Australian Iron Ore Miners A$ relief boosts upgrade momentum

Transcription

1 21 January 2019 Australia EQUITIES BHP Group Market Cap Price Price Target Outperform US$114,553m A$33.33/ 16.29/R A$39.00/ 18.50/R332 TSR 27%/25%/26% Rio Tinto Market Cap Price Price Target Outperform US$84,831m A$80.73/ A$94.00/ TSR 26%/26% Fortescue Metals Group Market Cap Price Price Target Outperform US$10,527m A$4.72 A$5.20 TSR 17% Mt Gibson Iron Market Cap Price Price Target Outperform US$473m A$0.60 A$0.66 TSR 15% Source: Macquarie Research, FactSet, Share prices at 18 January 2019 A$ relief boosts upgrade momentum Key points We upgrade our earnings forecasts for the to incorporate recent changes to our A$/US$ forecasts. The latest port data suggests BHP and RIO have made a solid start to 2019 while FMG s shipping rate is weaker than expected. Buoyant iron-ore prices continue to drive earnings upgrade momentum and we reiterate our Outperform ratings on BHP, RIO, FMG and MGX Event We update our earnings forecasts for the to reflect recent changes to our A$/US$ forecasts. Through the use of bespoke berth by berth breakdowns we analyse the shipping rates of the Australian Iron Ore Miners. Impact Cost relief in softer A$/US$: Macquarie s Economics Desk Strategy team has flattened its forecast outlook for the A$/US$. We now expect the A$/US$ to remain around current levels for the next two years, gradually rising to 0.75 by the end of The softer outlook for the A$/US$, combined with recent cuts to our oil price forecasts should provide some insulation against rising industry costs for the. Mixed start to the year for BHP and RIO: Our latest port data suggests BHP s shipping rate has continued to recover from the effects of the train derailment while RIO s shipping rate has softened from the strong finish to FMG has had a weak start to the year with the shipping rate ~20% below our estimate. Guidance suggests a flat year ahead: RIO s CY19 shipment guidance of mt was in line with our 340mt estimate and already incorporates the impact of the fire at Cape Lambert. We expect both BHP and FMG to deliver FY19 shipments towards the bottom end of guidance ranges. The upcoming wet season presents a key risk to the achievability of guidance for all three producers. Iron-ore prices continue to drive upgrade momentum: Spot iron-ore prices have remained buoyant. Benchmark prices are up a further 5% in 2019 to US$76/t while the lump premium is up to US$0.38/dmtu. Low grade prices have been stronger than the benchmark with 58% spot prices up 6% and 8% for low and high alumina products respectively. We note benchmark iron-ore prices are now ~18-19% higher than our CY19 and CY20 forecasts. Outlook Maintain Outperform: We reiterate our Outperform ratings for BHP, RIO, FMG and MGX. Spot iron-ore prices have remained buoyant in 2019 with recent rises in lump premiums and with easing cost pressures from the A$ and oil prices has enhanced the upside to our base case at spot prices. Low grade iron-ore prices have also continued to rise in recent weeks and there is now material upside to our base case valuation for FMG at spot prices. MGX continues to offer unique ASX exposure to the premium iron-ore market. Please refer to page 12 for important disclosures and analyst certification, or on our website

2 Changes to our Australian Dollar forecasts Our economics team have updated our A$ forecasts. We are now forecasting A$ to remain broadly around its current level (low US$0.70s), on average, over the next couple of years before rising to 0.75 by the end of The flattening of the outlook translates to cuts of 3-6% over the FY20-FY21 period. Fig 1 Changes to our AUDUSD exchange rate forecasts Y/E Dec 1Q/19 2Q/19 3Q/19 4Q/19 1Q/20 2Q/20 3Q/20 4Q/20 1Q/21 2Q/21 3Q/21 4Q/21 New AUD/USD Old AUD/USD Change 1% 0% (1%) (3%) (4%) (5%) (5%) (6%) (5%) (5%) (4%) (4%) Source: Macquarie Research, January 2019 We make only modest changes to our earnings forecasts for BHP and RIO. For BHP, our FY19 has declined by 0.9% and then sees increases of 1.8% and 2.0% for FY20 and FY21 respectively. The lack of earnings upgrades for BHP reflects cuts to our oil price outlook offsetting the more favourable outlook for the A$/US$. FMG and MGX both receive a substantial boost in earnings from out revised A$ price deck. With FMG earnings up 2.7% in FY19, 5.3% in FY20 and 9.4% in FY21. MGX s near-term earnings gains are notable, up 8.3% in FY19, 9.5% in FY20 and 8.3% in FY21. Fig 2 Earnings changes driven by A$ price deck revision Y/E June FY19e FY20e FY21e FY22e FY23e BHP Group (0.9%) 1.8% 2.0% 1.0% 1.1% FMG 2.7% 5.3% 9.4% 5.1% 0.3% Mount Gibson 8.3% 9.5% 8.3% 5.3% 0.3% Y/E December CY18e CY19e CY20e CY21e CY22e Rio Tinto 0.1% 0.8% 0.8% 0.8% 0.8% Source: Macquarie Research, January 2019 We keep our price targets for RIO unchanged for the ASX and LSE listings. Our price targets for BHP across all three listing has decreased as the modest earnings upgrades are offset by moving to an exdividend status for the special dividend. Our ASX, LSE and JSE target prices reduce 2.5% to A$39.00, 2.6% to and 3.8% to R332, respectively. Our FMG price target has increased 4.0% from A$5.00 to A$5.20 on the improved earnings outlook. MGX has only seen a 1.5% increase to price target from A$0.65 to A$0.66. Fig 3 BHP price targets fall post special dividend Company Code Price target - old Price target - new Change BHP Group ASX: BHP A$40.00 A$39.00 (2.5%) LSE: BHP (2.6%) JSE: BHP R345 R332 (3.8%) Rio Tinto ASX: RIO A$94.00 A$ % LSE: RIO % Fortescue Metals Group ASX: FMG A$5.00 A$ % Mt Gibson Iron ASX: MGX A$0.65 A$ % Source: Macquarie Research, January January

