Independence Group NL

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1 AUSTRALIA IGO AU Price (at 12:29, 26 Oct 216 GMT) Outperform A$4.25 Valuation A$ - DCF (WACC 8.4%, beta 1.2, ERP 5.%, RFR 3.3%) month target A$ month TSR % +2.2 Volatility Index High GICS sector Materials Market cap A$m 2,493 3-day avg turnover A$m 11.8 Number shares on issue m Investment fundamentals Year end 3 Jun 216A 217E 218E 219E Revenue m EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x IGO AU vs Small Ordinaries, & rec history 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, October 216 (all figures in AUD unless noted) 27 October 216 Macquarie Securities (Australia) Limited First concentrate at Nova Event IGO has announced that first copper and nickel concentrates have been produced at Nova, overshadowing a soft 1QFY17 production result. Impact Headline production result was mixed: IGO s 1QFY17 production result was mixed with a strong performance form Jaguar and Long offset by a weaker result at Tropicana. Jaguar s production result was strong with zinc output 1% higher and copper production 54% better than expected. Long s production result was 8% better than we expected but costs were also higher. Tropicana reported 5% weaker production but also lower cash and AISC costs. Earnings result weaker than expected: The mixed production result combined with delayed shipments at both Jaguar and Tropicana resulted in unaudited revenue and Ebitda for the quarter of A$95m and A$38m, 12% and 6% lower than we had forecast, respectively. The weaker revenue result, which was recovered in October, resulted in net debt of A$22m at the end of September, above our A$11m forecast. Nova production commences: Having announced construction completion and ore commissioning in early October Nova produced its first nickel and copper concentrates on 26 October. As we outlined in our deep dive, we expected Nova to commence production ahead of schedule hence the early production announcement was not much of a surprise. First concentrate shipments to Nickel West are expected to occur in the December quarter. Long Island study the next major catalyst: Technical studies for the Long Island project are expected to be completed by the end of the year. We expect the study will include a major reserve and resource upgrade at Tropicana, as the study will incorporate 1km of drilling completed over the past 12 months. Earnings and target price revision Earnings change less than 1% after incorporating the 1QFY17 production report and our A$5. price target is unchanged. Price catalyst 12-month price target: A$5. based on a 5/5 NPV/7.x EV/Ebitda methodology. Catalyst: The release of the Long Island study later this year presents a material catalyst for IGO. Action and recommendation Maintain Outperform: IGO s 1QFY17 production result was slightly weaker than we had expected, however all operating projects remain on target to hit production guidance for FY17. The commencement of production at Nova ahead of schedule was expected with the release of the Long Island study the next major catalyst for IGO. Please refer to page 6 for important disclosures and analyst certification, or on our website

2 1QFY17 production Tropicana produced 1koz in the 1QFY17, 5% lower than we had expected. Lower mill throughput and recoveries were the key drivers behind the softer result and the average grade was slightly higher than forecast. Gold sales for the quarter of 88koz, well below production and 16% lower than we had expected. Cash costs were slightly better than we had forecast despite the lower gold sales, due to lower capex and inventory adjustments. Long production of 2.17kt was 8% higher than we had forecast with the production beat due to higher average grades. Cash costs of A$3.23/lb were 8% lower than we had forecast due to lower mining costs and also favourable quotational pricing adjustments. Jaguar delivered an impressive quarter, with in-line zinc production of 1.3kt boosted by a 54% beat in copper output of 1.89kt. The higher copper by-product credits resulted in cash costs coming in 25% below our forecasts. However like Tropicana lower sales compared to production resulted in revenue from Jaguar coming in below our forecasts. Fig 1 Mixed production result Quarterly Result Macq Actual Variance Long Nickel production (kt) % Cash costs (A$/lb) (8%) Jaguar Zinc production (kt) % Copper production (kt) % Cash costs (A$/lb) (25%) Tropicana Gold production (koz) (5%) Cash costs (A$/oz) (4%) AISC (A$/oz) 1,188 1,97 (8%) Source: IGO, Macquarie Research, October 216 Lower gold sales at Tropicana and a delayed shipment from Jaguar resulted in revenue for the quarter missing our forecast by 12%. This was partially offset by inventory adjustments, however Ebitda and net profit were 6% and 35% lower than we were anticipating, respectively. The weaker earnings result translated to net debt coming in ~A$11m higher than anticipated. Fig 2 Lower revenue drove lower earnings and cash flow Quarterly Result Macq Actual Variance Revenue (A$m) (12%) Ebitda (A$m) (6%) Net Profit (A$m) (35%) Cash at bank (A$m) % Net cash / (debt) (A$m) (1.9) (22.) 12% Source: IGO, Macquarie Research, October 216 Modest changes to earnings We have made only modest adjustments to our earnings forecast after incorporating the 1QFY17 production result. The lack of earnings impact reflect the revenue catch-up at Tropicana and Jaguar that is expected to occur in the 2QFY17. Our $5. price target remains unchanged. Fig 3 Modest changes to earnings Quarterly Result FY17e FY18e FY19e FY2e NPV Net profit (A$m) - old Net profit (A$m) - new Change (%) % (1%) (1%) % Source: IGO, Macquarie Research, October October 216 2

