Australian Mid-cap Iron-Ore

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1 AUSTRALIA Recommendation changes None BC Iron Outperform Price $0.23 Market Cap A$45m Target Price $0.35 TSR 52% Mt Gibson Iron Neutral Price $0.18 Market Cap A$196m Target Price $0.25 TSR 39% Grange Resources Neutral Price $0.11 Market Cap A$127m Target Price $0.11 TSR 9% More than fully cash-backed Event We have updated our earnings forecasts for the mid-cap iron-ore producers to incorporate material cuts to our iron-ore price forecasts and also recent cuts to our A$/US$ forecasts. We also are transferring coverage of Mt Gibson Iron (MGX), Grange Resource (GRR) and BC Iron (BCI) to Andrew Hodge. Our recommendations for all three stocks remain unchanged after incorporating the changes. Impact Material cuts to iron-ore prices: We have made some material cuts to our iron-ore price forecasts to reflect the changes to our steel demand forecasts, a lack of supply response and lower energy prices and exchange rates, which have all conspired to lower the longer-term outlook for iron-ore. We cut our FY16 and FY17 prices by 3% and 10% and our FY18 and FY19 prices by 15%. We have removed our previous forecasts beyond FY20, reverting to our new long-term real price of US$65/t from CY21. For more detail on the commodity price cuts see today Commodities Comment. Partial relief due to a weaker Australian dollar: However, when factoring in the lower A$/US$ exchange rate, the cuts to our iron-ore price forecasts are less severe. We are actually upgrading our FY16 forecast by 4% and only cut our FY17 estimate by 3%. However, our longer-term forecasts fall by 11%, although our real A$ long-term iron-ore price of A$87/t will see the major Australian iron-ore producers continue to generate strong returns from their respective businesses. Outlook BCI remains our preferred pick: We continue to rate BCI an Outperform despite cutting our price target by 13% to A$0.35. The company is generating only marginal operating cash flow at its Nullagine JV, however after factoring earnings from Iron Valley, we estimate the company is cash flow positive at spot prices. The future outlook for Iron Valley presents a potential positive catalyst for BCI, while the company is backed by $0.31 in cash. GRR offers leverage to pellet premiums: GRR is the only pure play iron-ore pellet producer listed on the ASX. Pellet premiums have been relatively buoyant and we note that we expect GRR to remain cash flow positive at spot iron-ore prices. The company is also fully cash-backed, but lacks the potential positive catalyst that BCI enjoys with Iron Valley and we retain our Neutral rating on the stock. 24 September 2015 Macquarie Securities (Australia) Limited Mt Gibson s future still uncertain: Our Neutral rating on MGX reflects the company s strong cash backing, which at $0.30 remains is $0.12 higher than the current share price. MGX s Extension Hill project is the company s primary source of earnings with output at Koolan Island winding down. Uncertainty surrounding the future direction for MGX given the mine life of Extension Hill is only two years continues to suppress the share price in our view. We believe this will continue until MGX is able to secure an acquisition that provides some clarity on its future earnings outlook. Please refer to page 8 for important disclosures and analyst certification, or on our website

