Commodities Comment. PGM cost curve another difficult year for S. African miners GLOBAL. Feature article. Latest news

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1 GLOBAL LME cash price % change US$/tonne day on day Aluminium 1, Copper 5, Lead 2, Nickel 9, Tin 19, Zinc 2, Cobalt 53, Molybdenum 14, Other prices % change day on day Gold (US$/oz) 1, Silver (US$/oz) Platinum (US$/oz) Palladium (US$/oz) Oil WTI USD:EUR exchange rate AUD:USD exchange rate LME/COMEX stocks Tonnes Change Aluminium 1,936,275-9,525 LME copper 311,375-1,150 Comex copper 126, Lead 190,200 0 Nickel 382, Tin 3,715 0 Zinc 374,725-1,100 Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research, March March 2017 PGM cost curve another difficult year for S. African miners Feature article As most Southern African platinum miners have now reported full year 2016 production and cost data we have, with the help of our South African mining equities team, updated our PGM cost curve. Once again we find at prevailing market prices for PGMs the industry is under pressure, especially as the rand has offset dollar price strength. Latest news The weakness in Chinese alumina prices continues, with latest assessments at ~$380/t (including VAT). This is $40/t lower than levels at the end of February, and comes despite surging production. Certainly the environmental checks which were delaying restarts now look to have been overcome in certain provinces, and the import arbitrage (which was wide open in January and early February) is now $20/t shut. However another commodity which relies on the Chinese physical market to set pricing manganese is showing signs that the year-to-date slump which had seen a spot price fall of >50% has ended. Last week s market assessments rose slightly, and with low grade material now at $2.60/mtu CFR China we believe material trucked to port in South Africa struggles to be viable at these price levels. China s gold imports were 63t in February, we estimate from Chinese Customs valuation data. This was down from 81t in January but unchanged YoY. Using other countries export data, which gives volumes, we estimate flows into China were around 73t, up from 53t last month but down from 87t a year ago (note not all suppliers have reported yet). The differences in the two measures might reflect timing around the Chinese New Year, but in any case the underlying picture is the same - China continues to import a lot of gold but the amount does not seem to be growing. Meanwhile the world s central banks reported adding a small 9t to their gold reserves in February, according to latest IMF data published on Monday. Russia was the largest purchaser, though at 9t it added a small amount by its standards. There was only one seller of note, Argentina, down 5t, though as it had increased its reserves by the same amount in January this probably reflects swap transactions. As we have already reported China made no addition to its holdings for the fourth consecutive month, suggesting to us a trend. Macquarie invites you to register for two forthcoming conferences. Our annual Global Metals, Mining and Materials Conference is being held on June 27 28, 2017, at the Sheraton Times Square in New York. This will be Macquarie s 12th year hosting this event, which will feature senior management from up to 40 world-class metals, mining and basic materials companies as well as commodity-related keynote presenters from around the world. Meanwhile, we will be hosting our third-annual Global Gemstones Conference in our London office on April 27. This will include participation of senior executives from all segments of the diamond industry and will provide key insights for this year and beyond. Please refer to page 5 for important disclosures and analyst certification, or on our website

2 PGM cost curve another difficult year for PGM miners As most Southern African platinum miners have now reported full year 2016 production and cost data we have, with the help of our South African mining equities team, updated our PGM cost curve. Once again we find at prevailing market prices for PGMs the industry is under pressure, especially as the rand has offset dollar price strength. Our cost curve includes most South African and Zimbabwean mines, and calculates their cash cost in South African rand (ZAR) per 3E + AU oz produced, i.e. total cash costs divided by the output of platinum, palladium, rhodium and gold. We have also made an estimate of sustaining capex, again divided by production. We use South African rand not US dollars as the vast majority of South African mining costs are in rand. For 2016 the average cash cost per 3E + AU oz was ZAR 11,100 ($756). Including sustaining capex increases that to ZAR 11,800. This compares to an average spot price during 2016 for 3E + AU/oz (weighted according to South African mines production profile as a whole) of ZAR 12,500/oz. Fig 1 PGM cost curve, South Africa and Zimbabwe, R/3e+AU/oz (by mine) R/3E + AU oz 16,000 14,000 Cash Cost + Sustaining Capex Cash Cost 12, E+AU basket Current 3E +AU basket 10,000 8,000 6,000 4,000 2, ,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 3E + AU produced ounces ('000) Source: Company data, Macquarie Research, March 2017 Though on average this suggests the industry was profitable, a number of mines at the top end on this measure were not, especially if we look for them to cover sustaining capex. That said, this curve cannot be taken as a reliable measure of industry profitability - for instance we have not taken into account all the by-product credits available, for the minor PGMs, chrome and base metals, nor are cash costs a good long-term measure of the cost of mining. It s also the case that revenues vary for individual mines in the proportions they produce of each metal. Nevertheless as a rough guide to market trends the curve is quite illuminating. Those expecting large production cuts to boost the platinum price could be disappointed for a while yet - the flat nature of the cost curve in the latter half reduces the incentive for any one company to lead the way. It s also interesting to see how the various metals and the rand exchange rate contribute to pricing. In 2017 so far, for instance, one might expect the situation to look markedly better given the price in US dollars of platinum has risen 8%, palladium 21% and rhodium a huge 32% (gold has added 10%). This has meant the 3E + AU basket price in US dollars is up a handy 14%. 27 March

