Australian Iron Ore Miners

Transcription

1 AUSTRALIA BHP Billiton Neutral Market Cap US$69,410m Price A$18.55/ 8.48/ZAR Price Target A$15.50/ 7.20/ZAR163 TSR (15%)/(13%)/(9%) Rio Tinto Outperform Market Cap US$56,484m Price A$46.47/ Price Target A$48.00/ TSR 6%/7% Fortescue Metals Group Outperform Market Cap US$7,150m Price A$3.08 Price Target A$2.60 TSR (13%) 8 March 2016 Iron-ore prices rally 19% in a day Event Spot iron-ore prices have rallied an incredible 19%, over US$10/t in one day and now sit at US$62.60/t. We assess the leverage to rising iron-ore prices for BHP, RIO and FMG given the strong move in the spot iron-ore price. Impact We had expected spot iron-ore prices to keep rallying: Last week Macquarie s Commodities team highlighted the increasing bullish sentiment for iron-ore, with some traders at the Metal Bulletin Beijing conference expecting iron-ore prices to test US$60/t. Feedback from Macquarie s latest China Steel Demand Survey also showed some positive signs. Spot prices see biggest one day upward move: The spot TSI Index price soared an impressive 19% or US$10.20/t to US$62.60/t today. The move is the largest in percentage terms and is only equalled on a US$/t basis in 2011 when the price was ~US$130/t. The spot price move now leaves iron-ore trading ~30% and ~25% above our FY17 and FY18 forecasts respectively. Iron-ore leverage in both BHP and RIO: The diversified nature of BHP and RIO makes it harder to assess whether spot iron-ore prices on a standalone basis are being factored into the current share prices. We have assessed the impact of running current spot prices for all commodities for BHP and RIO. Oil and gas still more a factor for BHP: In assessing the earnings impact at spot prices we have assumed all spending ceases on the US Onshore assets from early In this scenario our EPS forecast would rise 45% for FY16, and ~10% for FY17 and FY18. Our spot NPV for BHP is 13% lower than our current valuation due to the drag of running lower oil prices into perpetuity. RIO offering value at spot prices: Running a spot price scenario for RIO after today s 19% jump in the iron-ore price results in an NPV ~25% above the current share price. Our spot price scenario translates to ~50% higher earnings in CY16 and CY18 and ~100% higher earnings in CY17. We note that our spot price scenario for RIO benefits from higher iron-ore but also higher aluminium prices. FMG offers upside at spot prices: Running a spot price scenario for FMG has a material impact on our earnings forecasts and valuation for the company. Incorporating current spot iron-ore price, shipping rate and A$/US$ forecasts would drive a ~80% increase in our NPV for the company and lift our earnings estimates by over 100% in FY17 and FY18. Importantly the cash buffer to meet its debt repayments as they fall due would increase from less than US$1bn under our forecasts to over US$4bn at spot. Outlook Prefer RIO over BHP and FMG for pure iron-ore exposure: The rocketing spot iron-ore price has exceeded our expectations and prices are now trading well above our forecasts for the next two years. Under our spot price scenario we note that there is upside to current share prices for FMG and RIO despite the impressive moves to date where for BHP spot valuations are dragged down by oil, gas and coking coal. Please refer to page 9 for important disclosures and analyst certification, or on our website

