Global Mining 2020 Capex

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1 Global Equity Research Diversified Metals & Mining The Ideas Engine series showcases Credit Suisse s unique insights and investment ideas. Research Analysts Europe Liam Fitzpatrick liam.fitzpatrick@credit-suisse.com James Gurry james.gurry@credit-suisse.com Michael Shillaker michael.shillaker@credit-suisse.com Conor Rowley conor.rowley@credit-suisse.com Australia Paul McTaggart paul.mctaggart@credit-suisse.com Christian Prendiville christian.prendiville@credit-suisse.com Canada Ralph M. Profiti, CFA ralph.profiti@credit-suisse.com Yan Truong, CFA yan.truong@credit-suisse.com Latin America Ivano Westin ivano.westin@credit-suisse.com Renan Criscio renan.criscio@credit-suisse.com Specialist Sales: James Brady james.brady@credit-suisse.com Global Mining 2020 Capex SECTOR REVIEW Deep dig on mining capex & capital allocation Figure 1: Diversified miners' capex progression E ($m) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000-22,144 2, Capex increase to maintain stable production 8,898 Capex to grow at 2% pa Companies used: BHP Billiton, Rio Tinto, Anglo American, Glencore, Vale and Teck Resources Source: Company data, Credit Suisse estimates 33, E In this Ideas Engine, we take a global approach to future capital allocation and capex: Through our in-depth analysis of the asset bases and investment profiles of the six largest diversified miners, we assess longer-term capex requirements and find material differences between the companies, with important implications for future cash flows and shareholder returns. Capex on the rise: A rebounding capex cycle is a sign of a healthier industry and only becomes a problem after several years of elevated returns (well above what is currently priced in), when more marginal projects are pursued. However, with growth capex having hit trough levels in 2016, volumes will begin to decline post 2020 without fresh investment normalised capex: An area lacking in competitor analysis is longerterm reliable capex estimates. Using our capex projection model, based on a detailed analysis of annual depletion rates and future project costs, we estimate that industry capex could rise by 50-60% compared with Under our capex estimates and assuming spot iron ore and coal prices moderate (iron ore to $55-60/tonne), sector FCF yields would fall from over 15% to 8-10%. However, we think material increases in capex are unlikely until 2019/20. Not all companies are equal: Companies where we see the lowest level of potential capex increases on a three- to five-year view look to be the best positioned. Vale is in the strongest position with declining capex, followed by Rio and Teck with limited increases expected by We see the greatest risk of capex increases at BHP and Anglo American. Glencore's capex could also rise significantly, but latent capacity is an advantage. Stock calls: Our preferred names are Rio, Glencore and Teck, all Outperform-rated. We have raised our 2017/18 iron ore price forecasts from $55/53 per tonne to $78/$58 per tonne and sit materially ahead of consensus. Linked to our view of contained capex for the next two years, we make significant upgrades to our two-year cash return assumptions. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Table of contents Focus charts 3 Stock ratings and valuation 5 Executive summary 8 Capex projection model 13 Company highlights 16 Growth capex outlook 21 Sustaining capex outlook: Potential upside pressure over the long term 27 Copper growth will increase capex intensity 30 Anglo American Plc (AAL.L) 31 BHP Billiton (BLT.L) 37 Glencore (GLEN.L) 44 Rio Tinto (RIO.L) 50 Teck Resources Ltd (TECKb.TO) 58 Vale (VALE) 65 Growth and capex outlook 67 Global Mining 2020 Capex 2

3 Focus charts Figure 2: Diversified miners' capex outlook Figure 3: capex outlook (% change vs 2017 guidance) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, /17 guided capex increase of 5% Potential ~52% capex 2020E normalized capex to grow production by 2%pa 2020E normalized capex to offset production decline E 2020E 100% 80% 60% 40% 20% 0% -20% Capex Increase Risk AAL BHP GLEN Teck VALE RIO capex to keep volumes stable 2020 capex to grow at 2% pa Source: Company data, Credit Suisse estimates, CY basis, Companies used: BHP, RIO, AAL, GLEN, Vale and Teck Source: Credit Suisse estimates Figure 4: Illustrative FCF Bridge 2017E spot to 2020E normalized Figure 5: CS capex estimates vs consensus 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Spot 2017E FCF Change in capex 2020 vs 2017 Higher volumes Iron ore $60/t and lower coal prices 2020E Normalised 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, E Total Capex CS estimates 2020E normalized capex to grow production by 2%pa 2018E 2019E IBES Consensus Capex 2020E Source: Credit Suisse estimates, CY basis Note: Above charts based on BHP,RIO, AAL, GLEN. Spot prices assumed for 2020 except for iron ore ($60), thermal coal ($70), coking coal ($140) Source: Company data, Credit Suisse estimates, I/B/E/S Consensus, Figure 6: Copper industry expansionary capital ($/t annual production) Figure 7: Large cap growth capex ,500 60,000 2,000 50,000 40,000 1,500 30,000 1,000 20,000 10, BLT RIO GLEN AAL VALE TECK Source: Wood Mackenzie, Credit Suisse research Source: Company data, CY basis Global Mining 2020 Capex 3

4 Figure 8: Copper supply will fall from 2020 without fresh investment (kt) Figure 9: Copper historical demand trends 30,000 25, '01-'16 2.8% CAGR 20,000 15,000 10,000 5, '76-'16 2.5% CAGR CS base case production Highly probable projects Primary demand Source: Wood Mackenzie, Credit Suisse estimates Source: Wood Mackenzie, Credit Suisse research Figure 10: 2017E sustaining capex/t ($/t) copper equivalent basis Figure 11: 2017E total capex ($/t) copper equivalent basis Higher precious /base Metals exposure Higher iron ore exposure - Lower Capex intensity compared to Copper 1,800 1,600 1,400 1, , GLEN Teck AAL VALE RIO BHP Mining - TECk GLEN RIO BLT AAL VALE Source: Credit Suisse estimates, CY basis Source: Credit Suisse estimates, CY basis Figure 12: E copper equivalent volume growth (CAGR) Figure 13: Post 2020 annual production decline BHP AAL Teck RIO GLEN VALE 0.0% 1.0% 2.0% 3.0% 4.0% VALE TECK AAL RIO BHP Mining GLEN BHP -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% Source: Company data, Credit Suisse estimates, CY basis Note: AAL pro forma for platinum sales Source: Credit Suisse estimates Global Mining 2020 Capex 4

5 Stock ratings and valuation In this report we assess the six global diversified miners listed in the UK, Australia, Brazil and Canada as below. Our ratings and target prices are summarised below and we provide more detailed company sections later in this report. Figure 14: Global Metals & Mining Ratings and Valuations Investment MktCap EV Share Target Potential PE EV:EBITDA P/B Div. Yield Name Rating USD USD price Price Upside US$mn US$mn (local) (local) (%) x x x x x x x % % Diversified Miners Anglo American Plc NEUTRAL 21,988 35,784 1,277 1,400 10% % 7.6% BHP Billiton NEUTRAL 98, ,198 1,346 1,380 3% % 6.1% Glencore OUTPERFORM 54,706 71, % % 4.3% Rio Tinto OUTPERFORM 77,661 87,248 3,355 4,000 19% % 8.3% Teck Resources Ltd OUTPERFORM 11,938 17, % % 0.4% Vale NEUTRAL 52,304 77, % % 5.6% Source: Company data, Credit Suisse estimates, multiples are based on fiscal year, AAL EV/EBITDA based on attributable basis In a separate report (Commodities Forecasts: Steel price should support iron ore until 2H) we have raised our iron ore prices from $55 / $53 in 2017/18 to $78 / $58/t. The strength and recovery in steel demand globally and in China, as highlighted by our steel team last year (Global Steel Update 108: Carbon steel outlook 2017), is driving steel and raw material prices in We expect demand growth rates to slow in late 2017 and 2018 but we have raised our price assumptions to reflect better market conditions. Figure 15: Iron ore price changes E 2018E Commodity Unit Spot Old New Change Old New Change Iron ore fines - 62% (China CFR) U$/t % % Source: Credit Suisse estimates Our EBITDA changes are summarized below and we now sit over 30% ahead of consensus for 2017 and 5% ahead for 2018 (EBITDA, simple average basis). Figure 16: EBITDA changes Old EBITDA 2017E New EBITDA 2017E % Change Old EBITDA 2018E New EBITDA 2018E % Change Diversified AAL 8,136 9,256 14% 6,737 6,995 4% BHP 23,074 25,017 8% 20,185 22,054 9% RIO 16,360 21,906 34% 12,663 14,273 13% VALE 14,056 18,822 34% 11,248 12,349 10% Source: Credit Suisse estimates Stock calls RIO (Outperform, 40 target price, two-year cash returns of 8.3/sh): We leave our target price unchanged but have raised our two-year cash return estimate from 6.3/sh to 8.3/sh (23% cumulative yield), reflecting the company's strong FCFs and rapidly deleveraging balance sheet. Through 2017E/18E we assume a dividend payout of close to 50% and total buybacks of $8bn. This level of cash return would keep gearing (net debt:equity) at close to 15%. With RIO we expect only a modest increase in capex levels. With FCF yields high on our estimates and spot, and a balance sheet near zero debt, we think significant net cash build would likely mean further shareholder returns (buyback extension / dividends). Global Mining 2020 Capex 5

6 GLEN (Outperform, 4 target price, two-year cash returns of 0.45/sh): We make no earnings changes and leave our target price unchanged. Assuming a dividend payout of 50% of attributable FCFs and an additional special dividend of ~$3bn in 2018E (to keep net debt in the $13-14bn range), the company could return a total of 0.45 per share (13% cumulative yield) over the next two years. We favour GLEN's diversified business mix, we see copper moving from a headwind in 2016 to a tailwind in 2017 and believe the company's latent capacity growth is underpriced by the market. BHP (Neutral, 13.8 target price, two-year cash returns of 1.8/sh): We leave our target price unchanged but raise our two-year cash return estimate from 1.5/sh to 1.8/sh (12% cumulative yield). For BHP we see the greatest volume decline and the greatest upside risk for capex. We do not view BHP as being in a position to make significant shareholder returns but expect it to retain its dividend policy of 50% of EPS plus additional returns as can be afforded, which would be weighted into late 2018 / early 2019 (CY basis). AAL (Neutral, 14 target price, two-year cash returns of 1.30/sh): We leave our target price unchanged but raise our two-year cash return estimate from 1.15/sh to 1.3/sh (10% cumulative yield) reflecting our increased earnings estimates. AAL's balance sheet is now more or less where it needs to be, in our view, and we expect a dividend restart at the mid-year (six months ahead of guidance). However, of the large caps Anglo is the only company guiding 2017 total capex to be at a level similar to sustaining capex of ~US$2.5bn; therefore, capex would need to rise materially if the company aims to maintain and/or grow volumes. VALE (Neutral, $9/ADR target price): Reduction of net debt to the USD15bn target remains the company's primary focus. The combination of lower capex, divestment of non-core assets, cost-cutting, and current momentum for commodity prices recently contributed to an improvement in Vale's balance sheet. CSe Net Debt/Ebitda of 1.2x YE17. Vale is the only company for which we expect 2020 capex to be materially below levels due to completion of the S11D project. TECK (Outperform, C$43 target price): We see compelling long-term valuation support based on cash generation and deleveraging catalysts. Teck's most recent tender offer provided a positive step towards a goal of reducing debt below US$5bn (vs. US$6.2bn at YE16), regaining investment grade credit, and ultimately an upgrade to the dividend (currently C$0.10/year; dividend yield: 0.34%). We see Teck's YE17 net debt at US$3.3bn, Debt/Debt+Equity to 27% (vs. 32% at end-fy16), and FY17/18 Debt-to-EBITDA at to 1.2/1.9x. Figure 17: Two-year cash returns (dividends and buybacks) CY cash basis 25% 20% 15% 10% 5% 0% RIO GLEN BHP AAL Dividend yield Buyback/special yields Source: Credit Suisse estimates Global Mining 2020 Capex 6

7 Our commodity price assumptions are summarised below: Figure 18: Commodity price forecast Source: Credit Suisse estimates, Thomson Reuters Figure 19: Valuation summary base and spot Commodity Unit E 2017E 2018E Spot Spot vs Spot vs Spot vs Iron ore 62% CFR $/t % 18% 57% Thermal coal $/t % 13% 19% Coking coal Contract $/t % -19% 25% Ferrochrome $/lb % 8% 38% Copper U$/lb % 11% 33% Nickel U$/lb % -5% -17% Zinc U$/lb % 13% 23% Aluminium U$/lb % 12% 20% Platinum U$/oz 1, ,015 3% 8% 8% Palladium U$/oz % 6% 5% Gold U$/oz 1,160 1,251 1,338 1,375 1,245 0% -7% -9% Oil (Brent) US$/t % 1% -13% USD:AUD % 6% 7% USD:ZAR % -7% -10% USD:Peso % -5% -11% USD:KZT % -3% -1% USD:SEK % 0% -2% Base case and spot multiples are summarized below for the six companies. Base Case P/E EV/EBITDA ND/EBITDA ND/Mrk Cap FCF Yield Div Yield Diversifieds BHP % 9.1% 6.2% 4.5% RIO % 8.0% 8.3% 5.5% Glen % 8.6% 4.3% 4.3% AAL % 11.0% 7.6% 5.7% Teck % 11.5% 0.4% 0.4% Vale % 12.6% 5.3% 3.6% Spot Case P/E EV/EBITDA ND/EBITDA ND/Mrk Cap FCF Yield Div Yield Diversifieds BHP % 15.2% 7.0% 7.0% RIO % 18.5% 9.6% 10.3% Glen % 11.2% 4.7% 6.0% AAL % 18.8% 8.2% 9.4% Teck % 18.4% 0.4% 0.4% Vale % 27.6% 3.3% 6.7% Source: Credit Suisse estimates, CY basis, PE based on Underlying EPS, AAL EV/EBITDA adjusted for minorities. Global Mining 2020 Capex 7

8 Executive summary After three years of heavy cuts, the global mining capex cycle is turning. The sector reached unprecedented levels of capex from 2011 to 2013 but then needed to cut investment sharply in reaction to weaker demand growth, falling prices and the resultant pressure on balance sheets and cash flows. From strategies led by volume and market share gains only 4-5 years ago, the large cap CEO mantra is now one of value over volume and a prudent approach to growth is likely to remain. However, mining is a capex-intensive industry with finite reserves and, with balance sheets repaired and the outlook for commodities brighter than 12 months ago, the industry now looks to be in a position to begin investing again to offset natural mine depletion and for longer-term growth. A frustration for investors is that sell-side estimates typically only factor in known projects and may show unrealistic capex and FCF profiles on a 2-3 year horizon. Our report addresses this issue by analysing where capex could trend to from We expect only modest increases in 2017/18 capex with businesses generally well capitalised following the significant investment during the boom years and steady annual volume growth from projects committed to 5-6 years ago. From 2020, we estimate capex for the six companies assessed could increase by 50-60% compared with 2016 levels assuming the companies aim to maintain average annual volume growth at 2% pa. If the companies only invest sufficiently to offset reserve decline/mine depletion, capex could remain at levels similar to 2017 guidance. Figure 20: Large cap total capex U$m could increase 60% by 2020E (vs 2016) 80,000 70,000 60,000 50,000 40, E normalized capex to grow production by 2% pa 2020E normalized capex to offset production decline 30,000 20,000 10, BLT RIO GLEN AAL Vale Teck E 2018E 2020E 2020E Source: Company data, Credit Suisse estimates, Glencore pro forma before 2013 and XTA capex before 2006 Balance sheet improvements should lead shareholder cash returns and then capex higher Capex cuts and efforts to improve cash flows were at their maximum in late 2015/early was a year of balance sheet recovery and 2017 and 2018 should see further material net debt reductions and higher shareholder returns. By end 2017, we expect net debt for the six diversified miners to have more than halved from the 2012 peak of $120bn to below $60bn. Net debt:ebitda should on average fall below 1x. All of the corporates are signaling more conservative balance sheet policies than in the past, but by the end of 2017 balance sheets should be under-geared, allowing for increased shareholder returns through ordinary dividends, specials and buybacks. Global Mining 2020 Capex 8

9 Figure 21: Net Debt: EBITDA 2016 and 2017E 2.50 Figure 22: Large cap aggregate Net Debt 140, , ,000 80,000 60,000 40,000 20, VALE GLEN TECK AAL BLT RIO Net Debt ND/EBITDA Source: Company data, Credit Suisse estimates, CY basis Note: 2017 are CS estimates Source: Company data, Credit Suisse estimates, CY basis, Includes BLT, RIO, GLEN, AAL, VALE and Teck Below we illustrate total shareholder cash returns (through dividends and buybacks) expected over the next two years. We break this down between our normal dividend assumptions and specials/buybacks. The below chart excludes VALE and TECK where we expect the focus through 2017 and 2018 to still be on debt reduction. Figure 23: Shareholder cash returns (dividends and buybacks) 25% 20% 15% 10% 5% 0% RIO GLEN BHP AAL Dividend yield Buyback/special yields Source: Credit Suisse estimates Volumes likely to decline post 2019/20 without increased investment For the diversified miners, volume growth averaged ~5% pa over but slowed sharply thereafter. Legacy growth projects should keep volumes expanded out to 2019, but from 2019/20, we expect volume growth to grind to a halt without fresh investment in replacement projects and potential new growth opportunities. An exception to this is VALE where iron ore growth volumes are expected to continue over the next 3-4 years. Global Mining 2020 Capex 9

10 Figure 24: Large cap indexed volume growth E Source: Company data, Credit Suisse estimates, CY basis Note: CS estimates from Total industry capex from 2020 could rise by 50-60% vs 2016 We estimate capex trends for each of the companies based on expected production levels in 2020, anticipated production declines thereafter (due to lower grades, mine depletion etc) and estimated project costs. Under a scenario where each of the companies invests sufficiently to offset reserve decline (typically of 3-4% pa) and grow group production volumes by 2% (slightly below long-term commodity demand growth trends), we estimate capex for the industry could climb by 50-60% from 2020 onwards. However, as we discuss in the company sections that follow, there are large differences between the companies. VALE is the only major where we expect lower capex in 2020 vs Excluding VALE we expect capex for the other companies to be up over 60% vs 2016 levels. Figure 25: Capex progression E ($m) 40,000 35,000 30,000 8,898 33,380 25,000 20,000 15,000 22,144 2,338 10,000 5, Capex increase to maintain stable production Capex to grow at 2% pa 2020E Source: Company data, Credit Suisse estimates, Companies used: BHP, RIO, AAL, GLEN, VALE and Teck The companies have inherent flexibility around capex and we don t expect more material increases until 2019/20. If prices were to decline and companies only invest sufficiently to keep group volumes stable, capex could remain at levels similar to 2017 guidance. Global Mining 2020 Capex 10

