back to square one: looking for value after market correction · 6 april equity 2018 extract from a...
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EQUITY
6 April 2018
Extract from a report
Metals & Mining Back to square one: looking for value after market correction Preferred stock
We are still constructive on the long-term sector outlook and raise some of
our commodity price assumptions, notably for copper and coal. However,
we see limited near-term upside in the commodity complex after a two-
year rally and now expect momentum in equities to slow. Seeking shelter
in value and rerating potential, we move from Hold to Buy on BHP (TP
£14.04=>£16.00), stick to Glencore as our top pick, and downgrade Anglo
American from Buy to Hold on price performance.
China slowdown vs global growth The synchronised expansion of the world economy
lends support to commodity markets, but China remains an overpowering influence on
demand and prices. China entered 2018 on a high note, but SG’s economist think this
strong start could prove to be a high-water mark with momentum slowing ahead. This
would weigh on commodities and leave the stock market short of positive drivers.
Cautious on near-term momentum We reiterate our positive long-term stance on the
base metal complex but see limited near-term upside as favourable conditions appear to
be largely discounted by the market. We think bulk commodities have peaked, with prices
likely to stay under pressure in the near term as China in particular cools. That said, given
positive demand momentum in emerging markets, we are now more constructive on coal as
opposed to iron ore in view of low inventories and constrained supply.
Top picks Metals & Mining has materially outperformed the commodity complex over the
last two years, a rare divergence. As such, M&M stocks could face headwinds as the
commodities rally starts to cool. We therefore shift our emphasis to relative value and
rerating potential.
Key recommendations We reiterate Glencore as our top pick (Buy, £4.70=>£4.20), with
the lower TP reflecting GBP appreciation and an extra discount to account for DRC risks.
We downgrade Anglo American to Hold (£16.50=>£17.50) on share price growth, with the
stock being one of the best performers in the sector. We upgrade BHP Billiton to Buy
(£14.04=>£16.00) on stronger profit outlook and dividend potential. We prefer BHP
(19.5% TSR) to Anglo (13.6%) and Rio (Buy, £44.00=>£40.50, 16.7% TSR). We also
upgrade the TP of Vale ($4.86=>$13.50), reflecting the progress in deleveraging, strong
FCF and organic growth potential, but leave the Hold rating unchanged given the share
price gains.
MT NA, GLEN LN
Least preferred stock
VALE US
SG strategy team sector weighting
Overweight
Equity analyst
Sergey Donskoy +44 20 7762 4594 [email protected]
Equity analyst
Christian Georges +44 20 7762 5969 [email protected]
Key recommendations
Company Curr Reco Price Target 12m 12m Adj FCF Comments
(5/4/18) price f’cast div TSR yield 19e
Anglo American £ Hold 16.45 17.50 1.18 13.6% 9.2% Still undervalued vs SOP but rerating potential nearly exhausted
BHP Billiton £ Buy 14.1 16.00 0.85 19.5% 8.4% Stronger FCF yields vs RIO, more attractive commodity mix
Glencore £ Buy 3.59 4.20 0.18 22.2% 13.6% Undervalued; highest FCF yield and positive earnings momentum
Rio Tinto £ Buy 36.46 40.50 2.05 16.7% 6.8% Low-beta name to hold into volatility, but triggers are lacking
Vale $ Hold 13.07 13.50 0.88 11.0% 9.6% Falling debt, strong FCF despite high iron ore exposure
Societe Generale (“SG”) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that SG 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. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE ANALYST(S) CERTIFICATION(S),
IMPORTANT DISCLOSURES AND DISCLAIMERS. ALTERNATIVELY, VISIT OUR GLOBAL RESEARCH DISCLOSURE WEBSITE
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Contents
Investment summary .................................................................................................................... 4
Will commodities continue to rally in 2018? .................................................................................. 7
Equities: the momentum trade needs a rest ................................................................................. 7
Sector valuation ........................................................................................................................... 9
Commodity markets ................................................................................................................... 11
Iron ore and coal: not all bulks are alike ...................................................................................... 11
Base metals: bumping against the glass ceiling .......................................................................... 16
Anglo American.......................................................................................................................... 25
BHP Billiton plc .......................................................................................................................... 33
Glencore .................................................................................................................................... 48
Rio Tinto .................................................................................................................................... 57
Vale ........................................................................................................................................... 66
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Investment summary
We maintain a positive long-term outlook for the Metals and Mining sector as fundamentals
remain favourable for miners. The key positives are: 1) reduced ‘hard-landing’ risks in China as
a result of supply-side reforms, 2) solid demand growth for base metals (along with some
other commodities) and 3) the dearth of shovel-ready projects to fill the possible
supply-demand gap beyond the 3/4-year horizon.
We increase the LT price for copper by $500/t to $7,500/t to reflect the growing optimism
about incremental demand from electric vehicles and renewable energy. We also increase the
target for Australian coal (for thermal from $75/t to $80/t, for coking from $130/t to $150/t) in
recognition of the tight balance that could last longer than we previously thought given the
Chinese coal market reform and lack of new supply.
Against that, we stick to our view (outlined in our previous sector update) that the share price
momentum is likely to slow this year. The rally in base metal prices should take a pause and
bulk commodities will likely correct after two years of almost uninterrupted recovery. More
recently, the near-term outlook has been clouded by the US-China trade spat that risks
escalating into a trade war with ramifications for the global economy.
The rollercoaster performance of commodities and equities in 1Q18 have justified the
additional risk discounts introduced in our November report to account for the risk of higher
price volatility in the commodity complex. In light of recent developments, we increase the
volatility band from 10% to 15%, leading to slightly bigger discounts. We also take into
account the stronger GBP (up 8%) and an increase in UST yields (up c.50bp for 10-year
treasuries).
Summary: risk-adjustment factors and TPs
Anglo
American
BHP Billiton Glencore Rio Tinto Vale
Adjusted beta* (1) 1.55 1.16 1.43 1.28 1.55
Correction in metals basket (2) -15% -15% -15% -15% -15%
Estimated downside risk (3)=(1)*(2) -23% -17% -21% -19% -23%
Assumed probability (4) 50% 50% 50% 50% 50%
Adjusting factor (5) = 1-(3)*(4) 0.88 0.91 0.89 0.90 0.88
Currency £ £ £ £ $
Valuation before adjustment (6) 19.85 17.54 4.71 44.95 15.34
TP** = (5)* (6) 17.50 16.00 4.20 40.50 13.50
12m dividend 1.18 0.85 0.18 2.05 0.88
Market price (5/4/18) 16.45 14.10 3.59 36.46 13.07
TSR 13.6% 19.5% 22.2% 16.7% 11.0%
Recommendation Hold Buy Buy Buy Hold
Source: SG Cross Asset Research/Equity *With respect to S&P Industrial Metals Index **Rounded
We downgrade Anglo American from Buy to Hold with the new price target of £17.50 (up from
£16.50). Anglo American remains undervalued relative to peers and its SOP, but the last leg of
rerating may be slower in coming given the jittery sentiment.
We reiterate a Buy for Glencore (£4.70=>£4.20), which remains our top pick despite a TP cut.
Our view reflects strong FCF yields and undemanding multiples that leave room for re-rating.
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The company is the only diversified miner in our universe to show positive earnings
momentum over 2018-20e thanks to organic growth and advantageous commodity exposure.
For the moment further rerating seems to be constrained by political and regulatory risks in
the DRC and investors’ concerns about the convertibility of FCF into dividends in the context
of the company’s active M&A. We expect management to use the interim results
announcement (8 August) to ‘top up’ the annual dividend and thus address the latter issue.
We maintain a Buy rating for Rio Tinto despite a TP cut (£44.00=>£40.50) and raise BHP
Billiton to Buy on the back of increased earnings expectations (mostly reflecting commodity
price adjustments) with the TP up from £14.04 to £16.00. We prefer BHP over Rio as a
defensive exposure to the mining sector. This reflects more attractive valuation multiples and
FCF yields, as well as stronger revenue diversification with more advantageous exposure to
bulk commodities and possibly a safer relative position in oil (especially in the context of the
planned shale divestment). In this context, our dividend estimates (at 80% of FCF in the
future) translate into a more attractive yield.
We increase our TP for Vale significantly ($4.86=>$13.5) after a thorough review of the
valuation model but maintain the stock at Hold since last year’s strong share price
performance is already discounting much of the improved conditions in our view. Consensus
may fail to discount the potential for stronger dividends (now that the official dividend policy is
a minimum 30% of EBITDA), but we believe this is largely offset by significant share overhang
from a potential reduction of some core shareholder positions. We think that the iron ore price
average should remain around $60/t, but momentum is negative near term. Hence, although
we believe that Vale shares will ultimately deserve undiscounted valuation multiples relative to
leading peers, it remains our least favourite stock for the time being.
