground 2.0 138.0 24.0 164.0 164.0

Dividends Paid A$m (29) 0 0 0 0 0 0 0 Narrabri North Underground 160.0 390.0 180.0 730.0 511.0

Debt A$m 91 204 222 (17) (105) (12) (60) (8) Werris Creek 18.0 4.0 0.0 22.0 22.0

Equity Issuance A$m (0) (0) (0) 0 0 0 0 0 Maules Creek 330.0 270.0 50.0 650.0 481.0

Other A$m 0 0 0 0 0 0 0 0 Ferndale open cut 103.0 135.0 134.0 372.0 372.0

Net Financing Cashflow A$m 61 204 222 (17) (105) (12) (60) (8) Oaklands North 110.0 260.0 580.0 950.0 950.0

Net change in cash A$m (403) (7) 10 19 2 66 43 94 Total Resources 2,471 1,446 1,194 6,942 3,277

BALANCE SHEET FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e EQUITY DCF VALUATION

Cash A$m 111 103 113 132 134 200 243 337 Projects A$m A$ps

PP&E & Mine Development A$m 3,310 3,548 3,886 3,830 3,767 3,704 3,626 3,542 Gunnedah 98 0.10

Exploration A$m 532 535 536 538 539 540 541 542 Werris Creek 121 0.12

Total Assets A$m 4,289 4,609 4,923 4,993 4,888 4,925 4,913 4,928 Narrabri 455 0.44

Debt A$m 582 788 1,038 1,022 916 904 844 836 Vickery Coal Project 53 0.05

Total Liabilities A$m 960 1,319 1,975 2,023 1,888 1,909 1,873 1,872 Maules Creek 647 0.63

Total Net Assets / Equity A$m 3,329 3,290 2,949 2,970 2,999 3,016 3,040 3,056 Corporate (168) (0.16)

Net Debt / (Cash) A$m 472 685 926 889 783 704 601 499 Cash 112 0.11

Gearing (net debt/(nd + equity)) % 12% 17% 24% 23% 21% 19% 17% 14% Debt (1,037) (1.01)

Gearing (net debt/equity) % 14% 21% 31% 30% 26% 23% 20% 16% Net equity value at 8% WACC 280 0.27

Target price 0.30

60%

65%

70%

75%

80%

85%

90%

95%

100%

0.00

5.00

10.00

15.00

20.00

25.00 ROM coal Saleable coal production Yield (%)Mt


22 March 2016 9

Fig 9 S32 summary model

Source: S32, Macquarie Research, March 2016

South32

ASX: S32 Price: (A$ps) 1.65 Mkt cap: (A$m) 8,784 Year end: Jun Rating: Underperform Up/dn TSR

LSE S32 Price: (£$ps) 0.86 Mkt cap: (US$m) 6,664 Diluted shares (m) 5,324 ASX Target: 1.20 -27% -27%

JSE S32 Price: (ZARps) 18.51 LSE Target: 0.60 -30% -30%

JSE Target: 14.00 -24% -24%

ASSUMPTIONS FY14 FY15 FY16e FY17e FY18e FY19e ASSUMPTIONS FY14 FY15 FY16e FY17e FY18e FY19e FY20e FY21e

Exchange Rate A$/US$ 0.91 0.84 0.71 0.64 0.64 0.68 Commodity prices

Exchange Rate USDBRL 2.26 2.74 3.92 4.87 4.87 4.50 Aluminium (US$/lb) 0.80 0.85 0.69 0.62 0.62 0.63 0.64 0.65

Exchange Rate USDZAR 10.30 11.67 14.32 15.29 14.61 14.14 Alumina (US$/t) 321 339 246 220 228 228 233 245

RATIO ANALYSIS FY14 FY15 FY16e FY17e FY18e FY19e Manganese ore (US$mtu) 5.07 3.75 2.47 2.28 2.43 2.63 2.88 3.13