11 Capex increases only become a problem at the end of a cycle The sector is enjoying high margins and FCFs well above the market average and historical norms, and a return to the free-spending years seems to be a growing concern with investors. Commodity prices, which lead capex direction by ~1 year, have recovered strongly over the past year and spot EBITDA margins are now higher than the peak years. Based on current guidance, the companies are already guiding in aggregate to 2017 capex 5-10% above 2016 levels. At the company level, there are different trends, with Vale guiding to lower capex YoY in 2017, Anglo to flat and the other companies to increases of more than 10% (details in the company sections). While capex will most likely increase over the coming years, a rebounding capex cycle is a sign of a healthier industry and excessive capex becomes a problem only towards the end of a cycle when supply outpaces demand and marginal projects are pursued. We think the industry would need to generate several years of elevated returns before a lack of capex discipline becomes a concern. Figure 26: Large cap EBITDA margins E vs prices Figure 27: Average ROCE E vs capex (U$m) 48% % 90,000 46% 44% 42% 40% 38% 36% 34% 32% 30% E EBITDA % Underlying Commodity index, Rhs % 20% 15% 10% 5% 0% E Average ROCE Total Capex, Rhs 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - Source: Company data, Credit Suisse estimates, Thomson Reuters, Large cap includes BLT,RIO and AAL, CY basis, Weights for Commodity index: Iron ore 35%, Cu 25%, Coal 15%, Ali 5%, Ni 3%, Zn 5%, Pt 5%, Brent 7% Source: Company data, Credit Suisse estimates, Large cap includes BLT, RIO and AAL, CY basis, Total capex for BLT, RIO, GLEN, AAL, Vale and Teck Capex intensity in US$ terms should remain structurally lower than the peak period, but The major mining resource currencies are now 25-40% weaker against the US$ compared with average levels in the period. Key input costs such as oil and steel are also materially lower and the overall supply chain is looser. Company management teams have estimated that current project costs are down 15-40% compared with the peak 2012 period (bigger increases for iron ore / bulk projects versus copper/base metals) capex intensity structurally higher for copper than for iron ore and Capex for growth is likely to be directed more towards later-cycle copper than to earliercycle iron ore where we expect production to continue to ramp up to installed capacity over the next three years. Our analysis later in this report shows that copper capex intensity (measured by capex:sales and capex to unit of production) is almost double that of iron ore, meaning targeted growth in copper will increase capex requirements over the long term. Global Mining 2020 Capex 11

12 sustaining capex is potentially being understated by ~20% Our analysis later in this report shows that sustaining capex in iron ore and copper (at the industry level) fell much more sharply than operating costs over the past five years. In a cost-cutting environment, this makes sense, with companies having more flexibility to defer/reduce capex (eg, equipment/fleet replacement, stripping activity) in the short term compared with opex (eg, labour, materials, energy/fuel). However, as conditions normalise, we would expect sustaining capex to increase faster than operating costs. Figure 28: Copper cash operating costs vs sustaining capex from 2011 (unit of copper production basis) Figure 29: Iron ore industry sustaining capex US$/t th % cost (net) 50th % cost (gross) Sustaining capex Sustaining capex/t Source: Wood Mackenzie, Credit Suisse research. Note: Sustaining capex excludes deferred stripping Source: Wood Mackenzie, Credit Suisse research Global Mining 2020 Capex 12

13 Capex projection model Figure 30: Capex outlook approach Capex Outlook Sustaining Capex Definitions Trends Differences between metals and companies Growth Capex Future demand trends Capex intensity Brownfield vs greenfield Reserves and Volume Decline Reserves and mine life Project pipelines Source: Credit Suisse research For each of the large caps, we have constructed a simplified capex model to estimate capex trends from 2020 based on normalised levels of investment. We look at two scenarios: 1) how much capex needs to be invested to keep group volumes stable; and 2) a more likely scenario where the companies invest sufficiently to grow group volumes at 2% pa. For each company, we have effectively broken down our analysis into three core areas: Sustaining capex: As a starting point we have used company guidance and defined what is included within sustaining capex. For all companies, there is a fairly consistent approach where sustaining capex excludes replacement or growth capex, but includes deferred stripping and all necessary expenditure to keep operations running efficiently and safely. For our 2020 analysis, we make a broad assumption that sustaining capex will increase ~15% compared with 2016/17 company guidance. Reserves and volume decline: We have looked in detail at the asset bases, reserve lives and project pipelines for each of the companies. We have taken 2020 as the starting point as this should reflect completion of all the existing approved growth projects (RIO's OT project is the obvious exception) and estimate the annual production decline thereafter due to lower grades and mine depletion assuming no replacement or growth capex is sunk. This allows us to estimate how much needs to be invested in new production/capacity to offset reserve decline and grow group production volumes. Estimating reserve decline or mine depletion is far from an exact science; companies do not report such figures and reserves can change depending on levels of exploration and changes in long-term price and cost assumptions. As such, we have relied on available data and our own estimates, which may differ from company assumptions. Global Mining 2020 Capex 13

14 Copper Grade Cu % 3 March 2017 Figure 31: Vale December 2016 Investor Day Figure 32: Industry copper grades Primary - Mill Primary - SxEw (All) All Primary Mines All Operations Co-By - Mill (RH axis) Source: Wood Mackenzie Source: Company data Source: Wood Mackenzie As part of its Investor Day in December, Vale estimated that production for the iron ore majors would decline by 15-30% over the next 5-7 years, implying a decline averaging 3-4% pa. This was also consistent with guidance given by RIO at a trip to the Pilbara assets in In the copper industry, over the past ~30 years, the industry has seen average copper grades fall by over 50%. WoodMackenzie estimates the mining grades could decline a further 3% by 2025 and examples from our coverage show that reserve grades are up to 30-40% below current mining grades. Together with mine depletion, the copper industry could face a similar 4-5% annual decline without fresh investment. Growth capex requirements: Based on forecast 2020 volumes and the expected annual production decline post 2020, we look at two growth capex scenarios: 1) how much needs to be spent to keep group volumes flat at 2020 levels; 2) how much capex is required to grow group production volumes at 2% pa. We assume that all the large caps aim to expand volumes in copper rather than in bulks. This is generally consistent with the growth strategies for RIO, BHP, GLEN and AAL. For the bulk commodities (iron ore and coal), we assume the companies keep volumes flat at 2020 levels even under our 2% growth scenario. Figure 33: Commodity market outlook to 2025 Figure 34: Copper historical demand trends '01-'16 2.8% CAGR '76-'16 2.5% CAGR Source: Company data BHPB FY16 results presentation Source: Wood Mackenzie, Credit Suisse research Global Mining 2020 Capex 14

15 Capex intensity assumptions: We discuss growth capital intensity in greater detail later in this report, but our high-level assumptions are outlined below. Figure 35: Project capex estimates $/t $/copper equivalent tonne Copper brownfield 14,000 14,000 Copper greenfield 18,000 18,000 Iron ore greenfield replacement 70 6,678 Source: Company data, Credit Suisse estimates Note: for copper equivalent tonnes we convert iron ore capex/t into copper capex/t using 10- year average prices Future inflation and currency movements will also be large swing factors but we have excluded these from our analysis. Global Mining 2020 Capex 15

16 Company highlights We provide more detailed company sections later in this report. Below are the key highlights for each company. RIO: Looks well positioned RIO entered the 2015/16 downturn with the strongest balance sheet and, as a result, was not required to cut capex as aggressively as peers and was the only company to approve major projects in RIO is aiming to sustain volume growth at over >2% pa in copper equivalent production output from We expect group volumes to expand by close to this 2% target in E based on approved project growth within iron ore (Pilbara expansion up to 360mtpa from 328mtpa in 2016), grade recovery at the Escondida copper mine and Amrun (bauxite). To keep group volumes flat post 2020, we estimate the company would need to spend ~$4.5bn pa. This is below 2017/18/19 guidance of ~$ bn. To grow volumes at 2% pa from 2020E, and assuming that incremental volume growth is primarily in copper rather than in iron ore, would mean that group capex could increase to over $6bn. Figure 36: RIO capex E and 2020E normalized capex Figure 37: 2016 EBITDA split 9,000 8,000 7,000 6,000 5,000 4, E normalized capex to grow production by 2%pa 2020E normalized capex to offset production decline Diamonds 2% Copper 8% Energy 6% Minerals 6% 3,000 2,000 1, E 2018E 2020E 2020E Aluminium 18% Iron Ore 60% Iron Ore Aluminium Copper & Diamonds Energy & Minerals Source: Company data, Credit Suisse estimates, Capex for product group total and excludes other operations Source: Company data GLEN: Latent capacity advantage GLEN's main advantage over its peers is its latent capacity growth potential over the next three years; assuming suspended volumes return across the major divisions by 2019/20, group volumes could expand by 3% pa over E at very low incremental capex and we expect these projects to be prioritised over other brownfield/greenfield projects. This would mean group capex should remain contained in the $ bn range for the next 2-3 years. We assume sustaining capex increases gradually above current guidance of ~$3bn to reflect the return of suspended zinc volumes. From 2020E, assuming all suspended volumes return, grade decline within the base metals business and mine depletion within the export coal business would likely lead to an annual production decline of over 3% pa. We also assume here that the company only Global Mining 2020 Capex 16

17 spends sustaining capex and does not approve any fresh growth projects. To keep group volumes flat post 2020, we estimate the company would need to spend ~$4.5bn pa. To grow volumes at 2% pa from 2020E, and assuming that incremental volume growth is primarily in copper rather than in coal, would mean that group capex could climb to ~$6bn. Glencore has shown a clear preference for M&A over greenfield projects and therefore acquisitions could be an alternative to increased capex. Figure 38: GLEN capex E and 2020E normalized capex Figure 39: 2016 EBITDA split 10,000 9,000 8,000 7,000 6, E normalized capex to grow production by 2%pa 2020E normalized capex to offset production decline Marketing 29% Cu 31% 5,000 4,000 3,000 2,000 1, E 2018E 2020E 2020E Copper Alloys/Iron ore Nickel/Ali Zinc Coal Oil Ag Agri 1% Oil 1% Coal 13% Alloys 4% Ni 4% Zn 18% Source: Company data, Credit Suisse estimates, segmental capex before JV adjustments Source: Company data BHP: Rising capex requirements The company has disposed of assets in recent years (mainly through the South 32 spinout in 2015), reducing the company's sustaining capex requirements, and of the majors BHP has the lowest level of sustaining capex based on company guidance of $1.4bn pa (excluding oil). This may mean a more aggressive definition than peers, but BHP has slimmed down its mining portfolio and reduced some of the more capex-intensive elements. However, the company's oil exposure is a key difference from peers; volumes for the petroleum business have been declining since 2014 and reserve life is short, meaning an increase in spend would be required to keep volumes stable. Latent capacity growth options should keep group volumes expanding out to 2019, but from 2020, without significant new project approvals, group volumes will begin to decline. Based on our review of BHP's major divisions, we estimate that mining volumes will decline at an average rate of ~3% pa out to 2030 assuming no capex is sunk beyond sustaining capex. For the oil division, we assume a decline rate (excluding any replacement/growth capex) of over 10%. To keep group volumes flat post 2020, we estimate the company would need to spend in the region of ~$ bn pa. To grow volumes at 2% pa from 2020E, and assuming that incremental volume growth is primarily in copper rather than in iron ore, coal or oil, would mean that group capex could climb to ~$9bn assuming copper capex intensity of $16,000/t. Global Mining 2020 Capex 17

18 Figure 40: BHP capex E and 2020E normalized capex Figure 41: FY17E EBITDA split 16,000 14,000 12,000 10, E normalized capex to grow production by 2%pa 2020E normalized capex to offset production decline Metallurgical Coal 20% Energy Coal 2% Petroleum 17% 8,000 6,000 4,000 2,000 Base Metals 17% E 2018E 2020E 2020E Petroleum Base metals Iron ore Met Coal Iron Ore 44% Energy Coal Stainless Other Source: Company data, Credit Suisse estimates, CY basis Source: Credit Suisse estimates Anglo: Spending below sustaining capex Anglo should deliver solid volume growth in 2017 and 2018 as two major projects Minas Rio (iron ore) and Grosvenor (coking coal) ramp up to full capacity and De Beers production volumes recover from the aggressive cuts made in 2015/16. The company is also mid-way through a restructuring and divestment plan, which suggests that the shape of the business could continue to change (and shrink) over the coming years. Figure 42: AAL capex E and 2020E normalized capex Figure 43: 2016 EBITDA split 7,000 6,000 5,000 4,000 3, E normalized capex to grow production by 2%pa 2020E normalized capex to offset production decline Other Mining & Ind. 2% Diamonds 23% AAL Copper 14% Nickel 1% Platinum 9% 2,000 1,000 Thermal coal 10% E 2020E Copper Nickel Platinum Iron ore & Mn Met coal Thermal coal Other Mining & Ind. Diamonds Met coal 16% Iron ore 25% Source: Company data, Credit Suisse estimates, Capex excludes cash outflows from derivatives related to capex, proceeds from PPE and funding received from non-controlling interests. Source: Company data Global Mining 2020 Capex 18

19 From 2019, group volumes will likely begin to decline. From 2020, we estimate group volumes will decline at a rate of up to 3% pa assuming no capex is sunk beyond sustaining capex (of ~$2.5bn). The decline relates mainly to falling grades in copper (after a guided increase in 2018), several coal mines closing and a number of mine closures across platinum and diamonds. Anglo is the only company guiding 2017 total capex to be at a level similar to guided sustaining capex of ~$2.5bn; therefore capex could increase significantly if the company aims to grow volumes longer term. To keep group volumes flat post 2020, we estimate the company would need to spend ~$3.5bn pa, which assumes $2.5bn sustaining capex. To grow volumes at 2% pa from 2020, and assuming incremental volume growth is primarily in copper rather than in iron ore, would mean that group capex could climb to ~$4.5bn based on copper capex intensity of $16,000/t. Vale: Capex on a downward path Vale has lagged behind its major iron ore peers in terms of iron ore volume growth over the past five years with the big three Australian producers gaining market share relative to Vale. However, over the next 3-4 years, the company should deliver peer-leading iron ore volume growth as its major S11D project ramps up to full capacity. The start-up of the S11D project should also contribute to Vale's capex and cost reduction. Vale has been targeting production at Mt in 2018 and Mt in 2019, upon conclusion of the project. We expect a E CAGR for iron ore sales of ~4%. Vale is the only company guiding 2017 capex to below 2016 levels and the company expects capex to continue to decline out to Figure 44: VALE capex E and 2020E normalized capex Figure 45: 2017E EBITDA split 14,000 12,000 10, E normalized capex to grow production by 2%pa Fertilisers 0% Base Metals 12% Coal 3% Others 1% 8,000 6, E normalized capex to offset production decline 4,000 2, E 2018E 2020E 2020E Ferrous Products 84% Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates From 2020, due to the company's recent expansions, the annual volume decline in the iron ore business should be low compared with peers, for the iron ore business at least. In 2020 we forecast $3.6bn in capex but within this analysis we assume ~$4bn group capex from 2020E as a normalised level to keep volumes stable. To grow volumes at 2% pa from 2020E, and assuming that incremental volume growth is primarily in copper, would mean that group capex could climb to $ bn based on copper capex intensity of $16,000/t. This is a large increase given the sheer size of Vale. However, unlike the peer group, Vale does not have a strategic aim to expand copper volumes and is centred on iron ore in Brazil. As such, the company is likely to take more of a value approach to future investment and growth decisions, based on the strength of iron ore prices over the medium-to-long term. Global Mining 2020 Capex 19

20 Teck Between 2012 and 2015, copper-equivalent volumes declined at 3% per annum as Teck scaled back on spending, and focused primarily on Fort Hills. Copper-equivalent volumes grew in 2016, mainly at Teck's coal business capitalising on the rally in coking coal prices. Construction completion and first oil at Fort Hills is expected in late-2017, and excluding a project sanction at QBII (mid-2018 at the earliest assuming receipt of permits), we estimate Teck's production (on a Cu-equivalent basis) will be broadly flat (-0.4%) over From 2020E, and absent a sanctioning decision at QBII, we estimate production will decline at an average 2% per annum through to To maintain total production volumes (on a Cu-equivalent basis) flat post-2020, we estimate Teck would require total capital investments of ~C$2.0bn per annum, ~8% above 2016 levels. To grow volumes at an average 2% pa from 2020E, and assuming incremental volume growth is primarily in copper, we estimate capex would need to increase to C$2.5bn (~34% above 2016 levels) pa. Assuming a successful permitting process and sanctioning of QBII, the incremental copper production (of 182Kt per year attributable to Teck) should offset the production decline at a project cost of ~C$4.5bn. Figure 46: Teck capex E and 2020E normalized capex (C$m) Figure 47: 2016 EBITDA split 3,000 2,500 2, E normalized capex to grow production by 2%pa 2020E normalized capex to offset production decline Zinc 26% 1,500 1, Copper 21% Coking Coal 53% E 2018E 2020E 2020E Copper Coking coal Zinc Energy Other Source: Company data, Credit Suisse estimates Source: Company data Global Mining 2020 Capex 20

21 Growth capex outlook To estimate growth capex requirements for each company, we have looked at two areas: 1. Estimated annual production decline post 2020 assuming no capex is sunk beyond sustaining capex. This then allows us to estimate how much total production the companies need to add to both offset mine depletion and grow group volumes. We detail the assumptions in the company sections later in this report. 2. Capital intensity (US$ per unit of production) for future greenfield and brownfield projects. We have focused this analysis on copper and iron ore, which account for a majority of earnings for the diversified miners. In the BHP section, we have assessed future capex requirements for the oil/gas division. Growth capex for the industry has reduced sharply over the past 4-5 years from a peak of ~$56bn for the six diversified miners to a 2016 level of just over $10bn; this is similar to the amount spent in 2005 despite industry production volumes climbing by over 50% over that period. Figure 48: Copper industry expansionary capital spent in each year / tonne production Figure 49: Large cap growth capex ,500 60,000 2,000 50,000 40,000 1,500 30,000 1,000 20, , BLT RIO GLEN AAL VALE TECK Source: Wood Mackenzie, Credit Suisse research Source: Company data, CY basis Capex intensity is structurally lower but by how much? In the period, project capex figures were provided readily by the large caps as each wanted to highlight its future options and growth potential. However, in recent years there have been very limited project approvals and updated capex estimates; and the FX and cost environment is very different now from that in BHP stated recently that capex intensity is down by over 40% from 2012 levels, consistent with the level of unit cost deflation we have seen in the bulk commodities. The CEO of Antofagasta stated recently that he believed construction costs in Chile had fallen 10-15%, although the company had left capex estimates for its Centinela Concentrates project unchanged from the guidance given in Global Mining 2020 Capex 21

22 Figure 50: US$ strength Figure 51: Spot vs average % decline 12,200 10,200 8,200 6,200 4,200 2, Brent ZAR CLP AUD Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 Feb-17 HRC Copper US Trade weighted Index -50% -40% -30% -20% -10% 0% Source: Thomson Reuters Source: Thomson Reuters Below we outline our capex intensity figures used for our future capex projections for the large cap miners: Figure 52: Project capex estimates $/t $/copper equivalent tonne Copper brownfield 14,000 14,000 Copper greenfield 18,000 18,000 Iron ore greenfield replacement 70 6,300 Source: Company data, Credit Suisse estimates; Note: for copper equivalent tonnes we convert iron ore capex/t into copper capex/t using 10- year average prices Copper: For future copper growth, we assume average capex intensity of $16,000/t, which is a simple average of our greenfield and brownfield estimates. We estimate copper project capex intensity will range from $14,000/t for brownfield projects to $18,000/t for greenfield projects. This is below peak capital intensity seen in recent years of over $20,000/t, but we assume ~15% deflation for future projects compared with those commissioned in the period. Iron ore: Capex deflation in iron ore has been sharper than in copper. We assume future greenfield replacement capex of $70/t. Pure greenfield projects (involving entirely new infrastructure) would be much higher, but we assume no large greenfield expansions are approved in our capex projections with companies far more likely to focus on brownfield and greenfield replacement projects, which leverage off existing infrastructure. Global Mining 2020 Capex 22

