European Metals and Mining ...280513

7/28/2019 European Metals and Mining ...280513

1/47www.jpmorganmarkets.

Europe Equity Research28 May 2013

Equity Ratings and Price Targets

Mkt Cap Price Rating Price TargetCompany Symbol ($ mn) CCY Price Cur Prev Cur P

Anglo American AAL.L 28,389.88 GBp 1,557 N n/c 1,820 1,Anglo American (AGLJ.J) AGLJ.J 28,505.89 ZAc 22,635 UW n/c 26,615 24,BHP Billiton BLT.L 61,426.41 GBp 1,923 N n/c 2,300 2,BHP Billiton (BILJ.J) BILJ.J 157,982.60 ZAc 27,845 N n/c 33,300 32,Glencore Xstrata plc GLEN.L 66,569.45 GBp 332 OW n/c 420 Rio Tinto plc RIO.L 80,631.17 GBp 2,867 OW n/c 4,520 4,Vedanta Resources VED.L 5,291.00 GBp 1,281 OW n/c 1,540 1,Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 24 May 13.

European Metals & MiningA tempered commodity outlook: GLEN XTA remainsthe top pick, AAL least preferred

European Metals, Mining & Steel

Fraser JamiesonAC

(44- 20) 7742-5930

[email protected]

J.P. Morgan Securities plc

Dominic O'KaneAC

(44-20) 7742-6729

[email protected]


Roger BellAC

(44-20) 7134-5932

[email protected]. Morgan Securities plc

Lyndon Fagan

(61-2) 9003-8648

[email protected]

J.P. Morgan Securities Australia Limited

Ben Defay

(44-20) 7134-5936

[email protected]


James Bateman

(44-20) 7742-6588

[email protected]


For Specialist Sales advice, pleascontact

James H McGeoch

(44-20) 7134-0690

[email protected]

See page 41 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware ththe firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singfactor in making their investment decision.

In recent weeks our view on supply/demand balances for base and preciousmetals has deteriorated. We therefore adjust near-term commodity forecasts toreflect current trading, leading to FY14/15E EPS cuts of 0-5% for RIO andBHP and 20-30% for base heavy VED, GLEN and AAL, though weakening

producer currencies provide some respite. With no changes to long-termforecasts the impact on NPVs is just 0-6% and all shares continue to trade at asteep discount. Though we do not expect an imminent equity re-rating towards

NPV as commodity sentiment is muted, we continue to see value & our orderof preference is intact: GLEN is our top pick and AAL our least preferred.

Slower growth, lower prices: lower GDP growth assumptions haveprompted revisions to supply & demand balances and we lower copper priceforecasts in 2013-15 to US$3.50/3.48/3.58/lb, -4%/12%/13%. Newaluminium prices are US$0.89//0.93/1.00/lb in 2013/14/15, -5%/12%/10%.With this review we also lower gold, and the other base metals. We cut ourexpectations for hard coking coal prices in 2013 from $173 to $168/t and for2014 from $183 to $179/t.

Sizeable 2014/15 earnings downgrades: weaker near-term producer FXforecasts (ZAR, AUD in particular) offset commodity price downgrades toan extent, but AAL, GLEN and VED see ~20-30% downgrades to FY14-15E EPS, driven by our tempered view on copper. RIO's "over-reliance" oniron ore sees it suffer the smallest downgrades at just 1%, while BHPBsdiversification also serves it well with a 5% cut to FY14-15E earnings.

Small cuts to Price Targets, pecking order remains intact : with no

changes to long-term price forecasts, the impact on our NPVs and pricetargets are more modest, falling 0-6% (including a roll-forward to Jun-14).GLEN XTA remains our top sector pick despite sizeable copper related EPSdowngrades, combining best-in-sector FCF yield with a differentiatedmessage on capital allocation and a high level of employee ownership.While premium near-term multiples are a headwind, we believe investorswill increasingly look beyond these, assuming progress on key development

projects remains on track. AAL continues to face a number of key structuralissues and notwithstanding likely support in the run-up to Mark Cutifanisfirst results in July, remains our least preferred name.


2/47

2


Fraser Jamieson(44- 20) [email protected]

Forecast changes

Commodity price changesTable 2 shows a summary of the changes made to our commodity price forecasts. We

have not made any changes to long-term forecasts; the key near-term changes are:

Copper: -4% to $7,707/t ($3.50/lb) in CY13, -12% to $7,675/t ($3.48/lb) in

CY14 and -14% to $7,900/t ($3.58/lb) in CY15;

Aluminium: -5% to $1,963/t ($0.89/lb) in CY13, -12% to $2,050/t ($0.93/lb) in

CY14 and -10% to $2,200/t ($1.00/lb) in CY15;

Coal: coking coal -3% to $168 in 2013, -2% to $183 in FY14; no changes to

thermal;

Iron Ore: unchanged at $130/t for Q2, $125/t for Q3 and $120/t for Q4, leading

to an average of $130/t for CY13, $115/t for CY14 and $105/t for CY15;

Gold: -8% to $1,595 in 2013, -5% to $1,719oz in 2014. We have upgraded our

long-term Silverprice to reflect a 60:1 gold:silver ratio, in-line with the historical

average.

We have also made adjustments, predominantly marked-to-market, to our exchange

rate forecasts, as shown below. Our revised forecasts are in line with J.P. Morgan

official forecasts.

Table 1: FX forecast changes

Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 2013 2014 2015 LT RealA$/US$ New 1.04 0.99 0.99 1.00 1.01 1.00 0.99 0.98 1.00 1.00 0.96 0.80

Old 1.04 1.05 1.06 1.07 1.07 1.06 1.04 1.03 1.05 1.05 1.00 0.80

New vs old 0% -6 -7% -7% -6 -5% -5% -5% -5% -5% -4% 0%New QoQ % / YoY % -5 0 1% 1 -1% -1% -1% -1% -4%Spot 0.97 0.97 0.97 0.97 0.97 0.97 0.97 0.97 0.97 0.97 0.97 0.97New vs spot 7% 2 2 3% 4 3 2% 1% 4 3 -1%

C$/US$ New 1.01 1.01 0.99 0.99 0.99 0.99 0.98 0.98 1.00 0.99 0.97 1.05Old 1.01 1.01 0.99 0.99 0.99 0.99 0.98 0.98 1.00 0.99 0.98 1.05New vs old 0% 0 0 0% 0 0 0% 0% 0 0 -1% 0%New QoQ % / YoY % 0 -2% 0% 0 0 0% 0% -1% -2%

Spot 1.03 1.03 1.03 1.03 1.03 1.03 1.03 1.03 1.03 1.03 1.03 1.03New vs spot -3% -2 -4% -4% -4 -5% -5% -5% -3% -5% -6%

/US$ New 1.55 1.51 1.49 1.49 1.52 1.52 1.53 1.53 1.51 1.53 1.54 1.43Old 1.55 1.47 1.51 1.51 1.51 1.52 1.53 1.54 1.51 1.53 1.55 1.43New vs old 0% 3 -1% -1% 1 0 0% -1% 0 0 -1% 0%New QoQ % / YoY % -3 -1% 0% 2 0 0% 0% 1 1%Spot 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51New vs spot 3% 0 -1% -1% 1 1 1% 1% 0 1 2%

ZAR/US$New 8.93 9.12 9.00 9.00 9.06 9.16 9.27 9.37 9.01 9.22 9.68 11.21Old 8.93 8.90 8.80 8.50 8.60 8.70 8.80 8.90 8.78 8.75 9.15 10.20New vs old 0% 2 2 6% 5 5 5% 5% 3 5 6% 10%New QoQ % / YoY % 2 -1% 0% 1 1 1% 1% 2 5%

Spot 9.53 9.53 9.53 9.53 9.53 9.53 9.53 9.53 9.53 9.53 9.53 9.53New vs spot -6% -4 -6% -6% -5 -4% -3% -2% -5% -3% 1%

Source: J.P. Morgan estimates.


3/47

3



Table 2: Commodity price forecast changes

Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 2013 2014 2015 LT Real

Al New US$/t 2,002 1,900 1,950 2,000 2,100 1,900 2,000 2,200 1,963 2,050 2,200 2,200

US$/lb 0.91 0.86 0.88 0.91 0.95 0.86 0.91 1.00 0.89 0.93 1.00 1.00Old US$/t 2,002 2,050 2,100 2,150 2,200 2,350 2,375 2,400 2,076 2,331 2,445 2,200New vs old % 0 -7% -7 -7% -5% -19% -16% -8% -5 -12% -10% 0 New QoQ % / YoY % % -5% 3 3 5% -10% 5% 10% 4% 7%Spot US$/t 1,852 1,852 1,852 1,852 1,852 1,852 1,852 1,852 1,852 1,852 1,852 1,852New vs spot % 8 3% 5 8 13% 3 8% 19% 6 11% 19%

Cu New US$/t 7,927 7,300 7,700 7,900 7,600 7,500 7,700 7,900 7,707 7,675 7,900 7,500US$/lb 3.60 3.31 3.49 3.58 3.45 3.40 3.49 3.58 3.50 3.48 3.58 3.40

Old US$/t 7,927 7,600 8,100 8,500 8,400 8,650 8,850 9,100 8,032 8,750 9,050 7,500New vs old % 0 -4% -5 -7% -10% -13% -13% -13% -4 -12% -13% 0 New QoQ % / YoY % % -8% 5 3 -4% -1% 3% 3% 0% 3%Spot US$/t 7,280 7,280 7,280 7,280 7,280 7,280 7,280 7,280 7,280 7,280 7,280 7,280New vs spot % 9 0% 6 9 4% 3 6% 9% 6 5% 9%

Ni New US$/t 17,311 15,500 14,500 15,200 16,700 16,500 17,000 16,800 15,628 16,750 17,500 18,000US$/lb 7.85 7.03 6.58 6.89 7.57 7.48 7.71 7.62 7.09 7.60 7.94 8.16

Old US$/t 17,311 16,900 17,350 18,250 19,150 19,500 19,600 20,450 17,453 19,675 19,750 18,000New vs old % 0 -8% -16 -17% -13% -15% -13% -18% -10 -15% -11% 0

New QoQ % / YoY % % -10% -6 5 10% -1% 3% -1% 7% 4%Spot US$/t 14,903 14,903 14,903 14,903 14,903 14,903 14,903 14,903 14,903 14,903 14,903 14,903New vs spot % 16% 4% -3 2 12% 11% 14% 13% 5 12% 17%

Zn New US$/t 2,030 1,880 2,000 2,100 2,250 2,000 2,150 2,300 2,002 2,175 2,250 2,000US$/lb 0.92 0.85 0.91 0.95 1.02 0.91 0.98 1.04 0.91 0.99 1.02 0.91

Old US$/t 2,030 2,050 2,150 2,200 2,250 2,300 2,350 2,400 2,107 2,325 2,450 2,000New vs old % 0 -8% -7 -5% 0% -13% -9% -4% -5 -6% -8% 0 New QoQ % / YoY % % -7% 6 5 7% -11% 8% 7% 9% 3%