2 Changes to our iron-ore price forecasts We have made some material cuts to our iron-ore price forecasts to reflect the changes to our steel demand forecasts, a lack of supply response and lower energy prices and exchange rates, which have all conspired to lower the longer-term outlook for iron-ore. We cut our FY16 and FY17 prices by 3% and 10% and our FY18 and FY19 prices by 15%. We have removed our previous forecasts beyond FY20, reverting to our new long-term real price of US$65/t from CY21. However, when factoring in the lower A$/US$ exchange rate, the cuts to our iron-ore price forecasts are less severe. We are actually upgrading our FY16 forecast by 4% and only cut our FY17 estimate by 3%. However, our longer-term forecasts fall by 11%, although our real A$ longterm iron-ore price of A$87/t will see the major Australian iron-ore producers continue to generate strong returns from their respective businesses. Fig 1 Iron-ore cuts higher in the long term Y/E June FY16e FY17e FY18e FY19e Long-term (real) Iron-ore (US$/t)- old Iron-ore (US$/t)- new Change (%) (3%) (10%) (15%) (15%) (19%) Iron-ore (A$/t)- old Iron-ore (A$/t)- new Change (%) 4% (3%) (9%) (7%) (11%) On the demand side, 2015 has seen steel mills at their lowest profitability since 2007 and the highest steel inventories since we began our survey of this metric in Coupled together with our view of slowing global growth, we now see no crude steel production growth on a 5-year view. Fig 2 Changes to our quarterly iron-ore price forecasts Iron-ore 3Q2015E 4Q2015E 1Q2016E 2Q2016E 3Q2016E 4Q2016E 1Q2017E 2Q2017E Iron-ore (US$/t) - old Iron-ore (US$/t) - new Change 13% (4%) (8%) (9%) (4%) (9%) (14%) (14%) We now expect prices to stay above US$50/t in 3QCY15 and 4QCY15, but after seasonally rising in 1QCY15, we expect continued weakness out till 1H17. In A$ terms, the decline is expected to be less severe, with prices only expected to dip in the next 6 months but recover after the weak 3QCY15 as the A$ weakness outpaces the iron-ore price recovery. Fig 3 Near-term outlook for iron-ore is weak 160 Iron-ore (US$/t) - Spot Iron-ore (A$/t) - Spot 140 Iron-ore (US$/t) - Forecast Iron-ore (A$/t) - Forecast Source: IRESS, Macquarie Research, September September

3 However, we note that the weakness in iron-ore is expected to be longer lived than previously thought. With a weaker overall demand and falling currencies allowing costs to fall even further in US$ terms, we have made a 19% cut to our long-term iron ore price to US$65/tonne. Significantly, after factoring in the weaker A$/US$ exchange rates, our iron-ore price forecasts in A$ terms rise for FY16 and are shielded from bigger falls beyond that. Fig 4 Iron-ore price forecasts in A$ terms not hit as hard Y/E June FY16e FY17e FY18e FY19e Long-term Iron-ore (US$/t) (3%) (10%) (15%) (15%) (19%) A$/US$ (6%) (7%) (7%) (9%) (9%) Iron-ore (A$/t) 