Diversified miners – SG target prices relative to the market Diversified miners – adjusted FCF yields in 2019e
Source: SG Cross Asset Research/Equity *Unadjusted valuation = new TP before valuation
discount to reflect near-term risks
Source: SG Cross Asset Research/Equity
50%
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Anglo American
BHP Glencore Rio Tinto Vale
12m range Market price Unadjusted v aluation* TP
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Anglo American
BHP Glencore Rio Tinto Vale
Base case Spot prices
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Metals & Mining sector peer group valuation
Bbg Ticker Market cap P/E EV/EBITDA Net debt/
EBITDA
$m 2018e 2019e 2018e 2019e 2017e
Diversified miners
BHP Billiton* BLT LN 112,208 13.1 13.6 5.4 5.5 0.6
Rio Tinto* RIO LN 90,934 11.2 12.7 5.7 6.2 0.2
Glencore* GLEN LN 72,417 10.9 9.9 5.8 5.2 0.7
Anglo American* AAL LN 29,749 8.3 10.3 4.4 5.0 0.5
Vale* VALE US 68,434 9.4 10.0 5.2 5.4 1.2
Teck Resources TECK US 15,288 7.3 9.4 3.9 4.3 0.4
South32 S32 LN 13,103 11.6 12.7 4.7 4.7 (0.9)
Average diversified 10.3 11.2 5.0 5.2 0.4
Copper
Antofagasta ANTO LN 12,841 15.2 14.5 5.6 5.2 0.1
KGHM KGH PW 5,261 6.1 6.0 3.8 3.6 0.9
Freeport-Mcmoran FCX US 26,220 8.5 13.8 4.3 5.7 0.6
Southern Copper SCCO US 43,359 21.6 20.2 11.3 10.5 1.0
First Quantum FM CN 9,711 15.2 10.9 8.1 5.8 2.7
Average copper 13.3 13.1 6.6 6.2 1.1
Aluminium
UC RUSAL* 486 HK 9,001 4.9 4.6 5.6 5.1 2.8
Norsk Hydro NHY NO 13,558 11.2 10.0 5.1 4.5 0.2
Alcoa AA US 11,186 13.3 12.5 4.2 4.1 0.0
Century Aluminium CENX US 1,579 18.4 7.9 7.1 3.8 0.6
Hindalco Industries HNDL IN 14,516 9.3 8.5 6.0 5.4 3.4
Chalco 2600 HK 25,147 48.4 18.2 9.4 4.7 5.4
Egypt Aluminium EGAL EY 822 8.7 10.2 6.1 6.2 (1.1)
Average aluminium 16.3 10.3 6.2 4.8 1.6
PGM
Anglo American Platinum AMS SJ 7,140 18.5 13.5 7.4 5.9 (0.0)
Impala Platinum IMP SJ 1,430 nm nm 4.7 2.9 0.7
Northam Platinum NHM SJ 1,477 neg neg 10.7 7.3 1.2
Average PGM 18.5 13.5 7.6 5.4 0.6
Iron ore
Kumba Iron Ore KIO SJ 7,394 11.1 12.4 5.4 6.0 (0.7)
Ferrexpo FXPO LN 1,963 6.8 7.6 4.9 5.0 0.2
Fortescue Metals FMG AU 10,315 8.5 8.6 3.7 3.7 0.7
CAP CAP CI 1,671 11.6 14.8 6.0 6.7 0.4
Cleveland Cliffs CLF US 2,144 5.8 7.7 5.8 6.9 2.2
Average iron ore 8.8 10.2 5.2 5.7 0.5
Coal
Exxaro Resources EXX SJ 3,336 6.9 7.7 6.2 6.8 0.7
Whitehaven Coal WHC AU 3,367 9.0 11.0 4.9 5.5 (0.3)
New Hope NHC AU 1,294 8.0 10.2 3.2 3.9 (1.2)
Adaro Energy ADRO IJ 4,712 8.4 8.5 3.6 3.4 (0.1)
Banpu BANPU TB 3,283 7.9 8.8 7.7 8.2 3.4
Warrior Coal HCC US 1,517 4.1 9.9 2.9 4.2 (0.0)
Average coal 7.4 9.4 4.7 5.3 0.4
Diamonds
Petra Diamonds PDL LN 502 12.2 5.0 4.2 3.0 2.1
Lucara Diamond Corp LUC CN 641 12.4 9.2 6.0 3.9 (0.6)
Alrosa ALRS RX 11,577 8.1 7.3 5.5 5.2 (0.3)
Stornoway Diamond Corp SWY CN 366 nm nm 6.2 6.1 2.0
Average diamonds 10.9 7.2 5.5 4.6 0.8
Source: Bloomberg, SG Cross Asset Research/Equity *Based on SG estimates; for Glencore net debt is adjusted for the value of RMI
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Will commodities continue to rally in 2018?
After two years of almost uninterrupted recovery in commodity prices, we expected to see
more volatility going into 2018 (see our November M&M sector report). Now that 1Q18 is
behind us, these expectations have been confirmed: the December rally in the S&P GSCI
Industrial Metals Index was followed by rollercoaster trading ending recently in a sharp
correction. As of today, the index sits at about the same levels we saw in early November,
although we note that equities have outperformed.
There is a whole range of opinions about the near-term price outlook for the base metal
complex. These include some forecasts for the rally to extend into 2018 drawing strength from
the synchronised momentum across the world’s biggest economies. However, we assume a
more cautious stance with our eyes fixed on China as it is still the main driving force behind
commodity demand.
We agree that commodities are supported by robust global macro but, at the same time, we
are not convinced that higher prices are on the cards on a 12-month horizon. We appreciate
the popular argument that the Fed’s rate-tightening cycles typically favour commodity prices,
but it is important to realise that this is not a cause-and-effect relationship. By the same token,
we do not see the weak dollar as a sure-fire prop to prices; instead, it could simply squeeze
miners’ profit margins.
Base metals vs Fed cycle Base metals vs US dollar
Source: Bloomberg, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity
In the near term, we assume that the base metal complex will stabilise near spot levels. We
see the possibility of upside risks prevailing after the recent correction but with the recovery
potential capped. We do not quite rule out gains in bulk raw materials, but we think that prices
are more likely to stay under pressure. That said, coal is more likely to surprise on the upside
with prices staying ‘stronger for longer’ on the back of low inventories and limited supply
growth in the environment of still-robust demand.
Equities: the momentum trade needs a rest
One observation in the wake of the recent market volatility is that the M&M sector has fared
much better than one might have expected. Key sector indices have printed practically in line
with the broader market benchmarks. This is remarkable given the long-established
perception of the sector as a high-beta play, which would normally mean a deeper sell-off.
Such a departure from the historical ‘norm’ reflects the progress made by miners in
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S&P GSCI Index Federal f unds rate (%, rhs)
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S&P GSCI Index USD v s basket of currencies (rhs)
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deleveraging their balance sheets and a substantial recovery in cash flows, together with the
improved long-term commodity price visibility.
Taking a long-term view, we are still more inclined to view the market situation as a ‘glass half
full’. The lower risk of a Chinese hard landing and the solid demand fundamentals (at least so
far as the base metals complex is concerned) reduce the probability of a serious correction.
The environment thus remains broadly favourable for M&M names, especially in the context of
rising dividend expectations that provide a cushion against market volatility (hence the drop in
market beta mentioned above).
We expect rising dividends to be a key supportive factor for the share prices of diversified
miners. Invariably, management remains focused on returning cash to shareholders which are
keen to obtain a reward for past support. In light of the solid long-term fundamentals, this
should bolster the confidence of yield-seeking investors to reinvest in the sector on a longer-
term horizon. As mentioned earlier, we believe that BHP Billiton could be the best vehicle for
this at present given the sector-low market beta.
On the other hand, we are not supporters of share buyback programmes, which we believe fail
to impact investor return in equal measure to dividends – especially now that share prices
have recovered from past trough levels. Rio’s recent programme finds some justification in the
accompanying assets’ sales, which impacted underlying asset value. Looking forward,
however, we support aggressive dividend payments at c.80% of free cash flow generation.
Metals & mining sector vs industrial metals Price performance to date: M&M sector vs industrial metals
Source: Bloomberg, SG Cross Asset Research/Equity *In US dollars Source: Bloomberg, SG Cross Asset Research/Equity *In US dollars
Still, caution is warranted in our view. Crucially, the sector has rarely performed strongly in the
absence of meaningful momentum in commodity prices – something we are not convinced of
on a 12m horizon. Taking the S&P GSCI industrial metals index as a yardstick, we note that
equities have already outperformed the commodity complex over the last two years (chart
above right). Although stocks may still have the potential to outperform, it is possibly the time
to turn more selective and look for names with greater re-rating potential.
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Sector valuation
Our base-case forecasts indicate almost no upside risk to 2018e EBITDA consensus. There is
more to the upside if commodity prices (especially those for bulk raw materials) remain near
spot levels for the next nine months; in that event, two companies would beat the EBITDA
consensus noticeably: BHP by 7% and Vale by 9%, although this is not exactly breathtaking
either. For us to see a bigger surprise, commodity prices need to bounce again and stabilise
at higher levels for the rest of the year.
