Fortescue Metals Group

Transcription

1 AUSTRALIA FMG AU Price (at 4:13, 31 Jan 217 GMT) Outperform A$6.6 Valuation A$ - DCF (WACC 8.5%, beta 1.3, ERP 5.%, RFR 3.3%) month target A$ month TSR % Volatility Index High GICS sector Materials Market cap A$m 2,552 3-day avg turnover A$m 83.2 Number shares on issue m 3,114 Investment fundamentals Year end 3 Jun 216A 217E 218E 219E Revenue m 7,83. 8, , ,633.6 EBIT m 1,815. 3, ,434. 1,88.8 Reported profit m , Adjusted profit m , Gross cashflow m 2,173. 3,29.4 2,86.3 1,848.9 CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x FMG AU vs ASX 1, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 217 (all figures in USD unless noted, TP in AUD) 31 January 217 Macquarie Securities (Australia) Limited Realised pricing boost Event FMG s 2QFY17 production result was strong. The company reported inline shipments and cash costs with realised pricing coming in 9% higher than we had anticipated. Impact Another strong production result: FMG shipped 42.2mt of iron-ore in the 2QFY17, in line with our expectations and only slightly below the preceding period. Ore mined and waste moved was higher than we expected but reflects usual seasonality, with mining ahead of shipping prior to the wet season. Impressive cash cost performance: C1 cash costs for the quarter of US$12.54/wmt were broadly in line with our forecasts and we believe place FMG as the lowest cost iron-ore producer on a C1 basis. Costs were 7% lower than the preceding period, which was an impressive performance given the A$/US$ exchange rate was essentially flat over the past six months. Realised pricing the key positive: FMG s average realised pricing of US$64.87/dmt was 9% higher than we had expected and equivalent to 92% of the benchmark price. Provisional pricing is likely to have been a major driver of the higher realised price. We note that FMG s 1QFY17 realised price of US$48.36/dmt was 83% of benchmark. FMG has reiterated it expects to realise 85-9% of benchmark prices in FY17. Debt falls to US$4.bn and gearing down to 3%: FMG s net debt fell US$2m in the 2QFY17 to US$4.bn, around US$35m higher than we were expecting with the cash flow shortfall largely attributable to provisional pricing adjustments, which are expected to flow through in the 3QFY17. Earnings and target price revision We have made only modest changes after incorporating the 2QFY17 result and updated prepayment schedule. We lift our FY17 forecast by 5% but cut our FY18 forecast by 5%. Our price target rises 4% to $7.6. Price catalyst 12-month price target: A$7.6 based on a 5/5 NPV and 6.x EV/Ebitda methodology. Catalyst: FMG is schedule to report its 1HFY17 earnings result on 22 February and 3QFY17 production on 13 April. Action and recommendation Maintain Outperform: FMG s 2QFY17 production result was impressive, with stronger realised pricing boosted by positive provisional pricing the key highlight. The company continues to report sector leading cash costs, with a further 7% reduction to US$12.54/wmt achieved during the quarter despite the absence of favourable currency movements. Net debt has fallen to US$4.bn with gearing down to 3%. Cash flow is expected to improve in the 2HFY17 as working capital unwinds and provisional pricing payments are received. At spot prices, FMG is generating US$4.5-5.bnpa in free cash flow and could become debt free before the end of 217. Please refer to page 6 for important disclosures and analyst certification, or on our website