23 Copper capex intensity When looking at capex intensity, we can look at it on a per tonne of copper produced or on a copper equivalent basis, which includes the benefits of by-products. As we show below, including the by-products can significantly reduce the capex per tonne (~30% based on historical average data). Figure 53: Average copper capex intensity over time (real basis) $/t copper equivalent $/t copper 1970-present 2012-present 1970-present 2012-present Copper greenfield 8,768 15,635 14,810 23,760 Copper brownfield 7,355 8,556 11,078 12,238 Source: Wood Mackenzie; Note: for copper equivalent tonnes we convert iron ore capex/t into copper capex/t using 10-year average prices In copper, capital intensity escalated for projects commissioning in the period with capex relating to these projects sunk during the peak period. The greenfield projects commissioning , based on Wood Mackenzie data, show capex intensity remaining at a similar level of ~$22,000/t. However, these estimates are based largely on announced capital figures that, in some cases, have not been updated for several years. We therefore assume 15-20% capex deflation in arriving at our greenfield assumption of $18,000/t. Figure 54: Capex intensity for greenfield mines commissioning in respective year ($/t annual copper production) weighted average Figure 55: Capex intensity for brownfield mines commissioning in respective year ($/t annual copper production) weighted average 30,000 30,000 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5, Greenfield ($/t copper) Brownfield ($/t copper) Source: Wood Mackenzie Source: Wood Mackenzie Global Mining 2020 Capex 23

24 Below, we illustrate the brownfield and greenfield projects over history and the possible projects ahead using data provided by WoodMackenzie. Looking forward, the data below highlight the wide range in capex intensity depending on the particular project. Figure 56: Historical project capital intensity ($/t) includes probable and possible projects excluding SxEw Figure 57: Future project capital intensity ($/t) includes probable and possible projects excluding SxEw Source: Wood Mackenzie Source: Wood Mackenzie Greenfield copper projects As the name suggests, greenfield projects involve building an entire operation mine from the mine to the processing facilities and often also transport infrastructure (road, rail and port). As an example of a 'pure' greenfield project, KAZ Minerals is in the process of bringing on two new greenfield projects that, while some capex reductions were achieved, are still both costing over $20,000/t to build. Other projects such as ANTO's Centinela Concentrator and BHP's Spence are classified as greenfield and involve building entirely new processing facilities but can, to a certain extent, leverage off existing infrastructure. Antofagasta's Centinela project, albeit located adjacent to ANTO's existing Centinela operations, involves the building of a brand new mine and concentrator. Taking 2013 capex guidance of ~$2.7bn and applying 15% deflation would point to a current capital cost of ~$2.3bn. We assume an average for greenfield projects going forward of $18,000/t. Figure 58: Greenfield projects summary Region Company Status Commissioning Copper (kt) Project capex ($m) Capex intensity Sentinel Zambia First Quantum Ramping up ,439 10,425 Bozshakol Kazakhstan KAZ Minerals Ramping up ,150 21,500 Aktogay Kazakhstan KAZ Minerals Ramping up ,100 22,105 Cobre Panama Panama First Quantum Construction ,480 19,712 Quebrada Blanca II Chile Teck Resources Possible ,700 19,748 Rosemont USA HudBay Minerals Possible ,700 15,408 Centinela concentrator Chile Antofagasta Unapproved ,295 16,393 Source: Wood Mackenzie, Company data, Credit Suisse research; Note: For Boshakol and Aktogay we use guided 10 year average production. We assume 15% cost deflation from company guided for Centinela ($/t) Global Mining 2020 Capex 24

25 Figure 59: Brownfield project summary Brownfield copper projects Brownfield projects are often a combination of production replacement and incremental growth volumes. As is common in a copper mine plan, grades will decline over time, meaning that without increased processing capacity, copper production levels will decline. There have been several recent examples of brownfield projects that have been developed to increase throughput and offset the impact of grade decline (e.g. Escondida, which spent over $4bn to increase production by ~200kt at a cost just over $20,000/t). Brownfield projects can vary widely in capex intensity depending on the scope of the project and the ability to leverage off existing infrastructure. For example, extensions to current mines where new ore can be processed through the current processing and tailings capacity are much less expensive and can bring new production on below $10,000/t; for example, Boliden is installing new grinding capacity that will allow it to take throughput from 36mtpa to 45mtpa and increase production by close to 20kt on our estimates (copper equivalent) at a cost of ~$70m equivalent to less than $5,000/t. Larger expansions, however, that require the expansion of mines, processing facilities and infrastructure are more costly and can be closer to greenfield capex intensity. For example, the Los Pelambres project requires new grinding capacity but also a desalination plant and a new tailings facility, and is guided to cost ~$17,000/t. BHP's Spence project will require a new concentrator as well as a desalination plant and is guided to cost $2.2bn and add 170kt of annual copper production (first 10-year average). The company reduced the budget from the original $3.2bn guidance by deciding to outsource the desalination rather than building its own plant. Brownfield projects will see significant variation but we assume an average capital cost of $14,000/t. Region Company Commissioning Copper (kt) Project capex ($m) Capex intensity Aitik (grinding) Sweden Boliden Approved ,667 Oyu Tolgoi Expansion Mongolia Rio Tinto Approved ,100 13,077 Los Pelambres Chile Antofagasta Unapproved ,600 16,842 Spence Chile BHP Billiton Unapproved ,200 12,941 Source: Wood Mackenzie, Company data, Credit Suisse research; Note: Aitik $66m capex is based on company guidance of SEK600m. Iron ore capex intensity In iron ore, the trend has been similar to copper not only due to the fall in input costs and currencies, but also the abandonment of high-intensity projects. According to Wood Mackenzie, over the past 10 years, 70% of completed projects have been greenfield. This greenfield focus is true for Rio Tinto, which invested in significant infrastructure to bring on the 290Mt at a cost of $9.8bn or ~$160/t followed by Phase II to 360Mt at $5.9bn or $100/t. Kumba's Kolomela mine has been ramping up since 2011 and cost R8.5bn for 12mt of production or ~$90/t (assuming a ZAR of 8). Anglo American's Minas Rio project is an example of how costs can overrun with the total cost of almost $8.5bn delivering just 26mtpa at full capacity, equivalent to over $300/t. ($/t) Global Mining 2020 Capex 25

26 Figure 60: Capex intensity for mines commissioning in respective year ($/tonne) weighted average Figure 61: Project capital intensity Greenfield Brownfield Number of greenfield projects Number of brownfield projects Source: Wood Mackenzie Source: Wood Mackenzie Greenfield: Pure greenfield projects involve building both the mine and all required infrastructure. Projects delivered during the period came at capital costs in excess of $150/t and in some cases far higher. However, we assume no 'pure' greenfield projects are approved over the next 5-7 years given expected supply growth and likely preference for replacement and expansion projects. Greenfield replacement: These sit between pure greenfield and brownfield projects and can partly leverage off existing infrastructure. For example, RIO's Koodaideri mine, which is guided to cost ~$60/t to build and will involve building a new mine, processing facilities and rail link but will use the existing rail and port infrastructure. Brownfield replacement: Brownfield projects are the lowest in capex intensity and can be built within the capacity of existing processing and transport capacity. For example, at RIO's Silvergrass mine where the ore can be processed through the company's existing processing plant at Nammuldi. The company is guiding the development costs for the mine to be $29/t. RIO believes that other brownfield replacement capital spend within its iron ore business will range from $5/t to 20/t over the next two years and this has been factored into the group capex guidance to Figure 62: Low-cost brownfield mine expansions Pilbara mine capital intensity US$/t installed Figure 63: Pilbara mine development options US$/t Installed capital intensity Source: Company data; Note: RIO presentation Source: Company data; Note: RIO presentation Global Mining 2020 Capex 26

27 Figure 64: Diversified miners sustaining capex (US$m) Sustaining capex outlook: Potential upside pressure over the long term Each company defines and reports sustaining capex in a slightly different way, but, in broad terms, sustaining capex includes all capital expenditure to ensure the integrity of a company's operations is maintained through regular expenditure on maintenance, equipment, fleet replacement and necessary mine development. Sustaining capex does not include replacement or growth capex including capital required to offset natural production decline (e.g. new mines to replace older mines or additional processing capacity to offset grade decline). Deferred stripping is generally included within sustaining capex guidance from each of the large cap miners. On our analysis, sustaining capex could climb by 15-20% from Sustaining capex in total terms has fallen far more aggressively than operating costs over the past 4-5 years. Intuitively this makes sense; companies have a lot more flexibility to defer capital costs than operating costs. Below we illustrate the evolution of sustaining capex since 2010 for the large cap miners. From the peak in 2012, sustaining capex fell by more than 40% from $20.4bn in 2012 to $11.3bn in This is consistent with industry-wide data, which we discuss later in this section. The data show that copper and iron ore industry sustaining capex has fallen by over 40% since Sustaining capex summary E BHP Billiton (FY basis) 1,703 2,244 3,643 3,565 2,863 2,000 2,000 1,400 Rio Tinto 2,000 3,500 4,500 2,800 2,700 2,100 1,700 2,100 Glencore - 3,348 3,820 3,474 3,481 3,208 2,700 3,000 Anglo American 1,700 2,400 3,074 3,003 2,841 2,124 2,000 2,500 Teck ,352 1, Vale 3,330 4,568 4,616 4,585 4,059 2,853 2,326 2,500 Total 16,586 20,362 18,779 17,023 13,128 11,305 12,379 Sustaining as a % of sales BHP Billiton (FY basis) 4% 4% 6% 7% 5% 6% 8% 4% Rio Tinto 4% 6% 9% 5% 6% 6% 5% 5% Glencore 7% 8% 7% 8% 9% 8% 7% Anglo American 6% 8% 11% 10% 10% 10% 9% 11% Teck 3% 5% 7% 15% 14% 13% 8% 9% Vale 7% 8% 10% 10% 11% 11% 8% 8% Total 6.1% 8.4% 8.0% 7.8% 8.4% 7.5% 6.8% Source: Company data, Credit Suisse estimates; Note: When calculating sustaining capex as a percentage of sales we exclude Glencore marketing revenues and for BHP we exclude oil. Sustaining capex company guidance: BHP Billiton: BHP reported sustaining capex up until 2014, but stopped thereafter. The company does provide forward group-level guidance for sustaining capex, which includes capitalised stripping but excludes any exploration capex (guided to ~$800m with the majority relating to the Petroleum division). At the recent results, the company revised its definition of sustaining capex and reduced FY17 guidance from $2.0bn to $1.4bn. BHP's definition of sustaining capex (referred to the company as maintenance capital) includes non-discretionary spend on "deferred development and production stripping; risk reduction, compliance and asset integrity". Rio Tinto: The company has stated its sustaining capex through (to the nearest $100m). Before 2013 we have estimated the group maintenance spend from company charts. The company has guided that sustaining capex should remain at ~$ bn pa for the next three years. This does not include Pilbara replacement capex. Global Mining 2020 Capex 27

28 Anglo American: Anglo American has reported group sustaining capex since 2012 and for 2010/11 gave this sustaining number (to the nearest $100m). Reported numbers and guidance include capitalised stripping and from 2012 changes in accounting practice led to an increase in capitalised stripping (and a corresponding reduction in cost of sales) of ~$ m. The company is guiding mid- to long-term sustaining capex at ~$2.5bn for the group. Glencore: Glencore reports sustaining capex on a divisional basis and we have shown the total above. The company has guided industrial capex to remain at ~$4bn for the next 3-5 years, of which sustaining will account for ~$3bn, up from a reported $2.7bn in This sustaining capex does not include capex for suspended zinc volumes, which we expect to be back on stream fully by 2019/20. Teck: Teck reports sustaining capex and capitalised stripping, which are both included in the numbers above. The jump in capex in 2013 is due to the inclusion of capitalised stripping previously accounted for in operating costs. For 2017, the company has guided to C$530m of sustaining capex and C$630m in capitalised stripping. We have converted the numbers to US$ at the average yearly exchange rate. Vale: Management has guided capex to 2021 and expects sustaining capex to fall from $2.5bn to $2.3bn. Copper sustaining capex has fallen 10-20% more than opex indicating upside risk over the long term Industry cash operating costs in US$ terms have fallen sharply over the past five years driven by weaker currencies, loose supply chains and lower input costs. However, sustaining capex per unit of production has fallen much more steeply than operating costs. Comparing unit costs with sustaining capex in the copper industry shows that sustaining capex has fallen 10-25% more than operating costs using 2010 or 2011 as the starting point. Figure 65: Copper cash operating costs vs sustaining capex from 2011 (unit of copper production basis) Figure 66: Copper cash operating costs vs sustaining capex from 2010 (unit of copper production basis) th % cost (net) 50th % cost (gross) Sustaining capex 50th % cost (net) 50th % cost (gross) Sustaining capex Source: Wood Mackenzie, Credit Suisse research. Note: Sustaining capex excludes deferred stripping Source: Wood Mackenzie, Credit Suisse research. Note: Sustaining capex excludes deferred stripping The charts above exclude deferred stripping. The accounting treatment for deferred stripping changed in 2012/13, leading to a reduction in operating costs and increase in capex relating to mine development and deferred stripping. Global Mining 2020 Capex 28

29 Figure 67: Copper industry sustaining capex and capitalised stripping ($m) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Figure 68: Copper industry sustaining capex and capitalised stripping (unit of copper production basis) Sustaining Capital Deferred Capital Sustaining capex /t Deferred stripping /t Source: Wood Mackenzie, Credit Suisse research Source: Wood Mackenzie, Credit Suisse research Iron ore and coal sustaining capex cuts have been more extreme In iron ore and coal, the capex cuts have been more extreme reflecting the heavy downward pressure on prices and margins in Below we show the sustaining capex trends for two pure-play iron ore companies FMG and KIO. Kumba cut capex aggressively in 2015/2016 with sustaining capex (including deferred stripping) falling to $2.5/t, down from $13.5/t only two years prior in Company guidance is that sustaining capex should increase to $6-7/t over the mid-to-long term (we assume from 2020). FMG has guided 2017 sustaining capex to $2/t. After FY17 sustaining capex is expected to rise steadily to long-term levels of $3.0-$3.5/t. Using aggregated industry data, sustaining capex has fallen by ~50% from the 2012 peak. Figure 69: Kumba and FMG sustaining capex US$/t Figure 70: Iron ore industry sustaining capex US$/t Kumba sustaining FMG sustaining Sustaining capex/t Source: Company data, Credit Suisse estimates E Source: Company data, Credit Suisse estimates E Global Mining 2020 Capex 29

30 Figure 71: Commodity market outlook to 2025 Copper growth will increase capex intensity Across the European majors, copper is a clear priority in terms of potential growth. The consensus opinion is that supply is more constrained and the long-term demand outlook more attractive compared with earlier-cycle iron ore and coking coal. Copper capex intensity, at both the sustaining and growth level, is significantly higher than for iron ore. The primary reason sustaining capex (per unit of production) is higher for GLEN, AAL and Teck than for RIO, BHP and Vale is the higher exposure to base and precious metals. A concerted drive towards copper growth will therefore put upward pressure on group capex levels over the longer term. Figure 72: Copper supply will fall from 2020 without fresh investment 30,000 25,000 20,000 15,000 10,000 5, CS base case production Primary demand Highly probable projects Source: Company data BHPB FY16 results presentation Source: Wood Mackenzie, Credit Suisse estimates from 2017 onwards Figure 73: Project capex intensity ($/copper equivalent tonne) Below we show copper and iron ore capex per unit of production. As can be seen from the charts, sustaining and total capex intensity (per unit of production) is materially higher for copper than for iron ore. Figure 74: Sustaining capex / copper equivalent tonne 20, , , , , , , , , ,000 0 Copper greenfield Copper brownfield Iron ore greenfield replacement Copper Iron ore Source: Credit Suisse estimates; Note: for copper equivalent tonnes we convert iron ore capex/t into copper capex/t using 10-year average prices Source: Wood Mackenzie; Note: for copper equivalent tonnes we convert iron ore capex/t into copper capex/t using 10-year average prices Global Mining 2020 Capex 30

31 Europe/United Kingdom Diversified Metals & Mining Rating NEUTRAL [V] Price (01 Mar 17, p) Target price (p) Market Cap ( m) 18,369.4 Enterprise value ( m) 27,411.7 Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) Share price performance Research Analysts Liam Fitzpatrick liam.fitzpatrick@credit-suisse.com Michael Shillaker michael.shillaker@credit-suisse.com James Gurry james.gurry@credit-suisse.com Conor Rowley conor.rowley@credit-suisse.com The price relative chart measures performance against the FTSE ALL SHARE INDEX which closed at on 01/03/17 On 01/03/17 the spot exchange rate was.86/eu 1.- Eu.95/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Anglo American Plc (AAL.L) Sustaining capex is not sustainable Capex outlook: Anglo is the only of the large caps guiding 2017 total capex to be at a similar level to sustaining capex of ~US$2.5bn. From 2019, group volumes will likely begin to decline and from 2020, we estimate group volumes will decline at a rate of close to 3% pa assuming no capex is sunk beyond sustaining capex (of ~US$2.5bn). This will mean capex will need to rise materially if the company aims to maintain and/or grow volumes. To keep group volumes flat post 2020, we estimate the company would need to spend ~US$3.5bn pa (US$2.5bn sustaining). To grow volumes at 2% pa from 2020, and assuming that incremental volume growth is primarily in copper rather than iron ore, would mean that group capex could climb to US$4.5bn. Investment overview: At the recent FY16 results, management gave the latest iteration of the Anglo strategy which now envisages retaining most of the iron ore and coal businesses. The balance sheet is now more or less where it needs to be and we expect a dividend restart at the mid-year (six months ahead of guidance). However, as we outlined in our recent note (Anglo American Plc - Breaking up is hard to do) we see strategic merit in divesting a large part (if not all) of the SA businesses, including reduced EM exposure (higher multiple, lower perceived political risk), simpler corporate structure and greater concentration towards later cycle commodities. The tough question for management now is whether Anglo in its current form is sufficiently differentiated compared to its larger (and simpler) global peers. Catalysts and risks: Progress on divestments (Samancor, domestic coal in SA); Coking coal, iron ore, platinum and copper prices; Regulatory developments in South Africa. Valuation and earnings changes: We increase EBITDA estimates by 14%/4% in 2017/18 on our higher base case iron ore prices. We leave our TP unchanged at 14 but increase our dividend assumptions for 2017/18 (50% payout ratio assumed). Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Revenue (US$ m) 21, , , ,290.6 EBITDA (US$ m) 6, , , ,459.3 Pre-tax profit adjusted (US$ m) 4, , , , CS EPS (adj.) (US$) Prev. EPS (US$) ROIC (%) P/E (adj.) (x) P/E rel. (%) EV/EBITDA (x) Dividend (12/17E, US$) 1.20 Net debt/equity (12/17E,%) 19.6 Dividend yield (12/17E,%) 7.4 Net debt (12/17E, US$ m) 5,419.3 BV/share (12/17E, US$) 16.9 IC (12/17E, US$ m) 33,109.4 Free float (%) EV/IC (12/17E, (x) 1.0 Source: Company data, Thomson Reuters, Credit Suisse estimates Global Mining 2020 Capex 31

