South32. Richards Bay and Hillside site tours. S32 AU/S32 LN/S32 SJ Outperform Price (at 02:33, 30 Nov 2016 GMT) A$2.72/ 1.66/R28.

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1 AUSTRALIA/UNITED KINGDOM/SOUTH AFRICA S32 AU/S32 LN/S32 SJ Outperform Price (at 2:33, 3 Nov 216 GMT) A$2.72/ 1.66/R28.84 Valuation A$2.55/ 1.59/R DCF (WACC 1.%, beta 1.1, ERP 5.%, RFR 3.3%) 12-month target A$3.4/ 2.1/R month TSR % Volatility Index High GICS sector Materials Market cap A$m 14,481 3-day avg turnover A$m 61.2 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, November 216 (all figures in USD unless noted, TP in AUD) 3 November 216 Richards Bay and Hillside site tours Event Day 2 of S32 s South African site tour incorporated a visit to the Richards Bay Coal Terminal and the Hillside aluminium smelter. Much of the focus was around the status and outlook for the Hillside electricity contracts. Impact Richard Bay running flat out: The Richards Bay Coal Terminal (RBCT) has a capacity of 91mt but is usually constrained by rail deliveries. Transnet delivered a record 74mt in CY15 and while the YoY number of CY16 is likely to be lower, the shipping rate in November was running at ~94mtpa. We are not surprised to see the step up in shipments given strong coal prices. Hillside all about power: The Hillside aluminium smelter is the largest in the Southern Hemisphere and has an electricity footprint of 1,2MW, compared to Eskom s installed capacity of 45,MW. There are two main power contracts the first covers potlines 1 and 2, which is around 8% of smelter output and is aligned to the aluminium price in Rand and the second covers potline 3 and is fixed in rand. Dispute over timing remains a key risk: According to Eskom, the electricity contract for potlines 1 and 2 expires in 22 while S32 believes the potline 3 agreement effectively extended the original contract to 228. We note that the original contract was a 25 year agreement that started on 3 July Downside risk to our forecasts beyond 22: We suspect that the dispute is likely to head to arbitration at some point. We currently assume the existing agreement extends to 228 hence there is likely downside risk to our earnings forecasts for Hillside beyond 22 as the aluminium linked contract is a significant loss maker for Eskom. Earnings and target price revision No Change. Price catalyst 12-month price target: A$3.4/ 2.1/R37. based on a NPV / 7x EV/Ebitda blend methodology. Catalyst: The final day of the South African site tour will visit the Klipspruit thermal coal mine. Action and recommendation Maintain Outperform: The strong November at RBCT is hardly surprising given the strength in thermal coal prices, although given previous run-rates we question how sustainable it is. The power contract at Hillside and its likely expiry date will continue to be a topic of discussion until it is resolved and presents downside risk to our forecasts for the smelter. We note Hillside accounts for 12% of our NPV for S32. That said, 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 RBCT running flat out The Richards Bay Coal Terminal (RBCT) has a capacity of 91mt but is usually constrained by deliveries from Transnet Freight Rail (TFR). We note that there are 49 load out points across the rail network, making the co-ordination and maximisation of railed tonnage a challenging exercise. RBCT is owned by 19 shareholders, 32.6% BEE and S32 holding 21%. We note that S32 did not follow its rights above the 84mtpa capacity allocation. We will take a more detailed look at S32 s South African coal assets at the site tour to Klipspruit tomorrow. Fig 1 Richards Bay Coal Terminal Source: Macquarie Research, November 216 Hillside all about power The Hillside aluminium smelter was commissioned in 1995 and is the largest smelter in the Southern Hemisphere. The smelter is a major employer in the region and consumes around 1,2MW of power, around 3% of Eskom s installed capacity. S32 previously owned the nearby Bayside smelter and still supplies liquid metal to Bayside for conversion into slag. Hillside was built in two main stages, with the initial construction in the mid-199s including two pot lines, with a third potline added later on. Hillside is believed to be the first smelter built with two potlines. The smelter has a favourable infrastructure set up with most raw material transported from the port via a conveyor. The smelter has a capacity of around 72ktpa and has a calendar year record of 715kt. We note that our forecasts assume average annual production of 694ktpa. Fig 2 Hillside location Fig 3 Hillside aluminium smelter Source: S32, Macquarie Research, November 216 Source: S32, Macquarie Research, November November 216 2

