Australia Resources. Bulks for cash, gold for value

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1 AUSTRALIA/UNITED KINGDOM/SOUTH AFRICA Recommendation upgrades Neutral to Outperform Newcrest Mining Underperform to Neutral Whitehaven Coal Recommendation downgrades Outperform to Neutral OZ Minerals Perseus Mining 20 December 2016 Macquarie Securities (Australia) Limited Bulks for cash, gold for value Event We have updated our earnings estimates and recommendations after incorporating changes to our commodity price outlook. Our preference for the diversified majors and bulk commodity producers remains unchanged, although value is now emerging in the gold sector. We make four recommendation changes on the back of the updated commodity outlook. Impact Bulk commodities looking good in 2017: Our commodities team has upgraded its price outlook for most bulk commodities in We lift our ironore price forecast by 8% in CY17 while our hard coking coal forecast is raised 41% in CY17 and 17% in CY18. Thermal coal forecasts increase 13-15% over the next five years and we have also lifted or short and medium-term forecasts for alumina and manganese. Cutting gold price outlook and base metals mixed: The material decline in gold prices has been a major surprise since the US election and we have cut our CY17 gold price forecast by 12%. The upgrade cycle for lead and zinc continues and we also increase our CY17 aluminium price forecast by 11%. Material earnings upgrades for bulk commodity producers but cuts for gold miners: Incorporating the commodity price changes has translated to significant earnings upgrades to the bulk commodity producers. On average over the next two years we lift our earnings forecasts by 20-25% for BHP, RIO and FMG, 45% for S32 ~5 for WHC and ~8% for NHC. We cut gold earnings by 12-2 on average over the next two years while changes to base metals earnings are generally less than 1. Outlook Maintain positive stance on diversified majors and iron-ore miners: We reiterate our Outperform ratings on BHP, RIO and S32. The changes to our commodity price forecasts have materially improved the earnings outlook for all three stocks. Despite the improved outlook there remains material upside risk to our base case forecasts for all three stocks. We also reiterate our Outperform rating on FMG, noting that the speed at which the company is degearing its balance sheet is likely to continue to drive sector outperformance. Value emerging in the gold sector: Gold equities have fallen 30-4 on average since the US election, comfortably outpacing the gold price which is down 13% over the same period. We attribute the aggressive fall to increased redemption selling by ETFs, which retain major holdings in most gold equities. Further ETF driven selling is possible in the near-term, however we are starting to see value emerge. We upgrade NCM to Outperform and reiterate EVN, NST, OGC and SBM as preferred mid-cap producers. Nickel remains favoured base metal: Nickel remains one of the few commodities that we expect to see commodity price appreciation over the next few years and we reaffirm IGO and WSA as our preferred nickel stocks. We retain SFR as our preferred copper pick and ORE and SYR for exposure to the emerging battery raw material thematic. Please refer to page 14 for important disclosures and analyst certification, or on our website

2 Upgrading bulk and base metal prices Our commodities team has made a number of revisions to commodity price forecasts. The bulk of the changes are positive, with material upgrades to manganese, coking coal and thermal coal in CY17. We also make significant upgrades to our lead, zinc and aluminium price forecasts, while only gold and silver suffer notable cuts to price forecasts for CY17. The changes to CY18 are more modest with coking coal and thermal coal seeing 10-2 increases and more modest rises for manganese, lead and aluminium. We make a modest cut to our CY18 nickel price forecast with our alumina, iron-ore, copper and gold forecasts remaining unchanged. Beyond CY18 we have increased forecasts for thermal coal, manganese