2 BHP RIO BHP - Iron ore RIO - Ironore FMG Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Macquarie Wealth Management Iron-ore price surges nearly 20% The spot TSI Index price soared an impressive 19%, or US$10.20/t, to US$62.60/t. The move is the largest in percentage terms and is only equalled on US$/t move in 2011 when the price was ~US$130/t. The spot price move now leaves iron-ore trading ~30% and 25% above our FY17 and FY18 forecasts respectively. Fig 1 Spot iron-ore prices back above US$60/t 180 TSI Iron Ore (US$/t) - Spot TSI Iron Ore (US$/t) - Forecast Source: TSI, Macquarie Research, March 2016 Iron-ore equities and the mining majors have ridden the iron-ore price recovery, with iron-ore prices up over 60% since the early January low. FMG s share price has more than doubled from its low of $1.44 in late January, while RIO and BHP have risen 23% and 18%, respectively, well below the iron-ore price move, which is up 60% from its early January low. Running a spot price scenario has a mixed outcome for BHP, RIO and FMG. Our NPV for BHP and RIO s respective iron-ore businesses rise 26% and 27%; however, factoring in spot prices for all other commodities sees BHP s group NPV fall 13% as the declines in Petroleum, Copper and Coal more than offset the US$14bn increase in our NPV for BHP s Iron Ore business. Our NPV for RIO rises 17% with declines in copper and coal and diamonds and minerals partially offsetting the US$15bn increase in our NPV for RIO s iron-ore business. For FMG our NPV rises ~80% to ~A$4.70, demonstrating FMG s greater pure leverage to iron-ore prices. Fig 2 Share price moves vs. iron-ore price since Jan Fig 3 Change in NPV using spot prices 120% 100% 80% 100% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% BHP RIO FMG Iron-ore Iron-ore (A$/t) (US$/t) Source: IRESS, Macquarie Research, March 2016 Source: BHP, RIO, FMG, Macquarie Research, March March

3 BHP Billiton weighed down by petroleum under a spot price scenario In assessing the earnings impact at spot prices we have assumed all spending ceases on the US Onshore assets from early In this scenario our EPS forecast would rise 45% for FY16 and ~10% for FY17 and FY18. However, if we kept our development scenario for the US Onshore assets unchanged, then BHP would only see earnings upgrades in FY16, with earnings in FY17 and beyond more than offset by running a sub US$40/bbl oil price. Fig 4 BHP earnings upgrades at spot prices excluding shale. EPS (USc) FY16e FY17e FY18e FY19e FY20e Change 45% 11% 11% 3% 14% Source: Macquarie Research, March 2016 Our spot NPV for BHP is 13% lower than our current valuation due to the drag of running lower oil prices. We note that on our base case assumptions BHP s iron-ore business accounts for around 59% of our asset NPV with Petroleum 15%. However at spot prices and assuming BHP stems the implied losses in the US Onshore business, then iron-ore would rise to over 80% of group NPV. Fig 5 BHP NPV using Macquarie forecasts Fig 6 BHP NPV at spot prices Coal 9% Petroleum and Potash 4% Coal Copper 3% 12% Copper 17% Petroleum and Potash 15% Iron-ore 59% Iron-ore 81% Source: BHP, Macquarie Research, March 2016 Source: BHP, Macquarie Research, March 2016 Under our spot price scenario we note that BHP still doesn t look overly cheap on key earnings multiples. On FY17 earnings using spot prices we note that BHP is trading on a ~22x P/E, a FCF yield of 7% and an EV/Ebitda ratio of 6.4x. Removing the future spend on shale post FY17 assists the multiple comparison; however, BHP s free cash flow yield and EV/Ebitda multiples are still lower under our spot price scenario. Fig 7 BHP still looks expensive at spot prices for all commodities BHP Multiples at Spot FY16e FY17e FY18e FY19e P/E 57.4x 21.7x 15.9x 14.2x EV/EBITDA 7.8x 6.4x 5.9x 5.5x FCF Yield 3.2% 7.0% 6.4% 7.9% Dividend yield 2.3% 2.3% 3.2% 3.5% Source: BHP, Macquarie Research, March March