Diluted share capital m 5,324 5,324 5,324 5,324 5,324 5,324 Ferromanganese (US$/t) 1,044 1,019 803 751 800 866 949 1,031

EPS (diluted and pre sig. items) US¢ 8.4 10.8 1.3 4.0 4.4 4.4 Nickel (US$/lb) 6.91 7.00 4.38 5.10 5.90 6.58 7.03 7.26

P/E x 14.9x 11.6x 98.9x 31.4x 28.6x 28.6x Thermal coal (US$/t) 78.38 64.37 52.78 45.38 43.00 45.50 48.50 50.00

CFPS US¢ 26.7 34.5 16.2 18.4 18.0 18.5 Coking coal (US$/t 140.00 116.38 86.75 82.50 87.00 95.00 105.00 110.00

P/CF x 6.2x 4.8x 10.2x 9.0x 9.1x 8.9x Silver (US$/oz) 20.56 17.33 14.99 16.50 19.06 21.50 22.50 22.25

DPS US¢ 0.0 0.0 0.3 0.7 1.8 1.8 Lead (US$/lb) 0.95 0.90 0.79 0.85 0.94 0.98 0.91 0.88

Dividend yield % 0.0% 0.0% 0.2% 0.6% 1.4% 1.4% Zinc (US$/lb) 0.89 1.00 0.78 0.94 1.12 1.24 1.27 1.13

Franking Level % 0% 0% 0% 0% 50% 100%

Book value per share US$ps 2.43 2.07 1.76 1.82 1.87 1.90 Production by commodity

P/Book value x 0.5x 0.6x 0.7x 0.7x 0.7x 0.7x Alumina

R.O.E. (pre sig items) % 1% 0% -18% 2% 2% 2% Worsley (kt) 3,916 3,819 3,946 4,000 4,000 4,000 4,000 4,000

R.O.A. (pre sig items) % 4% 6% 2% 3% 3% 3% Alumar (kt) 1,262 1,328 1,320 1,320 1,320 1,000 0 0

Interest Cover x -2.0x -1.9x 0.2x -1.0x -1.0x -1.0x Total alumina (kt) 5,178 5,147 5,266 5,320 5,320 5,000 4,000 4,000

EBITDA per share US$ps 0.28 0.35 0.19 0.21 0.21 0.21 Aluminium

EV/EBITDA x 4.9x 3.8x 6.4x 5.2x 4.7x 4.4x Hillside (kt) 725 699 698 694 694 694 694 694

ROIC % 3.3% 5.0% 0.7% 1.8% 2.3% 1.6% Bayside (kt) 89 0 0 0 0 0 0 0

Mozal (kt) 266 265 265 267 267 267 267 267

EARNINGS FY14 FY15 FY16e FY17e FY18e FY19e Alumar (kt) 104 40 0 0 0 0 0 0

Sales Revenue US$m 8,344 7,743 5,833 5,656 5,851 6,055 Total aluminium (kt) 1,184 1,004 963 961 961 961 961 961

Other Revenue US$m 0 0 0 0 0 0 Coal

Total Revenue US$m 8,344 7,743 5,833 5,656 5,851 6,055 South Africa Energy Coal (mt) 30.4 34.3 32.2 30.5 30.9 29.7 28.2 27.5

Operating Costs US$m (6,918) (5,892) (4,811) (4,443) (4,631) (4,855) Illawarra Coking Coal (mt) 7.5 8.9 8.2 9.5 9.4 9.4 9.4 9.4

Operational EBITDA US$m 1,426 1,851 1,021 1,212 1,220 1,199 Manganese ore

Associates US$m 62 (6) (44) 30 22 29 GEMCO (kt) 2,865 2,942 3,055 2,957 3,069 3,125 3,125 3,125

Corporate & Other Costs US$m (5) 4 53 (100) (100) (100) Hotazel (kt) 1,566 2,355 1,084 654 654 654 654 654