and alumina by over 1 with most other changes below that. Fig 1 Changes to our CY17 commodity prices Fig 2 Changes to our CY18 commodity prices (1) (2) (1) (2) Iron-ore prices remain strong Iron-ore prices continue to trade well above our expectations. Spot iron-ore prices are averaging close to US$70/t in the 4QCY16, well above our US$60/t forecast. Demand has been stronger than expected and we lift our 1QCY17 and 2QCY17 forecasts by 15% and 6% respectively. We also lift our 3QCY17 and 4QCY17 prices by 4% keeping the spot iron-ore prices above US$50/t. We recently upgraded our demand forecasts for iron-ore for 2016 with demand growth now forecast to be 2.9%, well up on our 0.4% forecast made in the 2QCY16 and implying Chinese domestic steel consumption. The stronger demand has been fairly widespread, with residential property, machinery, autos and appliances all seeing higher demand than we had previously anticipated. Fig 3 Iron-ore prices upgraded for next six months Iron-ore (US$/t)- old Iron-ore (US$/t)- old Iron-ore (US$/t)- new Iron-ore (US$/t)- new Change (%) 15% 6% 4% 4% Change (%) 8% Despite the stronger performance in 2016 we still see further demand growth in 2017 with Chinese steel consumption forecast to grow at 1.5%. We note that the demand growth is weighted to the 1HCY17 with a declining trend forecast to resume in the 2HCY17. Our expectation that prices will retreat back from current levels is driven by a number of key factors. Iron-ore demand has certainty been strong, however we believe that the supply response from the iron-ore industry, largely from smaller higher cost producers, is also likely to be strong. Indeed Chinese port iron-ore stockpiles have continued to rise over the year and the latest Mysteel data suggests that Chinese steel mill inventories have also risen, although this is usually the case ahead of the winter. 20 December

3 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Macquarie Wealth Management While we think iron-ore prices should fall back towards cost curve support around US$60/t, the current spot price is a boon for the iron-ore industry. In Australian dollar terms, spot iron-ore prices are trading over A$110/t, a price not seen since early In addition we note that our forecasts remain well below the Bloomberg iron-ore forward curve, although this does tend to move down broadly in line with spot prices. Fig 4 Spot iron-ore prices over A$110/t Fig 5 Changes to our CY18 commodity prices Metal Bulletin Iron Ore (US$/t) - CFR Metal Bulletin Iron Ore (A$/t) - CFR Macqaurie Forecast (US$/t) - Old Forward Curve (US$/t) Macqaurie Forecast (US$/t) - New Spot Price (US$/t) Source: Bloomberg, Macquarie Research, December 2016 Source: Bloomberg, Macquarie Research, December 2016 A stronger outlook for coking coal The rise in spot hard coking coal prices has captured many by surprise, punctuated by the US$285/t 1QCY17 contract price, which we pushed through our BHP and S32 estimates last week. In line with historic trends, which have never seen the benchmark quarterly contract fall more than US$55/t in any quarter, we upgrade our 2QCY17 hard coking coal contract price by 44% to US$230/t and US$175/t in the 3QCY17, both declines of US$55/t. We also lift our 2HCY17 hard coking coal prices by ~3 and the higher base effect sees a 17% upgrade to our CY18 forecast and 8% increases in our CY19 and CY20 estimates. Our long-term price of US$115/t remains unchanged. We make similar upgrades to our mid-range coking coal price forecasts. We note that our upgrades for the 1QCY17 reflect already announced quarterly contract prices while we retain our medium-term conversion assumptions of PCI coal being 75% of the hard coking coal price and semi-soft coking coal 7 of the hard coking coal benchmark. We note that the 1QCY17 contract prices did see a drop in the discount to mid-range coking coal with PCI and semi-soft equivalent to 63% and 6 of the hard coking coal benchmark prices respectively. Fig 6 Material upgrades to our coking coal prices Hard coking (US$/t)-old Hard coking (US$/t)-old Hard coking (US$/t)-new Hard coking (US$/t)-new Change (%) 54% 44% 3 29% Change (%) 41% 17% 8% 8% PCI coal (US$/t) - old PCI coal (US$/t)-old PCI coal (US$/t) - new PCI coal (US$/t)-new Change (%) 3 44% 3 29% Change (%) 33% 17% 8% 8% Semi-soft (US$/t) - old Hard coking (US$/t)-old Semi-soft (US$/t) - new Hard coking (US$/t)-new Change (%) 32% 44% 3 29% Change (%) 34% 17% 8% 8% 20 December

