AUSTRALIA Recommendation changes None BC Iron Outperform Price $0.23 Market Cap A$45m Target Price $0.35 TSR 52% Mt Gibson Iron Neutral Price $0.18 Market Cap A$196m Target Price $0.25 TSR 39% Grange Resources Neutral Price $0.11 Market Cap A$127m Target Price $0.11 TSR 9% More than fully cash-backed Event We have updated our earnings forecasts for the mid-cap iron-ore producers to incorporate material cuts to our iron-ore price forecasts and also recent cuts to our A$/US$ forecasts. We also are transferring coverage of Mt Gibson Iron (MGX), Grange Resource (GRR) and BC Iron (BCI) to Andrew Hodge. Our recommendations for all three stocks remain unchanged after incorporating the changes. Impact Material cuts to iron-ore prices: We have made some material cuts to our iron-ore price forecasts to reflect the changes to our steel demand forecasts, a lack of supply response and lower energy prices and exchange rates, which have all conspired to lower the longer-term outlook for iron-ore. We cut our FY16 and FY17 prices by 3% and 10% and our FY18 and FY19 prices by 15%. We have removed our previous forecasts beyond FY20, reverting to our new long-term real price of US$65/t from CY21. For more detail on the commodity price cuts see today Commodities Comment. Partial relief due to a weaker Australian dollar: However, when factoring in the lower A$/US$ exchange rate, the cuts to our iron-ore price forecasts are less severe. We are actually upgrading our FY16 forecast by 4% and only cut our FY17 estimate by 3%. However, our longer-term forecasts fall by 11%, although our real A$ long-term iron-ore price of A$87/t will see the major Australian iron-ore producers continue to generate strong returns from their respective businesses. Outlook BCI remains our preferred pick: We continue to rate BCI an Outperform despite cutting our price target by 13% to A$0.35. The company is generating only marginal operating cash flow at its Nullagine JV, however after factoring earnings from Iron Valley, we estimate the company is cash flow positive at spot prices. The future outlook for Iron Valley presents a potential positive catalyst for BCI, while the company is backed by $0.31 in cash. GRR offers leverage to pellet premiums: GRR is the only pure play iron-ore pellet producer listed on the ASX. Pellet premiums have been relatively buoyant and we note that we expect GRR to remain cash flow positive at spot iron-ore prices. The company is also fully cash-backed, but lacks the potential positive catalyst that BCI enjoys with Iron Valley and we retain our Neutral rating on the stock. 24 September 2015 Macquarie Securities (Australia) Limited Mt Gibson s future still uncertain: Our Neutral rating on MGX reflects the company s strong cash backing, which at $0.30 remains is $0.12 higher than the current share price. MGX s Extension Hill project is the company s primary source of earnings with output at Koolan Island winding down. Uncertainty surrounding the future direction for MGX given the mine life of Extension Hill is only two years continues to suppress the share price in our view. We believe this will continue until MGX is able to secure an acquisition