Spot US$/t 1,855 1,855 1,855 1,855 1,855 1,855 1,855 1,855 1,855 1,855 1,855 1,855New vs spot % 9 1% 8 13% 21% 8 16% 24% 8 17% 21%

Gold New US$/t 1,631 1,450 1,600 1,700 1,700 1,725 1,750 1,700 1,595 1,719 1,650 1,500Old US$/t 1,631 1,775 1,800 1,775 1,800 1,825 1,850 1,800 1,745 1,819 1,735 1,500New vs old % 0 -18% -11 -4% -6% -5% -5% -6% -9 -5% -5% 0 New QoQ % / YoY % % -11% 10 6 0% 1 1% -3% 8% -4%Spot US$/t 1,379 1,379 1,379 1,379 1,379 1,379 1,379 1,379 1,379 1,379 1,379 1,379New vs spot % 18% 5% 16 23% 23% 25% 27% 23% 16 25% 20%

Silver New US$/t 30.05 25.00 27.00 29.50 30.00 30.00 31.00 30.00 27.89 30.25 30.75 24.00Old US$/t 30.05 30.00 30.00 30.00 30.00 31.00 31.00 30.00 30.01 30.50 30.75 24.00New vs old % 0 -17% -10 -2% 0% -3% 0% 0% -7 -1% 0% 0 New QoQ % / YoY % % -17% 8 9 2% 0 3% -3% 8% 2%

Spot US$/t 22.33 22.33 22.33 22.33 22.33 22.33 22.33 22.33 22.33 22.33 22.33 22.33New vs spot % 35% 12% 21 32% 34% 34% 39% 34% 25 35% 38%

Pt New US$/oz 1,631 1,475 1,500 1,525 1,575 1,650 1,700 1,750 1,533 1,669 1,850 2,100Old US$/oz 1,611 1,611 1,611 1,611 1,750 1,750 1,750 1,750 1,611 1,750 1,945 1,800New vs old % 1 -8% -7 -5% -10% -6% -3% 0% -5 -5% -5% 17 New QoQ % / YoY % -10% 2 2 3% 5 3% 3% 9% 11%Spot US$/oz 1,457 1,457 1,457 1,457 1,457 1,457 1,457 1,457 1,457 1,457 1,457 1,457New vs spot 12% 1% 3 5 8% 13% 17% 20% 5 15% 27%

Pd New US$/oz 742 700 725 750 775 785 805 835 729 800 900 1,100Old US$/oz 700 700 700 700 881 881 881 881 700 881 1,080 1,000New vs old 6 0% 4 7 -12% -11% -9% -5% 4 -9% -17% 10 New QoQ % / YoY % -6% 4 3 3% 1 3% 4% 10% 13%

Spot US$/oz 741 741 741 741 741 741 741 741 741 741 741 741

New vs spot 0 -6% -2 1 5% 6 9% 13% -2 8% 21%Rh New US$/oz 1,199 1,200 1,200 1,200 1,350 1,500 1,700 1,450 1,200 1,500 1,300 2,250

Old US$/oz 1,100 1,100 1,100 1,100 1,750 1,750 1,750 1,750 1,100 1,750 3,781 3,500New vs old % 9 9% 9 9 -23% -14% -3% -17% 9 -14% -66% -36 New QoQ % / YoY % % 0% 0 0 13% 11% 13% -15% 25% -13%Spot US$/oz 1,115 1,115 1,115 1,115 1,115 1,115 1,115 1,115 1,115 1,115 1,115 1,115New vs spot % 8 8% 8 8 21% 35% 52% 30% 8 35% 17%

Coking New US$/t 165 172 165 170 175 180 180 180 168 179 190 170coal Old US$/t 165 172 172 180 180 185 185 180 173 183 190 170

New vs old % 0 0% -4 -6% -3% -3% -3% 0% -3 -2% 0% 0 New QoQ % / YoY % % 4% -4 3 3% 3 0% 0% 7% 6%

Spot US$/t 140 140 140 140 140 140 140 140 140 140 140 140New vs spot % 18% 23% 18 22% 25% 29% 29% 29% 20 28% 36%



4/47

4



Summary earnings & valuation changes

The relatively large cuts to near-term commodity price forecasts result in sizeable

downgrades to our earnings forecasts across the diversified peer group. Key points:

The lack of changes to our iron ore deck means the earnings and NPV impact of

our adjustments is smallest forRIO, followed by BHPB. In fact, BHPBs NPV

rises marginally, reflecting the impact of the roll forward of our NPV to H114

and the move beyond BHPBs peak capex.

GLEN XTA's downgrades are driven by its heavy exposure to Copper, Zinc and

Nickel, where we have downgraded forecasts by 4-15% across our forecast

horizon and which account for 63% of our (pre-adjustments) 2015E EBITDA.

Although AAL's relative exposure to Copper and Nickel is smaller than for

GLEN XTA, downgrades to our PGM price profile, as set out in our South

African colleagues note Platinum Foresight: Producers' foundations cracking,

time to overhaul strategy, and higher assumed cost inflation offset by weakerZAR assumptions, mean it sees slightly higher earnings downgrades. The NPV

impact is slightly lower than for GLEN XTA.

VED sees the most significant near-term earnings downgrades, driven by a high

exposure to Copper, Aluminium and Zinc (combined 65% & 46% of FY14E

revenue & EBITDA respectively), all of which see forecast cuts, coupled with

slightly higher D&A assumptions following FY13 results.

Table 3: Summary earnings and NPV changes

EBITDA (US$m, calendarised) EPS (USc, calendarised)NPV

(GBP)vs

prev 2013Evs

prev 2014Evs

prev 2015Evs

prev 2013Evs

prev 2014Evs

prev 2015Evs

prevAAL 18.18 -5.7 8,492 -7.9% 9,116 -11.4% 9,825 -17.3% 174 -11.7% 181 -17.6% 200 -26.3%BHPB 23.43 0.2 32,352 -0.8% 35,704 -3.8% 37,182 -4.0% 276 -0.6% 303 -5.0% 313 -5.4%GLEN 4.23 -6.4 12,876 -5.6% 1 5,944 -13.3% 1 8,632 -14.0% 33 -10.3% 44 -22.8% 53 -23.2%RIO 44.92 -0.5 18,725 1.2% 19,390 0.7% 20,148 -1.7% 507 1.7% 497 -1.4% 543 -4.3%VED 16.21 -1.4 4,985 -8.7% 6,339 -12.7% 7,041 -9.9% 127 -47.2% 298 -27.3% 317 -23.3%


Table 4: Traded UK diversified miner valuations Marked to Market (as on 24th May)

Price Mkt Cap EPS (GBp/sh) PER EV/EBITDA FCF Yield

() ($m) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015EBHPB 19.16 168,037 188.6 202.9 211.0 10.2x 9.4x 9.1x 6.0x 5.4x 5.0x 4.3 7.2% 8.8%RIO 29.01 84,884 373.2 407.0 450.4 7.8x 7.1x 6.4x 3.0x 2.8x 2.7x 3.3 4.5% 10.3%GLENXTA 3.35 67,191 18.7 21.3 23.7 17.9x 15.7x 14.2x 9.5x 8.5x 7.3x 4.0 5.2% 8.4%AAL 15.67 32,985 123.5 119.3 117.8 12.7x 13.1x 13.3x 4.5x 4.7x 4.7x -3.7 -1.6% 3.6%VED 12.94 5,215 59.0 118.8 132.9 21.9x 10.9x 9.7x 7.0x 5.6x 4.6x 0.8 18.3% 22.6%


Table 5: Traded UK diversified miner valuations JPM base case forecasts (as on 24th May)

Price Mkt Cap EPS (GBp/sh) PER EV/EBITDA FCF Yield

() ($m) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015EBHPB 19.16 168,037 182.7 198.5 202.8 10.5x 9.6x 9.4x 6.1x 5.4x 5.0x 4.0% 7.2% 8.5%RIO 29.01 84,884 335.4 328.8 359.5 8.6x 8.8x 8.1x 5.6x 5.5x 5.3x 1.4% 1.9% 7.2%GLENXTA 3.35 67,191 21.5 29.0 34.2 15.6x 11.6x 9.8x 9.0x 7.2x 5.8x 1.2% 5.6% 12.1%AAL 15.67 32,985 117.1 119.0 129.6 13.4x 13.2x 12.1x 5.1x 5.2x 5.1x -5.1% -3.5% 2.9%VED 12.94 5,215 109.1 190.0 195.6 11.9x 6.8x 6.6x 6.2x 4.7x 3.7x 4.5% 24.4% 28.9%

https://markets.jpmorgan.com/CFP_Research/PubServlet?action=open&doc=GPS-1114675-0&page=1&referrerPortlet=search_analyst&referrerPage=analyst_page&referrerUrl=https://markets.jpmorgan.com/CFP_Research/CFP?page=analyst_page&analystId=U863488https://markets.jpmorgan.com/CFP_Research/PubServlet?action=open&doc=GPS-1114675-0&page=1&referrerPortlet=search_analyst&referrerPage=analyst_page&referrerUrl=https://markets.jpmorgan.com/CFP_Research/CFP?page=analyst_page&analystId=U863488https://markets.jpmorgan.com/CFP_Research/PubServlet?action=open&doc=GPS-1114675-0&page=1&referrerPortlet=search_analyst&referrerPage=analyst_page&referrerUrl=https://markets.jpmorgan.com/CFP_Research/CFP?page=analyst_page&analystId=U863488https://markets.jpmorgan.com/CFP_Research/PubServlet?action=open&doc=GPS-1114675-0&page=1&referrerPortlet=search_analyst&referrerPage=analyst_page&referrerUrl=https://markets.jpmorgan.com/CFP_Research/CFP?page=analyst_page&analystId=U863488https://markets.jpmorgan.com/CFP_Research/PubServlet?action=open&doc=GPS-1114675-0&page=1&referrerPortlet=search_analyst&referrerPage=analyst_page&referrerUrl=https://markets.jpmorgan.com/CFP_Research/CFP?page=analyst_page&analystId=U863488https://markets.jpmorgan.com/CFP_Research/PubServlet?action=open&doc=GPS-1114675-0&page=1&referrerPortlet=search_analyst&referrerPage=analyst_page&referrerUrl=https://markets.jpmorgan.com/CFP_Research/CFP?page=analyst_page&analystId=U863488


5/47

5



As shown in the charts below, the typical inverse relationship between commodity

prices and producer currency exchange rates appears to be holding, with commodity

price-related downgrades offset to an extent by FX-related upgrades. Particularly

relevant for the peer group are the ZAR, which has weakened in the face of Eskomissues and labour unrest, and the AUD, where the impact of China slowing, dilution

of the interest rate carry trade and slowing FDI in large resource projects have

combined to drive a seemingly definitive move down through parity against the

USD.