Underlying Ebitda US$m 1,483 1,849 1,030 1,142 1,142 1,128 Total manganese ore (kt) 4,431 5,297 4,139 3,611 3,723 3,778 3,778 3,778

D&A US$m (823) (848) (759) (733) (730) (742) Other

Underlying Ebit US$m 660 1,001 271 409 411 386 Cerro Matoso Nickel (kt) 44.3 40.4 36.5 36.0 34.8 33.6 32.4 31.2

Adjustments US$m (323) (482) (1,728) 0 0 0 Cannington Silver (moz) 25.2 22.6 21.8 19.6 19.4 20.4 18.4 17.9

Profit from Operations US$m 337 519 (1,457) 409 411 386 Cannington Lead (kt) 186.4 182.7 175.1 166.2 173.4 173.4 158.1 158.1

Net Interest US$m (187) (60) (109) (102) (73) (49) Cannington Zinc (kt) 57.9 72.4 80.0 92.8 102.3 107.1 88.2 86.1

Profit Before Tax US$m 150 459 (1,566) 307 338 337

Tax Expense US$m (47) (431) (142) (95) (105) (104) EBITDA BY COMMODITY

Minorities US$m 0 0 0 0 0 0

Net Earnings US$m 103 28 (1,708) 212 233 233

Earnings Adjustments US$m 343 547 1,775 0 0 0

Underlying Earnings US$m 446 575 67 212 233 233

CASHFLOW FY14 FY15 FY16e FY17e FY18e FY19e

Profit from Operations US$m 337 519 (1,457) 409 411 386

Interest/Tax/D&A US$m 1,067 1,433 2,371 559 575 597

Working Capital/other US$m 15 (114) (51) 12 (25) (0)

Net Operating Cashflow US$m 1,419 1,838 864 980 961 982

Capital Expenditure US$m (590) (629) (514) (388) (397) (487)

Acquisitions/(Disposals) US$m 0 0 19 0 0 0

Dividends received US$m 206 472 52 79 36 32

Free cash flow US$m 1,035 1,681 421 672 600 528

Dividends US$m 0 0 0 (53) (37) (101) VALUATION

New Equity US$m 0 0 0 0 0 0 Projects US$m US$ A$m A$/sh GBPm GBP ZARm ZAR

Debt Drawdown/(Repayment) US$m 0 (658) (232) (97) (21) (6) Worsley Alumina 803 0.15 1,070 0.20 502 0.09 12,475 2.34

Net Financing Cashflow US$m 0 (658) (232) (150) (58) (107) South Africa Aluminium 915 0.17 1,219 0.23 572 0.11 14,214 2.67

Net change in cash US$m 1,035 1,023 189 521 542 420 Mozal Aluminium 147 0.03 197 0.04 92 0.02 2,291 0.43

Brazil Aluminium 15 0.00 20 0.00 9 0.00 232 0.04

South Africa Energy Coal 51 0.01 68 0.01 32 0.01 787 0.15

BALANCE SHEET FY14 FY15 FY16e FY17e FY18e FY19e Illawarra Metallurgical Coal 512 0.10 682 0.13 320 0.06 7,955 1.49

Cash US$m 364 644 829 1,350 1,892 2,312 Australia Manganese 356 0.07 474 0.09 222 0.04 5,526 1.04

PP&E & Mine Development US$m 10,353 9,550 8,595 8,250 7,916 7,661 South Africa Manganese 26 0.00 35 0.01 16 0.00 410 0.08

Other US$m 6,968 5,295 3,484 3,440 3,583 3,671 Cerro Matoso 713 0.13 951 0.18 446 0.08 11,081 2.08

Total Assets US$m 17,685 15,489 12,908 13,039 13,391 13,644 Cannington 1,644 0.31 2,192 0.41 1,027 0.19 25,547 4.80

Debt US$m 1,024 1,046 769 672 651 645 Third party products 27 0.01 36 0.01 17 0.00 416 0.08