4 Rio Tinto offers considerable upside at spot iron-ore prices Assessing the earnings impact of running spot prices is more straightforward for RIO than BHP, as we have not made any changes to our production forecasts under the spot scenario for RIO. The impact of running spot prices benefits both RIO s iron-ore and aluminium businesses, with spot prices for iron-ore and aluminium trading at 25% and 15% premiums to our forecasts for CY16 and 39% and 18% premiums to our CY17 forecasts respectively. Fig 8 Material upgrades to our base case earnings for RIO at spot prices EPS (USc) CY16e CY17e CY18e CY19e CY20e Change 50% 106% 55% 64% 73% Source: RIO, Macquarie Research, March 2016 Under the spot price scenario our NPV for RIO would rise 17%, driven by 27% and 42% increases in our valuations for RIO s Iron Ore and Aluminium businesses respectively. We note that under our spot price scenario, RIO s iron-ore business accounts or 79% of asset NPV, marginally lower than BHP. Fig 9 RIO NPV using Macquarie forecasts Fig 10 RIO NPV at spot prices Diamonds & Minerals 5% Aluminium 9% Diamonds & Minerals 2% Aluminium 12% Copper & Coal 7% Copper & Coal 15% Iron Ore 71% Iron Ore 79% Source: RIO, Macquarie Research, March 2016 Source: RIO, Macquarie Research, March 2016 RIO looks attractively prices compared to BHP on earnings multiples under our spot price scenario. The stock is trading on ~12x P/E, compared to +20x for BHP, EV/Ebitda around 4x for CY17 compared to >6x for EV/Ebitda multiples and cash flow yields around ~ % higher than BHP. Fig 11 RIO looks reasonable value at spot prices Multiples CY16e CY17e CY18e CY19e P/E 12.4x 11.7x 10.4x 9.5x EV/EBITDA 4.5x 4.0x 3.8x 3.3x FCF Yield 12.2% 10.4% 9.5% 11.9% Dividend yield 4.0% 4.2% 4.8% 5.3% Source: RIO, Macquarie Research, March March

5 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Macquarie Wealth Management FMG looks attractive at spot prices Running the current spot iron-ore price through our model for FMG has translates to significant increases in our earnings forecasts. Our estimate for FY16 would rise ~75% while our FY17 and FY18 estimates would increase more than 100%. We note the reduced impact from FY19 is attributable to our forecasts being more closely reflecting current spot prices from FY19. Fig 12 FMG earnings upgrades at spot prices excluding shale. EPS (USc) FY16e FY17e FY18e FY19e FY20e Change 75% 165% 144% 61% 68% Source: FMG, Macquarie Research, March 2016 A spot price scenario for FMG significantly increases the headroom FMG would face on repaying its US$8.bn in debt. Under our base case scenario, FMG has less than US$1bn of headroom above what we would consider a minimum cash balance required to run the business. However at spot prices, the headroom increases to over U$4bn when the main debt facility falls due in mid Fig 13 FMG cash balance at Macquarie forecasts Fig 14 FMG cash balance at spot prices Cash at bank (US$m) Minimum cash target (US$m) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Cash at bank (US$m) Minimum cash target (US$m) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Source: RIO, Macquarie Research, March 2016 Source: RIO, Macquarie Research, March 2016 We note that under our spot price scenario, FMG is trading on lower multiples than either BHP or RIO from FY17 onwards. The company s free cash flow yield is an impressive 30% from FY19, with the improving FCF yield reflecting the ending of prepayments which impact cash flow generation but not earnings in FY17 and FY18. Fig 15 FMG looks cheap on earnings at spot prices BHP Multiples at Spot FY16e FY17e FY18e FY19e P/E 13.0x 9.3x 8.2x 5.5x EV/EBITDA 4.8x 4.1x 3.6x 2.5x FCF Yield 21% 12% 16% 31% Dividend yield 2.3% 2.3% 2.9% 4.2% Source: BHP, Macquarie Research, March March