3 Mixed start to the year for WA iron-ore miners Through the use of bespoke berth by berth breakdowns, we analyse the shipping rates of the Australian Iron Ore Miners. The iron ore shipment rates started off soft, in a similar fashion to the start of the December 18 quarter. The volume run-rate for BHP is currently ahead of the December quarter, while RIO and FMG are lagging behind the shipping rate recorded last quarter. Fig 4 Mixed start to 2019 with BHP shipping rate up and RIO and FMG down (mtpa) Dec Q 17 Mar Q 18 Jun Q 18 Sep Q 18 Dec Q 18 Mar Q 19 RIO BHP FMG Total majors Roy Hill Utah Geraldton Esperance Kwinana Total Source: Thurlestone, Macquarie Research, January 2019 The March quarter is historically slightly weaker for Australian iron ore export volumes than the December quarter due to the impact of the wet season. However there has been no rain interruptions in the Pilbara in January. Roy Hill continues to deliver consistent output, exporting at a similar volume to the last three quarters. We note after arresting exports in the September quarter, iron ore exports out of the port of Esperance recommenced and have ramped-up but is still shy of it shipments recorded in the June 18 quarter. Fig 5 Strong finish to the year for BHP/RIO/FMG Fig 6 Roy Hill recovery and Esperance recommences 1,000 RIO BHP FMG 120 Roy Hill Utah Geraldton Esperance Source: Thurlestone, Macquarie Research, January 2019 Source: Thurlestone, Macquarie Research, January 2019 We have maintained our forecasts for the March 18 quarter, with RIO and BHP shipment rate currently tracking within 2% of our forecasts. FMG s current shipping rate has well below our forecasts however we have not made any changes to our estimates given the data only accounts for the first few weeks of the year. Fig 7 Quarterly shipment run-rate vs March quarter estimate mt Mar Q run-rate Macq Estimates Variance (%) Rio Tinto (2.0%) BHP Group (1.6%) Fortescue Group (20.3%) Total (6.0%) Source: Thurlestone, Macquarie Research, January January

4 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 May 18 Jul 18 Sep 18 Nov 18 Jan 19 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 May 18 Jul 18 Sep 18 Nov 18 Jan 19 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 May 18 Jul 18 Sep 18 Nov 18 Jan 19 Macquarie Wealth Management Iron-ore price rise continues Iron ore prices have rebounded in the lead up to 2019 and have maintained positive momentum into the New Year. Benchmark spot prices now site at ~US$76/t. Recently prices have been experiencing some volatility in line with the shipping rate which has had a volatile CY18. The benchmark Iron ore price peaked at US$77/t in October then dipped to mid-us$60s/t after trading in a band for March through to September. WA shipping rates have once again spiked in the month of December, and has seen some softening in January, which is in line with historical trends. Fig 8 Shipped rates spiked in December 1,000 6WMA (ktpa) Iron Ore (US$/t) Source: Bloomberg, Thurlestone, Macquarie Research, January 2019 Lump iron ore premiums have recovered strongly over CY18, starting off the year at a premium of 3% to benchmark and ending at a premium of ~35%. We note that historical average for lump premiums tend to be ~15%. We note from the middle of 2018 the rise in lump premium has coincided with a decline in premium for higher 66% Fe iron ore from a premium of 47% in July down to a ~15% currently. The price FMG receive for its 58% Fe product as a percentage of benchmark has improved markedly since the start of the year. Currently 58% Fe receives ~77% of the benchmark price, the price is currently trading above US$55/t. In line with the benchmark prices the lower grade product has experienced price volatility in the latter part of the year after trading in a tight band for the early part of There has been strong upward price momentum for the lower grade product in January Fig 9 Lump premiums moving higher Fig 10 FMG realised price improving gradually Iron-ore fines 62% Iron-ore lump 62% Lump premium (%) 50% 40% 30% Iron-ore fines 62% Iron-ore fines 58% % of Benchmark 95% 90% 85% 80% % 10% 0% % 70% 65% 60% 55% % Source: Bloomberg, Macquarie Research, January 2019 Source: Bloomberg, Macquarie Research, January January