that provides some clarity on its future earnings outlook. Please refer to page 8 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Changes to our iron-ore price forecasts We have made some material cuts to our iron-ore price forecasts to reflect the changes to our steel demand forecasts, a lack of supply response and lower energy prices and exchange rates, which have all conspired to lower the longer-term outlook for iron-ore. We cut our FY16 and FY17 prices by 3% and 10% and our FY18 and FY19 prices by 15%. We have removed our previous forecasts beyond FY20, reverting to our new long-term real price of US$65/t from CY21. However, when factoring in the lower A$/US$ exchange rate, the cuts to our iron-ore price forecasts are less severe. We are actually upgrading our FY16 forecast by 4% and only cut our FY17 estimate by 3%. However, our longer-term forecasts fall by 11%, although our real A$ longterm iron-ore price of A$87/t will see the major Australian iron-ore producers continue to generate strong returns from their respective businesses. Fig 1 Iron-ore cuts higher in the long term Y/E June FY16e FY17e FY18e FY19e Long-term (real) Iron-ore (US$/t)- old 54.25 58.00 66.25 72.50 80.00 Iron-ore (US$/t)- new 52.75 52.00 56.00 61.50 65.00 Change (%) (3%) (10%) (15%) (15%) (19%) Iron-ore (A$/t)- old 76.17 83.30 87.46 89.09 97.56 Iron-ore (A$/t)- new 79.20 80.62 79.72 82.83 86.67 Change (%) 4% (3%) (9%) (7%) (11%) On the demand side, 2015 has seen steel mills at their lowest profitability since 2007 and the highest steel inventories since we began our survey of this metric in 2011. Coupled together with our view of slowing global growth, we now see no crude steel production growth on a 5-year view. Fig 2 Changes to our quarterly iron-ore price forecasts Iron-ore 3Q2015E 4Q2015E 1Q2016E 2Q2016E 3Q2016E 4Q2016E 1Q2017E 2Q2017E Iron-ore (US$/t) - old 48.00 54.00 60.00 55.00 52.00 55.00 62.50 62.50 Iron-ore (US$/t) - new 54.00 52.00 55.00 50.00 50.00 50.00 54.00 54.00 Change 13% (4%) (8%) (9%) (4%) (9%) (14%) (14%) We now expect prices to stay above US$50/t in 3QCY15 and 4QCY15, but after seasonally rising in 1QCY15, we expect continued weakness out till 1H17. In A$ terms, the decline is expected to be less severe, with prices only expected to dip in the next 6 months but recover after the weak 3QCY15 as the A$ weakness outpaces the iron-ore price recovery. Fig 3 Near-term outlook for iron-ore is weak 160 Iron-ore (US$/t) - Spot Iron-ore (A$/t) - Spot 140 Iron-ore (US$/t) - Forecast Iron-ore (A$/t) - Forecast 120 100 80 60 40 Source: IRESS, Macquarie Research, September 2015 24 September 2015 2
However, we note that the weakness in iron-ore is expected to be longer lived than previously thought. With a weaker overall demand and falling currencies allowing costs to fall even further in US$ terms, we have made a 19% cut to our long-term iron ore price to US$65/tonne. Significantly, after factoring in the weaker A$/US$ exchange rates, our iron-ore price forecasts in A$ terms rise for FY16 and are shielded from bigger falls beyond that. Fig 4 Iron-ore price forecasts in A$ terms not hit as hard Y/E June FY16e FY17e FY18e FY19e