3 But unfortunately for the PGM miners, the rand this year has gained 8%, meaning the basket price in rand is up a far smaller 5% (and note most of that came today, Monday 27, as the rand fell sharply). Even more dispiritingly, this rand basket price at ZAR 11,894/oz remains well below the 2016 average (see red line in fig 1). So at least for now, the rand, normally a help to South African miners, has become a bit of a hindrance (fig 2) 1. Fig 2 The rand, usually a help, becomes a hindrance to South African PGM miners (start 2017 = 100) Fig 3...and strong gains for palladium and rhodium still can t offset platinum s weakness (ZAR / 3E + AU) USD basket price 85 ZAR basket price 80 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 14,000 12,000 10,000 0 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Source: Macrobond, Macquarie Research, March 2017 Source: Macrobond, Macquarie Research, March ,000 6,000 4,000 2,000 Platinum Palladium Rhodium Gold It is also useful to be reminded how a strong performance by palladium and rhodium rarely offsets a weak platinum price (fig 3). If we compare today s price of each metal in ZAR with the average in 2016, we see that platinum is down 14%, palladium up 11%, rhodium up 36%, and gold down 13%. But such is platinum s dominance in the 3E + AU basket (56%) that the basket price is down 5%. To be exact the fall in platinum has taken 1,113 ZAR off the basket price, while the increase in palladium (32% of the basket) has added only 315 ZAR, and rhodium (8%) another 276 ZAR. Finally what lessons does this have for PGM prices? What one would like to say is that given much of the industry, responsible for the vast majority of platinum and rhodium production and a large chunk of palladium production, is barely profitable, the rand basket price cannot go much lower. And to some extent we think we can say that, at least in the medium term. This does not tell us what the split between the relative moves in the rand and the component metal prices should be (except as we noted if platinum falls in price the others need to rise considerably to offset it, which would in turn have implications for substitution). And as we all know mining costs cannot provide a floor in the short term, especially given the institutional and social barriers to mine closures in South Africa and can shift considerably in the long term, for example if all PGM demand is curbed by electric vehicles. 1 One can debate what stress to put on the ZAR revenues, as opposed to dollar revenues. The argument as we note for using ZAR is the vast majority of miners costs are ZAR-denominated. The argument against is that over time the ZAR, as normally the weaker currency, is factoring in higher domestic inflation which should feed through into costs. 27 March

4 Monday 27 March 2017 Prices Closing price * Closing price * 27-Mar Mar Mar Mar-17 % ch. day 2017 YTD Ave 2016 US$/tonne US /lb US$/tonne US /lb on day US$/tonne US$/tonne LME Cash Aluminium 1, , ,844 1,605 Aluminium Alloy 1, , ,634 1,555 NAASAC 1, , ,843 1,704 Copper 5, , ,834 4,863 Lead 2, , ,275 1,872 Nickel 9, , ,308 9,609 Tin 19, , ,035 18,006 Zinc 2, , ,779 2,095 Cobalt 53,750 2,438 53,750 2, ,130 25,655 Molybdenum 14, , ,244 14,453 LME 3 Month Aluminium 1, , ,849 1,610 Aluminium Alloy 1, , ,647 1,577 NAASAC 1, , ,863 1,725 Copper 5, , ,852 4,867 Lead 2, , ,278 1,878 Nickel 9, , ,362 9,657 Tin 19, , ,016 17,912 Zinc 2, , ,790 2,102 Cobalt 53,750 2,438 53,750 2, ,141 25,758 Molybdenum 15, , ,246 14,472 * LME 2nd ring price hrs London time. Year-to-date averages calculated from official fixes. Gold - LBMA Gold Price (US$/oz) Silver - LBMA Silver Price (US$/oz) Platinum - London 3pm price (US$/oz) Palladium - London 3pm price (US$/oz) Oil WTI - NYMEX latest (US$/bbl) EUR : USD exchange rate - latest AUD : USD exchange rate - latest 1,258 1, ,217 1, Exchange Stocks Change since last report Cancelled End-16 Ch. since (tonnes) 27-Mar Mar-17 Volume Percent warrants stocks end-16 LME Aluminium 1,936,275 1,945,800-9, % 880,150 2,202, ,900 Shanghai Aluminium 326, , % 0 100, ,875 Total Aluminium 2,262,872 2,272,397-9, % 880,150 2,302,897-40,025 LME Copper 311, ,525-1, % 128, , Comex Copper 126, , % - 80,112 46,729 Shanghai Copper 312, , % - 146, ,986 Total Copper 750, , % 128, , ,265 LME Zinc 374, ,825-1, % 190, ,850-53,125 Shanghai Zinc 184, , % - 152,824 31,552 Total Zinc 559, ,201-1, % 190, ,674-21,573 LME Lead 190, , % 112, ,900-4,700 Shanghai Lead 74,176 74, % - 28,726 45,450 Total Lead 264, , % 112, ,626 40,750 Aluminium Alloy 14,900 15, % 1,160 12,980 1,920 NASAAC 125, , % 0 97,380 28,140 Nickel 382, , % 98, ,066 10,092 Tin 3,715 3, % 620 3, Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research 27 March

5 This publication was disseminated on 27 March 2017 at 17:47 UTC. 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