Prysmian SpA (PRY.MI)

Transcription

1 Europe Italy Electrical Components & Equipment Cable Company In-Depth 72 pages Prysmian SpA (PRY.MI) A Global Leader in a Multibillion Euro Market Strong and visible utilities capex cycle Our analysts expect utility company capex of c 90bn in in the US alone (T&D Capex Survey and Outlook, 10 May 2007), but investment is on the rise everywhere. Prysmian is the joint world leader in the cable industry and poised to ride a long wave of investment. coupled with sound demand in all cable segments Prysmian is expected to post c5% sales CAGR in both the Energy and Telecom divisions. Within Energy, the Utilities and Industrial units should see the lion's share (+c9% and +c15% respectively), while in Telecom, Fibre should excel (+7% pa). EPS: +52% E CAGR Thanks to a successful and timely turnaround, Prysmian boasts profitability unmatched by its peers: we expect earnings to triple in E. Prysmian should also generate a substantial amount of cash in the same period (FCF yield of c5.7% in 2009E), improving NFP and maintaining a minimum 30% dividend payout. Buy/Medium Risk 1M Price (14 Sep 07) Target price Expected share price return 25.2% Expected dividend yield 2.1% Expected total return 27.4% Market Cap 3,350M US$4,645M Price Performance (RIC: PRY.MI, BB: PRY IM) Valuation range Our three-scenario DCF analysis delivers a 25.8ps fair equity value, while FCF and multiple-based analyses point to a 20-22ps range. Accordingly, we initiate coverage on Prysmian with a Buy/ Medium Risk (1M) rating and a target price of Overhang risk? The IPO lock-up period expires at the beginning of November: Goldman Sachs Group could therefore place its majority stake (54%) on the market. In any scenario, we see potential overhang risk on Prysmian stock. See Appendix A-1 for Analyst Certification and important disclosures. Prysmian SpA (EUR) Year to 31 Dec 2005A 2006A 2007E 2008E 2009E Sales ( M) 3, , , , ,848.2 Net Income ( M) Diluted EPS ( ) PE (x) 2, EV/EBITDA (x) DPS ( ) Net Div Yield (%) Luca Todesco (02) luca.todesco@citi.com Mauro Baragiola 1 mauro.baragiola@citi.com Alberto Checchinato 1 alberto.checchinato@citi.com Marianna Primiceri 1 marianna.primiceri@citi.com Citigroup Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Non-US research analysts who have prepared this report are not registered/qualified as research analysts with the NYSE and/or NASD. Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 1 Citigroup Global Markets Ltd

2 For further data queries on Citigroup's full coverage universe please contact CIR Data Services Europe at or Fiscal year end 31-Dec E 2008E 2009E Valuation Ratios P/E adjusted (x) nm EV/EBITDA adjusted (x) P/BV (x) Dividend yield (%) Per Share Data ( ) EPS adjusted EPS reported BVPS DPS Profit & Loss ( M) Net sales 3,742 5,007 5,086 5,525 5,848 Operating expenses -3,625-4,749-4,603-5,021-5,304 EBIT Net interest expense Non-operating/exceptionals Pre-tax profit Tax Extraord./Min.Int./Pref.div Reported net income Adjusted earnings Adjusted EBITDA Growth Rates (%) Sales EBIT adjusted EBITDA adjusted EPS adjusted nm Cash Flow ( M) Operating cash flow Depreciation/amortization Net working capital Investing cash flow Capital expenditure Acquisitions/disposals Financing cash flow Borrowings Dividends paid Change in cash Balance Sheet ( M) Total assets 2,705 2,855 2,787 3,009 3,175 Cash & cash equivalent Accounts receivable ,009 Net fixed assets Total liabilities 2,498 2,685 2,375 2,385 2,321 Accounts payable Total Debt 1,191 1,354 1,234 1,153 1,023 Shareholders' funds Profitability/Solvency Ratios (%) EBITDA margin adjusted ROE adjusted ROIC adjusted Net debt to equity Total debt to capital

3 Contents Ride the long investment cycle 4 Valuation 6 Company overview 20 The cable market: basic facts 22 Cable market: a possible segmentation 23 The copper dilemma 29 The rules of the game 37 Prysmian divisions in depth 40 Financials 48 Appendix I: Snapshot of Prysmian Historical Financials 54 Appendix II: History of Prysmian 59 Appendix III: Prysmian Reference Market and Geographical Presence 60 Appendix IV: The Copper Process 61 Appendix V: China Engine of the Commodities Super Cycle 65 Appendix A

4 Ride the Long Investment Cycle Prysmian holds a world-leading position and a global foothold in the energy and telecom cable markets. In the energy segment, we see growth (c5.3% sales CAGR ) coming from the utilities capex cycle, increased specialised industrial cables demand and good results posted by the building wires division. In the telecom segment (c5.6% sales CAGR ) we expect the increase in bandwidth demand to be the main growth driver. Prysmian s strategy is clearly focused on specialty markets and fast-growing countries. The company is very efficient from a financial standpoint (EBITDA margin +270bps from 2006 to 2009E, ROIC of 24% and FCF yield of 5.7% in 2009E) and is the most efficient player in the industry, allowing for very impressive EPS growth of +52% CAGR E. Our DCF valuation (adjusted to take into account the industry's cyclicality) points to 25.8, while FCF yield and multiple valuations suggest a range between 20 and 22. Therefore, we initiate with a Buy/ Medium Risk (1M) rating and a target price of A truly global leader Prysmian (the former Pirelli Cable and System Division) is the joint world leader together with Nexans in the energy cable market and the second player worldwide in the optical cable industry after Corning. Company turnover was c 5bn in FY06, of which 90% was in energy cables. In the same year, Prysmian generated 67% of its sales in EMEA, 17% in North America, 8% in Latam and 8% in Asia Pacific. in a multibillion euro market The outlook for Prysmian s market is rosy: both the energy (+3.6% CAGR E) and telecom cable markets (+9.7% CAGR E) are expected to post robust growth. Global electricity demand is expected to double in the next 20 years (International Energy Outlook, 2007). To avoid blackout risks and accommodate this impressive demand, regulators worldwide are putting increasing pressure on utilities companies that are becoming eager to improve their transmission & distribution networks. Our analysts expect utilities companies to post c 90bn capex in in the US alone (Transmission and Distribution Capital Expenditure Survey and Outlook, 10 May 2007). Also the industrial cable market outlook is rosy: cable demand is growing at a fast pace along with profitability in selected, high value-added segments (OGP, Crane, Mining, Rail and Marine) while trade & installers segment growth is driven by solid residential and non-residential demand in Europe, Canada and Brazil. The telecom optical cable market should grow thanks to internet penetration and the development of FTTx demand, while copper telecom cables are quite popular in developing countries. 4

5 A clear strategic vision Prysmian has been pursuing a clear strategy aimed at improving company profitability for the last three years. The key points are: i) focusing on high value-added segments, while considering the commodities segments as cash cows; ii) expanding in promising geographic areas also through strategic M&A operations (see recent acquisitions in New Zealand and India); iii) providing turnkey systems, acting also as a system integrator; iv) maintaining strong operating leverage controlling fixed costs; v) keeping an eye on NWC, which risks penalising cash generation dramatically. Figure 1. Prysmian EPS, E A 2007E 2008E 2009E 2010E Source: Citigroup Investment Research Strong profitability and cash generation ahead In E we foresee sales, EBITDA and net profit CAGR of c5%, 15.7% and 51.8% respectively and EBITDA margin reaching 10.8% in 2009 (from a %). We expect the company to show very strong EPS growth of 52% CAGR Prysmian should post sound cash generation (53% EBITDA conversion and a good 5.7% FCF yield in 2009E) that should contribute to improving the net financial position of c 470m ( ). Prysmian should also generate a substantial amount of cash in the same period (FCF yield of c5.7% in 2009E), improving the NFP and maintaining a minimum 30% dividend payout. Best financial performance in the industry After the cable market downturn that took place at the end of the 90s, Prysmian was the first to start a large-scale restructuring process, by disposing of less profitable business lines and closing 11 plants. Thanks to the restructuring efforts, Prysmian proved to be the most efficient cable market player in The company boasted best-in-class financials both in terms of EBITDA margin (8.1% in FY06), ROCE (28% in FY06) and cash conversion rate (EBITDA-capex/EBITDA: 78%). This trend seems to be confirmed in 1H07. Initiating Coverage with a Buy/ Medium Risk rating We initiate coverage of Prysmian with a Buy/ Medium Risk (1M) rating and a 23.3 target price. As a value stock, we largely base our analysis of Prysmian on cash flow, using DCF and FCF yield methods with a WACC of 7.8% and a g of 2%. In both cases we explicitly consider the inherent cyclicality of the cable industry, running a scenario analysis whereby we discount cash flows. On the other hand, there are some good comparables in the market, so we run a multiple analysis as a sanity check, which confirms our valuation. We rate Prysmian Medium Risk. Despite being structurally cyclical, the cable market seems to be just at the beginning of an expansion period, while Prysmian enjoys a sound competitive position and financials. The company strategy is to focus on high value-added segments in which the aggressive local players should not represent a real threat. Prysmian is heavily exposed to copper price fluctuations, that could severely penalise its NWC and in turn FCF generation: however, our metals & mining team foresees a flattish/slowing declining copper price trend. Finally, the expiring of the IPO lock-up (beginning of November) on the 54% stake controlled by Goldman Sachs Group could generate overhang risk. 5

6 Valuation We approach Prysmian s valuation both from a free cash flow standpoint (DCF and FCF yield analysis) and from a market standpoint (multiple valuation). Weighting the fair values derived using the different methodologies, we arrive at 23.3 per share. Cash flow approaches We value Prysmian by adopting both a three-stage DCF and a FCF model based on three-year normalized cash flow. Three scenarios DCF We have run DCF assuming three different scenarios: 1. A Base Case, in which we assume the current market outlook remains stable for another eight to 10 years; 2. A Second-Best scenario, in which we assume the industry s inherent cyclicality to have an average 10% negative impact per year on our Base Case cash flows; and 3. A Worst-Case Scenario, in which major market downturns in the industry determine a 25% cut in our Base Case cash flows. Base Case sales growth still conservative Our Base Case top-line growth assumptions have been double checked with our metal and mining team s forecasts on copper consumption (see The World of Metals & Mining Everything You Need to Know, 24 August 2007, for more details). According to sector analysts, copper consumption worldwide is expected to post a CAGR of c5% from 2007 to Given that 57% of total copper is absorbed by the cable industry, we believe our c5.3% Prysmian sales CAGR (net of copper price variations) to be rather conservative, since it could include some mix improvement. We assume no impact from copper price fluctuations on our sales/profitability, since: i) our metals and mining team forecasts slightly decreasing prices in the next few years (see The Copper Dilemma section for more details); ii) the impact of copper price fluctuation on absolute margins is non-material as explained in the Financials section. DCF assumptions Our three-stage DCF model s main assumptions are: Explicit period until 2010: we have the following estimates for revenues, EBITDA and free operating cash flow growth. Figure 2. Expected Evolution of Sales, EBITDA and FOCF, E 2006A 2007E 2008E 2009E 2010E Revenue = % 101.6% 110.3% 116.8% 120.8% EBITDA = % 143.1% 148.9% 160.1% 165.3% FOCF = % 108.0% 115.2% 130.4% 141.1% Source: Company reports and Citigroup Investment Research 6

7 We would note that in 2007 EBITDA is expected to post significant growth: this is mainly due to the disposal of less profitable business and to the consequent mix improvement. FOCF, on the other hand, is penalised in a YoY comparison due to the exceptional NWC contraction in In the table below we run the same exercise using as a base 2007E, thus providing a more unbiased analysis. Figure 3. Expected Evolution of Sales, EBITDA and FOCF, E 2007E 2008E 2009E 2010E Revenue E= % 108.6% 115.0% 118.9% EBITDA E= % 104.1% 111.9% 115.6% FOCF E= % 106.7% 120.8% 130.7% Source: Citigroup Investment Research period, which has the following assumptions: i) revenue growth of 3% per year; ii) flat EBITDA margin of 10.9% (versus 10.8% in 2010). We assume that from 2011 onwards D&A is growing as capex. We calculate a WACC of 7.8% for Prysmian assuming a target financial structure in which the company maintains an equity/debt ratio of 70/30 (compared with the current 15/85), risk-free rate of 4.5%, market risk premium of 4% and Beta of 1.2. Our terminal value assumes also a long-term growth rate (g) in line with a normalised long-term inflation rate of 2%. We see this scenario as a Base Case, assuming constant (though not aggressive) revenue growth in the long run. The cable market, however, is a cyclical one (see Appendix I for details) and is currently in an expansive phase. Therefore, we can not rule out market downturns and for this reason we prefer to run scenario sensitivity on our DCF valuation. The Base Case scenario We assign to our Base Case scenario a 50% probability. We believe we have some reasons to be optimistic: there is visibility on a significant part of Prysmian s sales for the next two years and the current positive utilities investment cycle is expected to last for five to 10 years. Our Base Case scenario DCF-based valuation is 27.7 per share. 7