6 Fig 16 BHP summary financials BHP Billiton ASX: BHP Price: (A$ps) Year end: Jun Rating: Neutral Up/dn TSR LSE: BLT Price: ( ps) 8.48 Diluted shares (m) 5,323 ASX Target: % -15% JSE: BIL Price: (ZARps) LSE Target: % -13% Mkt cap: (US$m) 69,410 JSE Target: % -9% ASSUMPTIONS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e ASSUMPTIONS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Exchange Rate A$/US$ Commodity prices Exchange Rate USDBRL Iron-ore (US$/t) Exchange Rate USDZAR Hard coking coal (US$/t) RATIO ANALYSIS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Thermal coal (US$/t) Diluted share capital m 5,340 5,338 5,333 5,323 5,323 5,323 5,323 5,323 Copper (US$/lb) EPS (diluted and pre sig. items) US Nickel (US$/lb) P/E x 8.9x 5.3x 38.3x 83.1x 24.0x 17.5x 14.7x 14.5x Brent Crude (US$/bbl) CFPS US West Texas (US$/bbl) P/CF x 5.0x 3.9x 5.1x 10.5x 10.4x 9.5x 8.4x 7.6x Henry Hub (US$/mmbu) DPS US Dividend yield % 6.3% 8.8% 9.0% 1.8% 2.0% 2.8% 3.4% 3.4% Production by commodity Franking Level % 100% 100% 100% 100% 100% 100% 100% 100% Iron-ore Book value per share US$ps WAIO (mt) - 100% P/Book value x nm 0.9x 1.0x 1.2x 1.1x 1.1x 1.0x 1.0x WAIO (mt) - BHP share R.O.E. (pre sig items) % nm 18% 6% -8% 6% 7% 7% 7% Samarco (mt) - BHP share R.O.A. (pre sig items) % nm 15% 10% 2% 6% 7% 7% 7% Total Iron-ore (mt) - BHP share Interest Cover x 18.0x 19.4x 19.3x 2.8x 5.5x 6.9x 7.9x 8.6x Coal EBITDA per share US$ps Coking coal (mt) - 100% EV/EBITDA x 0.9x 2.9x 4.3x 8.3x 6.5x 5.7x 5.1x 3.4x Coking coal (mt) FCF Yield % 3.9% 16.4% 8.8% 2.8% 6.5% 5.1% 7.7% 8.7% Thermal coal (mt) EARNINGS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Copper (kt) Revenue US$m 65,953 67,206 44,636 30,437 31,979 34,267 37,366 39,169 Escondida - (100%) 1,161 1,164 1, ,114 1,108 1,100 1,092 Operating Costs US$m (36,079) (35,638) (22,868) (17,502) (17,435) (18,200) (19,760) (20,526) Cerro Colorado Operational EBITDA US$m 29,874 31,568 21,768 12,935 14,544 16,067 17,606 18,643 Spence Associates US$m 1,142 1, (881) Olympic Dam Corporate & Other Costs US$m (708) (404) (464) (481) (491) (504) (517) (531) Antamina Underlying Ebitda US$m 30,308 32,359 21,852 11,573 14,339 15,965 17,526 18,605 Total Copper (kt) 1,699 1,725 1,729 1,521 1,623 1,629 1,629 1,620 D&A & Impairments US$m (7,378) (9,498) (9,986) (8,630) (7,601) (7,705) (8,387) (9,327) Petroleum (mmboe) Underlying Ebit US$m 22,930 22,861 11,866 2,944 6,738 8,259 9,139 9,278 Conventional production Adjustments US$m (1,928) 551 (3,196) (8,372) Unconventional Production Profit from Operations US$m 21,002 23,412 8,670 (5,428) 6,738 8,259 9,139 9,278 Total Net Interest US$m (1,276) (1,176) (614) (1,047) (1,216) (1,201) (1,160) (1,080) Profit Before Tax US$m 19,726 22,236 8,056 (6,475) 5,522 7,058 7,979 8,199 EBITDA BY COMMODITY Tax Expense US$m (6,906) (7,012) (3,666) 1,382 (1,933) (2,470) (2,793) (2,870) Net Earnings US$m 12,820 15,224 4,390 (5,093) 3,589 4,588 5,186 5,329 Petroleum (US$bn) Copper (US$bn) Iron-ore (US$bn) Coal (US$bn). Other (US$bn) Discontinued operations US$m 0 0 (1,512) Minority interests US$m (1,597) (1,392) (968) (109) (542) (421) (222) (302) Attributable Profit US$m 11,223 13,832 1,910 (5,202) 3,047 4,167 4,964 5,027 Adjustments US$m 985 (385) 5,199 6, Underlying Profit US$m 12,208 13,447 7, ,047 4,167 4,964 5,027 4,220 5,105 6,464 7, CASHFLOW FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Net Earnings US$m 12,820 15,224 4,390 (5,093) 3,589 4,588 5,186 5,329 Interest/Tax/D&A US$m 7,792 9,034 