Commodities Comment. Zinc TC said to settle at $172 flat GLOBAL. Latest news

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1 GLOBAL LME cash price % change US$/tonne day on day Aluminium 1, Copper 5, Lead 2, Nickel 9, Tin 20, Zinc 2, Cobalt 54, Molybdenum 14, Other prices % change day on day Gold (US$/oz) 1, Silver (US$/oz) Platinum (US$/oz) Palladium (US$/oz) Oil WTI USD:EUR exchange rate AUD:USD exchange rate LME/COMEX stocks Tonnes Change Aluminium 1,912,075-11,225 LME copper 304,275-4,950 Comex copper 127, Lead 190, Nickel 379,866-1,314 Tin 3, Zinc 373, Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research, March March 2017 Zinc TC said to settle at $172 flat Media and industry sources reported on Wednesday that zinc concentrate treatment charges (TCs) had settled for 2017 between leading miner Teck and leading smelter Korea Zinc at $172/t flat i.e. without the price participation (PP) escalators and de-escalators that are typically present. Last year s benchmark settled at $188/t basis $1,500/t, but the 3%, 9% and 8% escalators (to $2,000/t, $2,500/t and $3,000/t respectively) meant that the strong price rally allowed realised contract TCs to appreciate to ~$262/t by December. However, because free metal revenues are expected to rise by ~40% this year on higher zinc prices, the settlement should not mean an overall deterioration in revenues for smelters. We understood that the smelters had been firmly against Teck s demand to drop the PP element, which explains how close the headline managed to creep towards the previous year s settlement despite much lower spot terms (~$45/t CIF China currently). Nevertheless, if the example from copper a decade ago is any guide, this is not a good day for zinc smelters. Latest news After stories of early agreements began to emerge lately, the Japanese Q2 aluminium ingot contract premium (MJP) was today reported to have settled at $128/t, up 35% from Q1 s $95/t. The increase is said to be reflective of rising physical market premiums in Japan, where Metal Bulletin assesses spot MJP at $ /t. The ferrochrome market is incrementally tightening once more, with Platts reporting that China s Taiyuan Iron and Steel has raised its reference purchase price for April to RMB9,600/t, up RMB300/t MoM. Chrome ore prices remain ~$400/t CFR China, holding on to the rapid gains made in Q4 last year and highlighting the ongoing raw material constraint in this sector. In the wake of Cyclone Debbie, Wednesday saw a wave of force majeure declarations on near-dated coal cargoes due to be exported from Queensland. Many coal mines remain shut, including BHP s Goonyella and Peak Downs met coal facilities, while damage inspections are carried out. In terms of infrastructure, rail operator Aurizon has confirmed the 20mtpa Newlands, 110mtpa Goonyella and 18mtpa Moura rail systems are shut due to localised flooding, though the 66mtpa Blackwater system to Gladstone port remains operational. The Peak Downs highway, which serves as the main access route to many Bowen Basin mines is also flooded in multiple places. We would estimate a minimum or one week s shipments would be lost, equivalent to ~4mt of met coal. Unlike 2011, there is unlikely to be significant buyer panic given marginal supply has already been attracted into the market by 2H16 price gains, most notably from the US and Mongolia. Reuters reports that the Indonesian government has granted clearance for Indonesian nickel producer PT Aneka Tambang (Antam) to export 2.7mt of nickel ore over the next 12 months. This is less than the 6mt that Antam had requested and is in line with its ore processing capacity at its existing capacity of ferronickel (around 27,000 tpa Ni in FeNi). A government spokesman suggested the full 6mtpa requested by Antam included planned smelters and that this had first to be independently verified before a licence could be granted. This strict line being taken by the government raises hopes that ore exports may be less than some fear this year. Please refer to page 5 for important disclosures and analyst certification, or on our website