2 2QFY17 production result was strong FMG shipped 42.2mt of iron-ore in the 2QFY17, in line with our 42.3mt forecast. Ore mined of 5.1mt and overburden removed of 54.6mt were 8% and 5% higher than we had forecast, respectively. C1 cash costs of US$12.54/wmt were just 2% lower than our US$12.74/wmt forecast, an impressive result given the higher total material movements. FMG reported an average realised iron-ore price of US$64.87/dmt for the quarter, equivalent to 92% of the benchmark price. We had assumed a wider discount in the 4QFY17, although this appears to have been offset by positive provisional pricing adjustments. FMG s net debt at the end of December had fallen to US$4.bn, a US$2m reduction on the previous quarter. Cash generation was weaker than we had expected due to higher pre-payment amortisation, a working capital build relating to the provisional pricing and higher capital expenditure. The bulk of these moves should unwind over the remainder of the year, boosting 2HFY17 cash flow. Fig 1 2QFY17 production result better on realised pricing Quarterly result Dec 16E Actual % Ore Mined (mt) % Overburden removed (mt) % Ore processed (mt) % Ore shipped (mt) (%) C1 cash costs (2%) Realised price % Net debt (US$b) 3,653 4, 9% Source: FMG, Macquarie Research, January 217 Earnings changes are mixed We have made only modest changes after incorporating the 2QFY17 result and updated prepayment schedule. We lift our FY17 forecast by 5%, cut our FY18 forecast by 5% and increase our FY19 forecast by 4%. The changes to our FY18 and FY19 earnings largely reflect the updated iron-ore prepayment schedule while our FY17 upgrade reflects the better realised pricing in the 2QFY17. Our price target rises 4% to $7.6. Fig 2 Mixed changes to earnings forecasts Y/E June (A$m) FY17e FY18e FY19e FY2e FY21e Price target Net profit - old 1, , Net profit - new 2, , Change 5% (5%) 4% (%) 1% 4% Source: FMG, Macquarie Research, January 217 Material upside at spot prices Spot iron-ore prices and shipping rates remain well ahead of our forecasts at US$83.34/dmt and US$5.5/wmt. FMG s earnings outlook are transformed under a spot price scenario, with the stock trading on P/E multiples below 4.x and EV/EBITDA multiples below 2.x. Free cash flow yields are an impressive ~3% under a spot price scenario and FMG could become debt free by the end of December 217 if prices hold at current levels. Fig 3 FMG trading on sub 4.x P/E and free cash flow yield of 3% at spot prices Macquarie forecasts Spot price scenario Y/E June FY17e FY18e FY19e FY2e Y/E June FY17e FY18e FY19e FY2e P/E 7.7x 18.7x 26.4x 14.9x P/E 4.9x 3.8x 3.7x 3.5x EV/EBITDA 4.1x 6.7x 7.4x 5.6x EV/EBITDA 2.8x 1.9x 1.5x 1.1x Gearing 21% 2% 15% 6% Gearing 11% (14%) (39%) (65%) Dividend yield 2.7% 2.4% 2.% 2.3% Dividend yield 5.% 12.7% 13.3% 1.8% FCF Yield 19% 3% 6% 1% FCF Yield 28% 29% 31% 31% Source: Macquarie Research, January January 217 2