11,720 13,833 6,109 6,151 6,828 7, Working Capital/other US$m (458) 1,106 3, (178) (335) (250) (103) Net Operating Cashflow US$m 20,154 25,364 19,296 9,386 9,520 10,405 11,764 13,064 Capital Expenditure (cash basis) US$m (22,291) (15,181) (11,581) (7,005) (5,013) (6,847) (6,405) (7,009) 15.0 Acquisitions/(Disposals) US$m 4,780 1, Other US$m 88 (713) (1,573) (407) Free cash flow US$m 2,731 11,352 6,142 1,973 4,507 3,557 5,359 6,055 Dividends US$m (6,167) (6,387) (6,498) (4,120) (1,224) (1,650) (2,342) (2,608) Minority dividends & payments US$m (837) 1,183 (501) (242) (542) (421) (222) (302) 5.0 New Equity US$m (424) (354) (346) (69) Debt Drawdown/(Repayment) US$m 7,172 (910) (931) 6, ,200 0 (1,200) 0.0 Net Financing Cashflow US$m (256) (6,468) (8,276) 1,711 (1,766) (871) (2,564) (4,111) FY13a FY14a FY15a FY16e FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e Net change in cash US$m 2,475 4,884 (2,134) 3,684 2,741 2,686 2,795 1,944 VALUATION BALANCE SHEET FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY20e Projects US$m US$ A$m A$/sh GBPm GBP ZARm ZAR Cash US$m 5,677 8,803 6,753 10,350 13,091 15,777 18,572 20,517 Petroleum 13, , , , Other current assets US$m 13,276 13,493 9,616 7,269 7,765 8,695 9,390 9,675 Iron-ore 55, , , , Property, Plant & Equipments US$m 100, ,787 94,072 85,045 82,898 82,040 83,058 84,740 Copper 15, , , , Other Non-current assets US$m 19,660 20,330 14,139 16,886 17,888 18,989 19,782 20,342 Coal 8, , , , Total Assets US$m 139, , , , , , , ,274 Nickel West (1,562) (0.29) (2,083) (0.39) (976) (0.18) (21,873) (4.11) Debt US$m 33,187 34,589 31,170 36,547 36,547 37,747 37,747 36,547 Group and unallocated (3,080) (0.58) (4,106) (0.77) (1,925) (0.36) (43,114) (8.10) Payables US$m 11,146 10,258 7,418 5,342 5,706 6,389 6,900 7,110 Other Other liabilities US$m 19,554 21,184 15,447 15,898 14,985 14,027 15,911 18,244 Cash 9, , , , Total Net Assets / Equity US$m 75,291 85,382 70,545 61,763 64,404 67,338 70,244 73,374 Debt (36,547) (6.87) (48,729) (9.15) (22,842) (4.29) (511,658) (96.13) Net Debt / (Cash) US$m 27,510 25,786 24,417 26,197 23,456 21,970 19,175 16,030 Net Equity Value (WACC 10.0% No 61, , , , Gearing (net debt/(nd + equity)) % 27% 23% 26% 30% 27% 25% 21% 18% Price Target AUD GBP 7.20 ZAR Gearing (net debt/equity) % 37% 30% 35% 42% 36% 33% 27% 22% Source: BHP, Macquarie Research, March March

7 Fig 17 RIO summary financials Rio Tinto ASX: RIO Price: (A$ps) Year end: Dec Rating: Outperform Up/dn TSR LSE: RIO Price: ( ps) Diluted shares (m) 1,827 ASX Target: % 6% Mkt cap: (US$m) 56,484 LSE Target: % 7% ASSUMPTIONS CY13 CY14 CY15 CY16e CY17e CY18e CY19e ASSUMPTIONS CY12 CY13 CY14 CY15 CY16e CY17e CY18e Exchange Rate A$/US$ Commodity prices Exchange Rate C$/US$ Iron-ore (US$/t) Exchange Rate USDZAR Hard coking coal (US$/t) RATIO ANALYSIS CY13 CY14 CY15 CY16e CY17e CY18e CY19e Thermal coal (US$/t) Diluted share capital m 1,858 1,859 1,827 1,827 1,827 1,827 1,827 Copper (US$/lb) EPS (underlying, undiluted) US Alumina (US$/t) P/E x 6.2x 6.8x 13.8x 18.6x 24.0x 16.2x 15.6x Aluminium (US$/lb) CFPS US P/CF x 4.2x 4.5x 6.7x 7.5x 8.0x 7.2x 6.7x Production by commodity DPS US Iron-ore (100% Basis) Dividend yield % 5.6% 6.2% 6.2% 3.2% 2.1% 3.0% 3.2% Pilbara (mt) Franking Level % 100% 100% 100% 100% 100% 100% 100% Iron Ore Company of Canada (mt) Book value per share US$ps Iron-ore (100%) P/Book value x 1.2x 1.2x 1.4x 1.4x 1.4x 1.3x 1.3x Iron-ore (RIO Reported Share) R.O.E. (pre sig items) % 2% 12% -4% 8% 6% 8% 8% Pilbara (mt) R.O.A. (pre sig items) % 15% 14% 9% 8% 6% 8% 8% Iron Ore Company of Canada (mt) Interest Cover x 39.3x 25.3x 11.4x 9.3x 7.6x 10.1x 11.1x Iron-ore (RIO Reported