Australian Iron Ore Miners

Transcription

1 AUSTRALIA/UNITED KINGDOM/SOUTH AFRICA A perfect storm Strong sentiment and weaker shipments A significant decline in Western Australia iron-ore shipment rates during January and February is likely to have contributed to the recent strength in iron-ore prices. Shipping rates have started to recover, but the wet season is far from over, and with 2 looking like a more average year, the risk of further supply interruptions remains. Inside Strong sentiment and weaker shipments 2 Shipping rates down significantly 4 Shipment guidance on track 6 Companies BHP Billiton Outperform Market Cap US$97,839m Price A$25.34/ 13.46/ZAR214 Target price A$33./.4/ZAR28 TSR 35%/34%/36% Rio Tinto Outperform Market Cap US$76,746m Price A$6.96/ Target price A$79./ 44. TSR 33%/35% Fortescue Metals Outperform Market Cap US$15,57m Price A$6.28 Target price A$7.6 TSR 28% Our latest China Steel Survey was one of the most positive surveys in terms of sentiment in recent years. Steel producer margins are high and with forward order book expectations rising, most participants in the survey were expecting to increase iron-ore purchases in the near term. We believe these two factors have been a key driver in pushing iron-ore prices well above market expectations and cost curve support. Pilbara shipping rate fell over +1mtpa in early February Several recent rainfall events in Western Australia have put pressure on iron-ore shipment volumes. Our weekly shipping rate data track all the key ports in Western Australia, as opposed to the monthly data published by the individual ports. The Pilbara iron-ore shipments were running around 85mtpa in the December quarter but declined to 81mtpa in January and 794mtpa in February, on the surface only a modest decline. However, the weekly data show that the average shipping rate over the last week of January and first two weeks of February fell to 725mtpa, a reduction of 125mtpa from the December quarter run-rate. Season impacts of the wet season are nothing new, although we note that both 215 and 2 were relatively benign, with the last normal wet season occurring in 214. While rainfall has been significant we suspect that the lack of cyclones has subdued market focus on what has been much wetter wet season than seen in the previous two years. Shipment guidance on track despite the rain We have undertaken a detailed analysis of the wet season impact on BHP and RIO s shipments since 22 and FMG since it began production. We believe a normal wet season would see the March Q contribution fall to 23%. Based on the guidance of the major Pilbara iron-ore producers, a normal wet season would see the shipping rate fall to ~78-81mtpa, broadly in line with the January and February averages. Both BHP and RIO note that iron-ore shipment guidance is subject to weather conditions. Given the lack of any wet season impact over the past two years we believe upper ends of guidance ranges are unlikely to adequately account for a normal or above-average wet season. 3 March 2 Our FY shipment forecast for BHP of 268mt is in the middle of the mt guidance range while for FMG our mt is at the top end of the 5-mt range. The shipping rate for January and February is 5% and 4% higher than our forecast 3QFY average for BHP and FMG, respectively. RIO s shipping rate in January and February of 37mtpa is 2% lower than our 1QCY forecast and we note our CY forecast for RIO of 334mt was in the middle of the 33-34mt range. Please refer to page 12 for important disclosures and analyst certification, or on our website

2 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan- Apr- Jul- Oct- Jan- Sentiment index Macquarie Wealth Management Shipping rates fell over 1mtpa on a 6 week rolling basis Strong sentiment and weaker shipments Iron-ore shipment rates in Western Australia fell in February A significant decline in Western Australia iron-ore shipment rates in late January and early February is likely to have been a contributor to the recent strength in iron-ore. On a six-week rolling-average basis, the shipping rate from the Pilbara Ports fell over 1mtpa. Shipping rates have started to recover, but the wet season is far from over, and with 2 looking like a more average year, the