Long-term Iron-ore (US$/t) (3%) (10%) (15%) (15%) (19%) A$/US$ (6%) (7%) (7%) (9%) (9%) Iron-ore (A$/t) 4% (3%) (9%) (7%) (11%) Key changes to exchange rate forecasts A contributor to the bearish outlook for commodity prices due to the negative impact on cost curves, weaker currencies provide some relief to the downgrades to our commodity outlook from an earnings perspective. Macquarie s Economics team recently pulled back its expectations for the key commodity currencies in their latest The Global Macro Outlook. Macquarie s economics team has made a number of changes to its exchange rate forecasts. Our A$/US$ forecasts have fallen by 6% in FY16, 8% in FY16 and 8-9% from then on. Fig 5 Changes to A$/US$ forecasts Y/E June FY16e FY17e FY18e FY19e Long-term AUSUSD - Old 0.71 0.70 0.76 0.81 0.82 AUD/USD - new 0.67 0.64 0.70 0.74 0.75 Change (6%) (8%) (8%) (9%) (9%) Break even prices at current spot prices We estimate all three mid-cap iron-ore producers are close to or operating above breakeven at spot prices. The additional capital being spent at Koolan Island results in MGX operating marginally below cash flow break even at spot prices. BCI and GRR should be generating positive cash flow at current spot iron-ore prices and exchange rates. Fig 6 Operating close to or above break-even at spot prices 70 FY16 FCF B/E Price (US$/t) FY17 FCF B/E Price (US$/t) Spot Ironore (US$/t) 60 50 40 30 20 10 0 MGX GRR BCI 24 September 2015 3
Price targets cut for the producers We keep our recommendations for the three mid-cap iron-ore producers unchanged after factoring in the updated iron-ore prices. BCI remains our preferred pick, offering strong cash backing, cash flow positive operations and a potential positive catalyst, should an expansion of Iron Valley go ahead. We note that for GRR our price target remains unchanged as the lower iron-ore price was largely offset by the cuts to our A$/US$ forecasts and changes to our long-term pellet premium assumptions. MGX s price target also remains unchanged as it is heavily dominated by its cash balance. Fig 7 No recommendation changes Company Code Old New Old New Change BC Iron BCI Outperform Outperform 0.40 0.35 (13%) Grange Resources GRR Neutral Neutral 0.11 0.11 0% Mount Gibson Iron MGX Neutral Neutral 0.25 0.25 0% We have made a number of changes to our earnings forecasts for the mid-cap iron-ore producers after incorporating the changes to our iron-ore and FX forecasts. We reduce our forecast loss for MGX by 31% for FY16, increase the loss by 21% in FY17 and swing from a small profit to a small loss in FY18. Similar to MGX, our earnings loss for BCI narrows for FY16 by 43%, but widens in FY17 and we swing from a small profit to a small loss for FY18. For GRR we have upgraded our CY15 earnings by 11%, keep our CY16 estimate largely unchanged but cut our CY17 and CY18 forecast by 18% and 37% respectively. Fig 8 Earnings changes largely irrelevant Company Code CY15e/FY15a CY16/FY16e CY17/FY17e CY18/FY18e Mount Gibson Iron MGX 31% (21%) nm Grange Resources GRR 11% 0% (18%) (37%) BC Iron BCI 43% nm nm 24 September 2015 4
