Commodities Comment. And another one gone and another gone...cu supply wobbling on cuts GLOBAL. Latest news

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1 GLOBAL LME cash price % change US$/tonne day on day Aluminium 1, Copper 5,163.6 Lead 1,656.2 Nickel 9, Tin 15, Zinc 1, Cobalt 27, Molybdenum 12,836. Other prices % change day on day Gold (US$/oz) 1,12.1 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 3,219,95-8,95 LME copper 352,325-3,525 Comex copper 34,56 45 Lead 174,45-2,125 Nickel 451,962-1,668 Tin 5, Zinc 552,65 25,775 Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research, 8 And another one gone and another gone...cu supply wobbling on cuts Glencore announced on Monday the suspension of its Mopani and Katanga copper mining and smelting operations in Zambia and the DRC for 18 months, with an expected output loss to the market of 4kt. We see this removing ~3kt (+35kt in disruption) from the balance in 215 and 325kt from 216, with the remaining ~1kt coming out in 217. Meanwhile, later the same day the closure of the Baluba mine in Zambia was announced, due to prices and insufficient power, taking ~2ktpa from the balance in 216/217. These announcements, hot on the heels of closures and cutbacks at Freeport McMoran, Asarco, Ok Tedi and elsewhere, underline the fragility in copper mine supply and the extent of cost pressure at today s prices. We cannot rule out more cutbacks, and at this stage the 215 disruption rate has been raised again to 5.8%, with the annualised rate running at 6.9% (895kt YTD disruptions). The 215 balance is now +115kt (adjusted), while the 216 balance has swung into a 248kt deficit as the full brunt of the recent closures hits the market. Price support at these levels looks firmer, with the metal balance looking set to draw into year-end and 216. That said, the initial jolt to prices failed to hold, with early gains fading to close ~$5,145/t, just.5% DoD. Latest news The People s Bank of China, the Chinese central bank, continued to add to its gold reserves in August, data released on Monday shows. Although they only give a valuation - $61.8bn at the end of August, from $59.24bn at the end of July, using the end-month London gold price implies they bought another 16t, slightly lower than the 19t they purchased in July. In June the PBoC made its first update to its gold reserves data in six years, announcing it had 6t more than previously reported. Since then it has reported monthly. Steel inventory at Chinese traders stopped falling last week. Both long and flat products saw a 1% inventory pick-up WoW, ending an 8-week period of extremely fast drawdown of long product inventory. This comes despite the production cuts taken by mills around Beijing last week for the military parade, thus boding ill for end-user demand conditions. Our proprietary steel survey due next week could shed more light on the issue. While the aluminium price has shown recent signs of stability as supply cuts have taken hold, the alumina spot price has continued its downward trend. The latest Platts assessment has fallen to $278/t FOB Australia, the lowest since Q3 9, and down 17% from June highs. However, the Chinese domestic price has fallen only 9% over the same period in USD terms, such that the arbitrage is wide open for imports. Meanwhile, the bauxite price is flat over the same time period, suggesting some underlying support for the alumina market. Preliminary Australian port shipping data suggests August saw a recovery in iron ore exports, with an annualised rate of 811mt versus 781mt in July (+6% YoY). This is well off the 848mtpa recorded in June when miners destocked heavily into quarter/year end. Interestingly, the share of exports destined for China continues to grow despite steel market concerns, at 83% versus a two-year average of 8%. Please refer to page 5 for important disclosures and analyst certification, or on our website