Total Liabilities US$m 4,735 4,454 3,553 3,334 3,461 3,539 Group and unallocated (416) (0.08) (555) (0.10) (260) (0.05) (6,472) (1.22)

Total Net Assets / Equity US$m 12,950 11,035 9,355 9,705 9,930 10,105 Cash 761 0.14 1,014 0.19 476 0.09 11,826 2.22

Net Debt / (Cash) US$m 660 402 (60) (678) (1,241) (1,667) Debt (797) (0.15) (1,063) (0.20) (498) (0.09) (12,392) (2.33)

Gearing (net debt/(nd + equity)) % 5% 4% (1%) (8%) (14%) (20%) Net Equity Value (@ 12% Nom) 4,754 0.89 6,339 1.19 2,971 0.56 73,896 13.88

Gearing (net debt/equity) % 5% 4% (1%) (7%) (12%) (17%) Price Target AUD 1.20 GBP 0.60 ZAR 14.00

0

500

1,000

1,500

2,000

2,500

FY14 FY15 FY16e FY17e FY18e FY19e FY20e

Aluminium Alumina Nickel Manganese Ag/Pb/ZN Coking Coal Energy Coal


22 March 2016 10

Fig 10 Glencore – key operating and financial estimates

Source: Company Data, Macquarie Research, March 2016

Profit & Loss 2012PF 2013PF 2014A 2015E 2016E 2017E Own Production 2012PF 2013A 2014A 2015E 2016E 2017E

Revenue US$m 236,236 239,673 224,198 172,695 165,996 175,003 Copper kt 1,190 1,497 1,546 1,502 1,266 1,161

- Total operating costs US$m 223,149 226,602 211,434 164,001 157,408 165,895 Zinc kt 1,532 1,399 1,387 1,445 1,124 1,140

EBITDA US$m 13,087 13,071 12,764 8,694 8,588 9,109 Lead kt 321 315 308 298 252 204

- Depreciation US$m 4,496 5,637 6,058 6,522 5,854 5,671 Nickel kt 103 98 101 96 113 109

EBIT (pro-forma) US$m 8,591 7,434 6,706 2,172 2,734 3,438 Cobalt kt 14 20 21 23 26 26

JV adjustment US$m -562 -436 -329 -159 -124 -139 Ferrochrome kt 938 1,238 1,295 1,462 1,600 1,600

EBIT (reported) US$m 8,029 6,998 6,377 2,013 2,609 3,299 Alumina (3rd party) kt 1,379 1,606 1,382 1,175 1,540 1,540

+ Net finance income US$m -1,117 -1,434 -1,439 -1,394 -1,176 -1,154 Thermal coal mt 121 126 137 122 120 120

Profit before tax US$m 6,912 5,564 4,938 619 1,433 2,145 Coking coal mt 6.9 7.3 6.0 5.9 6.0 5.7

+/- Other items US$m 0 0 0 0 0 0 Semi-soft mt 4.3 4.5 3.5 3.6 3.2 3.2

- Tax expense US$m (434) (712) (499) 362 (323) (483) Oil (100%) mbbl 22.6 23.2 28.5 30.6 26.0 23.4

- Minorities US$m (508) (269) (154) 361 (272) (309)

Significant items US$m (3,278) (2,110) (1,977) (6,306) - - Key Assumptions 2012A 2013A 2014A 2015E 2016E 2017E

Reported Profit US$m 2,692 2,473 2,308 -4,964 839 1,353 Copper USD/lb 3.61 3.32 3.11 2.50 2.26 2.39

Macquarie Adjusted profit US$m 5,970 4,583 4,285 1,342 839 1,353 Cobalt USD/lb 14.0 13.1 14.4 13.2 11.8 13.5

EPS (Basic) USD 0.20 0.19 0.18 -0.34 0.06 0.09 Zinc USD/lb 0.89 0.88 0.98 0.88 0.84 1.05