Fig 9 MGX summary financials Mount Gibson Iron ASX: MGX Price: (A$ps) 0.18 Year end: Jun Rating: Neutral Up/dn TSR Mkt cap: (A$m) 196 Diluted shares (m) 1090.8 Target: 0.25 39% 39% ASSUMPTIONS FY13 FY14 FY15 FY16e FY17e FY18e ATTRIBUTABLE MINE OUTPUT FY13 FY14 FY15 FY16e FY17e FY18e Exchange Rate A$/US$ 1.03 0.92 0.84 0.67 0.64 0.70 Iron-ore Shipped (kt) Spot iron-ore (62% CIF) US$/t 128 122 71 53 52 56 Koolan Island kt 3,461 3,703 2,136 800 70 0 Tallering Peak kt 2,550 2,960 0 0 0 0 RATIO ANALYSIS FY13 FY14 FY15 FY16e FY17e FY18e Extension Hill kt 2,760 3,041 3,408 3,600 2,590 0 Diluted share capital m 1,089.0 1,090.8 1,090.8 1,090.8 1,090.8 1,090.8 Shine kt 0 0 0 0 0 0 EPS (diluted and pre sig. items) A 14.4 10.2-1.3-0.6-1.0-0.2 Other kt 0 0 0 0 0 0 P/E x 1.2x 1.8x -14.1x -30.3x -17.5x -75.9x Total kt 8,771 9,704 5,544 4,400 2,660 0 CFPS A 26.8 28.9 (7.8) 0.5 1.0 (0.5) Cash costs P/CF x 0.7x 0.6x -2.3x 37.2x 17.3x -33.7x C1 cash costs (A$/wmt) 53 49 49 52 58 nm DPS A 4.0 4.0 0.0 0.0 0.0 0.0 Dividend yield % 22.2% 22.2% 0.0% 0.0% 0.0% 0.0% AISC (A$/wmt) 82 77 76 77 83 nm Franking Level % 100% 100% 50% 0% 0% 0% Book value per share x 1.09 1.16 0.28 0.27 0.26 0.26 P/Book value x 0.2x 0.2x 0.6x 0.7x 0.7x 0.7x R.O.E. (pre sig items) % 13% 9% -5% -2% -4% -1% OPERATIONAL OUTLOOK R.O.A. (pre sig items) % 8% 9% -15% -5% -7% -4% Koolan Island (mt) Tallering Peak (mt) Interest Cover x -26.7x -14.9x 6.5x 2.0x 2.8x 1.4x 12.0 Extension Hill (mt) Shine (mt) EBITDA per share A$ps 0.29 0.32 0.01 0.00-0.01-0.01 EV/EBITDA x -0.5x -0.9x -11.9x -202.9x 7.9x 7.9x 10.0 8.0 EARNINGS FY13 FY14 FY15 FY16e FY17e FY18e Sales Revenue A$m 853 898 316 256 161 0 6.0 Other Revenue A$m 0 0 0 0 0 0 Total Revenue A$m 853 898 316 256 161 0 Operating Costs A$m (504) (527) (272) (243) (162) 0 4.0 Operational EBITDA A$m 349 371 44 13 (1) 0 Exploration Expense/Write-offs A$m (0) (0) (1) 0 0 0 2.0 Corporate & Other Costs A$m (30) (26) (31) (12) (12) (13) EBITDA A$m 319 344 11 1 (14) (13) 0.0 D&A A$m (195) (197) (71) (19) (11) 0 EBIT A$m 124 147 (60) (18) (25) (13) Net Interest A$m 5 10 9 9 9 9 RESERVES AND RESOURCES (ATTRIBUTABLE) Profit Before Tax A$m 128 157 (51) (9) (16) (4) Iron-ore reserves Tax Expense A$m 29 (46) 37 3 5 1 Project Mt Fe SiO2 Al2O3 P S Minorities A$m 0 0 0 0 0 0 Koolan Island 0.9 59.9% 13.3% 0.4% 0.01% Adjusted NPAT A$m 157 111 (14) (6) (11) (3) Tallering Peak 0.0 Significant Items (post tax) A$m 0 (14) (898) 0 0 0 Extension Hill 6.2 58.2% 6.8% 2.2% 0.08% Reported NPAT A$m 157 96 (911) (6) (11) (3) Shine Total 7.1 58.4% 7.6% 2.0% 0.07% CASHFLOW FY13 FY14 FY15 FY16e FY17e FY18e Net Profit A$m 157 96 (911) (6) (11) (3) Iron-ore resources Interest/Tax/D&A A$m 112 185 40 14 3 (3) Project Mt Fe SiO2 Al2O3 P S Working Capital/other A$m 22 34 787 (2) 20 0 Koolan Island 61.6 62.9% 8.4% 0.8% 0.01% Net Operating Cashflow A$m 292 316 (85) 5 11 (6) Tallering Peak 1.6 57.9% 11.1% 2.2% 0.07% Capex A$m (146) (117) (50) (29) (12) (4) Extension Hill 15.8 58.2% 7.8% 1.9% 0.07% Investments A$m 0 (12) 0 0 0 0 Shine 15.9 58.1% 9.6% 1.5% 0.07% Sale of PPE and Other A$m 0 0 0 0 0 0 Total 94.9 61.2% 8.6% 1.1% 0.0% Free cash flow A$m 146 186 (134) (24) (1) (10) Dividends Paid A$m (40) (22) (44) 0 0 0 Debt A$m (22) (20) (7) (1) (1) 0 