8 Figure 4. Prysmian DCF Valuation Base Case Perpetual Growth Rate 2.00% WACC 7.80% Terminal Value as of 31/12/16 7,209.3 Discounting Rate of Terminal Value 0.50 Discounted Terminal Value 3,583.5 Cumulated DFOCF 2,376.4 Financial assets as of 31/12/ Deferred tax assets 30.9 Enterprise Value ( mn) 6,012.2 Net Financial Debt as of 31/12/06 ( mn) (878.7) Minorities book value ( mn) (19.2) Employees benefits obligations (127.6) Equity Value ( mn) 4,986.7 Value per share ( ) Price as of 12/09/07 ( ) Upside (downside) 45.9% Source: Company reports and Citigroup Investment Research The Second-Best scenario We then assume a Second-Best scenario, in which we assume the industry s inherent cyclicality to have an average 10% negative impact per year on our Base Case cash flows. We assign the Second-Best scenario a 30% probability. In this case our DCF returns a 24.4 value. Figure 5. Prysmian DCF Valuation Second-Best Case Perpetual Growth Rate 2.00% WACC 7.80% Terminal Value as of 31/12/16 7,209.3 Discounting Rate of Terminal Value 0.50 Discounted Terminal Value 3,225.2 Cumulated DFOCF 2,138.8 Financial assets as of 31/12/ Deferred tax assets 30.9 Enterprise Value ( mn) 5,416.2 Net Financial Debt as of 31/12/06 ( mn) (878.7) Minorities book value ( mn) (19.2) Employees benefits obligations (127.6) Equity Value ( mn) 4,390.7 Value per share ( ) Price as of 12/09/07 ( ) Upside (downside) 28.5% Source: Company reports and Citigroup Investment Research The Worst-Case scenario Finally, we wanted to model a Worst-Case scenario, in which Prysmian is heavily penalised by the cycle (25% discount to our Base-Case scenario cash flows, with a 20% probability). On this scenario our DCF returns a 23.0 value. 8

9 Figure 6. Prysmian DCF Valuation Worst-Case Perpetual Growth Rate 2.00% WACC 7.80% Terminal Value as of 31/12/16 7,209.3 Discounting Rate of Terminal Value 0.50 Discounted Terminal Value 2,687.7 Cumulated DFOCF 2,418.9 Financial assets as of 31/12/ Deferred tax assets 30.9 Enterprise Value ( mn) 5,158.8 Net Financial Debt as of 31/12/06 ( mn) (878.7) Minorities book value ( mn) (19.2) Employees benefits obligations (127.6) Equity Value ( mn) 4,133.3 Value per share ( ) Price as of 12/09/07 ( ) Upside (downside) 20.9% Source: Company reports and Citigroup Investment Research We summarise our hypothesis in the table below: our DCF valuation is therefore 25.8 per share. Figure 7. Weighted Target Price (Euros) Scenario Discount rate Vs Probability Fair Equity Weighted TP Blue Sky Value ps Base Case 0.0% 50.0% 27.7 Second Best case 10.0% 30.0% Worst case 25.0% 20.0% 23.0 Source: Citigroup Investment Research FCF Yield A FCF yield approach on normalised cash flows for E delivers an average value of 21.2 per share. This valuation method s fair equity value is below our DCF as we are not implying a continuous growth in revenue and a constant improvement in profitability (at least until 2011). Moreover, we included 2006 results: this has to be regarded as the last year of the Prysmian turnaround, and therefore is likely to penalise our fair equity value. We believe this valuation method allows us to assess Prysmian s value without drawing on explicit assumptions about the industry cycle. 9

10 Figure 8. Prysmian FCF Valuation ( m) E 2008E 2009E Sales EBITDA Adj. Taxes Adj. Change NWC Maintenance Capex Free Cash Flow (FCF) Discounted FCF Net debt (cash) and surplus assets FCF/Sales 4.8% 5.2% 5.0% 4.9% FCF/EBITDA 59.0% 50.0% 47.0% 45.2% Hurdle rate 7.75% 7.80% 7.80% 7.80% Expected growth rate 2.00% 2.00% 2.00% 2.00% Discount Rate 5.75% 5.80% 5.80% 5.80% Target EV/Sales Multiple Target EV Fair Equity Value Shares outstanding Fair Value per share PV of fair value Average 2006A-2009E Source: Company report and Citigroup Investment Research To assess a floor fair equity value we tried to evaluate the visibility on Prysmian s FCF in the next two and a half years. We have full visibility on 2007E, so no discount should be applied. As for 2008E we again have full visibility on a large portion of the utilities and optical cable businesses and we can make reasonable assumptions about the industrial division, so a 5% discount seems to be fair. Taking into account 2009E, finally, we have visibility only on the HV and sub-marine divisions: in this case a conservative 20% discount to our Base- Case FCF seems to be appropriate. In the table below we summarise our assumptions. Figure 9. Prysmian FOCF Visibility and Discount Year Visibility Discount 2006A n.m. n.m. 2007E Full 0% 2008E High 5% 2009E Limited 20% Source: Citigroup Investment Research Applying these discounts to our Base-Case cash flows we obtain a fair equity value to be considered as the floor of our valuation range of 20.3 per share. 10

11 Figure 10. Prysmian FCF Valuation Discounted ( m) 2006A 2007E 2008E 2009E Sales EBITDA Adj. Taxes Adj. Change NWC Maintenance Capex Free Cash Flow (FCF) Discounted FCF Net debt (cash) and surplus assets FCF/Sales 4.8% 5.2% 5.0% 4.5% FCF/EBITDA 59.0% 50.0% 47.3% 42.1% Hurdle rate 7.75% 7.80% 7.80% 7.80% Expected growth rate 2.00% 2.00% 2.00% 2.00% Discount Rate 5.75% 5.80% 5.80% 5.80% Target EV/Sales Multiple Target EV Fair Equity Value Shares outstanding Fair Value per share Average 2006A-2009E Source: Company reports and Citigroup Investment Research Peer analysis The global cable industry is dominated by a few international players: Prysmian is one of the few companies to compete on a global scale in the most relevant segments of both the energy and telecommunication cables markets. In order to run a multiple valuation of Prysmian we look at: Nexans (FR), General Cable (US) and Draka (NL), the global tier-one players. Prysmian expected performance versus peers We believe Prysmian should be able to maintain its strong competitive positioning. We used consensus data as reported by datacentral them with our estimates for Prysmian. We expect Prysmian to grow below the market average in 2007E (also due to the Prescot disposal) and broadly in line in 2008E. Figure 11. Prysmian vs Peers: Expected Growth Rates Sales EBITDA EBIT Net Income 2007E 2008E 2007E 2008E 2007E 2008E 2007E 2008E Nexans 9.3% 3.2% 41.2% 9.4% 43.9% 8.1% 51.4% 12.6% General Cable 18.0% 8.4% 48.0% 14.9% 57.2% 14.0% 72.9% 17.2% Draka 10.8% 7.5% 40.7% 16.5% 61.0% 22.0% 85.5% 22.4% Prysmian CIR 1.6% 8.6% 30.7% 10.3% 39.7% 11.4% % % Source: Citigroup Investment Research, company reports, Reuters and Thomson However, if we move to consider profitability, we note that Prysmian should post outstanding results well above its peers. 11

12 Figure 12. Prysmian versus Peers: Expected Profitability EBITDA EBIT E 2008E E 2008E Nexans (*) 4.7% 6.1% 6.5% 3.5% 4.6% 4.8% General Cable 7.8% 9.8% 10.4% 6.4% 8.6% 9.0% Draka 5.7% 7.3% 7.9% 3.6% 5.2% 5.9% Prysmian CIR 8.1% 10.5% 10.6% 6.6% 9.1% 9.3% Source: Citigroup Investment Research, company reports and datacentral (*) at current metal prices In the table below we show the current market multiples for Prysmian on consensus data and for its peers and compare them with the implied stock multiples taking into account our estimates. We would stress that: i) we considered fully diluted market capitalisation; ii) we adjusted net debt to take into account the impact of the dilution; iii) we adjusted EV to include minorities, unfunded pension funds, deferred tax assets and peripheral assets. We note that Prysmian trades at a discount using any multiple and that the stock is especially undervalued if we consider E.V. adjusted/ebit (discount above 10% both in 2007E and 2008E). The discount is still there also versus consensus estimates on Prysmian. Figure 13. Prysmian Peer Multiple Analysis E.V. Adj./EBITDA E.V. Adj./EBIT P / E (on outs shs) E 2008E E 2008E E 2008E Prysmian CIR 10.8x 8.0x 7.0x 13.3x 9.2x 8.0x 38.4x 14.2x 12.1x Nexans 12.0x 8.2x 7.3x 16.3x 11.0x 9.9x 24.8x 16.4x 14.5x General Cable 12.6x 8.3x 6.9x 15.4x 9.5x 8.0x 25.5x 14.7x 12.6x Draka 13.2x 9.7x 8.1x 21.1x 13.5x 10.8x 31.5x 17.0x 13.9x Average 12.6x 8.7x 7.4x 17.6x 11.3x 9.5x 27.3x 16.0x 13.7x Premium/(discount) -14.5% -8.9% -5.6% -24.4% -19.0% -16.0% 40.7% -11.3% -11.2% Prysmian consensus 10.8x 8.7x 7.9x 13.3x 9.8x 9.0x 38.4x 17.1x 13.8x Premium/(discount) -14.4% -0.1% 6.6% -24.4% -13.7% -5.8% 40.8% 6.5% 1.0% Source: Citigroup Investment Research, company reports, Reuters and Thomson We analyzed both E.V. adjusted/ebitda, E.V. adjusted/ebit and P/E multiples: evaluating Prysmian using the average market multiple we obtained a 21.7 fair equity value per share. 12

13 Figure 14. Prysmian Multiple Evaluation 2007E 2008E Mean E.V. Adj. /EBITDA multiple 8.7x 7.4x Implied price per share Mean E.V. Adj. /EBIT multiple 11.3x 9.5x Implied price per share Mean P/E multiple 16.0x 13.7x Fair value per share Average Fair Equity Value Source: Citigroup Investment Research, company reports, Reuters and Thomson We believe that assuming that the company should trade in line with/at a premium versus its peers makes sense. Prysmian boasts outstanding expected profitability, but, most of all, best-in-class financials. We will address this issue in the following section. Prysmian versus peers: As an introduction we provide a brief company overview for Prysmian s peers. Draka Draka (NE) develops, engineers, manufactures and sells advanced cables and solutions for all kinds of applications. Draka recorded 2.5bn revenues in FY06 becoming the sixth-largest cable manufacturer worldwide and the third in Europe. The company has 67 factories, employs 8,800 people and has a foothold in 29 countries. Draka operations could be divided into: Draka Cableteque: energy cable sector, focused on industrial and low voltage cables, which accounted for 77% of turnover in FY06. Draka Comteq: (JV with Alcatel controlled by Draka with a 50.1%): telecommunications sector, which accounted for 23% of revenues in FY06. Draka has been concentrating its effort in the past decade on a strategy based on expansion mainly through acquisitions. Currently the company has revised its strategic stance by focusing on organic growth. The company intends to: i) concentrate on core competences; ii) pursue careful expansion in selected markets (specialty products and specific geographical areas such as emerging markets); and iii) continue to compete in mature segments by improving efficiency and effectiveness of its operations. 13

14 General Cable General Cable is a US-based public company covering a broad portion of the cable industry s end markets. FY06 revenues stood at $3.7bn, up 54% Y.o.Y., while operating profit in FY06 was $236m (6.4% EBIT margin), more than twice the $98.5m reported in FY05. The company operations cover three lines of business: Energy (38% of FY06): GC provides a complete range of T&D cables in the low, medium and high voltage segment. Industrial and Specialties (43% of FY 06 sales): The company manufactures cable for industrial, OEMs, commercial and residential applications. Communications (19% of FY06 sales): GC produces both twisted copper and fibre optical cables. The two key points of General Cable s strategy are: i) ROI (return on investment) improvement by focusing on specialty products and services and markets; and ii) M&A expansion in selected market segments (energy, energy infrastructure or industrial niches). Nexans France based Nexans is the global leader (together with Prysmian) in the cable industry, and the European leader in the infrastructure market. Nexans posted 7.5bn turnover in FY06 (+37.4% YoY) operating in 29 countries and employing 20,000 people. Nexans business mix is quite similar to Prysmian's: Energy (85% of FY06 sales): world leader in the energy cable segment with a market share of 7%, the same as Prysmian. Telecoms (15% of FY06 sales): focus on copper cables, and limited importance of the fibre optical segment. Nexan s goals are to: i) increase profitability; ii) improve efficiencies; iii) reduce exposure to market cyclicality; iv) exploit synergies between businesses. The company aims to reach its goals by : Growth in energy markets; Focusing on longer cycle business; Strengthening its global competitive position. 14

