Commodities Comment. Copper disruptions: triple threat GLOBAL. Latest news

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1 GLOBAL LME cash price % change US$/tonne day on day Aluminium 1,887.7 Copper 5,89.8 Lead 2,231. Nickel 1,162.2 Tin 2, Zinc 2,811.8 Cobalt 53,25. Molybdenum 14,9. Other prices % change day on day Gold (US$/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 2,7,85-11,475 LME copper 339,25-1,5 Comex copper 122, Lead 19, Nickel 384,924-1,476 Tin 4,535 5 Zinc 377,725-1,55 Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research 16 March 217 Copper disruptions: triple threat With the entry of Cerro Verde onto the venerable register of disruptees, the top three copper mines in the world are now either fully or partially down. While Grasberg is pretty much meeting expectations (that is to say still unable to export and with no resolution in sight) our outlook on Escondida s strike length has been surpassed, and the Cerro Verde action was unlooked for since no labour contract deadlines are near. The upshot is that we are running at 256kt of known disruption, or ~6.4% annualised, versus our deployed disruption rate (i.e. the rate used in our SD balance) of 5.2%. Is it time for a disruption upgrade? Latest news The Macquarie China Steel Sector survey is brilliant. Or so say the Macquarie Quant team, who have backtested survey results since its inception in 211 in conjunction with our Asian resource equities team and found that our survey (which covers Chinese steel mills, steel traders and iron ore traders) has strong predictive power for related equities. Specifically, our quant team analysed two particular indices those covering sentiment and orders, and conclude that both can be beneficial in anticipating equity moves. For forward stock price returns a positive index move sees an average three-month active return of % with the Sentiment index and % with the Order index, while negative index moves are also followed by material stock underperformance of % over the following three months. For further details please refer to this report. Official data from China s NBS shows the country produced 1.37mt of refined copper in the first two months this year, up by 6.7% from same period last year and slightly higher than the 6% YoY growth for 216. Refined zinc production increased by 4.4% YoY in Jan-Feb to 982kt, versus 2% YoY growth for full-year 216. Refined lead production climbed by 7.4% YoY to 837kt in the first two months, while last year it grew by 5.7% YoY. These production data shows China metal production is running at a higher rate than full-year 216 and not yet facing any supply disruption on tighter raw materials. Earlier data from NBS suggests China primary aluminium output jumped by 15.6% YoY to 5.49mt in Jan-Feb, due to a low base last year and the ramp up of new added capacity. Reuters reported Nornickel, the Russian palladium miner, as saying it purchased 5t of palladium from the Russian central bank in 216 for its Global Palladium Fund, and that it would buy at least the same amount in 217. They said the fund was to meet customer demand, not to stockpile the metal. Macquarie invites you to save the date for two forthcoming conferences. Our annual Global Metals, Mining and Materials Conference is being held on June 27-28, 217, at the Sheraton Times Square in New York. This will be Macquarie s 12 th year hosting this event, which will feature senior management from up to 4 world-class metals, mining and basic materials companies as well as commodity-related keynote presenters from around the world. Meanwhile, we will be hosting our third-annual Global Gemstones Conference in our London office on April 27. This will include participation of senior executives from all segments of the diamond industry and will provide key insights for this year and beyond. Please refer to page 5 for important disclosures and analyst certification, or on our website

2 Copper mine disruptions: triple threat With the entry of Cerro Verde onto the venerable register of disruptees, the top three copper mines in the world are now either fully or partially down. While Grasberg is pretty much meeting expectations (that is to say still unable to export and with no resolution in sight) our outlook on Escondida s strike length has been surpassed, and the Cerro Verde action was unlooked for since no labour contract deadlines are near. The upshot is that we are running at 256kt of known disruption, or ~6.4% annualised, versus our deployed disruption rate (i.e. the rate used in our SD balance) of 5.2%. Is it time for a disruption upgrade? Fig 1 Stakeholder driven outages accounting for almost two thirds of disruptions to date Fig 2 Big mines and their problems Total YTD 256kt 217 copper mine disruptions, YTD 2% Slow rampup 12% Engineering/ Technical 22% Copper disruptions 217 YTD (kt Cu) Other 2 Strikes/Stake holder action 64% Escondida Grasberg Grasberg Sentinel Olympic Guelb Cerro Dam Moghrein Verde Source: Company reports, Wood Mac, Macquarie Research, March 217 Source: Company reports, Wood Mac, Macquarie Research, March 217 Escondida still down: World #1 mine Escondida is not operating currently due to a worker strike that began on 9 February. Given historical behaviours at this mine during labour action, we were expecting a resolution here to be found within two to three weeks. However, the shutdown is still occurring over five weeks later, and the workers leaders, at least, show no sign of softening their aggressive stance towards management: A paper invitation from management to return to the negotiating table earlier this week was solemnly combusted for the cameras. We expected the mine to lose ~45kt every two weeks of downtime, so at over a month we think ~1kt of disruption sounds about right to date. We note that the unions release their own estimate this week of ~122kt of outage, but since this is based on production targets we should think of this as the maximum outage. Contractors will of course have had the opportunity to perform maintenance tasks and odd jobs during the downtime which will assist the smooth running when it returns. When it returns, though, is a difficult thing to judge. Management say they will be restarting some operations soon with contractors, which will likely antagonise the union. On the other hand, having passed the 3-day mark, Minera Escondida is permitted to negotiate directly with workers, as opposed to solely through the labour organisation, and also now has the option to replace workers. Grasberg will be Grasberg: Grasberg is still unable to export, no surprises there. Combined with a guidance reduction in January, the second largest copper mine is also running at roughly 1kt of disruption YTD, and according to management losing ~7Mlb per month of copper (PTFI share), which amounts to ~35kt per month for the entire operation. Cerro Verde joins the fun: We had not been expecting the third largest mine to join the list, given it is in the middle of a labour contract term and has no particular difficulty with the Peruvian authorities. We add a token 5kt to disruption for this one for now, given it seems less serious than the other two, but will continue to monitor. Unfortunately for Freeport this is also their (majority-owned) asset, and workers apparently are looking to obtain family health benefits and more profit share. Copper prices causing the trouble: To the last point might lie the trouble for all three copper prices rebounded in November, improving margins but also resurrecting the old struggle between workers, owners and authorities over slices of the pie which so plagued the boom years. Miners might well sourly note that no one is in a rush to share the downside when the cycle turns, but such is resource extraction life. 16 March 217 2