Figure 1: AAL commodity price vs FX earnings impact


Figure 2: BHPB commodity price vs FX earnings impact


Figure 3: GLEN XTA commodity price vs FX earnings impact


Figure 4: RIO commodity price vs FX earnings impact


Pecking order remains intact

The market typically trades the sector based on marked to market earnings, so our

earnings downgrades are arguably already reflected in share prices. Nonetheless,valuations continue to look unchallenging across the group, with the shares trading at

15-35% discounts to the historical trading average. RIO is trading on a P/NPV of

0.65x, BHPB 0.82x, GLEN 0.79x, AAL 0.86x and VED 0.79x.

Our pecking order remains intact, with Glencore Xstrata our top pick and Anglo

American our least preferred. Despite our downgrades we estimate GLEN XTA will

generate 36% of its market cap in cumulative FCF from 2013-16E or 55% by 2017,

the best amongst the peer group. Volume growth is also strong, as shown in Figure 6,

with most projects (although notably not Central African copper) largely de-risked

and coming towards the end of their investment phase.

7,110

1,597

492 6,005

5,000

5,500

6,000

6,500

7,000

7,500

EBIT FY'14 Commodities FX EBIT FY'14

28,516

2,291

1,016 27,242

26,000

26,500

27,000

27,500

28,000

28,500

29,000

EBIT FY'14 Commodities FX EBIT FY'14

12,303

2,868

410 9,844

9,000

9,500

10,000

10,500

11,000

11,500

12,000

12,500

EBIT FY'14 Commodities F X EBI T F Y'14

14,410

755

852 14,507

13,000

13,500

14,000

14,500

15,000

EBIT F Y'14 Commodities FX EBIT FY'14


6/47

6



Figure 5: Cumulative FCF yield, GLEN & VED 55% & 129% by 2017E


Figure 6: Cumulative Copper Equivalent volume growth


Further detail on the rationale for our relative rankings can be found within the

relevant company sections towards the rear of this report, however in summary:

GLEN XTA [OW, 420p/sh Jun-14 PT]: best-in-sector 55% cumulative FY13-

17E FCF yield coupled with differentiated message on capital allocation and high

level of employee ownership make it our top pick. Key risks include project

execution, particularly Central African copper, and the copper price;

VED [OW, 1,540p/sh Jun-14 PT]: strong, non-commodity price investment

case, with approvals on corporate restructuring seemingly imminent and likely to

drive a re-rating as debt is distributed more sensibly through the structure.

Valuation and FCF generation also look supportive; key risks include Indian

government bureaucracy, particularly the risk of further delays to corporate

restructuring approvals. Significant debt refinancing/repayement is required over

the remainder of the year.

RIO [OW, 4,520p/sh Jun-14 PT]: most under-appreciated FCF improvement

story in the sector, with annual FCF yields of >12% by 2016, plus strong growth

in the interim. Key risks include the iron ore price, further project approvals (Oyu

Tolgoi phase II) and uninspiring messaging on capital allocation;

BHPB [N, 2,300p/sh Jun-14 PT]: recent strong performance likely to continue

as investors continue to appreciate strong messaging on cost and capital

discipline plus the benefits of the most diversified asset portfolio of the peer

group. Key risks would include capex approvals and an improvement in

messaging from the peers.

AAL [N, 1,820p/sh Jun-14 PT]: we continue to believe hope around MarkCutifanis arrival at AAL will be enough to support performance heading into

mid-year results. Longer-term, however, significant structural issues need to be

addressed, including South African labour and power issues, the problem Minas

Rio and Barro Alto projects, an uninspiring future growth pipeline and the

broader question of South African exposure. Premium valuation and lack of

growth does not help, in our view.

-20%

0%

20%

40%

60%

80%

100%

120%

140%

2013E 2014E 2015E 2016E 2017E

GLEN XTA BHP RIO AAL VED

90

100

110

120

130

140

150

2012A 2013E 2014E 2015E 2016E 2017E

GLEN XTA BHP RIO AAL VED


7/47

7



Commodity views base & precious

metalsThe following section includes data from the J.P. Morgan Commodity Research

teams latest price update, released on 23rd May Metals Weekly Slower growth,

lower price expectations.

Recent downward revisions to economic growth forecasts in the JPM view translate

to lower implied growth in global metals use. At the same time, fresh data on

production and inventories lead to upward adjustments in our refined supply

numbers, even as we maintain that market expectations are still somewhat too high.

The net effect is to lower our expectations for average cash prices over the next 18

months, but still to project the evolution of cash prices to be generally upward from

here. Moreover, long-dated prices continue to be well supported by high costs and,

thus, significant investment hurdle requirements.

Copper

Key changes:

2013: Global demand growth cut from +3.9% to +3.7%, reflecting weaker

Chinese import demand and global semi-fabricated product output year-to-date.

Refined supply growth increased from +3.9% to +4.1%, primarily driven by an

increase to the mine side where African output has exceeded expectations, even

allowing for disruptions to established mines elsewhere. Balance moves from

143kt surplus to 307kt.

2014: Global demand growth cut from +4.9% to +3.9%, with China again the

main driver, moving from +6.6% to +5.5%. Refined supply growth increasedfrom +3.7% to +3.8%.
https://markets.jpmorgan.com/research/EmailPubServlet?action=open&hashcode=te5pbope&doc=GPS-1130044-0.pdfhttps://markets.jpmorgan.com/research/EmailPubServlet?action=open&hashcode=te5pbope&doc=GPS-1130044-0.pdfhttps://markets.jpmorgan.com/research/EmailPubServlet?action=open&hashcode=te5pbope&doc=GPS-1130044-0.pdfhttps://markets.jpmorgan.com/research/EmailPubServlet?action=open&hashcode=te5pbope&doc=GPS-1130044-0.pdfhttps://markets.jpmorgan.com/research/EmailPubServlet?action=open&hashcode=te5pbope&doc=GPS-1130044-0.pdfhttps://markets.jpmorgan.com/research/EmailPubServlet?action=open&hashcode=te5pbope&doc=GPS-1130044-0.pdf


8/47

8



Table 6: Copper supply/demand balance

Source: Company Reports, Government and Industry data, WBMS, USGS, Exchanges, Wood Mackenzie, J.P. Morgan Commodities Research.


9/47

9



Aluminium

Key changes:

2013: Global demand growth cut from +7.4% to +6.4%, reflecting similar drivers

as those outlined for copper above. Supply growth increased from +6.9% to

+7.1%, primarily driven by faster than expected Chinese expansions. Balance

moves from surplus of 681kt to 1.54Mt.

2014: Global demand growth cut from +7.5% to +7.2%. Supply increased from

+7.3% to +7.4%. Balance goes to 1.75Mt from 411kt. Our improving price path

therefore implies substantial capacity shutdowns going forward.

Table 7: Aluminium supply/demand balance



10/47

10



Nickel

Key changes:

2013: Balance moves from a 35kt surplus to 30kt. The major change is a 30kt cut

to our nickel pig iron (NPI) production forecast in China, offset by increases to

RoW primary nickel production.

2014: Balance goes from 36kt surplus to 22kt surplus.

Table 8: Nickel supply/demand balance



11/47

11



Zinc

Table 9: Zinc supply/demand balance



12/47

12



Commodity views coal

The following section contains an extract from the note We Update Our Coal PriceDeck Ahead of The Q3 Coking Coal Negotiationby our global coal analyst team,

led by our US colleague, John Bridges. Overall we have made no changes to our

existing thermal coal price deck, which sees prices gently improve from the current

~$87/t to $95/t by the end 2013 then remaining at that level (in real terms) going

forward. We have modestly cut our near-term coking coal (benchmark contract)

forecasts to reflect the weak spot pricing environment (


13/47

13



and together with (almost) forced sales of Mongolian coking coal from the TT

Erdenes mine could be contributing to the very low spot price for excess coal.

After several years of acute cost inflation, Australian miners are targetingaggressive cost reductions

BHPB is showcasing its Queensland operations next week, with the key focus likely

to be on cost reduction measures. Unit costs should begin to fall with capacity

utilisation rising, new projects ramping up, and the A$ now falling. Assuming

demand remains subdued, this could force other higher cost suppliers, such as US

miners, to trim sales.

The spot market is a useful directional leading indicator for coking coal prices

However, the transaction price must make sense for both parties. Consequently, we

feel that the Q3 settlement is likely to be around $165/t not the current spot level of

$139.50. Yet the longer the spot price remains at this low level the greater the

downward pressure. We suspect BHPBs mine visits next week will be watchedclosely by the worlds coking coal industry since greater volumes from these mines

would likely force others to shut in capacity.


14/47

14



Anglo American

Neutral

Company Data

Price (p) 1,557Date Of Price 24 May 13Price Target (p) 1,820Price Target End Date 30 Jun 1452-week Range (p) 2,215 - 1,507Mkt Cap ( bn) 18.8Shares O/S (mn) 1,206

Anglo American (AAL.L;AAL LN)

FYE Dec 2011A 2012A 2013E(Prev)

2013E(Curr)

2014E(Prev)

2014E(Curr)

Adj. EPS FY ($) 4.99 2.26 1.97 1.77 2.20 1.82Revenue FY ($ mn) 36,548 32,786 37,021 35,749 38,822 37,049EBITDA FY ($ mn) 13,275 8,685 9,222 8,596 10,290 9,116EBITDA margin FY 36.3% 26.5% 24.9% 24.0% 26.5% 24.6%EBIT FY ($ mn) 10,975 6,164 7,290 6,685 7,740 6,611EBIT margin FY 30.0% 18.8% 19.7% 18.7% 19.9% 17.8%Bloomberg EPS FY ($) 4.73 1.92 - 2.31 - 2.80EV/EBITDA FY 2.6 4.0 4.7 4.8 4.6 4.9Source: Company data, Bloomberg, J.P. Morgan estimates.

We upgraded our recommendation on Anglo American from Underweight to Neutralon April 14th. We based the upgrade on a view that, with Mark Cutifani having just

got into the hot seat and 1-year performance having been so dire (>30%

underperformance against the key peers), that the "hope trade" on better messaging

would provide some support through H1. Year-to-date performance has been in line

with RIO, however the shares have continued to notably underperform BHPB and

GLEN XTA. Longer-term, the challenges appear to be piling up in Mr Cutifanis

inbox: addressing chronic labour and power issues in South Africa; coming up with a

credible plan to create value at Minas Rio and Barro Alto; re-invigorating the

development pipeline, which is currently skewed towards PGM and Metallurgical

Coal projects, in the context of a balance sheet that is adding rather than reducing

leverage over coming years; and, ultimately, deciding on an appropriate strategy with

respect to Amplats.

As shown in Figure 7, the majority of our FY13 downgrade is driven by the iron ore

division, specifically Kumba. Despite no changes to our underlying iron ore price

forecasts, we have taken this opportunity to adjust our production forecasts to reflect

the ongoing impact of strike action at Sishen during Q1, causing us to drop our

production forecast by ~3Mt to 47Mt. We have also adjusted sales to reflect planned

restocking and pushed our unit cost inflation forecast up from +5% to +10%. Copper

price downgrades are offset by a reduction to assumed unit costs at Collahuasi, in

line with the estimates we use for the JV partners. In FY14E, downgrades are

dominated by copper due to our lower price forecast and by the unit cost impact in

2013 rolling forward.