2 F F Macquarie Wealth Management Zinc TCs said to settle at $172/t flat Media and industry sources reported on Wednesday that zinc concentrate treatment charges (TCs) had settled for 2017 between leading miner Teck and leading smelter Korea Zinc at $172/t flat i.e. without the price participation (PP) escalators and de-escalators that are typically present. Last year s benchmark settled at $188/t basis $1,500/t, but the 3%, 9% and 8% escalators (to $2,000/t, $2,500/t and $3,000/t respectively) meant that the strong price rally allowed realised contract TCs to appreciate to ~$262/t by December. However, because free metal revenues are expected to rise by ~40% this year on higher zinc prices, the settlement should not mean an overall deterioration in revenues for smelters. We understood that the smelters had been firmly against Teck s demand to drop the PP element, which explains how close the headline managed to creep towards the previous year s settlement despite much lower spot terms (~$45/t CIF China currently). Nevertheless, if the example from copper a decade ago is any guide, this is not a good day for the zinc smelters. Fig 1 A long way from halfway nowadays smelters see their cut of the cake shrink 3,500 3,000 2,500 2,000 1,500 1, Zinc miners vs smelters share of zinc price (LHS, $/t) 60% 50% 40% - - Smelter revenues Mine revenues Smelters' share of total revenue Source: Wood Mackenzie, CRU, Macquarie Research, March 2017 As we heard at last month s IZA industry gathering, Teck were pushing for an end to PP and they appear to have got it with a removal for the 2017 term contract, at least. In order to drive through the change they have likely conceded more on the headline than they would otherwise have done, and so smelter net revenues at spot zinc prices of ~$2,810/t are around $657/t, a few dollars higher than last year s $652/t theoretical realised revenue using the 2016 average of $2,095/t. Given the low levels spot TCs have plummeted to since last year s settlement (Fig. 2), the flat revenue implication could in fact be considered a good result for the smelters. Fig 2 Yawning gap between spot and term TCs Fig 3 Copper smelters lost out in the boom Spot vs realised contract zinc TCs ($/t) Spot TCs 50 Contract realised TCs 0 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan Copper miners vs smelters share of copper price (LHS, c/lb) PP ends Mine revenue Smelter revenue Smelter's share 35% 25% 15% 5% 0% Source: CRU, Macquarie Research, March 2017 Source: Wood Mackenzie, Macquarie Research, March March

3 Macquarie Wealth Management Copper smelters regretted losing PP: However, we think that the example of the copper industry delivers a chilly warning to the custom zinc smelters. Their counterparts in copper, then led by the Japanese smelters, bowed to pressure from BHP Billiton (then the leading miner) to eliminate the PP element from term contracts after As Figure 3 shows, copper smelters were never able to recover PP and proceeded to largely miss out on the copper price rally during the extraordinary boom years. Only recently with a few incoming projects softening availability plus the formation of the CSPT and resulting Chinese buyers discipline has revenue share begun to move back to around. Still a far cry from the 15- of the past. 85% payability stays: That said, at least the zinc smelters kept their 85% payability. In copper and lead, metal payability is around 96.5% contained, very close to smelter recovery rates of 98-99%, whereas zinc smelters are still enjoying a roughly 11% free metal gap between payability and recovery. (This means that the share of the price that zinc smelters obtain is much higher than copper (Fig. 4), and is the reason why revenue is not expected to fall on an absolute basis in 2017, provided zinc prices remain ~40% higher than last year as we expect.) We actually thought that this anachronism (dating from the days of much lower recovery rates in the old ISF smelters) was a more obvious target for elimination, but clearly Teck had other ideas. Fig 4 Zinc share looks set to drop to 23%... Fig 5 KZ and silver, did they get a concession on these payability terms in return for dropping PP? 50% 45% 40% 35% 25% 15% 5% Smelters' share of revenue Cu vs Zn (%) Last year of Cu PP 0% Copper Zinc Korea Zinc share price (RHS, S Korean Won) vs Silver price (LHS, $/oz) Silver KP Equity (R1) Source: CRU, Wood Mackenzie, Macquarie Research, March 2017 Source: Bloomberg, Macquarie Research, March 2017 Why did KZ let it go? Letting them keep the 85% payability was probably one sweetener to encourage Korea Zinc to agree to drop the price participation. But why else did they let this happen? Clearly the concentrates market is tight; the smelter itself already reduced ingot output guidance for this year due to feed availability and pricing, so they were already in a weak position. Another thought occurs that agreeing on the price tranche system of escalators and de-escalators was a very involved part of the talks in years gone by, but if Teck (presumably) simply refused to be drawn into a discussion on these terms then intricate negotiation of these elements would be impossible. Perhaps KZ tried to offer $2,500/t as a basis we understand Teck got as far as $160/t on the headline at the IZA. A 4% escalator above $2,500/t on $160/t would get to ~$172/t realised at recent spot prices. The smelter could perhaps be comfortable with viewing the $172/t flat in this way provided they have no price appreciation expectations from here, of course, which is against consensus (and our own zinc forecast). Finally, could KZ have achieved some concession in another area of the contract more dear to their heart? Silver payability terms are an obvious avenue of thought the company is highly geared towards maximising silver recoveries and indeed its stock trades more in correlation with the precious metal s price moves than anything else (Fig. 5). 29 March