EPS (Diluted) USD 0.20 0.19 0.18 -0.34 0.06 0.09 Lead USD/lb 0.93 0.97 0.95 0.81 0.83 0.88

EPS (adjusted) USD 0.45 0.35 0.32 0.10 0.06 0.09 Gold USD/oz 1,668 1,412 1,266 1,157 1,199 1,251

DPS USD 0.16 0.17 0.18 0.06 0.00 0.00 Silver USD/oz 31 24 19 16 15 18

Avg. weighted shares m 13,263 13,263 13,278 14,586 14,586 14,586 Nickel USD/lb 7.87 6.81 8.09 5.36 4.50 5.44

Alumina USD/t 319 320 330 302 225 220

Cashflow 2012PF 2013A 2014A 2015E 2016E 2017E Thermal coal (NewC spot) USD/t 97 85 71 59 48 43

Cash flow from operations US$m 11,338 8,676 10,978 7,454 8,566 9,069 Thermal coal (Ref price) USD/t 119 100 85 71 60 53

Working capital changes US$m -757 2,599 -703 6,625 1,070 -554 Oil (Brent) USD/bbl 112 108 100 54 45 61

Net interest US$m -1,053 -1,498 -1,211 -1,084 -1,176 -1,154 USD/AUD USD 1.04 0.94 0.89 0.74 0.67 0.63

Tax paid US$m -1,076 -593 -928 -865 -323 -483 USD/GBP USD 1.59 1.57 1.64 1.52 1.41 1.51

Operating cashflow US$m 8,452 9,184 8,136 12,130 8,138 6,877 ZAR/USD ZAR 8.17 9.73 11.02 13.28 15.45 14.86

Capital expenditure US$m -12,769 -9,587 -9,060 -5,519 -3,532 -3,172

Asset sales/(purchases)/Other US$m -6,632 2,892 5,029 430 60 60 Profitability and liquidity analysis 2012PF 2013PF 2014A 2015E 2016E 2017E

Investing cashflow US$m -19,401 -6,695 -4,031 -5,089 -3,472 -3,112 ROE (reported) % 4.1% 4.7% 4.5% -12.0% 2.0% 3.1%

Dividends paid to equity US$m -1,862 -2,062 -2,244 -2,328 0 0 ROA (reported) % 1.6% 1.6% 1.5% -3.9% 0.7% 1.1%

Net borrowings US$m 12,692 725 -549 -7,807 -4,832 -4,754 ROE (adjusted) % 9.2% 8.7% 8.3% 3.2% 2.0% 3.1%

Equity financing US$m 141 10 -767 2,172 0 0 ROA (adjusted) % 3.5% 3.0% 2.8% 1.0% 0.7% 1.1%

Other US$m 1,533 -1,095 -570 -95 4,310 -90 EBITDA margin % 5.5% 5.5% 5.7% 5.0% 5.2% 5.2%

Financing cashflow US$m 12,504 -2,422 -4,130 -8,058 -522 -4,844 EBIT margin % 3.6% 3.1% 3.0% 1.3% 1.6% 2.0%

Net cashflow US$m 1,555 67 -25 -117 4,893 -1,079 Gearing (ND/Equity) % 51% 74% 67% 70% 48% 37%

Free cashflow US$m -4,157 -145 -718 6,726 4,605 3,705 Gearing (ND/(ND+E)) % 34% 43% 40% 41% 33% 27%

FCFPS UScps -0.31 -0.01 -0.05 0.46 0.316 0.254 Net Debt/LTM EBITDA x 2.5x 3.0x 2.7x 3.3x 2.4x 1.8x

Net Debt/NTM EBITDA x 2.5x 3.1x 4.0x 3.4x 2.3x 1.7x

Balance sheet 2012PF 2013A 2014A 2015E 2016E 2017E

Cash US$m 4,549 2,885 2,855 2,746 7,639 6,561 Key investment ratios 2012PF 2013PF 2014A 2015E 2016E 2017E