2 And another one gone and another one gone...cu supply wobbles on cuts Glencore announced on Monday the suspension of its Mopani and Katanga copper mining and smelting operations in Zambia and the DRC for 18 months, with an expected output loss to the market of 4kt. We see this removing ~3kt (+35kt in disruption) from the balance in 215 and 325kt from 216, with the remaining ~1kt coming out in 217. Meanwhile, later the same day the closure of the Baluba mine in Zambia was announced, due to prices and insufficient power, taking ~2ktpa from the balance in 216/217. These announcements, hot on the heels of closures and cutbacks at Freeport McMoran, Asarco, Ok Tedi and elsewhere, underline the fragility in copper mine supply and the extent of cost pressure at today s prices. We cannot rule out more cutbacks, and at this stage the 215 disruption rate has been raised again to 5.8%, with the annualised rate running at 6.9% (895kt YTD disruptions). The 215 balance is now +115kt (adjusted), while the 216 balance has swung into a 248kt deficit as the full brunt of the recent closures hits the market. Price support at these levels looks firmer, with the metal balance looking set to draw into year-end and 216. That said, the initial jolt to prices failed to hold, with early gains fading to close ~$5,145/t, just.5% DoD. Fig 1 4kt of copper cathode output lost to 18-month suspension Fig disruption now flaring out to 6.9% annualised rate as price-related outages hit high *1% basis Glencore Africa expected copper mine production* before and after 7915 announcement (kt) Before After Before After Before After 215f 216f 217f Mopani Katanga Source: Glencore, Katanga Mining, Macquarie Research, Copper mine disruptions (kt) Engineering/Technical Strikes/Stakeholder action Slow ramp-up Weather Ore Grades Price-related 9.% Other Annual disruption rate % 8.% 7.% YTD Source: Company reports, Wood Mac, Macquarie Research, 6.% 5.% 4.% 3.% 2.% 1.%.% Some debate later in the day was stirred when it was suggested that the 4kt announced cut could be even bigger if we consider that Glencore is not a 1% stakeholder in Mopani (73.1%) and Katanga (55.8%) and that the company only reported their equity share of output being down. We don t think so: The language used - suspension of operations will remove approximately 4, tonnes of copper cathode from the market - and the apparent motivation to be price supportive make it unlikely the opportunity to declare an even larger number for the newswire headlines would have been passed up. More pertinently, we feel, however, is the fact that Mopani Copper Mines Mufulira smelter is to close, and half its feed (~8-9ktpa) is third-party material. We are not 1% certain which mines made up the third-party feed, but those in Zambia without integrated smelting facilities include Barrick s Lumwana, Vale s Lubambe, and Jinchuan s Chibuluma. It may also have been taking material over the border from the DRC. Given Zambia s prohibitive export taxes on unprocessed concentrates, the smelter closure may present a major hurdle to the third-party operations. Some may be able to find a temporary tolling solution at FQM s new Kansanshi smelter, but as its Sentinel mine ramps up this opportunity is likely to diminish. As Figures 1 and 2 show, the impact of the Glencore closures is large, particularly in 216, but even in 215 we can see the impact that price-led closures are now having on output. The 65kt stripped from 215 meant that the SXEW side of the remaining disruption allowance fell to a paltry figure, just 12kt, and so we raised disruption from 5.6% to 5.8%, tightening the underlying balance by around 25kt. From 216 there is no consideration of stripping the tonnage from disruption as this concept caters for mine outages during the calendar year in question. Thus, we have stripped a massive 345kt of supply from the 216 balance - pushing it into a 248kt deficit. 8 2