risk of further supply interruptions remains. We note that shipments from Western Australia are only one of many contributors to movements in iron-ore prices, but there certainly appears to be some correlation, particularly during the wet season. We note there was almost no impact during the 215 wet season on shipments but the 2 wet season, which was relatively short, saw iron-ore prices rise from ~US$45/t to US$6/t before volumes recovered. Fig 1 Pilbara port shipping rates have a strong inverse relationship to iron-ore 93, 6WMA (tpa) Iron Ore (US$/t) 1 88, , 7 78, , 4 68, Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb Apr Jun Aug Oct Dec Feb 3 Source: Bloomberg, Thurlestone, Macquarie Research, March 2 Sentiment in China looks positive Sentiment at a five year high Our latest China Steel Survey was one of the most positive surveys in terms of sentiment in recent years. Steel producer margins are high and with forward order book expectations rising, most participants in the survey were expecting to increase iron-ore purchases in the near term. We have included some key charts and commentary below. Fig 2 Market bullishness at highest level in over five years Are you positive or negative on the market over the next three months? Increasing number of respondents positive Increasing number of respondents negative Mills Steel traders Iron ore traders Source: Macquarie Research, March 2 3 March 2 2

3 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan- Apr- Jul- Oct- Jan- Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan- Apr- Jul- Oct- Jan- Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan- Apr- Jul- Oct- Jan- Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan- Mar- May- Jul- Sep- Nov- Jan- Macquarie Wealth Management Expectations rather than actual demand driving sentiment The bullish sentiment is reflecting expectations for post Chinese New Year demand rather than recent orders. The auto sector remains the strongest area of demand nonetheless, while orders from infrastructure and construction sectors starting to show a mild improvement last month ahead of the seasonally strong spring construction season. Fig 3 Mill steel orders robust, but this is a seasonally quiet time of year Fig 4 orders Auto demand remains the leading sector for Have domestic orders increased or decreased over the last month? Total Increasing no. of mills seeing orders rise Net change in orders at mills and traders - end use sectors Construction Infrastructure Machinery Autos White goods Shipbuilding Increasing no. of mills seeing orders fall -4-5 Source: Macquarie Research, March 2 Source: Macquarie Research, March 2 Steel margins have improved Most mills expect to purchase more ore Steel mill margins continue to improve, aided to some degree by the easing in coking coal prices in recent months. Operating rates at mills remain low, however, but this is due to seasonality, and we expect to see a surge in steel output in the weeks ahead. Chinese steel output traditionally rises strongly from March through May, and tends to peak every May or June before steadying over 2H. Steel mills have seen minimal inventory build despite the optimistic outlook towards orders, but this is probably better reflected in steel trader inventory. Trader inventory levels are at their highest levels in nearly three years, and their expectations for strong orders and ongoing price increases are clearly behind the strong inventory build. Steel mills have clearly built iron ore inventory in anticipation of lifting steel output in the months ahead. Moreover, despite already high inventory levels, mills in our survey report that they plan to raise purchases further over the next month, meaning iron ore prices may still be supported in the very near term. Fig 5 Increasing number of mills are profitable following the recent surge in steel prices Fig 6 Mills still have plans to buy more iron ore near term despite high inventory levels What is the current level of profitability? Total Increasing no. of mills making money Do you plan to increase or decrease iron ore purchases? Total Increasing no. of mills planning to raise Increasing no. of mills losing money Increasing no. of mills planning to reduce 2 1 Source: Macquarie Research, March 2 Source: Macquarie Research, March 2 3 March 2 3