5 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 May 18 Jul 18 Sep 18 Nov 18 Jan 19 Mar 19 May 19 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 May 18 Jul 18 Sep 18 Nov 18 Jan 19 Mar 19 May 19 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Macquarie Wealth Management BHP shipment rate below our expectations After a strong June quarter with a shipping rate of 286mtpa, BHP s shipping rate has declined over the following two quarters. December again proved to be a strong month for BHP in terms of volumes exported, however after two slow months in October and November and a below average start to January, it was not enough to keep the 6 month moving average above the 280mtpa target, currently 263mtpa. We are forecasting BHP to produce 242mt of iron ore (BHP share) in FY19, at the bottom end of guidance which is between mt (BHP share). Our long-term forecast remains unchanged at 280mtpa (100% basis). We believe BHP could lower the guidance range due to the negative impact of the train derailment in the 2QFY19. Fig 11 BHP on track to hit guidance Fig 12 BHP monthly shipment rate (mtpa) Weekly shipping rate (ktpd) Qty avg (ktpd) Guidance (ktpd) - Low Guidance (ktpd) - High Macq (ktpd) BHP 6MMA Target Source: Thurlestone, Macquarie Research, January 2019 Source: Thurlestone, Macquarie Research, January 2019 RIO on track to hit CY19 production guidance RIO s shipping rate has been fairly consistent over the last few months, with a strong December month helping RIO achieve the top end of guidance for CY18. Shipping rate for the 1QCY19 has started off well below those of the December quarter, but remain with 2% of our estimates. We are forecasting RIO to produce 340mt of iron ore (100% basis) in CY19, within guidance of between mt (100% share). Our long-term forecast remains unchanged at 340mtpa (100% basis). Fig 13 RIO shipment rates have slowed in January Fig 14 RIO monthly shipment rate (mtpa) Weekly shipping rate (ktpd) Qty avg (ktpd) CY18 Guidance - low (ktpd) CY18 Guidance - high (ktpd) Macq (ktpd) 1,200 1,100 1, RIO 6MMA Target Source: Thurlestone, Macquarie Research, January 2019 Source: Thurlestone, Macquarie Research, January January

6 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 May 18 Jul 18 Sep 18 Nov 18 Jan 19 Mar 19 May 19 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Macquarie Wealth Management FMG has had a weak start to CY19 FMG s shipping rate recovered over November and December from a slow start in October, mirroring the profile from the June quarter. FMG has again started the quarter slow, with the current run-rate well below our quarterly and full year estimates. Our forecasts for FY19 remains at 168mt, which is at the lower end of guidance of mt. While our long term forecast remain at 170mtpa from FY20 onwards. Fig 15 FMG s shipping rate recovers Fig 16 FMG monthly shipment rate (mtpa) 700 Weekly shipping rate (ktpd) Guidance (ktpd) - Low Macq (ktpd) Qty avg (ktpd) Guidance (ktpd) - High 220 FMG 6MMA Target Source: Thurlestone, Macquarie Research, January 2019 Source: Thurlestone, Macquarie Research, January 2019 FMG is trading at a significant discount to our spot price valuation, using spot iron ore and A$/US$ exchange rates our valuation increases to $10.40/sh an 120% premium to our target price. We note that the historically highly correlation between FMG s realised AUD iron ore price and its stock price has broken down since June 18. We see significant upside in FMG, at current commodity prices and exchange rates the risk is outweighed highly to the upside. Continued strength in iron ore prices should lead to a resumption in the upgrade momentum for FMG. Fig 17 FMG s spot price valuation has soared Fig 18 FMG s shares had decoupled from iron-ore price Valuation ($/sh) Share Price ($/sh) 7.50 FMG 58% Fe (A$) Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 May 18 Jul 18 Sep 18 Nov 18 Jan Source: Bloomberg, FMG, Macquarie Research, January 2019 Source: Bloomberg, FMG, Macquarie Research, January January

7 Upside risk at spot prices We note that with the revised A$ price deck, and sustained strength of the iron ore price, there remains significant upside at spot to earnings. A spot price scenario for BHP delivers earnings 7%, 31% and 47% higher than our forecasts for FY19, FY20 and FY21 respectively. Similarly, RIO spot price analysis derives earnings which are 7%, 27% and 33% higher than our forecasts for FY19, FY20 and FY21 respectively. FMG s earnings outlook at spot prices has strengthened due to a ~US$5/t rise in low grade iron-ore prices and a weakening of the A$/US$ exchange rate. We note that our EBITDA forecasts are above Bloomberg consensus for FY19, in line for FY20 and below for FY21. However running spot prices delivers 25% and 72% higher earnings for FMG than our forecasts for FY19 and FY20 while the upside against consensus is 64% and 88% respectively. Fig 19 BHP Earnings Macq v Spot v Consensus Fig 20 RIO Earnings Macq v Spot v Consensus Consensus (US$m) Macquarie (US$m) Spot prices (US$m) 14,000 12,000 Consensus (US$m) Macquarie (US$m) Spot (US$m) 12,000 10,000 10,000 8,000 6,000 4,000 2,000 8,000 6,000 4,000 2, CY18e CY19e CY20e FY19e FY20e FY21e Source: Bloomberg, BHP, Macquarie Research, January 2018 Source: Bloomberg, RIO, Macquarie Research, January 2018 Fig 21 FMG EBITDA Macq v Spot v Consensus Fig 22 FMG Earnings Macq v Spot v Consensus 4,500 Consensus Macquarie Spot 2,000 Consensus Macquarie Spot 4,000 1,800 3,500 1,600 3,000 2,500 2,000 1,500 1,400 1,200 1, , FY19e FY20e FY21e FY19e FY20e FY21e Source: Bloomberg, FMG, Macquarie Research, January 2018 Source: Bloomberg, FMG, Macquarie Research, January January