Equity Issuance A$m 0 0 0 0 0 0 Other A$m 0 0 0 0 0 0 Net Financing Cashflow A$m (62) (41) (50) (1) (1) 0 Net change in cash A$m 84 145 (185) (26) (2) (10) EQUITY DCF VALUATION BALANCE SHEET FY13 FY14 FY15 FY16e FY17e FY18e Projects A$m A$ps Cash A$m 376 520 334 308 306 297 Koolan Island (14) (0.01) PP&E & Mine Development A$m 909 879 35 45 46 50 Tallering Peak 0 0.00 Exploration A$m 1 22 3 5 7 9 Extension Hill (11) (0.01) Total Assets A$m 1,555 1,603 411 399 374 356 Shine 0 0.00 Debt A$m 28 9 3 1 0 0 Undeveloped Resources 0 0.00 Total Liabilities A$m 373 341 106 99 86 70 Unpaid capital 0 0.00 Total Net Assets / Equity A$m 1,182 1,262 306 299 288 285 Corporate/forwards (21) (0.02) Net Debt / (Cash) A$m (348) (510) (331) (307) (306) (297) Net cash (debt) 319 0.29 Gearing (net debt/(nd + equity)) % (42%) (68%) 1,289% 3,856% 1,655% 2,625% Net Equity Value (@ 11% WACC) 273 0.25 Gearing (net debt/equity) % (29%) (40%) (108%) (103%) (106%) (104%) Price Target (1x NPV) 0.25 Source: MGX, Macquarie Research, September 2015 24 September 2015 5
Fig 9 GRR summary financials Grange Resources ASX: GRR Price: (A$ps) 0.11 Year end: Dec Rating: Neutral Up/dn TSR Mkt cap: (A$m) 127 Diluted shares (m) 1158.1 Target: 0.11 0% 9% ASSUMPTIONS CY13 CY14 CY15e CY16e CY17e CY18e CY19e ATTRIBUTABLE MINE OUTPUT CY13 CY14 CY15e CY16e CY17e CY18e CY19e Exchange Rate A$/US$ 0.97 0.90 0.74 0.63 0.67 0.72 0.75 Concentrate produced Spot iron-ore (62% CIF) US$/t 135 97 57 51 54 58 65 Savage River kt 1,955 2,626 2,520 2,531 2,690 2,702 2,702 Southdown kt 0 0 0 0 0 0 0 RATIO ANALYSIS CY13 CY14 CY15e CY16e CY17e CY18e CY19e Total kt 1,955 2,626 2,520 2,531 2,690 2,702 2,702 Diluted share capital m 1,158.1 1,158.1 1,158.1 1,158.1 1,158.1 1,158.1 1,158.1 Pellets produced EPS (diluted and pre sig. items) A 1.8 6.6 4.5 3.7 2.9 2.1 1.7 Savage River kt 1,916 2,341 2,475 2,531 2,690 2,702 2,702 P/E x 6.2x 1.7x 2.5x 3.0x 3.8x 5.4x 6.4x Southdown kt 0 0 0 0 0 0 0 CFPS A 10.0 15.3 7.3 6.6 6.2 5.5 5.3 Total kt 1,916 2,341 2,475 2,531 2,690 2,702 2,702 P/CF x 1.1x 0.7x 1.5x 1.7x 1.8x 2.0x 2.1x Cash costs DPS A 3.0 1.0 1.0 1.0 1.0 1.0 1.0 Savage River (US$/t) 74 46 30 32 35 39 44 Dividend yield % 27.3% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% Realised price (US$/t) 141 111 67 61 62 65 70 Franking Level % 0% 0% 0% 0% 0% 0% 0% Book value per share x 0.65 0.46 0.40 0.43 0.45 0.46 0.47 P/Book value x 0.2x 0.2x 0.3x 0.3x 0.2x 0.2x 0.2x R.O.E. (pre sig items) % 3% 14% 11% 9% 7% 4% 4% OPERATIONAL OUTLOOK R.O.A. (pre sig items) % 3% 15% 13% 10% 7% 5% 4% Interest Cover x -5.2x -21.6x -25.1x -13.0x -10.2x -8.1x -8.6x 3.0 Savage River (mt) Cash costs (US$/t) 140 EBITDA per share A$ps 0.11 0.13 0.09 0.08 0.07 0.06 0.06 EV/EBITDA x 0.1x -0.2x -0.2x -0.3x -0.2x 0.1x 0.4x 2.5 120 100 2.0 EARNINGS CY13 CY14 CY15e CY16e CY17e CY18e CY19e 80 Sales Revenue A$m 281 297 219 236 244 236 244 1.5 Other Revenue A$m 1 0 0 0 0 0 0 60 Total Revenue A$m 282 297 219 236 244 236 244 1.0 Operating Costs A$m (154) (135) (106) (134) (151) (155) (167) 40 Operational EBITDA A$m 128 163 113 102 94 81 78 Exploration Expense/Write-offs A$m 0 (2) (1) 0 0 0 0 0.5 20 Corporate & Other Costs A$m (5) (5) (5) (7) (7) (7) (8) EBITDA A$m 124 156 108 95 86 74 70 0.0 0 D&A A$m (98) (59) (35) (39) (42) (44) (45) EBIT A$m 26 97 72 56 44 30 25 Net Interest A$m 5 4 3 4 4 4 3 RESERVES AND RESOURCES (ATTRIBUTABLE) Profit Before Tax A$m 31 101 75 61 48 34 28 Iron-ore reserves Tax Expense A$m (10) (25) (23) (18) (15) (10) (9) Project Mt % DTR Minorities A$m 0 0 0 0 0 0 0 Savage River 109 52.1% Adjusted NPAT A$m 21 77 52 42 34 24 20 Southdown 397 35.7% Significant Items (post tax) A$m 5 (187) (109) 0 0 0 0 Total 506 39.2% Reported NPAT A$m 26 (110) (57) 42 34 24 20 Iron-ore resources Project Mt % DTR CASHFLOW CY13 CY14 CY15e CY16e CY17e CY18e CY19e Savage River 344 51.3% Net Profit A$m 26 (110) (57) 42 34 24 20 Southdown 1,257 33.8% Interest/Tax/D&A A$m 109 86 36 36 38 40 42 Long Plains 108 35.2% Working Capital/other A$m (18) 201 105 (2) (0) 0 (1) Total 1,708 37.4% Net Operating Cashflow A$m 116 177 84 77 72 64 61 Capex A$m (95) (135) (76) (58) (76) (78) (71) Investments A$m 0 0 0 0 0 0 0 Sale of PPE and Other A$m 0 0 0 0 0 0 0 Free cash flow A$m 21 42 8 19 (4) (14) (10) Dividends Paid A$m (23) (23) (12) (12) (12) (12) (12) Debt A$m (16) (27) 14 0 0 0 0 Equity Issuance A$m 0 0 0 0 0 0 0 Other A$m 0 0 0 0 0 0 0 Net Financing Cashflow A$m (39) (50) 2 (12) (12) (12) (12) Net change in cash A$m (18) (9) 10 7 (16) (26) (22) BALANCE SHEET CY13 CY14 CY15e CY16e CY17e CY18e CY19e EQUITY DCF VALUATION Cash A$m 160 154 168 175 159 133 111 Projects A$m A$ps PP&E & Mine Development A$m 534 322 175 195 228 263 309 Savage River 5 0.00 Exploration A$m 115 0 1 3 5 7 9 Southdown 0 0.00 Total Assets A$m 909 628 554 588 607 607 601 Undeveloped Resources 1 0.00 Debt A$m 47 1 14 14 14 14 14 Unpaid capital 0 0.00 Total Liabilities A$m 160 93 87 90 87 75 61 Corporate/forwards (18) (0.02) Total Net Assets / Equity A$m 749 535 467 498 520 532 540 Net cash (debt) 144 0.12 Net Debt / (Cash) A$m (112) (153) (153) (160) (145) (119) (97) Net Equity Value (@ 14% WACC) 132 0.11 Gearing (net debt/(nd + equity)) % (18%) (40%) (49%) (48%) (39%) (29%) (22%) Price Target (1x NPV) 0.11 Gearing (net debt/equity) % (15%) (29%) (33%) (32%) (28%) (22%) (18%) Source: GRR, Macquarie Research, September 2015 24 September 2015 6
Fig 10 BCI summary financials BC Iron ASX: BCI Price: (A$ps) 0.24 Year end: Jun Rating: Outperform Up/dn TSR Mkt cap: (A$m) 47 Diluted shares (m) 196.2 Target: 0.35 46% 46% ASSUMPTIONS FY13 FY14 FY15 FY16e FY17e FY18e FY19e ATTRIBUTABLE MINE OUTPUT FY13 FY14 FY15 FY16e FY17e FY18e FY19e Exchange Rate A$/US$ 1.03 0.92 0.84 0.67 0.64 0.70 0.74 Iron-ore Mined (kt) - NJV 100% Spot iron-ore (62% CIF) (US$/t) 128 122 71 53 52 56 62 Nullagine DSO kt 5,092 5,653 5,880 5,000 5,000 5,000 5,000 Spot iron-ore (62% CIF) (A$/t) 124 133 85 79 81 81 83 Nullagine Low-grade kt 0 0 0 0 0 0 0 RATIO ANALYSIS FY13 FY14 FY15 FY16e FY17e FY18e FY19e Total kt 5,092 5,653 5,880 5,000 5,000 5,000 5,000 Diluted share capital m 113.8 123.8 174.8 196.5 196.5 196.5 196.5 Iron-ore shipped (kt) - NJV 100% EPS (diluted and pre sig. items) A 62.7 64.3 7.1-2.4-3.1-6.1-11.4 Nullagine DSO kt 5,090 5,792 5,250 5,000 5,000 5,000 5,000 P/E x 0.4x 0.4x 3.4x -10.1x -7.8x -4.0x -2.1x Nullagine