32 Anglo American Plc (AAL.L) Price (01 Mar 2017): p; Rating: NEUTRAL [V]; Target Price: p; Analyst: Liam Fitzpatrick Income statement (US$ m) 12/16A 12/17E 12/18E 12/19E Revenue 21,378 24,614 22,255 23,291 EBITDA 6,075 9,256 6,995 7,459 Depr. & amort. (2,309) (2,628) (2,753) (2,831) EBIT 3,766 6,628 4,242 4,629 Net interest exp. (229) (407) (259) (262) Associates PBT 4,724 6,664 4,344 4,730 Income taxes (698) (1,661) (1,025) (1,177) Profit after tax 4,026 5,003 3,319 3,552 Minorities (332) (832) (466) (520) Preferred dividends Associates & other (2,100) (685) (566) (569) Net profit 1,594 3,487 2,287 2,463 Other NPAT adjustments Reported net income 1,594 3,487 2,287 2,463 Cash flow (US$ m) 12/16A 12/17E 12/18E 12/19E EBIT 3,766 6,628 4,242 4,629 Net interest (229) (407) (259) (262) Cash taxes paid Change in working capital 1,863 (400) 0 (118) Other cash and non-cash items (1) 1,133 1,601 1,527 Cash flow from operations 5,399 6,954 5,584 5,776 CAPEX (2,418) (2,499) (2,553) (2,839) Free cashflow to the firm 4,112 3,875 2,477 2,366 Acquisitions Divestments Other investment/(outflows) 1, Cash flow from investments (525) (2,216) (2,415) (2,769) Net share issue/(repurchase) Dividends paid 0 (807) (1,287) (1,206) Issuance (retirement) of debt (4,519) (5,320) (3,000) 0 Cashflow from financing (5,780) (6,990) (4,979) (1,847) Changes in net cash/debt 4,423 3,068 1,190 1,160 Company Background Anglo American plc is a global mining company. Its portfolio of mining assets and natural resources includes platinum group metals and diamonds, with interests in copper, iron ore, metallurgical coal, nickel and thermal coal. Blue/Grey Sky Scenario Our Blue Sky Scenario (p) Our Blue Sky valuation of 18.0 assumes a full break-up / take-out valuation for the group. Net debt at start 12,910 8,487 5,419 4,230 Change in net debt (4,423) (3,068) (1,190) (1,160) Net debt at end 8,487 5,419 4,230 3,069 Balance sheet (US$ m) 12/16A 12/17E 12/18E 12/19E Assets Total current assets 12,449 10,197 8,386 9,776 Total assets 50,149 47,794 45,748 47,178 Liabilities Total current liabilities 6,525 6,125 6,125 6,236 Total liabilities 25,824 20,104 17,104 17,215 Total equity and liabilities 50,149 47,794 45,748 47,178 Per share 12/16A 12/17E 12/18E 12/19E No. of shares (wtd avg.) (mn) 1,300 1,300 1,300 1,300 CS EPS (adj.) (US$) Dividend (US$) Free cash flow per share (US$) Key ratios and valuation 12/16A 12/17E 12/18E 12/19E Growth/Margin (%) Sales growth (%) (9.6) 4.7 EBIT growth (%) (36.0) 9.1 Net income growth (%) (34.4) 7.7 EPS growth (%) (34.4) 7.7 EBITDA margin (%) EBIT margin (%) Pretax profit margin (%) Net income margin (%) Valuation 12/16A 12/17E 12/18E 12/19E EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Dividend yield (%) P/E (x) Credit ratios (%) 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) Net debt to EBITDA (x) Interest coverage ratio (x) Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates Our Grey Sky Scenario (p) Our Grey Sky valuation of 8 assumes ~$45/t iron ore and ~200c copper, but we do not assume a return to the extreme balance sheet stress as seen in late 2015/early Share price performance The price relative chart measures performance against the FTSE ALL SHARE INDEX which closed at on 01/03/17 On 01/03/17 the spot exchange rate was.86/eu 1.- Eu.95/US$1 Global Mining 2020 Capex 32

33 Growth & capex outlook We expect Anglo to deliver volume growth in 2017 and 2018 as two major projects Minas Rio (iron ore) and Grosvenor (coking coal) - ramp up to full capacity and De Beers production volumes recover from the aggressive cuts made in 2015/16. The company is also mid-way through a restructuring and divestment plan meaning the shape of the business could continue to change (and shrink) over the coming years. From 2019, group volumes will likely begin to decline. From 2020, we estimate group volumes will decline at a rate of <3% pa assuming no capex is sunk beyond sustaining capex (of ~$2.5bn). The decline relates mainly relate to falling grades in copper (after a guided increase in 2018), several coal mines closing and a few closures across platinum and diamonds, based on reported reserves. Figure 75: AAL Capex E and 2020E Normalized Capex 7,000 6,000 5, E normalized capex to grow production by 2%pa 2020E normalized capex to offset production decline 4,000 3,000 2,000 1, E 2020E Copper Nickel Platinum Iron ore & Mn Met coal Thermal coal Other Mining & Ind. Diamonds Source: Company data, Credit Suisse estimates, Capex excludes cash outflows from derivatives related to capex, proceeds from PPE and funding received from non-controlling interests. Anglo is the only company guiding 2017 total capex to be at a similar level to guided medium-long term sustaining capex of ~$2.5bn; therefore, capex could increase significantly from 2016/17 levels if the company aims to grow volumes longer term. To keep group volumes flat post 2020, we estimate the company would need to spend ~$3.5bn pa which assumes $2.5bn sustaining capex. To grow volumes at 2% pa from 2020, and assuming that incremental volume growth is primarily in copper rather than iron ore, would mean that group capex could climb to $4.5bn based on copper capex intensity of $16,000/t. Capex history and guidance Anglo capex peaked at ~$6bn pa and has been slower to decline than peers due to a lagging project growth profile and major delays at the Minas Rio iron ore project. Capex fell to $2.4bn in 2016 and is guided to remain at this level over the next two years. Anglo only reports and guides sustaining and growth capex at a group level and this includes minority interest capex but excludes capitalised operating cash flows. Sustaining capex, including deferred stripping, is guided at ~$2.5bn pa beyond Through sustaining capex guidance (including capitalised development) remained relatively steady at ~$3bn, but, in addition to weaker currencies and lower input costs, the Global Mining 2020 Capex 33

34 company has sold several smaller non-core businesses including the Phosphates/Niobium business to China Molybdenum Co. in 2016 for $1.5bn and cut capex heavily in the iron ore and coal businesses. Volume growth outlook Group volumes declined in 2016 due to operational issues and lower grades at Los Bronces, change in mine plan at Kumba, lower platinum production and also market-led reductions within the diamond division. We expect volumes to rebound in 2017 driven by increasing diamond volumes and increased volumes from Minas Rio as it continues to ramp up offset by lower platinum production following the sale of Rustenberg and Union in 2016/17. Higher copper grades, diamond volumes and Minas Rio should also keep volumes expanding into From 2019, we expect group volumes to begin to decline primarily due to lower grades at the two main copper mines and some coal mine closures. We also expect De Beers to be producing at close to full capacity by Figure 76: Group Production Volume E (pro forma excluding divestments) e 2018e 2019e 2020e Copper kt Nickel kt Thermal Export mt Coking Coal mt Platinum (own production) koz 1,989 1,943 1,773 1,773 1,324 1,837 1,688 1,348 1,197 1,197 1,197 Kumba mt Minas Rio mt Diamonds 000 crts Copper equivalant kt 3,017 2,939 3,015 3,207 3,202 3,308 3,223 3,248 3,294 3,362 3,311 YoY Growth % 8% -3% 3% 6% 0% 3% -3% 1% 1% 2% -2% Source: Company data, Credit Suisse estimates Key asset overview For Anglo, we have assessed the largest eight groups of mining assets as detailed below. Combined these accounted for over 80% of group EBITDA in The company discloses separate financials for its base metal mines and in iron ore (although we group Kumba as one asset in the chart below). On the other hand, there is no mine-by-mine earnings breakdown for the Australian met coal and South African thermal coal businesses. For De Beers, the company has recently provided country-by-country financials, but we assess the volume outlook for the business overall and we have taken a similar approach to platinum. Global Mining 2020 Capex 34

35 Figure 77: Anglo top 8 assets 2016 EBITDA 1,400 1,200 1, KIO Diamond mining Met coal Collahuasi Platinum South Africa thermal Los Bronces Minas Rio Source: Company data De Beers: Anglo owns an 85% stake in De Beers, the world's largest producer and distributor of rough diamonds with activities in mining, sorting, valuing and downstream sales. De Beers has a production capacity of mcts (on a 100% basis) from JVs and controlled mines. Production volumes are flexible and managed depending on end-demand. Sales volumes recovered strongly in 2016 sales volumes (mcts) to 32 mcts and we expect sales to trend up to 34 mcts by The majority of the production and reserves (~75%) comes from Debswana (on a 100% basis). The mines have varying lives ranging from 2018 to Taking reported mine reserve lives and the implied annual production (total reserves/years of life), we think that between 2020 and 2030 the large Orapa mine in Botswana and the smaller Voorspoed and Orange River mines in South Africa, could close. This would reduce production by ~11mcts from ~34mcts to 23mcts equivalent to ~4% annual decline assuming no changes to reserves. Kumba: Kumba is listed in South Africa and 70% owned by Anglo. KIO controls 74% of the underlying assets giving Anglo an attributable stake of 52%. There are two operating mines; Sishen has been in operation since 1953 and produced just over 28 mt in Kolomela began production in 2011 and produced just less than 13 mt. The two mines have reserve lives of 17 and 18 years, respectively, as reported by the company but management sees the potential to extend each to over 20 years through brownfield projects to exploit lower grade material. In 2016, the company announced it would reduce production at Sishen from 36mtpa to ~27mtpa but reduce the stripping requirements as well. Kumba cut capex aggressively in 2015/2016 with sustaining capex (including deferred stripping) falling to $2.5/t, down from $13.5/t only two years ago in Company guidance is that sustaining capex should increase to $6-7/t over the medium-long term (we assume from 2020). Out to 2030, production should remain relatively stable but decline soon thereafter as both mines reach the end of life. Collahuasi: Anglo owns 44% of Collahuasi with JV partner GLEN holding an identical stake. We discuss the asset in the Glencore section but we would expect a steady grade driven volume decline post 2020 without investment in additional processing capacity. Global Mining 2020 Capex 35

36 Los Bronces: Anglo controls 50.1% of Los Bronces and the mine has a long reserve life of ~25 years. Mining head grades fell through 2016 to average 0.67% vs a 2015 average of 0.92% and now sit slightly above reserve grade of 0.58% assuming a similar mining grade in 2020 to If we assume mine grades fall to reserve grade by 2030 and no investment in increased throughput capacity, copper production could fall by ~1%pa. Minas Rio: Minas Rio is an iron ore project in Brazil, 100% owned by Anglo that is currently ramping up production. The majority of the expansionary capex for the project is now sunk; however, the project experienced multiple delays that meant first production was over three years later than originally projected and total capex was ~$8.4bn, almost 3x the original budget. However, as a new mine with almost all of the capital sunk, Minas Rio has a long reserve life of ~45 years and could provide growth potential post The company has previously noted potential productivity improvements that could take production up from guidance to ~26 mt to 29 mt. Platinum: Anglo operates a number of platinum operations across South Africa. The portfolio has been slimmed down in recent years through mines curtailments and asset sales (most recently Rustenberg sold to Sibanye and Union sold to Siyanda Resources). The company both mines its own material and processes third party. Mogalakwena remains the company's flagship asset and primary earnings contributor. The mine is the largest producer, lowest in cost and has a mine life of over 100 years. In 2017, we expect Anglo to produce total platinum of ~2.4Moz and own-mined production of ~1.4Moz. In 2019, the Rustenberg material will be processed on a tolling arrangement and therefore reported production volumes are expected to fall to ~2.1mt and own production will fall to ~1.2Moz following the sale completion at Union. In the 10 years after 2020, according to reserve lives, Tumela (100% owned) and the company's JVs Kroondal and Mototolo will reach the end of life. These closures could lower own production from ~1.2Moz to ~0.9Moz, an annual decline rate of ~3%. Met coal: The company has various met coal mines across Australia with varying ownerships levels and reserve bases ranging from 13 years (Dawson) up to almost 30 years (Grosvenor). The Met coal division, as reported by the company, also produces some thermal coal from Dawson and Drayton. Anglo also has two met coal operations in Canada, namely Trend and Roman Mountain, however these were not producing in 2016 and we have left these out of our future scenarios. Met coal volume (including PCI) reached 20.9 mt in 2016 and is guided to 20-22mt in 2019 with the ramp up of Grosvenor (5 mtpa at full capacity started production in 2016) offsetting the impact of the sale of Foxleigh in Between 2020 to 2030, Dawson and Capcoal U/G have been guided to reach end of life which would mean a reduction of ~6mt of coking coal and ~1.5mt of thermal coal. This equates to ~4% annual decline in met coal volumes. South Africa & Colombia coal: Anglo's thermal coal assets are spread predominantly across South Africa but also include the company's 33.3% stake in Cerrejon in Colombia. Export production in 2016 was~30mt and has been guided to remain at this level for the remainder of the decade (29-31mt). The life of the mines ranges from 7 years (Landau) to over ~20 years (Zibulo) and have a weighted average reserve life of ~16 years; however, many of the assets have much larger resources bases. Looking just at mines producing coal for the export market, those with guided end of lives between 2020 and 2030 include Goedehoop, Greenside, Kleinkopje and Landau with an implied annual production of a little over 8mt. This would mean an annual decline of ~3%; however, we do note these mines have significant resource bases. Global Mining 2020 Capex 36

37 Asia Pacific/Australia Diversified Metals & Mining Rating NEUTRAL [V] Price (01 Mar 17, p) Target price (p) Market Cap ( m) 78,458.7 Enterprise value ( m) 90,015.4 Primary RIC BHP.AX Price (01 Mar 17, A$) Target price (A$) Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) Share price performance Research Analysts Paul McTaggart paul.mctaggart@credit-suisse.com James Gurry james.gurry@credit-suisse.com Liam Fitzpatrick liam.fitzpatrick@credit-suisse.com Conor Rowley conor.rowley@credit-suisse.com The price relative chart measures performance against the FTSE ALL SHARE INDEX which closed at on 01/03/17 On 01/03/17 the spot exchange rate was.86/eu 1.- Eu.95/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) BHP Billiton (BLT.L) Rising capex requirements on a 2-3 year horizon Event: We increase BHP EBITDA by 8%, 9% and 3% over the 3 years FY17- FY19 on our higher base case iron ore prices. However, in this analysis, we also note the rising capex profile we expect at BHP as it considers the next round of project approvals including the next Phase at Escondida, Olympic Dam growth to 450kt/yr, iron ore replacement mines near 2020 and the Jansen potash project as shaft development approaches completion. This is even before considering the oil business where volumes are declining and investment increasing, with extremely high levels of exploration spend at ~US$800m/yr. We do not see BHP in a position to make significant shareholder returns but expect it to stick to its dividend policy of 50% of EPS plus additional returns as can be afforded. Investment overview: Oil is the differentiator and we would be more negative on BHP except for our view on oil prices is for upside risk. The shale operations were FCF positive for the first time in the Dec-2016 half year. Catalysts and risks: Oil and iron ore prices are key risks and potential catalysts and we see divergent expectations - positive for the former and negative for the latter - on a 12-month view. We expect the Spence copper project US$2.2bn to be approved in coming months. Thereafter, we highlight a series of project approval considerations for BHP over the coming 2-3 years. Valuation: BHP trades on c.9x FY17E PE and 4.4x EBITDA. This is not demanding but lacks the clear value and shareholder return case we see in its major rivals. Financial and valuation metrics Year 6/16A 6/17E 6/18E 6/19E Revenue (US$ m) 30, , , ,619.0 EBITDA (US$ m) 12, , , ,918.3 Pre-tax profit adjusted (US$ m) 2, , , , CS EPS (adj.) (US$) Prev. EPS (US$) ROIC (%) P/E (adj.) (x) P/E rel. (%) EV/EBITDA (x) Dividend (06/17E, US$) 1.01 Net debt/equity (06/17E,%) 21.6 Dividend yield (06/17E,%) 6.1 Net debt (06/17E, US$ m) 14,392.9 BV/share (06/17E, US$) 11.4 IC (06/17E, US$ m) 81,036.9 Free float (%) 99.5 EV/IC (06/17E, (x) 1.4 Source: Company data, Thomson Reuters, Credit Suisse estimates Global Mining 2020 Capex 37

38 BHP Billiton (BLT.L) Price (01 Mar 2017): p; Rating: NEUTRAL [V]; Target Price: p; Analyst: Paul McTaggart Income statement (US$ m) 6/16A 6/17E 6/18E 6/19E Revenue 30,912 43,611 40,417 36,619 EBITDA 12,340 25,017 22,054 17,918 Depr. & amort. (8,871) (7,803) (7,596) (6,861) EBIT 3,469 17,214 14,458 11,057 Net interest exp. (1,024) (913) (706) (636) Associates PBT 2,445 16,300 13,752 10,421 Income taxes 1,052 (5,927) (4,401) (3,335) Profit after tax 1,444 10,423 9,352 7,086 Minorities (178) (706) (634) (298) Preferred dividends Associates & other Net profit 1,266 9,717 8,718 6,788 Other NPAT adjustments (7,651) (40) 0 0 Reported net income (6,385) 9,677 8,718 6,788 Cash flow (US$ m) 6/16A 6/17E 6/18E 6/19E EBIT 3,469 17,214 14,458 11,057 Net interest (702) (457) 0 0 Cash taxes paid (2,286) (3,682) (3,000) (2,273) Change in working capital Other cash and non-cash items 10,144 5,412 5,543 5,464 Cash flow from operations 10,625 18,487 17,001 14,248 CAPEX (7,022) (4,600) (5,400) (6,547) Free cashflow to the firm 9,835 17,491 15,023 11,202 Acquisitions (237) (243) (150) (150) Divestments Other investment/(outflows) (259) (707) (900) (784) Cash flow from investments (7,245) (4,869) (6,450) (7,481) Net share issue/(repurchase) (3,000) Dividends paid (4,217) (3,227) (5,556) (4,002) Issuance (retirement) of debt 4,451 (1,000) 0 1,000 Cashflow from financing 284 (4,303) (5,556) (6,002) Changes in net cash/debt (1,685) 11,709 4,996 (234) Net debt at start 24,417 26,102 14,393 9,397 Change in net debt 1,685 (11,709) (4,996) 234 Net debt at end 26,102 14,393 9,397 9,632 Balance sheet (US$ m) 6/16A 6/17E 6/18E 6/19E Assets Total current assets 17,714 27,165 32,161 32,926 Total assets 118, , , ,402 Liabilities Total current liabilities 12,340 11,999 11,999 11,999 Total liabilities 58,882 57,110 57,110 58,110 Total equity and liabilities 118, , , ,402 Per share 6/16A 6/17E 6/18E 6/19E No. of shares (wtd avg.) (mn) 5,322 5,362 5,362 5,278 CS EPS (adj.) (US$) Dividend (US$) Free cash flow per share (US$) Key ratios and valuation 6/16A 6/17E 6/18E 6/19E Growth/Margin (%) Sales growth (%) (30.7) 41.1 (7.3) (9.4) EBIT growth (%) (70.8) (16.0) (23.5) Net income growth (%) (80.1) (10.3) (22.1) EPS growth (%) (80.1) (10.3) (20.9) EBITDA margin (%) EBIT margin (%) Pretax profit margin (%) Net income margin (%) Valuation 6/16A 6/17E 6/18E 6/19E EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Dividend yield (%) P/E (x) Credit ratios (%) 6/16A 6/17E 6/18E 6/19E Net debt/equity (%) Net debt to EBITDA (x) Interest coverage ratio (x) Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates Company Background BHP Billiton Limited is a diversified natural resources company. It operates nine units: petroleum, aluminium, base metals (incl. uranium), diamonds and specialty products, stainless steel materials, iron ore, manganese, metallurgical & energy coal. Blue/Grey Sky Scenario Our Blue Sky Scenario (p) China reverses its declining steel demand trend and stimulates the economy significantly, resulting in much tighter iron ore markets and prices in the $85/t range, while oil and copper markets also tighten on higher China demand resulting in a valuation of GBp2000/shr. Our Grey Sky Scenario (p) China steel demand declines significantly as the economy slows and urbanisation rate declines. While still generating positive bottom of the cycle earnings, we think iron ore could trade as low as $35/tonne, petroleum and copper prices also fall to $30/bbl and $1.75/lb resulting in a valuation of GBp400/shr. Share price performance The price relative chart measures performance against the FTSE ALL SHARE INDEX which closed at on 01/03/17 On 01/03/17 the spot exchange rate was.86/eu 1.- Eu.95/US$1 Global Mining 2020 Capex 38