15/47

15



Figure 7: Impact of price and FX changes on FY13E EBIT


Figure 8: Impact of price and FX changes on FY14E EBIT


AAL trades on spot PERs of 12.7x/13.1x for FY13/14E respectively, a 41/58%

premium to the peer group. Our base case P/NPV of 0.86x is more attractive than haspreviously been the case, but the company continues to screen at a premium to all

other peers and arguably still faces unresolved structural challenges. We retain our

Neutral recommendation, although AAL is still our least preferred exposure in the

diversified peer group.

Table 11: J.P. Morgan changes to AAL forecasts

FY13E FY14E FY15EOld New Change Old New Change Old New Change

Revenue US$m 33,188 32,015 -4% 34,895 33,187 -5% 37,652 35,121 -7%EBITDA US$m 9,222 8,596 -7% 10,290 9,116 -11% 11,880 9,825 -17%Operating profit US$m 7,290 6,685 -8% 7,740 6,611 -15% 9,181 7,170 -22%EPS USc/sh 197.0 177.0 -10% 220.2 181.5 -18% 271.0 200.0 -26%DPS USc/sh 89.3 87.1 -2% 93.7 89.3 -5% 98.4 91.5 -7%

CFO US$m 6,466 6,153 -5% 6,605 5,846 -11% 7,425 6,145 -17%Capex US$m -7,772 -7,772 0% -6,932 -6,932 0% -5,121 -5,121 0%Net cash/(debt) US$m -12,895 -13,058 1% -16,057 -16,685 4% -16,944 -18,346 8%NPV GBp/sh 1,928 1,819 -6% - - n/a - - n/aDivisional operating profitPlatinum US$m 425 396 -7% 616 458 -26% 1,676 693 -59%Diamonds US$m 747 747 0% 807 807 0% 870 870 0%Copper US$m 1,909 1,882 -1% 2,542 2,042 -20% 3,043 2,456 -19%Nickel US$m 45 -27 -160% 143 4 -97% 134 23 -83%Iron ore & manganese US$m 3,376 2,869 -15% 2,741 2,383 -13% 2,304 1,977 -14%Met coal US$m 299 331 11% 430 495 15% 605 702 16%Thermal coal US$m 744 740 0% 813 774 -5% 853 755 -12%Other mining & industrial US$m 165 165 0% 78 78 0% 136 136 0%Exploration US$m -211 -211 0% -216 -216 0% -222 -222 0%Corporate activities US$m -208 -208 0% -213 -213 0% -219 -219 0%Other US$m 0 0 0% 0 0 0% 0 0 0%Total US$m 7,290 6,685 -8% 7,740 6,611 -15% 9,181 7,170 -22%

Source: J.P. Morgan estimates. Note: new 2013 NPV refers to June-14 NPV.

7,290

6,685

6,1006,3006,5006,7006,9007,1007,3007,500

7,7007,900 7,740

6,611

6,1006,3006,5006,7006,9007,1007,3007,500

7,7007,900


16/47

16



Figure 9: AAL FY13E EBITDA breakdown


Figure 10: AAL FY13E earnings sensitivities


Investment Thesis, Valuation and Risks

Anglo American (Neutral; Price Target: 1,820p)

Investment Thesis

We maintain our Neutral recommendation on Anglo American as we believe that

after a period of protracted underperformance the combination of an emerging self-

help story and the arrival of new CEO Mark Cutifani will be enough to reverse the

weakness as market anticipation of improvement in the business is heightened. We

do recognise however that sustained outperformance is likely to be limited by AALs

expensive relative valuation to diversified peers.

Valuation

Our 18.20/sh Jun-14 PT for AAL is based on 1x our mid-14E NPV forecast for the

company, in line with historical multiples. The cut to our price target is driven by areduction in our NPV caused by cuts to our commodity price forecasts. We believeP/NPV multiples more accurately reflect the drivers of long-term share price

performance.

Risks to Rating and Price Target

Specific upside risk essentially comes from any improvement in perceived SouthAfrican risks, or indeed any increase in price in commodities where Anglo hasunique exposure, such as diamonds or PGMs. A fundamental reassessment of thecompany strategy or a thorough restructuring of the Platinum business could leadshares of AAL to outperform. Besides that, the risks are essentially the same as forthe rest of the sector (commodity prices, currencies, fiscal regimes).

On the downside, outside of the inevitable industry-related risks of lower thanexpected commodity prices or demand, we anticipate that AALs gearing will rise to>25% by 2015 while RIO and BHPB are de-gearing and so the company will need to

be cautious to avoid facing an overburdened balance sheet. Furthermore, if theoperating environment in South Africa were to suddenly deteriorate the stock wouldsee major underperformance as the country accounts for c.50% of earnings. Finally, alack of progress in H113 in delivering a convincing strategy or finding a partner forMinas Rio is likely to be seen a disappointment by the market, significantly weighingupon the share price

Copper, 27%

Coking coal,8%

Thermal coal,11%PGM, 6%

Iron ore, 35%

Diamonds /Minerals, 13%

9%

2%

5%

6%

7%

4%-4%

9%

-15% -10% -5% 0% 5% 10% 15%

Copper

Nickel

PGM

Thermal Coal

Iron ore

Hard coking coalA$/US$

Rand/US$


17/47

17



Anglo American: Summary of FinancialsProfit and Loss Statement Cash flow statement$ in millions, year end Dec FY12 FY13E FY14E FY15E $ in millions, year end Dec FY12 FY13E FY14E FY15E

Revenues 32,786 35,749 37,049 39,106 EBIT 6,164 6,685 6,611 7,170

% Change Y/Y -10.3% 9.0 3.6 5.6% Depreciation & amortization 2,521 1,912 2,506 2,654Gross Margin (%) - - - - Change in working capital (527) 947 (109) (169)

EBITDA 8,685 8,596 9,116 9,825 Taxes (1,799) (1,854) (1,709) (1,810)

% Change Y/Y -34.6% -1.0 6.0 7.8% Cash flow from operations 7,021 8,185 7,953 8,537

EBITDA Margin (%) 26.5% 24.0 24.6 25.1%

EBIT 6,164 6,685 6,611 7,170 Capex (5,607) (7,772) (6,932) (5,121)% Change Y/Y -43.8% 8.4 -1.1 8.5% Disposals/(purchase) (4,716) (452) 0 0

EBIT Margin 18.8% 18.7 17.8 18.3% Net Interest (496) (397) (658) (863)

Net Interest (377) (397) (658) (863) Free cash flow (666) (1,690) (1,156) 953

Earnings before tax -239 5,307 5,347 5,672% change Y/Y -102.2% -2318.7 0.8 6.1% Equity raised/repaid 24 0 0 0

Tax (375) (1,854) (1,709) (1,810) Debt Raised/repaid 4,886 0 0 0

as % of EBT (156.8%) 31.0 31.0 31.0% Other - - - -Net Income (Reported) (1,493) 1,808 2,216 2,453 Dividends paid (970) (1,067) (1,129) (1,157)

% change Y/Y -124.5% -221.1 22.6 10.7% Beginning cash 11,732 9,312 4,696 1,069Shares Outstanding 1,254.0 1,284.0 1,284.0 1,284.0 Ending cash 9,312 4,696 1,069 -592

EPS (Reported) -1.19 1.41 1.73 1.91 DPS 85.00 87.13 89.30 91.54% Change Y/Y (123.6%) (218.2%) 22.6 10.7% DPS (ZARc) 698 785 823 886

EPS (ZARc) 1,858 1,595 1,673 1,935

Balance sheet Ratio Analysis$ in millions, year end Dec FY12 FY13E FY14E FY15E $ in millions, year end Dec FY12 FY13E FY14E FY15E

Cash and cash equivalents 9,094 4,696 1,069 (592) EBITDA margin 26.5% 24.0% 24.6% 25.1%Accounts Receivable 3,275 3,763 3,900 4,116 Operating margin 18.8% 18.7% 17.8% 18.3%

Inventories 5,005 4,937 5,079 5,324 Net Profit margin NM 5.1% 6.0% 6.3%Others 571 571 571 571 SG&A/Sales - - - -

Current assets 18,047 14,069 10,721 9,521

Sales per share growth -13.4% 6.5% 3.6% 5.6%

Net fixed assets - - - - Sales growth -10.3% 9.0% 3.6% 5.6%Total assets 79,369 82,081 83,608 85,357 Net profit growth -124.5% -221.1% 22.6% 10.7%

EPS growth (123.6%) (218.2%) 22.6% 10.7%

ST loans 2,604 2,604 2,604 2,604

Payables 4,536 5,903 6,072 6,366 Interest coverage (x) 16.4 16.8 10.1 8.3

Others 4,267 4,267 4,267 4,267 Net debt to Total Capital 15.2% 23.8% 30.4% 33.3%Total current liabilities 8,803 10,170 10,339 10,633 Net debt to equity 16.9% 24.7% 30.0% 31.3%

Long term debt 15,150 15,150 15,150 15,150 Sales/assets (x) 0.4 0.4 0.4 0.5

Other liabilities 10,710 10,710 10,710 10,710 Assets/Equity 1.8 1.8 1.8 1.8Total liabilities 35,582 36,949 37,118 37,412 ROE 7.4% 6.1% 6.3% 6.9%

Shareholders' equity 43,787 44,986 46,414 47,941 ROCE 12.1% 11.5% 10.4% 10.6%BVPS 35 35 36 37

Source: Company reports and J.P. Morgan estimates.


18/47

18



Anglo American (AGLJ.J)

Underweight

Company Data

Price (c) 22,635Date Of Price 24 May 13Price Target (c) 26,615Price Target End Date 30 Jun 1452-week Range (c) 29,145 -

21,329Mkt Cap (R bn) 273.0Shares O/S (mn) 1,206

Anglo American (AGLJ.J) (AGLJ.J;AGL SJ)

FYE Dec 2011A 2012E(Prev)

2012E(Curr)

2013E(Prev)

2013E(Curr)

2014E(Prev)

2014E(Curr)

Adj. EPS FY ($) 5.04 1.93 (1.19) 1.74 1.41 2.38 1.73Revenue FY ($ mn) 36,548 32,015 32,786 35,489 35,749 38,752 37,049EBITDA FY ($ mn) 13,275 8,296 8,685 8,829 8,596 10,397 9,116EBITDA margin FY 36.3% 25.9% 26.5% 24.9% 24.0% 26.8% 24.6%EBIT FY ($ mn) 10,975 5,887 6,164 6,238 6,685 7,661 6,611EBIT margin FY 30.0% 18.4% 18.8% 17.6% 18.7% 19.8% 17.8%EV/EBITDA FY - 5.2 - 5.5 - 4.9 -EPS (ZARc) FY 3,650 1,590 (977) 1,501 1,269 2,044 1,590DPS (ZARc) FY - - - - - - -Source: Company data, Bloomberg, J.P. Morgan estimates.