Share) EBITDA per share US$ps Aluminium (RIO Share) EV/EBITDA x 3.5x 3.5x 5.6x 5.7x 6.0x 5.2x 4.7x Bauxite (mt) FCF Yield % 7% 14% 8% 9% 5% 5% 7% Alumina (mt) EARNINGS CY13 CY14 CY15 CY16e CY17e CY18e CY19e Aluminium (mt) Revenue US$m 51,171 47,664 34,829 30,998 30,138 32,678 35,662 Copper (RIO Share) Operating Costs US$m (33,090) (30,376) (24,164) (21,429) (21,512) (22,304) (24,490) Mined Copper (kt) Operational EBITDA US$m 18,081 17,288 10,665 9,569 8,626 10,374 11,173 Refined Copper (kt) Corporate Costs & EAU Adjustments US$m 3,428 2,377 1,956 2,438 2,612 2,425 2,357 Total Copper (mt) Underlying Ebitda US$m 21,509 19,665 12,621 12,007 11,238 12,799 13,529 Coal (RIO Reported Share) Depreciation & Amortisation US$m (4,791) (4,860) (4,646) (4,807) (5,267) (4,755) (5,155) Thermal coal (mt) Operational Ebit US$m 16,718 14,805 7,975 7,200 5,971 8,045 8,375 Semi-soft Coking Coal (mt) Impairments US$m (7,531) (473) (2,791) Hard Coking Coal (mt) Share of EAU Profit/(Loss) US$m Total Coal (mt) Adjustments US$m (1,973) (2,397) (1,569) (1,410) (1,448) (1,496) (1,541) Other (RIO Share) Profit from Operations US$m 7,912 12,560 3,976 6,146 4,952 6,812 7,012 Diamonds (kcts) 13,122 16,026 13,872 17,394 20,848 28,545 28,137 Net Interest US$m (425) (585) (698) (774) (787) (793) (751) Uranium (mlbs) Other Finance Costs US$m (3,982) (2,423) (4,004) (400) (400) (400) (400) TiO2 Feedstock (kt) 1,595 1,622 1,442 1,089 1,000 1,192 1,192 Profit Before Tax US$m 3,505 9,552 (726) 4,973 3,764 5,618 5,860 Borates (kt) Tax Expense US$m (2,426) (3,053) (993) (1,492) (1,129) (1,685) (1,758) Net Earnings US$m 1,079 6,499 (1,719) 3,481 2,635 3,933 4,102 Post-tax exceptionals US$m EBITDA BY COMMODITY Minority Interests US$m 2, (120) (32) (74) (83) Attributable Profit US$m 3,665 6,527 (866) 3,360 2,603 3,859 4,020 Iron Ore (US$bn) Aluminium (US$bn) Post-tax adjustments to underlying US$m 6,552 2,778 5, Copper & Coal (US$bn) Diamonds and Minerals (US$bn) Other (US$bn) Underlying Profit US$m 10,217 9,305 4,540 3,360 2,603 3,859 4,020 CASHFLOW CY13 CY14 CY15 CY16e CY17e CY18e CY19e Net Earnings US$m 1,079 6,499 (1,719) 3,481 2,635 3,933 4,102 Interest/Tax/D&A US$m 6,762 6,322 7,722 5,207 5,667 5,155 5,555 Working Capital/other US$m 7,237 1,465 3,380 (302) (413) (312) (243) Net Operating Cashflow US$m 15,078 14,286 9,383 8,386 7,889 8,775 9,414 Capital Expenditure US$m (12,944) (7,418) (4,550) (4,073) (5,142) (5,728) (5,311) Disposals/(Acquisitions) US$m (57) (744) (135) Other US$m 2,055 1, Free cash flow US$m 4,132 7,783 4,783 5,060 2,805 3,047 4,103 Dividends US$m (3,322) (3,710) (4,076) (2,677) (1,962) (1,635) (1,925) New Equity US$m 159 1,291 (2,028) Debt Drawdown/(Repayment) US$m 2,122 (3,034) (1,681) Other US$m Net Financing Cashflow US$m (934) (5,436) (7,670) (2,677) (1,962) (1,635) (1,925) FX Adjustment US$m (117) (140) (170) Net change in cash US$m 3,081 2,207 (3,057) 2, ,412 2, CY13 CY14 CY15a CY16e CY17e CY21e CY22e CY23e CY24e CY25e BALANCE SHEET CY13 CY14 CY15 CY16e CY17e CY18e CY19e VALUATION Cash US$m 10,216 12,423 9,366 11,749 12,593 14,005 16,182 Projects US$m US$/sh A$m A$/sh GBPm GBP/sh Other current assets US$m 12,066 8,702 6,188 5,695 5,550 5,995 6,589 Iron Ore 56, , , Property, Plant & Equipments US$m 70,827 68,693 61,057 59,576 59,393 60,367 60,523 Copper & Coal 12, , , Other Non-current assets US$m 17,916 18,009 14,953 15,112 15,483 15,924 16,339 Diamonds & Minerals 3, , , Total Assets US$m 111, ,827 91,564 92,131 93,019 96,291 99,634 Aluminium 7, , , Debt US$m 28,551 25,219 23,624 23,624 23,624 23,624 23,624 Cash 10, , , Payables US$m 8,976 8,308 6,919 6,367 6,206 6,703 7,367 Debt (23,624) (12.93) (31,499) (17.24) (14,765) (8.08) Other liabilities US$m 19,996 19,706 16,893 17,208 17,584 18,060 18,562 Group & Unallocated (1,707) (0.93) (2,277) (1.25) (1,067) (0.58) Total Net Assets / Equity US$m 53,502 54,594 44,128 44,932 45,605 47,903 50,080 Net Equity Value (WACC 11% Nom) 65, , , Net Debt / (Cash) US$m 18,335 12,796 14,258 11,875 11,031 9,619 7,442 Price Target AUD GBP Gearing (net debt/(nd + equity)) % 26% 19% 24% 21% 19% 17% 13% Gearing (net debt/equity) % 34% 23% 32% 26% 24% 20% 15% Source: RIO, Macquarie Research, March March