Inventories US$m 26,404 22,753 24,436 18,303 16,055 16,897 P/E (adjusted) x 4.5x 5.9x 6.3x 20.8x 35.4x 22.0x

Receivables US$m 27,430 24,536 21,456 17,001 17,727 18,589 EV/EBITDA x 3.8x 3.8x 3.9x 5.8x 5.9x 5.5x

Other current assets US$m 6,220 9,118 4,472 4,148 4,148 4,148 EV/EBIT x 5.9x 6.8x 7.5x 23.1x 18.4x 14.6x

Non-current assets US$m 104,440 95,570 98,986 86,287 79,355 76,646 Dividend yield % 7.7% 8.1% 8.8% 2.9% 0.0% 0.0%

Total assets US$m 169,043 154,862 152,205 128,485 124,925 122,841 FCF yield % -15.4% -0.5% -2.7% 22.6% 15.5% 12.5%

Accounts payable US$m 27,638 26,041 26,881 24,088 23,636 24,786

Current liabilities US$m 53,104 45,825 43,947 40,872 40,420 41,570 Enterprise Value USDm GBPm

Total liabilities US$m 104,084 102,181 100,725 87,142 82,561 78,905 Glencore market cap 29,750 19,194

Shareholder equity US$m 64,959 52,681 51,480 41,343 42,364 43,936 Net Debt (excl. 80% RMI) 20,515 13,235

Total debt US$m 52,593 55,173 52,693 44,049 39,217 34,463 EV 50,265 32,429

Net funding US$m 47,876 52,288 49,838 41,303 31,578 27,902

Readily marketable inventories US$m 18,646 16,418 19,226 15,356 13,828 14,501 NPV and Target Price USDm USD/s GBP/s

Net debt (-80% RMI) US$m 32,959 39,154 34,457 29,018 20,515 16,301 Valuation Industrial Business 40,132 2.75 1.78

NPV Metals & Mining 32,636 2.24 1.44

Divisional EBITDA 2012PF 2013PF 2014A 2015E 2016E 2017E NPV Energy 6,724 0.46 0.30

Industrial business US$m 10,859 10,472 9,763 6,034 5,926 6,272 NPV Agriculture 772 0.05 0.03

Metals & Minerals US$m 7,053 7,203 7,077 4,030 4,615 5,413 Valuation Marketing Business 20,224 1.39 0.89

Energy US$m 4,083 3,378 2,841 2,269 1,577 1,134 Value listed assets 879 0.06 0.04

Agriculture US$m 59 61 213 150 139 139 Value total operations 61,235 4.20 2.71

Other and Corporate US$m -336 -170 -368 -415 -405 -415 Adjusted net debt (excl. 80% RMI) 20,515 1.41 0.91

Marketing business US$m 2,228 2,599 3,001 2,660 2,662 2,836 Equity Value 40,720 2.79 1.80

Metals & Minerals US$m 1,379 1,643 1,545 1,280 1,547 1,636 Target price 1.80

Energy US$m 494 666 565 826 482 539

Agriculture US$m 394 383 996 584 674 703

Other US$m (39) (93) (105) (30) (41) (42) Current share price 2.04 1.48

Total EBITDA US$m 13,087 13,071 12,764 8,694 8,588 9,109 Upside -100% 22%


22 March 2016 11

Fig 11 Anglo American – key operating and financial estimates

Source: Company Data, Macquarie Research, March 2016

Investment Recommendation: Underperform Exchange: JSE LSE

Market Cap (Rm): R145,955 Ticker: AGL SJ AAL LN

Market Cap (£m): £6,649 Price: R 113 £5.16

Market Cap ($m): $9,489 12m target: R85 £3.85

Diluted shares (m): 1,288 Up/down: -25% -25%

Income statement FY14A FY15A FY16F FY17F FY18F Production FY14A FY15A FY16F FY17F FY18F