2018e EBITDA outlook: SG vs consensus ($bn) Price performance: base metals vs bulk commodities
Source: Bloomberg, SG Cross Asset Research/Equity *Adjusted for difference between financial
and calendar year
Source: Bloomberg, SG Cross Asset Research/Equity *S&P GSCI industrial metals **ANZ Bank
China bulk commodities
Unlike the previous two cycles that ended in 2007-08 and 2010-11, this time the recovery is
not quite synchronised across the commodity space. While some of the base metals still have
room to appreciate over the long term (especially copper and aluminium), bulk commodities
are more likely to go south. We expect that the majority of diversified miners will see earnings
momentum stall this year, although some will fare better depending on their positioning within
the commodity space.
Metals & Mining sector: historical valuations* P/E ratio expansion: M&M sector vs broader market
Source: Bloomberg, SG Cross Asset Research/Equity *STOXX Europe 600 Basic Resources Source: Bloomberg, SG Cross Asset Research/Equity *STOXX Europe 600 Basic Resources
**Euro STOXX 50 ***S&P 5000
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Anglo American
BHP Billiton* Glencore Rio Tinto Vale
SGe - Base case SGe - Spot Bloomberg consensus
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When it comes to financial multiples, we would do well to remember their countercyclical
nature: they top out when commodity markets bottom and reach nadir when commodities are
about to peak. The sector is currently trading at a P/E of 11-12x (depending on the index and
the consensus used, which is not low in an historical context: the ratio averaged 10.6x and
8.9x in 2006-07 and 2010-11, respectively. One could argue that significant multiple
expansion is characteristic of the current bull market, but even in this context, the M&M sector
has been doing well (chart above right).
Diversified miners’ commodity exposure (2018e EBITDA) Diversified miners: FCF yield outlook*
Source: SG Cross Asset Research/Equity *Adjusted for difference between financial and
calendar year
Source: SG Cross Asset Research/Equity *2017 estimates based on average mkt cap for the year
These considerations do not necessarily mean that the rally in mining equities is over.
However, we think it could be taking a pause after two years of exceptional returns. Our view
is supported, in particular, by the risks to bulk raw materials that account for a high proportion
of earnings for most of the sector heavyweights (chart above left). Strong cash flow yields and
dividends should provide a cushion of sorts, making the sector less sensitive to volatility in
commodity markets. Nevertheless, we think it is the right time to take a more cautious stance
and focus on relative value.
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Anglo American
BHP Billiton* Glencore Rio Tinto Vale
Iron ore Coal Oil Base metals Other
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Anglo American
BHP Billiton* Glencore Rio Tinto Vale
2017 2018e 2019e
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Commodity markets
Main changes to SG commodity price assumptions ($/t)
2017 Spot 2018e 2019e 2020e 2021e 2022e
Base metals
Copper 6,172 6,691 6,839 7,000 7,300 7,500 7,500
Old 6,500 6,500 6,800 7,000 7,000
Change (%) 5% 8% 7% 7% 7%
Aluminium 1,968 1,969 2,076 2,100 2,150 2,175 2,200
Old 2,000 2,000 2,100 2,200 2,200
Change (%) 4% 5% 2% -1% 0%
Zinc 2,891 3,263 3,252 3,200 3,000 2,900 2,800
Old 3,500 3,300 3,000 2,800 2,800
Change (%) -7% -3% 0% 4% 0%
Nickel 10,414 13,100 13,441 14,000 15,000 16,000 16,000
Old 12,000 13,000 14,000 15,000 15,000
Change (%) 12% 8% 7% 7% 7%
Cobalt 55,826 89,050 74,211 55,000 50,000 50,000 50,000
Old 38,000 38,000 38,000 38,000 38,000
Change (%) 95% 45% 32% 32% 32%
Bulk raw materials
Iron ore (62% IODEX) 71 62 64 60 60 60 60
Old 60 60 60 60 60
Change (%) 6% 0% 0% 0% 0%
Thermal coal (Newcastle) 88 94 89 80 80 80 80
Old 78 75 75 75 75
Change (%) 15% 7% 7% 7% 7%
Hard coking coal (Australia) 189 199 196 150 150 150 150
Old 140 130 130 130 130
Change (%) 40% 15% 15% 15% 15%
Precious metals
Gold ($/oz) 1,258 1,329 1,343 1,350 1,350 1,350 1,350
Old 1,250 1,250 1,250 1,250 1,250
Change (%) 7% 8% 8% 8% 8%
Platinum ($/oz) 948 915 983 1,000 1,000 1,000 1,000
Old 920 920 920 920 920
Change (%) 7% 9% 9% 9% 9%
Palladium ($/0z) 870 935 1,009 1,150 1,200 1,250 1,300
Old 1,020 1,120 1,170 1,220 1,220
Change (%) -1% 3% 3% 2% 7%
Source: Bloomberg, SG Cross Asset Research/Equity
Iron ore and coal: not all bulks are alike
Although iron ore and coal prices both outperformed our expectations in recent months, we
reiterate our view that they are likely to go south from here. That said, taking a short-term
view, we prefer coal (especially thermal) over iron ore, reflecting stronger fundamentals that
we believe point to a higher risk of upside price surprise.
Coal: a glorious decline?
Coal markets delivered a major surprise last year with the average prices of Australian thermal
and coking benchmarks rising 33-34% to finish December near five-year highs. Three months
into 2018, we still do not see prices collapsing: even after the recent correction, they remain
high enough to incentivise some investment activity and M&A. The bigger correction in coking
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coal (down c.25% from its January peak, chart below left) was only enough to bring the
coking/thermal ratio in line with the last 12m average.
Australian coal benchmarks ($/t FOB) Australian coking coal exports (kt)
Source: Bloomberg, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity
Last year, the rally in coking coal unfolded against the backdrop of weather-induced supply
disruption in Australia in 1H17. This led to an 18mt drop in exports, only partly offset by higher
supply from the US and Russia. Demand was buoyed by the strong momentum in world pig
iron output, mainly driven by China (+4.6% yoy). The latter increased imports by 10mt,
reflecting limited availability of domestic coals in the wake of capacity cuts over 2016-17. This
was nothing short of a perfect storm and we expect the situation to normalise only gradually
over 2018.
The rally in thermal coal was more surprising given the meaningful yoy increase in seaborne
supply, which we estimate in the ballpark of 25-30mt (i.e. 3% of the market). As it happens,
however, demand turned out to be much stronger than many observers expected at the
beginning of the year. This was driven by leading Asian economies including South Korea,
Japan, Taiwan and China, which collectively ratcheted up purchases by around 30mt, with an
additional support from emerging market economies.
Going into 2018, demand momentum ex-China is likely to weaken but in all likelihood to
remain positive in the context of the sustained growth in emerging markets. The same is true
of supply although realistically, we think it is unlikely to increase by more than c.15mt. The
outlook therefore mainly depends on China, which suffered from the poor availability of
domestic coals during the last heating season when the situation was exacerbated by the cold
snap. As a result, inventories at the power stations of the six major coastal utilities fell to just
10 days of consumption in early February.
50%
100%
150%
200%
250%
300%
350%
400%
0
50
100
150
200
250
300
350
Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17
Thermal Coking Coking/Thermal (%, rhs)
6
8
10
12
14
16
18
20
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2014 2015 2016 2017
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China: apparent consumption of thermal coal* (mt) China: coal inventories (mt)
Source: NBS, Customs General Office, SG Cross Asset Research/Equity *3m moving average Source: SG Cross Asset Research/Equity *Including coking coal **Annualised
Although stock levels at utilities normalised in March, it is probably too soon to say that the
crunch is over. After two years of country-wide mine closures totalling c.400mt (10+% of 2015
output) and with hardly any new capacity commissioned, the industry must be operating close
to its limits in the situation of still growing demand. We believe that, in the worst case, it is
possible that China will increase imports by 25-30mt, bringing them back to 2014 levels,
which would keep the seaborne market tight through the year. In fact, even a modest increase
of 5-10mt could be enough to support prices near their current levels.
To be fair, we are not speaking of a sustained shortage that will last for years on end. There
will ultimately be a supply response, either from China or from elsewhere (or both). In parallel
to this, we will likely start to see coal-fired power capacity give way to renewable sources,
nuclear power and natural gas.
That said, it is possible that coal will be saved by its very ‘ugliness’: given the widespread
market perception of coal mines as potential ‘stranded assets’, practically no new ones are
being built in key exporting countries such as Australia and South Africa (with Indonesia being
increasingly inward-looking). Given the typical mine life of 20-25 years, half of the mines
currently in existence will likely face depletion risks within a decade. In some cases, closures
can be avoided by carrying mining activities over to an adjacent parcel of land at little cost.
However, for many mines such a solution will unlikely to be available.
We doubt that coal consumption will fall off the cliff so quickly. There is therefore a risk that
underinvestment in mining operations in the coming years will lead to a shortage of coal,
making its twilight years a comfortable period for miners, in contrast to popular perception.
Indeed, even in the (unlikely) ‘sustainable development’ scenario, the International Energy
Agency expects world trade in thermal coal to decline by only c.30% over 2016-25. Glencore
estimates that in the absence of investment in new capacity, seaborne supply could drop by
as much over the same period (charts below).
