South32. Klipspruit coal mine tour AUSTRALIA/ UNITED KINGDOM/ SOUTH AFRICA. Event. Impact. Earnings and target price revision.

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1 AUSTRALIA/ UNITED KINGDOM/ SOUTH AFRICA S32 AU/S32 LN/S32 SJ Outperform Price (at 12:26, 2 Dec 216 GMT) A$2.83/ 1.67/R29.31 Valuation - DCF (WACC 1.%, beta 1.1, ERP 5.%, RFR 3.3%) A$ 2.55/ 1.59/R month target A$ 3.4/ 2.1/R month TSR % Volatility Index High GICS sector Materials Market cap A$m 15,67 3-day avg turnover A$m 63.4 Number shares on issue m 5,324 Investment fundamentals Year end 3 Jun 216A 217E 218E 219E Revenue m 5,812. 7,15.2 6, ,971.6 EBIT m , ,23.2 1,95.4 Reported profit m Adjusted profit m Gross cashflow m , , ,545.3 CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % 46 1 ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x S32 AU vs ASX 1, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, December 216 (all figures in USD unless noted, TP in AUD) 5 December 216 Klipspruit coal mine tour Event The final day of S32 s South African asset tour consisted of a trip to the Klipspruit coal mine. Impact Klipspruit Life Extension Project looks likely on lower capex: The Klipspruit mine is expected to produce 7-7.5mtpa over the next four years. S32 has an option to extend the life of the project, with initial capital costs estimated at US$25m, around half the original budget. We note that the reduction in capital costs has come by utilising contractors and staging spending over the first ten years. The life extension project still in feasibility study and yet to receive final investment decision. We already factor in the extension project in our estimates. Khutala extension reliant on Eskom: The Khutala underground mine is unique in S32 s portfolio as it operates under a cost plus arrangement, making S32 effectively a mining contractor for Eskom. The potential exists to move the mine from an underground to an open pit operation which would most likely deliver a much lower cash cost however we suspect a variation to the current agreement with Eskom would be needed for this to occur. Take or pay agreement a driver of investment decisions: The South African Coal business has a 16.4mtpa take-or-pay agreement with Transnet that runs to 224 including minimum take up of 15.6mtpa. We believe extensions of current operations are likely at least until the take or pay agreements are fulfilled. We note that S32 is currently exporting ~14mtpa and is looking to rail third party tonnes to cover the shortfall. Earnings and target price revision No change. Price catalyst 12-month price target: A$3.4 based on a NPV / 7x EV/Ebitda blend methodology. Catalyst: S32 is set to report its 2QFY17 production on 19 January and 1HFY17 earnings result on 16 February. Action and recommendation Maintain Outperform: The South African coal business is enjoying a renaissance on the back of higher export thermal coal prices. However downside risk remains at lower prices given S32 struggles to produce enough export coal to cover its take or pay rail volumes. That said the SA coal business only accounts for 9% of our NPV and ~1% of group Ebitda both on our forecasts and under a spot price scenario. The near-term upside risk to our earnings forecasts for S32 is significant. Using spot prices as averages for the last nine months of FY17 and for FY18 translates to earnings upgrades of ~12% and ~28%, respectively. We note that at spot prices, S32 is trading on FY17 and FY18 free cash flow yields of ~2% and ~3%, respectively. Please refer to page 7 for important disclosures and analyst certification, or on our website

2 South African coal site tour S32 s South African coal business consists of the 1% owned Klipspruit, Khutala and Wolvekrans Middleburg Complex (WMC) a 5% interest in the Phola wash plant and a 21% interested in the Richards Bay Coal Terminal (RBCT). S32 has a 92% interest in the South African Energy Coal business, which owns the aforementioned assets, with Phembani Group owning the remaining 8%. Fig 1 Phola wash plant Source: Macquarie Research, December 216 WMC is comfortably the largest mine producing ~15-16mt of coal split ~5:5 between domestic and export. The domestic supply agreement is with Eskom for the Duvha power station for 8.5mtpa and runs through to 224. We note that Eskom has the option to extend the contract beyond its current term. Klipspruit is an export mine producing around 7-8mtpa but only as a mine life of four years. The Khutala coal mine produces mtpa of domestic coal that supplies the nearby Kendal power station. S32 operates Khutala under a cost plus agreement that extends to 233. The cost plus agreement is essentially equivalent to operating as a mining contractor. There is potential to extend the life of Khutala under the existing agreement, both via the current underground or moving to an open pit. Fig 2 Reserves by project Fig 3 Resources by project WMC - Domestic 18% Klipspruit 7% Khutala Underground 11% Naudesbank 5% Khutala Open Weltevreden Cut 11% 5% Khutala Underground 22% Leandra South 22% WMC - Export 13% WMC - Export 64% Leandra North 1% Davel 5% WMC - Domestic 4% Klipspruit 3% Source: S32, Macquarie Research, December 216 Source: S32, Macquarie Research, December December 216 2