15 Best-in-class financials After the cable market downturn of the late 90s (utilities capex contraction) and of 2001 (internet bubble burst) Prysmian was possibly the first company to put in place a drastic restructuring process. The result of this effort was quite visible before the Pirelli disposal of its Cable Divisions, in The gap in terms of efficiency versus its comparables has been widening in 2005 and Taking into account the period, Prysmian boasted best-in-class financials. To begin with, the company boasted an unmatched mix of growth and margin improvement. Figure 15. Sales Growth and Adj. EBITDA Margin Source: Citigroup Investment Research 1 Excluding the contribution of Silec and other assets acquired over the period. 2 Excluding the impact of Enamelled and Pirelli Broadband Solution businesses. 3 For the sake of consistency, Nexans margins are calculated at current metal prices. The ball in dotted line represents Nexans excluding the Electrical Wires segment, net of intereliminations. Also in terms of profitability and ROCE Prysmian has been able to outperform its peers, with the possible exception of General Cable. At the same time, the company proved to be quite effective in managing its ROCE. This result has been achieved by carefully planning its investments capex and by reducing net working capital needs. 15

16 Figure 16. Prysmian vs Peers: Adj. EBITDA margin Adj. EBITDA 9.0% ( m) Prysmian 8.1% % General Cable % 7.8% 7.0% 6.5% 6.1% 6.6% 6.0% 5.5% 5.7% Draka 5.1% 5.0% % 5.1% 5.1% Nexans 4.7% 4.8% 4.7% % 4.0% Source: Company presentation For the sake of consistency, Nexans margins are calculated at current metal prices. Prysmian's 2003 figures from Pirelli Group Annual Report. USD/ =0.803 Figure 17. Prysmian vs Peers: ROCE 30% Prysmian 28.0% 25% 26.2% General 20% Cable 16.5% 15% 11.4% 13.9% Nexans 10% 8.4% 9.1% 9.9% 8.9% 7.9% 5% 3.7% Draka 1.9% 0% Source: Company presentation Calculated as Adj. EBIT/(Shareholders equity + Net Debt + Unfunded Pensions Fund) USD/ =0.803 Turning to labour force efficiency, Prysmian achieved the best adjusted EBITDA/employee (27.2) ratio in 2006 among its peers. Finally, Prysmian boasted in FY06 the best cash conversion rate (defined as EBITDA-capex/EBITDA) in the industry (78% together with General Cable) while in 2006 Draka posted a 61% result and Nexans 52%. Rating Buy; target price 23.3 To derive our target price, we have assigned a weight to each method. We prefer cash-based approaches, since we believe it is especially important, in the current market momentum, to stick to fundamentals. Therefore, we assigned a 0.5 weight to our three-scenario DCF and a 0.3 weight to our rather conservative FCF yield analysis, while a 0.2 weight has been given to multiple analysis. Figure 18. Valuation Summary ( ) Fair Equity Value Weight Target Price DCF FCF Multiple analysis Target price 23.3 Source: Citigroup Investment Research Our target price for Prysmian stock is therefore 23.3 per share. 16

17 After the Lock-Up: What s Next? After the IPO, the selling shareholder was given a six-month lock-up period. Prysmian s first day of trading was 3 May 2007, meaning that after 3 November 2007, the majority stake of the company can be offered on the market. The company is performing well and we believe it has excellent prospects from both an industrial and financial point of view, so the divestment could be postponed. It should, however, be taken into account that the main shareholder is a private equity fund that has already achieved a more than satisfactory IRR. In July 2005 the Goldman Sachs Group in fact acquired the Pirelli Cable business activities for a total consideration of 1.4bn, while the IPO raised 1.2bn; taking into account that the transaction was completed through a leveraged buyout, GS managed to pay back its investment by selling just 46% of the company during the IPO. We identify four possible scenarios. We would stress that the company has not commented on this issue. The GS stake could be: Acquired by Prysmian s main competitor, Nexans. We believe this scenario has a low probability of materialising, for a number of reasons: o o o Antitrust issues on the Energy division (the two companies would have more than a 50% market share in certain geographical markets). We believe integration of the two companies could destroy more value than it creates: Prysmian and Nexans in fact share a similar product/geography exposure. Prysmian s managers are also shareholders and would probably oppose a takeover that could drastically reduce their involvement in the newco management. Conferred to a newco in order to merge Prysmian with one of the minor competitors, Draka or General Cables: some synergies appear possible, if Draka's activities were integrated with Prysmian s. Note the smaller capitalisation of the company versus Prysmian (1.2bn market cap versus 3.4bn) which implies Draka shareholders would face significant dilution. Scale economies seem possible from any potential deal with General Cables and some savings may be possible from the disposal of GC s European operations. Current exchange rates, though, should represent a concern if CG decided to acquire the GS stake in Prysmian. As a matter of record, we note that Fidelity is either a main or second shareholder in each of the four major cable players worldwide, and GS has a relevant stake in General Cable. Figure 19. Cable Players Shareholder Structure Draka General Cable Nexans Prysmian Market cap (bn) 1,27 3,11 3,02 3,30 First shareholder Flint Holding Fidelity Dodge & Cox GS % 47,9% 6,6% 14,5% 54,0% Second shareholder Fidelity GS Fidelity Fidelity % 7,5% 4,7% 7,1 10,1% Source: Bloomberg 17

18 Acquired by a financial investor (i.e. private equity fund). We consider this option as unlikely, since Prysmian s balance sheet is already considerably leveraged; and ii) we believe that after the extensive restructuring process the company underwent after the GS deal, only marginal efficiency increases could be achieved; iii) the recent credit crunch demands investors take extra care before taking any action. Sell on the market, thus creating a public company. We believe this scenario has the greatest probability of materialising, since we believe many institutional investors, given the positive outlook on the company, could exploit the opportunity. We would underline that the offer on the market of Prysmian s control stake could create temporary overhang risk that should be taken into account by potential investors. Stock performance Since the IPO, Prysmian has been outperforming the index (+c22%), despite showing volatility. We would stress that, as of today, Prysmian has been one of the most successful IPOs in the Italian stock market. Figure 20. Prysmian Performance vs MIBTEL Prysmian MIBTEL /3/07 5/17/07 5/31/07 6/14/07 6/28/07 7/12/07 7/26/07 8/9/07 8/23/07 9/6/07 Source: datacentral In the graph below we compare Prysmian's price performance with that of its main peers. We clearly see that, before the recent subprime financial crisis, all of the cable players had been posting strong growth since the Prysmian IPO. We believe this further confirms the sound industry outlook and the market confidence in the robustness of the current positive investment cycle. 18

19 Figure 21. Prysmian Performance versus Peers Prysmian Nexans General Cable Draka /3/07 5/17/07 5/31/07 6/14/07 6/28/07 7/12/07 7/26/07 8/9/07 8/23/07 9/6/07 Source: datacentral It has been recently announced that Prysmian SpA, will replace Capitalia SpA in the Italy S&P/MIB Index, Standard & Poor's. We believe this could give more visibility and boost stock performance. Risks We rate Prysmian as Medium Risk. The risk rating on the stock derives from a number of factors. These factors include an assessment of industry-specific risks, financial risk and management risk. In addition, we consider historical share price volatility, based on the input of the CIR quantitative research team, as a possible indicator of future stock-specific risks that may potentially impede the shares from achieving our target price. Economic cycle Prysmian business is inherently cyclical, being linked to large companies capex cycles (utilities and telecoms) and to GDP in the Industrial and T&I segments, which is also exposed to the housing and infrastructure market. Exposure to copper price fluctuations Copper price dynamics impact both net working capital and also the profitability of segments in which metal hedging is not possible (e.g. T&I). However, our metal & mining team does not foresee major copper price fluctuations in the near future. Fibre price erosion The fibre price fell sharply after 2001, and has further decreased to circa $10 per km since then. We expect slight price erosion until 2009, when the fibre market should match 2001 volumes, absorbing excess production capacity and easing price pressure on fibre. Competitive pressure on the commodities market Prysmian is likely to suffer from competition in the low value-added segments, in which low-cost, low-quality companies could push prices downwards. We do not rule out, however, that in the medium term some competition could arise also in the specialties market. Overhang risk: We would underline that the offer on the market of Prysmian s control stake by Goldman Sachs could create temporary overhang risk that should be taken into account by potential investors. 19

20 Figure 22. Prysmian Sales by Product (FY 06) Other 9% Industrial 12% Telecom 11% Trade & Installers 32% Utilities 36% "Other" refers to the now closed Prescot plant Source: Citigroup Investment Research Company Overview Prysmian is a world-leading company in the energy (89% of FY06 sales) and telecom (11% of FY06 sales) cable industry. The group has been in business as a division of the old Pirelli Group since In more than a century, the company established an international foothold by manufacturing, marketing and selling cables worldwide. In 2005, the Goldman Sachs group acquired from the Pirelli Group its Energy and Telecom Cable divisions via Prysmian Srl, a subsidiary of Prysmian (LUX) II Sarl. Prysmian was IPO ed in May The market positioning of Prysmian Prysmian posted over 5bn sales in 2006, of which 4.5bn were generated by the Energy Division and 0.5bn by the Telecom Division. Prysmian is global leader (together with Nexans) in the energy cable market with a c7% market share, while holding second position after Corning in the optical cable business. Energy cables The energy cable division can be divided into three business areas: Utilities: In the high voltage and extra high voltage (HV and EHV) segments Prysmian enjoys a strong competitive position in Europe, in North America and in Latam. Furthermore, being on the market for more than a century, the company has established consolidated relationships with the major incumbent utility companies (EdF, Endesa, Enel ). Prysmian is one of the main players in the sub-marine segment and holds the record for the deepest and the longest sub-marine cable connections while retaining a consolidated position in the power distribution segment in Europe, North America and Australia. Industrial: The company has a global foothold and has built a strong position in the more profitable infrastructure and machinery sub-segments (focusing on the so-called Priority Five : OGP, Crane, Mining, Rail and Marine). Trade & installers: Prysmian s main areas of interest are Canada, Latam, Europe and Australia. Telecom cables Prysmian operates in both the copper and optical telecom cable markets. Copper TLC cable: Prysmian holds a consolidated position in this rather commoditised segment in Latam, Australia, France and Italy. Optical TLC cable: Prysmian s main markets in this high-technology segment are the US and EMEA. 20

21 Figure 23. Prysmian Sales by Geography (FY06) North America 17% Asia Pacific 8% Latin America 8% EMEA 67% Source: Citigroup Investment Research Geographic presence The bulk of Prysmian s revenues are generated in the EMEA region, but the company boasts an established presence worldwide both in terms of sales and plants. The energy cable market operates on a local-for-local basis, cable companies need to have installed capacity close to the target market. This is also true for TLC copper cables, while optical cables, due to relatively limited logistics costs, do not suffer from this limitation. Prysmian group structure After the IPO, Prysmian SpA s majority stake (54%) is owned by Prysmian (LUX) II Sarl (indirectly controlled by the Goldman Sachs Group) while management and certain directors indirectly hold a 8.1% stake. Prysmian SpA, in turn, holds a 100% stake in Prysmian Cavi e Sistemi Energia Srl and Prysmian Telecom Srl (for further details on the Pirelli acquisition and the current group structure see Appendix I). Prysmian operates 54 plants (41 in the energy cable business, six in the telecom cable segment and seven are shared) in 34 countries and employs 12,143 people. Figure 24. Prysmian Global Presence Source: Company presentation Copper price impact More than 50% of Prysmian s COGS are related to copper. For this reason, copper price fluctuations have been crucial in influencing the company s revenue evolution in the past three years (16% of FY06 turnover is due to copper inflation). According to the company, however, Prysmian is generally able to transfer to customers copper price variations (with the possible exception of T&I): profitability, therefore, should not be impacted. However, the copper price is not perfectly neutral on company s performance: net working capital needs are likely to increase in an inflationary scenario. 21