4 Mar-02 Nov-02 Jul-03 Mar-04 Nov-04 Jul-05 Mar-06 Nov-06 Jul-07 Mar-08 Nov-08 Jul-09 Mar-10 Nov-10 Jul-11 Mar-12 Nov-12 Jul-13 Mar-14 Nov-14 Jul-15 Mar-16 Nov-16 Macquarie Wealth Management Similar to iron-ore the current spot coking coal prices have almost never been better than now in Australian dollars. Current prices were only as high as the 1QCY17 benchmark of A$ /t during 2008 when the annual benchmark system was still in place. The 2008 benchmark price of US$300/t was the only time that were better than the current price, with movements in the A$ driving the annual benchmark price as high as A$430/t. Fig 7 Hard coking coal prices remain buoyant Fig 8 Prices back to peak levels in A$ terms Premium HCC FOB Aus (US$/t) Hard Coking Coal (US$/t) - Macq - old Hard Coking Coal (US$/t) - Macq - new Source: Bloomberg, Macquarie Research, December 2016 Source: BHP, Bloomberg, Macquarie Research, December 2016 Thermal coal price upgrades are material The implementation of the Chinese Government s 276 day policy has transformed the outlook for thermal coal prices. We retain a bearish outlook for thermal coal prices over the next five years, as aside from the aforementioned Chinese Government actions, we struggle to see any bullish features for the market into the long-term. That said the upgrades to our thermal coal price forecasts are significant, with our forecasts now calling for prices to remain above US$70/t for the rest of 2017, declining back to US$60/t by CY20. Our long-term forecast remains unchanged but we have effectively lifted our forecasts for the next five years by 14% Hard coking coal (US$/t) Hard coking coal (A$/t) Fig 9 Thermal coal prices upgraded by 12-14% through to 2021 Thermal coal (US$/t)- old Thermal coal (US$/t)- old Thermal coal (US$/t)-new Thermal coal (US$/t)-new Change (%) 11% 12% 12% 12% Change (%) 12% 13% 14% 14% Lithium higher on supply delay We have upgraded our CY17 Lithium price forecast by 6% as supply from some of the new Australian hard rock entrants has not arrived as quickly as we had previously anticipated. We lift our 1QCY17 price by 2 and our 2QCY17 forecast by 8%. Our base case view on lithium remains that there is sufficient new supply either in construction or planned that can outpace demand growth into the long-term. Fig 10 Modest upgrade to near-term lithium prices Lithium (US$/t)- old 8,300 8,300 8,250 8,150 Lithium (US$/t)- old 8,250 7,500 7,000 6,750 6,000 Lithium (US$/t)-new 10,000 9,000 8,000 8,000 Lithium (US$/t)-new 8,750 7,500 7,000 6,750 6,000 Change (%) 2 8% (3%) (2%) Change (%) 6% 20 December

5 Manganese price moves have been astonishing The rise in manganese prices has been one of the biggest surprises both in the sustained strength and magnitude of the rise. We had previously expected manganese prices to quickly retreat back towards our longer-term prices, however strong demand and a lack of real supply response is likely to see prices stay at higher levels for longer. Having upgraded our 4QCY16 price by 65% we also lift our 1QCY17 price by more than 10. We still expect prices to decline back into the cost curve, particularly with the supply side response expected to have an impact early next year, however prices are expected to remain well above our previous forecasts, with our CY17 and CY19 averages rising 71% and 15% respectively. Fig 11 Manganese prices trading well above our forecasts Manganese(US$/mtu)- old Manganese(US$/mtu)- old Manganese(US$/mtu)-new Manganese (US$/mtu)-new Change (%) 115% 83% 58% 25% Change (%) 71% 8% 15% 7% Alumina set for a strong 2017 Spot alumina prices have surged to US$350/t and we have upgraded our 1QCY17 forecast to reflect the current strength in spot prices. The lack of capacity restarts in China for alumina refineries compared