Revenue US$m 27,073 20,455 19,658 20,815 23,536 Iron Ore mt 49 54 55 62 67

Operating costs US$m (26,935) (24,567) (17,867) (19,111) (21,359) Manganese (ore + alloys) kt 3,595 3,325 1,240 1,240 1,240

Operating Profit US$m 138 (4,112) 1,791 1,703 2,177 Coal mt 100 95 95 98 99

Non-operating special items US$m (385) (1,278) - - - Copper (attributable) kt 748 709 638 638 638

Income from associates and JV's US$m 208 (221) 18 15 20 Nickel kt 37 30 45 45 45

EBIT US$m (39) (5,611) 1,809 1,718 2,197 Niobium t 4,600 5,100 6,000 6,800 7,500

Net interest US$m (220) 157 (549) (552) (540) Phosphates kt 1,572 1,523 1,523 1,523 1,523

NPBT US$m (259) (5,454) 1,259 1,166 1,657 Platinum (Equiv. Refined) koz 1,842 2,337 2,350 2,450 2,550

Income tax US$m (1,265) (388) (378) (350) (497) Diamonds Mcts 32.6 28.7 26.0 26.0 30.0

Net profit / loss US$m (1,524) (5,842) 882 816 1,160 Key assumptions FY14A FY15A FY16F FY17F FY18F

Iron ore (62% Fe - CIF China) US$/t 97 55 50 45 55

Attrib. to shareholders US$m (2,513) (5,624) 643 661 1,006 Manganese US$/mtu 4.47 2.94 2.23 2.35 2.50

Attrib. to minorities US$m 989 (218) 239 155 154 Copper US$/lb 3.11 2.51 2.26 2.39 2.15

Nickel US$/lb 7.65 5.36 4.50 5.44 6.35

HEPS (diluted) US$/sh $1.19 $0.29 $0.50 $0.51 $0.78 Platinum US$/oz 1,385 1,052 944 1,044 1,219

EPS (ordinary) US$/sh -$1.96 -$4.36 $0.50 $0.51 $0.78 Palladium US$/oz 803 690 593 650 763

EPS (diluted) US$/sh -$1.96 -$4.36 $0.50 $0.51 $0.78 Hard Coking Coal US$/t 126 102 82 84 90

EPS Underlying (Anglo Measure) US$/sh $1.73 $0.64 $0.61 $0.66 $1.01 Thermal Coal (FOB RBCT) US$/t 72 57 48 42 43

DPS US$/sh $0.85 $0.32 $0.00 $0.00 $0.00 ZARUSD x 10.82 12.75 15.47 14.95 14.30

USDAUD x 0.90 0.74 0.68 0.63 0.66

Cash Flow Statement FY14A FY15A FY16F FY17F FY18F Ratio analysis FY14A FY15A FY16F FY17F FY18F

Cash generated from operations US$m 6,949 4,240 4,248 4,336 5,073 PER x 10.8x 11.5x 12.0x 11.1x 7.3x

Tax paid US$m (1,298) (596) (656) (625) (702) EV/EBITDA x 5.3x 7.0x 5.3x 5.1x 4.2x

Other US$m 460 333 89 124 3

Cash flow from operating US$m 6,111 3,977 3,681 3,835 4,374 FCF US$m (20) (276) 492 1,055 1,488

Capex - replacement US$m (2,883) (2,686) (2,349) (2,639) (2,866) Net cash / (debt) US$m 12,978 12,386 12,600 12,155 11,288

Capex - expansion US$m (3,248) (1,567) (840) (140) (21) EBITDA Margin % 26% 15% 21% 20% 21%

Net aquisition / (disposals) US$m (151) 1,538 - - - EBIT Margin % 1% -20% 9% 8% 9%

Other US$m 157 101 171 177 194

Cash flow from investing US$m (6,125) (2,614) (3,017) (2,602) (2,692) ROE % 5% 2% 3% 3% 4%

Net change in borrowings US$m 1,783 1,332 281 (56) 69 ROCE (EBIT / Debt + Equity) % 0% -10% 4% 4% 5%