0
5
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30
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300
Dec '13 Dec '14 Dec '15 Dec '16 Dec '17
Domestic Import (rhs)
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350
400
Dec ’10 Dec ’11 Dec ’12 Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17
Total inv entories* Thermal coal imports**
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IEA thermal coal trade outlook Seaborne coal supply outlook without further investment (mt)
Source: IEA, SG Cross Asset Research/Equity Source: Glencore
In view of these considerations and taking into account the recent price resilience, we raise
our 2018 forecast for thermal coal (6,000kcal/kg FOB Australia) from $78/t to $89/t (almost flat
yoy) and increase our long-term target (starting from 2019) from $75/t to $80/t. We also
increase assumptions for hard coking coal to $196/t in 2018 and $150/t from $140/t and
$130/t respectively, largely based on the historical price correlation between the two
commodities. We note that even at these higher prices, investment in greenfield capacity may
remain problematic (especially in Australia).
Iron ore: rising stockpiles finally sent prices lower
For many years, rising inventories in Chinese ports had failed to quench the optimism of iron
ore traders, with the benchmark 62% ore price rising above $75/t in February before finally
correcting recently. One consideration that might explain this resilience is that, while growing
in absolute terms, inventories had until recently remained below records measured in weeks of
consumption as import volumes swelled. At the same time, strong profitability in steelmaking
has spurred demand for higher-quality ore (62+% iron content, low impurities) with
lower-grade material reportedly representing a growing share of the port-side stockpiles.
Principal iron ore benchmarks ($/t CFR China) Chinese port-side iron ore stocks
Source: Platts, SG Cross Asset Research/Equity Source: Steelhome, SG Cross Asset Research/Equity
0%
20%
40%
60%
80%
100%
120%
140%
160%
New policies Current policies Sustainable dev elopment
2016 2025 2040
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40
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160
Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17
62% Fe 65% Fe 58% Fe low alumina
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180
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Total (mt) Weeks of consumption (rhs)
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That said, we think that going forward it will be increasingly difficult for prices to resist gravity.
For one thing, inventories are finally beginning to loom large even in relative terms. This should
be seen in the context of rising seaborne supply, with January imports into China setting a
new record of 100mt. Taking into account the seasonality in shipments, we estimate that
Chinese imports could total 1,130mt this year, or c.55mt up yoy. Assuming stable domestic
mine output, we estimate that it would take about 765mt of pig iron output to absorb so much
supply, an increase of c.50mt yoy. We find this unlikely.
On the other hand, we believe profit margins in steelmaking (especially in China) can hardly
get much higher than they are already, while any meaningful decline (e.g. triggered by
weakening demand, especially from the construction sector) would put pressure on premiums
for higher-grade ore and eventually weigh on prices. With this in mind, we believe that the
balance of probabilities is in favour of iron ore prices staying low after contracting to almost
$60/t in recent weeks.
Steel inventories held by Chinese traders* (mt) China: steel price/raw materials cost spread
Source: Steelhome, SG Cross Asset Research/Equity *Largest urban centres Source: Platts, SG Cross Asset Research/Equity
On the other hand, we believe there is a low risk of the price falling through a certain
acceptable level for a prolonged period of time. This is due to the degree of supply-side
consolidation of the seaborne market and the increasing adoption of the ‘value over volume’
principle by the management of the leading producers. Based on historical trends, we
estimate such a level to be in the region of BRL130-140/t on an FOB basis (chart below right)
which would translate into c.$55/t in the current FX and freight rate environment.
World iron ore supply ex China (2017e) Iron ore price: Vale perspective (BRL/t)
Source: Worldsteel, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity
6
8
10
12
14
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18
20
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2018 2017 2016 2015
0
500
1,000
1,500
2,000
2,500
3,000
Dec ’10 Dec ’11 Dec ’12 Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17
HRC, CNY/t Rebar, CNY/t
23%
24%
18%
11%
24%Vale
Rio Tinto
BHP Billiton
Fortescue
Other
100
150
200
250
300
350
Dec ’11 Dec ’12 Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17
CFR China FOB Brazil
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We adjust our 2018 forecast, increasing the price to $64/t (from $60/t) reflecting the recent
strength, but we leave our forecast beyond the current year unchanged at $60/t.
Base metals: bumping against the glass ceiling
After two years of price gains, the base metal complex has largely recovered the ground lost
during the correction of 2015. Some metals, most notably zinc of the majors, are trading near
multi-year highs with even miners in the 4th quartile enjoying decent profitability. The recovery
looks even more impressive if we take into account US dollar depreciation, which has been
one of the key drivers for commodity prices. Viewed in Australian dollars, copper is now
trading just a tad below the previous cyclical highs of 2007-08 and 2010-11 (chart below
right).
Base metals complex price performance since 2013 LME copper price: different currencies
Source: Bloomberg, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity
At the very least, this picture demands a closer examination before one can confidently
reiterate a bullish stance. To make things more complicated, there is little similarity between
different parts of the base metal complex – each has its own specific drivers, although lack of
new supply has emerged as one common theme. In the following paragraphs, we take a brief
look at the main moving parts, starting with the one overriding factor: Chinese demand
outlook.
China: ‘hard landing’ odds are falling but so is growth momentum
The multitude of policy measures introduced by Chinese authorities over the past two years
has significantly reduced the risk of a meltdown. For this reason, the ‘hard landing’ has been
virtually taken off the table as a serious near-term threat. Capital controls have helped stabilise
the official FX reserves and boost the yuan exchange rate, currently up c.10% from the
December 2016 bottom. At the same time, long-delayed supply-side reforms helped arrest
capex growth and shore up company finances in critical sectors thus opening the doors to
long-overdue deleveraging of the corporate sector (including SOEs).
75
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85
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100
105
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150
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Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17
S&P GSCI Index USD v s major currencies (rhs)
0
2,000
4,000
6,000
8,000
10,000
12,000
Dec' 00 Dec' 05 Dec' 10 Dec' 15
USD per tonne AUD per tonne
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China currency and FX reserves dynamics Chinese industrial companies: capex and net debt* (CNYbn)
Source: Bloomberg, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity. *Top 50 member companies of Shanghai
Stock Exchange Industry Index since 2008; last reported net debt and 12m trailing capex.
As we explained in our previous report, a critically important aspect of the favourable
economic situation observed today is the degree of destocking achieved across a number of
sectors (e.g. steel, coalmining). Most importantly, the real estate market is one of the areas
where inventories remain near their lowest levels since 2010 and practically 50% down from
the 2014 peak. This seriously diminishes the risk of a sudden meltdown, making it easier for
authorities to adjust the policy mix.
The broad economic recovery has been reflected in a prolonged stretch of above-50 PMI
readings and a strong rebound in industrial profits, which surged 9.3% yoy to a record of
CNY7.5tn as illustrated in the charts below. Importantly, however, these very charts also point
at possible cracks in the ongoing recovery. One of the cautionary indicators is the recent
volatility in the new order components of manufacturing PMI despite the encouraging March
readings (chart below left).
China industrial PMI China: official and Caixin/Markit PMIs
Source: Bloomberg, SG Cross Asset Research Source: Bloomberg, SG Cross Asset Research/Equity
There was also a notable divergence between the official PMI and the alternative Caixin/Markit
survey, the latter falling to a four-month low (and falling short of the economist consensus) in
contrast to the recovery posted by the official metric. Such a divergence is not unprecedented
and does not necessarily mean that the official PMI is giving an overly glossy picture.
2,300
2,700
3,100
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3,900
4,3006.0
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7.0
2009 2010 2011 2012 2013 2014 2015 2016 2017
CNY/$ FX reserv es ($bn, rhs)
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Capex Net debt
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2010 2011 2012 2013 2014 2015 2016 2017
Composite Domestic orders Export orders
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Dec ’12 Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17
Federation of Logistics Caixin (rhs)
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However, it does mean elevated uncertainty and, as a result, a risk of further volatility in
economic data series, which could dampen sentiment.
One key area requiring close attention is the real estate market. Fortunately, there has been no
inventory build-up observed here so far. In fact, inventories of unsold housing in top urban
areas remain c.50% down from the 2014 peak. This should allay concerns about an imminent
threat of a slowdown in construction. That said, the Chinese real estate market entered 2018
with ebbing sales momentum and with apartment prices flat-lining after two years of growth
(chart below right). On balance, the near-term outlook for the construction sector is blurred: it
does not pose obvious risks, but likewise is unlikely to prove a growth driver.
China: housing inventory and sales China real estate market: key indicators
Source: NBS, China Real Estate Information, SG Cross Asset Research/Equity *Top urban areas,
m sqm **Nationwide, 3m moving average
Source: NBS, China Real Estate Information, SG Cross Asset Research/Equity *1st Tier cities,
newly built housing
It is not clear whether infrastructure investment will provide sufficient support to demand for
materials if residential construction slows. Last year, investments in the electric grid and
railway system plateaued. Furthermore, according to a recent statement from the China
Railway Corp., railways are going to receive even less money this year (no target for the grid
investment has yet been announced to the best of our knowledge). Given the increased focus
on fiscal discipline and lowering systemic financial risks, we are cautious about the
contribution to demand growth from government spending.