to aluminium smelters has created a shortage of alumina. We believe restarts will eventually occur but have upgraded our short and medium-term forecasts to reflect the stronger than expected market. We note that our bauxite spot price forecasts remain unchanged. Fig 12 Upgrading short and medium-term alumina prices Alumina (US$/t)- old Alumina (US$/t)- old Alumina (US$/t)-new Alumina (US$/t)-new Change (%) 9% 5% 5% 5% Change (%) 6% 12% 3% Spot prices for manganese and alumina remain well above our forecasts and present material upside risk to our base case forecasts. Manganese spot prices are currently trading at the highest premium to our 1QCY17 forecast for any commodity in our coverage universe. We note our longterm forecasts for manganese and alumina remain well below current spot prices due to unfavourable market fundamentals in the long-term. Fig 13 Manganese price rise has surprised Fig 14 Alumina has been a strong performer Manganese Ore (US$mtu) - Spot Alumina (US$/t) - Spot Alumina (US$/t) - Macq new Manganese Ore (US$/mtu) - Macq - old 380 Alumina (US$/t) - Macq old Manganese Ore (US$/mtu) - Macq - new Source: Platts, BHP, Macquarie Research, December 2016 Source: Platts, Macquarie Research, December December

6 LME metal upgrades dominated by aluminium, lead and zinc The changes to our base metal forecasts are significantly more subdued than the upgrades to our bulk commodity forecasts. The most significant upgrades to our forecasts for CY17 are in lead, zinc and aluminium which rise 17%, 15% and 11% respectively, although we also upgrade our 1HCY17 nickel price forecast by 13-14%. In the medium-term we lift our aluminium price forecasts by 5-6% to reflect the higher Chinese thermal coal price expectation. We pull back our zinc price forecasts in CY19 and CY20 but remain relatively bullish for both lead and zinc in the near-term. We recently upgraded our copper price forecasts and make no change to our estimates in this update. Fig 15 Base metal price upgraded for aluminium, zinc and lead Aluminium (US$/lb) - old Aluminium (US$/lb) - old Aluminium (US$/lb) - new Aluminium (US$/lb) - new Change (%) 17% 14% 7% 7% Change (%) 11% 5% 6% 6% Copper (US$/lb) - old Copper (US$/lb) - old Copper (US$/lb) - new Copper (US$/lb) - new Change (%) Change (%) Nickel (US$/lb) - old Nickel (US$/lb) - old Nickel (US$/lb) - new Nickel (US$/lb) - new Change (%) 14% 13% (4%) Change (%) 5% (4%) Lead (US$/lb) - old Lead (US$/lb) - old Lead (US$/lb) - new Lead (US$/lb) - new Change (%) 1 17% 2 21% Change (%) 17% 7% 1% Zinc (US$/lb) - old Zinc (US$/lb) - old Zinc (US$/lb) - new Zinc (US$/lb) - new Change (%) 18% 15% 14% 13% Change (%) 15% 3% (12%) (13%) Gold de-rating post US election was a surprise The fall in spot gold and silver prices post the US election caught us by surprise and we have made significant revisions to our gold and silver price forecasts in the near-term to reflect increased rate rise expectations in the US and spot price movements. Our CY17 forecast for gold falls 12% while our silver price forecast falls 1. We have made only modest revisions beyond CY18 for either commodity. Fig 16 Cutting gold and silver price forecasts post US election Gold (US$/oz) - old 1,325 1,375 1,425 1,400 Gold (US$/oz) - old 1,381 1,375 1,406 1,438 1,250 Gold (US$/oz) - new 1,115 1,125 1,275 1,350 Gold (US$/oz) - new 1,216 1,375 1,363 1,400 1,250 Change (%) (16%) (18%) (11%) (4%) Change (%) (12%) (3%) (3%) Silver (US$/oz) - old Silver (US$/oz) - old Silver (US$/oz ) - new Silver (US$/oz ) - new Change (%) (12%) (16%) (12%) (1%) Change (%) (1) 4% (2%) (2%) No changes to exchange rate forecasts We have not made any material changes to our exchange rate forecasts in this update. Our forecast for the A$/US$ remains relatively flat, expected to trade in a range of in the short, medium and long-term. Fig 17 Cutting gold and silver price forecasts post US election A$/US$ - old A$/US$ - old A$/US$ - new A$/US$ - new Change (%) Change (%) 20 December