4 Macquarie Wealth Management Pilbara shipping rates declined over 1mtpa First decent wet season in three years Shipping rates down significantly A number of recent rainfall events in Western Australia have put pressure on iron-ore shipment volumes. Pilbara iron-ore shipments were running around 85mtpa in the December quarter, declining to ~8mtpa in January and 795mtpa in February. We note that in the last week of January and the first two weeks of February, the shipping rate fell to 725mtpa, 125mt below the December quarter average. Season impacts of the wet season are nothing new, although we note that both 215 and 2 were relatively benign, with the last normal wet season occurring in 214. Based on the guidance of the major Pilbara iron-ore producers, a normal wet season would see the shipping rate fall to ~785mtpa, significantly higher than the average for the past three weeks. The shipping data on a weekly basis is volatile, but trends can clearly be seen when we look at three- and six-week moving averages, and we also assess the 12-week average. The data in the chart below includes the weekly shipping data from BHP, FMG, Roy Hill and Utah Point at Port Hedland and also RIO s Dampier and Cape Lambert ports. Fig 7 Shipping rates from Pilbara ports down +1mtpa 9 12WMA (ktpa) 6WMA (ktpa) 3WMA (ktpa) Jan 15 Apr 15 Jul 15 Oct 15 Jan Apr Jul Oct Jan Source: Thurlestone, Macquarie Research, March 2 The shipping rate fell aggressively from late January RIO appears to have suffered the most On a rolling six-week basis the shipping rate from the Pilbara iron-ore ports peaked at around 87-88mtpa in December. The shipping rate then declined to around 8mtpa in mid-january and troughed at 725mtpa in early February. The shipping rate has begun to recover on a rolling three-week basis to ~78mtpa but remains at a low point on a six-week rolling basis. The most significant decline in shipping rates is from RIO, which saw its shipping rate fall 23% from its December quarter average to the late January/early February trough. BHP s shipping rate fell 13% while Utah Point shipments were down 13% over the same period. Interestingly FMG and Roy Hill appear comparatively unscathed down 5% and up 6% over the same period, respectively. Fig 8 Shipping rate is down 125mtpa from December quarter average Company Dec Q total (mt) Dec Q rate (mtpa) Mar Qtd (mtpa) February (mtpa) January (mtpa) December (mtpa) RIO BHP FMG Roy Hill Utah Total Source: Thurlestone, Macquarie Research, March 2 3 March 2 4

5 Macquarie Wealth Management A return to a normal wet season Wet season impacts are nothing new, although we note that there has been limited impact over the past two years. There was almost no impact in 215, while the 2 wet season impact was also modest, with shipments only impacted for a brief period, albeit long enough to drive a significant move in iron-ore prices. We note that over the past 15 years the March quarter has accounted for 23% of BHP s and 22% of RIO s annual iron-ore shipments. The December quarter is usually the peak quarter accounting for 26-27% of the annual total. We note that the average impact of the wet season is arguably more significant than this analysis suggests given both BHP and RIO have been growing iron-ore production over this period. Fig 9 BHP Billiton historical March Q shipments Fig 1 Rio Tinto historical March Q shipments 27% March Q BHP Billiton (WAIO) - 1% 27% March Q Rio Tinto (WA) - 1% 25% 25% 23% 23% 21% 21% 19% 19% % % 15% 15% Source: BHP, Macquarie Research, March 2 Source: RIO, Macquarie Research, March 2 Smaller producers down more in percentage terms We note that the combined shipping rate for BHP, RIO and FMG is down 43mtpa from the December quarter average to the first two months of the year. Smaller producers were also hit, down 8mtpa and greater than the larger producers in percentage terms. We note that Roy Hill and output from Utah Point (Mineral Resources (MIN AU, A$11.41, Outperform, TP: A$14.51, Andrew Wackett) and Atlas Iron (AGO AU, A$.34, Not Rated)) accounted for the bulk of this fall. Fig 11 BHP/RIO/FMG shipments down 43mtpa YTD Fig 12 Smaller producers down 8mtpa YTD RIO BHP FMG Roy Hill Utah Geraldton Esperance Mar 15 Jun 15 Sep 15 Dec 15 Mar Jun Sep Dec Mar Mar 15 Jun 15 Sep 15 Dec 15 Mar Jun Sep Dec Mar Source: Thurlestone, Macquarie Research, March 2 Source: Thurlestone, Macquarie Research, March 2 3 March 2 5