39 Growth & capex outlook In the super cycle years, BHP targeted annual group volume growth above global GDP and in the range of 5-6% pa. Annual growth exceeded this level in but has since slowed sharply on oil asset maturity, grade dilution in copper and some asset operational issues. Capex peaked at over $22bn in FY12 and is expected to fall to a low of $5.4bn in FY17. The company has disposed on assets in recent years (mainly through the South 32 spin out in 2015), reducing the company's sustaining capex requirements (none of these assets was a growth focus). However, the company's oil exposure is a key difference compared to peers; volumes for the petroleum business have been declining since 2014 and reserve life is short. Latent capacity growth options should keep group volumes expanding out to 2019 but from 2020, without significant new project approvals, group volumes will begin to decline. Based on our review of BHP's major divisions, we estimate that mining volumes will decline at an average rate of ~3% pa out to 2030 assuming no capex is sunk beyond sustaining capex. For the oil division, we assume a decline rate (excluding any replacement/growth capex) of over 10%. Figure 78: BHP capex 25,000 20,000 15,000 10, E normalized capex to grow production by 2%pa 2020E normalized capex to offset production decline 5, E 2018E 2020E 2020E Petroleum Base metals Iron ore Met Coal Energy Coal Stainless Other Source: Company data, Credit Suisse estimates, CY basis To keep group volumes flat post 2020, we estimate the company would need to spend in the region of ~$6.5-7bn pa. To grow volumes at 2% pa from 2020, and assuming that incremental volume growth is primarily in copper rather than iron ore, coal or oil, this would mean that group capex could climb to ~$9bn assuming copper capex intensity of $16,000/t. Capex history and guidance The company guides capex and exploration on a consolidated cash basis which excludes capitalised interest but includes capitalised stripping and exploration. At the group level, the company then outline the capitalised development and also minority interest portion in order to reach the BHP share of total capex. The company typically guides on total group capex and also separates out the maintenance (to ensure asset integrity not any volume growth) capex and exploration components. Global Mining 2020 Capex 39

40 For FY16, the company reported capex and exploration of $7.7bn ($6.4bn on an attributable basis) and is guiding this to fall to $5.4bn in FY17 before increasing to $6.3bn in FY18. Sustaining capex is guided at $1.4bn in FY17 (asset maintenance only no growth) and exploration (largely related to conventional oil/gas) is guided at under $1bn pa in FY17 and $0.9bn in FY18. Volume growth outlook The company made a large move into US Onshore in 2011 through the acquisition of Fayetteville and Petrohawk. Between , group volumes expanded at close to 9% pa driven primarily by growth in iron ore but also expansion in petroleum and coking coal. The company spun out a number of smaller, non-core businesses in 2015 and on a pro forma basis volumes declined in 2016 due to lower petroleum volumes, closure of Samarco and lower grades within the copper business. We expect volumes to rebound in driven by the iron ore and copper divisions. Figure 79: BHP Production CY basis (pro forma basis excluding disposed assets) e 2018e 2019e 2020e Total Petroleum products Mmboe Copper (payable in conc. & cathode) kt 1,114 1,047 1,163 1,244 1,212 1,179 1,114 1,293 1,334 1,324 1,311 Zinc kt Iron Ore mt Metallurgical Coal mt Thermal Coal mt Nickel kt Copper equivalent kt 6,364 6,774 7,141 7,827 8,504 8,607 7,987 8,249 8,409 8,485 8,501 YoY 6.4% 5.4% 9.6% 8.6% 1.2% -7.2% 3.3% 1.9% 0.9% 0.2% Source: Company data, Credit Suisse estimates Key asset overview BHP has simplified its portfolio along four key divisions iron ore, copper, petroleum and coking coal. Figure 80: FY17E EBITDA split chart Figure 81: FY17E Group EBITDA by division Metallurgical Coal 20% Energy Coal 2% Petroleum 17% 12,000 10,000 8,000 45% 50% 45% 40% 35% 30% 6,000 4,000 21% 17% 13% 25% 20% 15% Base Metals 17% 2,000 3% 10% 5% Iron Ore 44% - Iron ore Coking Coal Copper Conventional petroleum EBITDA % Group EBITDA US onshore 0% Source: Credit Suisse estimates Source: Credit Suisse estimates Global Mining 2020 Capex 40

41 Pilbara iron ore Similar to its rival Rio Tinto, BHP's Western Australian iron ore operations will require replacement mines as current operations mature and the installed infrastructure capacity remains well above mining capacity. While BHP is targeting a ramp up to 290Mt/year,we see the Yandi mine needing a replacement within 3-4 years. We assume similar depletion rates and replacement capex intensity to RIO. Figure 82: Installed infrastructure capacity supports mine growth options Source: Company data, October-2014 presentation Petroleum In FY17, total petroleum production is guided to decrease to mmboe. Petroleum capex and exploration is guided at $2.2bn (split $1.4bn capex and $800m exploration), down from a peak of ~$6.5bn in FY14. Conventional capital expenditure of US$0.8bn is focused on life extension projects at Bass Strait and North West Shelf. We forecast onshore US capital expenditure to be approximately US$0.6bn, with development activity tailored to market conditions. By 2020, we forecast total petroleum volumes of 200 mmboe as we assume a lift in Permian capex and production levels fitting the house view of oil prices recovering back above $60/bbl. If oil prices don't recover sufficiently to enable expanded Permian production, Petroleum will face even larger challenges in managing its production profile. Finding and Development costs for the major global E&P stocks average ~US$30/boe. BHP Petroleum has enjoyed periods of strong F&D performance but not in the last three years with F&D costs averaging ~US$75/boe. BHP's reserve life is low, at just over five years. We estimate it would cost US$40-50/bbl to buy and develop reserves. To keep petroleum group volumes stable at 2020 levels, we estimate the group will need to spend $2-2.5bn pa excluding exploration capex. Global Mining 2020 Capex 41

42 Figure 83: BHP Petroleum Production/Reserves (years) Figure 84: BHP oil production: Conventional and Unconventional (mmboe) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Production/1P reserves (years) 50 0 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18F FY20F FY22F Conventional oil (mmboe) Unconconventional oil (mmboe) Source: Company data, Credit Suisse research Source: Company data, Credit Suisse estimates As outlined in our recent note (BHP.AX: BHP Billiton - BHP playing catch-up in conventional oil), BHP's recent winning bid for a stake in the Trion oil play was a reminder of how much work BHP has to do to sustain its current oil output. BHP conventional oil output peaked in FY10 at 157mmobe as Gulf of Mexico (GoM) production reached its zenith. GoM production peaked in Q1 FY10 at an annualised rate of 52mmboe but in Q2 FY17 was running at an annualised rate 37mmboe. Atlantis, Shenzi and Neptune are now mature fields. Mad Dog 2 was approved by BHP in Feb 2017 with BP (the operator) having already given the go ahead for the ~US$9bn development. BHP's share of capex is guided at $2.2bn (23.9% stake). Peak production (100%) basis is expected to be around 140,000boe/day with first production scheduled for late CY21 and peak production 4-5 years later. For BHP, that means FY26 and BHP's share of production at peak we estimate to be around 12mmboe. By FY22, we expect that conventional oil production will slip below 100mboe. The best we should expect from Mad Dog 2 is that by the time it hits full production rates, it can lift BHP conventional oil production back to the 100mmboe level (excluding the impact of Trion). Historically, BHP Petroleum was able to point to a strong record in terms of finding costs, and finding and development costs. However, that hasn't been the case for a while now. 1P Reserves peaked in FY12-13 at ~2.6bn boe before lower oil and gas prices resulted in a sharp reduction in unconventional reserves. Apart from FY11 and FY12 in which BHP purchased onshore reserves, BHP's reserves/replacement ratio has been well less than 100% (and in most cases negative meaning that reserves decreased in absolute terms). This is best illustrated by considering reserve life in terms of annual production which had consistently been around 10 years (or greater); however, in FY16, reserve life fell to just 5.3 years following a reduction to 7.3 years in Copper BHP is one of the top three global listed copper producers and operates five major copper assets. By far the largest is Escondida which accounts for 50-55% of production on an attributable basis. Across the entire division, we assume an average annual production decline of 2-2.5% pa out to 2030, based on reported reserves and grades and assuming no incremental investment in replacement projects. Spence: The Spence project is expected to move for Board approval in H2 CY17. The incremental 200kt/yr would cost below $2.2bn and be operational by In H2 CY16, the mine head grades were ~1.2% vs an average reserve grade of ~0.8%. We factor a reversion to reserve grade, however, into our estimates by the end of this decade. Global Mining 2020 Capex 42

43 Antamina: BHP owns 33.75% of Antamina and, as noted in the Glencore section, combined copper/zinc grades are relatively close to reserve grades and the mine is long life. Out to 2030, we would expect an average annual production decline due to grades of below 1%. Escondida: BHP owns 57.5% of Escondida. The mine produced 1.23 mt copper (100% basis) in FY15 driven by high copper grades of ~1.37%. Over the past year, grades fell to just below 1% and production was 980kt in CY16. We assume grades continue to fall to 0.8% by 2020 but throughput capacity increases should see production volumes increase to 1.2 mtpa The company has guided to a lift in grades in the early-mid 2020s, but reserve grade of ~0.6% is below the expected mine grade in Assuming the mines approaches reserve grade by 2030 and that there is no incremental investment in increased throughput capacity, this would imply an average annual decline of 2-2.5% pa. Escondida incremental from three concentrators: Extending the life of the Los Colorados concentrator can add 150kt/yr. The concentrator was recently placed on care and maintenance following completion and ramp up of the new concentrator that is located further from the mine, eventually allowing for greater ore access. We already model this assuming a capex cost of $550m (100% level, BHP effective 57.5% but consolidates) for a new crusher and conveyors. With new concentrator throughput 240kt/yr plus another 150kt increase in copper production from refurbishing the old concentrator and running a three concentrator operation for 5+ years can create high rates of return and stem the grade decline (Site trip note: BHP Billiton - To Outperform, 15-December-2015). Olympic Dam incremental: Olympic Dam has been improving in recent years after interruptions in 2009 and The rate of 240kt can be lifted to 280kt/yr by accessing the Southern Mine Area with minimal amounts of capex and provides access to grades of copper >2.2% from recent 1.9%. Olympic Dam growth option: BHP is trailing heap leaching of OD ore as a precursor to a possible expansion to a potential ~450ktpa operation. This would require leaching to run at ~200ktpa. OD is a relatively high grade polymetallic chalcopyrite-bornite copper-uranium deposit (10bn tonnes) and is not the sort of deposit that would normally lend itself to leaching. Leaching is normally applied to low grade oxidised copper ores but we understand the trial OD heap leaching utilises particularly long leaching cycles (multi-year). Current OD operations use two ore hoisting systems with combined nominal capacity of 10.5mtpa and an underground expansion would see ore hoisted increase to 20mtpa through an additional shaft with the potential to deliver ~450ktpa of copper production from CY25. The heap leach would be operated in parallel with the current concentrator and leach circuit. BHP claims that test results from the ongoing large-scale integrated pilot plant are encouraging. Conclusive results are expected in FY19. Coking coal The Caval Ridge Southern Circuit approval is anticipated in the near term adding an incremental 4Mt to capacity. After the boom prices of 2H 2016, BHP was already operating at a higher than capacity level via high cost trucking operation that should cease with the Southern Circuit. We anticipate low capital spend in the range of $100/tonne of new capacity. Global Mining 2020 Capex 43

44 Europe/United Kingdom Diversified Metals & Mining Glencore (GLEN.L) Rating OUTPERFORM [V] Price (01 Mar 17, p) Target price (p) Market Cap ( m) 44,797.5 Enterprise value ( m) 55,743.2 Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) Share price performance Research Analysts Liam Fitzpatrick liam.fitzpatrick@credit-suisse.com Michael Shillaker michael.shillaker@credit-suisse.com James Gurry james.gurry@credit-suisse.com Conor Rowley conor.rowley@credit-suisse.com The price relative chart measures performance against the FTSE 100 IDX which closed at on 01/03/17 On 01/03/17 the spot exchange rate was.86/eu 1.- Eu.95/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Benefiting from latent capacity Capex outlook: At the recent results, the company guided capex would remain ~US$4bn over the next 3-5 years of which sustaining would account for ~US$3bn. In our view the company should be able to maintain this level (US$4-4.5bn) through without the need to approve any major projects benefiting from latent capacity growth potential in copper and zinc. This should underpin growth of ~3% pa after which point, assuming all suspended volumes return, we estimate group production volumes will decline at a rate of 3% pa or higher, assuming no capex is sunk beyond sustaining capex. To keep group volumes flat post 2020, we estimate Glencore (GLEN) would need to spend $ bn pa. To grow volumes at 2% pa from 2020, and assuming that incremental volume growth is primarily in copper, this would mean that group capex could climb to ~US$6bn. Investment overview: As we recently outlined (Glencore - Diversification and copper exposure to the fore), we favour GLEN's diversified business mix, we see copper moving from a headwind in 2016 to a tailwind in 2017, and the company's latent capacity growth is under-priced by the market, in our view. The company delivered a strong cost and cash flow performance in 2016 and gave consistent guidance for We expect the balance sheet to move to an 'under-geared' position (sub 1x net debt : EBITDA by mid-2017 or H217) and this should open the door for higher dividend payments. Based on our medium-long term price assumptions, we believe the business can sustain a dividend payout of over US$2.5bn pa (>4.5% dividend yield) based on a 40% payout of industrial cash flows. Catalysts and risks: Base metal and thermal coal prices, potential M&A. Valuation: Glencore has no iron ore exposure and therefore we have left our estimates unchanged. Our 4/sh TP is based on a target EV/EBITDA multiple of 6x 2017E and 6.5x 2018E (higher due to lower price assumptions). Our Blue Sky valuation is 5 based on a rerating to 2013/14 multiples of ~7x industrial EV/EBITDA. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Revenue (US$ m) 177, , , ,014.0 EBITDA (US$ m) 10, , , ,918.3 Pre-tax profit adjusted (US$ m) 2, , , , CS EPS (adj.) (US$) Prev. EPS (US$) ROIC (%) P/E (adj.) (x) P/E rel. (%) EV/EBITDA (x) Dividend (12/17E, US$) 0.18 Net debt/equity (12/17E,%) 30.5 Dividend yield (12/17E,%) 4.3 Net debt (12/17E, US$ m) 13,876.0 BV/share (12/17E, US$) 3.2 IC (12/17E, US$ m) 59,352.2 Free float (%) 65.0 EV/IC (12/17E, (x) 1.2 Source: Company data, Thomson Reuters, Credit Suisse estimates Global Mining 2020 Capex 44

45 Glencore (GLEN.L) Price (01 Mar 2017): p; Rating: OUTPERFORM [V]; Target Price: p; Analyst: Liam Fitzpatrick Income statement (US$ m) 12/16A 12/17E 12/18E 12/19E Revenue 177, , , ,014 EBITDA 10,268 13,955 12,375 13,918 Depr. & amort. (6,338) (6,225) (6,683) (7,039) EBIT 3,930 7,730 5,691 6,880 Net interest exp. (1,533) (1,332) (1,434) (1,451) Associates PBT 2,397 6,399 4,257 5,429 Income taxes (362) (1,813) (1,328) (1,602) Profit after tax 2,035 4,586 2,929 3,827 Minorities 422 (293) (183) (239) Preferred dividends Associates & other (264) (405) (315) (419) Net profit 2,193 3,888 2,431 3,170 Other NPAT adjustments Reported net income 2,193 3,888 2,431 3,170 Cash flow (US$ m) 12/16A 12/17E 12/18E 12/19E EBIT 3,930 7,730 5,691 6,880 Net interest (1,533) (1,332) (1,434) (1,451) Cash taxes paid Change in working capital (1,201) (344) 19 (1,878) Other cash and non-cash items 3,622 2,451 3,664 3,436 Cash flow from operations 4,818 8,506 7,940 6,987 CAPEX (3,048) (3,617) (3,528) (3,536) Free cashflow to the firm 8,430 5,308 4,907 4,137 Acquisitions 0 (534) 0 0 Divestments 5, Other investment/(outflows) Cash flow from investments 3,612 (3,198) (3,033) (2,851) Net share issue/(repurchase) Dividends paid 0 (1,501) (2,684) (2,654) Issuance (retirement) of debt (7,839) Cashflow from financing (8,629) (1,501) (2,684) (2,654) Changes in net cash/debt 10,619 3,755 2,011 4,564 Net debt at start 28,250 17,631 13,876 11,865 Change in net debt (10,619) (3,755) (2,011) (4,564) Net debt at end 17,631 13,876 11,865 7,301 Balance sheet (US$ m) 12/16A 12/17E 12/18E 12/19E Assets Total current assets 43,412 47,185 49,159 57,511 Total assets 124, , , ,966 Liabilities Total current liabilities 36,206 36,206 36,206 41,416 Total liabilities 80,819 80,822 80,816 86,121 Total equity and liabilities 124, , , ,966 Per share 12/16A 12/17E 12/18E 12/19E No. of shares (wtd avg.) (mn) 14,224 14,218 14,218 14,218 CS EPS (adj.) (US$) Dividend (US$) Free cash flow per share (US$) Key ratios and valuation 12/16A 12/17E 12/18E 12/19E Growth/Margin (%) Sales growth (%) EBIT growth (%) (26.4) 20.9 Net income growth (%) (37.5) 30.4 EPS growth (%) (37.5) 30.4 EBITDA margin (%) EBIT margin (%) Pretax profit margin (%) Net income margin (%) Valuation 12/16A 12/17E 12/18E 12/19E EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Dividend yield (%) P/E (x) Credit ratios (%) 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) Net debt to EBITDA (x) Interest coverage ratio (x) Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates Company Background Glencore is a leading commodities producer and marketer. It produces, sources, processes, refines, transports, stores, finances and supplies commodities that industries around the world need. Blue/Grey Sky Scenario Our Blue Sky Scenario (p) Our Blue Sky valuation of 5.0 assumes >300c copper and thermal coal remaining above $70/t. Our Grey Sky Scenario (p) Our Grey Sky valuation of 2 assumes ~200c copper and thermal coal falling back below $60/t, but we do not assume a return to the extreme balance sheet stress as seen in late 2015/early Share price performance The price relative chart measures performance against the FTSE 100 IDX which closed at on 01/03/17 On 01/03/17 the spot exchange rate was.86/eu 1.- Eu.95/US$1 Global Mining 2020 Capex 45