7 A strong year for bulk commodity and base metal producers 2016 YTD has been a strong year for bulk commodity and base metal producers, with nearly every stock comfortably outperforming the ASX 200 index. WHC and FMG have been the standout performers with both stocks up over 20 this year, with +10 gains for S32 and MGX. Only SFR and NHC managed to underperform the benchmark index. The performance of the bulk commodity and base metal producers has remained solid over the course of the year, with coal and iron-ore producers continuing to dominate over the diversified majors and base metals companies. We note only ILU managed to underperform the broader ASX200 in the 2HCY16 to date with SFR and NHC managing to turn around its 1HCY16 underperformance. Fig 18 CY16 share price performance bulks/base Fig 19 2HCY16 share price performance bulks/base (5) Source: IRESS, Macquarie Research, December 2016 Source: IRESS, Macquarie Research, December 2016 The battery raw material supply story has been a strong thematic in 2016, although most of the share price outperformance compared to the ASX200 came in the first half, with only GXY able to report positive share price performance since the 1 July, and all stocks underperforming the ASX200 in the 2HCY16. Fig 20 CY16 price performance Graphite/Lithium Fig 21 2HCY16 price performance Graphite/Lithium (5) GXY AJM NMT MNS ORE PLS ASX 200 SYR -5 ASX 200 GXY ORE PLS NMT MNS AJM SYR Source: IRESS, Macquarie Research, December 2016 Source: IRESS, Macquarie Research, December December

8 It has been a mixed year for gold equities with most stocks in our coverage universe comfortably outperforming the ASX 200, albeit less so than the bulk and base metal producers. However post the US election in early November the sector has suffered from a significant selloff, with most of the stocks in our coverage universe down 3 on the back of increased ETF outflow and a 13% decline in the gold price. Fig 22 CY16 price performance Gold Fig 23 Gold stock sell off since US election (2) (4) (1) (2) (3) (4) (5) (6) (7) Source: IRESS, Macquarie Research, December 2016 Source: IRESS, Macquarie Research, December 2016 Four changes to recommendations We make only four recommendation changes after incorporating the changes to our commodity price forecasts. Our recommendation on OZL is cut from Outperform to Neutral, while we lift NCM from Neutral to Outperform and WHC from Underperform to Neutral. We also cut PRU from Outperform to Neutral after incorporating the recent cut to production guidance. Fig 24 Four recommendation changes Company Code Recommendation - old Recommendation - New Oz Minerals OZL Outperform Neutral Perseus Mining PRU Outperform Neutral Newcrest Mining NCM Neutral Outperform Whitehaven Coal WHC Underperform Neutral Our positive view on the diversified majors has been maintained with the earnings upgrades enhancing that view. We maintain Outperform ratings on BHP, RIO and S32, noting that all three stocks maintain material upside risk to our base case forecasts compared to spot prices and our estimates remain ahead of consensus for FY17. We continue to favour pure play iron-ore producers with our Outperform ratings on FMG and MGX maintained. The upgrades to our coal price forecasts have transformed the earnings outlook for WHC and NHC and we upgrade WHC to Neutral and maintain our Outperform rating on NHC. Nickel is one of the few commodities that we are forecasting material price appreciation from current levels and we retain positive stance on WSA and IGO. We maintain our preference for SFR over OZL for pure play copper exposure and cut our rating on OZL from Outperform to Neutral to reflect the cuts to our gold price forecasts. 20 December