3 The cost plus agreement for Khutala means that Eskom covers all mine capex. As a result any potential change to the mining method from underground to open pit is largely a decision for Eskom but needs S32 s approval. We believe a move to an open pit is the most likely outcome for extending the mine beyond 22. Fig 4 Kendal power station Fig 5 Rehabilitation of old mining area Source: S32, Macquarie Research, December 216 Source: S32, Macquarie Research, December 216 If the Klipspruit or Khutala life extension projects were not approved then S32 s South African thermal coal production would fall from ~3mtpa to below 2mtpa by FY22. However given S32 s take or pay obligations we believe this is unlikely hence our base case assumptions incorporate an extension of both Klipspruit and Khutala. Fig 6 Macquarie base case by product Fig 7 Macquarie base case includes extensions 4. Export Thermal Coal (mt) Eskom (mt) Domestic (mt) Middelburg (mt) Klipspruit (mt) Khutala life extension (mt) Wolvekrans (mt) Khutala Underground (mt) Klipspruit life extension (mt) Source: S32, Macquarie Research, December 216 Source: S32, Macquarie Research, December December 216 3

4 Fig 8 S32 NPV by asset Fig 9 S32 NPV by commodity 2, 1,8 1,6 1,4 1,2 1, Nickel 8% Coking Coal 18% Energy Coal 9% Aluminium 2% Alumina 19% Manganese 7% Ag/Pb/ZN 2% Source: Macquarie Research, December 216 Source: Macquarie Research, December 216 Fig 1 S32 Australian cost base Fig 11 S32 South African cost base Cannington (A$m) Illawarra Metallurgical Coal (A$m) Material moved cost (A$/t) 3,5 3, 2,5 Australia Manganese (A$m) Worsley Alumina (A$m) 5 4 Mozal Aluminium (ZARm) South Africa Manganese (ZARm) Southern African cost base 5, 4, South Africa Aluminium (ZARm) South Africa Energy Coal (ZARm) , 3 3, 15 1,5 1, , 1, 1 5 FY16 FY17e FY18e FY19e FY2e FY16 FY17e FY18e FY19e FY2e Source: Company data, Macquarie Research, December 216 Source: Company data, Macquarie Research, December 216 Fig 12 S32 earnings margin Fig 13 S32 cumulative cash flow generation 35% 3% Ebitda margin (%) Ebit margin (%) Earnings margin (%) 16, 14, Net cash / (debt) (US$m) Market Capitalisation (US$m) 25% 12, 2% 1, 15% 8, 1% 6, 4, 5% 2, % FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY2e Source: Company data, Macquarie Research, December 216 Source: Company data, Macquarie Research, December December 216 4