46 Growth & capex outlook GLEN's main advantage versus peers is its latent capacity growth potential over the next three years. In H215, the company suspended a significant amount of copper and zinc production and, assuming these volumes return across the major divisions by 2019/20, group volumes should expand by ~3% pa , one of the fastest rates across the majors, and at very low incremental capex. This should allow the company to keep total group capex contained at ~$4-4.5bn for the next 2-3 years ( ) without the need to approve any major projects. Figure 85: GLEN capex E and 2020E normalized capex 16,000 14,000 12,000 10,000 8,000 6, E normalized capex to grow production by 2%pa 2020E normalized capex to offset production decline 4,000 2, E 2018E 2020E 2020E Copper Alloys/Iron ore Nickel/Ali Zinc Coal Oil Ag Source: Company data, Credit Suisse estimates, segmental capex before JV adjustments From 2020, assuming all suspended volumes return, we estimate group production volumes will decline at a rate of 3% pa or higher on our estimates assuming no capex is sunk beyond sustaining capex. To keep group volumes flat post 2020, we estimate the company would need to spend $ bn pa. To grow volumes at 2% pa from 2020, and assuming that incremental volume growth is primarily in copper, this would mean that group capex could climb to ~$6bn based on copper capex intensity of $16,000/t. Glencore has a clear preference for M&A over greenfield project and therefore acquisitions could be an alternative to increased capex. Capex history, guidance and outlook Glencore has the best level of disclosure among its peers on sustaining and growth capex providing divisional and group level guidance as well as separate guidance for marketing. Capex for Glencore peaked in 2012 and 2013 ~$13bn with a majority of this capex relating to legacy projects approved by Xstrata pre the merger with Glencore (including the Las Bambas greenfield copper project which was sold in H114). Efforts to cut capex intensified through 2015 due to balance sheet concerns with the company suspending a material amount of zinc and copper production in H215 and cutting group capex guidance to ~$3.5bn for capex is guided at $4.1bn split $3bn sustaining, $1bn expansionary and $0.1bn marketing (including share of associates and JVs). Expansionary capex primarily relates to Katanga, Mopani, the Koniambo rebuild and some small projects in coal and oil. The company has guided that group capex should remain at a similar level to 2017 guidance for the next 3-5 years. Global Mining 2020 Capex 46

47 Sustaining capex includes share of JVs capex and deferred stripping. Deferred stripping relates primarily to copper (e.g. on projects such as Katanga) but excludes reserve replacement or life extension projects. After the merger with Xstrata, Glencore guided that sustaining capex should stay in the region of $4-5bn. By the end of 2013, the company had reduced this to $ bn (or 10%) which is comparable with the decline in major resource currencies and input costs. Subsequently, it was cut to a low of $2.7bn in 2016 reflecting the pressure on the company's balance sheet and need to improve company cash flows. In December 2016, the company guided that sustaining capex is expected to remain at ~$3bn pa over the next 5 years even as the suspended Katanga and Mopani operations comes back online through 2018 and Marketing capex is guided at $ m pa. However, this guidance does not include sustaining capex related to the return of the suspended 500 kt of zinc production. From 2020, we estimate that group sustaining capex including the return of suspended zinc production and $ m for marketing could climb to ~$3.5bn although this will depend on the strength of commodity prices from here, particularly coal where sustaining capex has been cut the hardest. Volume growth outlook Figure 86: Group production volume E Between , group volumes expanded at nearly 6% pa driven primarily by new projects in copper and coal volumes have declined at 3-4% pa due to price led closures in copper, zinc and coal in We expect most of the suspended copper and zinc volumes to progressively return from early 2018 and be back close to full capacity by late In addition, the company's Koniambo nickel project in New Caledonia should continue to expand volumes over the next two years. Beyond capex associated with the return of these projects, we see limited need for fresh investment from a group volume perspective over the next two years. Capex for the oil E&P business should increase if and when prices return to >$60. Proforma Production Units E 2018E 2019E 2020E Zinc kt 1,662 1,557 1,532 1,399 1,387 1,445 1,094 1,206 1,445 1,505 1,496 Copper kt 1,213 1,326 1,190 1,497 1,552 1,502 1,426 1,355 1,418 1,517 1,636 Nickel kt Ferrochrome kt 1,165 1, ,238 1,295 1,462 1,523 1,540 1,540 1,540 1,540 Platinum Koz Coking Coal mt Semi-soft Coal mt Thermal export coal mt Total export coal mt Oil k bbls ,360 5,451 7,351 10,569 7,511 5,531 4,480 3,629 2,940 Cu Equivalent kt 3,066 3,277 3,327 3,719 3,871 3,805 3,600 3,639 3,772 3,892 4,023 YoY % 1.4% 6.9% 1.5% 11.8% 4.1% -1.7% -5.4% 1.1% 3.7% 3.2% 3.4% Source: Company data, Credit Suisse estimates From 2020, if the company does not approve fresh replacement or growth projects, we estimate group volumes will decline by an average of over 3% pa. Global Mining 2020 Capex 47

48 Key asset overview Glencore's concentration of assets is low relative to peers due to a larger number of divisions and assets. Figure 87: Top 8 assets 2016 EBITDA and % contribution Figure 88: 2016 EBITDA split 1,600 1,400 1,200 1, % Thermal Australia 14% Tintaya/Antapaccay 13% 8% 7% 7% Collahuasi Mutanda Antamina Kazzinc EBITDA % Group EBITDA 6% 6% Zinc Australia INO 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Agri 1% Oil 1% Coal 13% Marketing 28% Alloys 4% Ali -2% Ni 4% Cu 31% Zn 18% Source: Company data Source: Company data The company discloses separate financials for its largest base metal mines (Collahuasi and Antamina), but does not provide the same level of detail for the coal businesses in Australia and South Africa. We have therefore treated the Australian thermal coal and South African thermal coal businesses as a single operation. Similarly for base metals, some mines are grouped into a single region and we treat these as a single operation (INO-nickel, Zinc Australia, Kazzinc). Figure 89: Top 8 assets Production EBITDA (U$m) Reserves Mine life Resources Name Commodity Country (mt) (Years) 2016 (mt) Thermal Australia Thermal Coal Australia mt ,224 1,159 1,334 1, ,806 Kazzinc Zinc Kazakhstan kt Tintaya/Antapaccay Copper Peru kt , , Antamina Copper Peru kt ,085 Mutanda Copper DRC kt Collahuasi Copper Chile kt , ,122 Zinc Australia Zinc Australia kt INO Nickel Canada kt Source: Company data, Credit Suisse research. Mine life based on 2016 Production. Copper Collahuasi: Glencore's largest copper mine is 44% owned Collahuasi in Northern Chile. Collahuasi has a reported LOM of 69 years however, reserve grades are at ~0.84% copper, materially below 2016 mining grades of ~1.2%. We expect mine grades to drop to ~1% by If we assume mine grades fall to reserve grade by 2030 and no investment in increased throughput capacity (to offset grade decline) copper production could fall by an average of 1-2% pa. Up until 2011, previous owner Global Mining 2020 Capex 48

49 Xstrata was considering an expansion of the mine by adding one or two additional grinding lines (on top of three currently) and expanding concentrator capacity from ~160 ktpa up to 270 ktpa or 380 ktpa. Antamina: Antamina is a large copper/zinc mine located in the Andes mountain range in Peru. The mine is a JV between Glencore (33.75%), BHP (33.75%), Teck (22.5%) and Mitsubishi Corporation (10%). Antamina has a reserve life of 12 years but also significant resource potential. The mine is currently mining at a copper head grade of 0.92% vs reserve grade of 0.95% and a zinc grade of 1.64% vs a reserve grade of 0.97%. The mine is more weighted to copper and therefore if we assume grades revert to reserve grades by 2030, on a copper equivalent basis, we only expect ~4% reduction or an annual decline of <1%. African copper: The company has three high grade African copper operations. Mutanda is currently operational but Katanga and Mopani have been suspended while the company invests in expansion programmes at each operation. The company is investing in Katanga and Mopani and therefore this should provide the company with growth towards the end of the decade as the projects ramp up from The company does not report the reserve grades or at what head grade the operation will mine in However, we do not assume full guided production at either asset and, with fresh investment, the annual production fade post 2020 should be relatively low in the initial years at least. Zinc Kazzinc: Kazzinc is ~70% owned by Glencore and has a number of assets under its portfolio and produces around 65kt of copper and over 300kt of zinc per annum at a very low cash cost given the high by-product credits the polymetallic mines produce. The mine life is only six years based on reported reserves but there is a substantial resource base. Zinc Australia: The company largest zinc assets are its Australian operations with volumes over the next few years dependent on how quickly they are returned following the suspension announced at the end of Management has said that the curtailed production will be brought back to the market when it is sufficiently tight. We assume that, by 2020, volumes at both mines will have returned back above 2015 levels. Based on 2015 production levels, Mt Isa has a reserve life of ~11 years while McArthur River's life extends over 33 years; however, both mines have also significant resource potential. Coal Glencore is one of the largest coal producers in the world; in 2017, we expect the company to export ~100mt of thermal coal, equivalent to over 10% of the global seaborne market. Total group production is upwards of 130mt when we include domestic production and met coal was a peak year of production where volumes were close to hitting 150mt before the company announced production suspensions beginning in Australia towards the end of the year. Following this, Glencore closed some production and 2016 production totalled 125mt. In 2017, in reaction to higher prices, Glencore is guiding to volumes of ~135mt and we expect this level to be broadly maintained out to The company's assets are spread across Australia, South Africa and Colombia with reserve lives ranging from ~ years (weighted average life of over 30 years). The company recently guided that the export coal industry could see annual volumes decline at 5% pa without fresh investment between 2016 and Global Mining 2020 Capex 49

50 Asia Pacific/Australia Diversified Metals & Mining Rating OUTPERFORM Price (01 Mar 17, p) Target price (p) Market Cap ( m) 63,406.4 Enterprise value ( m) 66,133.9 Primary RIC RIO.AX Rating OUTPERFORM Price (01 Mar 17, A$) Target price (A$) Target price is for 12 months. Share price performance Research Analysts James Gurry james.gurry@credit-suisse.com Paul McTaggart paul.mctaggart@credit-suisse.com Liam Fitzpatrick liam.fitzpatrick@credit-suisse.com Conor Rowley conor.rowley@credit-suisse.com The price relative chart measures performance against the FTSE ALL SHARE INDEX which closed at on 01/03/17 On 01/03/17 the spot exchange rate was.86/eu 1.- Eu.95/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Rio Tinto (RIO.L) Consider what's possible Total returns = small share price appreciation and 20% yield? Reiterate our positive stance on Rio Tinto focusing on possible yield rather than capitalizing spot commodity prices: We consider these scenarios: 1) iron ore prices average US$78 and US$58 this year and next (now our base case), 2) aluminium prices rise 30% on Chinese supply side reform this coming winter (aluminium is Rio's second largest business and 15% of EBITDA), 3) sales (PacAli and IOC) of the less strategic units that the company has tried to sell before. All are mutually exclusive but could fund a near $15bn or ~20% buyback if the extra cash flow is returned to shareholders in-line with the example set this past reporting season. While this represents the bull case (our blue sky total return valuation increases to 48 from 42), Rio's balance sheet with otherwise zero debt drives our confidence to forecast a $2.5bn mid-year 2017 buyback boost and $7bn extension over (13% of capital). Harvesting cash flows: Investor reluctance to capitalise current iron ore prices is evident but FCF yields are 17% on our forecasts and higher at spot. The company already has a near zero debt balance sheet, three growth projects in development and funded, no approval ready projects and in its own words "limited opportunity for M&A". We think significant net cash build will be discounted by the market (acquisition fears given weak 10-year track record). Further shareholder returns (buyback extension/ dividends) are likely to result, in our view. Catalysts and risks: China steel and iron ore prices remain the overwhelming driver and we continue to see a moderating price over time but high margins mean significant cash flow generation. China's intervention in aluminium supply could push up prices significantly, asset sales (IOC, PacAli) and an extension of the modes but meaningful US$500m buyback in August. Valuation: 10.8x PE / 6x EBITDA on our 2018 forecasts, lower for 2017E. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Revenue (US$ m) 33, , , ,310.3 EBITDA (US$ m) 13, , , ,308.2 Pre-tax profit adjusted (US$ m) 6, , , , CS EPS (adj.) (US$) Prev. EPS (US$) ROIC (%) P/E (adj.) (x) P/E rel. (%) EV/EBITDA (x) Dividend (12/17E, US$) 3.42 Net debt/equity (12/17E,%) 6.9 Dividend yield (12/17E,%) 8.2 Net debt (12/17E, US$ m) 3,415.4 BV/share (12/17E, US$) 24.6 IC (12/17E, US$ m) 52,661.0 Free float (%) 90.0 EV/IC (12/17E, (x) 1.5 Source: Company data, Thomson Reuters, Credit Suisse estimates Global Mining 2020 Capex 50

51 Rio Tinto (RIO.L) Price (01 Mar 2017): p; Rating: OUTPERFORM; Target Price: p; Analyst: James Gurry Income statement (US$ m) 12/16A 12/17E 12/18E 12/19E Revenue 33,781 45,127 36,312 34,310 EBITDA 13,510 21,906 14,273 11,308 Depr. & amort. (4,794) (5,223) (5,109) (4,845) EBIT 8,716 16,683 9,164 6,463 Net interest exp. (1,022) (482) (453) (482) Associates PBT 6,693 16,201 8,711 5,982 Income taxes (1,412) (4,860) (2,613) (1,795) Profit after tax 5,281 11,341 6,098 4,187 Minorities -0 (307) (58) (44) Preferred dividends Associates & other (181) Net profit 5,100 11,689 6,553 4,554 Other NPAT adjustments (483) Reported net income 4,617 11,689 6,553 4,554 Cash flow (US$ m) 12/16A 12/17E 12/18E 12/19E EBIT 8,716 16,683 9,164 6,463 Net interest (1,294) (482) (453) (482) Cash taxes paid Change in working capital (341) Other cash and non-cash items 1,384 1,018 3,009 3,462 Cash flow from operations 8,465 17,538 11,722 9,446 CAPEX (3,012) (5,000) (5,500) (5,500) Free cashflow to the firm 6,465 15,538 9,722 7,366 Acquisitions Divestments 1,115 2, Other investment/(outflows) (207) Cash flow from investments (2,104) (2,734) (5,400) (5,400) Net share issue/(repurchase) 101 (3,000) (5,000) (2,000) Dividends paid (2,725) (5,620) (4,632) (3,167) Issuance (retirement) of debt Cashflow from financing (7,491) (8,620) (9,632) (5,167) Changes in net cash/debt 4,671 6,172 (3,311) (1,121) Net debt at start 14,258 9,587 3,415 6,726 Change in net debt (4,671) (6,172) 3,311 1,121 Net debt at end 9,587 3,415 6,726 7,847 Balance sheet (US$ m) 12/16A 12/17E 12/18E 12/19E Assets Total current assets 15,086 19,944 16,659 15,588 Total assets 89,263 91,748 88,755 88,239 Liabilities Total current liabilities 9,362 8,367 8,394 8,447 Total liabilities 43,533 42,538 42,565 42,618 Total equity and liabilities 89,263 91,783 88,790 88,274 Per share 12/16A 12/17E 12/18E 12/19E No. of shares (wtd avg.) (mn) 1,797 1,768 1,692 1,624 CS EPS (adj.) (US$) Dividend (US$) Free cash flow per share (US$) Key ratios and valuation 12/16A 12/17E 12/18E 12/19E Growth/Margin (%) Sales growth (%) (3.0) 33.6 (19.5) (5.5) EBIT growth (%) (45.1) (29.5) Net income growth (%) (5.1) (43.9) (30.5) EPS growth (%) (3.6) (41.4) (27.6) EBITDA margin (%) EBIT margin (%) Pretax profit margin (%) Net income margin (%) Valuation 12/16A 12/17E 12/18E 12/19E EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Dividend yield (%) P/E (x) Credit ratios (%) 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) Net debt to EBITDA (x) Interest coverage ratio (x) Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates Company Background Rio Tinto Limited is engaged in minerals exploration, development, production and processing. The Company s product groups include aluminum, copper, diamonds and minerals, energy, and iron ore. Blue/Grey Sky Scenario Our Blue Sky Scenario (p) (from ) Our Blue Sky valuation reflects the scenario that iron ore prices remain elevated through 2018 (at above $65/tonne), Chinese intervenes in the aluminium market causing a 30% increase in prices for 12 months, and $3bn of non-core assets are sold with 100% of proceeds passed to shareholders (via buybacks / dividends) Our Grey Sky Scenario (p) China hits a hard landing and iron ore prices fall below $30/tonne. Share price performance The price relative chart measures performance against the FTSE ALL SHARE INDEX which closed at on 01/03/17 On 01/03/17 the spot exchange rate was.86/eu 1.- Eu.95/US$1 Global Mining 2020 Capex 51

52 Growth & capex outlook RIO entered the 2015/16 downturn with the strongest balance sheet and, as a result, was the only large cap to approve major projects in 2016 (Oyu Tolgoi underground and Silvergrass). The company has stated that it is aiming to sustain annual volume growth at over >2% pa in copper equivalent production output from We expect group volumes to expand by close to this 2% target in based on approved project growth within iron ore (Pilbara expansion up to 360 mtpa from 328 mt in 2016) and grade recovery at the Escondida copper mine. Post 2020, without approving any further projects (replacement or growth), we estimate that production would decline by ~3% pa out to Figure 90: RIO Capex history and 'Normalized' capex estimates 18,000 16,000 14,000 12,000 10,000 8, E normalized capex to grow production by 2%pa 2020E normalized capex to offset production decline 6,000 4,000 2, E 2018E 2020E 2020E Iron Ore Aluminium Copper & Diamonds Energy & Minerals Source: Company data, Credit Suisse estimates, Capex for product group total and excludes other operations To keep group volumes flat post 2020, we estimate the company would need to spend ~$4.5bn pa which includes ~$2.5bn sustaining capex. To grow volumes at 2% pa from 2020, and assuming that incremental volume growth is primarily in copper rather than iron ore, this would mean that group capex could climb to over $6bn. Capex history and guidance Rio reports total capex by division and these divisional capex numbers include 100% of Rio's subsidiaries capex and Rio's share of capex for JV operations and equity accounted units. Conceptually, the company breaks down and guides capex between sustaining, replacement and growth, but only provides divisional detail for the main Pilbara iron ore division. As part of the December Investor Update, the company guided to $5bn total capex in 2017, up from just over $3bn in 2016 and $5.5bn pa in 2018/19. Key growth projects (all well-known) include Silvergrass in iron ore, Amrun bauxite and Oyu Tolgoi underground. In 2015/16, group capex included $346m / $232m of capitalised stripping costs relating largely to the copper operations. Global Mining 2020 Capex 52

53 Figure 91: Capex guided back to Normalised levels Capex guidance Figure 92: The return of replacement mine capex Pilbara iron ore capex profile (Rio share) Source: Rio Tinto presentation Nov-2016 Source: Rio Tinto presentation Nov-2016 Sustaining capex is guided to slightly below $2.5bn pa over the period. For the Pilbara business, we expect sustaining capex to climb from ~$500m in 2016 to $ m pa and replacement capex is guided by the company at $ m (projects ranging from $5-20/t) and increasing to~$500m in Pilbara growth capex in 2017 largely relates to Silvergrass volume outlook Figure 93: Group Production Volume E Since 2012, the group has delivered consistent growth in volumes YoY predominantly driven by the ramp up of its Pilbara iron ore business which should grow by ~50% by 2018/19 vs Post 2019, incremental project growth will come from a greater contribution from Grasberg and Oyu Tolgoi e 2018e 2019e 2020e Aluminium equivalent kt 3,491 3,505 3,527 3,486 3,491 3,526 3,810 3,677 3,677 3,677 3,677 Copper (mined) kt Iron ore mt Coal - hard coking mt Coal - Thermal mt Diamonds 000 crts 13,844 11,733 13,120 16,027 13,871 17,394 17,952 20,520 16,060 16,240 16,240 CU equiv kt 3,997 3,859 3,989 4,165 4,387 4,677 4,981 5,328 5,297 5,365 5,357 YoY 2% -3% 3% 4% 5% 7% 7% 7% -1% 1% 0% Source: Company data, Credit Suisse estimates In the past 12 months, RIO has approved three projects: Amrun Bauxite Dec-2015 $1.9bn (23 mtpa with first production in H119), Oyu Tolgoi Copper Underground Mongolia May $5.3bn and Silvergrass iron ore Aug-2016 $338m. Global Mining 2020 Capex 53