Aluminium: front-loaded rally may be out of steam for now
Before the latest correction, aluminium had been one of the best-performing base metals over
the past four years. It gained almost 30% from 2013 to end-2017 on falling inventories and the
optimism about structural reforms in the Chinese aluminium industry, along the same lines as
those carried out in other sectors.
Sentiment was strengthened by declining growth in Chinese aluminium exports, which after
rising for three consecutive years to 2015, have largely stabilised since (chart below right).
Although not nearly as impressive as the c.50% contraction in steel exports that occurred
over the same period, this was nonetheless a positive development, especially viewed through
the prism of c.3% annual growth in demand ex-China.
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2009 2010 2011 2012 2013 2014 2015 2016 2017
Real estate inv entory * Residential property sold y oy ** (rhs)
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30%
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50%
2010 2011 2012 2013 2014 2015 2016 2017
Housing starts Residential space sold Prices*
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LME aluminium price vs visible inventories Chinese exports: aluminium vs steel* (mt)
Source: Bloomberg, SG Cross Asset Research/Equity Source: Customs general administration, SG Cross Asset Research/Equity *6m moving average,
annualised
The resulting market tightening is manifesting itself in rising regional premiums (the recent
surge in the US reflects the imposition of import duties under Section 232 of the Trade
Expansion Act of 1962) and an elevated price spread between the LME and Shanghai, which
hit the multi-year high of $300/t in February before contracting recently on the back of the
broad derisking move across commodity markets (chart below right). The steady build-up of
inventories on SFE (+0.87mt since end-2016) is a cautionary indicator, although the warning
loses some of its potency in view of the depletion of LME warehouses.
Aluminium: regional premiums ($/t) Aluminium prices: LME vs Shanghai ($/t)
Source: Bloomberg, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity
Despite the positive long-term outlook, we think that the recent correction was not unjustified
and lower prices could be here to stay for some time. After all, the optimism about production
curtailments in China is about to be put to the test now that winter capacity restrictions are
being phased out. These were apparently of questionable efficiency anyway, given the steady
rise in inventories.
On the other hand, the squeeze in profitability of Chinese smelters (chart below left) suggests
that growth in stocks is not driven by traders’ optimism; rather it seems that the market is
having difficulty coping with the current level of supply. Unless demand growth picks up,
further accumulation of stockpiles could therefore lead to a bigger outpour of metal to export
markets. At the same time, higher prices stimulate restarts of the latent capacity outside China
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LME (mt) SFE (mt) LME price ($/t, rhs)
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Aluminium exports* Steel exports* (rhs)
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Dec' 15 Jun' 16 Dec' 16 Jun' 17 Dec' 17
Europe Japan US (rhs)
From blizzard to Trump...
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Dec' 13 Dec' 14 Dec' 15 Dec' 16 Dec' 17
LME SHE (ex VAT)
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(with the US producers being especially active in the wake of the new tariff protection) with the
risk of too much supply arriving too soon.
China: aluminium prices and smelter profitability (CNY/t) China: primary aluminium apparent demand
Source: Bloomberg, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity
With this in mind, we think that the $2,200+/t prices we saw in 1Q18 set the high-water mark
for the year. We expect prices to consolidate slightly above the spot levels in the coming
months averaging c.$2,075/t for the full year (a 5% increase yoy).
Copper: risk of supply disruptions to support prices
The main supporting factor for copper prices this year is the wave of labour contract
negotiations, primarily in Chile, with nearly 25% of world mine capacity exposed to the risk of
disruptions. To be fair, various companies have different track records for dealing with labour
disputes. The bulk of the capacity in question (2.2mt or 10-11% of the world total) is owned
by Chilean producers Codelco and Antofagasta (table below), which we think may be better
positioned to avoid serious disruptions. More serious risks may loom elsewhere, however, in
particular at Escondida (6% of world capacity), which last year witnessed one of the longest
strikes in the history of the industry, resulting in no agreement.
Copper: labour contract expiries in mines in 2018
Source: Industry reports, Company Sources, Metal Bulletin, Reuters, SG Cross Asset Research/Equity *Italics represent mines with multiple wage
negotiations in 2018
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Dec ’10 Dec ’11 Dec ’12 Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17
SFE spot SFE less cost of coal, alumina (rhs)
-5%
0%
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15%
20%
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30%
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Dec ’14 Jun ’15 Dec ’15 Jun ’16 Dec ’16 Jun ’17 Dec ’17
kt y oy
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Although we expect growth in mine output to overtake growth in demand this year, we cannot
rule out unforeseen developments on the supply side, which could tilt the market balance
towards a deficit. This should be seen in the context of the positive long-term demand outlook
(with vehicle electrification and a secular shift towards renewable sources of energy as key
drivers) and the relatively empty project pipeline with only a few significant mines under
construction or at the planning stage. This should prevent copper prices from sinking too low,
especially in 1H18, even if the demand does not impress.
On the other hand, the upside looks limited as well. Even taking into account the possibility of
disruptions, there is hardly any real risk of shortage of refined copper in 2018-19 (chart below
left). It is not only that mine capacity is expanding: the demand side does not look very
promising either. With China and the US drawing closer to a cyclical slowdown, means
demand momentum is likely to weaken this year and further into 2019 (chart below left).
Needless to say, China has an outsized importance here: from 2010 to 2017 the country
accounted for c.90% of the increase in global apparent demand (chart below right).
Copper market outlook to 2021 World refined copper demand 2010-17 (mt)
Source: Companies, ICSG, SG Cross Asset Research/Equity Source: ICSG, SG Cross Asset Research/Equity
As we already mentioned, we do not see serious near-term risks to the Chinese
macroeconomic outlook, not of the sort that would flare up fears of the ‘hard landing’ again.
Given China’s success in implementing the key supply-side reforms and taming currency
outflows, the government has breathing room to tackle structural issues even though long-
term success is not assured. However, this very task is likely to limit China’s ability to resort to
stimulating growth via fixed asset investment and residential construction. We expect Chinese
demand growth to slow from 2.6% last year towards 2% in 2018.
On the other hand, higher prices observed in January and February were likely approaching
levels sufficient to incentivise investment activity, which we see at c.$7,500/t, in the current FX
setting. Although this leaves meaningful room for prices to go higher, we do not think it likely
that prices will solidify above $7,000/t again this year. With this in mind, we expect copper
prices to average $6,800-6,850/t this year (minor upside to the spot levels) with volatility on
both sides. At the same time, we increase our long-term target price to $7,500/t from $7,000/t,
mainly reflecting the US dollar depreciation.
-1%
0%
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2%
3%
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5%
6%
7%
8%
9%
2011 2012 2013 2014 2015 2016 2017e2018e2019e2020e2021e
Ref ined demand (y oy , %) Ref ined supply (y oy , %)
Forecast
0 5 10 15 20 25
2010
China
Asia ex China
N America
Europe
Other
2017
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Zinc: risks of substitution, supply response are rising
On the face of it, zinc has the strongest fundamentals that fully justify its strong performance
to date. The forward curve remains in backwardation – in contrast to other principal metals –
indicating a continued shortage of physical metal. Such a conclusion is corroborated both by
the plummeting reported inventories standing at their lowest level since November 2008 (chart
below left) and the Chinese foreign trade data with a 0.48mt increase in zinc imports reported
last year (unwrought metal and zinc in concentrates).
Zinc inventories and prices China net imports of zinc (mt)
Source: Bloomberg, SG Cross Asset Research/Equity Source: Customs general office, SG Cross Asset Research/Equity
The situation is a boon for miners. The question is whether things could improve much from
here without risks piling up. One is that of zinc rationing by galvanizers which are tempted to
increase the usage of alloys with aluminium and/or magnesium allowing them to reduce the
thickness of coatings by half. Another is that of supply response, which has so far been muted
at best – reflecting some high-profile mine closures in recent years, including deliberate output
cuts by Glencore – but which can be back with vengeance if prices stay too high for too long.
World zinc mine supply (2016) China zinc ore output (kt)
Source: USGS, SG Cross Asset Research/Equity Source: WBMS, SG Cross Asset Research/Equity
The critical unknown is the situation in China, which accounts for nearly 40% of world mine
production (chart above left). Chinese zinc producers have struggled to keep pace with the
demand in recent years, initially because of the low metal prices and more recently as a result
of increasingly stringent pollution controls, which hit a large number of small-scale mines.
However, it would probably be optimistic to expect Chinese supply to stay inert forever,
0
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Dec ’07 Dec ’09 Dec ’11 Dec ’13 Dec ’15 Dec ’17
LME (mt) SFE (mt) LME price ($/t, rhs)
0.0
0.5
1.0
1.5
2.0
2.5
2010 2011 2012 2013 2014 2015 2016 2017
Unwrought metal Zinc in concentrate
38%
11%8%
6%
6%
5%
26%
China
Peru
Australia
US
Mexico
India
Other0
100
200
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400
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600
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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2014 2015 2016 2017
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especially in the very benign commodity price environment (Zinc prices at SFE are up c.70%
from the 2013 average).