5 Fig 14 S32 summary financials ASX: S32 Price: (A$ps) 2.83 Mkt cap: (A$m) 15,66 Year end: Jun Rating: Outperform Up/dn TSR LSE S32 Price: ( $ps) 1.64 Mkt cap: (US$m) 11,278 Diluted shares (m) 5,324 ASX Target: 3.4 2% 21% JSE S32 Price: (ZARps) LSE Target: % 29% JSE Target: % 27% ASSUMPTIONS FY14 FY15 FY16 FY17e FY18e FY19e FY2e ASSUMPTIONS FY14 FY15 FY16 FY17e FY18e FY19e FY2e FY21e Exchange Rate Commodity prices Exchange Rate Aluminium (US$/lb) Exchange Rate Alumina (US$/t) RATIO ANALYSIS FY14 FY15 FY16 FY17e FY18e FY19e FY2e Manganese ore (US$mtu) Diluted share capital 5,324 5,324 5,324 5,324 5,324 5,324 5,324 Ferromanganese (US$/t) 1,44 1, ,122 1,31 1,73 1,114 1,196 EPS (diluted and pre sig. items) Nickel (US$/lb) P/E 25.3x 19.6x 81.7x 11.7x 14.6x 15.6x 18.7x Thermal coal (US$/t) CFPS Coking coal (US$/t P/CF 1.6x 8.2x 15.1x 1.x 9.7x 1.1x 11.3x Silver (US$/oz) DPS Lead (US$/lb) Dividend yield.%.%.5% 1.6% 2.8% 2.5% 2.1% Zinc (US$/lb) Franking Level % % % % 5% 1% 1% Book value per share Production by commodity P/Book value.9x 1.x 1.2x 1.x 1.x.9x.9x Alumina R.O.E. (pre sig items) 1% % -17% 9% 7% 6% 5% Worsley (kt) 3,916 3,819 3,961 3,997 3,965 4, 4, 4, R.O.A. (pre sig items) 4% 6% 3% 1% 8% 7% 5% Alumar (kt) 1,262 1,328 1,335 1,31 1,35 1,32 1,28 1,28 Interest Cover -2.x -1.9x.2x -1.x -1.x -1.x -1.x Total alumina (kt) 5,178 5,147 5,296 5,298 5,315 5,32 5,28 5,28 EBITDA per share Aluminium EV/EBITDA 8.x 6.3x 9.7x 4.5x 4.6x 4.2x 3.3x Hillside (kt) ROIC 3.3% 5.% 1.5% 7.5% 6.3% 4.5% 3.7% Bayside (kt) 89 FCF Yield 9% 15% 6% 1% 11% 1% 8% Mozal (kt) EARNINGS FY14 FY15 FY16 FY17e FY18e FY19e FY2e Alumar (kt) 14 4 Sales Revenue 8,344 7,743 5,812 7,15 6,838 6,972 6,758 Total aluminium (kt) 1,184 1, Other Revenue Coal Total Revenue 8,344 7,743 5,812 7,15 6,838 6,972 6,758 South Africa Energy Coal (mt) Operating Costs (6,918) (5,892) (4,826) (4,849) (4,86) (5,47) (5,92) Illawarra Coking Coal (mt) Operational EBITDA 1,426 1, ,166 1,978 1,924 1,666 Manganese ore Associates 62 (6) (23) GEMCO (kt) 2,865 2,942 3,71 3,72 3,125 3,125 3,125 3,125 Corporate & Other Costs (5) (1) (12) (15) (18) Hotazel (kt) 1,566 2,355 1,711 1,383 1,288 1,288 1,288 1,288 Underlying Ebitda 1,483 1,849 1,131 2,249 1,956 1,92 1,668 Total manganese ore (kt) 4,431 5,297 4,782 4,454 4,413 4,412 4,412 4,412 D&A (823) (848) (775) (716) (753) (824) (87) Other Underlying Ebit 66 1, ,533 1,23 1, Cerro Matoso Nickel (kt) Adjustments (323) (482) (1,797) Cannington Silver (moz) Profit from Operations (1,441) 1,533 1,23 1, Cannington Lead (kt) Net Interest (187) (6) (14) (138) (81) (49) 12 Cannington Zinc (kt) Profit Before Tax (1,545) 1,395 1,122 1, Tax Expense (47) (431) (7) (432) (349) (325) (271) EBITDA BY COMMODITY Minorities Aluminium Alumina Nickel Manganese Ag/Pb/ZN Coking Coal Energy Coal Net Earnings (1,615) ,5 Earnings Adjustments ,753 4, Underlying Earnings ,5 CASHFLOW FY14 FY15 FY16 FY17e FY18e FY19e FY2e 3, Profit from Operations (1,441) 1,533 1,23 1, ,5 Interest/Tax/D&A 1,67 1,433 2, , Working Capital/other 15 (114) (13) (63) 45 (14) 7 1,5 Net Operating Cashflow 1,419 1, ,513 1,55 1,492 1,334 1, Capital Expenditure (59) (629) (387) (563) (423) (428) (59) Acquisitions/(Disposals) 46 5 Dividends received Free cash flow 1,35 1, ,176 1,219 1, FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY2e Dividends (229) (17) (298) (256) VALUATION New Equity (4) Projects US$m US$ A$m A$/sh GBPm GBP ZARm ZAR Debt Drawdown/(Repayment) (658) (96) (5) (54) (44) (39) Worsley Alumina 1, , , , Net Financing Cashflow (658) (1) (234) (224) (342) (295) South Africa Aluminium 1, , , , Net change in cash 1,35 1, Mozal Aluminium , Brazil Aluminium ,94.93 South Africa Energy Coal , , BALANCE SHEET FY14 FY15 FY16 FY17e FY18e FY19e FY2e Illawarra Metallurgical Coal 1, , , , Cash ,225 2,167 3,162 3,983 4,621 Australia Manganese , PP&E & Mine Development 1,353 9,55 8,651 8,498 8,168 7,771 7,473 South Africa Manganese , Other 6,968 5,295 3,498 4,159 3,924 4,15 4,298 Cerro Matoso , , Total Assets 17,685 15,489 13,374 14,824 15,253 15,859 16,393 Cannington 1, , , , Debt 1,24 1, Third party products Total Liabilities 4,735 4,454 3,952 3,827 3,388 3,227 3,135 Group and unallocated (534) (.1) (712) (.13) (445) (.8) (7,739) (1.45) Total Net Assets / Equity 12,95 11,35 9,422 1,998 11,865 12,632 13,258 Cash 1, , , , Net Debt / (Cash) (312) (1,259) (2,37) (3,173) (3,85) Debt (939) (.18) (1,252) (.24) (783) (.15) (13,621) (2.56) Gearing (net debt/(nd + equity)) 5% 4% (3%) (13%) (24%) (34%) (41%) Net Equity Value (@ 1% Nom) 1, , , , Gearing (net debt/equity) 5% 4% (3%) (11%) (19%) (25%) (29%) Price Target (5% 7.x EV/Ebitda/5% NPV) AUD 3.4 GBP 2.1 ZAR 37. Source: S32, Macquarie Research, December December 216 5