6 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Macquarie Wealth Management BHP YTD shipping rate 5% higher than our forecast Shipment guidance on track BHP shipping rate running head of our expectations BHP has grown volumes steadily over 1HFY, with total iron-ore shipments for the half of 135mt. In order to meet guidance BHP will need to ship 13-14mt in 2HFY which implies a shipping rate of ktpd. We note BHP s average for January and February was 745ktpd, 5% higher than we were expecting. To hit the lower end of guidance we believe BHP needs to deliver 6mt in 3QFY (71kptd) and 7mt (76kptd) in 4QFY. The upper end of guidance is calculated to need 67mt in 3QFY (75ktpa) and 73mtpa in 4QFY (8ktpd). Fig 13 BHP operating within guidance targets BHP Guidance Total Sep Dec Mar Jun Low (mt) High (mt) Macq (mt) Implied daily shipping rates Low (ktpd) High (ktpd) Macq (ktpd) Actual (ktpd) 745 Variance 5% Source: BHP, Thurlestone, Macquarie Research, March 2 FY guidance looks achievable But a record 4QFY is needed Our forecasts for BHP assume a normal wet season, that should see shipments fall to 64mt, then rise to 69mt in 4QFY. YTD BHP has averaged 745ktpd, suggesting the company is on track to hit at least the middle of the range of guidance. We note that the implied shipping rate required for the last four months of FY to hit our forecasts is 731ktpd or 267mtpa. We note that BHP had a major train derailment last week, which could further impact the shipping rate in the next week or so. BHP is going to need to set record quarterly average shipping rates to hit the upper end of its guidance ranges, something that is certainly possible post the commissioning of the second crusher at Jimblebar. Fig 14 BHP shipping rate and forecasts needed to hit guidance Weekly shipping rate (ktpd) Guidance (ktpd) - Low Macq (ktpd) Qty avg (ktpd) Guidance (ktpd) - High 5 Source: BHP, Thurlestone, Macquarie Research, March 2 3 March 2 6

7 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Macquarie Wealth Management Rio Tinto has had a soft start to the year RIO guidance for CY is 33-34mt RIO shipped 328mt in CY, and has set a forecast of 33-34mt for CY, although the company noted that guidance remains subject to weather conditions. Based on our historical analysis of normal seasonality we estimate RIO needs to ship between 73mt and 75mt in 1QCY to remain on track to hit guidance. Fig 15 Rio Tinto has had a soft start to the year RIO Guidance CY 1QCY 2QCY 3QCY 4QCY Low (mt) High (mt) Macq (mt) Implied daily shipping rates Low (ktpd) High (ktpd) Macq (ktpd) Actual (ktpd) 842 Variance (2%) Source: RIO, Thurlestone, Macquarie Research, March 2 Shipments marginally lower than we had expected In the first two months of the year, RIO s shipping rate has averaged 842ktpa, or 37mtpa, marginally lower than we were expecting. As a December year-end producer, RIO has time to make up the shortfall and normal seasonality dictates that 1QCY is the weakest. We note that our forecasts are broadly in line with the middle of the guidance range for RIO. Like BHP, RIO will need to record quarterly shipment records for 3QCY and 4QCY in order to hit its guidance targets. Fig RIO shipping rate and forecasts needed to hit guidance 1,2 1,1 1, Weekly shipping rate (ktpd) CY Guidance - low (ktpd) Macq (ktpd) Qty avg (ktpd) CY Guidance - high (ktpd) 5 Source: RIO, Thurlestone, Macquarie Research, February 2 3 March 2 7