4% (3%) (9%) (7%) (11%) Key changes to exchange rate forecasts A contributor to the bearish outlook for commodity prices due to the negative impact on cost curves, weaker currencies provide some relief to the downgrades to our commodity outlook from an earnings perspective. Macquarie s Economics team recently pulled back its expectations for the key commodity currencies in their latest The Global Macro Outlook. Macquarie s economics team has made a number of changes to its exchange rate forecasts. Our A$/US$ forecasts have fallen by 6% in FY16, 8% in FY16 and 8-9% from then on. Fig 5 Changes to A$/US$ forecasts Y/E June FY16e FY17e FY18e FY19e Long-term AUSUSD - Old AUD/USD - new Change (6%) (8%) (8%) (9%) (9%) Break even prices at current spot prices We estimate all three mid-cap iron-ore producers are close to or operating above breakeven at spot prices. The additional capital being spent at Koolan Island results in MGX operating marginally below cash flow break even at spot prices. BCI and GRR should be generating positive cash flow at current spot iron-ore prices and exchange rates. Fig 6 Operating close to or above break-even at spot prices 70 FY16 FCF B/E Price (US$/t) FY17 FCF B/E Price (US$/t) Spot Ironore (US$/t) MGX GRR BCI 24 September

4 Price targets cut for the producers We keep our recommendations for the three mid-cap iron-ore producers unchanged after factoring in the updated iron-ore prices. BCI remains our preferred pick, offering strong cash backing, cash flow positive operations and a potential positive catalyst, should an expansion of Iron Valley go ahead. We note that for GRR our price target remains unchanged as the lower iron-ore price was largely offset by the cuts to our A$/US$ forecasts and changes to our long-term pellet premium assumptions. MGX s price target also remains unchanged as it is heavily dominated by its cash balance. Fig 7 No recommendation changes Company Code Old New Old New Change BC Iron BCI Outperform Outperform (13%) Grange Resources GRR Neutral Neutral % Mount Gibson Iron MGX Neutral Neutral % We have made a number of changes to our earnings forecasts for the mid-cap iron-ore producers after incorporating the changes to our iron-ore and FX forecasts. We reduce our forecast loss for MGX by 31% for FY16, increase the loss by 21% in FY17 and swing from a small profit to a small loss in FY18. Similar to MGX, our earnings loss for BCI narrows for FY16 by 43%, but widens in FY17 and we swing from a small profit to a small loss for FY18. For GRR we have upgraded our CY15 earnings by 11%, keep our CY16 estimate largely unchanged but cut our CY17 and CY18 forecast by 18% and 37% respectively. Fig 8 Earnings changes largely irrelevant Company Code CY15e/FY15a CY16/FY16e CY17/FY17e CY18/FY18e Mount Gibson Iron MGX 31% (21%) nm Grange Resources GRR 11% 0% (18%) (37%) BC Iron BCI 43% nm nm 24 September