See investment comments above on Anglo American Plc


Anglo American (AGLJ.J) (Underweight; Price Target: 26,615c)

Investment Thesis

We assign an Underweight rating to shares of AGL due primarily to 1) full valuation

(c.10% premium to BIL on spot PERs, 25% on P/NPV) and 2) potential negative

catalysts including further labour unrest in S Africa and disappointment on the

Platinum review in 113, plus a greater risk to its dividend that BIL.

Valuation

Our R266/sh Jun-14 PT for AGL is based on 1x our revised year end NPV forecastfor the company, in line with historical multiples. We believe P/NPV multiples moreaccurately reflect the drivers of long-term share price performance.


Specific upside risk essentially comes from any improvement in perceived South

African risks, or indeed any increase in prices in commodities where Anglo has

unique exposure, such as diamonds or PGMs. Moreover, a thorough restructuring of

the Platinum business could potentially lead to outperformance. Besides that, the

risks are essentially the same as for the rest of the sector (commodity prices,

currencies, fiscal regimes).


19/47

19



Anglo American (AGLJ.J): Summary of FinancialsProfit and Loss Statement Cash flow statement$ in millions, year end Dec FY11 FY12E FY13E FY14E $ in millions, year end Dec FY11 FY12E FY13E FY14E

Revenues 36,548 32,786 35,749 37,049 EBIT - - - -

% Change Y/Y 11.0% -10.3% 9.0 3.6% Depreciation & amortization 10,975 6,164 6,685 6,611EBITDA 13,275 8,685 8,596 9,116 Change in working capital (1,694) (1,137) (1,359) (1,054)

% Change Y/Y 11.3% -34.6% -1.0 6.0% Taxes 11,422 7,021 8,185 7,953

EBITDA Margin (%) 36.3% 26.5% 24.0 24.6% Cash flow from operations 24,856 16,233 15,834 17,179EBIT 10,975 6,164 6,685 6,611

% Change Y/Y 12.1% -43.8% 8.4 -1.1% Capex 8,829 5,012 6,153 5,846

EBIT Margin 30.0% 18.8% 18.7 17.8% Disposals/(purchase) (6,203) (5,607) (7,772) (6,932)

Net Interest (695) (798) (925) (925) Net Interest 8,883 5,222 6,331 6,244

Earnings before tax 978 493 378 449 Free cash flow - - - -

% change Y/Y 15.7% -49.6% -23.3 18.8%Tax - - - - Equity raised/repaid (5,203) (10,100) (8,295) (7,003)

as % of EBT (286000.0%) (37500.0%) (185409.3%) (170932.8%) Debt Raised/repaid -347 24 0 0

Net Income (Reported) (1,753) (879) (1,645) (1,422) Dividends paid 533 (4,716) (452) 0% change Y/Y 11.3% -49.9% 87.2 -13.5% Beginning cash -1,374 -8,442 -13,058 -16,685

Shares Outstanding -47.0 -5,760.0 -673.7 -166.5 Ending cash 6,460 11,732 9,312 4,696Minorities 7,846 (614) 3,453 3,638 DPS 0.00 0.00 0.00 0.00

EPS (Reported) 5.04 -1.19 1.41 1.73 DPS (ZARc) - - - -

% Change Y/Y (7.8%) (123.6%) (218.2%) 22.6%EPS (ZARc) 3,650 (977) 1,269 1,590

Balance sheet Ratio Analysis$ in millions, year end Dec FY11 FY12E FY13E FY14E $ in millions, year end Dec FY11 FY12E FY13E FY14E

Cash and cash equivalents - - - - P/E 4.7 NM 16.8 13.7Accounts Receivable 3,674 3,275 3,763 3,900 Net Profit margin NM NM NM NM

Inventories 3,517 5,005 4,937 5,079

Current assets 379 571 571 571 Sales per share growth -4147.6% -99.3% 832.2% 319.4%

Sales growth 11.0% -10.3% 9.0% 3.6%

Fixed Assets 2,896 2,278 2,730 2,730 Net profit growth 11.3% -49.9% 87.2% -13.5%

Total assets 72,442 79,369 82,081 83,608 EPS growth (7.8%) (123.6%) (218.2%) 22.6%a

ST loans 8,178 8,803 10,170 10,339 Interest coverage (x) 15.8 7.7 7.2 7.1

Payables 5,098 4,536 5,903 6,072 Dividend Yields - - - -

Total current liabilities 8,178 8,803 10,170 10,339 Net debt to equity 2.9% 16.9% 24.7% 30.0%Long term debt 1,018 2,604 2,604 2,604 Assets/Equity 1.7 1.8 1.8 1.8

Total liabilities 29,253 35,582 36,949 37,118 EV/EBITDA - - - -

Shareholders' equity 43,189 43,787 44,986 46,414 P/BV -45.6 -11,122.8 -579.0 -142.0

BVPS (1) (0) (0) (0) ROE - - - -

ROCE - - - -



20/47

20



BHP Billiton

Neutral

Company Data


BHP Billiton (BLT.L;BLT LN)

FYE Jun 2011A 2012A 2013E(Prev)

2013E(Curr)

2014E(Prev)

2014E(Curr)

Adj. EPS FY ($) 4.07 3.21 2.40 2.41 2.92 2.83Revenue FY ($ mn) 71,739 72,226 67,118 66,912 75,349 73,188EBITDA FY ($ mn) 37,093 33,746 28,883 28,918 34,481 33,543EBITDA margin FY 51.7% 46.7% 43.0% 43.2% 45.8% 45.8%EBIT FY ($ mn) 31,980 27,238 21,814 21,883 26,292 25,519EBIT margin FY 44.6% 37.7% 32.5% 32.7% 34.9% 34.9%Adj P/E FY 7.1 9.1 12.1 12.1 10.0 10.3DPS (Gross) FY (p) 101.0 112.0 116.0 116.0 124.0 124.0Source: Company data, Bloomberg, J.P. Morgan estimates.

BHP Billiton has outperformed the peer group (excl-VED) over the past month,

demonstrating typical defensive qualities in difficult market conditions, but also

reflecting the companys strong messaging on cost and capital discipline relative to

the peer group. We expect this to continue in the medium term, with asset disposal

potential better than at the majority of the competitors and major additional capex

approvals, for example on Jansen, likely to be pushed further down the road, leaving

the FCF profile to improve as capex requirements taper off. Longer-term, however,

FCF yield reaches a plateau at 8-9% pa, lower than several of the peers, constraining

management with respect to capital allocation to a greater degree than the peer group.

Downgrades are dominated by the Base Metals (copper) division, driven by our cuts

to copper price forecasts in both years. Nickel and Aluminium also suffer

downgrades for FY14, although slightly lower cost assumptions in FY13 see a smallupgrade to Aluminium EBIT. The remainder of the divisions, including the key Iron

Ore division, see modest upgrades, driven by our lower AUD forecasts that benefit

the cost side of the profit equation.

Figure 11: Impact of price and FX changes on FY13E EBIT ($m)


Figure 12: Impact of price and FX changes on FY14E EBIT ($m)


BHPB trades on spot PERs of 10.2x/9.4x for FY13/14E, a30% premium to RIO.

Our base case P/NPV of 0.82x is more attractive than has previously been the case,

but also continues to trade at a premium to the peer group. While we recognise the

attraction of the companys stronger messaging on cost and capital discipline, we

21,50021,55021,60021,65021,70021,75021,80021,85021,90021,950

23,500

24,000

24,500

25,000

25,500

26,000

26,500


21/47

21



retain the view that better longer-term cashflow generation is available elsewhere in

the sector and therefore keep our Neutral recommendation.

Table 12: J.P. Morgan changes to BHPB forecasts

FY13E FY14E FY15EOld New Change Old New Change Old New Change

Revenue US$m 69,503 69,297 0 75,899 73,738 -3% 82,600 80,008 -3%EBITDA US$m 28,883 28,918 0 34,481 33,543 -3% 38,887 37,371 -4%Operating profit US$m 21,814 21,883 0 26,292 25,519 -3% 29,904 28,530 -5%EPS USc/sh 240 241 0 292 283 -3% 335 318 -5%DPS USc/sh 116 116 0 124 124 0% 132 132 0%CFO US$m 18,003 18,038 0 24,444 23,587 -4% 27,499 26,434 -4%Capex US$m -21,802 -21,767 0 -16,907 -16,711 -1% -13,723 -13,573 -1%Net cash/(debt) US$m -28,144 -28,074 0 -25,991 -26,582 2% -18,025 -19,532 8%NPV GBp/sh 2,339 2,343 0Divisional EBITPetroleum US$m 6,338 6,320 0 9,184 9,093 -1% 10,570 10,486 -1%Aluminium US$m -230 -194 -16 93 -34 -136% 582 305 -47%

Base metals US$m 4,107 3,980 -3 5,638 4,792 -15% 6,751 5,358 -21%Diamonds & specialty US$m -104 -104 0 0 0 n/a 0 0 n/aStainless steel materials US$m -137 -197 43 39 -431 -1194% 194 -273 -241%Iron ore US$m 10,935 11,019 1 9,350 9,720 4% 9,419 9,752 4%Manganese US$m 481 503 5 392 479 22% 384 465 21%Metallurgical coal US$m 13 78 518 925 983 6% 1,236 1,426 15%Energy coal US$m -461 -457 -1 -796 -781 -2% -809 -796 -2%Total EBIT US$m 21,814 21,883 0% 26,292 25,519 -3% 29,904 28,530 -5%


Figure 13: BHPB FY13E EBITDA breakdown


Figure 14: BHPB FY13E earnings sensitivities



BHP Billiton (Neutral; Price Target: 2,300p)

Investment Thesis

While the BHPB shares trade at a discount to our NPV, we maintain our Neutral

recommendation and preference for RIO in the diversified mining space given what

we see as the latters compelling long-term valuation support, organic growth profile

and continued strong cash generation.

We recognise that the volume growth outlook for BHP Billiton over the next 3-5

years is strong; however, a large component of that growth is coming from the

recently acquired US shale gas assets, where long-term value remains to be proved,

Copper, 17%

Aluminium,1%

Coking coal,2%

Thermal coal,5%

Iron ore, 43%

Nickel, 1%

Petroleum,33%

2%

3%

1%

1%

3%6%

2%

-5%

1%

-15% -10% -5% 0% 5% 10% 15%

Alumina/Aluminium

Copper

Nickel

Thermal Coal

WTI / BrentIron ore

Hard coking coal

A$/US$

Rand/US$


22/47

22



so the relative growth argument is not enough in isolation for us to change our

preference

Valuation

Our Jun-14 price target for BHP Billiton Plc of 23.00/sh is based on our year-endNPV, to which we apply a 1x multiple, in line with the methodology on the otherdiversifieds. The cut to our price target is driven by a reduction in our NPV caused

by cuts to our commodity price forecasts. We believe P/NPV multiples moreaccurately reflect the drivers of long term share price performance than near termearnings multiples.