4 Macquarie Wealth Management Wednesday 29 March 2017 Prices Closing price * Closing price * 29-Mar Mar Mar Mar-17 % ch. day 2017 YTD Ave 2016 US$/tonne US /lb US$/tonne US /lb on day US$/tonne US$/tonne LME Cash Aluminium 1, , ,548 1,605 Aluminium Alloy 1, , ,372 1,555 NAASAC 1, , ,546 1,704 Copper 5, , ,885 4,863 Lead 2, , ,908 1,872 Nickel 9, , ,615 9,609 Tin 20, , ,778 18,006 Zinc 2, , ,329 2,095 Cobalt 54,750 2,483 53,750 2, ,590 25,655 Molybdenum 14, , ,772 14,453 LME 3 Month Aluminium 1, , ,553 1,610 Aluminium Alloy 1, , ,382 1,577 NAASAC 1, , ,563 1,725 Copper 5, , ,900 4,867 Lead 2, , ,910 1,878 Nickel 10, , ,661 9,657 Tin 20, , ,762 17,912 Zinc 2, , ,338 2,102 Cobalt 54,750 2,483 53,750 2, ,599 25,758 Molybdenum 15, , ,774 14,472 * LME 2nd ring price hrs London time. Year-to-date averages calculated from official fixes. Gold - LBMA Gold Price (US$/oz) Silver - LBMA Silver Price (US$/oz) Platinum - London 3pm price (US$/oz) Palladium - London 3pm price (US$/oz) Oil WTI - NYMEX latest (US$/bbl) EUR : USD exchange rate - latest AUD : USD exchange rate - latest 1,251 1, ,021 1, Exchange Stocks Change since last report Cancelled End-16 Ch. since (tonnes) 29-Mar Mar-17 Volume Percent warrants stocks end-16 LME Aluminium 1,912,075 1,923,300-11, % 900,800 2,202, ,100 Shanghai Aluminium 326, , % 0 100, ,875 Total Aluminium 2,238,672 2,249,897-11, % 900,800 2,302,897-64,225 LME Copper 304, ,225-4, % 132, ,825-7,550 Comex Copper 127, , % - 80,112 47,744 Shanghai Copper 312, , % - 146, ,986 Total Copper 744, ,309-4, % 132, , ,180 LME Zinc 373, , % 187, ,850-54,050 Shanghai Zinc 184, , % - 152,824 31,552 Total Zinc 558, , % 187, ,674-22,498 LME Lead 190, , % 112, ,900-4,750 Shanghai Lead 74,176 74, % - 28,726 45,450 Total Lead 264, , % 112, ,626 40,700 Aluminium Alloy 14,720 14, % ,980 1,740 NASAAC 125, , % 0 97,380 28,400 Nickel 379, ,180-1, % 99, ,066 7,800 Tin 3,565 3, % 425 3, Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research 29 March

5 This publication was disseminated on 29 March 2017 at 19:27 UTC. 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