5 Fig 9 MGX summary financials Mount Gibson Iron ASX: MGX Price: (A$ps) 0.18 Year end: Jun Rating: Neutral Up/dn TSR Mkt cap: (A$m) 196 Diluted shares (m) Target: % 39% ASSUMPTIONS FY13 FY14 FY15 FY16e FY17e FY18e ATTRIBUTABLE MINE OUTPUT FY13 FY14 FY15 FY16e FY17e FY18e Exchange Rate A$/US$ Iron-ore Shipped (kt) Spot iron-ore (62% CIF) US$/t Koolan Island kt 3,461 3,703 2, Tallering Peak kt 2,550 2, RATIO ANALYSIS FY13 FY14 FY15 FY16e FY17e FY18e Extension Hill kt 2,760 3,041 3,408 3,600 2,590 0 Diluted share capital m 1, , , , , ,090.8 Shine kt EPS (diluted and pre sig. items) A Other kt P/E x 1.2x 1.8x -14.1x -30.3x -17.5x -75.9x Total kt 8,771 9,704 5,544 4,400 2,660 0 CFPS A (7.8) (0.5) Cash costs P/CF x 0.7x 0.6x -2.3x 37.2x 17.3x -33.7x C1 cash costs (A$/wmt) nm DPS A Dividend yield % 22.2% 22.2% 0.0% 0.0% 0.0% 0.0% AISC (A$/wmt) nm Franking Level % 100% 100% 50% 0% 0% 0% Book value per share x P/Book value x 0.2x 0.2x 0.6x 0.7x 0.7x 0.7x R.O.E. (pre sig items) % 13% 9% -5% -2% -4% -1% OPERATIONAL OUTLOOK R.O.A. (pre sig items) % 8% 9% -15% -5% -7% -4% Koolan Island (mt) Tallering Peak (mt) Interest Cover x -26.7x -14.9x 6.5x 2.0x 2.8x 1.4x 12.0 Extension Hill (mt) Shine (mt) EBITDA per share A$ps EV/EBITDA x -0.5x -0.9x -11.9x x 7.9x 7.9x EARNINGS FY13 FY14 FY15 FY16e FY17e FY18e Sales Revenue A$m Other Revenue A$m Total Revenue A$m Operating Costs A$m (504) (527) (272) (243) (162) Operational EBITDA A$m (1) 0 Exploration Expense/Write-offs A$m (0) (0) (1) Corporate & Other Costs A$m (30) (26) (31) (12) (12) (13) EBITDA A$m (14) (13) 0.0 D&A A$m (195) (197) (71) (19) (11) 0 EBIT A$m (60) (18) (25) (13) Net Interest A$m RESERVES AND RESOURCES (ATTRIBUTABLE) Profit Before Tax A$m (51) (9) (16) (4) Iron-ore reserves Tax Expense A$m 29 (46) Project Mt Fe SiO2 Al2O3 P S Minorities A$m Koolan Island % 13.3% 0.4% 0.01% Adjusted NPAT A$m (14) (6) (11) (3) Tallering Peak 0.0 Significant Items (post tax) A$m 0 (14) (898) Extension Hill % 6.8% 2.2% 0.08% Reported NPAT A$m (911) (6) (11) (3) Shine Total % 7.6% 2.0% 0.07% CASHFLOW FY13 FY14 FY15 FY16e FY17e FY18e Net Profit A$m (911) (6) (11) (3) Iron-ore resources Interest/Tax/D&A A$m (3) Project Mt Fe SiO2 Al2O3 P S Working Capital/other A$m (2) 20 0 Koolan Island % 8.4% 0.8% 0.01% Net Operating Cashflow A$m (85) 5 11 (6) Tallering Peak % 11.1% 2.2% 0.07% Capex A$m (146) (117) (50) (29) (12) (4) Extension Hill % 7.8% 1.9% 0.07% Investments A$m 0 (12) Shine % 9.6% 1.5% 0.07% Sale of PPE and Other A$m Total % 8.6% 1.1% 0.0% Free cash flow A$m (134) (24) (1) (10) Dividends Paid A$m (40) (22) (44) Debt A$m (22) (20) (7) (1) (1) 0 Equity Issuance A$m Other A$m Net Financing Cashflow A$m (62) (41) (50) (1) (1) 0 Net change in cash A$m (185) (26) (2) (10) EQUITY DCF VALUATION BALANCE SHEET FY13 FY14 FY15 FY16e FY17e FY18e Projects A$m A$ps Cash A$m Koolan Island (14) (0.01) PP&E & Mine Development A$m Tallering Peak Exploration A$m Extension Hill (11) (0.01) Total Assets A$m 1,555 1, Shine Debt A$m Undeveloped Resources Total Liabilities A$m Unpaid capital Total Net Assets / Equity A$m 1,182 1, Corporate/forwards (21) (0.02) Net Debt / (Cash) A$m (348) (510) (331) (307) (306) (297) Net cash (debt) Gearing (net debt/(nd + equity)) % (42%) (68%) 1,289% 3,856% 1,655% 2,625% Net Equity Value (@ 11% WACC) Gearing (net debt/equity) % (29%) (40%) (108%) (103%) (106%) (104%) Price Target (1x NPV) 0.25 Source: MGX, Macquarie Research, September September