There is little, in our view, that could affect BHP Billiton outside the normal risksattached to the mining sector in general. Upside risks could come from higher-than-expected commodity prices where the company has unique exposure (coking coal

and oil). Similarly, downside risk could come from lower-than-expected oil andcoking coal prices. While we believe the companys balance sheet is solid, we thinkit offers less flexibility than that of RIO.


23/47

23



BHP Billiton: Summary of FinancialsProfit and Loss Statement Cash flow statement$ in millions, year end Jun FY12 FY13E FY14E FY15E $ in millions, year end Jun FY12 FY13E FY14E FY15E

Revenues 72,226 66,912 73,188 79,458 EBIT 27,238 21,883 25,519 28,530

% Change Y/Y 0.7% -7.4% 9.4 8.6% Depreciation & amortization 6,508 7,035 8,024 8,841Gross Margin (%) - - - - Change in working capital - - - -

EBITDA 33,746 28,918 33,543 37,371 Taxes (8,337) (7,812) (8,359) (9,451)

% Change Y/Y -9.0% -14.3% 16.0 11.4% Cash low from operations 33,746 28,918 33,543 37,371

EBITDA Margin (%) 46.7% 43.2% 45.8 47.0%

EBIT 27,238 21,883 25,519 28,530 Capex (20,837) (21,767) (16,711) (13,573)% Change Y/Y -14.8% -19.7% 16.6 11.8% Disposals/(purchase) (11,199) 5,822 1,020 1,020

EBIT Margin 37.7% 32.7% 34.9 35.9% Net Interest (588) (944) (1,598) (1,486)

Net Interest (730) (1,369) (1,535) (1,395) Free cash flow 5,999 (2,208) 8,392 14,376

Earnings before tax 26,508 20,514 2 3,984 2 7,134% change Y/Y -15.6% -22.6% 16.9 13.1% Equity raised/repaid (385) (309) 0 0

Tax - - - - Debt Raised/repaid 8,827 6,836 0 0

as % of EBT 35.0% 36.6% 36.4 36.8% Other - - - -Net Income (Reported) - - - - Dividends paid (5,933) (6,107) (6,404) (6,831)

% change Y/Y - - - - Beginning cash - - - -Shares Outstanding 5,336.6 5,336.6 5,336.6 5,336.6 Ending cash - - - -

EPS (Reported) 2.89 2.40 2.83 3.18 DPS - - - -% Change Y/Y (35.0%) (17.1%) 18.0 12.6% DPS (ZARc) 870 1,015 1,123 1,246

EPS (ZARc) 2,492 2,107 2,559 3,002

Balance sheet Ratio Analysis$ in millions, year end Jun FY12 FY13E FY14E FY15E $ in millions, year end Jun FY12 FY13E FY14E FY15E

Cash and cash equivalents 4,781 7,411 8,903 15,953 EBITDA margin 46.7% 43.2% 45.8% 47.0%Accounts Receivable 7,704 8,319 8,845 9,525 Operating margin - - - -

Inventories 6,233 7,082 7,529 8,108 Net Profit margin - - - -Others 1,451 1,799 1,799 1,799 SG&A/Sales - - - -

Current assets - - - -

Sales per share growth 0.4% -7.4% 9.4% 8.6%

Net fixed assets - - - - Sales growth 0.7% -7.4% 9.4% 8.6%Total assets - - - - Net profit growth - - - -

EPS growth (35.0%) (17.1%) 18.0% 12.6%

ST loans - - - -

Payables 12,024 9,842 10,354 10,950 Interest coverage (x) 37.3 16.0 16.6 20.4

Others 3,668 3,335 3,335 3,335 Net debt to Total Capital - - - -Total current liabilities - - - - Net debt to equity 34.5% 36.1% 30.6% 19.9%

Long term debt 24,799 31,835 31,835 31,835 Sales/assets (x) - - - -

Other liabilities - - - - Assets/Equity - - - -Total liabilities - - - - ROE - - - -

Shareholders' equity 67,085 76,445 85,682 96,759 ROCE - - - -BVPS - - - -



24/47

24



BHP Billiton (BILJ.J)

Neutral

Company Data

Price (c) 27,845Date Of Price 24 May 13Price Target (c) 33,300Price Target End Date 30 Jun 1452-week Range (c) 31,156 -

21,921Mkt Cap (R bn) 1,512.9Shares O/S (mn) 5,433

BHP Billiton (BILJ.J) (BILJ.J;BIL SJ)

FYE Jun 2010A 2011A 2012A 2013E(Prev)

2013E(Curr)

2014E(Prev)

2014E(Curr)

Adj. EPS FY (c) 1,699 2,839 2,492 2,085 2,107 2,527 2,559Revenue FY (R mn) 400,481 500,103 561,228 583,625 585,506 651,772 662,778EBITDA FY (R mn) 185,670 258,581 262,222 251,150 253,045 298,258 303,759EBITDA margin FY 46.4% 51.7% 46.7% 43.0% 43.2% 45.8% 45.8%EBIT FY (R mn) 149,572 222,937 211,651 189,681 191,485 227,426 231,092EBIT margin FY 37.3% 44.6% 37.7% 32.5% 32.7% 34.9% 34.9%EPS (ZARc) FY 1,699 2,839 2,492 2,085 2,107 2,527 2,559DPS (ZARc) FY 660 704 870 1,009 1,015 1,073 1,123Source: Company data, Bloomberg, J.P. Morgan estimates.

See investment comments above on BHP Billiton Plc


BHP Billiton (BILJ.J) (Neutral; Price Target: 32,540c)

Investment Thesis

While shares of BHPB trade at a discount to our NPV, we maintain our Neutral

recommendation given continued uncertainty in the macroeconomic outlook, despite

signs of improvement. BIL management will need to deliver on operational

improvements and cost reductions before a meaningful rerating takes place.

We recognise that the volume growth outlook for BHP Billiton over the next 3-5

years is strong; however, a large component of that growth is coming from the

recently acquired US shale gas assets where long-term value remains to be proved, so

the relative growth argument is not enough in isolation for us to change our

preference.

Valuation

Our Jun-14 price target for BHP Billiton Plc of R325.4/sh is based on our year-endNPV, to which we apply a 1x multiple, in line with the methodology used on theother diversifieds. The cut to our price target is driven by a reduction in our NPVcaused by cuts to our commodity price forecasts. We believe P/NPV multiples moreaccurately reflect the drivers of long-term share price performance than near-termearnings multiples.


There is little, in our view, that could affect BHP Billiton outside the normal risksattached to the mining sector in general. Upside risks could come from higher-than-expected commodity prices where the company has unique exposure (coking coaland oil). Similarly, downside risk could come from lower-than-expected oil andcoking coal prices. While we believe the companys balance sheet is solid, we thinkit offers less flexibility than that of RIO.


25/47

25



BHP Billiton (BILJ.J): Summary of FinancialsProfit and Loss Statement Cash flow statementR in millions, year end Jun FY12 FY13E FY14E FY15E R in millions, year end Jun FY12 FY13E FY14E FY15E

Revenues 561,228 585,506 662,778 749,767 EBIT 211,651 191,485 231,092 269,206

% Change Y/Y 12.2 4.3% 13.2% 13.1% Depreciation & amortization 50,570 61,560 72,667 83,425EBITDA 262,222 253,045 303,759 352,631 Change in working capital - - - -

% Change Y/Y 1.4 -3.5% 20.0% 16.1% Taxes (64,782) (68,359) (75,694) (89,178)

EBITDA Margin (%) 46.7 43.2% 45.8% 47.0% Cash flow from operations 262,222 253,045 303,759 352,631

EBIT 211,651 191,485 231,092 269,206

% Change Y/Y -5.1 -9.5% 20.7% 16.5% Capex (161,913) (190,470) (151,333) (128,080)EBIT Margin 37.7 32.7% 34.9% 35.9% Disposals/(purchase) (87,021) 50,942 9,241 9,629

Net Interest (5,672) (11,976) (13,899) (13,165) Net Interest (4,569) (8,260) (14,468) (14,021)

Earnings before tax 205,979 179,509 217,193 256,041 Free cash flow 46,615 (19,320) 75,992 135,657

% change Y/Y -6.0 -12.9% 21.0% 17.9%Tax - - - - Equity raised/repaid (2,992) (2,704) 0 0

as % of EBT 35.0 36.6% 36.4% 36.8% Debt Raised/repaid 68,590 59,818 0 0

Net Income (Reported) - - - - Dividends paid (46,102) (53,438) (57,992) (64,456)% change Y/Y - - - - Beginning cash - - - -

Shares Outstanding 5,336.6 5,336.6 5,336.6 5,336.6 Ending cash - - - -Minorities (894) (1,392) (1,447) (1,554) DPS - - - -

EPS (Reported) - - - - DPS (ZARc) 870 1,015 1,123 1,246

% Change Y/Y - - - -

EPS (ZARc) 2,492 2,107 2,559 3,002

Balance sheet Ratio AnalysisR in millions, year end Jun FY12 FY13E FY14E FY15E R in millions, year end Jun FY12 FY13E FY14E FY15E

Cash and cash equivalents 37,151 64,849 80,624 150,533 P/E - - - -Accounts Receivable 59,864 72,796 80,098 89,876 Net Profit margin - - - -

Inventories 48,433 61,969 68,186 76,509Current assets - - - - Sales per share growth 11.9 4.3% 13.2% 13.1%

Sales growth 12.2 4.3% 13.2% 13.1%

Fixed Assets 740,112 886,339 982,209 1,053,797 Net profit growth - - - -

Total assets - - - - EPS growth - - - -a

ST loans - - - - Interest coverage (x) 37.3 16.0 16.6 20.4

Payables 93,432 86,123 93,760 103,321 Dividend Yields - - - -

Total current liabilities - - - - Net debt to equity 34.5 36.1% 30.6% 19.9%

Long term debt 192,699 278,571 288,292 300,396 Assets/Equity - - - -Total liabilities - - - - EV/EBITDA - - - -

Shareholders' equity 521,280 668,928 775,923 913,019 P/BV 191,232.6 169,815.6 164,089.5 157,477.4BVPS 0 0 0 0 ROE - - - -

ROCE - - - -



26/47

26



Glencore Xstrata plc

Overweight

Company Data

Price (p) 332Date Of Price 24 May 13Price Target (p) 420Price Target End Date 30 Jun 1452-week Range (p) 392 - 284Mkt Cap ( bn) 44.0Shares O/S (mn) 13,264

Glencore Xstrata plc (GLEN.L;GLEN LN)

FYE Dec 2012A 2013E(Prev)

2013E(Curr)

2014E(Prev)

2014E(Curr)

2015E(Prev)

2015E(Curr)

Adj. EPS FY ($) 0.00 36.42 32.44 57.37 44.16 68.83 52.70Revenue FY ($ mn) 236,091 265,112 260,886 296,348 286,785 311,307 301,229Adj EBITDA FY ($ mn) 12,952 13,634 12,834 18,400 15,944 21,661 18,632Adj EBITDA Margin FY 5.5% 5.1% 4.9% 6.2% 5.6% 7.0% 6.2%EBIT FY ($ mn) 7,531 7,958 7,243 12,303 9,844 15,033 11,998Net Att. Income FY ($ mn) 5,599 4,814 4,288 7,610 5,857 9,130 6,990EPS Reported FY ($) 0.00 39.11 35.21 61.79 48.55 74.55 58.29DPS (Net) FY (p) - 13.40 13.40 13.83 13.83 14.18 14.18Source: Company data, Bloomberg, J.P. Morgan estimates.