8 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Macquarie Wealth Management FMG s shipment rate has been comparatively stable Fortescue and Roy Hill have shown a mixed performance FMG s production has been extremely consistent over the past two years, averaging a quarterly shipment rate of 42mtpa with a range of 4-44mtpa. Our forecasts for 3QFY and 4QFY are based on the seasonality patterns of BHP and RIO, but again in the first two months of 2, FMG s shipment rate has been more stable than its larger peers. Fig FMG shipping rate and forecasts needed to hit guidance 65 6 Weekly shipping rate (ktpd) Guidance (ktpd) - Low Macq (ktpd) Qty avg (ktpd) Guidance (ktpd) - High Source: FMG, Thurlestone, Macquarie Research, March 2 Roy Hill shipping rate has fallen short of our expectations in the 1QCY Roy Hill s shipping rate has been volatile in 2, with the average for the first two months of the year of 34mtpa 12% lower than we had forecast and below the 37mtpa rate achieved in 4QCY. Fig 18 Roy Hill shipping rate and forecasts needed to hit guidance Weekly shipping rate (ktpd) Guidance (ktpd) - 4mtpa Macq (ktpd) Qty avg (ktpd) Guidance (ktpd) - 5mtpa Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Source: Roy Hill, Thurlestone, Macquarie Research, March 2 3 March 2 8

9 Macquarie Wealth Management Fig 19 BHP Billiton summary financials BHP Billiton ASX: BHP Price: (A$ps) Year end: Jun Rating: Outperform Up/dn TSR LSE: BLT Price: ( ps) Diluted shares (m) 5,323 ASX Target: 33. 3% 35% JSE: BIL Price: (ZARps) LSE Target:.4 29% 34% Mkt cap: (US$m) 97,839 JSE Target: % 36% ASSUMPTIONS FY14 FY15 FY FYe FY18e FY19e FY2e ASSUMPTIONS FY14 FY15 FY FYe FY18e FY19e FY2e FY21e Exchange Rate A$/US$ Commodity prices Exchange Rate USDBRL Iron-ore (US$/t) Exchange Rate USDZAR Hard coking coal (US$/t) RATIO ANALYSIS FY14 FY15 FY FYe FY18e FY19e FY2e Thermal coal (US$/t) Diluted share capital m 5,338 5,333 5,322 5,323 5,323 5,323 5,323 Copper (US$/lb) EPS (diluted and pre sig. items) US Nickel (US$/lb) P/E x 7.5x 54.3x 85.3x 14.5x 21.x 26.5x 2.5x Brent Crude (US$/bbl) CFPS US West Texas (US$/bbl) P/CF x 5.3x 7.x 12.7x 8.1x 1.8x 1.1x 8.8x Henry Hub (US$/mmbu) DPS US Dividend yield % 6.2% 6.4% 1.5% 4.3% 2.9% 2.3% 2.9% Production by commodity Franking Level % 1% 1% 1% 1% 1% 1% 1% Iron-ore Book value per share US$ps WAIO (mt) - 1% shipments P/Book value x 1.2x 1.5x 1.7x 1.6x 1.5x 1.5x 1.4x WAIO (mt) - BHP share R.O.E. (pre sig items) % 18% 6% -1% 12% 8% 6% 8% Samarco (mt) - BHP share R.O.A. (pre sig items) % 15% 1% 3% 11% 8% 6% 8% Total Iron-ore (mt) - BHP share Interest Cover x 19.4x 19.3x 3.4x 13.4x 12.x 1.1x 13.3x Coal EBITDA per share US$ps Coking coal (mt) - 1% EV/EBITDA x 3.8x 5.6x 1.x 5.4x 6.3x 6.6x 4.2x Coking coal (mt) FCF Yield % 12% 6% 3% 12% 6% 6% 9% Thermal coal (mt) EARNINGS FY14 FY15 FY FYe FY18e FY19e FY2e Copper (kt) Revenue US$m 67,26 44,636 3,912 39,531 38,232 37,458 38,886 Escondida - (1%) 1,153 1, ,71 1,63 1,55 1,45 Operating Costs US$m (35,638) (22,761) (,526) (18,81) (2,723) (21,354) (2,874) Cerro Colorado Operational EBITDA US$m 31,568 21,875 14,386 2,73,59,14 18,12 Spence Associates US$m 1, (2,14) Olympic Dam Corporate & Other Costs US$m (44) (571) 58 (77) (124) (127) (13) Antamina Underlying Ebitda US$m 32,359 21,852 12,34 21,14,848,462 18,363 Total Copper (kt) 1,714 1,78 1,58 1,52 1,66 1,637 1,62 1,63 D&A & Impairments US$m (9,498) (9,986) (8,871) (7,864) (8,458) (8,777) (8,829) Petroleum (mmboe) Underlying Ebit US$m 22,861 11,866 3,469 13,15 9,39 7,685 9,534 Conventional production Adjustments US$m 551 (3,196) (9,74) 75 Unconventional Production Profit from Operations US$m 23,412 8,67 (6,235) 13,225 9,39 7,685 9,534 Total Net Interest US$m (1,6) (614) (1,24) (979) (781) (758) (719) Profit Before Tax US$m 22,236 8,56 (7,259) 12,246 8,68 6,927 8,815 EBITDA BY COMMODITY Tax Expense US$m (7,12) (3,666) 1,52 (4,43) (3,56) (2,459) (3,129) Net Earnings US$m 15,224 4,39 (6,27) 7,8 5,552 4,468 5,686 Petroleum (US$bn) Copper (US$bn) Iron-ore (US$bn) Coal (US$bn). Other (US$bn) Discontinued operations US$m (1,512) 35. Minority interests US$m (1,392) (968) (8) (699) (619) (558) (624) Attributable Profit US$m 13,832 1,91 (6,385) 7,1 4,933 3,911 5,62 Adjustments US$m (385) 4,57 7, Underlying Profit US$m 13,447 6,4 1,215 7,157 4,933 3,911 5, CASHFLOW FY14 FY15 FY FYe FY18e FY19e FY2e Net Earnings US$m 15,224 4,39 (6,27) 7,8 5,552 4,468 5,686 Interest/Tax/D&A US$m 9,34 11,72 15,99 9,64 7,368 8,77 9,36 2. Working Capital/other US$m 1,16 3, (759) (487) Net Operating Cashflow US$m 25,364 19,296 1,625,697 12,433 13,31 15,322 Capital Expenditure (cash basis) US$m (15,181) (11,581) (7,281) (5,398) (6,137) (7,23) (6,413) 15. Acquisitions/(Disposals) US$m 1,882 Other US$m (713) (1,573) () 1. Free cash flow US$m 11,352 6,142 3,38 12,27 6,296 6,287 8,99 Dividends US$m (6,387) (6,498) (4,13) (2,882) (4,45) (2,395) (2,52) Minority dividends & payments US$m 1,183 (51) (87) (759) (619) (558) (624) 5. New Equity US$m (354) (346) (16) (68) Debt Drawdown/(Repayment) US$m (91) (931) 4,67 (3,5). Net Financing Cashflow US$m (6,468) (8,276) 284 (7,29) (4,665) (2,953) (3,126) FY13 FY14 FY15 FY FYe FY18e FY19e FY2e FY21e FY22e FY23e FY24e FY25e Net change in cash US$m 4,884 (2,134) 3,664 4,998 1,631 3,334 5,784 VALUATION BALANCE SHEET FY14 FY15 FY FYe FY18e FY19e FY2e Projects US$m US$ A$m A$/sh GBPm GBP ZARm ZAR Cash US$m 8,83 6,753 1,319 15,334,965 2,299 26,83 Petroleum 18, , , , Other current assets US$m 13,493 9,6 7,395 8,289 7,381 7,514 8,29 Iron-ore 53, , , , Property, Plant & Equipments US$m 18,787 94,72 83,975 81, 79,111 77,56 75,35 Copper 18, , , , Other Non-current assets US$m 2,33 14,139,264,75 15,88,344,54 Coal, , , , Total Assets US$m 151, ,58 118, , , ,7 127,2 Nickel West (1,13) (.21) (1,471) (.28) (883) (.) (14,344) (2.7) Debt US$m 34,589 31, 36,421 31,544 31,544 31,544 31,544 Group and unallocated (667) (.13) (889) (.) (533) (.1) (8,668) (1.63) Payables US$m 1,258 7,418 5,42 5,661 5,41 5,132 5,484 Other.... Other liabilities US$m 21,184 15,447,59 19,62 15,341 15,461,555 Cash 15, , , , Total Net Assets / Equity US$m 85,382 7,545 6,71 64,582 67,34 69,58 72,419 Debt (31,544) (5.93) (42,59) (7.9) (25,235) (4.74) (41,72) (77.5) Net Debt / (Cash) US$m 25,786 24,4 26,12,21 14,579 11,245 5,461 Net Equity Value (WACC 1% Nom) 9, , , ,1, Gearing (net debt/(nd + equity)) % 23% 26% 3% 2% 18% 14% 7% Price Target (5/5 NPV and 7.5x EV/Ebitda) AUD 33. GBP.4 ZAR 28. Gearing (net debt/equity) % 3% 35% 43% 25% 22% % 8% Source: BHP, Macquarie Research, March 2 3 March 2 9

10 Macquarie Wealth Management Fig 2 Rio Tinto summary financials Rio Tinto ASX: RIO Price: (A$ps) 6.92 Year end: Dec Rating: Outperform Up/dn TSR LSE: RIO Price: ( ps) Diluted shares (m) 1,786 ASX Target: 79. 3% 33% Mkt cap: (US$m) 76,746 LSE Target: % 35% ASSUMPTIONS CY14 CY15 CY CYe CY18e CY19e CY2e ASSUMPTIONS CY14 CY15 CY CYe CY18e CY19e CY2e Exchange Rate A$/US$ Commodity prices Exchange Rate C$/US$ Iron-ore (US$/t) Exchange Rate USDZAR Hard coking coal (US$/t) RATIO ANALYSIS CY14 CY15 CY CYe CY18e CY19e CY2e Thermal coal (US$/t) Diluted share capital m 1,859 1,825 1,797 1,786 1,786 1,786 1,786 Copper (US$/lb) EPS (underlying, undiluted) US Alumina (US$/t) P/E x 9.2x 18.7x.4x 12.8x 18.5x 19.8x 13.x Aluminium (US$/lb) CFPS US P/CF x 6.1x 9.x 9.4x 7.4x 9.2x 9.x 6.9x Production by commodity DPS US Iron-ore (1% Basis) Dividend yield % 4.6% 4.6% 3.7% 4.7% 3.2% 3.% 4.6% Pilbara (mt) Franking Level % 1% 1% 1% 1% 1% 1% 1% Iron Ore Company of Canada (mt) Book value per share US$ps Iron-ore (1%) P/Book value x 1.6x 1.9x 1.8x 1.7x 1.7x 1.7x 1.6x Iron-ore (RIO Reported Share) R.O.E. (pre sig items) % 12% -4% 1% 13% 9% 8% 12% Pilbara (mt) R.O.A. (pre sig items) % 14% 9% 1% 12% 9% 8% 1% Iron Ore Company of Canada (mt) Interest Cover x 25.3x 11.4x 8.5x.3x 13.4x 13.3x.6x Iron-ore (RIO Reported Share) EBITDA per share US$ps Aluminium (RIO Share) EV/EBITDA x 4.6x 7.2x 6.4x 5.1x 6.4x 6.2x 5.x Bauxite (mt) FCF Yield % 1% 6% 9% 11% 4% 5% 1% Alumina (mt) EARNINGS CY14 CY15 CY CYe CY18e CY19e CY2e Aluminium (mt) Revenue US$m 47,664 34,857 33,781 34,85 31,12 32,676 36,323 Copper (RIO Share) Operating Costs US$m (3,376) (24,192) (21,88) (21,693) (21,15) (22,473) (23,913) Mined Copper (kt) Operational EBITDA US$m,288 1,665 11,973 13,112 9,997 1,23 12,41 Refined Copper (kt) Corporate Costs & EAU Adjustments US$m 2,377 1,956 1,537 2,9 2,777 2,764 2,844 Total Copper (mt) Underlying Ebitda US$m 19,665 12,621 13,51,28 12,774 12,967 15,254 Coal (RIO Reported Share) Depreciation & Amortisation US$m (4,86) (4,646) (4,794) (5,11) (4,939) (5,332) (5,697) Thermal coal (mt) Operational Ebit US$m 14,85 7,975 8,7 11,18 7,835 7,635 9,557 Semi-soft Coking Coal (mt) Impairments US$m (473) (2,791) (249) Hard Coking Coal (mt) Share of EAU Profit/(Loss) US$m Total Coal (mt) Adjustments US$m (2,397) (1,569) (1,672) (1,397) (1,48) (1,418) Other (RIO Share) Profit from Operations US$m 12,56 3,976 7,1 1,244 6,955 6,713 1,87 Diamonds (kcts) 13,871,394,953 2,24 2,11 19,73 19,393 Net Interest US$m (585) (698) (1,22) (637) (583) (575) (544) Uranium (mlbs) Other Finance Costs US$m (2,423) (4,4) 249 (4) (4) (4) (4) TiO2 Feedstock (kt) 1,442 1,89 1,48 1,192 1,192 1,192 1,192 Profit Before Tax US$m 9,552 (726) 6,343 9,27 5,972 5,738 9,142 Borates (kt) Tax Expense US$m (3,53) (993) (1,567) (2,762) (1,792) (1,721) (2,743) Net Earnings US$m 6,499 (1,719) 4,776 6,445 4,18 4, 6,4 Post-tax exceptionals US$m EBITDA BY COMMODITY Minority Interests US$m (159) (18) Attributable Profit US$m 6,527 (866) 4,6 6,484 4,496 4,22 6, Iron Ore (US$bn) Aluminium (US$bn) Post-tax adjustments to underlying US$m 2,778 5, Copper & Coal (US$bn) Diamonds and Minerals (US$bn) Other (US$bn) Underlying Profit US$m 9,35 4,54 5,1 6,484 4,496 4,22 6,381 CASHFLOW CY14 CY15 CY CYe CY18e CY19e CY2e Net Earnings US$m 6,499 (1,719) 4,776 6,445 4,18 4, 6,4 Interest/Tax/D&A US$m 6,322 7,722 4,319 5,411 5,339 5,732 6,97 Working Capital/other US$m 1,465 3,38 (218) (627) (531) (494) (526) Net Operating Cashflow US$m 14,286 9,383 8,877 11,229 8,988 9,255 11,971 Capital Expenditure US$m (7,418) (4,55) (2,658) (5,31) (5,576) (5,567) (4,91) Disposals/(Acquisitions) US$m (744) (135) (354) 58 Other US$m 1, ,5 Free cash flow US$m 7,783 4,783 6,773 8,756 3,412 3,688 7,88 Dividends US$m (3,71) (4,76) (2,725) (4,4) (3,214) (2,518) (3,) New Equity US$m 1,291 (1,925) 11 (5) Debt Drawdown/(Repayment) US$m (3,34) (1,681) (4,948) Other US$m Net Financing Cashflow US$m (5,436) (7,67) (7,491) (4,9) (3,214) (2,518) (3,) FX Adjustment US$m (14) () (35) Net change in cash US$m 2,27 (3,57) (753) 3, , 4, CY13 CY14 CY15a CYa CYe CY18e CY19e CY2e CY21e CY22e CY23e CY24e CY25e BALANCE SHEET CY14 CY15 CY CYe CY18e CY19e CY2e VALUATION Cash US$m 12,423 9,366 8,21 12,4 12,238 13,49 18,182 Projects US$m US$/sh A$m A$/sh GBPm GBP/sh Other current assets US$m 8,72 6,188 6,885 6,366 5,833 6,227 6,953 Iron Ore 6, , , Property, Plant & Equipments US$m 68,693 61,57 58,855 56,3 56,954 57,189 55,583 Copper & Diamonds 21, ,782.12, Other Non-current assets US$m 18,9 14,953 15,322 15,769,1,746,523 Energy & Minerals 8, , , Total Assets US$m,827 91,564 89,263 9,493 91,141 93,571 98,241 Aluminium 13, , , Debt US$m 25,219 23,624 18,392,63,63,63,63 Cash 12,4 6.74, , Payables US$m 8,38 6,919 7,15 6,611 6,57 6,467 7,221 Debt (,63) (9.87) (23,57) (13.) (14,14) (7.9) Other liabilities US$m 19,76,893,991 18,494 18,73 19,251 19,874 Group & Unallocated (1,446) (.81) (1,927) (1.8) (1,156) (.65) Total Net Assets / Equity US$m 54,594 44,128 45,73 47,759 48,725 5,223 53,5 Net Equity Value (WACC 1% Nom) 96, , , Net Debt / (Cash) US$m 12,796 14,258 1,191 5,59 5,392 4,221 (552) Price Target (5/5 NPV and 6.5x EV/Ebitda) AUD 79. GBP 44. Gearing (net debt/(nd + equity)) % 19% 24% 18% 1% 1% 8% (1%) Gearing (net debt/equity) % 23% 32% 22% 12% 11% 8% (1%) Source: RIO, Macquarie Research, March 2 3 March 2 1

11 Macquarie Wealth Management Fig 21 Fortescue Metals summary financials Fortescue Metals ASX: FMG Price: (A$ps) 6.28 Year end: Jun Rating: Outperform Up/dn TSR Mkt cap: (A$m) 19,555 Diluted shares (m) 3,114 Target: % 28% Mkt cap: (US$m) 15,57 ASSUMPTIONS FY14 FY15 FY FYe FY18e FY19e FY2e ATTRIBUTABLE MINE OUTPUT FY14 FY15 FY FYe FY18e FY19e FY2e Exchange Rate A$/US$ Iron-ore shipped (kt) Spot iron-ore (62% CIF) US$/t Cloudbreak (mt) mt Spot iron-ore (62% CIF) A$/t Christmas Creek (mt) mt RATIO ANALYSIS FY14 FY15 FY FYe FY18e FY19e FY2e Firetail (mt) mt Diluted share capital m 3,119 3,12 3,1 3,132 3,132 3,132 3,132 Kings Valley (mt) mt EPS (diluted and pre sig. items) A FMG Shipped (mt) mt P/E x 6.6x 51.8x 14.5x 7.x.3x 25.4x 14.3x Nullagine JV (mt) - 1% mt CFPS A Iron Bridge (mt) mt P/CF x 3.3x 11.3x 5.9x 4.4x 1.x 1.1x 6.4x Total shipments (1%) mt DPS A C1 Cash costs US$/wmt Dividend yield % 3.2%.8% 2.4% 6.8% 3.7% 2.5% 3.2% All in cash costs US$/wmt Franking Level % 1% 1% 1% 1% 1% 1% 1% CFR 62% Fe Equ costs US$/dmt Book value per share A$ps OPERATIONAL OUTLOOK P/Book value x 2.4x 2.2x 1.7x 1.5x 1.4x 1.4x 1.3x Cloudbreak (mt) Christmas Creek (mt) Firetail (mt) R.O.E. (pre sig items) % 36% 4% 9% 21% 8% 6% 9% 18. Kings Valley (mt) Nullagine JV (mt) - 1% Iron Bridge (mt) R.O.A. (pre sig items) % 21% 5% 9% % 8% 6% 9%. Interest Cover x 6.5x 1.7x 2.8x 8.4x 5.3x 4.x 9.4x EBITDA per share A$ps EV/EBITDA x 4.5x 9.6x 6.4x 3.9x 6.5x 7.2x 5.5x 