6 Fig 9 GRR summary financials Grange Resources ASX: GRR Price: (A$ps) 0.11 Year end: Dec Rating: Neutral Up/dn TSR Mkt cap: (A$m) 127 Diluted shares (m) Target: % 9% ASSUMPTIONS CY13 CY14 CY15e CY16e CY17e CY18e CY19e ATTRIBUTABLE MINE OUTPUT CY13 CY14 CY15e CY16e CY17e CY18e CY19e Exchange Rate A$/US$ Concentrate produced Spot iron-ore (62% CIF) US$/t Savage River kt 1,955 2,626 2,520 2,531 2,690 2,702 2,702 Southdown kt RATIO ANALYSIS CY13 CY14 CY15e CY16e CY17e CY18e CY19e Total kt 1,955 2,626 2,520 2,531 2,690 2,702 2,702 Diluted share capital m 1, , , , , , ,158.1 Pellets produced EPS (diluted and pre sig. items) A Savage River kt 1,916 2,341 2,475 2,531 2,690 2,702 2,702 P/E x 6.2x 1.7x 2.5x 3.0x 3.8x 5.4x 6.4x Southdown kt CFPS A Total kt 1,916 2,341 2,475 2,531 2,690 2,702 2,702 P/CF x 1.1x 0.7x 1.5x 1.7x 1.8x 2.0x 2.1x Cash costs DPS A Savage River (US$/t) Dividend yield % 27.3% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% Realised price (US$/t) Franking Level % 0% 0% 0% 0% 0% 0% 0% Book value per share x P/Book value x 0.2x 0.2x 0.3x 0.3x 0.2x 0.2x 0.2x R.O.E. (pre sig items) % 3% 14% 11% 9% 7% 4% 4% OPERATIONAL OUTLOOK R.O.A. (pre sig items) % 3% 15% 13% 10% 7% 5% 4% Interest Cover x -5.2x -21.6x -25.1x -13.0x -10.2x -8.1x -8.6x 3.0 Savage River (mt) Cash costs (US$/t) 140 EBITDA per share A$ps EV/EBITDA x 0.1x -0.2x -0.2x -0.3x -0.2x 0.1x 0.4x EARNINGS CY13 CY14 CY15e CY16e CY17e CY18e CY19e 80 Sales Revenue A$m Other Revenue A$m Total Revenue A$m Operating Costs A$m (154) (135) (106) (134) (151) (155) (167) 40 Operational EBITDA A$m Exploration Expense/Write-offs A$m 0 (2) (1) Corporate & Other Costs A$m (5) (5) (5) (7) (7) (7) (8) EBITDA A$m D&A A$m (98) (59) (35) (39) (42) (44) (45) EBIT A$m Net Interest A$m RESERVES AND RESOURCES (ATTRIBUTABLE) Profit Before Tax A$m Iron-ore reserves Tax Expense A$m (10) (25) (23) (18) (15) (10) (9) Project Mt % DTR Minorities A$m Savage River % Adjusted NPAT A$m Southdown % Significant Items (post tax) A$m 5 (187) (109) Total % Reported NPAT A$m 26 (110) (57) Iron-ore resources Project Mt % DTR CASHFLOW CY13 CY14 CY15e CY16e CY17e CY18e CY19e Savage River % Net Profit A$m 26 (110) (57) Southdown 1, % Interest/Tax/D&A A$m Long Plains % Working Capital/other A$m (18) (2) (0) 0 (1) Total 1, % Net Operating Cashflow A$m Capex A$m (95) (135) (76) (58) (76) (78) (71) Investments A$m Sale of PPE and Other A$m Free cash flow A$m (4) (14) (10) Dividends Paid A$m (23) (23) (12) (12) (12) (12) (12) Debt A$m (16) (27) Equity Issuance A$m Other A$m Net Financing Cashflow A$m (39) (50) 2 (12) (12) (12) (12) Net change in cash A$m (18) (9) 10 7 (16) (26) (22) BALANCE SHEET CY13 CY14 CY15e CY16e CY17e CY18e CY19e EQUITY DCF VALUATION Cash A$m Projects A$m A$ps PP&E & Mine Development A$m Savage River Exploration A$m Southdown Total Assets A$m Undeveloped Resources Debt A$m Unpaid capital Total Liabilities A$m Corporate/forwards (18) (0.02) Total Net Assets / Equity A$m Net cash (debt) Net Debt / (Cash) A$m (112) (153) (153) (160) (145) (119) (97) Net Equity Value (@ 14% WACC) Gearing (net debt/(nd + equity)) % (18%) (40%) (49%) (48%) (39%) (29%) (22%) Price Target (1x NPV) 0.11 Gearing (net debt/equity) % (15%) (29%) (33%) (32%) (28%) (22%) (18%) Source: GRR, Macquarie Research, September September