3 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 2 Jun 2 Sep 2 Dec 2 Mar 21 Jun 21 Sep 21 Dec 21 Mar 22 Jun 22 Sep 22 Dec 22 Sep 15 Apr 16 Nov 16 Jun 17 Jan 18 Aug 18 Mar 19 Oct 19 May 2 Dec 2 Jul 21 Feb 22 Sep 22 Apr 23 Nov 23 Jun 24 Jan 25 Aug 25 Mar 26 Oct 26 May 27 Dec 27 Jul 28 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY2e FY21e FY22e FY23e FY24e FY25e FY26e FY27e FY28e FY29e FY3e Macquarie Wealth Management Fig 4 FMG group production Fig 5 FMG quarterly cash costs Shipments (mt) (LHS) All in cash costs (US$/wmt) (RHS) C1 Cash costs (US$/wmt) All in cash costs (US$wmt) Source: FMG, Macquarie Research, January 217 Source: FMG, Macquarie Research, January 217 Fig 6 FMG reserves by project Fig 7 FMG resources by project Cloudbreak 9% Firetail 5% Kings and Queens 28% Christmas Creek 41% Cloudbreak 25% Eliwana and Flying Fish 6% Nyidinghu 21% Greater Solomon 23% Kings and Queens 16% Christmas Creek 18% Firetail 3% Source: FMG, Macquarie Research, January 217 Source: FMG, Macquarie Research, January 217 Greater Chichester 4% Fig 8 FMG debt repayment schedule Fig 9 FMG cumulative cash flow 2,5 Senior unsecured note (US$m) Senior secured credit facility/ secured notes (US$m) 2, Net cash (debt) (US$m) Market Cap (US$m) 2, 15, 1,5 1, 5, 1, 5 (5,) (1,) Source: Macquarie Research, January 217 Source: FMG, Macquarie Research, January January 217 3

4 Fig 1 FMG summary financials Fortescue Metals ASX: FMG Price: (A$ps) 6.6 Year end: Jun Rating: Outperform Up/dn TSR Mkt cap: (A$m) 2,551 Diluted shares (m) 3,114 Target: % 18% Mkt cap: (US$m) 15,542 ASSUMPTIONS FY14 FY15 FY16 FY17e FY18e FY19e FY2e ATTRIBUTABLE MINE OUTPUT FY14 FY15 FY16 FY17e FY18e FY19e FY2e Exchange Rate A$/US$ Iron-ore shipped (kt) Spot iron-ore (62% CIF) US$/t Cloudbreak (mt) mt Spot iron-ore (62% CIF) A$/t Christmas Creek (mt) mt RATIO ANALYSIS FY14 FY15 FY16 FY17e FY18e FY19e FY2e Firetail (mt) mt Diluted share capital m 3,119 3,12 3,117 3,132 3,132 3,132 3,132 Kings Valley (mt) mt EPS (diluted and pre sig. items) A FMG Shipped (mt) mt P/E x 6.9x 54.5x 18.9x 7.7x 18.7x 26.4x 14.9x Nullagine JV (mt) - 1% mt CFPS A Iron Bridge (mt) mt P/CF x 3.5x 11.9x 6.2x 4.2x 12.9x 1.7x 6.5x Total shipments (1%) mt DPS A C1 Cash costs US$/wmt Dividend yield % 3.%.8% 2.3% 2.7% 2.4% 2.% 2.3% All in cash costs US$/wmt Franking Level % 1% 1% 1% 1% 1% 1% 1% CFR 62% Fe Equ costs US$/dmt Book value per share A$ps OPERATIONAL OUTLOOK P/Book value x 2.5x 2.3x 1.8x 1.6x 1.5x 1.4x 1.3x R.O.E. (pre sig items) % 36% 4% 9% 2% 8% 5% 9% Cloudbreak (mt) Christmas Creek (mt) Firetail (mt) R.O.A. (pre sig items) % 21% 5% 9% 16% 7% 6% 9% 18. Kings Valley (mt) Nullagine JV (mt) - 1% Iron Bridge (mt) Interest Cover x 6.5x 1.7x 2.8x 1.x 5.4x 4.2x 1.2x 16. EBITDA per share A$ps EV/EBITDA x 4.6x 9.9x 6.6x 4.1x 6.7x 7.4x 5.6x 14. FCF Yield % 26% 5% 13% 19% 3% 6% 1% EARNINGS FY14 FY15 FY16 FY17e FY18e FY19e FY2e Sales Revenue US$m 11,753 8,574 7,83 8,299 6,718 6,634 7, Other Revenue US$m Total Revenue US$m 11,879 8,651 7,9 8,299 6,718 6,634 7, Operating Costs US$m (6,131) (6,51) (3,841) (3,748) (3,943) (4,21) (4,468) 2. Operational EBITDA US$m 5,748 2,6 3,249 4,551 2,775 2,433 2,974 Exploration Expense/Write-offs US$m (16) (52) (136) (4) (41) (42) (43). FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17eFY18eFY19eFY2eFY21eFY22eFY23eFY24eFY25e Corporate & Other Costs US$m (112) (94) (54) (72) (73) (75) (77) EBITDA US$m 5,62 2,454 3,59 4,439 2,661 2,316 2,854 RESERVES AND RESOURCES (ATTRIBUTABLE) D&A US$m (965) (1,45) (1,244) (1,225) (1,227) (1,227) (1,227) Iron-ore reserves EBIT US$m 4,655 1,49 1,815 3,214 1,434 1,89 1,627 Project Mt Fe CaFe SiO2 Al2O3 P LOI Net Interest US$m (72) (629) (653) (32) (264) (26) (16) Cloudbreak % 62.5% 5.5% 2.8%.6% 8.3% Profit Before Tax US$m 3, ,162 2,894 1, ,467 Christmas Creek % 61.8% 5.7% 2.9%.5% 7.4% Tax Expense US$m (1,173) (14) (369) (868) (351) (249) (44) Firetail % 63.1% 5.8% 2.5%.11% 6.4% Minorities US$m (1) (1) Kings and Queens % 62.2% 6.8% 2.7%.6% 9.1% Adjusted NPAT US$m 2, , ,27 Total Reserves 2, % 62.1% 6.