3 Fig 4 Tropicana production and costs Fig 5 Long production and costs 5 Tropicanca (koz) Cash costs (A$/oz) ,2 1, Nickel mined (kt) Cash costs (A$lb) Source: IGO, Macquarie Research, October 216 Source: IGO, Macquarie Research, October 216 Fig 6 Jaguar production and costs Fig 7 Nova production and costs Copper in conc (kt) Zinc in conc (kt) 35. Nickel in conc (kt) Copper in conc (kt) 5 Cash costs (A$/lb).9 3 Cash costs (A$/lb) AISC (A$/lb) FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e Source: IGO, Macquarie Research, October 216 Source: IGO, Macquarie Research, October Fig 8 IGO net cash vs. market cap Fig 9 IGO NPV by project 3, 2,5 2, Net cash (A$m) Market Cap (A$m) Long 5% Jaguar 5% 1,5 1, 5 Nova 5% Tropicana 39% -5-1, Stockman 1% Source: IGO, Macquarie Research, October 216 Source: IGO, Macquarie Research, October October 216 3

4 Fig 1 IGO summary financials Independence Group ASX: IGO Price: (A$ps) 4.25 Year end: Jun Rating: Outperform Up/dn TSR Mkt cap: (A$m) 2,493 Diluted shares (m) Target: 5. 18% 2% ASSUMPTIONS FY14 FY15 FY16 FY17e FY18e FY19e FY2e ATTRIBUTABLE MINE OUTPUT FY14 FY15 FY16 FY17e FY18e FY19e FY2e Exchange Rate (A$/US$) Nickel Production (equity) Nickel price (US$/lb) Long kt Gold price (US$/oz) 1,296 1,223 1,167 1,327 1,394 1,381 1,438 AISC US$/lb RATIO ANALYSIS FY14 FY15 FY16 FY17e FY18e FY19e FY2e Nova kt Diluted share capital m AISC US$/lb nm nm nm EPS (diluted and pre sig. items) A Zinc/Copper production (equity) P/E x 12.7x 13.7x 45.5x 99.5x 14.x 11.8x 11.1x Zinc kt CFPS A Copper kt P/CF x 6.5x 6.2x 22.5x 24.6x 5.5x 5.1x 5.6x Net Cash Cost (per pay lb Zn) US$/lb DPS A Gold production (equity) Dividend yield % 1.9% 2.%.5% 2.4% 3.1% 3.5% 2.8% Tropicana koz Franking Level % 1% 1% 1% 1% 1% 1% 1% All in Cash Cost (US$/oz) US$/oz Book value per share x EBITDA BY PROJECT P/Book value x 1.5x 1.5x 1.3x 1.4x 1.4x 1.3x 1.2x 6 Long (A$m) Jaguar (A$m) Tropicana (A$m) Stockman (A$m) Nova (A$m) R.O.E. (pre sig items) % 11% 11% 3% 1% 1% 11% 11% R.O.A. (pre sig items) % 12% 13% 2% 2% 11% 11% 12% 5 Interest Cover x 22.9x 628.6x -6.4x 3.9x 54.8x -37.6x -17.4x EBITDA per share A$ps EV/EBITDA x 14.1x 11.6x 19.3x 13.8x 4.8x 3.8x 3.2x FCF Yield % 1% 5% (13%) (8%) 15% 17% 15% 3 EARNINGS FY14 FY15 FY16 FY17e FY18e FY19e FY2e 2 Sales Revenue A$m Other Revenue A$m Total Revenue A$m Operating Costs A$m (28) (234) (226) (368) (432) (436) (437) Operational EBITDA A$m FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY2e Exploration Expense/Write-offs A$m (4) (25) (2) (3) (2) (2) (2) RESERVES AND RESOURCES (ATTRIBUTABLE) Corporate & Other Costs A$m (12) (3) (29) (1) (8) (8) (9) Nickel reserves EBITDA A$m Project (kt) Mt % Ni Ni (kt) D&A A$m (7) (99) (1) (147) (235) (236) (233) Long.4 3.9% 14 EBIT A$m Nova % 275 Net Interest A$m (5) () 1 (12) (5) 8 17 Total nickel reserves (kt) % 289 Profit Before Tax A$m Nickel resources Tax Expense A$m (21) (33) (9) (76) (91) (97) Project (kt) Mt % Ni Ni (kt) Minorities A$m Long % 6 Adjusted NPAT A$m Nova % 325 Significant Items (post tax) A$m (32) 3 (11) Total nickel resources (kt) % 385 Reported NPAT A$m (59) Gold reserves Project (kt) Mt g/t Au Au (koz) Tropicana (IGO share) CASHFLOW FY14 FY15 FY16 FY17e FY18e FY19e FY2e Total gold reserves (koz) Net Profit A$m (59) Gold Resources Interest/Tax/D&A A$m Project (kt) Mt g/t Au Cu (kt) Working Capital/other A$m 15 (33) 61 (49) (17) (2) 3 Tropicana (IGO share) ,244 Net Operating Cashflow A$m Total gold resources (koz) ,244 Capex A$m (123) (6) (29) (222) (78) (61) (65) Copper reserves Investments A$m () 13 (24) (76) Project (kt) Mt % Cu Cu (kt) Sale of PPE and Other A$m Jaguar % 17 Free cash flow A$m (328) (195) Nova % 113 Dividends Paid A$m (9) (26) (13) (29) (65) (82) (94) Total copper reserves (kt) % 13 Debt A$m 9 (29) 265 (66) (2) Copper Resources Equity Issuance A$m 274 Project (kt) Mt % Cu Cu (kt) Other A$m Jaguar % 48 Net Financing Cashflow A$m () (54) (265) (82) (94) Nova % 134 Net change in cash A$m 3 61 (76) (16) Total copper resources (kt) % 182 EQUITY DCF VALUATION Spot prices Macquarie forecasts Projects A$m A$ps A$m A$ps BALANCE SHEET FY14 FY15 FY16 FY17e FY18e FY19e FY2e Long Cash A$m Jaguar PP&E & Mine Development A$m ,518 1,668 1,511 1,336 1,167 Tropicana Exploration A$m Stockman Total Assets A$m ,7 2,344 2,437 2,568 2,629 Nova , Debt A$m Undeveloped Resources Total Liabilities A$m Unpaid capital Total Net Assets / Equity A$m ,456 1,726 1,839 1,969 2,1 Corporate/forwards (52) (9) (55) (9) Net Debt / (Cash) A$m (29) (121) (142) (492) (777) Net cash (debt) (189) (.32) (188) (.32) Gearing (net debt/(nd + equity)) % (4%) (22%) 13% 9% (8%) (33%) (59%) Net Equity Value (@ 9% WACC) 1, , Gearing (net debt/equity) % (4%) (18%) 15% 1% (8%) (25%) (37%) Price Target (5/5 Blend NPV (1.4x for gold) and 7x (FY18) EV/Ebitda) (1x NPV) 5. Source: IGO, Macquarie Research, October October 216 4