8 Fig 18 FMG summary financials Fortescue Metals ASX: FMG Price: (A$ps) 3.08 Year end: Jun Rating: Outperform Up/dn TSR Mkt cap: (A$m) 9,625 Diluted shares (m) 3,125 Target: % -13% Mkt cap: (US$m) 7,142 ASSUMPTIONS FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e FY19e ATTRIBUTABLE MINE OUTPUT FY13 FY14 FY15 FY16e FY17e FY18e FY19e Exchange Rate A$/US$ Iron-ore Mined (kt) Spot iron-ore (62% CIF) US$/t Cloudbreak (mt) mt Spot iron-ore (62% CIF) A$/t Christmas Creek (mt) mt RATIO ANALYSIS FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e FY19e Firetail (mt) mt Diluted share capital m 3, ,114 3,115 3,119 3,125 3,125 3,125 3,125 3,125 Kings Valley (mt) mt EPS (diluted and pre sig. items) A FMG Mined (mt) mt P/E x 5.4x 5.7x 5.4x 3.2x 25.4x 13.0x 9.3x 8.2x 5.5x Nullagine JV (mt) - 100% mt CFPS A Iron Bridge (mt) mt P/CF x 4.1x 4.3x 4.7x 1.6x 5.6x 3.8x 4.2x 3.7x 2.5x Total mt DPS A Iron-Ore Shipped (100%) mt Dividend yield % 2.3% 2.6% 3.2% 6.5% 1.6% 2.3% 2.3% 2.9% 4.2% C1 Cash costs US$/wmt Franking Level % 50% 100% 100% 100% 100% 100% 100% 100% 100% All in cash costs US$/wmt Book value per share A$ps CFR 62% Fe Equ costs US$/dmt P/Book value x 3.9x 2.6x 1.9x 1.2x 1.1x 0.8x 0.7x 0.7x 0.6x OPERATIONAL OUTLOOK R.O.E. (pre sig items) % 71% 46% 34% 36% 4% 6% 8% 8% 12% Cloudbreak (mt) Christmas Creek (mt) Firetail (mt) R.O.A. (pre sig items) % 29% 17% 15% 21% 5% 7% 7% 7% 12% Kings Valley (mt) Nullagine JV (mt) - 100% Iron Bridge (mt) Interest Cover x 5.8x 5.1x 5.6x 6.5x 1.7x 2.4x 2.9x 3.3x 5.0x EBITDA per share A$ps EV/EBITDA x 4.3x 5.6x 5.7x 2.8x 6.2x 4.8x 4.1x 3.6x 2.5x FCF Yield % 12% -53% -57% 56% 10% 21% 12% 16% 31% EARNINGS FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e FY19e 80.0 Sales Revenue US$m 5,489 6,716 8,120 11,753 8,574 6,285 6,301 6,553 7,454 Other Revenue US$m Total Revenue US$m 5,489 6,716 8,411 11,879 8,651 6,306 6,301 6,553 7, Operating Costs US$m (2,735) (3,749) (4,703) (6,131) (6,051) (3,544) (3,520) (3,651) (3,981) 20.0 Operational EBITDA US$m 2,754 2,967 3,708 5,748 2,600 2,762 2,781 2,903 3,472 Exploration Expense/Write-offs US$m 0 0 (45) (16) (52) (116) (20) (21) (22) 0.0 Corporate & Other Costs US$m (97) (104) (110) (112) (94) (77) (82) (84) (86) EBITDA US$m 2,657 2,863 3,553 5,620 2,454 2,569 2,679 2,798 3,365 RESERVES AND RESOURCES (ATTRIBUTABLE) D&A US$m (177) (266) (463) (965) (1,405) (1,185) (1,258) (1,258) (1,258) Iron-ore reserves EBIT US$m 2,480 2,597 3,090 4,655 1,049 1,384 1,422 1,540 2,107 Project Mt Fe CaFe SiO2 Al2O3 P LOI Net Interest US$m (429) (505) (553) (720) (629) (584) (483) (468) (419) Cloudbreak % 62.4% 5.1% 2.8% 0.05% 8.3% Profit Before Tax US$m 2,051 2,092 2,537 3, ,072 1,688 Christmas Creek 1, % 62.8% 5.2% 2.7% 0.05% 8.0% Tax Expense US$m (313) (367) (720) (1,173) (104) (278) (281) (322) (506) Firetail % 62.7% 6.3% 2.6% 0.11% 6.5% Minorities US$m (10) Kings and Queens % 61.8% 7.1% 2.7% 0.06% 8.9% Adjusted NPAT US$m 1,738 1,725 1,817 2, ,182 Total Reserves 2, % 62.4% 5.8% 2.8% 0.06% 8.2% Significant Items (post tax) US$m (719) 0 (71) (22) Iron-ore resources Reported NPAT US$m 1,019 1,725 1,746 2, ,182 Project Mt