54 Key asset overview Figure 94: 2016 EBITDA split chart Figure 95: 2016 Group EBITDA by division Diamonds 2% Copper 8% Aluminium 18% Energy 6% Minerals 6% Iron Ore 60% 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000-63% Pilabara Iron ore 18% 8% 7% 7% 2% Aluminium Copper Minerals Energy Diamonds 70% 60% 50% 40% 30% 20% 10% 0% EBITDA % Group EBITDA Source: Company data Source: Company data The RIO portfolio is dominated by the Pilbara iron ore business. To assess future reserve decline and capex requirements, we have assessed this division primarily but also aluminium and copper. Pilbara iron ore As shown below, the company's reserve base in the Pilbara is not very large vs the annual production level; however, it is typically maintained in line with the annual depletion rate and the resource potential is very large. At the Pilbara site visit in 2013, RIO guided that 50-60Mt of new mine capacity would be required every five years to sustain its Pilbara operations. Other than mine development, the infrastructure must also be in place to sustainably deliver the targeted 360mt (vs 2017 guidance of mt). As shown in the chart below, the port is already at the required capacity but as well as mining, the rail capacity needs to be raised which RIO believe can be delivered through productivity and low capital investment as well as the full implementation of Autohaul. From 2020, we assume that replacement capex intensity increases to ~$70/t. Global Mining 2020 Capex 54

55 Figure 96: Pilbara reserves, resources and production Figure 97: Rio Tinto capacity progress for 360Mt Source: Rio Tinto presentation Dec-2016 Source: Rio Tinto presentation Dec-2016 $1bn of unapproved mine replacement capex: RIO has approved ~$100m replacement mine capital over next three years, (e.g. ~$64m Yandicoogina Oxbow) and has also highlighted ~$1bn of unapproved replacement mine capital over next three years. The capex intensity of the replacement will depend on the specific mine. The Silvergrass development approved July 2016 that is currently in development is expected to add ~20Mt/a of capacity at a capital intensity of $29/t with first production in H217. Brownfield vs greenfield: More generally, the company has guided brownfield Pilbara mine replacement capital intensity varies from $5-20/t whereas greenfield projects will be higher. RIO has a greenfield option with Koodaideri; Phase 1 of the project would add ~40Mt/a of capacity at a capital intensity of $55/t. Koodaideri is a larger development than Silvergrass but it will require new processing plants and a 150km+ rail link (~$5m per km on average). Although it is only 30km from Yandicoogina, the path goes through a mountain range and there is no easy road to those facilities. New ore bodies will not be the same quality as existing operations (the best mines are developed first) and more than 100mtpa will be mined below the water table (~30mt currently), which will require adjustment to the existing facilities and will mean higher cost mining. Global Mining 2020 Capex 55

56 Figure 98: Pilbara brownfield expansions capex intensity Figure 99: Pilbara development options capex intensity Source: Rio Tinto presentation Dec-2016 Source: Rio Tinto presentation Dec-2016 Copper assets RIO's copper production is small compared to peers, but should expand from through the Oyu Tolgoi expansion and increased volumes from Grasberg production is guided at kt with Escondida making up a little over 50% of this at the midpoint and assuming the Escondida strike is resolved within the next few weeks. By 2020, we forecast a similar level of production to 2017, but by the mid-2020s, RIO copper production could expand up to 900-1,000 kt driven by incremental volumes from Oyu Tolgoi and Grasberg. Beyond the mid-2020s, we would expect copper volumes to decline due to lower grades, particularly at Escondida. The company has two main assets; Escondida, which is the main contributor to production now, and Oyu Tolgio which offers long-term growth from Escondida: Escondida is the world's largest mine of which Rio owns 30%. We assume grades continue to fall to 0.8% by 2020 but throughput capacity increases should see production volumes increase to 1.2 mtpa The company has guided to a lift in grades in the early-mid 2020s, but reserve grade of ~0.6% is below the expected mine grade in Assuming the mines approaches reserve grade by 2030 and that there is no incremental investment in increased throughput capacity, this would imply an average annual decline of 2-2.5% pa. Oyu Tolgoi: Oyu Tolgoi is a relatively high grade and long life globally significant copper project. Rio Tinto owns 51% of Turquoise Hill which in turn owns 66% of the Oyu Tolgoi project with the government of Mongolia owning the rest. This gives RIO a 34% effective interest in the mine. The underground operation is currently being developed and capex is to be on average $1bn for the next five years. This should provide a significant boost to production primarily driven by a material lift in grades. Production is guided at 560 ktpa on average We do however sense a significant capex buffer in the $5.3bn approved budget perhaps to avoid a material cost overrun. In our view, following our visit to the asset, Rio is likely to de-risk through (hopefully) successful delivery of project before acquiring the remaining 49% of ownership vehicle, Turquoise Hill (TRQ). Global Mining 2020 Capex 56

57 Grasberg: Symptomatic of some of the world's other key copper mines of the past decade, Grasberg is also transitioning from open pit to an underground operation. The mine is operated by Freeport with Rio Tinto as a minority partner now but has the option to move to 40% of Grasberg in Grasberg will require significant development capex for the underground development. Rio is not obliged to contribute but will need to so if it wants to take up its significant share of production as expected (40%); so this is not a windfall gain as commonly perceived. With the policy uncertainty of the mine, Rio needs to make a decision in the coming months about its level of contribution (which would amount to around $200m/year this year and the next and is factored into guidance). Aluminium assets: Production creep, not decline Unlike the mining assets, aluminium smelters and power stations tend to increase efficiency and increase output incrementally over time. This reaches a point (after years) at which power stations or smelters need to be rebuilt or retrofitted with modern technology. Rio's aluminium strategy has been focused on cost and cash flow since the new Kimimat smelter (a modernisation of the existing operation) was complete in 2015 after significant capex overrun. Capex has been running at $400- $500m per year, below depreciation at $700m/year. We do not expect a significant change in the near term; nor do we see capacity expansion as necessary given the overcapacity situation globally (overwhelmingly in China). The primary smelting assets make up 70% of the asset base of the division. Rio's bauxite growth project (Amrun) has been discussed above. Global Mining 2020 Capex 57

58 Americas/Canada Diversified Metals & Mining Rating OUTPERFORM [V] Price (01-Mar-17, C$) Target price (C$) week price range (C$) Market cap (C$ m) 15, Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) Share price performance Research Analysts Ralph M. Profiti, CFA ralph.profiti@credit-suisse.com Yan Truong, CFA yan.truong@credit-suisse.com On 01-Mar-2017 the S&P/TSX Composite closed at Daily Mar02, Mar01, 2017, 03/02/16 = C$9.51 Quarterly EPS Q1 Q2 Q3 Q4 2015A E E Teck Resources Ltd (TECKb.TO) Strong cash flows & diversification pave the way Capex outlook: Capex peaked in 2013 (at C$2.6bn) and, in an effort to protect its balance sheet in a weak commodities price environment, Teck embarked on a cost-cutting programme reducing capex by 10% pa through to During this period, production saw limited growth. With the recent recovery in metal prices (most notably coking coal), Teck is budgeting for FY17 capex of C$2.2bn (+16% YoY), of which C$1.2bn will be spent on sustaining capital and capitalised stripping a partial catch up on previous deferrals. With the completion of Fort Hills (in late-2017) and absent a sanctioning decision at QBII, we forecast Teck's capex to normalise at ~C$1.2bn pa by From 2020, we estimate production (on a copperequivalent basis) will decline at an average rate of -2% pa to 2030 assuming no capex is invested into brownfield/greenfield projects (i.e. QBII). To maintain production volume flat post-2020, we estimate Teck would require capex to return to ~C$2.0bn pa, or ~8% above 2016 levels. In order to grow volumes at an average +2% pa, we estimate capex of C$2.5bn pa (~34% above 2016 levels) based on a copper-equivalent capex intensity of $18,000/t. Alternatively, successful permitting and sanctioning of QBII would offset the 2% pa production decline at a project cost of ~C$4.5bn (spent between ). Catalysts and risks: i) China policy on coal working day restriction (mid- March); (ii) 2Q17 benchmark HCC price settlement (April); (iii) potential for debt rating agencies to upgrade to investment grade (2H17); (iv) potential increase in dividend (2H17); and (v) completion and first oil at Fort Hills (late- 2017). Investment overview and valuation: We estimate Teck is trading at an equity-implied coking coal benchmark price of US$120/t (at US$2.60/lb copper, US$1.25/lb zinc and CAD$0.76). While Teck shares are not immune to volatility in spot coking coal prices, we see compelling long-term valuation support based on cash generation and deleveraging catalysts, with potential reflation of the steelmaking cost curve supporting coking coal prices. Financial and valuation metrics Year 12/15A 12/16E 12/17E 12/18E EPS (CS adj.) (C$) Prev. EPS (C$) P/E (x) P/E rel. (%) Revenue (C$ m) 8, , , ,745.9 EBITDA (C$ m) , , ,931.3 OCFPS (C$) P/OCF (x) EV/EBITDA (current) Net debt (C$ m) 7,771 6,941 4,310 2,947 ROIC (%) Number of shares (m) IC (current, C$ m) 24, BV/share (Next Qtr., C$) 30.3 EV/IC (x).9 Net debt (Next Qtr., C$ m) 6,936.0 Dividend (current, C$) - Net debt/tot eq (Next Qtr.,%) 39.4 Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates Global Mining 2020 Capex 58

59 Teck Resources Ltd (TECKb.TO) Price (23 Feb 2017): C$27.29; Rating: OUTPERFORM [V]; Target Price: C$43.00; Analyst: Ralph Profiti Income Statement 12/15A 12/16E 12/17E 12/18E Revenue (C$ m) 8, , , ,745.9 EBITDA (872) 3,369 6,126 3,931 Depr. & amort. (1,366) (1,385) (1,332) (1,301) EBIT (C$) (2,238) 1,984 4,794 2,630 Net interest exp (314) (341) (440) (548) Associates (10) (10) (10) (10) Other adj PBT (C$) (2,562) 1,633 4,344 2,072 Income taxes 836 (587) (1,607) (767) Profit after tax (1,726) 1,046 2,737 1,305 Minorities 10 (10) 1 (3) Preferred dividends Associates & other 1, Net profit (C$) 188 1,099 2,737 1,303 Other NPAT adjustments (2,662) (63) 0 0 Reported net income (2,474) 1,036 2,737 1,303 Cash Flow 12/15A 12/16E 12/17E 12/18E EBIT (2,238) 1,984 4,794 2,630 Net interest (314) (341) (440) (548) Cash taxes paid Change in working capital 180 (360) 0 0 Other cash & non-cash items 1,437 1,778 1,041 1,514 Cash flow from operations (935) 3,061 5,395 3,596 CAPEX (2,244) (1,912) (2,314) (1,618) Free cashflow to the firm (3,179) 1,149 3,080 1,978 Aquisitions Divestments Other investment/(outflows) (0) 0 Cash flow from investments (1,104) (1,838) (2,256) (1,618) Net share issue(/repurchase) Dividends paid (395) (44) (58) (58) Issuance (retirement) of debt (448) (993) (64) (29) Other 1, (386) (529) Cashflow from financing activities 374 (329) (507) (616) Effect of exchange rates 304 (64) 0 0 Changes in Net Cash/Debt (1,361) 830 2,631 1,362 Net debt at start 6,410 7,771 6,941 4,310 Change in net debt 1,361 (830) (2,631) (1,362) Net debt at end 7,771 6,941 4,310 2,947 Balance Sheet (C$) 12/15A 12/16E 12/17E 12/18E Assets Cash & cash equivalents 1,888 1,402 3,969 5,303 Account receivables 1,298 1,682 1,682 1,682 Inventory 1,620 1,673 1,673 1,673 Other current assets Total current assets 4,806 4,757 7,324 8,658 Total fixed assets 26,791 27,595 28,519 28,836 Intangible assets and goodwill 1,127 1,127 1,127 1,127 Investment securities Other assets 1,965 2,145 2,145 2,145 Total assets 34,689 35,624 39,115 40,766 Liabilities Accounts payables 1,673 2,101 2,101 2,101 Short-term debt Other short term liabilities Total current liabilities 1,726 2,200 2,200 2,200 Long-term debt 9,606 8,244 8,180 8,151 Other liabilities 6,719 7,584 8,460 8,892 Total liabilities 18,051 18,028 18,840 19,243 Shareholder equity 16,408 17,437 20,116 21,364 Minority interests Total liabilities and equity 34,689 35,624 39,115 40,766 Net debt 7,771 6,941 4,310 2,947 Source: Company data, Thomson Reuters, Credit Suisse estimates Per share 12/15A 12/16E 12/17E 12/18E No. of shares (wtd avg) CS adj. EPS Prev. EPS (C$) Dividend (C$) Dividend payout ratio Free cash flow per share (5.52) Earnings 12/15A 12/16E 12/17E 12/18E Sales growth (%) (4.0) (16.2) EBIT growth (%) (326.7) (45.1) Net profit growth (%) (58.4) (52.4) EPS growth (%) (58.4) (52.4) EBITDA margin (%) (10.6) EBIT margin (%) (27.1) Pretax margin (%) (31.0) Net margin (%) Valuation 12/15A 12/16E 12/17E 12/18E EV/Sales (x) EV/EBITDA (x) (26.5) EV/EBIT (x) (10.4) P/E (x) Price to book (x) Asset turnover Returns 12/15A 12/16E 12/17E 12/18E ROE stated-return on (%) (14.1) ROIC (%) (0.1) Interest burden (%) Tax rate (%) Financial leverage (%) Gearing 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) Net Debt to EBITDA (x) Net Interest coverage ratio (X) Cash (7.1) Quarterly EPS Q1 Q2 Q3 Q4 2015A E E Share price performance On 23-Feb-2017 the S&P/TSX Composite closed at Daily Feb25, Feb23, 2017, 02/25/16 = C$7.67 Global Mining 2020 Capex 59

60 Growth & capex outlook Teck offers investors a diversified business model with exposure to coking coal, copper zinc and oil, with mines predominantly in the Americas. Between , Teck embarked on an aggressive cost cutting program aimed at protecting its balance sheet in the weak (and volatile) commodities price environment, by minimizing project spend at its copper, zinc and coal businesses, while building out its energy business (construction of Fort Hills oilsands). During this period, production saw limited growth with coal production growing an average +0.9% pa, zinc growing +3.0%, while copper declined -1.5% (copperequivalent production declined 3.3% over this period). More recently, alongside the recovery in coking coal prices in 2H16, Teck has directed its FCF towards buying back debt and has budgeted in its 2017 capital outlook to catch up on previously deferred sustaining capital and capitalized stripping. Further, the recovery in the copper price has also allowed Teck to re-focus on greenfield projects with permitting of its Quebrada Blanca II (QBII - copper) project currently underway. Construction completion and first oil at Fort Hills is expected in late 2017, and excluding a project sanction at QBII (mid-2018 at the earliest assuming receipt of permits), we estimate Teck's production (on a copper-equivalent basis) to be essentially flat (-0.4%) between , with annual capex of C$ bn (vs capex of C$1.9bn). From 2020 onwards, we estimate production to decline at an average rate of -2% pa out to 2030 assuming no capex is invested into brownfield/greenfield projects (i.e. QBII) and only sustaining capital and capitalized stripping is maintained. Figure 100: Teck Capex E and 2020E Normalized Capex (C$m) 3,000 2,500 2, E normalized capex to grow production by 2%pa 2020E normalized capex to offset production decline 1,500 1, E 2018E 2020E 2020E Copper Coking coal Zinc Energy Other Source: Company data, Credit Suisse estimates In order to maintain total production volumes (on a Cu-equivalent basis) flat post-2020, we estimate Teck would require total capital investments of ~C$2.0bn per year, ~8% above 2016 levels. In order to grow volumes at an average +2% per year from 2020, and assuming that incremental volume growth is primarily in copper, we estimate capex would need to increase to C$2.5bn (~34% above 2016 levels) per year based on a copper capex intensity of US$18,000/t. Global Mining 2020 Capex 60

61 Capex history and guidance Teck's capex peaked in 2013 at C$2.6bn as construction at Fort Hills began. Subsequently, Teck embarked on an aggressive cost cutting programme reducing capex by an average ~10% per year through to 2016 through a number of initiatives including mining productivity/optimisation efforts, workforce reductions and deferral of sustaining capex and capitalised stripping. Teck ended FY2016 with total capex spend of C$1.9bn, including C$744m in combined sustaining capital and capitalised stripping, with the balance spent on growth projects and mine enhancements. For 2017, Teck is budgeting a +16% YoY increase to C$2.2bn, of which C$1.2bn will be spent on sustaining capital and capitalised stripping which has been reduced significantly over the past few years. As construction of Fort Hills completes in late-2017, and excluding investment into QBII, we forecast Teck's total capex to normalize at ~C$1.2bnn beginning in A go-ahead decision on QBII would increase capex spend between by a total ~C$4.5bn, and add 182Kt of attributable copper production per year over an initial 25-year mine life. Volume growth outlook Figure 101: Group Production Volume E Between , copper-equivalent volumes declined at 3% per year as Teck scaled back on spending, and focused primarily on Fort Hills. Copper-equivalent volumes grew in 2016, mainly at Teck's coal business capitalising on the rally in coking coal prices. Going forward, and excluding a sanctioning of QBII, we forecast production to peak in 2019 (as Fort Hills ramps up to full capacity) Production Units E 2018E 2019E 2020E Coking coal Mt Copper Kt Zinc Kt Oil MBbl Copper-equivalent Kt 1,097 1,212 1,170 1,081 1,030 1,059 1,254 1,086 1,200 1,251 1,234 YoY% 10% -3% -8% -5% 3% 18% -13% 10% 4% -1% Source: Company data, Credit Suisse estimates; Copper-equivalent calculated using actual metal prices pre-2017, and 10-yr historical average going forward (i.e. $163/tonne coking coal, $3.40/lb copper, $1.05/lb zinc and $84/bbl WTI) From 2020, and absent a sanctioning decision at QBII, we estimate production to decline at an average 2% per year through to Assuming a successful permitting process and sanctioning of QBII, the incremental copper production (of 182Kt per year attributable to Teck) will offset the 2% pa production decline at a project cost of ~C$4.5bn. Global Mining 2020 Capex 61