According to the World Bureau of Metal Statistics (WBMS), Chinese mine output returned to
growth in 4Q17, rising 7% yoy after largely stagnating during the previous nine months. The
November reading was the highest since June 2014 and even though growth slowed
considerably in December (chart above right), it is more likely than not that we are going to
see positive momentum this year.
To be clear, we believe that the long-term price outlook for zinc remains favourable given the
lack of significant projects in the pipeline to augment supply ex-China beyond 2018 and the
steady demand growth of c.2% over 2018-22 (Wood Mackenzie analysis). For the moment,
however, we assume a cautious stance in anticipation of further supply developments,
assuming LME zinc prices will stabilise around $3,200/t for the rest of 2018 after touching
multi-year highs of $3,600/t at end-February 2018.
Nickel: upside for believers
Nickel beat our expectations YTD, reaching new highs in February with the LME price briefly
surpassing $14,000/t. Sentiment towards the metal continues to be supported by the
optimism about the battery sector and more recently by the weakening of the US dollar, which
has lost c.10% vs a basket of currencies since 2016. It is the latter consideration that leads us
to increase our price forecast for 2018-22, including the long-term target, to $16,000/t from
$15,000/t. In doing so, we remain on the cautious side, given that these price levels are far
from the highs achieved in 2010-11, let alone from the 2007 peak of $50,000+/t.
Can it be that we are too cautious? Nickel is trading some 10-15% below end-2014 levels,
while other major base metals have long surpassed them, suggesting room for a catch-up. On
the other hand, the long-term demand outlook, which is historically determined by the trends
in stainless steel consumption, has recently assumed a more exciting aspect with the
emergence of electric vehicles and expectations of explosive demand growth from battery
producers. According to some estimates (Vale, Glencore), incremental demand from the
battery sector could surpass 1mt by 2030, i.e. 50% of current global consumption.
Nickel price (LME) and inventories Nickel demand for the battery market (kt)
Source: Bloomberg, SG Cross Asset Research/Equity Source: Vale
0
5,000
10,000
15,000
20,000
25,000
30,000
0.0
0.1
0.2
0.3
0.4
0.5
0.6
Dec' 13 Dec' 14 Dec' 15 Dec' 16 Dec' 17
LME (mt) SFE (mt) Price ($/t, rhs)
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However, there are three reasons why we remain cautious:
First, nickel inventories are still plentiful with the combined LME and SFE stocks of c.360kt
or 17% of global demand. It is true that these stocks dropped by c.150kt from the highs
reached in early 2016, and they continue to decline at an annualised pace of about 250kt.
Nevertheless, their existence allays concerns about possible near-term shortages.
Second, supply may prove to be more elastic than we think. Although it will probably take
prices of $25,000+/t to justify investments in greenfield HPAL capacity, we believe that new
NPI plants could be economical to build with nickel above $10,000/t. The regulatory
environment in Indonesia and the Philippines poses risks to NPI as a long-term solution, but
given the political will, it could be a serious deflationary factor.
Finally, expectations of booming nickel demand are based on state-of-the-art battery
technologies, which will not necessarily stand the test of time as more money is spent on R&D
every year. With the phase of exceptional demand growth still being some years away, the
outlook for nickel may change substantially with one breakthrough discovery.
Given the above, we believe that our price forecast is reasonably optimistic, possibly with
upside risks prevailing at the back end of our forecast period. However, for the time being a
more bullish view does not seem fundamentally justified to us.
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Mining Rating downgrade United Kingdom @ Go to SG website
Anglo American Downgrading to Hold on share price performance despite SA optimism
Hold (from Buy) We raise our TP to £17.50 from £16.50 on the back of a lower cost of
capital and higher target multiple to capture improved sentiment on South
Africa. We nevertheless lower our earnings and FCF estimates beyond
2018. The stock having been one of the strongest gainers in the sector
over 2016-17, we see little room for continued outperformance; hence we
downgrade to Hold from Buy on valuation grounds.
FY17 results: earnings, leverage and dividends Underlying earnings missed SGe by
11%, but the company surprised on deleveraging with net debt $1.6bn below SGe on the
back of a $0.9bn WC reduction and a $0.6bn deferral in tax payments. Cash returns were
underwhelming, strictly in line with the dividend policy and significantly below SGe. We think,
however, that, barring a serious worsening of the commodity markets outlook, Anglo
American will be compelled to be more generous this year.
South Africa: staying put Management appears rather enthusiastic about recent changes
in South African politics, which we think renders the probability of Anglo American exiting the
country nil in the foreseeable future. Although financial markets largely share the optimism
today, a decision to stay would go against the wisdom of "selling on the trumpets", i.e.
pulling out when the going is good, and we think that investors may come to regret the
company’s decision not to dispose of the assets.
Still cheap but less alluring The stock looks cheap vs a synthetic valuation based on
peer multiples and the market prices of its listed subsidiaries. However, this observation
should be treated with more caution than before given the somewhat stretched valuation
multiples of Amplats and Kumba. Anglo American trades at a c.1% premium to BHP
Billiton on 2019e FCF yield, which does not offer much relative value, in our view.
South Africa optimism vs lower earnings Our TP is a 50:50 mix of an NPV and target
EV/EBITDA valuations, adjusted for a 12% risk discount (reflecting a 15% correction in the
commodity index on a 12m horizon). We lower our cost of capital assumption and
increase our target multiple to reflect positive developments in South African politics,
which more than offset the cut in our financial expectations beyond 2018. As a result, we
upgrade our TP by 6% but given a TSR of <15%, we downgrade to Hold.
Price 05/04/18 1,644.8p
12m target 1,750.0p
Upside to TP 6.4%
12m f'cast div 118p
12m TSR 13.6%
Main changes since last report Target (p) 1750.0 (1650.0)
EPS 18e ($) 2.73 (2.33) +17.2%
EPS 19e ($) 2.24 (2.33) -4.0%
EPS 20e ($) 2.43 nc new vs (old) nc: no change
Preferred stock
MT NA, GLEN LN
Least preferred stock
VALE US
SG strategy team sector weighting
Overweight
Share price performance
Source: SG Cross Asset Research/Equity Perf. (%) 1m 3m 12m ytd
Share -2.5 2.5 32.8 6.2
Rel. index* -2.4 6.9 30.2 8.9
Rel. sector** -0.9 12.8 27.8 14.2
* MSCI World ($) ** MSCI World Metals & Mining ($)
RIC AAL.L, Bloom AAL LN
52-week range 1,843-959
EV 18 ($m) 32,455
Mkt cap. (£m) 20,971
Free float (%) 85.5
No. shares o/s (m) 1275
Avg vol. 3m (No. shares) 5,678,046
Equity analyst
Sergey Donskoy +44 20 7762 4594 [email protected]
Equity analyst
Christian Georges +44 20 7762 5969 [email protected]
Financial data 12/17 12/18e 12/19e 12/20e Ratios 12/17 12/18e 12/19e 12/20e
Revenues ($bn) 26.2 27.1 25.8 26.5 P/E (x) 7.0 8.5 10.4 9.5
Rev. yoy growth (%) 22.8 3.3 -4.8 2.6 FCF yield (/EV) (%) 18.7 10.2 9.8 10.6
EBIT margin (%) 23.8 23.5 20.8 21.6 Dividend yield (%) 5.7 7.2 5.9 6.4
Rep. net inc. ($bn) 3.17 3.53 2.89 3.14 Price/book value (x) 1.00 1.17 1.13 1.06
EPS (adj.) ($) 2.53 2.73 2.24 2.43 EV/revenues (x) 1.04 1.20 1.23 1.15
EPS yoy growth (%) 48.9 7.9 -18.1 8.5 EV/EBIT (x) 4.36 5.10 5.90 5.34
Dividend/share ($) 1.02 1.66 1.36 1.48 EV/IC (x) 0.7 0.9 0.8 0.8
Dividend yoy growth (%) NA 62.9 -18.1 8.5 ROIC/WACC (x) 1.6 1.6 1.3 1.4
Payout (%) 40 61 61 61 Net Debt/EBITDA (x) 0.47 0.30 0.23 0.089
9
11
13
15
17
19
Apr Jun Aug Oct Dec Feb
Price
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Investment summary
Summary changes
(Hold, £17.50) vs (Buy, £16.50) 2018e 2019e
New Old % ch. Cons. SG vs cons. New Old % ch. Cons. SG vs cons.