3 Hillside sources its alumina from S32 s Worsley refinery in Western Australia and uses AP35 (Aluminium Pechiney) technology to produce solid and liquid metal for the domestic market and aluminium ingots for the export market. In FY16 alumina accounted for nearly 4% of total costs with all raw materials accounting for ~55% of costs. Energy currently accounts for ~25% of costs. In FY15 Hillside had 72 pots operating however with the suspension of 22 pots in September 215 due to weak prices, 698 were in operation in FY16. These pots are gradually being brought back on line during FY17. S32 expenses all pot relines and we note that each pot needs a reline every ~five years. Fig 4 Hillside cast house Fig 5 Hillside pot Source: S32, Macquarie Research, November 216 Source: S32, Macquarie Research, November 216 Our production forecasts for Hillside do not currently assume any material uplift in costs on a ZAR basis and actually decline in US$ terms. The declining costs reflect our weaker aluminium price outlook, which under the current agreement translates to lower power costs for Hillside. The power contracts at Hillside are what makes the project unique and present material risk to our longerterm forecasts for the project. The original 25 year contract for potlines 1 and 2 was established in 1992, commenced in 1995 and is expected to expire in July 22. The contract covers ~8% of Hillside s production capacity and calculates a power cost linked to the aluminium prices in South African Rand. The electricity agreement for potline 3 is fixed in rand, albeit at a lower level than other recent industrial contract pricing. The dispute between Eskom and S32 is whether the original contract was extended to have an end date of 228, in line with the potline 3 contract or not. The outcome of this dispute is a key risk to our forecasts as if S32 is unsuccessful then we would expect to see an increase in power costs for Hillside. Fig 6 Hillside production forecasts Fig 7 Hillside costs in US$ and ZAR (real terms) 8 Hillside production (kt) AISC (US$/lb) AISC (ZAR$/lb) Source: S32, Macquarie Research, November 216 Source: S32, Macquarie Research, November November 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, November 216 Source: Macquarie Research, November 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$m) 5 4 Mozal Aluminium (ZARm) South Africa Manganese (ZARm) Southern African cost base 5, 4, South Africa Aluminium (ZARm) South Africa Energy Coal (ZARm) , 3 3, 15 1,5 1, , 1, 1 5 FY16 FY17e FY18e FY19e FY2e FY16 FY17e FY18e FY19e FY2e Source: Macquarie Research, November 216 Source: Macquarie Research, November 216 Fig 12 S32 earnings margin Fig 13 S32 cumulative cash flow generation 35% 3% Ebitda margin (%) Ebit margin (%) Earnings margin (%) 16, 14, Net cash / (debt) (US$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: Macquarie Research, November 216 Source: Macquarie Research, November November 216 4

5 Fig 14 S32 summary financials ASX: S32 Price: (A$ps) 2.72 Mkt cap: (A$m) 14,481 Year end: Jun Rating: Outperform Up/dn TSR LSE S32 Price: ( $ps) 1.66 Mkt cap: (US$m) 1,84 Diluted shares (m) 5,324 ASX Target: % 25% JSE S32 Price: (ZARps) LSE Target: % 27% JSE Target: % 29% 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$/lb) P/E 24.3x 18.9x 78.5x 11.3x 14.x 15.x 18.x Thermal coal (US$/t) CFPS Coking coal (US$/t P/CF 1.2x 7.9x 14.5x 9.6x 9.3x 9.7x 1.9x Silver (US$/oz) DPS Lead (US$/lb) Dividend yield.%.%.5% 1.6% 2.9% 2.7% 2.2% Zinc (US$/lb) Franking Level % % % % 5% 1% 1% Book value per share Production by commodity P/Book value.8x 1.x 1.2x 1.x.9x.9x.8x 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 7.8x 6.1x 9.3x 4.3x 4.4x 4.x 3.1x Hillside (kt) ROIC 3.3% 5.% 1.5% 7.5% 6.3% 4.5% 3.7% Bayside (kt) 89 FCF Yield 1% 16% 6% 11% 11% 11% 9% 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, November November 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. 1/1523 Global rank in Materials % of BUY recommendations 38% (8/21) Number of Price Target downgrades 5 Number of Price Target upgrades 9 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 1.4 BHP Billiton Amcor.8 Amcor Newcrest Mining.5 Newcrest Mining Orica.5 Orica James Hardie Industries.2 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) 3 November 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, November 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 3 November 216 7

8 This publication was disseminated on 3 November 216 at 5:13 UTC. Macquarie Wealth Management 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 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. 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