62 C$Mln 3 March 2017 Key asset overview Figure 102: Teck core assets and EBITDA contribution ,500 53% 60.0% 2, % 1, % 30.0% 1, % 11% 7% 6% 2% 1% 20.0% 10.0% 0 Coking Coal Red Dog Antamina (22.5%) EBITDA Highland Valley Trail Carmen de Andacollo (90%) % of total EBITDA Quebrada Blanca (76.5%) 0.0% Source: Company data, Credit Suisse estimates Teck's current portfolio of producing assets offer investors with diversification over coking coal (~50% of EBITDA at current prices), zinc (~25% through Red Dog and the Trail smelter) and copper (~25% through Antamina, Highland Valley, Carmen de Andacollo and QB). Beginning in 2018 with the completion of Fort Hills (in late-2017), Teck will expand its portfolio into the oil business which will account for ~10% of Teck's total EBITDA once fully ramped up. Figure 103: Teck core assets summary Production (Kt) EBITDA (C$Mln) Name Commodity Country Reserves 2016 (Mt) Mine Life (Years)* Resources 2016 (Mt) Coking Coal Coal Canada , ,861 Highland Valley Copper Canada ,972 Antamina (22.5%) Copper Peru ,780 Quebrada Blanca (76.5%) Copper Chile (19) Quebrada Blanca II (76.5%) Copper Chile , Carmen de Andacollo (90%) Copper Chile Other Total Copper $ 1,177 $ 931 $ 788 Trail Zinc Canada n/a n/a n/a Red Dog Zinc USA Pend Oreille Zinc USA n/a (1) (9) Other (6) Total Zinc (excl. Trail Production) $ 779 $ 805 $ 984 Fort Hills (20%) Oil Canada n/a n/a n/a n/a n/a n/a 2, n/a Total $ 2,879 $ 2,645 $ 3,781 Source: Company data, Credit Suisse estimates; *Mine life estimate based on 2P reserves; "Other" production includes metal produced as a by-product. Coking coal: Teck's coal business consists mainly of six Canadian operations with five located in B.C. (Fording River, Elkview, Greenhills, Coal Mountain and Line Creek) and one in Alberta (Cardinal River). All of Teck's coal mines consist of conventional openpit operations producing a combined 27.6Mt in Based on Teck's average production over the past three years, we estimate an average mine life of 36 years on 2P reserves alone, with significant upside potential when accounting for potential resource conversion and undeveloped projects. Further, Teck's production optionality Global Mining 2020 Capex 62

63 exists at Coal Mountain Phase II (2.25Mt/year) and Quintette restart (currently on care & maintenance) at 3-4Mt, the latter requiring 18 months to remobilize and to bring into production, and both operations likely require prices sustainably above $140/t (our estimate). Antamina (22.5%): Antamina is a large copper-zinc mine located in the Andes mountain range in Peru. Teck owns a 22.5% interest in Antamina, with Glencore (33.75%), BHP (33.75%), and Mitsubishi Corporation (10%) forming the JV. The mine is expected to produce ~400Kt of copper (~90Kt attributable to Teck) in 2017, and an average of 420Kt of copper over (95Kt attributable to Teck). Currently Antamina is mining at a copper head grade of 0.92% vs reserve grade of 0.95% and a zinc grade of 1.64% vs a reserve grade of 0.97%. Highland Valley: HVC is an open-pit copper operation located in B.C., Canada. The processing plant has the capacity to process up to 145Ktpd of ore depending on ore hardness. The HVC mine plan is expected to vary significantly over the next few years due to fluctuations in ore grades/hardness in the three currently active pits production is expected to trough at 97.5Kt (vs Kt) as grades decline into 1H17, and gradually recover thereafter with average annual production expected at Kt and further recovery to LOM average of 140Kt per year in Based on current 2P reserves alone, we estimate a mine life of 11 years, with a upside potential on its substantial resource base. Carmen de Andacollo (90%): Andacollo is an open-pit copper mine located in the Coquimbo Region of central Chile. Teck has a 90% interest in the operation with Empresa Nacional de Mineria (ENAMI) owning the remaining 10%. Copper concentrate is produced by processing hypogene ore through a flotation plant, with some supergene ore also mined and directed towards heap leach pads. Copper production in 2017 is expected at ~74Kt (vs. 70Kt in 2016). We expect the declining grades post-2017 (as per mine plan) to be offset by throughput improvements leading to total production of 65-70Kt per year over the life of the mine (15 years based on 2P reserves). Quebrada Blanca Phase I and II (76.5%): QB is an open-pit copper mine located in the Tarapaca Region of northern Chile. The current QBI operation produces ore for both heap leach and lower grade dump leach production, for processing in an SX/EW plant. Annual production was ~85Kt of copper cathode per year, but following an unexpected ground movement in 2015, the north portion of the plant was decommissioned with only the south side of the plant being active and having ~40Kt of production capacity. As reserves deplete for the leach operation, and with metal prices recovering, Teck is currently in the process of permitting its QBII project. The project consists of the construction of a new concentrating plant, a tailings facility and other major infrastructure installations. QBII is expected to produce 238Kt (100%-basis) of copper per year over a mine life of 25 years. The project SEIA was submitted in 3Q16 with a permitting decision expected in early-2018 and a potential project sanction in mid-2018 at the earliest. Red Dog: The zinc-lead mine, concentrator and shipping facility is located in Alaska, USA and has been operating since Red Dog employs conventional open-pit drill and blast, and truck and shovel technology. The operation is expected to produce 555Kt of zinc and 113Kt of lead in 2017, with grades gradually declining in 2018 leading to average annual production over of Kt of zinc and Kt of lead. We estimate current 2P reserves support a mine life of 14 years with potential upside through an exploration programme and studies aimed at extending mine life through the development of the Paalaaq and Anarraaq deposits. Global Mining 2020 Capex 63

64 Implied Share Price (C$/share) 3 March 2017 Trail: Teck's Trail operation is an integrated smelting and refining complex in B.C., Canada. The complex's primary products are refined zinc, lead and silver, with secondary products including chemicals and fertilizer products. Trail is expected to produce Kt of refined zinc, 95Kt of refined lead and 23-25Moz of silver in production is expected at similar levels. Fort Hills: Fort Hills is an oilsands project located ~90Km north of Fort McMurray, in Alberta, Canada. Teck owns a 20% interest in the project, with operator Suncor (50.8%) and Total (29.2%) forming the JV. As of end-2016 construction of the project achieved 76% completion with two of the six major project areas (mining and infrastructure) turned over to operations. Oil production from the first of three secondary extraction units is expected in late Once fully ramped-up, we forecast Teck's share of production to be ~13.6Mbbl/year over an initial 40+ year mine life. Valuation We estimate Teck is trading at an equity-implied coking coal benchmark price of $120/t (at $2.60/lb copper, $1.25/lb zinc and CAD$0.76). While Teck shares are not immune to volatility in spot coking coal prices, we see compelling long-term valuation support based on cash generation and deleveraging catalysts, with potential reflation of the steelmaking cost curve supporting coking coal prices. Teck recently announced commencement of a tender offer for up to US$650m of outstanding notes ranging in maturities from 2019 to 2024: we view the tender offer as a positive in that it moves Teck towards its goal of reducing debt below US$5bn (vs. US$6.2bn at end-fy16), regaining its investment grade credit rating, and ultimately an upgrade to the dividend (currently C$0.10/year; dividend yield: 0.34%). Assuming full tender, we estimate Teck's total debt outstanding would decrease to US$5.6bn, Debt/Debt+Equity to 29% (vs. 32% at end-fy16), and Debt-to-EBITDA (FY17/18) to 1.2/1.9x, metrics within the range of general guidelines required for investment grade. Assuming full tender, we estimate Teck still generates free cash flow (including mandatory debt repayments) of C$2.0bn in FY17 and C$1.9bn in FY18. Figure 104: Equity-implied coking coal price Figure 105: EV/EBITDA valuation Teck share price (LHS) Benchmark HCC (US$/t) Teck - Equity-implied coking coal price Spot HCC (US$/t) EV/EBITDA valuation Fort Hills Elk Valley Coal Quebrada Blanca (I&II) Andacollo Highland Valley Antamina Pend Oreille Red Dog Trail , x 5.0x 6,000 5,000 4,000 3,000 EBITDA (C$Mln) x 3.0x 2,000 1, Source: Thomson Reuters Source: Company data, Credit Suisse estimates Coking coal: FY17 (US$184/t); FY18 (US$130/t); FY19-LT (US$120/t). Copper: US$2.60/lb. Zinc: US$1.25/lb. Global Mining 2020 Capex 64

65 Americas/Brazil Diversified Metals & Mining Vale (VALE) Rating NEUTRAL [V] Price (01-Mar-17, US$) Target price (US$) week price range (US$) Market cap (US$ m) 55, Enterprise value (US$ m) 73, Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) Share price performance Research Analysts Ivano Westin ivano.westin@credit-suisse.com Renan Criscio renan.criscio@credit-suisse.com Rafael Cunha rafael.cunha@credit-suisse.com On 01-Mar-2017 the S&P 500 INDEX closed at Daily Mar02, Mar01, 2017, 03/02/16 = US$3.63 Quarterly EPS Q1 Q2 Q3 Q4 2016A E E Capex on a downward path Summary: The combination of lower capex, divestment of non-core assets, cost-cutting, and current momentum for commodities prices recently contributed to an improvement in Vale's balance sheet. Net debt to EBITDA dropped to 2.1x in 4Q16 from 2.9x in 3Q16 and 3.6x in 4Q15, while the gross debt-to-ebitda ratio moved from 4.1x in 4Q15 and 3.6x in 3Q16 to 2.4x. The ramp-up of S11D should provide additional support for deleveraging, all else equal. We estimate ND/EBITDA at 1.2x YE Capex on a downward path: Vale is the only major in this report for which we expect 2020 capex to be materially below due to the growth expected from S11D over the next 3-4 years and capex close to conclusion. In 2020 we forecast capex of $3.6bn compared with $8.4/$5.5bn in 2015/16 and we estimate $ bn should be sufficient to keep volumes stable post To grow volumes at 2% pa post 2020 based on our methodology of copper-focused growth at capex intensity of $16,000/t could mean capex climbing back to the $ bn range, a scenario which we estimate unlikely to materialize, given our base case of no increase in copper asset base. Iron ore outlook: Vale expects steel demand in 2017 to be better than 2016 whereas seaborne iron ore supply should be lower and is seeing a restocking movement from mills ahead of increasing demand in the spring. High inventories at the port are not a major concern for the company as the bulk of the ore is low quality, for which demand is lower. For 2018, Vale reinforced that it will be responsible for ~50% of the additional seaborne supply volume and will always operate with the end-goal of margin optimisation. Dividends: Reduction of net debt to the USD15bn target remains the company's primary focus, but we expect dividends to be at robust levels in CY17 (CSe ~ 5% dividend yield). Vale's agenda short to mid-term: Vale mentioned the current agenda is not completed and still needs to conclude: (i) ramp-up of all projects, especially S11D, (ii) leverage reduction, (iii) shareholder restructuring at Vale, and (iv) cost reduction. Once all these projects are concluded, Vale might consider new projects that could be explored. Vale intends to increase cash return to shareholders at the right time. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Revenue (US$ m) 29, , , ,791.5 EBITDA (US$ m) 12, , , ,388.0 EBIT (US$ m) 8, , , ,823.7 Net Income (US$ m) 3, , , EPS (CS adj.) (US$) Prev. EPS (US$) Dividend yield (%) P/E (x) EV/EBITDA P/B (x) ROE stated-return on equity ROIC (%) Net debt (US$ m) 25,060 17,991 12,532 11,576 Net debt/ebitda (12/16E, %) Capex (US$ m) -5,469-4,513-4,504-4,101 Source: Company data, Thomson Reuters, Credit Suisse estimates Global Mining 2020 Capex 65

66 Vale (VALE) Price (01 Mar 2017): US$10.69; Rating: NEUTRAL [V]; Target Price: US$9.00; Analyst: Ivano Westin Income Statement 12/16A 12/17E 12/18E 12/19E Revenue (US$ m) 29, , , ,791.5 EBITDA 12,185 18,822 12,349 8,388 Depr. & amort. (3,834) (4,397) (4,359) (4,319) EBIT (US$) 8,154 14,262 7,844 3,824 Net interest exp (2,542) (2,866) (2,616) (2,548) Associates Other adj. 3,185 (584) (351) (365) PBT (US$) 8,797 10,812 4, Income taxes (2,151) (2,703) (1,219) (228) Profit after tax 6,646 8,109 3, Minorities Preferred dividends Associates & other (2,666) (316) (124) (106) Net profit (US$) 3,986 8,234 3, Other NPAT adjustments Reported net income 3,986 8,234 3, Cash Flow 12/16A 12/17E 12/18E 12/19E EBIT 8,154 14,262 7,844 3,824 Net interest (2,542) (2,866) (2,616) (2,548) Cash taxes paid Change in working capital (1,991) (773) Other cash & non-cash items 7,140 8,767 8,016 7,767 Cash flow from operations 10,761 19,390 13,948 9,245 CAPEX (5,469) (4,513) (4,504) (4,101) Free cashflow to the firm 5,292 14,877 9,444 5,145 Aquisitions Divestments Other investment/(outflows) 770 2,053 2,232 0 Cash flow from investments (4,699) (2,460) (2,272) (4,101) Net share issue(/repurchase) Dividends paid (543) (2,895) (1,978) (763) Issuance (retirement) of debt (740) (353) 0 0 Other (4,577) (6,612) (4,240) (3,426) Cashflow from financing activities (5,860) (9,861) (6,217) (4,188) Effect of exchange rates Changes in Net Cash/Debt 202 7,069 5, Net debt at start 25,262 25,060 17,991 12,532 Change in net debt (202) (7,069) (5,459) (956) Net debt at end 25,060 17,991 12,532 11,576 Balance Sheet (US$) 12/16A 12/17E 12/18E 12/19E Assets Cash & cash equivalents 4,262 11,857 17,612 18,867 Account receivables 3,663 4,010 3,309 3,102 Inventory 3,349 4,385 4,282 4,436 Other current assets 10,930 10,930 10,930 10,930 Total current assets 22,204 31,182 36,133 37,335 Total fixed assets 55,419 55,535 56,077 56,253 Intangible assets and goodwill 6,871 6,871 6,474 6,080 Investment securities Other assets 14,157 11,626 9,125 8,774 Total assets 98, , , ,442 Liabilities Accounts payables 3,630 4,240 4,140 4,289 Short-term debt 1,660 1,660 1,660 1,660 Other short term liabilities 5,942 5,589 5,589 5,589 Total current liabilities 11,232 11,489 11,389 11,538 Long-term debt 27,662 28,188 28,484 28,783 Other liabilities 19,096 19,096 19,096 19,096 Total liabilities 57,990 58,772 58,969 59,416 Shareholder equity 39,042 44,381 46,359 46,359 Minority interests 1,982 2,423 2,845 3,029 Total liabilities and equity 99, , , ,805 Net debt 25,060 17,991 12,532 11,576 Source: Company data, Thomson Reuters, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E No. of shares (wtd avg) 5,153 5,153 5,153 5,153 CS adj. EPS Prev. EPS (US$) Dividend (US$) Dividend payout ratio Free cash flow per share Earnings 12/16A 12/17E 12/18E 12/19E Sales growth (%) (18.5) (11.2) EBIT growth (%) (45.0) (51.3) Net profit growth (%) (52.0) (80.7) EPS growth (%) (52.0) (80.7) EBITDA margin (%) EBIT margin (%) Pretax margin (%) Net margin (%) Valuation 12/16A 12/17E 12/18E 12/19E EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) P/E (x) Price to book (x) Asset turnover Returns 12/16A 12/17E 12/18E 12/19E ROE stated-return on (%) ROIC (%) Interest burden (%) Tax rate (%) Financial leverage (%) Gearing 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) Net Debt to EBITDA (x) Interest coverage ratio (X) Quarterly EPS Q1 Q2 Q3 Q4 2016A E E Share price performance On 01-Mar-2017 the S&P 500 INDEX closed at Daily Mar02, Mar01, 2017, 03/02/16 = US$3.63 Global Mining 2020 Capex 66

67 Growth and capex outlook Vale has lagged behind its major iron ore peers in terms of iron ore volume growth over the past five years, with the big three Australian producers gaining market share relative to Vale. However, over the next 3-4 years the company should deliver peer-leading iron ore volume growth as its major S11D project ramps up to full capacity. Vale started up its S11D project recently, which as of 4Q16 registered construction progress of 85%, 97% of which was at the mine site and 76% at the logistics infrastructure sites. The conclusion of S11D capex marks the end of Vale's capex-intensive cycle and should allow the company to reduce expenditures in the coming years. Figure 106: Vale capex E and 2020E normalized capex 18,000 16,000 14,000 12,000 10,000 8,000 6, E normalized capex to offset production decline 2020E normalized capex to grow production by 2%pa 4,000 2, E 2018E 2020E 2020E Source: Company data, Credit Suisse estimates From 2020E, due to the company's recent expansions, the annual volume decline in the iron ore business should be low compared with peers, for the iron ore business at least. In 2020 we forecast $3.6bn in capex but within this analysis we assume ~$4bn group capex from 2020E as a normalised level to keep volumes stable. To grow volumes at 2% pa from 2020E, and assuming that incremental volume growth is primarily in copper, would mean that group capex could climb to $ bn based on copper capex intensity of $16,000/t. Unlike the peer group, Vale does not have a strategic aim to expand copper volumes and is centred on iron ore in Brazil. As such, the company is likely to take more of a value approach to future investment and growth decisions based on the strength of iron ore prices over the medium-to-long term. Capex history, guidance and outlook Vale's latest capex guidance is highlighted below. Total capex peaked in 2011 at just over $22bn and Vale's project or growth capex declined from US$17.6bn in 2011 to US$3.2bn in 2016 and is expected to continue decreasing until reaching only sustaining and replacement capex by With the company's volumes continuing to ramp up over the next three years, capex should decline steadily from $5.5bn in 2016 to a guided $2.9bn in Vale is the only company guiding 2017 capex to below 2016 levels and the company expects capex to continue to decline to Global Mining 2020 Capex 67

68 Figure 107: Vale's capex guidance as of 2016 Vale Day US$bn 22.2 Project Execution Sustaining / Replacement Capex e 2018e 2019e 2020e 2021e Source: Company data Replacement capex guided by the company is ~US$2.5bn per year in the following years, whereas replacement capex ranges from US$ bn/year. Figure 108: Vale's Replacement vs Sustaining Capex Guidance US$bn Replacement Capex Sustaining e 2018e 2019e 2020e 2021e Source: Company data The company expects its S11D project to reduce its sustaining capex intensity further and group sustaining capex is guided to fall from $2.5bn to $2.3bn. Volume growth outlook Vale has been targeting production at Mt in 2018 and Mt in 2019, upon completion of the project. We expect a CAGR for iron ore sales of ~4%. For 2018, Vale reinforced recently that it will be responsible for ~50% of the additional seaborne supply volume and will always operate with the end-goal of margin optimisation. Vale's base-case scenario is to see Samarco resuming operations in 3Q17, even though the company acknowledges there are several exogenous factors that could delay the process. When Samarco resumes operations, it should operate at ~67% of capacity utilisation. Global Mining 2020 Capex 68

69 Figure 109: Depletion of Vale vs. its main peers Figure 110: Production volumes range (Mtpy) Source: Company data Source: Company data, Note: Including third party purchases Key asset overview The Vale business is dominated by the iron ore business that made up almost 90% of group EBITDA in 2016, although on a revenue basis this reduces to ~75%. The nickel division is a distant second followed by copper. As part of its Investor Day in December, Vale guided that it expected a low level of annual depletion compared with peers over the next 5-7 years. Figure 111: 2017E EBITDA split Figure 112: 2016 EBITDA three largest divisions Fertilisers 0% Base Metals 12% Coal 3% Others 12,000 1% 88% 10,000 8, % 90% 80% 70% 60% 6,000 50% 4,000 40% 30% Ferrous Products 84% 2,000-8% 6% Ferrous Products Nickel Copper EBITDA % Group EBITDA 20% 10% 0% Source: Company data Source: Company data Global Mining 2020 Capex 69