8 Fig 23 BHP Group summary financials BHP Group ASX: BHP Price: (A$ps) Year end: Jun Rating: Outperform Up/dn TSR LSE: BHP Price: ( ps) Diluted shares (m) 5,057 ASX Target: % 27% JSE: BHP Price: (ZARps) LSE Target: % 25% Source: BHP, Macquarie Research, January 2019 Mkt cap: (US$m) 114,553 JSE Target: % 26% ASSUMPTIONS FY16 FY17 FY18 FY19e FY20e FY21e FY22e FY23e ASSUMPTIONS FY16 FY17 FY18 FY19e FY20e FY21e FY22e FY23e Exchange Rate A$/US$ Commodity prices Exchange Rate USDBRL Iron-ore (US$/t) Exchange Rate USDZAR Hard coking coal (US$/t) RATIO ANALYSIS FY16 FY17 FY18 FY19e FY20e FY21e FY22e FY23e Thermal coal (US$/t) Diluted share capital m 5,322 5,336 5,337 5,071 5,071 5,071 5,071 5,071 Copper (US$/lb) EPS (diluted and pre sig. items) US Nickel (US$/lb) P/E x 104.6x 18.9x 14.2x 13.0x 13.7x 15.0x 12.0x 11.6x Brent Crude (US$/bbl) CFPS US West Texas (US$/bbl) P/CF x 16.7x 10.6x 9.6x 10.2x 10.6x 10.9x 9.0x 9.2x Henry Hub (US$/mmbu) DPS US Dividend yield % 1.3% 3.5% 4.9% 9.6% 5.1% 4.6% 5.8% 6.0% Production by commodity Franking Level % 100% 100% 100% 100% 100% 100% 100% 100% Iron-ore Book value per share US$ps WAIO (mt) - 100% shipments P/Book value x 2.1x 2.0x 2.1x 2.2x 2.1x 1.9x 1.8x 1.7x WAIO (mt) - BHP share R.O.E. (pre sig items) % -10% 10% 13% 20% 17% 15% 17% 17% Samarco (mt) - BHP share R.O.A. (pre sig items) % 3% 11% 14% 16% 15% 14% 16% 16% Total Iron-ore (mt) - BHP share Interest Cover x 3.4x 8.7x 12.8x 19.0x 18.9x 18.0x 23.0x 25.4x Coal EBITDA per share US$ps Coking coal (mt) - 100% EV/EBITDA x 11.9x 6.7x 5.6x 5.6x 5.8x 6.0x 5.0x 4.8x Coking coal (mt) FCF Yield % 3% 11% 11% 18% 8% 7% 10% 10% Thermal coal (mt) EARNINGS FY16 FY17 FY18 FY19e FY20e FY21e FY22e FY23e Copper (kt) Revenue US$m 30,912 38,285 43,638 43,609 42,909 43,349 48,284 49,260 Escondida - (100%) ,213 1,159 1,193 1,212 1,212 1,212 Operating Costs US$m (16,526) (18,127) (20,444) (21,186) (21,269) (22,432) (23,901) (24,251) Cerro Colorado Operational EBITDA US$m 14,386 20,158 23,194 22,423 21,640 20,917 24,383 25,009 Spence Associates US$m (2,104) Olympic Dam Corporate & Other Costs US$m 58 (134) (158) (122) (167) (214) (132) (135) Antamina Underlying Ebitda US$m 12,340 20,296 23,183 22,763 21,923 21,215 24,828 25,495 Total Copper (kt) 1,580 1,326 1,753 1,699 1,841 1,968 2,129 2,081 D&A & Impairments US$m (8,871) (7,907) (7,187) (5,907) (5,854) (6,023) (6,114) (5,975) Petroleum (mmboe) Underlying Ebit US$m 3,469 12,389 15,996 16,856 16,070 15,192 18,714 19,520 Conventional production Adjustments US$m (9,704) (636) Unconventional Production Profit from Operations US$m (6,235) 11,753 15,996 16,856 16,070 15,192 18,714 19,520 Total Net Interest US$m (1,024) (1,431) (1,245) (886) (851) (844) (814) (769) Profit Before Tax US$m (7,259) 10,322 14,751 15,971 15,219 14,348 17,899 18,751 EBITDA BY COMMODITY Tax Expense US$m 1,052 (4,100) (7,007) (5,191) (5,286) (5,094) (6,354) (6,657) Net Earnings US$m (6,207) 6,222 7,744 10,780 9,933 9,254 11,545 12,094 Discontinued operations US$m 0 0 (2,921) (300) Minority interests US$m (178) (332) (1,118) (978) (1,139) (1,195) (1,473) (1,648) Attributable Profit US$m (6,385) 5,890 3,705 9,502 8,793 8,060 10,072 10,446 Adjustments US$m 7, , Underlying Profit US$m 1,215 6,732 8,933 9,502 8,793 8,060 10,072 10,446 CASHFLOW FY16 FY17 FY18 FY19e FY20e FY21e FY22e FY23e Net Earnings US$m (6,207) 6,222 7,744 10,780 9,933 9,254 11,545 12,094 Interest/Tax/D&A US$m 15,990 10,817 9,068 5,886 6,131 6,221 7,064 6,221 Working Capital/other US$m 842 (235) 1,649 (94) (75) (7) Net Operating Cashflow US$m 10,625 16,804 18,461 16,573 15,989 15,550 18,853 18,308 Capital Expenditure (cash basis) US$m (8,046) (5,576) (6,098) (6,813) (7,481) (8,033) (7,341) (7,046) Acquisitions/(Disposals) US$m , Other US$m 801 1, Free cash flow US$m 3,380 12,643 12,540 20,875 8,698 7,714 11,715 11,469 Dividends US$m (4,130) (2,921) (5,220) (11,737) (6,592) (5,730) (6,237) (7,302) Minority dividends & payments US$m (87) (597) (1,582) (978) (1,139) (1,195) (1,473) (1,648) New Equity US$m (106) (108) (171) (5,200) Debt Drawdown/(Repayment) US$m 4,607 (5,507) (3,918) Net Financing Cashflow US$m 284 (9,133) (10,891) (17,915) (7,732) (6,925) (7,711) (8,950) Net change in cash US$m 3,664 3,510 1,649 2, ,004 2,519 BALANCE SHEET FY16 FY17 FY18 FY19e FY20e FY21e FY22e FY23e Projects US$m US$ A$m A$/sh GBPm GBP ZARm ZAR Cash US$m 10,319 14,153 15,871 18,831 19,798 20,587 24,591 27,110 Petroleum 10, , , , Other current assets US$m 7,395 6,903 19,259 7,010 6,760 7,006 7,818 7,794 Iron-ore 65, , , , Property, Plant & Equipments US$m 83,975 80,497 67,182 68,088 69,716 71,726 72,952 74,022 Copper 25, , , , Other Non-current assets US$m 17,264 15,453 9,681 9,649 10,067 10,620 12,128 12,766 Coal 18, , , , Total Assets US$m 118, , , , , , , ,692 Nickel West 1, , , , Debt US$m 36,421 30,474 26,805 26,805 26,805 26,805 26,805 26,805 Group and unallocated (728) (0.14) (1,011) (0.19) (553) (0.10) (9,900) (1.86) Payables US$m 5,402 5,556 5,980 5,724 5,519 5,721 6,383 6,364 Other Other liabilities US$m 17,059 18,250 18,538 16,329 15,156 14,570 16,518 15,454 Cash 30, , , , Total Net Assets / Equity US$m 60,071 62,726 60,670 54,721 58,860 62,844 67,782 73,069 Debt (26,805) (5.04) (37,229) (7.00) (20,345) (3.82) (364,548) (68.50) Net Debt / (Cash) US$m 26,102 16,321 10,934 7,974 7,007 6,218 2,214 (305) Net Equity Value (WACC 10% Nom) 124, , , ,692, Gearing (net debt/(nd + equity)) % 30% 21% 15% 13% 11% 9% 3% (0%) Price Target (50/50 NPV and 6.5x EV/Ebitda) AUD GBP ZAR Gearing (net debt/equity) % 43% 26% 18% 15% 12% 10% 3% (0%) VALUATION Petroleum (US$bn) Copper (US$bn) Iron-ore (US$bn) Coal (US$bn). Other (US$bn) FY13 FY14 FY15 FY16 FY17 FY18 FY19e FY20e FY21e FY22e FY23e FY24e FY25e 21 January

9 Fig 24 Rio Tinto summary financials Rio Tinto ASX: RIO Price: (A$ps) Year end: Dec Rating: Outperform Up/dn TSR LSE: RIO Price: ( ps) Diluted shares (m) 1,613 ASX Target: % 26% Mkt cap: (US$m) 84,727 LSE Target: % 26% ASSUMPTIONS CY15 CY16 CY17 CY18e CY19e CY20e CY21e CY22e ASSUMPTIONS CY15 CY16 CY17 CY18e CY19e CY20e CY21e CY22e Exchange Rate A$/US$ Commodity prices Exchange Rate C$/US$ Iron-ore (US$/t) Exchange Rate USDZAR Hard coking coal (US$/t) RATIO ANALYSIS CY15 CY16 CY17 CY18e CY19e CY20e CY21e CY22e Thermal coal (US$/t) Diluted share capital m 1,825 1,797 1,787 1,650 1,613 1,613 1,613 1,613 Copper (US$/lb) EPS (underlying, undiluted) US Alumina (US$/t) P/E x 23.2x 20.3x 12.0x 10.2x 11.4x 11.1x 10.7x 10.1x Aluminium (US$/lb) CFPS US P/CF x 11.2x 12.3x 7.4x 8.5x 7.5x 7.1x 6.8x 6.5x Production by commodity DPS US Iron-ore (100% Basis) Dividend yield % 3.7% 2.9% 5.0% 9.2% 5.2% 5.4% 5.7% 5.9% Pilbara (mt) Franking Level % 100% 100% 100% 100% 100% 100% 100% 100% Iron Ore Company of Canada (mt) Book value per share US$ps Iron-ore (100%) P/Book value x 2.4x 2.3x 2.0x 1.7x 1.7x 1.6x 1.5x 1.4x Iron-ore (RIO Reported Share) R.O.E. (pre sig items) % -4% 10% 17% 24% 15% 15% 15% 15% Pilbara (mt) R.O.A. (pre sig items) % 9% 10% 15% 16% 14% 14% 14% 14% Iron Ore Company of Canada (mt) Interest Cover x 11.4x 8.5x 20.1x 28.3x 20.9x 21.2x 23.2x 28.1x Iron-ore (RIO Reported Share) EBITDA per share US$ps Aluminium (RIO Share) EV/EBITDA x 8.4x 7.5x 5.1x 4.7x 5.8x 5.3x 4.9x 4.5x Bauxite (mt) FCF Yield % 6% 8% 14% 16% 8% 8% 12% 13% Alumina (mt) EARNINGS CY15 CY16 CY17 CY18e CY19e CY20e CY21e CY22e Aluminium (mt) Revenue US$m 34,857 33,781 40,030 40,616 36,187 37,687 37,341 38,150 Copper (RIO Share) Operating Costs US$m (24,192) (21,808) (23,277) (23,814) (22,129) (22,757) (21,998) (22,231) Mined Copper (kt) Operational EBITDA US$m 10,665 11,973 16,753 16,801 14,057 14,929 15,343 15,918 Refined Copper (kt) Corporate Costs & EAU Adjustments US$m 1,956 1,537 1,827 2,374 2,395 2,519 2,749 3,115 Underlying Ebitda US$m 12,621 13,510 18,580 19,175 16,453 17,448 18,093 19,034 Coal (RIO Reported Share) Depreciation & Amortisation US$m (4,646) (4,794) (4,375) (4,375) (4,602) (4,878) (5,042) (5,066) Thermal coal (mt) Operational Ebit US$m 7,975 8,716 14,205 14,800 11,851 12,570 13,051 13,967 Semi-soft Coking Coal (mt) Impairments US$m (2,791) (249) (796) 4, Hard Coking Coal (mt) Share of EAU Profit/(Loss) US$m ,033 Total Coal (mt) Adjustments US$m (1,569) (1,672) 726 (548) Other (RIO Share) Profit from Operations US$m 3,976 7,116 14,474 19,771 12,469 13,257 13,865 15,000 Diamonds (kcts) 17,394 17,953 21,627 18,427 15,476 17,684 15,470 2,986 Net Interest US$m (698) (1,022) (707) (524) (566) (594) (563) (496) Uranium (mlbs) Other Finance Costs US$m (4,004) 249 (951) (20) (353) (313) (321) (330) TiO2 Feedstock (kt) 1,089 1,048 1,315 1,117 1,310 1,310 1,310 1,310 Profit Before Tax US$m (726) 6,343 12,816 19,227 11,549 12,351 12,981 14,174 Borates (kt) Tax Expense US$m (993) (1,567) (3,965) (5,982) (3,465) (3,705) (3,894) (4,252) Net Earnings US$m (1,719) 4,776 8,851 13,246 8,084 8,645 9,087 9,922 Post-tax exceptionals US$m EBITDA BY COMMODITY Minority Interests US$m 853 (159) (89) (347) 86 (292) (346) (733) Attributable Profit US$m (866) 4,617 8,762 12,899 8,170 8,353 8,741 9, Iron Ore (US$bn) Aluminium (US$bn) Copper & Diamonds (US$bn) Post-tax adjustments to underlying US$m 5, (135) (3,534) Energy & Minerals (US$bn) Other (US$bn) Underlying Profit US$m 4,540 5,100 8,627 9,365 8,170 8,353 8,741 9,189 CASHFLOW CY15 CY16 CY17 CY18e CY19e CY20e CY21e CY22e Net Earnings US$m (1,719) 4,776 8,851 13,246 8,084 8,645 9,087 9,922 Interest/Tax/D&A US$m 7,722 4,319 6,794 4,180 4,955 5,191 5,363 5,396 Working Capital/other US$m 3,380 (630) (1,761) (6,261) (615) (688) (815) (1,032) Net Operating Cashflow US$m 9,383 8,465 13,884 11,164 