Low-grade kt 0 0 0 0 0 0 0 CFPS A 72.6 115.7 (21.6) 6.6 0.0 2.1 (5.8) Total kt 5,090 5,792 5,250 5,000 5,000 5,000 5,000 P/CF x 0.3x 0.2x -1.1x 3.6x 1475.8x 11.5x -4.1x Iron-ore Mined (kt) - BCI share DPS A 35.0 32.0 0.0 0.0 0.0 0.0 0.0 Nullagine DSO kt 3,182 4,240 4,410 3,750 3,750 3,750 3,750 Dividend yield % 145.8% 133.3% 0.0% 0.0% 0.0% 0.0% 0.0% Nullagine Low-grade kt 0 0 0 0 0 0 0 Franking Level % 100% 100% 0% 0% 0% 0% 0% Total kt 3,182 4,240 4,410 3,750 3,750 3,750 3,750 Book value per share x 1.91 1.90 0.91 0.79 0.76 0.70 0.58 Iron-ore shipped (kt) - BCI share P/Book value x 0.1x 0.1x 0.3x 0.3x 0.3x 0.3x 0.4x Nullagine DSO kt 3,181 4,344 3,938 3,750 3,750 3,750 3,750 R.O.E. (pre sig items) % 33% 34% 8% -3% -4% -9% -20% Nullagine Low-grade kt 0 0 0 0 0 0 0 R.O.A. (pre sig items) % 22% 30% -12% -4% -5% -10% -20% Total kt 3,181 4,344 3,938 3,750 3,750 3,750 3,750 Interest Cover x 61.3x -1870.2x -35.6x 4.2x 5.9x 11.4x 25.2x Iron-ore shipped (kt) - BCI share EBITDA per share A$ps 1.01 1.21-0.02 0.05 0.05 0.01-0.06 Buckland kt 0 0 0 0 0 0 0 EV/EBITDA x 0.1x -0.4x 5.1x -1.4x -0.8x -2.3x -1.2x Total kt 0 0 0 0 0 0 0 Source: BCI, Macquarie Research, September 2015 Cash costs C1 Cash Costs (FOB) (A$/wmt) 49 52 53 46 47 48 49 EARNINGS FY13 FY14 FY15 FY16e FY17e FY18e FY19e AISC (FOB) (A$/wmt) 69 74 68 61 62 63 65 Sales Revenue A$m 324 466 278 244 250 248 243 Cash costs (CFR 62% Fe) (US$/dmt) 93 89 77 55 53 59 64 Other Revenue A$m 1 1 1 0 0 0 0 Total Revenue A$m 325 467 279 244 250 248 243 OPERATIONAL OUTLOOK Operating Costs A$m (202) (308) (261) (218) (224) (230) (238) Operational EBITDA A$m 123 159 17 27 26 19 5 Exploration Expense/Write-offs A$m 0 0 (4) (4) (4) (4) (4) Corporate & Other Costs A$m (9) (9) (16) (12) (12) (13) (13) EBITDA A$m 115 150 (3) 11 9 2 (12) D&A A$m (22) (34) (29) (19) (20) (20) (21) EBIT A$m 93 116 (32) (9) (10) (19) (33) Net Interest A$m (2) 0 (1) 2 2 2 1 Profit Before Tax A$m 91 116 (33) (7) (9) (17) (32) Tax Expense A$m (20) (36) 45 2 3 5 10 Minorities A$m 0 0 0 0 0 0 0 Adjusted NPAT A$m 71 80 12 (5) (6) (12) (22) Significant Items (post tax) A$m (23) (6) (171) 0 0 0 0 Reported NPAT A$m 49 74 (158) (5) (6) (12) (22) CASHFLOW FY13 FY14 FY15 FY16e FY17e FY18e FY19e RESERVES AND RESOURCES (ATTRIBUTABLE) Net Profit A$m 49 74 (158) (5) (6) (12) (22) Iron-ore reserves Interest/Tax/D&A A$m 32 28 (18) 17 17 15 11 Project Mt Fe CaFe SiO2 Al2O3 P LOI Working Capital/other A$m 2 42 139 0 (11) 1 (0) Nullagine DSO 21 57.0% 64.8% 3.0% 2.0% 0.01% 12.1% Net Operating Cashflow A$m 83 143 (38) 13 0 4 (11) Nullagine BSO 5 54.0% 61.7% 4.3% 3.0% 0.02% 12.5% Capex A$m (141) (15) (7) (12) (8) (8) (7) Iron Valley 130 58.9% 63.4% 4.8% 3.0% 0.2% 7.1% Investments A$m (6) 0 0 0 0 0 0 Buckland 134 57.6% 62.6% 6.4% 2.4% 0.15% 8.0% Sale of PPE and Other A$m 0 0 24 0 0 0 0 Total 290 57.1% 61.9% 5.4% 2.6% 0.15% 7.7% Free cash flow A$m (64) 128 (21) 1 (8) (4) (19) Iron-ore resources Dividends Paid A$m (22) (58) (19) 0 0 0 0 Project Mt % Fe CaFe SiO2 Al2O3 P LOI Debt A$m 67 (52) (58) (6) 0 0 0 Nullagine DSO 31 57.1% 64.7% 3.2% 2.2% 0.02% 11.8% Equity Issuance A$m 56 2 0 0 0 0 0 Nullagine CID 92 52.8% 60.0% 5.6% 4.5% 0.02% 11.9% Other