3 Fig 3 Top three in trouble Fig 4 11% affected from the three Top 1 copper mines, 217f (kt) Escondida Grasberg Copper mine output share of mines on downtime Total before disruption: 2.1Mt Mines on outage 11% Cerro Verde Morenci Buenavista Collahuasi Chuquicam El Teniente Others 89% Las Bambas Los Bronces Source: Company reports, Macquarie Research, March 217 Source: Company reports, Wood Mac, CRU, Macquarie Research, March 217 As Figure 5 shows, thanks to the world s top three copper mines, plus some other incidents known about, disruptions are up on the year at 6.4% annualised. Since we are only using 5.2% in our numbers, it may well be asked whether the deployed rate should be raised. A raise to match the annualised rate would mean removing ~24kt from the supply-demand balance, which is currently +5kt. Fig 5 Disruption returns to high levels Fig 6 but outages are lumpy; look where we were in May last year Copper mine disruptions (kt) 9.% Other Annual disruption rate % 8.% 7.% YTD 6.% 5.% 4.% 3.% 2.% 1.%.% Source: Company reports, Wood Mac, Macquarie Research, March 217 Source: Company reports, Wood Mac, Macquarie Research, March Copper mine disruptions (kt) 9.% Other Annual disruption rate % 8.% 7.% YTD 6.% 5.% 4.% 3.% 2.% 1.%.% Glancing at Figure 6, however, gives us pause. Further progressed into the year last year, in May 216, we were faced with a realised annualised disruption rate of just 1.9% versus our deployed rate of 5.9%. In that note the scale of the disparity was too large and so we reduced to 5.%, later to end the year at 4.2%. Had we shifted straight to ~2%, however, even halfway through the year, we would have vastly overestimated supply (by around 38kt) and ignored the very lumpy nature of surprise production misses, which is what disruptions are after all. Ultimately, we think it is premature to raise annual disruption before even one quarter has passed. We are allowing for just under 1Mt of disruption at present, and we have filled 256kt or just over a quarter of it. Clearly Grasberg will be barred from exports for some time further (we maintain roughly six months) but what would disruption be without Grasberg in any given year? Escondida is trickier, and we have been wrong-footed by the length of the dispute so far, but each day over 3 adds pressure to the workers (in terms of salary loss) and erodes the core support for the strike. Our base case remains that this mine goes back to work in the near term. 16 March 217 3

4 Thursday 16 March 217 Prices Closing price * Closing price * 16-Mar Mar Mar Mar-17 % ch. day 217 YTD Ave 216 US$/tonne US /lb US$/tonne US /lb on day US$/tonne US$/tonne LME Cash Aluminium 1, , ,65 1,65 Aluminium Alloy 1, , ,461 1,555 NAASAC 1, , ,648 1,74 Copper 5, , ,244 4,863 Lead 2, , ,4 1,872 Nickel 1, , ,289 9,69 Tin 2, , ,958 18,6 Zinc 2, , ,491 2,95 Cobalt 53,25 2,415 53,25 2, ,681 25,655 Molybdenum 14, , ,693 14,453 LME 3 Month Aluminium 1,9 86 1, ,653 1,61 Aluminium Alloy 1, , ,473 1,577 NAASAC 1, , ,667 1,725 Copper 5, , ,259 4,867 Lead 2, , ,43 1,878 Nickel 1, , ,338 9,657 Tin 2, , ,947 17,912 Zinc 2, , ,5 2,12 Cobalt 53,25 2,415 53,25 2, ,692 25,758 Molybdenum 15, 68 15, ,695 14,472 * LME 2nd ring price - 17 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 1,229 1, ,9 1, Exchange Stocks Change since last report Cancelled End-16 Ch. since (tonnes) 16-Mar Mar-17 Volume Percent warrants stocks end-16 LME Aluminium 2,7,85 2,19,325-11, % 726,325 2,22, ,325 Shanghai Aluminium 268, ,824.% 1, ,12 Total Aluminium 2,276,674 2,288,149-11, % 726,325 2,32,897-26,223 LME Copper 339,25 34,525-1,5 -.4% 159,2 311,825 27,2 Comex Copper 122, , % - 8,112 42,36 Shanghai Copper 326, ,732.% - 146,598 18,134 Total Copper 788, , % 159,2 538, ,694 LME Zinc 377, ,275-1,55 -.4% 176,55 427,85-5,125 Shanghai Zinc 194, ,788.% - 152,824 41,964 Total Zinc 572, ,63-1,55 -.3% 176,55 58,674-8,161 LME Lead 19,425 19, % 68, ,9-4,475 Shanghai Lead 72,159 72,159.% - 28,726 43,433 Total Lead 262, , % 68, ,626 38,958 Aluminium Alloy 14,7 14,7.% 72 12,98 1,72 NASAAC 123,76 123,76.% 1 97,38 26,38 Nickel 384, ,4-1, % 1,62 372,66 12,858 Tin 4,535 4,53 5.1% 1,32 3, Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research 16 March 217 4

5 This publication was disseminated on 16 March 217 at 19:43 UTC. 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