12,425 13,148 13,635 14,285 Capital Expenditure US$m (4,537) (2,658) (4,344) (5,266) (5,997) (6,239) (3,507) (2,978) Other US$m (148) (354) (138) Disposals/(Acquisitions) US$m ,109 7, Free cash flow US$m 4,783 6,361 11,511 13,741 6,478 6,910 10,127 11,307 Dividends US$m (4,076) (2,725) (4,250) (5,388) (8,778) (4,968) (4,919) (5,581) New Equity US$m (1,925) 101 (1,913) (5,305) (1,759) Debt Drawdown/(Repayment) US$m (1,681) (4,948) (2,777) (2,074) Other US$m (201) (45) Net Financing Cashflow US$m (7,670) (7,491) (9,141) (12,812) (10,537) (4,968) (4,919) (5,581) FX Adjustment US$m (170) (35) (21) (28) Net change in cash US$m (3,057) (1,165) 2, (4,059) 1,942 5,208 5, CY16a CY17e CY18e CY19e CY20e CY21e CY22e CY23e CY24e CY25e BALANCE SHEET CY15 CY16 CY17 CY18e CY19e CY20e CY21e CY22e VALUATION Cash US$m 9,366 8,201 10,550 11,451 7,392 9,334 14,541 20,268 Projects US$m US$/sh A$m A$/sh GBPm GBP/sh Other current assets US$m 6,188 6,885 8,622 11,055 9,696 10,135 10,292 10,192 Iron Ore 58, , , Property, Plant & Equipments US$m 61,057 58,855 62,093 54,957 52,302 53,663 52,129 50,040 Copper & Diamonds 18, , , Other Non-current assets US$m 14,953 15,322 14,461 14,529 14,834 15,622 16,473 17,482 Energy & Minerals 6, , , Total Assets US$m 91,564 89,263 95,726 91,992 84,224 88,753 93,435 97,983 Aluminium 25, , , Debt US$m 23,624 18,392 16,052 13,726 13,726 13,726 13,726 13,726 Cash 12, , , Payables US$m 6,919 7,150 7,917 7,516 6,593 6,890 6,997 6,930 Debt (13,726) (8.51) (19,064) (11.82) (9,804) (6.08) Other liabilities US$m 16,893 17,991 20,642 15,599 9,448 10,001 10,409 10,684 Group & Unallocated Total Net Assets / Equity US$m 44,128 45,730 51,115 55,152 54,458 58,135 62,303 66,644 Net Equity Value (WACC 10% Nom) 108, , , Reported Net Debt / (Cash) US$m 14,258 9,587 3,845 (233) 3,826 1,884 (3,323) (6,542) Price Target (50/50 NPV and 7.0x EV/Ebitda) AUD GBP Gearing (net debt/(nd + equity)) % 24% 17% 7% (0%) 7% 3% (6%) (11%) Gearing (net debt/equity) % 32% 21% 8% (0%) 7% 3% (5%) (10%) Source: RIO, Macquarie Research, January January

10 Fig 25 Fortescue Metals Group summary financials Fortescue Metals ASX: FMG Price: (A$ps) 4.72 Year end: Jun Rating: Outperform Up/dn TSR Mkt cap: (A$m) 14,697 Diluted shares (m) 3,114 Target: % 17% Mkt cap: (US$m) 10,527 ASSUMPTIONS FY16 FY17 FY18 FY19e FY20e FY21e FY22e ATTRIBUTABLE MINE OUTPUT FY16 FY17 FY18 FY19e FY20e FY21e FY22e Exchange Rate A$/US$ Iron-ore shipped (kt) Iron-ore (62% CIF) US$/dmt Cloudbreak (mt) mt Iron-ore (58% CIF) US$/dmt Christmas Creek (mt) mt RATIO ANALYSIS FY16 FY17 FY18 FY19e FY20e FY21e FY22e Kings Valley (mt) mt Diluted share capital m 3,117 3,122 3,123 3,031 2,997 2,997 2,997 Firetail (mt) mt EPS (diluted and pre sig. items) A Eliwana (mt) mt P/E x 10.9x 5.3x 13.0x 8.5x 9.9x 13.9x 12.6x FMG Shipped (mt) mt CFPS A Nullagine JV (mt) - 100% mt P/CF x 4.4x 2.6x 8.3x 3.9x 4.4x 5.5x 4.9x Total shipments (100%) mt DPS A C1 Cash costs US$/wmt Dividend yield % 3.2% 9.5% 4.9% 7.0% 7.2% 5.1% 5.7% All in cash costs US$/wmt Franking Level % 100% 100% 100% 100% 100% 100% 100% CFR 62% Fe Equ costs US$/dmt Book value per share A$ps OPERATIONAL OUTLOOK P/Book value x 1.3x 1.1x 1.2x 1.0x 1.0x 1.0x 1.0x R.O.E. (pre sig items) % 9% 22% 11% 12% 10% 7% 8% Cloudbreak (mt) Christmas Creek (mt) Firetail (mt) Kings Valley (mt) Nullagine JV (mt) - 100% Eliwana (mt) R.O.A. (pre sig items) % 9% 18% 10% 10% 9% 7% 8% Interest Cover x 2.8x 7.1x 4.4x 10.5x 9.4x 7.0x 8.5x EBITDA per share A$ps EV/EBITDA x 5.2x 2.9x 4.6x 4.2x 4.5x 5.3x 4.9x FCF Yield % 20% 33% 4% 13% 6% 7% 11% EARNINGS FY16 FY17 FY18 FY19e FY20e FY21e FY22e Sales Revenue US$m 7,083 8,447 6,887 7,123 7,075 7,023 7, Other Revenue US$m Total Revenue US$m 7,090 8,461 6,917 7,123 7,075 7,023 7, Operating Costs US$m (3,841) (3,667) (3,665) (3,818) (3,954) (4,300) (4,550) 0.0 Operational EBITDA US$m 3,249 4,794 3,252 3,305 3,121 2,723 2,875 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19e FY20e FY21e FY22e FY23e FY24e FY25e Exploration Expense/Write-offs US$m (136) (51) (32) (101) (104) (106) (109) RESERVES AND RESOURCES (ATTRIBUTABLE) Corporate & Other Costs US$m (54) (50) (70) (81) (83) (85) (87) Iron-ore reserves EBITDA US$m 3,059 4,693 3,150 3,123 2,935 2,531 2,679 Project Mt Fe CaFe SiO2 Al2O3 P LOI D&A US$m (1,244) (1,243) (1,277) (1,201) (1,287) (1,287) (1,287) Cloudbreak % 62.2% 5.8% 2.8% 0.06% 8.0% EBIT US$m 1,815 3,450 1,873 1,922 1,648 1,244 1,392 Christmas Creek % 61.8% 5.7% 3.0% 0.04% 7.7% Net Interest US$m (653) (483) (426) (182) (176) (177) (163) Firetail % 63.5% 5.7% 2.5% 0.11% 6.7% Profit Before Tax US$m 1,162 2,967 1,447 1,740 1,472 1,067 1,229 Kings and Queens % 62.5% 6.6% 2.7% 0.07% 9.0% Tax Expense US$m (369) (874) (367) (522) (441) (320) (369) Eliwana % 63.8% 4.9% 2.4% 0.13% 5.9% Minorities US$m (1) Total Reserves 2, % 62.3% 5.9% 2.8% 0.06% 7.9% Adjusted NPAT US$m 792 2,093 1,081 1,218 1, Iron-ore resources Significant Items (post tax) US$m (202) Project Mt Fe CaFe SiO2 Al2O3 P LOI Reported NPAT US$m 984 2, ,218 1, Cloudbreak 1, % 61.5% 6.1% 3.5% 