22 The Cable Market: Basic Facts We now provide an overview on Prysmian's reference market: some history, a possible segmentation, some information on outlook and growth drivers and finally the competitive structure. Cable history in a nutshell The cable market has been characterised in the past 20 years by some major negative events, which should be considered when trying to understand the current competitive scenario. Mid 90s: utilities privatisation 2001: the internet bubble burst : copper price rally Prysmian reaction: external growth and extensive restructuring The first shock that affected the energy cable was the wave of utilities company deregulation and privatisation that took place in the mid 90s: the new utilities owners cut capex and focused on cash generation, thus leading to stagnation in the cable market. A second blow to the industry came from the bursting of the internet bubble (2001). After the strong growth to accommodate the expected peak in demand for internet services, at the end of the bubble the telecom cable market was dramatically penalised by the combined effect of the lack of demand and the huge amount of installed transmission capacity. The last event was the copper price rally that took place in 2005 and The price of copper (50% of energy and TLC copper cable COGS) jumped from the 2005 average price of 2.97/lb to 5.3/lb in Prysmian reacted aggressively to these market downturns. During the negative utilities cycle the company acquired the businesses sold off by other industry players (Siemens, NKF, MM and BICC from 1998 to 2001). Then Prysmian started a large-scale restructuring process, among the first to do so in the industry, by: Concentrating on core products while disposing of less profitable business lines and closing of 11 plants rightsizing the labour force at the same time; Focusing on financial efficiency, working hard to improve its NWC management (NWC/sales ratio of 8.8% in FY06 versus 13.1% in FY05). 22

23 Cable Market: a Possible Segmentation Prysmian s reference market 1 was valued at 58bn aggregate turnover in 2005, of which 49bn (85%) was in the energy cable market and 9bn (15%) in the telecom cable market. By product A broad distinction in the cable market is between energy (used to deliver electricity to consumer, in industrial and civil applications) and telecom cables (to transmit voice or data). The energy cable market can be further divided into three segments: Utilities: Cables used for transmission and distribution of electrical power. Cables used in transmission have typically a high voltage and connect generation sites to distribution systems, while distribution cables, usually lower in voltage, are used to transport the electrical power across the distribution system. Industrial: Cables used for specialised industrial applications (OGP, transportation, mining, infrastructure). Trade & installers: For commercial and residential construction wiring applications. The telecom cables market can be divided in two segments, fibre and copper: Fibre: Optical cables are specialty products embodying a high level of technology, They are mainly used in the creation of backbones and in MANs (Metropolitan Area Networks). More recently, fibre has been used also to cover the last mile. Data are transmitted thanks to light signals. Copper: Copper telecom cables have been traditionally used in delivering POTS: they are low-technology, standard cables, though recent development in xsdl broadened the range of possible applications. In this type of cables information is transmitted in the form of a low-voltage electric signal. By value added/competition The cable market ranges from plain building wire to high-technology sub-marine cables. A further classification could be based on the value added and/or on the competitive scenario there is a strong correlation between the profitability of a segment and the competitive scenario. According to this segmentation, we can broadly divide the cable market distinguishing between commodities products and specialties products: Commodities: Low voltage cables, building cables and copper telecom cables are standard, low-value-added products. Significant transportation costs and time to market needs oblige players to locate their plants close to the final geographic markets, determining a basically local-for-local competition. Competition is therefore based on logistics and costs while limited product differentiation is possible. Commodities products profitability varies with market conditions, but on average we should expect a high single digit EBITDA margin. 1 The reference market is identified by excluding from the total cable market the segments in which the company does not compete: i) winding wires for the energy cable sector; and ii) internal telecom data and copper LAN cables for the telecom cable sector. See Appendix III for further details. 23

24 Specialties: High (and extra high) voltage, industrial cables, sub-marine cables, network components and optical cables and fibres are more sophisticated and high-technology products, that allow for a considerable degree of innovation and diversification. This implies: i) higher profitability; and ii) significant entry barriers that in turn determine a global competition among a few big players. These products value-added is further increased by the overall complexity of the projects in which these cables are used: companies are therefore able to offer turnkey solutions to customers. These products usually have a low double digit EBITDA margin (with some segments such as sub-marine reaching 13%-14%). Summing up: Figure 25. Cable Market at a Glance Commodities Specialties Energy Trade & Installers Utilities and Industrial Telecom Copper Fibre Competition Source: Citigroup Investment Research Local-for-local Cost based Global R&D and differentiation based Cable market outlook and growth drivers Both the energy and cable markets are expected to be growing steadily in volume in the next four years, at a +3.6% CAGR for energy and, in telecom, +9.7% CAGR (for fibre) and -2.0% CAGR (for copper). Energy cable trends The energy cable market posted low growth rates in the period, mainly due to the stagnating sales in the utilities segment due to the contraction of the investment cycle brought in by the privatisation trend in Europe and in the US in the late 90s. From 2003 on, however, the restarting of utilities capex boosted volume growth. All in all, the energy cable market showed a 4.1% CAGR in the period Figure 26. Energy Cable Market Trend (Mt Conductor) ,5 6,7 6,9 7,1 7,4 7,7 8,2 8,6 9,0 9,3 9,6 9, E 2008E 2009E 2010E Source: Company presentation The energy cable market outlook for the next three years is still rosy: it is expected to grow +3.6% CAGR in , reaching 9.9mt of conductor in

25 Telecom cable trends The telecom cables market has been growing at a sustained rate from the mid 90s, thanks to the increase of worldwide data traffic that boosted telecom player investments, until 2001 when the internet bubble burst. Immediately after, the telecom cable market faced a harsh crisis, with strong contraction both in volume and price. There are, however, sharp differences among optical and copper cables. The optical cable market peaked in 2001 at 95m km of fibre after several years of sound growth. After the bubble burst, the segment experienced a large downturn: in 2002 volume were basically halved, leading the way to a flattish market phase that lasted until Figure 27. Optical Cable Market Trend (m Km Fibre) 100,0 80,0 60,0 40,0 20,0 0,0 45,0 66,0 91,0 95,0 55,0 53,0 54,0 65, E 2008E 2009E 2010E Source: Company presentation In the next three years the optical cable market is expected to grow again (+9.7% CAGR), matching 2001 volume by 2009, thanks to the strong demand for broadband services and to FTTx development in the city areas. Optical cable prices, however, are likely to be negatively impacted by the excess productive capacity installed before 2001 that has led to a fibre overhang: prices are expected to decline slightly until 2009, and then stabilise or increase. The copper cable market recorded unexciting growth rates until it was impacted, though marginally compared with fibre, by the telecom boom, reaching a 275m km sales peak in 2000.After 2001 the market faced a declining phase and then lateral movement in the period Figure 28. Copper TLC Cable Market Trend (m Km Pair) ,0 200,0 100,0 0, Source: Company presentation E 2008E 2009E 2010E

26 Future copper telecom cable volume estimates are uninspiring: the market will probably continue to slowly decline ( E CAGR -2.0%). Copper cable represents in fact a second best option in the creation of TLC networks, suffering fibre supremacy in terms of bandwidth and reliability. The recent development in the xdsl technologies have only slowed the ongoing substitution process of copper cables with fibre ones. Copper cable demand is, however, expected to be sustained in the near future by the telecom infrastructure deployment that is taking place in less developed countries, in which price elasticity is higher and where Prysmian enjoys a strong competitive position. Substitute products We see no possible substitutes for energy cables at the moment. In the telecom cable industry, high speed wireless transmission technologies (such as Wi-Max) could provide a viable alternative to cable-based last mile solutions (both xdsl and FTTx) in certain situations. Such technologies should not represent a real threat for Prysmian, since any "hot spot" needs to be connected (with fibre) to the internet and the last mile does not constitute the core of the company s telecom business The competitive structure A broad distinction has to be drawn between the energy and telecom cable markets, each of these is characterised by a peculiar competitive structure: The energy cable market should be in turn divided into commodities and specialties: The commodity segment is generally highly fragmented and local, mainly due to: i) low entry barriers; ii) high transportation costs; and iii) region-specific standard compliance needs. The specialty segment is concentrated and has high entry barriers mainly because of: i) the average size of projects, which commands an adequate structure; ii) the fact that the business is capital intensive both in terms of fixed assets and in terms of net working capital requirements; iii) the longstanding relationships with utility incumbents, which we believe constitute a unique competitive advantage on such mission critical applications. The energy cable industry structure can be represented by plotting players competitive positions in a graph ranking them by product portfolio range and by global market presence: Prysmian and Nexans lead the market in terms of market share (6.8% each in FY05). The third company, General Cable, has a market share of about 3%, while the fourth and last global player, Draka, has a 2.8% market share (Value Partners analysis based on CRU data, October 2006). We would stress that the last two companies have less than half the market share versus the top two companies and that the total energy market is quite fragmented: some 80% of it is made up of small players with a market share below 2%. 26

27 Figure 29. Energy Industry Main Players Market presence Global players with wide product range PRYSMIAN Cables & Systems Global Niche specialized players DRAKA NEXANS ABB Players with strong continental presence and more focused product range GENERAL CABLE Continental LEONI HUBER+ SUHNER CENTRILIFT SUPERIOR ESSEX Southwire BeldenCDT FURUKAWA ELECTRIC YAZAKI Fujikura Ltd. SEI LS Cable Continental players with wide product range Local ACOME LTC La Triveneta Cavi TFKable SüDKABLE HENGTONGGROUP Basic local players Niche Focused Wide Product portfolio range Source: Company presentation and Citigroup Investment Research The telecom cable market could in turn be split into the copper and fibre cable markets: the former is quite similar to the commodity energy one, while the latter is much more complex: i) the copper TLC cable market is mainly local for local: the C4 concentration index (i.e. the sum of the top four players market share divided by the total market) in this market is therefore quite low (20%); ii) on the other hand, the fibre cable market is more concentrated, with a C4 index of 50%. 27

28 Figure 30. Telecom Industry Main Players Market presence Global AFL Telecommunications A Fujikura Business CORNING PRYSMI AN Cables & Systems General Cable ofs FURUKAWA Draka Nexans Continental SUPERIOR ESSEX Fujikura Sterlite Optical Technologies Ltd LS Cable SUMITOMOELECTRIC BELDEN YOFC Local ACOME TRATOS HENGTONGGROUP Niche Focused Wide Product range Source: Company presentation and Citigroup Investment Research Potential entrants The current market structure could be modified in the future by the entrance of newcomers. We believe this risk mainly concerns the commodity market. In this market segment emerging countries local players could engage in a price war leveraging on low quality/cost production. Prysmian s strategy, however, focuses on the specialty markets, where capital intensity and know-how needs coupled with the reputation requirements constitute a high entry barrier. 28

29 The Copper Dilemma More than 50% of Prysmian s COGS is related to copper. For this reason, copper price fluctuations have been crucial in influencing the company s revenue evolution in the past three years (16% of FY06 turnover is due to copper inflation). According to the company, however, Prysmian is generally able to transfer to customers copper price variations: profitability, therefore, should not be impacted by this. This holds especially true for frame and predetermined delivery date contracts. The only possible exception is the T&I business, in which metal hedging is not possible: pricing is managed by price lists which take some time to be adjusted. However, the copper price is not perfectly neutral on the company s performance: net working capital needs are likely to increase in an inflationary scenario. Prysmian is devoting significant attention to the effective management of NWC, and proved able to deliver an impressive NWC/sales ratio of 8.8% in FY06 that compares with the 13.1% of FY05 despite the strong increase in the copper price. Copper global consumption As reported in the CIR metals & mining report, The World of Metals & Mining Everything You Need to Know, 24 August 2007: Significant consumption growth over the last five years led by the rapid industrial development of the Chinese economy has pushed the metals and mining industry to the fore. The structural shift in demand for metals is illustrated by the growth in the consumption of copper: Figure 31. Copper Consumption, 1995 to 2010E 23,000 21,000 19,000 17,000 15,000 13,000 11,000 9,000 7,000 5, RoW USA Japan Germany China Source: Brook Hunt, Citigroup Investment Research Chinese copper consumption more than trebled over the same period to 3.6mtpa, accounting for 21% of global demand. China is now the dominant consumer of metals. We discuss the Chinese-led commodities super cycle in Appendix V. 29

30 Copper applications Copper is now one of the major industrial metals, ranking only behind iron and aluminium in terms of consumption by mass. Figure Consumption by End Use Brass 18% Other Alloy 7% Building w ire 27% Sheet+Strip 7% Tube 11% Other w ire 11% Pow ertrans 3% Telecom 8% Winding w ire 8% Source: Citigroup Investment Research Copper s malleability, thermal and electrical conductivity (copper has the second-highest electrical conductivity of all the metals behind silver), and its resistance to corrosion, give it wide-ranging uses. Consumption can be divided into three main product groups: Copper wire rod: This is the largest group, accounting for c.57% of consumption in 2006, encompassing building wire, power transmission, telecommunications and winding wire. Copper products: Copper tube is the largest of the copper product markets. It is used in plumbing, heating and air conditioning systems. Copper alloy products: Bronze and brass are two of the most well-known copper alloys, both used for building fixtures and fittings. Copper sheet and strip is used for roofing, gutters and drain pipes. Copper alloys are also used in coinage. 30