Fe CaFe SiO2 Al2O3 P LOI Cloudbreak 1, % 61.8% 6.1% 3.4% 0.05% 8.3% Christmas Creek 2, % 61.2% 6.3% 3.4% 0.05% 7.9% CASHFLOW FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e FY19e Firetail % 62.4% 6.4% 3.0% 0.11% 6.7% Net Profit US$m 1,019 1,725 1,746 2, ,182 Kings and Queens 1, % 60.8% 7.8% 3.3% 0.07% 8.7% Interest/Tax/D&A US$m ,876 1,019 1,536 1,261 1,298 1,442 Fortescue Mines 5, % 61.2% 6.7% 3.3% 0.06% 8.2% Working Capital/other US$m (471) (484) (372) (51) Greater Chichester % 61.5% 5.9% 3.3% 0.07% 7.1% Net Operating Cashflow US$m 2,336 2,277 2,111 5,395 1,447 1,779 1,434 1,676 2,574 Greater Solomon 2, % 61.3% 6.9% 3.7% 0.08% 7.3% Capex US$m (1,477) (6,044) (6,355) (1,995) (849) (283) (605) (549) (355) Eliwana and Flying Fish % 63.2% 5.2% 2.9% 0.09% 6.5% Investments US$m (26) Nyidinghu 2, % 62.9% 4.9% 3.3% 0.15% 8.7% Sale of PPE and Other US$m Total Resources 11, % 61.7% 6.3% 3.4% 0.09% 8.0% Free cash flow US$m 833 (3,766) (4,055) 4, , ,127 2,219 Magnetite Reserves Mt Mass Recovery (Fe) (SiO2) (Al2O3) Dividends Paid US$m (96) (251) (131) (581) (343) (111) (161) (98) (248) North Star % 67.2% 5.5% 0.3% Debt US$m 631 3,628 4,033 (3,174) (257) (899) (20) (20) (4,871) Magnetite Resources Equity Issuance US$m 2 0 (20) (17) (30) (21) Project Mt Mass Recovery Fe SiO2 Al2O3 Other US$m North Star 2, % 30.9% 40.6% 2.4% Net Financing Cashflow US$m 537 3,377 3,882 (3,772) (630) (1,031) (181) (118) (5,119) Glacier Valley 2, % 32.3% 39.2% 1.8% Net change in cash US$m 1,370 (389) (173) ,008 (2,900) West Star % 28.3% 43.4% 3.4% Total 5, % 31.4% 40.1% 2.1% VALUATION BALANCE SHEET FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e FY19e Projects A$m A$ps Cash US$m 2,663 2,343 2,158 2,398 2,381 2,833 3,480 4,488 1,588 Fortescue Operations 18, PP&E & Mine Development US$m 5,093 11,357 17,159 18,068 17,729 16,799 16,146 15,438 14,535 Undeveloped Resources Exploration US$m Other resources Total Assets US$m 8,626 15,063 20,867 22,694 21,360 20,390 20,387 20,822 17,094 Unpaid capital Debt US$m 4,662 8,501 12,691 9,557 9,569 8,503 8,483 8,463 3,592 Prepayments (1,465) (0.47) Total Liabilities US$m 6,192 11,301 15,578 15,111 13,823 12,244 11,746 11,529 6,867 Corporate (705) (0.23) Total Net Assets / Equity US$m 2,434 3,762 5,289 7,583 7,537 8,146 8,641 9,293 10,227 Cash 3, Net Debt / (Cash) US$m 1,999 6,158 10,533 7,159 7,188 5,670 5,003 3,975 2,004 Debt (12,058) (3.86) Gearing (net debt/(nd + equity)) % 45% 62% 67% 49% 49% 41% 37% 30% 16% Net Equity Value (@ 10% WACC) 8, Gearing (net debt/equity) % 82% 164% 199% 94% 95% 70% 58% 43% 20% Price Target (1x NPV) 2.60 Source: FMG, Macquarie Research, March March

9 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 >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% 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 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 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 % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% 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 31 December 2015 AU/NZ Asia RSA USA CA EUR Outperform 50.68% 61.04% 53.16% 47.90% 65.22% 43.59% (for global coverage by Macquarie, 5.33% of stocks followed are investment banking clients) Neutral 31.51% 24.66% 34.18% 47.70% 29.71% 34.62% (for global coverage by Macquarie, 5.02% of stocks followed are investment banking clients) Underperform 17.81% 14.30% 12.66% 4.39% 5.07% 21.79% (for global coverage by Macquarie, 3.78% of stocks followed are investment banking clients) Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at 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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