12. FCF Yield % 27% 5% 14% 18% 5% 7% 1% 1. EARNINGS FY14 FY15 FY FYe FY18e FY19e FY2e 8. Sales Revenue US$m 11,753 8,574 7,83 8,375 6,764 6,634 7, Other Revenue US$m Total Revenue US$m 11,879 8,651 7,9 8,375 6,764 6,634 7, Operating Costs US$m (6,131) (6,51) (3,841) (3,68) (3,943) (4,21) (4,468) 2. Operational EBITDA US$m 5,748 2,6 3,249 4,695 2,821 2,433 2,974 Exploration Expense/Write-offs US$m () (52) (136) (63) (41) (42) (43). FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY FYeFY18eFY19eFY2eFY21eFY22eFY23eFY24eFY25e Corporate & Other Costs US$m (112) (94) (54) (64) (73) (75) (77) EBITDA US$m 5,62 2,454 3,59 4,568 2,77 2,3 2,854 RESERVES AND RESOURCES (ATTRIBUTABLE) D&A US$m (965) (1,45) (1,244) (1,226) (1,227) (1,227) (1,227) Iron-ore reserves EBIT US$m 4,655 1,49 1,815 3,342 1,48 1,89 1,627 Project Mt Fe CaFe SiO2 Al2O3 P LOI Net Interest US$m (72) (629) (653) (396) (279) (27) (3) Cloudbreak % 62.5% 5.5% 2.8%.6% 8.3% Profit Before Tax US$m 3, ,2 2,946 1, ,455 Christmas Creek % 61.8% 5.7% 2.9%.5% 7.4% Tax Expense US$m (1,3) (14) (369) (889) (36) (246) (436) Firetail % 63.1% 5.8% 2.5%.11% 6.4% Minorities US$m (1) (1) Kings and Queens % 62.2% 6.8% 2.7%.6% 9.1% Adjusted NPAT US$m 2, , ,18 Total Reserves 2,3 57.1% 62.1% 6.% 2.8%.6% 8.% Significant Items (post tax) US$m (22) Iron-ore resources Reported NPAT US$m 2, , ,18 Project Mt Fe CaFe SiO2 Al2O3 P LOI Cloudbreak 1,9 56.5% 61.6% 6.1% 3.4%.6% 8.3% Christmas Creek 2, % 6.9% 6.7% 3.5%.5% 7.9% CASHFLOW FY14 FY15 FY FYe FY18e FY19e FY2e Firetail % 62.3% 6.4% 3.%.11% 6.7% Net Profit US$m 2, , ,18 Kings and Queens 1, % 6.9% 7.8% 3.3%.7% 8.8% Interest/Tax/D&A US$m 1,876 1,19 1,727 1, ,241 1,372 Fortescue Mines 5, % 61.1% 6.9% 3.4%.6% 8.2% Working Capital/other US$m (298) (126) (382) (366) (13) Greater Chichester % 61.3% 6.6% 3.5%.6% 6.8% Net Operating Cashflow US$m 5,395 1,447 2,413 3,358 1,455 1,448 2,288 Greater Solomon 2, % 61.3% 6.9% 3.7%.8% 7.3% Capex US$m (1,995) (849) (358) (668) (72) (423) (847) Eliwana and Flying Fish % 63.2% 5.2% 2.9%.9% 6.5% Investments US$m Nyidinghu 2, % 62.9% 4.9% 3.3%.15% 8.7% Sale of PPE and Other US$m Total Resources 11, % 61.7% 6.4% 3.4%.9% 8.% Free cash flow US$m 4,3 76 2,55 2, ,25 1,44 Magnetite Reserves Mt Mass Recovery (Fe) (SiO2) (Al2O3) Dividends Paid US$m (581) (343) (114) (639) (614) (263) (327) North Star % 67.2% 5.5%.3% Debt US$m (3,4) (257) (2,695) (1,664) (2) (1,973) (2) Magnetite Resources Equity Issuance US$m () (3) (21) (27) Project Mt Mass Recovery Fe SiO2 Al2O3 Other US$m North Star and Eastern Limb 3, % 3.7% 41.% 2.5% Net Financing Cashflow US$m (3,772) (63) (2,83) (2,33) (634) (2,236) (347) Glacier Valley 2, % 32.5% 39.1% 1.7% Net change in cash US$m (775) (1,211) 1,93 West Star % 29.% 42.9% 3.2% Total 6, % 31.4% 4.3% 2.2% VALUATION Spot Prices Macquarie Forecasts BALANCE SHEET FY14 FY15 FY FYe FY18e FY19e FY2e Projects A$m A$ps A$m A$ps Cash US$m 2,398 2,381 1,583 1,941 2, ,942 Fortescue Operations 59, , PP&E & Mine Development US$m 18,68,729,867,3 15,775 14,971 14,592 Undeveloped Resources 2, , Exploration US$m Other resources Total Assets US$m 22,694 21,36 19,337 19,341 18,741,772,652 Unpaid capital.. Debt US$m 9,557 9,569 6,771 5,146 5,126 3,153 3,133 Prepayments (1,6) (.34) (1,96) (.35) Total Liabilities US$m 15,111 13,823 1,931 9,478 8,651 6,372 6,561 Corporate (638) (.2) (655) (.21) Total Net Assets / Equity US$m 7,583 7,537 8,46 9,862 1,9 1,4 11,91 Cash 5, , Net Debt / (Cash) US$m 7,159 7,188 5,188 3,25 3,66 2,34 1,191 Debt (6,712) (2.15) (6,861) (2.2) Gearing (net debt/(nd + equity)) % 49% 49% 38% 25% 23% 18% 1% Net Equity Value (@ 8.5% WACC) 59, , Gearing (net debt/equity) % 94% 95% 62% 33% 3% 22% 11% Price Target (5/5 NPV and 6.x EV/Ebitda) 7.6 Source: FMG, Macquarie Research, March 2 3 March 2 11

12 This publication was disseminated on 3 March 2 at 1:51 UTC. Macquarie Wealth Management Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 5.72% 45.57% 42.28% 6.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.9% 33.97% 43.4% 5.11% 37.23% 35.62% (for global coverage by Macquarie, 8.5% of stocks followed are investment banking clients) Underperform 8.56% 15.3% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. 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