Despite copper and nickel driven FY13/14 EPS downgrades of 11/23%, GLEN

remains our most preferred UK diversified. In our view, GLEN offers sector-leading

capital returns potential due to best in sector FCF, combined with explicit and

conservative capital allocation messaging. We forecast $24bn 2013-16 cumulative

FCF ($27bn previously or $20bn on spot), equivalent to 34% its current market cap

(28% on spot) versus BHPB in second place at 29% its market cap. GLEN is owned

37% by staff (25.9% by the top 13 senior managers) and management has stated that

new projects must justify a 20-25% RoE otherwise excess cash will be returned to

shareholders.

GLEN trades at a75/60% premium to peers on 16.3/12.0x PER FY13E/14E on

JPMe or on mark to market multiples of 18.5/16.3x PER FY13E/14E. We believe

our base case 0.80x P/NPV more accurately captures GLENs best in sector earningsgrowth (85% growth 2013-16 on JPMe, or 39% on spot). We also consider an

upfront PER premium is justified by Marketing, which JPMe will deliver 70-75%

cash conversion on steady EBIT of ~$3bn pa, plus underappreciated synergies that

we estimate could exceed $1.0bn pa in total (JPMe $610m across 2014-16). We

estimate preferential price risk for copper, zinc and coal versus iron ore and PGMs.

The key risks to GLENs equity rating are: i) copper price as copper is ~35%

EBITDA JPMe; and ii) execution of its Industrial pipeline, with Central African

Coppers expansion from 279kt FY12 to >600kt by FY15 most susceptible to

delays or disappointments, in our view.


27/47

27



Figure 15: Impact of price and FX changes on FY'13 EBIT ($m)




Table 13: J.P. Morgan changes to GLEN XTA forecasts$ in millions

2012A 2013E 2014E 2015EPro- orma Prev New vs prev Prev New vs prev Prev New vs prev

Revenue 236,091 265,112 260,886 -1.6% 296,348 286,785 -3.2 311,307 301,229 -3.2%EBITDA Marketing 2,228 2,893 2,811 -2.8 3,299 3,107 -5.8 3,497 3,301 -5.6%EBITDA Industrial 11,063 11,008 10,289 -6.5 15,373 13,110 -14.7 18,443 15,610 -15.4%EBITDA 12,952 13,634 12,834 -5.9% 18,400 15,944 -13.3% 21,661 18,632 -14.0%EBIT Marketing 2,130 2,748 2,667 -3.0 3,151 2,959 -6.1 3,345 3,150 -5.9%EBIT Industrial 6,368 5,496 4,863 -11.5% 9,446 7,179 -24.0 11,988 9,149 -23.7%EBIT 7,531 7,958 7,243 -9.0% 12,303 9,844 -20.0% 15,033 11,998 -20.2%PBT 6,348 6,349 5,635 -11.2% 10,572 8,118 -23.2 13,363 10,338 -22.6%Net income underlying 5,599 4,814 4,288 -10.9% 7,610 5,857 -23.0 9,130 6,990 -23.4%EPS underlying 36 32 -10.9% 57 44 -23.0% 69 53 -23.4%DPS 13 13 0.0 14 14 0.0 14 14 0.0%

CFO 8,452 10,467 10,687 2.1 10,058 10,813 7.5 15,298 13,247 -13.4%Capex -9,854 -9,854 0.0 -7,027 -7,027 0.0 -5,121 -5,121 0.0%Net debt 47,962 48,954 48,733 -0.4 47,725 46,750 -2.0 35,110 36,426 3.7%Net gearing 42% 39 39% 36% 37% 26% 28SOTP NPV 93,295 87,243 -6.5%SOTP NPV (/shr) 4.52 4.23 -6.5%

EBIT 7,958 7,243 -9.0% 12,303 9,844 -20.0% 15,033 11,998 -20.2%Marketing 2,752 2,671 -3.0 3,155 2,963 -6.1 3,350 3,154 -5.8%Copper 3,423 3,039 -11.2% 5,313 3,954 -25.6 6,603 4,900 -25.8%Coal 876 955 8.9 1,191 1,329 11.6 1,740 1,870 7.5%Zinc 981 686 -30.0% 1,878 1,328 -29.3 2,471 1,767 -28.5%Nickel -206 -242 17.4 633 157 -75.2 770 354 -54.0%Oil 445 445 0.0 352 352 0.0 289 289 0.0%Alloys -58 -25 -57.2% -9 44 -594.3 19 -67 -451.5%Aluminium 14 -17 -220.2% 61 -10 -116.2 69 9 -87.5%

Agriculture 0 0 0.0 0 0 0.0 1 1 0.0%Corporate & other -270 -270 0.1 -272 -273 0.3 -278 -279 0.3%


7,958

81

384

295 36 31

7833 7,243

7,000

7,200

7,400

7,600

7,800

8,000 12,303

193

1,359

549

476 71

138 52 9,845

9,000

9,500

10,000

10,500

11,000

11,50012,000

12,500


28/47

28



Figure 17: GLEN FY15 EBITDA by segment (JPMe)


Figure 18: GLEN FY13E earnings sensitivities


Investment Thesis, Valuation and RisksGlencore Xstrata plc (Overweight; Price Target: 420p)

Investment ThesisWe believe GLEN offers a compelling combination of sector-leading volume andfree cash flow growth, along with a differentiated business model that benefits fromthe smoothing effects and reduced cost of capital of the worlds pre-eminentcommodity marketing/trading business. In our view, the company can justifiably layclaim to offering investors the most obvious path to enhanced shareholder returnsover the next three-five years.

ValuationOur Jun-14 price target of 4.20/sh (previously 4.50/sh) is based on a 1.0x multiple

of our base case NPV. The cut to our price target is driven by a reduction in our NPVcaused by cuts to our commodity price forecasts. Our NPV assumes a WACC of10.6% on the companys Industrial assets and 8.0% for the Marketing business,reflecting the relatively lower risk profile of marketing activities, where the majorityof capital employed is asset-backed and self-liquidating on a rolling ~1-month basis.Our price target implies near-term earnings multiples at a 10% premium to the peergroup but this is justified by GLENs best in sector 85% underlying earnings growthfrom 2013-16 on JPM base case estimates plus its lack of iron ore exposure.


GLEN faces the same commodity price and exchange rate risks as the broader sector,

although arguably to a lesser degree given the smoothing effect of pass-through

marketing contracts. In addition, we identify the following company-specific key

downside risks to our Overweight recommendation and price target:

1. Geopolitical risk: GLEN has a higher exposure to non-OECD economies

than either RIO or BHPB and a similar proportion as AAL. GLEN also has

a number of key assets (Katanga, Mutanda/Kansuki, Oil & Gas, Kazzinc,

Peruvian copper etc.) in countries considered to carry a high level of

political risk. Any unrest or moves towards so called resource nationalism

could have a detrimental impact on near-term earnings and/or disrupt

longer-term growth opportunities;

2. Execution risk: we forecast GLENs Industrial assets will deliver sector

leading copper equivalent volume growth of 35% from 2013-2016. This is

Marketing18%

Copper36%

Coal21%

Zinc15%

Nickel7%

Oil2%

Alloys1%

1%

12%

3%

6%

5%

2%

1%

2%

-4%-7%

1%

-15% -10% -5% 0% 5% 10% 15%

Alumina/Aluminium

Copper

Nickel

Zinc

Thermal Coal

WTI / Brent

Hard coking coal

Ferrochrome

A$/US$/US$

Rand/US$


29/47

29



driven by the start-up and expansion of over 10 projects, including

Koniambo (nickel), Katanga, Mutanda, Mopani, Antapaccay (all copper),

Ravenswood North, Optimum (coal), Alen Block and Chad (both oil), LasBambas. The geographically and commodity diverse portfolio presents a

risk to managements stewardship. We identify African copper as the key

risk, where output is forecast to grow from 279kt copper to>600kt by 2016.

This requires timely and on budget developments at the three mines, but

GLEN must also solve in-country power constraints. GLEN is funding the

US$284m refurbishment of two turbines at the Inga dam to provide 450MW

of shared power to Katanga, Mutanda and Kansuki.

3. Integration risk: the merger of GLEN and XTA brings together two well-

diversified portfolios, both commodity and geography, and differentiated

management styles. Although we view diversification as positive on

balance, applying a relatively devolved management style across >90

operations could create operational inefficiencies;

4. Retention risk: GLENs success owes much to the contribution of key

employees from both of the heritage companies and is particularly relevant

in the marketing business. The departure of a selection of key Xstrata

executives (CEO, CFO, Head of Strategy, most Divisional CEOs) creates a

risk around implementation of the combined group strategy. The loss of key

personnel in the Marketing division would be detrimental to the outlook for

a key division and the groups key differentiating earnings stream.

5. Credit risk: GLEN carries a high level of debt and consequently relatively

high levels of current gearing, particularly associated with the Marketing

business. A significant seizure in global credit market that impacted

GLENs ability to fund its marketing activities through short-term debt

markets could have a negative impact on group earnings. We note, however,that marketing debt is almost entirely backed (~90%) by readily-marketable

inventories (RMI), creating a low-risk and therefore attractive credit profile

for potential lenders - GLEN has a syndicate of ~85 relationship banks and

was able to refinance a $13bn revolving facility in April 2013 with a

syndicate of 33 banks;

6. Trading risk : GLEXs physical commodity trading Marketing activities

operates with relatively small equity capital employed. The notional value

of trades dwarfs the groups balance sheet meaning the management of

Value At Risk (VAR) is critical. ~US$100m of cotton trading losses in 2011

highlight non-performance risk that GLEN is subject to, namely if suppliers

or customers elect not to supply or accept contracted commodities. We

regard this risk to most acute in illiquid markets. GLEN hedges the vast

majority of positions, mitigating price, settlement and counterparty risk,

therefore VAR risk is most relevant for those trades where GLEN takes a

directional or speculative position, which are a minority of transactions.

Any failure of VAR controls could have significant negative implications

for earnings and valuation.

7. M&A risk: we anticipate that GLEN will remain an active participant in

sector M&A going forward, at least in assessing potential opportunities.

While historic M&A performance has been good, not least in the merger

transaction, any future activity creates the risk of value destruction which

would impact our group NPV.