31 Do our top-line growth assumptions make sense? As stated above, the global demand for copper is mainly driven by wires and cable manufacturing. Based on this, we shall consider copper demand as a good proxy for cable demand (assuming no price fluctuation). This allows us to run a reality check on our estimates for Prysmian s top-line growth at constant metal prices: we will show why we believe this assumption to be a sensible one. Figure 33. Prysmian Sales vs Global Copper Demand Prysmian sales ( m) 5,086 5,525 5,848 6,046 % growth 1.6% 8.6% 5.9% 3.4% Global copper demand (Mt) % growth 6.5% 5.0% 4.7% 5.0% Source: Citigroup Investment Research Excluding 2007 sales growth, negatively influenced by the closure of the Prescott copper rod plant, we see that our revenue estimates (which incorporate also a product mix improvement) are consistent with the expected global copper demand. Copper price projected evolution Despite the recent rally in copper prices caused by an increase in global demand, they are expected to remain close to balance through the period, mainly due to super-cycle demand and constrained supply. This fact, coupled with the relative inelasticity of Prysmian s absolute profitability to the copper price, allows us to assume a constant copper price in our model. Rising prices in the past As reported in the CIR metals & mining report, The World of Metals & Mining Everything You Need to Know, 24 August 2007: In response to increased demand metal prices have surged over recent years, supported also by increased investor interest in commodities and tight supply as producers have struggled to keep up with rising demand. Factors impacting on the supply-side response include underinvestment at the end of the 1990s/early 2000s and constraints on equipment supply; we discuss these factors further in the Mining Costs section of this report. The copper price, seen as the barometer for the other base metals, has increased from below 2,000 $/t in 2002 to over 7,000 $/t at current spot prices. 31

32 Figure 34. Copper Price 2002 to Present 10, , $/t 8,000 7,000 6,000 5,000 4,000 3,000 2, USc/lb 1, Aug- 02 Jan- 03 May- 03 Oct- 03 Feb- 04 Jul- 04 Dec- 04 Apr- 05 Sep- 05 Jan- 06 Jun- 06 Nov- 06 Mar- 07 Aug Source: Datastream slowly declining in the future As reported in the CIR metals & mining report, Metals and Mining Strategy Copper Look at These Prices!, 2 August 2007: Our commodity analyst has made significant upgrades to copper for driven by super-cycle demand and constrained supply, resulting in a market close to balance through the period. The 32% increase in long-term prices to US$1.45/lb is driven by a combination of the structural cost increases for existing producers, combined with increasing capital and operating cost hurdles for new operations that will push them towards the top of the cost curve. Figure 35. Copper Price Upgrades (US /lb) 2008e 2009e 2010e Long-term New Old Change 40% 100% 100% 32% Source: Citigroup Investment Research 32

33 Figure 36. New Copper Forecasts Copper ($ / lb) Historical Copper Price Current Futures 7/10/2007 Citi Estimates Previous Estimates Source: Citigroup Investment Research We have also increased our long-term molybdenum price from US$2.50/lb to US$8/lb. For full details please refer to the report by Alan Heap, Copper A Super Cycle Sheen, 23 July The key points are: Cycle Shining on Copper The copper market is enjoying a repeat of its performance in the super cycles of 50 and 100 years ago. Demand is strong and supply is struggling to keep up. Structural change is underway in consequence. Cost Explosion Industry average cash costs exploded nearly 50% higher in 2006 to USc71/lb, reversing the long-run trend decline. The main contributors to the increase were consumables (especially spare parts) and TC/RCs. Byproduct credits were an offset. Nearly 40% of the recent cost inflation is likely to prove structural. Figure 37. A Steepening Cost Curve 90% 80% 75 percentile less 50th 90th percentile less 50th" 70% 60% 50% 40% 30% 20% 10% 0% Source: Company reports and Citigroup Investment Research 33

34 Sustained Margin Growth We believe two factors will support higher long-run returns: the cost curve, which is getting steeper, and high barriers to entry that are increasing as new projects are located in regions of high political risk. Figure 38. Margins at Different Points on the Cost Curve 100% 90% 1st quartile 2nd quartile 3rd quartile 9th declile 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Company reports and Citigroup Investment Research Long-term price Our approach to deriving long-term prices is: Determine the proportion of current costs which are structural vs cyclical. Normalising for exchange rates, energy costs, TC/RCs and by product credits, we estimate sustainable costs in 2006 to be USc66/lb. (Previously we estimated sustainable costs in 2005 to be USc58/lb.) Project long-term costs. We estimate the industry average cash cost in 2015 will be USc80/lb (previously USc70). Determine an appropriate long-term margin. We believe there is a trend to long-term margin expansion, driven in part by a steepening cost curve. We have increased our assumption of long-term industry average cash margin 45%, previously 39%. Figure 39. Long-Term Costs and Prices (2007USc/lb) sustainable long term incr % incr. component sustainable Cash Cost % 38% Margin (%) 45% Price 145 Source: Citigroup Investment Research 34

35 Supply-Demand Persisting Tightness Lower production growth is the main reason for a much tighter supply demand outlook than we previously forecast, and we do not now expect prices to decline sharply in 2008 and However, we still expect softer prices in 2H07 due to the end of Chinese restocking, and easing of strike concerns. Supply-Demand Outlook We now expect persisting tightness in the copper market through From 2010 the market moves into surplus as supply increases to meet continuing strong demand growth. The smelter bottleneck also eases, allowing smelter utilisation rates to recover. Figure 40. Supply-Demand Balance Summary Central Forecast Mt e 2008e 2009e 2010e 2011e 2012e 2013e 2014e Mine Production (Concentrates) Smelter Utilisation (%) 83% 84% 84% 84% 85% 90% 95% 97% 97% Refined Production (Total) Consumption Surplus/Deficit Stock:Consumption Ratio (wks) Price (US /lb) Source: Citigroup Investment Research Figure 41. Global Supply Delay Scenario Mt e 2008e 2009e 2010e 2011e 2012e 2013e 2014e Mine Production (Concentrates) Smelter Utilisation (%) 83% 84% 84% 84% 85% 90% 90% 95% 97% Refined Production (Total) Consumption Surplus/Deficit Stock:Consumption Ratio (wks) Source: Citigroup Investment Research Our central forecast points to an excess in mine supply from In the forecast this is reflected in a build-up of concentrate stocks, as there is unlikely to be sufficient smelter capacity to process the concentrate. If sufficient smelter capacity does become available surpluses would be expected to build in the metal market. 35

36 What if new supply is delayed? Our central forecast incorporates probability discounts for new projects, depending on their stage of development and location. To study the sensitivity of the copper market outlook to the potential for further delays in new supply we have adjusted the probability discounts. In the delay scenario we increased the discounts for highly probable projects from 10%-20%, probable projects from 20%-30% and possible projects from 30%-40% The effect was to remove 400kt of supply in 2011 and 1mt in The market consequences were a persisting tightness in the metal market. The smelter bottleneck is still present, although less pronounced. A$ upgrades Partly offsetting the copper price upgrade has been an increase in our A$ assumptions to reflect the latest forecasts from CitiFX. Figure 42. A$/US$ Revisions 2007e 2008e 2009e New Old Change 2% 5% 9% Source: Citigroup Investment Research 36

37 The Rules of the Game In the previous section we analysed the cable market fundamentals: structure, competition and the copper price impact. To succeed in such a competitive environment, companies need to focus on profitability (addressing promising segments and countries and trying to provide turnkey solutions) and on an efficient management of NWC and operating leverage. Prysmian s strategy could be summarised as follows: 1. Focus on high value-added segments We have already addressed the issue of the differences in terms of the profitability of different cables. The first strategic move of Prysmian is to focus on the specialties, while considering the commodities segments as cash cows. Figure 43. Prysmian Shift Towards Value-Added Products Source: Company presentation 2. Expand in promising geographic areas Prysmian is striving to grow in the most promising geographic markets. To address a specific country, however, it is usually necessary to establish a plant in the area: cable logistics are a nightmare. As a consequence, Prysmian s strategy is based on small strategic acquisitions such as the two the company has recently finalised: Nicco Corporation: India-based Nicco Corporation's cable division produces a wide range of medium and low voltage power cables and industrial cables for applications in several sectors (OEMs, Windmill, Infrastructure, Mining, Railways, Defence, etc). Employing approximately 900, the company reported revenue of 55m in International Wire & Cable Company Limited (IWC): New Zealand company producing power cables for more than 60 years and generating approximate revenues of 20m in FY06. IWC should allow Prysmian to expand its market in New Zealand, particularly in the power distribution segment, whilst also exploiting Australian wind farm expertise. 37

38 3. Act also as a system integrator The specialty segments Prysmian is focusing on are characterised by a high degree of complexity. In particular, in the transmission segment (HV, EHV and sub-marine), customers are willing to pay a premium price for turnkey solutions. Prysmian is therefore trying to expand its presence through the value chain, acting as a system integrator. The company can leverage on its huge experience to manage the deployment on a turnkey system. Prysmian takes care of every phase from the project development and engineering (integrating upwards in the value chain), to the maintenance and other services (integrating downwards in the value chain). Those activities are typically more profitable and less capital intensive than the cable manufacture, thus improving the company's profitability and cash flow. Figure 44. From Cable to Turnkey System Project Development System Engineering Cable & Components Design Cable & Components Production Project Management Installation & Testing Connection Maintenance & Services Traditional Cable Manufacturer System Supplier Integrated Engineering & Contracting Provider Source: Company presentation 4. Control fixed costs Prysmian s fixed costs were 420m in FY06, 8.4% of sales (and 9% of total operating costs including depreciation charges). The management motto is fixed costs are fixed by definition : it might sound like nothing more than a clever pun, but they actually proved able to deliver. Fixed costs have in fact remained broadly stable over time, moving from 417m in 2004 to 420m in This might be important in a growing market, but can become crucial in a declining one: companies could be tempted to increase substantially their cost structure in good times, but then they will be obliged to exploit their productive capacity in bad times, thus being forced to decrease prices. 5. Keep an eye on NWC The cable manufacturing industry is inherently NWC intensive: the massive weight of copper in the materials bill coupled with a significant stock demands considerable financial resources to run the business. After the copper price rally of , NWC management has obviously become a crucial issue for the cable industry. 38

39 Prysmian Thanks to the strategic approach outlined above, Prysmian has been able to post significant growth since the Pirelli deal. Sales went up to 5bn in FY06 from 3.4bn in FY04 (+21% CAGR) while adjusted EBITDA moved up to 407m in FY06 from 208m in FY04 (+40% CAGR). Figure 45. Prysmian Historical Performance ( m) 2004A 2005A 2006A Energy Sales 2, , ,570.3 Telecom Sales Interdivisional Adj. (45.0) (61.8) (100.3) Group revenues 3,407 3,742 5,007 YoY Change Energy Sales 13.1% 35.3% Telecom Sales -8.2% 25.9% Interdivisional Adj. 37.5% 62.2% Group revenue 9.9% 33.8% Energy Adj. EBITDA Telecom Adj. EBITDA Corporate cost Group adj. EBITDA Margin Energy Adj. EBITDA 6.4% 7.3% 8.3% Telecom Adj. EBITDA 3.6% 4.4% 7.3% Group adj. EBITDA 6.1% 7.1% 8.1% Source: Company reports We believe Prysmian is still poised to exploit the relevant opportunities in the cable market, leveraging on: Unique competitive position: Prysmian: i) is active in the most value-added market segments (c65% of sales in specialty products); ii) has a high-quality and differentiated product portfolio; iii) boasts a worldwide presence and significant market share. Strong operating leverage: Thanks to the successful restructuring, Prysmian has been able to optimise its fixed cost structure. Fixed costs remained in fact substantially flat at c 420m throughout the period, thus creating strong operating leverage. Efficiency: Variable costs, on the other hand, have been reduced thanks to efficiencies of 50m in FY06 and we expect a similar reduction to take place also in FY07. Moreover, there are not key metal suppliers (the main three suppliers provide only 24% of the company s copper) while no raw material shortage risks are expected, so we do not foresee cost increases from this. Differentiated client base: Prysmian's largest customers generated only 3% of revenues in FY06. Prysmian has a limited exposure also to single countries: France, the largest single market in the EMEA, contributed less than 12% of FY06 sales. 39