5 Macquarie Quant View The quant model currently holds a strong negative view on Independence Group NL. The strongest style exposure is Price Momentum, indicating this stock has had strong medium to long term returns which often persist into the future. The weakest style exposure is Quality, indicating this stock is likely to have a weaker and less stable underlying earnings stream. 142/1521 Global rank in Materials % of BUY recommendations 22% (4/18) Number of Price Target downgrades Number of Price Target upgrades 4 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Materials) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score % -8% -6% -4% -2% % 2% 4% 6% 8% 1% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple % -5% % 5% 1% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Book FY1 Price to Book LTM Price to Book NTM 25d Volatility Return on Equity NTM Return on Equity FY1 Net Income Margin NTM Operating Margin NTM Negatives Positives -18% -19% -19% -21% 24% 21% 28% 27% -3% -2% -1% % 1% 2% 3% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/1521) Percentile relative to market(/423) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 27 October 216 5

6 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 >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% 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 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 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 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% 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 3 September 216 AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.5% 38.46% 45.47% 59.9% 48.21% (for US coverage by MCUSA, 8.2% of stocks followed are investment banking clients) Neutral 38.1% 29.31% 42.86% 48.77% 37.88% 36.79% (for US coverage by MCUSA, 8.25% of stocks followed are investment banking clients) Underperform 14.73% 15.19% 18.68% 5.76% 3.3% 15.% (for US coverage by MCUSA, 8.% of stocks followed are investment banking clients) IGO AU vs Small Ordinaries, & rec history (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, October month target price methodology IGO AU: A$5. based on a 5/5 NPV/7.x EV/Ebitda methodology Company-specific disclosures: IGO AU: The Macquarie Group together with its affiliates, beneficially owns 1% or more of a class of common equity securities of Independence Group (IGO.AX) MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Independence Group NL in the past 12 months, for which it received compensation. The analyst principally responsible for the preparation of this report or a member of the analyst's immediate household holds exercises investment discretion over a long position in Windward Resources Ltd, which has received a takeover offer from. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 14-Oct-216 IGO AU Outperform A$5. 7-Sep-216 IGO AU Outperform A$ Jul-216 IGO AU Underperform A$ Jul-216 IGO AU Neutral A$4. 6-Jul-216 IGO AU Neutral A$ Jun-216 IGO AU Neutral A$ May-216 IGO AU Neutral A$ May-216 IGO AU Neutral A$3. 28-Apr-216 IGO AU Neutral A$ Mar-216 IGO AU Neutral A$ Feb-216 IGO AU Outperform A$ Dec-215 IGO AU Outperform A$ Dec-215 IGO AU Outperform A$3.1 3-Oct-215 IGO AU Outperform A$ Sep-215 IGO AU Outperform A$ Jul-215 IGO AU Outperform A$5. 24-Jul-215 IGO AU Outperform A$ October 216 6

7 This publication was disseminated on 26 October 216 at 13:33 UTC. Macquarie Wealth Management 16-Jul-215 IGO AU Outperform A$ May-215 IGO AU Outperform A$ May-215 IGO AU Outperform A$6.2 9-Apr-215 IGO AU Outperform A$ Mar-215 IGO AU Outperform A$ Feb-215 IGO AU Outperform A$6. 15-Jan-215 IGO AU Outperform A$5.9 4-Dec-214 IGO AU Outperform A$ Oct-214 IGO AU Outperform A$ Aug-214 IGO AU Outperform A$ Aug-214 IGO AU Outperform A$ Jul-214 IGO AU Outperform A$ Jul-214 IGO AU Outperform A$ May-214 IGO AU Outperform A$ Apr-214 IGO AU Outperform A$5. 9-Apr-214 IGO AU Outperform A$ Mar-214 IGO AU Outperform A$ Nov-213 IGO AU Outperform A$ Oct-213 IGO AU Outperform A$4.7 Target price risk disclosures: IGO 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. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. 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