7 Fig 10 BCI summary financials BC Iron ASX: BCI Price: (A$ps) 0.24 Year end: Jun Rating: Outperform Up/dn TSR Mkt cap: (A$m) 47 Diluted shares (m) Target: % 46% ASSUMPTIONS FY13 FY14 FY15 FY16e FY17e FY18e FY19e ATTRIBUTABLE MINE OUTPUT FY13 FY14 FY15 FY16e FY17e FY18e FY19e Exchange Rate A$/US$ Iron-ore Mined (kt) - NJV 100% Spot iron-ore (62% CIF) (US$/t) Nullagine DSO kt 5,092 5,653 5,880 5,000 5,000 5,000 5,000 Spot iron-ore (62% CIF) (A$/t) Nullagine Low-grade kt RATIO ANALYSIS FY13 FY14 FY15 FY16e FY17e FY18e FY19e Total kt 5,092 5,653 5,880 5,000 5,000 5,000 5,000 Diluted share capital m Iron-ore shipped (kt) - NJV 100% EPS (diluted and pre sig. items) A Nullagine DSO kt 5,090 5,792 5,250 5,000 5,000 5,000 5,000 P/E x 0.4x 0.4x 3.4x -10.1x -7.8x -4.0x -2.1x Nullagine Low-grade kt CFPS A (21.6) (5.8) Total kt 5,090 5,792 5,250 5,000 5,000 5,000 5,000 P/CF x 0.3x 0.2x -1.1x 3.6x x 11.5x -4.1x Iron-ore Mined (kt) - BCI share DPS A Nullagine DSO kt 3,182 4,240 4,410 3,750 3,750 3,750 3,750 Dividend yield % 145.8% 133.3% 0.0% 0.0% 0.0% 0.0% 0.0% Nullagine Low-grade kt Franking Level % 100% 100% 0% 0% 0% 0% 0% Total kt 3,182 4,240 4,410 3,750 3,750 3,750 3,750 Book value per share x Iron-ore shipped (kt) - BCI share P/Book value x 0.1x 0.1x 0.3x 0.3x 0.3x 0.3x 0.4x Nullagine DSO kt 3,181 4,344 3,938 3,750 3,750 3,750 3,750 R.O.E. (pre sig items) % 33% 34% 8% -3% -4% -9% -20% Nullagine Low-grade kt R.O.A. (pre sig items) % 22% 30% -12% -4% -5% -10% -20% Total kt 3,181 4,344 3,938 3,750 3,750 3,750 3,750 Interest Cover x 61.3x x -35.6x 4.2x 5.9x 11.4x 25.2x Iron-ore shipped (kt) - BCI share EBITDA per share A$ps Buckland kt EV/EBITDA x 0.1x -0.4x 5.1x -1.4x -0.8x -2.3x -1.2x Total kt Source: BCI, Macquarie Research, September 2015 Cash costs C1 Cash Costs (FOB) (A$/wmt) EARNINGS FY13 FY14 FY15 FY16e FY17e FY18e FY19e AISC (FOB) (A$/wmt) Sales Revenue A$m Cash costs (CFR 62% Fe) (US$/dmt) Other Revenue A$m Total Revenue A$m OPERATIONAL OUTLOOK Operating Costs A$m (202) (308) (261) (218) (224) (230) (238) Operational EBITDA A$m Exploration Expense/Write-offs A$m 0 0 (4) (4) (4) (4) (4) Corporate & Other Costs A$m (9) (9) (16) (12) (12) (13) (13) EBITDA A$m (3) (12) D&A A$m (22) (34) (29) (19) (20) (20) (21) EBIT A$m (32) (9) (10) (19) (33) Net Interest A$m (2) 0 (1) Profit Before Tax A$m (33) (7) (9) (17) (32) Tax Expense A$m (20) (36) Minorities A$m Adjusted NPAT A$m (5) (6) (12) (22) Significant Items (post tax) A$m (23) (6) (171) Reported NPAT A$m (158) (5) (6) (12) (22) CASHFLOW FY13 FY14 FY15 FY16e FY17e FY18e FY19e RESERVES AND RESOURCES (ATTRIBUTABLE) Net Profit A$m (158) (5) (6) (12) (22) Iron-ore reserves Interest/Tax/D&A A$m (18) Project Mt Fe CaFe SiO2 Al2O3 P LOI Working Capital/other A$m (11) 1 (0) Nullagine DSO % 64.8% 3.0% 2.0% 0.01% 12.1% Net Operating Cashflow A$m (38) (11) Nullagine BSO % 61.7% 4.3% 3.0% 0.02% 12.5% Capex A$m (141) (15) (7) (12) (8) (8) (7) Iron Valley % 63.4% 4.8% 3.0% 0.2% 7.1% Investments A$m (6) Buckland % 62.6% 6.4% 2.4% 0.15% 