A$m 0 0 0 0 0 0 0 Iron Valley 247 58.4% 62.8% 5.3% 3.2% 0.2% 7.0% Net Financing Cashflow A$m 101 (108) (77) (6) 0 0 0 Buckland 276 56.5% 61.6% 8.0% 2.7% 0.15% 8.2% Net change in cash A$m 38 20 (97) (5) (8) (4) (19) Total 646 56.8% 62.0% 6.4% 3.1% 0.13% 8.5% Maitland River 1,106 30.4% 30.8% 44.0% 2.3% 0.1% 1.2% EQUITY DCF VALUATION BALANCE SHEET FY13 FY14 FY15 FY16e FY17e FY18e FY19e Projects A$m A$ps Cash A$m 138 159 68 62 55 51 32 Nullagine DSO 1 0.00 PP&E & Mine Development A$m 204 189 64 57 45 32 19 Nullagine BSO 0 0.00 Exploration A$m 10 12 4 4 4 4 4 Nullagine CID 1 0.01 Total Assets A$m 422 387 257 228 208 191 165 Iron Valley 32 0.16 Debt A$m 103 52 6 0 0 0 0 Buckland 0 0.00 Total Liabilities A$m 204 152 98 73 60 54 51 Undeveloped Resources 4 0.02 Total Net Assets / Equity A$m 217 235 159 155 149 137 114 Unpaid capital 0 0.00 Net Debt / (Cash) A$m (35) (107) (61) (62) (55) (51) (32) Corporate/forwards (35) (0.18) Gearing (net debt/(nd + equity)) % (19%) (83%) (63%) (67%) (58%) (59%) (39%) Net cash (debt) 66 0.34 Gearing (net debt/equity) % (16%) (45%) (39%) (40%) (37%) (37%) (28%) Net Equity Value (@ 12% WACC) 68 0.35 Price Target (1x NPV) 0.35 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Nullagine DSO (mt) Buckland (mt) Cash costs (CFR 62% Fe) (US$/t) Nullagine Low-grade (mt) Spot iron-ore (62% CIF) (US$/t) FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e 180 160 140 120 100 80 60 40 20 0 24 September 2015 7
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non-recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2015 AU/NZ Asia RSA USA CA EUR Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients) Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients) Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients) BCI AU vs Small Ordinaries, & rec history MGX AU vs Small Ordinaries, & rec history GRR AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, September 2015 12-month target price methodology BCI AU: A$0.35 based on a DCF methodology MGX AU: A$0.25 based on a DCF methodology GRR AU: A$0.11 based on a DCF methodology Company-specific disclosures: MGX AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Mount Gibson Iron Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Target price risk disclosures: BCI AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. The iron ore price has shown weakness over the last few weeks and further steel destocking could put further pressure on iron ore prices. MGX AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. There has been a wholesale change in senior board directors and management over the last 18 months, as the minority shareholders APAC and Shougang have taken control of the Board. There is risk of a conflict of interest as these shareholders are also major customers. GRR AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. The company receives revenue in US$ and incurs cost in A$, making it susceptible to exchange rate risk. The recent report of a rock slide at GRR' Savage River operations highlights the operational risk. 24 September 2015 8
Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Macquarie Group 24 September 2015 9