Revenue ($m) 27,108 24,194 12% 26,630 2% 25,796 22,957 12% 25,618 1%
EBITDA ($m) 8,880 8,193 8% 9,022 -2% 7,905 8,006 -1% 7,843 1%
Underlying EPS ($) 2.73 2.33 17% 2.58 6% 2.24 2.33 -4% 2.12 5%
DPS ($) 1.66 1.41 18% 1.05 58% 1.36 1.65 -17% 0.97 41%
Source: Bloomberg, SG Cross Asset Research/Equity
Main changes
We upgrade our profit forecast for 2018 on the back of higher commodity price assumptions,
especially for iron ore and coal, with 7% and 15% increases in EBITDA and underlying
earnings, respectively. On the other hand, we lower our forecasts for 2019 and following
periods as we expect higher operating costs (reflecting the miss in 2017 results as well as the
weak US dollar, especially vs ZAR) to outweigh a stronger top line.
We also increase our capex forecast (+19% in 2018 and +33% in 2019) aligning it with the
latest management guidance, although our expectations remain below the middle of the range
beyond 2018. As a result, our FCF forecast for 2018 remains unchanged but we downgrade
expectations for 2019 and later years. However, we believe that the company will strengthen
its balance sheet vs our previous expectations on the back of the progress achieved last year.
Despite the downward adjustments to our profit and FCF forecasts beyond 2018 and a
strengthening GBP, we increase our TP to £17.50 from £16.50 reflecting the bigger-than-
expected debt reduction achieved last year and changes to the valuation methodology
discussed below (higher target EV/EBITDA, lower cost of capital). Nevertheless, with a TSR of
less than 15% (including 12m dividend of $1.7) we downgrade our recommendation to Hold.
Anglo American – changes to financial forecast
$m 2018e 2019e 2020e
New Old % ch. New Old % ch. New Old % ch.
Revenue 27,108 24,194 12% 25,796 22,957 12% 26,464 23,517 13%
EBITDA 8,880 8,193 8% 7,905 8,006 -1% 8,289 8,309 0%
Underlying earnings 3,531 3,027 17% 2,892 3,034 -5% 3,138 3,215 -2%
Capex 2,718 2,290 19% 2,773 2,084 33% 2,770 2,162 28%
FCF* 3,162 3,066 3% 2,728 3,113 -12% 2,848 3,218 -11%
Net debt** 2,933 5,048 -42% 2,105 3,591 -41% 1,037 2,539 -59%
DPS ($) 1.66 1.41 18% 1.36 1.65 -17% 1.48 1.75 -15%
Source: SG Cross Asset Research/Equity *Excluding WC changes, **Including derivatives
Main arguments for our recommendation
SG Equity Research view
The stock has been one of the best performing names in the sector over the past 12 months,
as well as since our previous sector update on 8 November. Nevertheless, it still appears
cheap compared to its synthetic SOP valuation based on peers’ multiples for Copper, Coal
and Diamond segments and market valuations for its listed subsidiaries Amplats and Kumba
(chart below right).
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That said, we are less convinced by this observation than before given the stretched
valuations of Amplats and (to a lesser extent) Kumba, especially in the context of the latest
ZAR appreciation. Indeed, we estimate that both names offer 2019 FCF yields of 3-4% (with
little if any organic growth), which look inconsistent with the relatively elevated P/E and
EV/EBITDA multiples.
Share price performance (last 12 months) Anglo American – valuation vs peer group
Source: Bloomberg, SG Cross Asset Research/Equity Source: Bloomberg, SG Cross Asset Research/Equity *Amplats **Kumba Iron Ore
The discount to the SOP can be seen as supportive of the idea that breaking up Anglo American
would potentially be a way to create value for shareholders (possibly by exploiting market
aberrations) but it does not necessarily mean that the stock is fundamentally undervalued.
In this light, a comparison with other diversified miners looks more relevant. We estimate that
after adjusting for the fair value of non-controlling interests, Anglo American is trading at a
2019e EV/EBITDA of 4.9x and P/E of 10.5x, representing respectively 10% and 14%
discounts to BHP Billiton (we assume prices of bulk commodities normalising next year and
hence prefer 2019 over 2018 for relative value analysis).
In FCF terms, which we increasingly prefer over other metrics, Anglo American offers a 1.6%
premium over BHP Billiton in 2018e but 0.9-1.0% in 2019-20e, which must be considered in
the context of the remaining difference in the credit quality of the two companies.
Anglo American vs Rio Tinto – current year EV/EBITDA* Anglo American vs Rio Tinto – FCF yield (%)
Source: SG Cross Asset Research/Equity *Historical multiples are based on average market cap
for the given year
Source: SG Cross Asset Research/Equity *Historical yields are based on average market cap for
the given year
-40%
-20%
0%
20%
40%
60%
80%
Apr ’17 Jun ’17 Aug ’17 Oct ’17 Dec ’17 Feb ’18 Apr ’18
AAL RIO BLT GLEN VALE
Weighted average
5
7
9
11
13
15
17
19
21
3 4 5 6 7 8
2018e P
/E
2018e EV/EBITDA
Anglo American
PGM*
Iron ore**
Copper
Coal
Diamonds
0
2
4
6
8
10
12
2012 2013 2014 2015 2016 2017 2018e 2019e
Anglo American (adjusted) BHP Billiton Rio Tinto
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2017 2018e 2019e 2020e 2021e 2022e
Anglo American BHP Billiton Rio Tinto
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Given higher country risks and somewhat lower asset quality, we do not think that such
discounts/spreads are sufficiently big for Anglo American to be genuinely attractive in relative
terms. That said, we admit that the stock could still be moving towards parity with Rio Tinto
on the back of improved sentiment towards South Africa in the wake of the recent political
changes in the country.
Dividends – The wrong type of caution
While the company’s 2017 results were largely in line with the consensus, they missed our
expectations by 4% and 11% on EBITDA and underlying earnings levels, respectively.
Unimpressive dividends were a bigger disappointment, however. Contrary to our
expectations, Anglo American declared a final dividend of only $0.54 per share, bringing the
total for the year to $1.02. This amounted to a 40% payout from the underlying earnings, in
strict keeping with the dividend policy but significantly below our forecasts (table below).
Anglo American – 2017 results vs expectations
$m 2017A 2017C A/C 2017SG A/SG
Revenue 28,650 27,189 5% 27,635 4%
EBITDA 8,823 8,794 0% 9,168 -4%
Platinum 866 633 37% 680 27%
Diamonds 1,435 1,374 4% 1,481 -3%
Copper 1,508 1,568 -4% 1,338 13%
Nickel 81 68 19% 65 24%
Iron ore 2,357 2,414 -2% 2,659 -11%
Coal 2,868 2,955 -3% 3,121 -8%
Other (292) (218) 34% (176) 66%
Underlying earnings 3,272 3,335 -2% 3,664 -11%
Underlying EPS ($) 2.57 2.58 0% 2.82 -9%
DPS ($) 1.02 1.05 -3% 1.70 -40%
Net debt 4,501 5,508 -18% 6,122 -26%
Source: Company, SG Cross Asset Research/Equity
This results in a rather unexciting dividend yield of 4% (based on the current share price),
which pales in comparison with the 12% FCF yield. Such frugality looks out of place given an
almost 50% reduction in net debt over the year (a positive surprise) and 0.5x net debt/EBITDA
ratio at end-December, in line with other major miners. The market seems to have shared our
disappointment, the share price correcting upon the announcement despite otherwise solid
results (although the stock regained the lost ground in later trading).
We believe that Anglo American will be more generous next time, possibly when 1H18 results
are announced on 26 July and almost certainly when the full-year financials are released next
year. Given the strong cash flows generated by the group (even taking into account the likely
correction in iron ore and coal prices), we believe that it can safely return at least 60% of the
underlying earnings – which would translate into a 6-7% dividend yield over 2018-22e – with
c.$1bn per year remaining for growth capex and/or share buybacks.
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Anglo American – 2018 FCF bridge ($bn) Anglo American – FCF generation and dividends ($bn)
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity *Excluding WC changes **Paid during the year
Bulky profits – The biggest coal play among diversified miners
Coal is the single biggest contributor to the company’s earnings with a 45+% share in 2018e,
followed by iron ore with a 20+% share. Even though we expect bulk commodities to
depreciate on a 12m horizon, they will in all likelihood remain the biggest revenue/profit drivers
for years to come (chart below left). Anglo American has arguably the strongest leverage to
coal among major diversified miners: a simultaneous 10% increase in LT prices for thermal
and coking coal means a c.10% increase in our NPV (chart below right), even more than for
Glencore and BHP – the world’s biggest producers of thermal and coking coal.
Anglo American – underlying earnings’ commodity exposure NPV sensitivity to a 10% variance in commodity prices
Source: Company, SG Cross Asset Research/Equity Source: Company, SG Cross Asset Research/Equity
South Africa – Staying put
Management seems enthusiastic about recent changes in South African politics, with Cyril
Ramaphosa taking the helm from Jacob Zuma. To be fair, Anglo American has never
demonstrated a clear intention to exit the country, even though it conceded that various
options had been studied in response to adverse developments under the previous
government. One of the main takeaways from the February analyst briefing is that the
company has seemingly made up its mind to stay.