0.06% 8.3% Christmas Creek 2, % 61.0% 6.6% 3.6% 0.05% 7.8% Firetail % 61.9% 7.0% 3.1% 0.11% 6.9% CASHFLOW FY16 FY17 FY18 FY19e FY20e FY21e FY22e Kings and Queens 1, % 60.7% 8.0% 3.4% 0.08% 9.1% Net Profit US$m 984 2, ,218 1, Eliwana 1, % 62.9% 5.5% 3.0% 0.11% 6.5% Interest/Tax/D&A US$m 1,863 1, ,695 1,338 1,241 1,475 Fortescue Mines 6, % 61.3% 6.8% 3.4% 0.07% 8.0% Working Capital/other US$m (434) 233 (175) (284) (64) (104) (146) Greater Chichester % 61.3% 6.6% 3.5% 0.06% 6.8% Net Operating Cashflow US$m 2,413 4,209 1,376 2,628 2,304 1,884 2,189 Greater Solomon 2, % 61.3% 6.9% 3.7% 0.08% 7.3% Capex US$m (358) (715) (910) (1,266) (1,653) (1,103) (1,010) Western Hub 1, % 62.7% 5.7% 2.9% 0.08% 9.0% Investments US$m Nyidinghu 2, % 62.9% 4.9% 3.3% 0.15% 8.7% Sale of PPE and Other US$m 0 0 (55) Total Resources 13, % 61.8% 6.3% 3.4% 0.09% 8.1% Free cash flow US$m 2,055 3, , ,180 Magnetite Reserves Mt Mass Recovery (Fe) (SiO2) (Al2O3) Dividends Paid US$m (114) (755) (874) (499) (664) (673) (518) North Star % 67.2% 5.5% 0.3% Debt US$m (2,695) (2,453) (474) (34) (34) (34) (1,111) Magnetite Resources Equity Issuance US$m (21) (27) (24) (267) (90) 0 0 Project Mt Mass Recovery Fe SiO2 Al2O3 Other US$m North Star and Eastern Limb 4, % 30.0% 41.5% 2.7% Net Financing Cashflow US$m (2,830) (3,235) (1,372) (800) (788) (707) (1,629) Glacier Valley 3, % 22.4% 40.5% 2.1% Net change in cash US$m (775) 259 (961) 563 (136) 73 (450) West Star % 28.3% 43.4% 3.4% Total 7, % 26.7% 41.1% 2.5% VALUATION Spot Prices Macquarie Forecasts BALANCE SHEET FY16 FY17 FY18 FY19e FY20e FY21e FY22e Projects A$m A$ps A$m A$ps Cash US$m 1,583 1, ,426 1,289 1, Fortescue Operations 34, , PP&E & Mine Development US$m 16,867 16,493 16,189 16,253 16,619 16,436 16,158 Undeveloped Resources 1, , Exploration US$m Other resources 3, , Total Assets US$m 19,337 19,115 17,849 18,561 18,816 18,672 18,020 Unpaid capital Debt US$m 6,771 4,471 3,975 3,941 3,907 3,873 2,762 Prepayments (680) (0.22) (633) (0.21) Total Liabilities US$m 10,931 9,381 8,117 8,377 8,356 8,138 7,144 Corporate (747) (0.25) (686) (0.23) Total Net Assets / Equity US$m 8,406 9,734 9,732 10,184 10,460 10,534 10,876 Cash 3, , Net Debt / (Cash) US$m 5,188 2,633 3,112 2,515 2,618 2,510 1,849 Debt (5,495) (1.81) (5,467) (1.80) Gearing (net debt/(nd + equity)) % 38% 21% 24% 20% 20% 19% 15% Net Equity Value (@ 9.3% WACC) 36, , Gearing (net debt/equity) % 62% 27% 32% 25% 25% 24% 17% Price Target (50/50 NPV and 5.0x EV/Ebitda) 5.20 Source: FMG, Macquarie Research, January January

11 Fig 26 Mt Gibson summary financials Mount Gibson Iron ASX: MGX Price: (A$ps) 0.60 Year end: Jun Rating: Outperform Up/dn TSR Mkt cap: (A$m) 660 Diluted shares (m) 1,100 Target: % 15% Mkt cap: (US$m) 473 ASSUMPTIONS FY17 FY18 FY19e FY20e FY21e FY22e FY23e ATTRIBUTABLE MINE OUTPUT FY17 FY18 FY19e FY20e FY21e FY22e FY23e Exchange Rate A$/US$ Iron-ore Shipped (kt) Spot iron-ore (62% CIF) US$/t Koolan Island kt ,700 3,600 5,050 5,400 Tallering Peak kt RATIO ANALYSIS FY17 FY18 FY19e FY20e FY21e FY22e FY23e Extension Hill/Iron Hill kt 2,750 3,623 2, Diluted share capital m 1, , , , , , ,099.6 Shine kt EPS (diluted and pre sig. items) A Other kt P/E x 30.6x 20.0x nm nm 12.9x 6.2x 4.6x Total kt 3,167 3,623 3,000 2,700 3,600 5,050 5,400 CFPS A C1 Cash costs P/CF x 35.6x 13.5x nm nm 6.2x 3.9x 3.0x Koolan Island (A$/wmt) DPS A Tallering Peak (A$/wmt) Dividend yield % 3.3% 5.0% 5.0% 5.0% 6.7% 10.0% 15.0% Extension Hill/Iron Hill (A$/wmt) Franking Level % 50% 50% 50% 50% 100% 50% 0% Book value per share x CFR China Costs P/Book value x 1.6x 1.3x 1.3x 1.5x 1.4x 1.3x 1.1x Koolan Island (US$/wmt) R.O.E. (pre sig items) % 5% 7% 5% -4% 11% 20% 24% Tallering Peak (US$/wmt) R.O.A. (pre sig items) % 2% 4% 4% -6% 11% 20% 26% Extension Hill/Iron Hill (US$/wmt) Interest Cover x -0.8x -2.0x -2.0x 3.6x -7.1x -12.3x -12.8x EBITDA per share A$ps EV/EBITDA x 14.1x 7.4x nm nm 2.6x 0.9x 0.1x Free cash flow Yield % 7% 5% (8%) (3%) 14% 24% 32% EARNINGS FY17 FY18 FY19e FY20e FY21e FY22e FY23e OPERATIONAL OUTLOOK Sales Revenue A$m Other Revenue A$m Koolan Island (mt) Tallering Peak (mt) Extension Hill / Iron Hill (mt) Total Revenue A$m Operating Costs A$m (129) (212) (185) (236) (198) (278) (237) Operational EBITDA A$m Exploration Expense/Write-offs A$m (0) Corporate & Other Costs A$m (22) (15) (16) (17) (17) (17) (18) 6.0 EBITDA A$m (0) D&A A$m (6) (5) (9) (32) (44) (55) (60) 4.0 EBIT A$m (33) Net Interest A$m Profit Before Tax A$m (23) Tax Expense A$m 1 0 (11) 7 (22) (45) (61) Minorities A$m Adjusted NPAT A$m (16) RESERVES AND RESOURCES (ATTRIBUTABLE) Significant Items (post tax) A$m Iron-ore reserves Reported NPAT A$m (16) Project Mt Fe SiO2 Al2O3 P S Koolan Island % 4.5% 0.9% 0.01% CASHFLOW FY17 FY18 FY19e FY20e FY21e FY22e FY23e Tallering Peak Net Profit A$m (16) Extension Hill/Iron Hill Interest/Tax/D&A A$m Iron Hill Working Capital/other A$m (14) (56) 0 3 (9) (13) 0 Shine Net Operating Cashflow A$m Total % 4.5% 0.9% 0.01% Capex A$m (6) (80) (98) (39) (21) (15) (10) Investments A$m (13) (1) Iron-ore