8.0% Sale of PPE and Other A$m Total % 61.9% 5.4% 2.6% 0.15% 7.7% Free cash flow A$m (64) 128 (21) 1 (8) (4) (19) Iron-ore resources Dividends Paid A$m (22) (58) (19) Project Mt % Fe CaFe SiO2 Al2O3 P LOI Debt A$m 67 (52) (58) (6) Nullagine DSO % 64.7% 3.2% 2.2% 0.02% 11.8% Equity Issuance A$m Nullagine CID % 60.0% 5.6% 4.5% 0.02% 11.9% Other A$m Iron Valley % 62.8% 5.3% 3.2% 0.2% 7.0% Net Financing Cashflow A$m 101 (108) (77) (6) Buckland % 61.6% 8.0% 2.7% 0.15% 8.2% Net change in cash A$m (97) (5) (8) (4) (19) Total % 62.0% 6.4% 3.1% 0.13% 8.5% Maitland River 1, % 30.8% 44.0% 2.3% 0.1% 1.2% EQUITY DCF VALUATION BALANCE SHEET FY13 FY14 FY15 FY16e FY17e FY18e FY19e Projects A$m A$ps Cash A$m Nullagine DSO PP&E & Mine Development A$m Nullagine BSO Exploration A$m Nullagine CID Total Assets A$m Iron Valley Debt A$m Buckland Total Liabilities A$m Undeveloped Resources Total Net Assets / Equity A$m Unpaid capital Net Debt / (Cash) A$m (35) (107) (61) (62) (55) (51) (32) Corporate/forwards (35) (0.18) Gearing (net debt/(nd + equity)) % (19%) (83%) (63%) (67%) (58%) (59%) (39%) Net cash (debt) Gearing (net debt/equity) % (16%) (45%) (39%) (40%) (37%) (37%) (28%) Net Equity Value (@ 12% WACC) Price Target (1x NPV) Nullagine DSO (mt) Buckland (mt) Cash costs (CFR 62% Fe) (US$/t) Nullagine Low-grade (mt) Spot iron-ore (62% CIF) (US$/t) FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e September

8 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 First South - 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 % 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 30 June 2015 AU/NZ Asia RSA USA CA EUR Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients) Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients) Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients) BCI AU vs Small Ordinaries, & rec history MGX AU vs Small Ordinaries, & rec history GRR AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, September month target price methodology BCI AU: A$0.35 based on a DCF methodology MGX AU: A$0.25 based on a DCF methodology GRR AU: A$0.11 based on a DCF methodology Company-specific disclosures: MGX AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Mount Gibson Iron Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Target price risk disclosures: BCI AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. The iron ore price has shown weakness over the last few weeks and further steel destocking could put further pressure on iron ore prices. MGX AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. There has been a wholesale change in senior board directors and management over the last 18 months, as the minority shareholders APAC and Shougang have taken control of the Board. There is risk of a conflict of interest as these shareholders are also major customers. GRR AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. The company receives revenue in US$ and incurs cost in A$, making it susceptible to exchange rate risk. The recent report of a rock slide at GRR' Savage River operations highlights the operational risk. 24 September

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