40 Prysmian Divisions in Depth Energy We divided energy cable division revenue according to the product segmentation commented on above: Utilities (in turn divided into High Voltage, Sub-marine, Power Distribution and Network Components), Industrial and Trade & Installers (i.e. building wires). Utilities According to the International Energy Outlook 2007, global electricity demand should rise c2.4% CAGR from 2004 to 2030, when it should exceed 30,000bn of Kw/h. Non-OECD countries should grow at a faster pace (c3.5% CAGR), due to the demographic trend coupled with the wealth increase those countries should benefit from in the future. Electricity consumption increase requires: i) the renewal/substitution of existing T&D networks; ii) new T&D network creation. In a word: utilities capex. In the table below we present our utilities team forecasts on transmission and distribution spending (from "Transmission and Distribution Capital Expenditure Survey and Outlook", 10 May 2007). Figure 46. Transmission and Distribution Spending CIR Survey Results Figures before 2004 represent actual spending amounts. Source: CIR, Company Reports & Survey Responses Our utilities analysts expect those companies to post c 90bn capex in the US alone in , a huge market in which Prysmian has a global leading position. We therefore expect a strong sales growth in the utilities division, mainly thanks to the HV and sub-marine sub-divisions. Prysmian has a one-and-a-half-year and two-year visibility respectively on those business units. 40

41 Figure 47. Utilities Sales and EBITDA, E 2005A 2006A 2007E 2008E 2009E 2010E Energy Power Distribution 1, , , , ,326.8 HV Sub-marine Network components Utilities 1, , , , , ,529.4 Adj. EBITDA Adj. EBITDA margin 9.9% 10.8% 12.7% 13.0% 13.4% 13.4% %Change 33.4% 40.8% 25.9% 14.5% 10.5% 5.4% EBITDA n/a n/a n/a n/a EBITDA margin 9.6% 10.1% n.m. n.m. n.m. n.m. %Change 34.1% 34.8% n.m. n.m. n.m. n.m. Change YoY Power Distribution 7.0% 6.0% 4.0% 1.5% HV 12.0% 14.0% 12.0% 11.0% Sub-marine 5.0% 15.0% 13.0% 12.0% Network components 1.5% 6.7% 4.6% 2.1% Utilities 20.6% 28.5% 7.5% 11.8% 7.2% 5.4% Weight Power Distribution 57.7% 57.4% 56.1% 54.5% 52.5% HV 22.7% 23.6% 24.9% 26.0% 27.4% Sub-marine 12.5% 12.2% 12.5% 13.2% 14.0% Network components 7.2% 6.8% 6.5% 6.3% 6.1% Utilities 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company Reports and Citigroup Investment Research estimates Power distribution The power distribution division is expected to grow at about 6% in the next two years to decline in 2009 and 2010: this is a rather conservative assumption, given the reduced visibility versus HV and sub-marine. The market growth should be propelled by: The global increase in electricity demand and the consequent need to increase the distribution network, especially in emerging markets. The strong attention to the level of service provided and to the continued availability of supply (e.g. to avoid blackouts). Prysmian revenue should grow thanks to the continuous innovation and an increase in the customer service level. High voltage We expect the high voltage division to constantly grow at more than 10% per year until 2010 in a market that is expected to be expanding thanks to: The combination of constantly increasing electricity demand and ageing transmission networks that are pushing towards grid expansion and refurbishment (e.g. US Energy Policy Act). The impact of the so called interconnection projects (Decision n. 1364/2006/CE) in Europe and the Middle East, that should improve the transmission capabilities of networks in order to allow for cross-border energy trade and at the same time increase the security of energy supply; 41

42 Figure 48. Interconnections: the EU Case EL 7 EL 7 EL 7 EL 7 EL 7 EL 6 EL 5 EL 6 EL 7 EL 7 EL 5 EL 1 EL 8 EL 2 EL 8 EL 3 EL 3 EL 3 EL 2 EL 2 EL 2 EL 4 EL 3 EL 9 EL 9 EL 9 EL 9 EL 9 EL 9 EL 9 EL 9 EL 9 EL 9 EL 9 EL 9 Axes of priority projects EL 1 France - Belgium The Netherlands - Germany EL 2 Connections on the borders of Italy EL 3 France - Spain - Portugal EL 4 Greece - Balkan countries - UCTE System Source: Company presentation EL 5 EL 6 EL 7 EL 8 EL 9 UK - Continental and Northern Europe Ireland - United Kingdom Denmark - Germany - Baltic Electricity Ring Connections in Central Europe Mediterranean Electricity Ring The impact of stricter safety and reliability requirements in certain jurisdictions, which is expected to increase demand for high-end cables and for maintenance and monitoring services. Prysmian should concentrate on expanding its HV and EHV productive capacity (now fully booked) in strategic markets and increasing its presence in US, China and Middle East. Sub-marine Also the sub-marine division should post impressive results, boasting double digit growth rates until 2010, with the only exception of FY07, due to the uneven accounting of multi-year contracts. The sub-marine market growth estimates are based on: Cross-border sub-marine interconnections (see above). The increasing need for connecting areas separated by sea to the grid (e.g. island to mainland connections, such as in the Tasmania-Australia link). The expected increase in alternative energy production, especially wind energy, in which wind farms are typically offshore. 42

43 Prysmian is the worldwide leader in sub-marine power cables and systems with a fully booked capacity up to The company owns one of the two privately owned cable-layer ships worldwide, called the Julius Verne (the other is Nexans'). Some recent milestones have been the handing over of the Neptune cable (sub-marine power connection in the New York area) and the Spain- Morocco connection. In the last five years Prysmian has completed more than 30 sub-marine cable projects worldwide, among which are the Basslink (Australia), the longest submarine connection to date and the Italy-Greece link, the deepest ever. Other projects under completion are: i) SAPEI, 1000MW HVDC sub-marine cable transmission link between Sardinia and the Italian peninsula, and ii) the GCCIA cable between Saudi Arabia and Bahrain. Recently Prysmian has been awarded a $125m+ contract for the provision of the first turnkey system (together with Siemens) that should link Pittsburg and San Francisco through two 200 kv DC cable interconnections (consisting of 80km of Extruded Sub-marine Cables and 5km of Extruded Land Cables (AC and DC)) with a total transmission capacity of 400MW. The network components division sales evolution is mainly based on the previous three sub-segments performance. We would remind readers that Prysmian does not produce overhead lines: those are commoditised, low-margin cables. This is far from being an issue for the company, since there is growing consensus towards adopting underground lines, for a number of reasons: Safety: Underground lines are not exposed to extreme weather conditions and are not easily damaged. Flexibility: Underground cables can be used in situations in which overhead lines would not be viable (e.g. airports). Environmental factors: Overhead lines generate electromagnetic emissions (EMF) and may cause visual pollution problems. Industrial The industrial market growth is generally cyclical and follows GDP trends. However, cable demand is growing due to the increased wiring density (think about the electronic devices you could find in a car now and 10 years ago) and to the expansion of specific industrial applications. In particular, we expect Prysmian to post solid growth in the Priority Five areas: a selection of highgrowth/high value-added sub-segments in the market (crane, OGP, mining, marine and rail and rolling stocks). 43

44 Figure 49. Industrial: "Priority Five" Products Source: Company presentation We expect the strong growth posted in FY06 to continue also in FY07. For the next few years we can not rule out Prysmian being able to replicate those impressive growth rates, but since the visibility is quite limited we prefer to take a conservative stance and assume a high single digit "normalised" growth. Figure 50. Industrial Sales, E ( m) 2005A 2006A 2007E 2008E 2009E 2010E Industrial revenue ,042.3 Growth % -1.7% 29.5% 21.0% 15.0% 10.0% 5.0% Source: Company reports and Citigroup Investment Research T&I T&I market revenue dynamics are generally correlated to the residential and non-residential construction industry which in turn is linked to the GDP trend. Given the current stagnating housing market we do not foresee a brilliant market performance in the near future. However, Prysmian has very limited exposure to the US housing market, while its North America exposure is mainly in Canada. Prysmian's T&I division, however, is expected to grow c2% in the next few years, since: i) Prysmian is basically not exposed to the US housing market; ii) divisional sales are positively impacted by the infrastructure cycle. Moreover, there is an increasing demand for safety requirement compliant cables (such as low smoke, zero halogen or flame retardant cables), which are less commoditised. Figure 51. T&I Sales, E ( m) 2005A 2006A 2007E 2008E 2009E 2010E T&I revenue 1, , , , , ,890.6 Growth % 15.3% 38.6% 7.5% 2.0% 2.0% 2.0% Source: Company reports and Citigroup Investment Research 44

45 Prescot plant disposal In FY06 Prysmian disposed its copper rod plant located in Prescot: for this reason Prysmian FY07 revenue on a like-for-like basis would have been c 320m higher than reported. Copper rod is, however, very low value added and Prescot's operations had a neutral impact on company's EBITDA. Energy division at a glance In the table below we summarise our revenue estimate for Prysmian's energy cable division. Figure 52. Energy Sales by Division, E ( m) 2005A 2006A 2007E 2008E 2009E 2010E Utilities 1, , , , , ,529.4 T&I 1, , , , , ,890.6 Industrial ,042.3 Others Interbusiness adj. (18.9) (3.3) Total Energy Sales 3, , , , , ,519.3 Change YoY Utilities 20.6% 28.5% 7.5% 11.8% 7.2% 5.4% T&I 15.3% 38.6% 7.5% 2.0% 2.0% 2.0% Industrial -1.7% 29.5% 21.0% 15.0% 10.0% 5.0% Others -3.1% 60.3% -88.2% 28.3% 35.5% 4.0% Energy 13.1% 35.3% 0.6% 9.3% 6.2% 3.5% Weight Utilities 42.9% 40.8% 43.6% 44.6% 45.0% 45.8% T&I 35.2% 36.1% 38.6% 36.2% 34.8% 34.3% Industrial 14.6% 13.9% 16.8% 18.0% 18.6% 18.9% Others 7.8% 9.3% 1.1% 1.3% 1.6% 1.0% Interbusiness adj. -0.6% -0.1% 0.0% 0.0% 0.0% 0.0% Energy 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company Reports and Citigroup Investment Research estimates Energy division profitability In terms of profitability we expect Prysmian s focus on high value-added segments/geographic markets to allow for a constant improvement at the energy division adjusted EBITDA level, that should increase up to 10.8% by Moreover, the utilities segment should benefit also from the switch from products provision to systems: we expect utilities EBITDA to grow from 10.8% in 2006 to 13.4% in Also industrial segment profitability should increase while we expect some price pressure in the T&I segment that should result in some margin contraction. 45

46 Figure 53. Energy Division Profitability, E ( m) 2005A 2006A 2007E 2008E 2009E 2010E Utilities T&I Industrial Others Energy Adj. EBITDA Adj. EBITDA margin Utilities 9.9% 10.8% 12.7% 13.0% 13.4% 13.4% T&I 5.2% 7.5% 8.5% 8.0% 7.6% 7.5% Industrial 7.9% 7.5% 10.0% 10.4% 10.8% 10.7% Others 0.6% 1.1% 1.1% 1.1% 1.1% 1.1% Energy 7.3% 8.3% 10.5% 10.6% 10.7% 10.7% YoY Change Utilities 33.4% 40.8% 25.9% 14.5% 10.5% 5.4% T&I 53.3% 99.7% 21.6% -3.6% -3.1% 0.7% Industrial -7.8% 22.8% 60.6% 21.8% 14.2% 4.0% Others 66.7% 220.0% -88.6% 28.3% 35.5% -34.2% Energy 28.6% 53.9% 27.4% 10.0% 7.4% 3.9% Weight Utilities 58.3% 53.3% 52.7% 54.8% 56.4% 57.2% T&I 25.2% 32.7% 31.2% 27.4% 24.7% 23.9% Industrial 15.9% 12.7% 16.0% 17.7% 18.8% 18.8% Others 0.6% 1.3% 0.1% 0.1% 0.2% 0.1% Energy 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company reports and Citigroup Investment Research Telecom We expect telecom division sales to post substantial growth in 2007, mainly due to the good performance of copper cables, while for the next few years we estimate conservative growth of c3.5% per year. The main growth driver in this market is the level of large telecom companies capex (both incumbent and alternative provider). Those are likely to be influenced by: Internet penetration: After the false start at the end of the past decade, internet penetration has been experiencing very strong growth: at the beginning of 2007, over 1bn people worldwide used the internet (Source: Internet World Stats.) and this trend is expected to continue in the next few years, especially in developing countries. FTTx development: The future market growth is going to be boosted by the ever increasing demand in bandwidth: telecom companies are responding to user demand by pushing their fibre networks closer to customers premises. As for Prysmian, optical cable sales are expected to growth at c7% per year despite the ongoing price erosion due to installed productive overcapacity, thanks to the long-standing business relations the company has been creating with TLC incumbents, which are the biggest investors in FTTx deployment: Prysmian is currently a supplier of Verizon in the US. Moreover, Prysmian aims at cooperating more closely with the system integrator deploying telecom network in developing countries. 46