9 Gold equities have fallen on average 3 since the US election and we now see significant value emerging from the sector. We upgrade NCM to Outperform and keep our positive recommendations on the majority of gold producers in our coverage universe. Our preferred names in the mid cap gold space remain OGC, EVN, NST and SBM. We also cut PRU from Outperform to Neutral after incorporating the recent cut to production guidance. Fig 25 Macquarie mining equites coverage universe recommendation and price target summary Company Code Analyst Recommendation Market Cap (A$m) Price (A$) Price Target (A$) TSR Diversified BHP Billiton BHP Hayden Bairstow Outperform 131, % Rio Tinto RIO Hayden Bairstow Outperform 101, % South32 S32 Hayden Bairstow Outperform 14, % Alumina Alumina AWC Hai Le Neutral 5, % Iron-ore Fortescue Metals Group FMG Hayden Bairstow Outperform 14, % Mount Gibson Iron MGX Hayden Bairstow Outperform % Coal New Hope NHC Andrew Hodge Outperform 1, Whitehaven Coal WHC Andrew Hodge Neutral 2, % Mineral Sands Iluka Resources ILU Ben Crowley Neutral 2, (5%) Nickel Independence Group IGO Hayden Bairstow Outperform 2, % Western Areas WSA Hayden Bairstow Outperform % Copper Oz Minerals OZL Hayden Bairstow Neutral 2, % Sandfire Resources SFR Hayden Bairstow Outperform % Lithium Orocobre ORE Andrew Hodge Outperform % Galaxy Resources GXY Ben Crowley Underperform (41%) Pilbara Minerals PLS Ben Crowley Underperform (3%) Neometals NMT Ben Crowley Outperform % Altura Mining AJM Andrew Hodge Underperform % Graphite Syrah Resources SYR Ben Crowley Outperform % Magnis Resources MNS Ben Crowley Outperform % Gold Newcrest Mining NCM Hayden Bairstow Outperform 13, % Evolution Mining EVN Ben Crowley Outperform 2, % OceanaGold Corporation OGC Ben Crowley Outperform 2, % Northern Star Resources NST Ben Crowley Outperform 1, % Regis Resources RRL Ben Crowley Outperform 1, % St Barbara SBM Ben Crowley Outperform % Saracen Mineral Holdings SAR Ben Crowley Outperform % Alacer Gold AQG Ben Crowley Outperform % Gold Road Resources GOR Ben Crowley Outperform % Perseus Mining PRU Ben Crowley Neutral % Dacian Gold DCN Ben Crowley Outperform % Beadell Resources BDR Ben Crowley Outperform % Doray Minerals DRM Ben Crowley Neutral % Medusa Mining MML Ben Crowley Neutral Troy Resources TRY Ben Crowley Outperform % Source: IRESS, Macquarie Research, December December

10 Upgrading targets for bulk and base metal producers but cuts in gold Incorporating the changes to our commodity prices has driven upgrades to our price targets for the diversified majors and bulk commodity producers. We note that we have reduced our EV/Ebitda multiple used to derive price targets for the diversified majors by ~1 to reflect reduced upside risk to our new forecasts, which has pared back the upgrades to price targets. Gold producers see significant cuts to our price targets due to a combination of the cuts to our gold price forecasts and also reductions in our NPV and cash flow multiples used to derive price targets. Our price target methodology for gold equities is consistent globally, using a 50/50 blend of NPV multiples and forward operating cash flow multiples to derive price targets. We lower our NCM NPV multiple from 1.3x to 1.2x, in line with the other global gold majors and our cash flow multiple from 12x to 10x. For the mid-cap producers we cut our NPV multiples from ~1.3x to 1.0x for the producers and ~1.1x to 0.8x for the higher risk operators and developers. Our operating cash flow multiples see similar reductions in percentage terms to the NPV multiple. The impact of the cuts to our gold prices and reduction in implied gold premium sees price targets for most gold stocks cut by 20-3 with higher cost producers seeing cuts closer to 5. Fig 26 Upgrading targets for bulks but material cuts to gold Company Code Price target - old Price Target - new Change Diversified BHP Billiton BHP % Rio Tinto RIO % South32 S % Iron-ore Fortescue Metals Group FMG % Mount Gibson Iron MGX % Coal New Hope NHC % Whitehaven Coal WHC (4%) Other bulks Alumina AWC % Iluka Resources ILU % Copper Oz Minerals OZL (9%) Sandfire Resources SFR (4%) Nickel Independence Group IGO (2%) Western Areas WSA (5%) Lithium/Graphite Syrah Resources SYR Magnis Resources MNS (29%) Orocobre ORE Pilbara Minerals PLS % Galaxy Resources GXY Neometals NMT % Altura Mining AJM Gold Newcrest Mining NCM (17%) Evolution Mining EVN (28%) Northern Star Resources NST (27%) OceanaGold Corporation OGC (16%) Regis Resources RRL (22%) St Barbara SBM (3) Saracen Mineral Holdings SAR (23%) Alacer Gold AQG (32%) Gold Road Resources GOR (2) Dacian Gold DCN (25%) Perseus Mining PRU (56%) Beadell Resources BDR (5) Doray Minerals DRM (17%) Medusa Mining MML (17%) Troy Resources TRY (56%) 20 December