3 Fig 3 Latest cutback announcements dwarf already long list of closures Fig 4 Balance shifts to a hefty deficit in 216 on Glencore closures on top of prior announcements Copper cutbacks annoucned in 215 (kt) Total Africa China USA S America 215f 216f 217f PNG Mexico Canada Refined copper supply/demand (kt, LHS) vs LME cash price ($/t, RHS) F 218F 22F Refined Balance LME Cash Price ($/t) 9, 8,5 8, 7,5 7, 6,5 6, 5,5 5, Source: Company reports, Macquarie Research, Source: Wood Mac, ICSG, CRU, LME, Macquarie Research, Less than a month ago we had a 216 surplus of almost 3kt, shortly after our downgrade to Chinese demand which softened the balance from 215 onwards. However, in late August the supply cutback information began to gather steam (Asarco, FCX, Ok Tedi, Cobriza etc), and as we added these to 215 disruption and stripped them from the numbers from 216 onwards, the 216 balance began to tuck in dramatically to, as detailed above, a quarter of a million tonne deficit. Fig 5 Copper mine closures YTD and annual impact expected (kt Cu) Copper mine closures/cutbacks announced in 215 (kt) Supply reduction Annual cap. 215f 216f 217f Africa Katanga Mining Africa Mopani Copper PNG Ok Tedi USA Ray USA Tyrone USA Miami USA Mineral Park USA Other FCX Africa Boseto Mexico Aranzazu S America El Abra S America Cobriza China Duobaoshan exp Africa Baluba Canada Wolverine Africa Dikulushi Canada Troy Canada Lockerby China China various Total Source: Company reports, Macquarie Research, A glance at the composition in Fig 5 shows how this was achieved, and the number and variety of operations contributing lends support to our view that copper relative to other industrial metals is far less tolerant of trading into the cost curve, and much more reactive to price pain. It also signals, as we have seen today, that we are sufficiently deep into the curve to motivate capitulation on a large scale. Of course, power issues in Zambia/DRC plus weather in Papua New Guinea were also factors in the decisions to close, but going back to figure 2 we see that such challenges are the constant companions to copper mining. What has changed is that the price cushion from which to surmount major disruptions is no longer there for many, and so we are more rather than less expectant of further closures unless prices lift. 8 3

4 Monday 7 Prices Closing price * Closing price * 7-Sep-15 7-Sep-15 4-Sep-15 4-Sep-15 % ch. day 215 YTD Ave 214 US$/tonne US /lb US$/tonne US /lb on day US$/tonne US$/tonne LME Cash Aluminium 1, , ,73 1,867 Aluminium Alloy 1, , ,766 1,951 NAASAC 1, , ,81 2,86 Copper 5, , ,749 6,862 Lead 1, , ,833 2,96 Nickel 9, , ,895 16,867 Tin 15, , ,49 21,893 Zinc 1, , ,7 2,164 Cobalt 27,19 1,233 27,691 1, ,84 31,251 Molybdenum 12, , ,47 25,548 LME 3 Month Aluminium 1, , ,753 1,894 Aluminium Alloy 1, , ,779 1,974 NAASAC 1, , ,827 2,117 Copper 5, , ,742 6,828 Lead 1, , ,843 2,113 Nickel 9, , ,949 16,935 Tin 14, , ,481 21,887 Zinc 1, , ,77 2,167 Cobalt 27,25 1,236 27,75 1, ,94 31,287 Molybdenum 13, , ,525 25,548 * LME 2nd ring price - 13 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 1,12 1, ,183 1, ,114 1, Exchange Stocks Change since last report Cancelled End-14 Ch. since (tonnes) 7-Sep-15 4-Sep-15 Volume Percent warrants stocks end-14 LME Aluminium 3,219,95 3,228,9-8,95 -.3% 1,28,625 4,25, ,275 Shanghai Aluminium 37,328 37,328.% - 27,428 99,9 Total Aluminium 3,527,278 3,536,228-8,95 -.3% - 4,412, ,375 LME Copper 352, ,85-3,525-1.% 59, ,25 175,3 Comex Copper 34,56 34, % - 24,15 1,41 Shanghai Copper 128, ,887.% - 111,915 16,972 Total Copper 515, ,252-3,48 -.7% - 313,9 22,682 LME Zinc 552,65 526,875 25, % 141,65 69, ,175 Shanghai Zinc 153, ,597.% - 83,471 7,126 Total Zinc 76,247 68,472 25, % - 774,296-68,49 LME Lead 174,45 176,575-2, % 28, ,975-47,525 Shanghai Lead 14,114 14,114.% - 63,64-49,49 Total Lead 188,564 19,689-2, % - 285,579-97,15 Aluminium Alloy 12,74 12,74.% 4 26,52-13,78 NASAAC 44,52 44, % 4,74 8,7-36,18 Nickel 451, ,63-1, % 163, ,9 37,62 Tin 5,795 5, % 2,125 12,135-6,34 Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research 8 4

5 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 First South - 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). 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