47 Copper telecom cable sales have been declining in the past few years due to the ongoing substitution with fibre cables and we expect this to continue in the future. This long-term trend has however been delayed thanks to: i) the introduction of innovative copper-based technological solutions such as xdsl that allows speed above 20 Mb/s; ii) the demand for low-priced telecom networks from developing countries. Moreover, copper TLC cables sales are not based on multi-year contracts. This is likely to lead to some volatility in copper cable revenue: we expect substantial growth in FY07 (c14% YoY) due to strong demand coming from large TLC incumbents from the Middle East, Latam and US while from FY08 we prefer to take a conservative stance assuming a zerogrowth scenario. Figure 54. Telecom Division, E ( m) 2005A 2006A 2007E 2008E 2009E 2010E Optical Cables Connectivity Copper Cables Sales Adj. EBITDA Adj. EBITDA margin 4.4% 7.3% 9.5% 10.0% 10.0% 9.5% %Change 14.5% 106.3% 43.9% 9.1% 3.3% -2.6% YoY Change Optical cables -3.1% 14.2% 7.0% 7.0% 7.0% 6.0% Connectivity 2.1% 3.0% 3.0% 3.0% 3.0% Copper Cable 11.2% 4.9% 14.0% 0.0% -1.0% -2.0% Telecom -8.2% 25.9% 10.0% 3.6% 3.3% 2.5% Weight Optical Cables 57.7% 52.3% 50.9% 52.5% 54.4% 56.3% Connectivity 2.6% 2.8% 2.6% 2.6% 2.6% 2.6% Copper Cables 29.3% 44.9% 46.5% 44.9% 43.0% 41.1% Telecom 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company Reports and Citigroup Investment Research estimates Profitability should be increasing quite significantly in FY07 and then remain quite stable at c10% from the 7.3% level of 2006, thanks to the expected price recovery of fibre. Prysmian is also in a position to apply a premium price thanks to: High fibre quality: despite conventional wisdom, optical fibre is not a commodity and Prysmian s is of high quality. Easiness of installation: deploying a fibre network is usually quite complicated and expensive. Prysmian devoted much effort to creating optical cables that are as easy as possible to install. 47

48 Financials Based on the strategies we described in the previous chapter, we believe Prysmian should post the following results: Figure 55. Prysmian Energy and Telecom Division Sales and Adjusted EBITDA ( m) 2005A 2006A 2007E 2008E 2009E 2010E Energy Sales 3, , , , , ,519.3 Telecom Sales Interdivisional Adj. (61.8) (100.3) (101.9) (110.7) (117.2) (121.1) Group revenues 3,742 5,007 5,086 5,525 5,848 6,046 YoY Change Energy Sales 13.1% 35.3% 0.6% 9.3% 6.2% 3.5% Telecom Sales -8.2% 25.9% 10.0% 3.6% 3.3% 2.5% Interdivisional Adj. 37.5% 62.2% 1.6% 8.6% 5.9% 3.4% Group revenue 9.9% 33.8% 1.6% 8.6% 5.9% 3.4% Weight Energy Sales 90.3% 91.3% 90.4% 90.9% 91.2% 91.3% Telecom Sales 11.4% 10.7% 11.6% 11.1% 10.8% 10.7% Interdivisional Adj. -1.7% -2.0% -2.0% -2.0% -2.0% -2.0% Group revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Energy Adj. EBITDA Telecom Adj. EBITDA Corporate cost Group adj. EBITDA Margin Energy Adj. EBITDA 7.3% 8.3% 10.5% 10.6% 10.7% 10.7% Telecom Adj. EBITDA 4.4% 7.3% 9.5% 10.0% 10.0% 9.5% Group adj. EBITDA 7.1% 8.1% 10.5% 10.6% 10.8% 10.8% Source: Company reports and Citigroup Investment Research Our full P&L estimates on Prysmian are presented in the following table: 48

49 Figure 56. Prysmian P&L, E ( m) 2005A 2006A 2007E 2008E 2009E 2010E Energy 3, , , , , ,519.3 Telecom Interdivisional Adj Revenues 3, , , , , ,046.5 COGS -2, , , , , ,620.9 OPEX , , , ,297.2 Personnel Costs Other Costs Operating cost -3, , , , , ,406.1 Reported EBITDA Reported EBITDA margin 5.9% 7.4% 10.9% 10.4% 10.6% 10.6% Exceptionals Adj. EBITDA Adj. EBITDA margin 7.1% 8.1% 10.5% 10.6% 10.8% 10.8% Depreciation Amortisation EBIT EBIT margin 3.1% 5.2% 9.5% 9.1% 9.3% 9.3% EBIT exceptionals Adj. EBIT Adj. EBIT margin 4.6% 6.6% 9.1% 9.3% 9.5% 9.5% Interests Margin before exceptionals Non operating items Associate Exceptionals Profit before taxes PBT margin 1.3% 2.9% 7.1% 7.9% 8.3% 8.4% Taxes Profit after taxes Minorities Net income Net margin 0.0% 1.8% 4.7% 5.1% 5.3% 5.4% Source: Company reports and Citigroup Investment Research We would stress that Prysmian s revenue should be growing less than 2% in FY07 due to the disposal of the UK-based Prescot plant (copper rod manufacture)in energy, with a negative impact on revenues of c 300m. At the same time, however, labour costs and COGS are expected to be declining by the same amount, since Prescot operations were basically neutral at the EBITDA level. In FY07E exceptionals (i.e. non recurring items) are positively affected by the 40m purchase price adjustments related to the acquisition of Pirelli & Systems divisions from Pirelli & C. SpA completed in July 2005, and should therefore reach a positive 22m. From FY08E onwards, however, we assume exceptionals should stabilise to about 10m. We expect Prysmian to have financial charges in excess of 120m in FY07E, mainly due to passive interest on debt ( 54m), banking fees and other expenses to finance Prysmian s operation worldwide (c 30m), one-off costs related to the renegotiation of the financial structure ( 59m) and others including hedging costs on metals and forex and the one-off repayment of the shareholder loan. In FY08 we should have normalised financial charges of c 70m (implying a passive interest rate below 5%, due to the recent renegotiation of Prysmian's credit agreement). 49

50 In 2007 the tax rate should be c33% (and we expect it to stabilise to c35%) from the FY06 c38%, mainly thanks to an improved geographic mix: Prysmian is generating an increasing portion of revenue: i) in countries with a favourable tax rate; ii) in countries in which the company has some carry forward losses. The company carry-forward of fiscal losses was some 590m at IPO, of which 215m had no time limitation with 174m expiring between 2010 and The FY07 tax rate should be quite low also due to the impact of the Pirelli Price Purchase Adjustment non-fiscal exceptionals ( 39m). Cash Flow We expect Prysmian to generate a substantial amount of cash in the next four years, c 680m of cumulated free cash flow with an average operating cash flow/ebitda conversion rate of above 50%. We believe interest charges should decline over time, thanks to the debt repayment; still, Prysmian should pay a significant amount of banking fees (average of c 30m, see above). Prysmian s net working capital management is already rather efficient, so we do not see major improvements in the future. We note that our assumptions are metal-neutral, and that a copper price increase/decrease is reflected in a simultaneous increase/decrease in NWC needs. Prysmian capex should remain in the 90m- 100m region, slightly below 2% of sales. This figure should not be regarded as too low, since: i) a large portion of Prysmian sales are copper, which is a pass-through and the price of which has been increasing dramatically in the past two years; ii) operating in a cyclical environment Prysmian prefers to adopt a conservative stance towards capacity. Figure 57. Prysmian Cash Flow, E ( m) 2005A 2006A 2007E 2008E 2009E 2010E Net income Depreciation & amortisation Interest Charges Cash from operations Change in working capital (48.3) Trading cash flow Capex Operating cash flow Changes in other sources Free cash flow to equity Dividends (Y-1) Pay out 0.0% 0.0% 30.0% 30.0% 30.0% 30.0% change in NFP NFP Source: Company reports and Citigroup Investment Research 50

51 M&A scenario Prysmian should generate a substantial amount of cash in FY07 and we expect the company to further accelerate cash generation mainly thanks to sound NWC management (NWC/sales ratio below 10%) coupled with a wise investment policy, with capex steadily below 2% of sales. As a consequence, Prysmian should be able to reduce its net debt and have a positive net financial position by 2011, implying a three-year payback time. We believe the management is willing to keep the company s balance sheet leveraged in order to maintain an efficient financial structure. In order to achieve this goal: Dividend: Prysmian guidance on dividend policy is a 30% payout ratio from 2007 on. We believe this broad rule could change in order to assure a satisfactory return to shareholders: we are convinced Prysmian intends to maintain an appealing dividend policy to acquire a value stock reputation. The company moreover recently renegotiated its credit agreement, and no covenant on dividend distribution could be applied as long as the company maintains a leverage below NFP/EBITDA 3.0x (in FY07 should be below 2.0x). M&A: small acquisition. Prysmian is focusing on strategic geographic markets and/or product segments. See as an example the two recently closed acquisitions in India and New Zealand. M&A: larger acquisitions. We believe Prysmian could in the future evaluate the opportunity to bid either for Draka or General Cable, two of its main competitors. The cable industry allows for substantial economies of scale and we believe some synergies could be created both in the top line (mainly thanks to cross selling) and cost base (dispose of redundant plants). 1H07 Financials On 11 September 2007, Prysmian reported a very strong set of 1H07 results. Prysmian posted 8.3% YoY organic growth in 1H07 on a like-for-like basis, basically in line with the 1Q07 figure. Adjusted EBITDA reached a record in 1H07, +31.1% at 269m and with a margin of 10.4%: we believe this outstanding result has been achieved thanks to an improved product mix coupled with tight fixed cost control. Also adjusted EBIT recorded a surge from 6.8% in 1H06 to 9.1% in 1H07. Net profit was 150m in 1H07, almost double the 1H06 figure. As for cash generation, Prysmian posted a 74m cash flow from operations in 1H07 from the negative 28m of 1H06, thanks to the combined effect of profitability increase and further NWC management improvements. In 1H07, the energy division grew 8.1% YoY: the industrial segment posted dramatic growth, while utilities was up only 2.8% YoY due to the invoice of the Neptune project (sub-marine) that took place in 1H06. 51

52 Figure 58. Prysmian Energy Division 1H07 Revenue ( m) H1 06 1H07 Change % Organic growth % Utilities % 2.8% T&I % 6.0% Industrial % 21.5% Others Total Energy % 8.1% Source: Company reports Prysmian s strategy to focus on high value-added segments led to a strong increase of energy division profitability that peaked at 10.4% in 1H07 from 8.2% in 1H06, mainly thanks to the impressive leap in the industrial adjusted EBITDA margin. Figure 59. Prysmian Energy Division Adjusted EBITDA Adj. EBITDA % margin ADJ. EBITDA H1 06 1H07 H1 06 1H07 Utilities % 12.2% T&I % 9.0% Industrial % 10.4% Others 4 3 Total Energy % 10.4% Source: Company reports As for the telecom division, sales grew 10.2% YoY in 1H07 to 404m with an adjusted EBIT margin moving up to 8.6% from 8.0% in 1H06. 1H07: Prysmian versus peers Analysing the recently reported cable company 1H07 results, Prysmian still stands out as the most efficient, both in terms of profitability and especially NWC management. Figure 60. Cable Companies 1H07 Results at a Glance Sales growth EBITDA margin EBIT margin NWC/sales Draka 8.0% 6.9% 5.0% 19% Nexans 12.7% 6.4% 4.9% 40% General Cables 8.0% 10.0% 8.8% 26% Prysmian 8.3% 10.4% 9.1% 11% Source: Citigroup Investment Research Nexans margins at current metal prices 52

53 Consensus Since Prysmian's IPO, the outlook on the cable industry has steadily improved, leading to several upward revisions of consensus estimates, especially in terms of profitability. We believe the current consensus could increase after the strong set of results the company posted in 1H07. Figure 61. CIR vs Consensus ( m) 2007E 2008E 2009E Revenues Citigroup Consensus Difference 2.6% 6.7% 9.2% EBITDA Citigroup Consensus Difference 8.1% 12.4% 11.9% Net income Citigroup Consensus Difference 20.1% 13.8% 10.5% Source: Powered by datacentral Shareholder Structure Figure 62. Shareholding as September 2007 Free float 30% Lazard Asset Management 2% JP Morgan Asset management UK 2% Reach Capital Management LLC 2% FMR Corp. 10% The Goldman Sachs Group 54% Source: CONSOB Prysmian is currently controlled by Goldman Sachs (54%), the IPO selling shareholder, through a vehicle called Prysmian (LUX) II S.a.r.l. and by a number of primary institutional investors including Fidelity (above 10%). We would stress that also the management is significantly though indirectly invested in the company: they globally own a 8.1% interest in Prysmian (LUX) II S.a.r.l. 53