11 Earnings upgrades significant for bulk commodity producers Incorporating the updated commodity price outlook has translated to material upgrades to our earnings forecasts for the bulk commodity producers. We lift our earnings for BHP by 16% in FY17 and 19% in FY18 largely due to the upgrades to our coking coal and near-term iron-ore price forecasts. RIO sees upgrades of 36% for CY17 and 11% for CY18 as it also benefits from the upgrade to our aluminium price outlook. S32 is the main benefactor from this round of commodity price changes, with upgrades to our manganese, coking coal, thermal coal, alumina and aluminium price outlook translated to 41% and 48% upgrades to our FY17 and FY18 forecasts. We also lift our FY19 and FY20 earnings forecasts for S32 by more than 3. Pure play coal producers WHC and NHC are also major benefactors from the price upgrades. We lift our WHC earnings by 41% for FY17 and over 7 for FY18-FY20. NHC sees upgrades of 13% for FY17 and 2-3% for FY18-FY19. FMG benefits from the current strength in iron-ore prices, with earnings upgraded by 25% in FY17 and 14% in FY18 with AWC seeing a 22% upgrade for CY17 due to a similar lift in our alumina price forecast. Fig 27 Material changes to earnings forecasts Company Code FY16a FY17e FY18e FY19e FY20e Diversified BHP Billiton BHP 16% 19% 8% 5% Rio Tinto* RIO 9% 36% 11% 9% 5% South32 S32 41% 48% 34% 36% Iron-ore Fortescue Metals Group FMG 25% 14% 1% 1% Mount Gibson Iron MGX 44% nm 2% 1% Coal New Hope NHC 13% 2% 3% (4%) Whitehaven Coal WHC 41% 74% 72% 72% Paringa Resources PNL nm nm nm nm nm Other bulks Alumina* AWC 8% 22% 318% nm Iluka Resources* ILU 18% 8% Copper Oz Minerals OZL () (1) 46% nm (9%) Sandfire Resources SFR (4%) (1%) (1%) (1%) Nickel Independence Group IGO 32% (3%) (6%) (7%) Western Areas WSA nm 73% (19%) (2%) Lithium/Graphite Syrah Resources SYR nm nm () () () Magnis Resources MNS nm nm nm (32%) (31%) Orocobre ORE nm 13% (31%) (16%) (9%) Pilbara Minerals PLS nm nm nm 95% 4% Galaxy Resources* GXY nm 12% (3%) (1%) () Neometals NMT nm 33% (6%) (1%) Altura Mining AJM nm nm nm (3%) () Gold Newcrest Mining NCM (3) (9%) (8%) (14%) Evolution Mining EVN (21%) (6%) (3%) (7%) Northern Star Resources NST (21%) (6%) (5%) (1) OceanaGold Corporation* OGC (3%) (36%) (6%) (11%) (6%) Regis Resources RRL (2) (7%) (4%) (8%) St Barbara SBM (18%) (7%) (4%) (8%) Saracen Mineral Holdings SAR (24%) (8%) (5%) (9%) Alacer Gold AQG 2% nm nm (12%) (8%) Gold Road Resources GOR nm nm nm (16%) (15%) Dacian Gold DCN nm nm 1% (11%) (14%) Perseus Mining PRU nm nm (15%) (6%) (9%) Beadell Resources* BDR (16%) (31%) (1%) (8%) (8%) Doray Minerals DRM nm (2) (12%) (16%) Medusa Mining MML (32%) (9%) (7%) (13%) Troy Resources TRY nm (59%) () () (29%) *December Y/E, all others June Y/E The earnings changes for nickel producers are mixed with upgrades in FY17 offset by modest downgrades to FY18. We note IGO sees cuts to FY19 and FY20 due to the reduction in our zinc prices forecasts. 20 December

12 Spot prices trading well above our forecasts for most commodities We note there remains material upside to our commodity price forecasts despite the upgrades incorporated in this note. The bulk of the upside risk lies in the bulk commodity prices with coking coal and iron-ore spot prices currently ~3 above our FY17 forecasts and 60-7 higher than our FY18 forecasts. Manganese presents the largest upside risk with current spot prices ~5 and 135% above our FY17 and FY18 forecasts, although this only impacts S32. There is also upside risk to our base metal forecasts, although the variances are generally less than 1 in FY17. Aluminium and copper continue to trade above our FY18 forecasts while nickel, lead and zinc are all currently trading below our forecasts for FY18. Nickel remains the only base metal we expect to rise from current levels in the medium to long-term. The decline in gold prices post the US election has come as a surprise and we note that spot gold and silver prices remain below our downgraded forecasts