30/47

30



Key upside risks to our current price target, beyond commodity prices, include:

1. Synergy upside: the official synergy target of $500m pa (pre-tax) could

well be exceeded, with XTAs abandoned Management IncentiveArrangements mooting an $800m target. These additional savings could

come from a variety of sources including enhanced cost of funding, higher

sustainable margins in marketing due to the identification of enhanced

blending opportunities and further streamlining of centralised cost pools;

2. Disposals: GLEN has one of the most extensive pre-development asset

portfolios across the peer group. Most obviously, the required disposal of

Las Bambas could create upside to our price target, with our existing group

valuation assuming a 50% discount to the assets NPV. A thorough review

and reprioritisation of the broader pipeline may also identify a number of

non-core assets for disposal. Our NPV currently applies a 25% risk-

weighting (i.e. 75%) to the estimated value of these projects; sales at a

higher value would imply upside to our group valuation;

3. Volume growth: our base case NPV already factors in significant volume

growth, particularly in the Copper and Coal divisions. Nonetheless, with

sector-leading FCF generation there is the scope for additional volume

growth to emerge.


31/47

31



Glencore Xstrata plc: Summary of FinancialsProfit and Loss Statement Cash flow statement$ in millions, year end Dec FY11 FY12 FY13E FY14E FY15E$ in millions, year end Dec FY11 FY12 FY13E FY14E FY15E

Revenues 208,893 236,091 260,886 286,785 301,229 EBIT 11,395 7,531 7,243 9,844 11,998

% Change Y/Y 19.3% 13.0% 10.5% 9.9% 5.0% Depreciation & amortization 4,283 4,804 5,592 6,099 6,634Gross Margin (%) - - - - - Change in working capital & Other - 276 (2,139) (1,191) (694)

EBITDA 16,223 12,952 12,834 15,944 18,632 Taxes - (1,076) (978) (1,678) (2,606)

% Change Y/Y 9.1% -20.2% -0.9% 24.2% 16.9%Cash f low f rom operations 16,223 13,228 10,696 14,753 17,938

EBITDA Margin (%) 7.8% 5.5% 4.9% 5.6% 6.2%

EBIT 11,395 7,531 7,243 9,844 11,998 Capex - (12,769) (9,854) (7,027) (5,121)% Change Y/Y 1.6% -33.9% -3.8% 35.9% 21.9% Disposals/(purchase) - (6,611) (430) 0 4,045

EBIT Margin 5.5% 3.2% 2.8% 3.4% 4.0% Net Interest - (1,053) (1,608) (1,726) (1,660)

Net Interest (1,162) (1,191) (1,694) (1,801) (1,801) Free cash flow - (4,317) 833 3,786 8,127

Earnings before tax 10,233 2,917 5,635 8,118 10,338% change Y/Y 11.1% -71.5% 93.2% 44.1% 27.3% Equity raised/repaid - 141 0 0 0

Tax (1,876) (260) (978) (1,678) (2,606) Debt Raised/repaid - 15,478 0 0 0

Tax as a % of BT 18.3% 8.9% 17.4% 20.7% 25.2% Dividends paid - (1,937) (1,175) (1,803) (1,848)Net Income (Reported) 7,917 5,599 4,288 5,857 6,990 Other - - - - -

% change Y/Y 20.5% -29.3% -23.4% 36.6% 19.3%Shares Outstanding (m) - - 13,219.8 13,263.7 13,263.7 Beginning cash - - 4,511 3,740 5,723

EPS (Reported) - $ 0.00 0.00 35.21 48.55 58.29 Ending cash - 4,511 3,740 5,723 16,047% Change Y/Y - - - 37.9% 20.1% DPS - - 13.40 13.83 14.18

Balance sheet Ratio Analysis$ in millions, year end Dec FY11 FY12 FY13E FY14E FY15E$ in millions, year end Dec FY11 FY12 FY13E FY14E FY15E

Cash and cash equivalents - 4,511 3,740 5,723 16,047 EBITDA margin (%) 7.8% 5.5% 4.9% 5.6% 6.2%

Accounts Receivable - 28,136 30,275 31,466 32,160 Operating margin (%) - - - - -Inventories 0 26,404 28,489 32,017 33,008 Net margin (%) 3.8% 2.4% 1.6% 2.0% 2.3%

Others - - - - -SG&A/Sales - - - - -Current assets - 61,777 65,229 71,931 83,942

Sales per share growth - - - 9.6% 5.0%

LT investments - - - - - Sales growth (%) 19.3% 13.0% 10.5% 9.9% 5.0%

Net fixed assets - - - - - Attributable net profit growth (%) 20.5% -29.3% -23.4% 36.6% 19.3%Total assets - 169,043 176,328 183,957 198,500 EPS growth (%) - - - 37.9% 20.1%

Liabilities

ST loans - 17,142 17,142 17,142 17,142 Interest coverage (x) 9.8 6.3 4.3 5.5 6.7

Payables - 27,638 32,300 35,292 35,860 Net debt to Total Capital - - - - -

Others - - - - - Net debt to equity - 73.8% 63.7% 57.6% 38.3%Total current liabilities - 52,346 57,008 60,000 60,568 Sales/assets (x) - - - - -

Long term debt - 35,331 35,331 35,331 35,331 Total Assets/Equity - 2.6 2.3 2.3 2.1

Other liabilities - - - - - ROE - - - - -Total liabilities - 104,084 106,733 109,725 110,293 ROCE - - - - -

Shareholders' equity - 64,959 7 6,505 8 1,143 9 5,118BVPS - $ - - - - -



32/47

32



Rio Tinto plc

Overweight

Company Data


Rio Tinto plc (RIO.L;RIO LN)

FYE Dec 2011A 2012E 2013E(Prev)

2013E(Curr)

2014E(Prev)

2014E(Curr)

Adj. EPS FY ($) 8.31 5.04 4.98 5.07 5.04 4.97Revenue FY ($ mn) 60,537 50,967 48,516 48,015 52,143 51,727Adj EBITDA FY ($ mn) 28,357 19,125 18,508 19,784 19,261 19,941EBITDA margin FY 42.7% 32.9% 43.9% 38.8% 43.1% 37.3%EBIT FY ($ mn) 23,620 13,491 14,349 15,206 14,410 15,140EBIT margin FY 39.0% 26.5% 29.6% 31.7% 27.6% 29.3%Adj P/E FY 5.2 8.6 8.7 8.6 8.6 8.7Bloomberg EPS FY ($) 8.11 4.96 - 5.98 - 6.80Source: Company data, Bloomberg, J.P. Morgan estimates.

On a 12-month time horizon, RIO is our second most favoured UK diversified miner,

principally due to its compelling valuation and long-term capital returns potential. On

0.63x P/NPV on JPMe, RIO is trading at a 23% discount to BHPB on 0.82x P/NPV.

On JPMe RIO is trading at a 23/9% discount to BHPB on 8.6/8.8x FY13/14 PER, or

a 25% discount on market to market FY13/14 PERs of 7.7/7.1x. RIOs shares are

down17.6% YTD reflecting concerns over its high exposure to iron ore, yet prices

remain well supported and RIO continues to show mark to market EPS upgrades. On

$111/t for Q114 delivery we forecast 1/16% upgrades to our FY14E/15E EPS, or

21/34% on $123/t spot. Despite downside risk for its core commodity, we believe

RIO is the key beneficiary among the peer group of currency weakness. We calculate

a weaker A$ boosts RIOs FY14 EBIT by $852m offsetting a $755m decline dueour lower commodity price deck; the A$ has weakened 8.7% since January.

On a longer term horizon, we rank RIO alongside GLEN as generating sector-leading

FCF. On our base case, which assumes conservative $80/t CFR long-term iron ore,

we forecast RIOs current FCF yield at 12.7/13.2% for 2016/17. We forecast, post

2014 RIO will rank near the forefront of the sector in terms of growing its 4.0%

FY13E dividend yield to levels more commensurate with its FCF generation. In our

view, RIO is cheap, the investment case is compelling, but long dated.


33/47

33







Table 14: J.P. Morgan changes to RIO forecasts

$ in millions

2012A 2013E 2014E 2015EPrev New vs prev Prev New vs prev Prev New vs prev

Revenue 50,967 48,516 48,015 -1.0 52,143 51,727 -0.8% 55,928 55,027 -1.6%EBITDA 16,337 18,508 18,725 1.2% 19,261 19,390 0.7% 20,488 20,148 -1.7%EBIT 12,457 14,349 14,600 1.8% 14,410 14,507 0.7% 15,146 14,791 -2.3%PBT 12,915 14,020 14,145 0.9 14,232 13,976 -1.8% 15,359 14,673 -4.5%Net income underlying 9,303 9,206 9,363 1.7 9,309 9,179 -1.4% 10,490 10,038 -4.3%EPS underlying 504 498 507 1.7% 504 497 -1.4% 568 543 -4.3%DPS 167 176 176 0.0 181 181 0.0% 183 183 0.0%

CFO 9,368 13,980 14,152 1.2 14,726 14,603 -0.8% 16,223 15,709 -3.2%Capex -17,458 -13,172 -12,936 -1.8 -13,023 -13,004 -0.2% -9,789 -9,560 -2.3%

Net debt 19,737 21,956 21,547 -1.9 23,573 23,268 -1.3% 20,526 20,507 -0.1%Net gearing 25% 25% 25% -1.5 25% 24% -0.9% 20% 21 0.6%SOTP NPV 119,212 119,212 0.0%SOTP NPV (/shr) 45.17 45.17 0.0%

EBIT 12,457 14,349 14,600 1.8% 14,410 14,507 0.7% 15,146 14,791 -2.3%Iron ore 13,842 14,024 14,415 2.8 11,345 12,265 8.1% 11,499 11,957 4.0%Aluminium -8 -28 -174 nm 558 -56 nm 570 122 -78.7%Copper 1,169 1,929 1,374 -28.8 4,344 3,205 -26.2% 4,496 3,262 -27.4%Energy 424 -287 60 nm -145 362 nm 11 394 nmDiamonds 559 1,451 1,451 0.0 1,228 1,228 0.0% 2,011 2,011 0.0%Other -3,529 -2,739 -2,526 -7.8 -2,920 -2,498 -14.5% -3,441 -2,955 -14.1%


14,349

146

555

348

391

14,600213

13,500

14,000

14,500

15,000

14,410

614

1,139

507

92114,507422

12,500

13,000

13,500

14,000

14,500

15,000


34/47

34



Figure 21: RIO FY13 EBITDA by segment (JPMe)


Figure 22: RIO FY13E earnings sensitivities


Investment Thesis, Valuation and RisksRio Tinto plc (Overweight; Price Target: 4,520p)

Investment Thesis

We are OW on RIO, as we see: 1) an attractive long-term valuation (~15-20%

discount to BHPB on P/NPV) , 2) a value-enhancing growth proposition (attributable

iron ore production to increase 58% in 2011-16E) and 3) balance sheet flexibility,

which we believe provides room for increasing shareholder returns and opportunistic

M&A.

Valuation

Our 45.20 Jun-14 PT for RIO (Plc) is based on 1x our year end NPV forecast forthe company, in line with historical performance, reflecting our iron ore price

assumptions as described above. The cut to our price target is driven by a reductionin our NPV caused by cuts to our commodity price forecasts.

Risks to Rating and Target Price

The key risks to our Over

European Metals and Mining ...280513

Documents

Transcript of European Metals and Mining ...280513