Net change in equity US$m (55) 15 - - - ROA 2% 1% 1% 1% 2%

Dividends paid to shareholders US$m (1,099) (1,078) - - - Free cash flow yield % 0% -3% 5% 11% 16%

Dividends paid to minorities US$m (823) (242) (151) (58) (81)

Other US$m (633) (974) (721) (730) (734) Dividend yield % 4.6% 4.3% 0.0% 0.0% 0.0%

Cash flow from financing US$m (827) (947) (590) (844) (746) Dividend cover x 1.4x 0.9x 0.0x 0.0x 0.0x

Net change in cash US$m (841) 416 73 389 936 Net Debt / Equity % 40% 58% 57% 53% 46%

Cash at the end of the year US$m 6,747 6,889 6,962 7,351 8,287 Net interest cover x -.2x 35.7x 3.3x 3.1x 4.1x

FFO/ND % 72% 65% 24% 27% 35%

Balance sheet FY14A FY15A FY16F FY17F FY18F ND/EBITDA x 1.1x 1.3x 2.9x 2.8x 2.2x

Property, plant and equipment US$m 38,475 29,621 30,508 30,753 30,848

Intangible assets US$m 3,912 3,394 3,394 3,394 3,394 Valuation 100% Anglo US$/sh ZAR/sh GBP/sh

Investments and financial assets US$m 6,986 3,413 3,324 3,200 3,197 US$m share

Other non-current US$m 2,329 1,788 2,067 2,342 2,546 Iron Ore and Manganese 3,917 75% $2.30 R35.33 £1.60

Non-current assets US$m 51,702 38,216 39,292 39,689 39,985 Coal 2,246 100% $1.75 R26.94 £1.22

Inventories US$m 4,720 4,051 4,103 4,197 4,298 Copper 3,491 47% $1.28 R19.64 £0.89

Receivables US$m 2,568 1,983 2,009 2,054 2,104 Nickel 1,814 100% $1.41 R21.76 £0.98

Cash US$m 6,748 6,895 6,962 7,351 8,287 Niobium 391 100% $0.31 R4.70 £0.21

Other current US$m 272 868 841 841 841 Phosphates 637 100% $0.50 R7.64 £0.35

Current assets US$m 14,308 13,797 13,915 14,443 15,530 Platinum 6,093 80% $3.79 R58.33 £2.64

Shareholders equity US$m 32,177 21,342 22,225 23,143 24,389 De Beers 7,281 85% $4.83 R74.24 £3.36

Borrowings US$m 18,535 17,967 18,248 18,192 18,261 Corporate and other (1,753) 100% -$1.37 -R21.03 -£0.95

Payables US$m 3,515 2,753 2,788 2,852 2,921 Enterprise value 27,553 $16.33 R251.24 £11.36

Provisions US$m 3,488 3,185 3,185 3,185 3,185 Less: Net Debt (12,578) -$9.81 -R150.90 -£6.83

Other liabilities US$m 8,295 6,766 6,760 6,760 6,760

Total liabilities US$m 33,833 30,671 30,982 30,989 31,127 Equity value 14,975 $6.52 R100.33 £4.54

Anglo American Plc


22 March 2016 12

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 December 2015

AU/NZ Asia RSA USA CA EUR Outperform 50.68% 61.04% 53.16% 47.90% 65.22% 43.59% (for global coverage by Macquarie, 5.33% of stocks followed are investment banking clients)

Neutral 31.51% 24.66% 34.18% 47.70% 29.71% 34.62% (for global coverage by Macquarie, 5.02% of stocks followed are investment banking clients)

Underperform 17.81% 14.30% 12.66% 4.39% 5.07% 21.79% (for global coverage by Macquarie, 3.78% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research, , is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures © Macquarie Group

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Australian coal - MacquarieThis would allow loss-making mines to close, and possibly create a circuit breaker in falling commodity markets. We see this working for above rail and port