% 2.8%.6% 8.% Significant Items (post tax) US$m (22) 192 Iron-ore resources Reported NPAT US$m 2, , ,27 Project Mt Fe CaFe SiO2 Al2O3 P LOI Cloudbreak 1,9 56.5% 61.6% 6.1% 3.4%.6% 8.3% Christmas Creek 2, % 6.9% 6.7% 3.5%.5% 7.9% CASHFLOW FY14 FY15 FY16 FY17e FY18e FY19e FY2e Firetail % 62.3% 6.4% 3.%.11% 6.7% Net Profit US$m 2, , ,27 Kings and Queens 1, % 6.9% 7.8% 3.3%.7% 8.8% Interest/Tax/D&A US$m 1,876 1,19 1,727 1, ,125 1,418 Fortescue Mines 5, % 61.1% 6.9% 3.4%.6% 8.2% Working Capital/other US$m (298) (39) (337) (28) (13) Greater Chichester % 61.3% 6.6% 3.5%.6% 6.8% Net Operating Cashflow US$m 5,395 1,447 2,413 3,711 1,191 1,425 2,343 Greater Solomon 2, % 61.3% 6.9% 3.7%.8% 7.3% Capex US$m (1,995) (849) (358) (758) (72) (423) (847) Eliwana and Flying Fish % 63.2% 5.2% 2.9%.9% 6.5% Investments US$m Nyidinghu 2, % 62.9% 4.9% 3.3%.15% 8.7% Sale of PPE and Other US$m Total Resources 11, % 61.7% 6.4% 3.4%.9% 8.% Free cash flow US$m 4,3 76 2,55 2, ,1 1,495 Magnetite Reserves Mt Mass Recovery (Fe) (SiO2) (Al2O3) Dividends Paid US$m (581) (343) (114) (443) (464) (253) (346) North Star % 67.2% 5.5%.3% Debt US$m (3,174) (257) (2,695) (1,581) (2) (1,996) (2) Magnetite Resources Equity Issuance US$m (17) (3) (21) Project Mt Mass Recovery Fe SiO2 Al2O3 Other US$m North Star and Eastern Limb 3, % 3.7% 41.% 2.5% Net Financing Cashflow US$m (3,772) (63) (2,83) (2,24) (484) (2,249) (366) Glacier Valley 2, % 32.5% 39.1% 1.7% Net change in cash US$m (775) (1,248) 1,13 West Star % 29.% 42.9% 3.2% Total 6, % 31.4% 4.3% 2.2% VALUATION Spot Prices Macquarie Forecasts BALANCE SHEET FY14 FY15 FY16 FY17e FY18e FY19e FY2e Projects A$m A$ps A$m A$ps Cash US$m 2,398 2,381 1,583 2,512 2,517 1,269 2,399 Fortescue Operations 48, , PP&E & Mine Development US$m 18,68 17,729 16,867 16,4 15,875 15,71 14,692 Undeveloped Resources 1, , Exploration US$m Other resources Total Assets US$m 22,694 21,36 19,337 19,825 19,146 17,137 18,26 Unpaid capital.. Debt US$m 9,557 9,569 6,771 5,19 5,17 3,174 3,154 Prepayments (899) (.29) (917) (.29) Total Liabilities US$m 15,111 13,823 1,931 9,836 8,83 6,467 6,674 Corporate (647) (.21) (655) (.21) Total Net Assets / Equity US$m 7,583 7,537 8,46 9,989 1,343 1,67 11,351 Cash 5, , Net Debt / (Cash) US$m 7,159 7,188 5,188 2,678 2,653 1, Debt (6,863) (2.2) (6,92) (2.22) Gearing (net debt/(nd + equity)) % 49% 49% 38% 21% 2% 15% 6% Net Equity Value (@ 8.5% WACC) 47, , Gearing (net debt/equity) % 94% 95% 62% 27% 26% 18% 7% Price Target (5/5 NPV and 6.x EV/Ebitda) 7.6 Source: FMG, Macquarie Research, January January 217 4

5 Macquarie Quant View The quant model currently holds a strong positive view on Fortescue Metals Group. The strongest style exposure is Growth, indicating this stock has good historic and/or forecast growth. Growth metrics focus on both top and bottom line items. The weakest style exposure is Quality, indicating this stock is likely to have a weaker and less stable underlying earnings stream. 