resources Sale of PPE and Other A$m Project Mt Fe SiO2 Al2O3 P S Free cash flow A$m (53) (21) Koolan Island % 8.4% 0.8% 0.01% Dividends Paid A$m 0 (22) (33) (33) (33) (44) (66) Tallering Peak % 11.1% 2.2% 0.07% Debt A$m (0) Extension Hill/Iron Hill % 9.5% 2.4% 0.75% Equity Issuance A$m Iron Hill % 8.7% 1.6% 0.07% Other A$m Shine % 9.6% 1.5% 0.07% Net Financing Cashflow A$m (0) (22) (33) (33) (33) (44) (66) Total % 7.9% 0.9% 0.04% Net change in cash A$m (86) (54) EQUITY DCF VALUATION Spot Prices Macquarie Forecasts BALANCE SHEET FY17 FY18 FY19e FY20e FY21e FY22e FY23e Projects A$m A$ps A$m A$ps Cash A$m Koolan Island PP&E & Mine Development A$m Tallering Peak Exploration A$m Extension Hill/Iron Hill Total Assets A$m Shine Debt A$m Undeveloped Resources Total Liabilities A$m Unpaid capital Total Net Assets / Equity A$m Corporate/forwards (49) (0.04) (49) (0.04) Net Debt / (Cash) A$m (447) (457) (371) (317) (375) (492) (639) Net cash (debt) + Investments Gearing (net debt/(nd + equity)) % nmf nmf (315%) (258%) (454%) (1,779%) 1,452% Net Equity Value (@ 10% WACC) 1, Gearing (net debt/equity) % (107%) (92%) (76%) (72%) (82%) (95%) (107%) Price Target (1x NPV) 0.66 Source: MGX, Macquarie Research, January January

12 Important disclosures: Recommendation definitions Macquarie Asia, USA, Canada, Europe and Mazi Macquarie (SA): Outperform expected return >10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Australia/New Zealand Outperform expected return >10% Neutral expected return from 0% to 10% Underperform expected return <0% Note: expected return is reflective of a Medium Volatility stock and should be assumed to adjust proportionately with volatility risk 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 select stocks in Asia/Australia/NZ/Canada 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). Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Recommendation proportions For quarter ending 31 December 2018 AU/NZ Asia RSA USA CA EUR Outperform 53.56% 57.51% 47.06% 48.65% 69.08% 51.23% (for global coverage by Macquarie, 4.12% of stocks followed are investment banking clients) Neutral 31.09% 30.24% 34.12% 46.22% 26.32% 39.41% (for global coverage by Macquarie, 1.92% of stocks followed are investment banking clients) Underperform 15.36% 12.25% 18.82% 5.14% 4.61% 9.36% (for global coverage by Macquarie, 0.47% of stocks followed are investment banking clients) BHP AU vs ASX 100, & rec history RIO AU vs ASX 100, & rec history FMG AU vs ASX 100, & rec history (all figures in AUD currency unless noted) MGX 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, January month target price methodology BHP AU: A$39.00 based on a NPV - 6.5x EV/Ebitda blend methodology RIO AU: A$94.00 based on a 50/50 Blend 6.5x EV/Ebitda and NPV methodology FMG AU: A$5.20 based on a 50/50 NPV and 5.0x EV/Ebitda methodology MGX AU: A$0.66 based on a Sum--of-the-parts NPV methodology Company-specific disclosures: BHP AU: Macquarie Group Limited together with its affiliates beneficially owns 1% or more of the equity securities of BHP Billiton Ltd. RIO AU: Macquarie Capital (USA) Inc. or one of its affiliates, expects to receive or intends to seek compensation for investment banking services from Rio Tinto Ltd in the next three months. Macquarie Group Limited together with its affiliates beneficially owns 1% or more of the equity securities of Rio Tinto Ltd. Macquarie Capital (Australia) Limited is currently providing financial advisory services to EMR Capital in connection with acquisition of Kestrel coking coal mine from Rio Tinto Ltd. FMG AU: Macquarie Group Limited together with its affiliates beneficially owns 1% or more of the equity securities of Fortescue Metals Group Ltd. Macquarie Securities (Australia) Limited or one of its affiliates is currently managing an on-market buyback for Fortescue Metals Group Ltd. A Macquarie analyst involved with the preparation of this research has, in the past 12 months, visited material operations of Fortescue Metals Group. The company furnished local transportation as part of this site visit, which was authorized in adherence with Macquarie policy requirements. Important disclosure information regarding the subject companies covered in this report is available at 21 January

13 This publication was disseminated on 21 January 2019 at 09:49 UTC. Macquarie Wealth Management Target price risk disclosures: BHP 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. RIO 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. FMG 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. A$ strength vs the US$ is a key risk as costs and capital expenditure are denominated in A$, while product prices are denominated in US$. The company has senior unsecured debt of US$7bn; this potentially leaves interest service risk should markets turn down unexpectedly or operations be hampered unexpectedly. 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. 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. 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