for FY17. There is now material downside risk to our forecasts for gold and silver into FY18, with spot prices currently trading 16% and 21% lower and our FY18 forecasts for gold and silver respectively. Fig 28 Material upside risk to our base case forecasts Y/E June Spot FY17e Variance FY18e Variance Bulks Iron-ore (US$/t) % 49 63% Coking Coal (US$/) % Thermal Coal (US$/t) % 68 26% Manganese (US$/mtu) % % Alumina (US$/t) % % Base metals Aluminium (US$/lb) % % Copper (US$/lb) % % Nickel (US$/lb) (5%) 5.50 (8%) Lead (US$/lb) % 1.12 (9%) Zinc (US$/lb) % 1.30 (6%) Precious metals Gold (US$/oz) 1,137 1,197 (5%) 1,350 (16%) Silver (US$/oz) (9%) (21%) Energy Brent Crude (US$/bbl) % 65 (14%) West Texas (US$/bbl) % 59 (12%) Henry Hub (US$/mmbtu) % % Exchange rates A$/US$ (3%) 0.74 (2%) US$/ZAR % US$/BRL (4%) 4.30 (21%) Source: Bloomberg, IRESS, Platts, Macquarie Research, December December

13 Our forecasts and consensus still well below spot price scenario We note that the upside risk to our base case forecasts remains significant under a spot price scenario despite the material upgrades to our earnings forecasts for the bulk commodity producers. Our FY17 earnings estimates for BHP are 19% higher than Bloomberg consensus and 5% higher for RIO. At spot prices the upside is significant with BHP generating underlying earnings 5 and 2 higher than Bloomberg consensus and our estimates respectively while the upside for RIO is around 5 for both. For FMG and S32 the upside under a spot price scenario is more material with FMG generating underlying earnings 87% and 7 higher than Bloomberg consensus and our forecasts respectively. For S32 the upside to earnings under a spot price scenario is 77% to Bloomberg consensus and 16% to our forecasts. We note that our FY17 earnings forecasts for FMG and S32 are 1 and 5 above Bloomberg consensus respectively. Fig 29 FY17 underlying earnings upside risk at spot prices for BHP and RIO Fig 30 FY17 underlying earnings upside risk at spot prices is 10,000 Consensus (US$m) Macquarie (US$m) Spot (US$m) 3,500 Consensus (US$m) Macquarie (US$m) Spot (US$m) 9,000 8,000 3,000 7,000 2,500 6,000 2,000 5,000 4,000 1,500 3,000 1,000 2,000 1, BHP RIO S32 FMG Source: Bloomberg, Macquarie Research, December 2016 Source: Bloomberg, Macquarie Research, December 2016 We do not believe current spot prices are sustainable into perpetuity and running a spot price scenario into perpetuity delivers material upside to our base case valuations for the diversified majors and FMG with valuations under this scenario generally 10 or higher than our base case price targets. Fig 31 Material upside risk to our bullish view for diversified majors and FMG under spot prices Company Code Market Cap (US$m) Rating Share price Price target TSR Spot valuation Change Upside BHP Billiton ASX: BHP 93,152 Outperform A$25.09 A$ % A$ % 88% BHP Billiton LSE: BLT 93,152 Outperform % % BHP Billiton JSE: BIL 93,152 Outperform ZAR ZAR % ZAR % 98% Rio Tinto ASX: RIO 72,336 Outperform A$59.55 A$ % A$ % 107% Rio Tinto LSE: RIO 72,336 Outperform % % 119% South32 ASX: S32 10,324 Outperform A$2.66 A$ % A$ % 171% South32 LSE S32 10,324 Outperform % % 176% South32 JSE S32 10,324 Outperform ZAR28.00 ZAR % ZAR % 165% Fortescue Metals ASX: FMG 13,630 Outperform A$6.00 A$ % A$ % 165% Source: IRESS, Macquarie Research, December December

14 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 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 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 30 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 30 September 2016 AU/NZ Asia RSA USA CA EUR Outperform 47.26% % 45.47% 59.09% 48.21% (for US coverage by MCUSA, 8.2 of stocks followed are investment banking clients) Neutral 38.01% 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% 3.03% 15.0 (for US coverage by MCUSA, 8.0 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. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. 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15 This publication was disseminated on 19 December 2016 at 18:57 UTC. Macquarie Wealth Management 20 December