1/1555 Global rank in Materials % of BUY recommendations 24% (4/17) Number of Price Target downgrades 3 Number of Price Target upgrades 7 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Materials) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score % -8% -6% -4% -2% % 2% 4% 6% 8% 1% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple % -5% % 5% 1% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Volatility 25 Day 25d Volatility PEG Ratio Inverted Price to Cash NTM Interest Cover Merton Score Turnover (USD) 25 Day EPS Growth 5yr Historic -38% -28% -29% -3% Negatives Positives 23% 2% 35% 35% -4% -2% % 2% 4% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/1555) Percentile relative to market(/423) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 31 January 217 5

6 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 216 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 5.72% 45.57% 42.28% 6.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.9% 33.97% 43.4% 5.11% 37.23% 35.62% (for global coverage by Macquarie, 8.5% of stocks followed are investment banking clients) Underperform 8.56% 15.3% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) FMG AU vs ASX 1, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January month target price methodology FMG AU: A$7.6 based on a 5/5 NPV and 6.x EV/Ebitda methodology Company-specific disclosures: FMG AU: Mark Barnaba, Chairman of Macquarie Group, WA is a non executive director of Ltd. MACQUARIE SECURITIES (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Ltd in the past 12 months, for which it received compensation. Macquarie Securities Australia Limited acted as Broker for a Dividend Neutralisation for Fortescue Metals Group Limited. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates has provided Ltd with investment advisory services in the past 12 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 2-Dec-216 FMG AU Outperform A$ Nov-216 FMG AU Outperform A$6.3 2-Sep-216 FMG AU Outperform A$ Aug-216 FMG AU Outperform A$ Jul-216 FMG AU Outperform A$5. 19-Jul-216 FMG AU Outperform A$4.7 6-Jul-216 FMG AU Outperform A$ Jun-216 FMG AU Outperform A$ May-216 FMG AU Outperform A$ May-216 FMG AU Outperform A$ Apr-216 FMG AU Outperform A$3.4 4-Apr-216 FMG AU Outperform A$3.3 8-Mar-216 FMG AU Outperform A$ Feb-216 FMG AU Outperform A$ Jan-216 FMG AU Outperform A$ Dec-215 FMG AU Outperform A$ Dec-215 FMG AU Outperform A$ Nov-215 FMG AU Outperform A$3. 3-Oct-215 FMG AU Outperform A$ January 217 6

7 This publication was disseminated on 31 January 217 at 5:1 UTC. Macquarie Wealth Management 15-Oct-215 FMG AU Outperform A$ Sep-215 FMG AU Outperform A$ Aug-215 FMG AU Outperform A$ May-215 FMG AU Neutral A$ Apr-215 FMG AU Neutral A$ Mar-215 FMG AU Neutral A$ Feb-215 FMG AU Neutral A$ Jan-215 FMG AU Neutral A$ Sep-214 FMG AU Neutral A$4.4 2-Aug-214 FMG AU Neutral A$5. 17-Jul-214 FMG AU Neutral A$ Jun-214 FMG AU Outperform A$ May-214 FMG AU Outperform A$5.5 2-Feb-214 FMG AU Outperform A$6.3 Target price risk disclosures: FMG AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. A$ strength vs the US$ is a key risk as costs and capital expenditure are denominated in A$, while product prices are denominated in US$. The company has senior unsecured debt of US$7bn; this potentially leaves interest service risk should markets turn down unexpectedly or operations be hampered unexpectedly. 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. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. 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