6 Macquarie Quant View The quant model currently holds a strong positive view on. The strongest style exposure is Price Momentum, indicating this stock has had strong medium to long term returns which often persist into the future. The weakest style exposure is Quality, indicating this stock is likely to have a weaker and less stable underlying earnings stream. 26/1523 Global rank in Materials % of BUY recommendations 38% (8/21) Number of Price Target downgrades 5 Number of Price Target upgrades 1 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Materials) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. Rio Tinto Rio Tinto BHP Billiton 1.2 BHP Billiton Amcor.8 Amcor Newcrest Mining.6 Newcrest Mining Orica.4 Orica James Hardie Industries.3 James Hardie Industries % -8% -6% -4% -2% % 2% 4% 6% 8% 1% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. Rio Tinto BHP Billiton Amcor Newcrest Mining Orica James Hardie Industries Rio Tinto BHP Billiton Amcor Newcrest Mining Orica James Hardie Industries % -5% % 5% 1% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/1523) Percentile relative to market(/423) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 5 December 216 6

7 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 3 September 216 AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.5% 38.46% 45.47% 59.9% 48.21% (for US coverage by MCUSA, 8.2% of stocks followed are investment banking clients) Neutral 38.1% 29.31% 42.86% 48.77% 37.88% 36.79% (for US coverage by MCUSA, 8.25% of stocks followed are investment banking clients) Underperform 14.73% 15.19% 18.68% 5.76% 3.3% 15.% (for US coverage by MCUSA, 8.% of stocks followed are investment banking clients) S32 AU vs ASX 1, & rec history S32 LN vs FTSE 1, & rec history S32 SJ vs FTSE/JSE, & rec history (all figures in AUD currency unless noted) (all figures in GBP currency unless noted) (all figures in ZAR currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, December month target price methodology S32 AU: A$3.4 based on a NPV / 7x EV/Ebitda blend methodology S32 LN: 2.1 based on a NPV / 7x EV/Ebitda blend methodology S32 SJ: R37. based on a NPV/7x EV/Ebitda blend methodology Company-specific disclosures: S32 AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. S32 LN: Macquarie Group Limited together with its affiliates, beneficially owns 1% or more of a class of common equity securities of Ltd. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 15-Nov-216 S32 AU Outperform A$ Oct-216 S32 AU Outperform A$3.3 2-Oct-216 S32 AU Outperform A$2.9 2-Sep-216 S32 AU Outperform A$ Aug-216 S32 AU Underperform A$1.5 6-Jul-216 S32 AU Underperform A$ May-216 S32 AU Underperform A$ Feb-216 S32 AU Neutral A$1.2 6-Feb-216 S32 AU Neutral A$1. 21-Jan-216 S32 AU Neutral A$ Dec-215 S32 AU Neutral A$ Oct-215 S32 AU Outperform A$1.8 7-Oct-215 S32 AU Outperform A$ Sep-215 S32 AU Outperform A$1.8 1-Jul-215 S32 AU Outperform A$ May-215 S32 AU Outperform A$ May-215 S32 AU Outperform A$2.4 Target price risk disclosures: S32 AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global 5 December 216 7

8 This publication was disseminated on 2 December 216 at 13:46 UTC. Macquarie Wealth Management economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. S32 LN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. S32 SJ: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. 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