54 Appendix I: Snapshot of Historical Financials The Pirelli acquisition Prysmian is a global cable manufacturer, distributor and installer, which recently underwent a change in both its activities by the disposal of 11 plants and of unprofitable business such as rod manufacture and enameled wires, as well as of Pirelli Broadband Solutions and in its legal structure. At the end of July 2005, Prysmian (LUX) II S.à.r.l. (indirectly controlled by the Goldman Sachs Group) founded GSCP Athena, which afterwards acquired Pirelli Cables and Systems Telecom SpA and Pirelli Cables and Systems Energy SpA through GSCP Athena (French) Holdings SAS and GSCP Athena (German) Holdings GmbH. Each of the acquired groups was then merged with the controlling companies and respectively renamed Prysmian Telecom and Prysmian Cables and Systems Energy. Figure 63. Prysmian Group Structure Prysmian (LUX) II S.á r.l. Indirectly controlled by The Goldman Sachs Group Management and certain directors indirectly hold a 8.1% minority stake Transaction Perimeter 100% Prysmian S.p.A. 100% 100% Prysmian Cavi e Sistemi Energia S.r.l. Prysmian Telecom S.r.l. Energy Cables & Systems Telecom Cables & Systems Total 2006 Net Sales % of Total Net Sales 2006 Adj. EBITDA 2 % of Sales 4,570m 89% 379m 8.3% 537m 11% 39m 7.3% 5,007m 1 407m 3 8.1% ¹ Net of intercompany eliminations. 2 EBITDA adjusted excluding non-recurring items. 3 Including corporate fixed costs. Source: Company Presentation Following the new legal structure, financial statements have been restated as following in accordance with IFRS standards: i) for FY04 they are presented on an aggregated basis, ie. the cable business is treated as if it were a separate entity from the rest of Pirelli Group business; ii) for FY05 they combine the period starting 1 January 2005 and ending 28 July 2005 (or the acquisition date) with the consolidated accounts from 12 May 2005 to 31 December 2005, while Prysmian remains idle in the period from 12 May 2005 (incorporation date) to 28 July 2005; iii) for FY06 they are provided on a consolidated base. 54

55 Sales Financials Between Y04 and Y06PF the group s sales approximately increased by 23.7% per annum (net of disposed activities) thanks to: i) an 8.7% organic CAGR, net of the metal price effect, in the energy segment and 9.6% in the telecom business; ii) a stunning increase in metal prices in Y06 which allowed Prysmian to increase its top line by 17% CAGR in the energy segment and by 5.3% CAGR in the telecom business; iii) insignificant impact of exchange rates in a period when these were extremely volatile. Figure 64. Prysmian Energy Cables & System Division +7.3% 3,378 2, % 4, Metals Effect Exchange Rates Organic Growth 2005 Metals Effect Exchange Rates Organic Growth 2006 Organic CAGR 8.7% 1 Net of 69m related to the Enamelled business Source: Company Reports Figure 65. Prysmian Telecom Cables & System Division + 3%, despite %, despite price erosion price erosion Metals Effect Exchange Rates Organic Growth 2005 Metals Effect Exchange Rat es Organic Growth 2006 Organic CAGR 9.6% 2 Net of 63m related to the Pirelli Broadband Solutions Source: Company Reports EBITDA & EBIT Between Y04A and Y06PF the impact of raw materials on sales increased because of the price trend. Nonetheless, the company s EBITDA and EBIT improved as following: 55

56 Figure 66. Prysmian EBITDA and EBIT, Y04-06PF ( m) EBITDA % Growth 5.4% 69.2% EBITDA margin 6.1% 5.9% 7.4% EBITDA Adj EBITDA Adj. margin 6.1% 7.1% 8.1% EBIT % Growth 9.2% 119.8% EBIT margin 3.2% 3.1% 5.2% EBIT Adj EBIT Adj. margin 3.2% 4.6% 6.6% Source: Company Reports and Citigroup Investment Research Profitability In the same period, the group s profitability ratio was affected by costs such as: 10m IPO costs, 17m restructuring costs in Y06 involving the closure of plants (mainly Prescot and Vologne); 6m invested in Y06 for the launch of the Prysmian brand; 33m in Y05 for the step-up of inventories for Purchase Accounting (IFRS 3) purposes; the disposal in Y04 of the telecom sub-marine segment. As shown in the figure below, the outcome is a higher underlying adjusted EBITDA/EBIT. Figure 67. Prysmian P&L Non-Recurring Items, Y04A and Y06PF Restructuring Launch of Prysmian brand IPO costs Inventories step-up (IFRS 3) TLC sub-marine (disposed in 2004) (7) - 1 IT Segregation and other fees EBITDA adjustments < of which attributable to Energy Business of which attributable to Telecom Business (7) 1 2 of which Corporate Costs Pirelli brand licence D&A Goodwill reallocation EBIT adjustments < of which attributable to Energy Business of which attributable to Telecom Business (7) 1 2 of which Corporate Costs Source: Company Reports and Citigroup Investment Research Net financial position Net debt in Y06A amounted to 879m, or down 13m YoY. In spite of this contraction, the result looks positive considering that financial charges reached 112m (including bank fees of 51m) and that Prysmian distributed equity for 141m (of which shareholder loan repayments totalled 51m). As shown below, the net financial position amount was the result of a strong cash flow from operations and an efficient management of net working capital, which contracted as copper prices increased. 56

57 Figure 68. Prysmian Net Financial Position, EBITDA Gain on disposal Utilisation provision Addition to provision Total 371 (8) (51) Cash Flow from Operations 1 347m Free Cash Flow (unlevered) 278m 31 Dec 2005 Cash Flow from Operations (before WC changes) WC changes Paid taxes Net Capex Financial charges Equity changes Others 31 Dec Includes 16m related to non-recurring cash out Source: Company Presentation Energy and telecom cables & fibres lines The energy business, providing sub-marine and terrestrial cables for electricity transmission and distribution to many of the largest power utilities worldwide, generates the bulk of sales (90.7%) and 88% of Prysmian s EBIT (EBIT CAGR +46%). The EBIT margin of 5.5% is lower than the telecom s business (this one reaching 6.4%) because of less D&A. Energy s EBITDA amounted to 357m in Y06, vs. 37m registered in the telecom segment. 57

58 Figure 69. Prysmian P&L by Division, Y04A and Y06PF Energy Business Telecom Business ( m) Revenues 2,987 3,378 4, YoY Change 13.1% 35.3% -8.2% 25.9% EBITDA YoY Change 9.9% 76.7% -27.0% 111.6% EBITDA margin 6.2% 6.0% 7.8% 5.2% 4.1% 6.9% EBITDA Adj YoY Change 28.8% 54.1% 11.8% 105.3% Adj. EBITDA margin 6.4% 7.3% 8.3% 3.7% 4.5% 7.3% Depreciation (74.5) (84.5) (104.6) (26.0) (17.4) (3.0) As a % sales -2.5% -2.5% -2.3% -5.6% -4.1% -0.6% EBIT (2.0) YoY Change 7.5% 114.3% n.m. n.m. EBIT margin 3.7% 3.5% 5.5% -0.4% 0.0% 6.4% EBIT Adj YoY Change 45.3% 80.0% n.m. n.m. Adj. EBIT margin 3.9% 5.0% 6.7% -1.9% 0.2% 6.7% Source: Company Reports and Citigroup Investment Research 58

59 Appendix II: History of Prysmian Giovanni Battista Pirelli, the father of the Pirelli group, founded the cable business in 1879 to enter the energy and telegraph cable industry. Organic growth ( ) In 1886 the company began producing telecom sub-marine cables. Between 1902 and 1930 the group opened new plants in Argentina, in Brazil, in Spain and in the UK. In 1950 the company won the tender for the Italian telephone and television cable infrastructure. In 1982 Pirelli (with STET) was ranked first in the production of optical fibres in Italy, after beginning research in this business in the 70s. In 1998 the company bought the cable-laying vessel Giulio Verne, one of the few ships in the world able to lay high-capacity sub-marine cables even in severe weather conditions. Acquisitions ( ) Attractive market trends allowed the company to follow an acquisition strategy between 1998 an 2001, by acquiring business lines sold by those competitors which suffered from the squeeze in utilities investments followed by the privatisations in the mid-90s and that consequently wanted to reduce market exposure. Prysmian acquired 12 plants from the Siemens AG energy cable division in 1998, the Metal Manufacturers (Australia) energy and construction cable division in 1999, some of BICC General s business activities in Italy, Africa and the Far East in 2000, and the NKF energy cable division (controlled by Draka) in the same year. Restructuring ( ) Market trends in 2001 turned unfavorable, as energy cable demand slowed down and telecom cable market deflated after the internet bubble burst. In this context, Prysmian disposed its less strategic business, such as enameled and transposed wires, closed 11 plants out of 63, reduced fixed costs and the labour force. The holding company of the Cable and Systems Division, Pirelli Cavi e Sistemi SpA, was split into two holding companies each offering either energy or telecom business. Acquisition & IPO ( ) In 2005 Pirelli Cables was bough by Goldman Sachs for 1.4bn through a leveraged takeover. In May 2007 Prysmian went public. 59

60 Appendix III: Prysmian Reference Market and Geographical Presence The reference market for Prysmian belongs to a small portion of the whole cable market as generally considered by CRU analysis. In particular Prysmian s portion excludes the following: Enameled wires for the energy and internal telecom data and copper LAN cables for the telecom sector. The following arenas: The energy market for Prysmian excludes Mexico, Japan, Korea, Taiwan and the Indian area. Latam, mainly Brazil and Argentina, is key in the Trade & Installers and Power Distribution sector, while both the Eastern Europe and Scandinavian areas are less important. T&I presence in APAC is limited to Australia. The company s industrial business involves specific industrial applications (eg. automotive sector) and leaves out others, such as elevators. Figure 70. Prysmian Market Covered & Measure Unit Used Mn Tons Conductor 8.6 Mn Tons Cable Industrial Utilities Trade & Installers 2005 CRU Market Not Covered Covered Market Source: Company Presentation The telecom market for Prysmian, inclusive of the optical and copper cable business, excludes Japan as the company is both absent in that country and because of the perceived local protectionist policy. The group is absent in the copper cable arena only in North America. Figure 71. Prysmian Optical Cable Mn Km Fibre Figure 72. Prysmian Copper Cable Mn Km Pair CRU Market Not Covered Covered Market Source: Company Presentation 2005 CRU Market Not Covered Covered Market Source: Company Presentation As reported by the company, Prysmian s reference market for Y05 amounts to 58bn, of which 49bn or 85% belongs to the energy cable market and the remaining 9bn or 15% applies to the telecom cable market. 60

61 Appendix IV: The Copper Process As reported in the CIR metals & mining report, The World of Metals & Mining Everything You Need to Know, 24 August 2007: Copper deposits are often found with other metals, commonly gold, lead, zinc and nickel, and are mostly extracted from large open pit mines. Underground mining of copper usually involves block caving. Copper can be found in many forms, however, commercially viable copper is found either as sulfide ores (primary ores), or as oxide ores (secondary ores). Sulfide ores formed when molten solution flowed into the earth s crust as a result of volcanic activity. Oxide ores are found near the surface and are formed from the oxidation of sulfide ores. The earth s crust contains an average of 60ppm of copper, although estimates vary. For commercial exploitation a grade in excess of 0.5% is usually required and a typical grade is 2% for underground and 0.5%-1.0% for open pit. The production method is dependent on the ore type; sulfide ores are beneficiated in floatation cells whereas oxide ores are generally leached. Copper sulfide ores (concentrates) The copper ore is crushed and ground into a fine powder and sent to a floatation machine for concentration. At the concentration stage the ore is mixed with a collector chemical and introduced to a water bath. Copper sulfides form as a froth at the surface and are skimmed off. The dried froth contains between 20%-40% copper and can be traded as an intermediate product in its own right, known as copper concentrate. The copper concentrate is then smelted to form copper matte, that contains c.70% copper, which is then converted to blister that is c.98% pure copper by blowing hot air through the molten matte. Electrolytic refining is then used to produce copper cathode that is 99.99% pure copper. Copper cathode can be sold directly to customers or spun into coils at a rod plant. Mill Crushing Plant Mill Concentrator Smelter Electrolytic Refinery Copper Cathode Rod Plant 61