The move goes against old wisdom to "buy on the cannons, sell on the trumpets", i.e. pulling
out when the going is good, and we think that investors may come to regret the company’s
0 2 4 6 8 10
EBITDA
Income of associates
Div idends f rom associates
Tax paid
Interest paid
Capex
Non-controlling interests
Other
FCF
-8%
-4%
0%
4%
8%
12%
16%
20%
-4
-2
0
2
4
6
8
10
2016 2017 2018e 2019e 2020e 2021e 2022e
FCF* Div idends** Net debt FCF y ield (%, rhs)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2014 2015 2016 2016 2018e 2019e 2020e 2021e
Diamonds PGM Base metals Iron ore Coal
0% 2% 4% 6% 8%
Iron ore
Coking coal
Copper
Thermal coal
Diamonds
PGM
Nickel
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decision not to dispose of the assets. To say that Zuma's controversial presidency was the
principal cause of the country's economic malaise could be oversimplification; in a way, it was
possibly its consequence as well.
Regardless of the efforts made by the new president and his team, it will probably take years
(if not decades) for any reforms to yield palpable and lasting results. Their long-term success
is not assured and there is always a risk that the next electoral cycle will give the power back
to populists, with destructive implications for business sentiment. The only undeniable near-
term consequence of Ramaphosa’s victory is the stronger rand (up 13% since 1Q17), which
miners in fact need the least. We estimate that a 10% appreciation of ZAR may result in 9%
hit in the company’s equity value (chart below right).
Anglo American – EBITDA exposure to Africa Anglo American – NPV sensitivity to 10% FX variance
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity
Valuation summary
Given the favourable political developments in South Africa, which have been met with an
enthusiastic response from financial markets, we adjust our TP calculation, eliminating the
100bp equity risk premium in the NPV-based estimate (which brings the WACC from 9.1% to
8.7%, despite an upward move in US treasury yields) and increasing the target EV/EBITDA
from 5.5x to 6.0x (thus aligning it with Rio Tinto). The resulting valuations are summarised in
the tables below.
The average of the two estimates is £19.84, to which we to which we apply an adjusting factor
of 0.88 (based on 1.6x adjusted beta vs S&P Industrial Metals index and an assumption of
15% commodity price downside) to obtain our new TP of £17.50 (after minor rounding, a 6%
increase from £16.50). Excluding the effect of a stronger GBP, our TP would increase by 14%.
Taking into account the expected 12m dividend of $1.7 (approx. £1.2) we arrive at a TSR of
<15% and downgrade to Hold.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2016 2017e 2018e 2019e 2020e 2021e
South Af rica Other Af rica Other regions0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
ZAR CLP AUD BRL
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Anglo American – Sum-of-the-parts NPV valuation
$m NPV EV/EBITDA (x)
2018e 2019e 2020e 2021e 2022e
PGM 5,304 7.6 6.5 5.8 5.8 5.5
Diamonds 7,133 5.0 5.8 6.1 5.8 5.7
Copper 11,661 6.6 6.4 5.8 6.0 6.2
Nickel 2,002 9.1 8.2 6.9 6.0 6.0
Iron ore & manganese 10,700 5.6 6.0 5.6 5.3 5.3
Coal 13,567 4.4 6.1 6.1 6.1 6.1
Overheads (3,966)
Total 46,399 5.2 5.9 5.6 5.5 5.5
Net debt (2,933)
Minority interest (8,388)
Equity 35,077
Equity ($) 27.13
Equity (£) 19.35
Source: SG Cross Asset Research/Equity
Anglo American – Target multiple valuation
$m Average 2018e 2019e 2020e 2021e 2022e
EBITDA* 7,905 8,289 8,445 8,454 8,419
Target EV/EBITDA (x) 6.0 6.0 6.0 6.0 6.0
EV 47,429 49,733 50,667 50,724 50,516
Net debt (2,933) (2,105) (1,037) 137 1,232
Minority interest* (7,257) (8,146) (8,186) (7,992) (7,858)
Equity 37,238 39,482 41,445 42,869 43,890
Discount factor 1.00 1.10 1.22 1.34 1.48
Target equity ($) 28.80 30.54 32.05 33.15 33.94
PV of target equity ($) 28.80 27.68 26.34 24.70 22.92
Dividends ($) - 1.56 1.40 1.50 1.55
PV of dividends ($) - 1.41 1.15 1.12 1.04
Equity + cumulative dividends ($) 28.80 29.09 28.90 28.38 27.64
Equity + cumulative dividends (£) 20.33 20.54 20.75 20.61 20.24 19.71
Source: SG Cross Asset Research/Equity *Following period
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Anglo American Sales/division 17
EBIT/division 17
Sales/region 17
Major shareholders (%)
Public Investment Corp. 14.5
Valuation ($m) 12/13 12/14 12/15 12/16 12/17 12/18e 12/19e 12/20e
No. of shares basic year end/outstanding 1,278 1,280 1,285 1,288 1,275 1,275 1,275 1,275
Share price: avg (hist. yrs) or current (p) 1,579 1,447 849 751 1,265 1,645 1,645 1,645
Average market cap. (SG adjusted) (1) 31,559 30,489 16,661 13,054 20,769 29,522 29,522 29,522
Restated net debt (-)/cash (+) (2) -10,652 -12,871 -12,910 -8,487 -4,520 -2,933 -2,105 -1,037
Value of minorities (3) NA NA NA NA NA NA NA NA
Value of financial investments (4)
Other adjustment (5)
EV = (1) - (2) + (3) - (4) + (5) 42,211 43,360 29,571 21,541 27,228 32,455 31,627 30,559
P/E (x) 11.9 13.8 20.3 6.0 7.0 8.5 10.4 9.5
Price/cash flow (x) 4.9 5.5 4.9 2.7 3.0 4.6 4.8 4.7
Price/free cash flow (x) 78.7 NM NM 5.36 4.12 7.70 8.37 8.29
Price/book value (x) 1.00 1.16 1.01 0.69 1.00 1.17 1.13 1.06
EV/revenues (x) 1.44 1.60 1.45 1.01 1.04 1.20 1.23 1.15
EV/EBITDA (x) 4.3 5.5 6.1 3.5 3.1 3.7 4.0 3.7
Dividend yield (%) 3.4 3.6 2.5 0.0 5.7 7.2 5.9 6.4
Per share data ($)
SG EPS (adj.) 2.08 1.72 0.64 1.70 2.53 2.73 2.24 2.43
Cash flow 5.08 4.29 2.62 3.75 6.01 5.07 4.87 4.90
Book value 24.6 20.5 12.8 14.6 17.8 19.8 20.6 21.8
Dividend 0.85 0.85 0.32 0.00 1.02 1.66 1.36 1.48
Income statement ($m)
Revenues 29,342 27,073 20,455 21,378 26,243 27,108 25,796 26,464
Gross income NA NA NA NA NA NA NA NA
EBITDA 9,106 7,104 4,419 5,469 7,632 7,698 7,058 7,442
Depreciation and amortisation NA NA NA NA NA NA NA NA
EBIT 6,620 4,933 2,223 3,766 6,247 6,367 5,362 5,727
Impairment losses NA NA NA NA NA NA NA NA
Net interest income -313 -320 -371 -229 -525 -347 -305 -272
Exceptional & non-operating items -3,634 -4,730 -6,451 -616 -106 0.00 0.00 0.00
Taxation -1,274 -1,265 -388 -698 -1,446 -1,409 -1,234 -1,346
Minority interests -1,387 -989 218 -332 -893 -695 -665 -705
Reported net income -961 -2,513 -5,624 1,594 3,166 3,531 2,892 3,138
SG adjusted net income 2,673 2,217 827 2,210 3,272 3,531 2,892 3,138
Cash flow statement ($m)
EBITDA 9,106 7,104 4,419 5,469 7,632 7,698 7,058 7,442
Change in working capital -1,121 9 25 391 879 -152 108 -55
Other operating cash movements -1,863 -1,918 -1,360 -1,335 -1,097 -1,351 -1,227 -1,415
Cash flow from operating activities 6,524 5,535 3,386 4,873 7,774 6,556 6,299 6,332
Net capital expenditure -6,121 -6,060 -4,223 -2,417 -2,186 -2,668 -2,722 -2,719
Free cash flow 403 -525 -837 2,456 5,588 3,887 3,578 3,613
Cash flow from investing activities 440 -58 1,545 1,627 180 27 51 51
Cash flow from financing activities -2,078 -258 -292 -4,989 -4,219 -4,340 -2,800 -2,597
Net change in cash resulting from CF -1,596 -955 142 -845 1,748 -425 829 1,068
Balance sheet ($m)
Total long-term assets 55,006 51,702 38,216 37,700 39,828 40,218 40,484 40,840
of which intangible 1,415 1,359 1,224 1,047 1,153 1,153 1,153 1,153
Working capital 3,771 3,773 3,281 2,575 2,076 2,228 2,120 2,175
Employee benefit obligations NA NA NA NA NA NA NA NA
Shareholders' equity 31,671 26,417 16,569 19,016 22,972 25,563 26,592 28,146
Minority interests 5,693 5,760 4,773 5,309 5,910 5,537 5,495 5,419
Provisions
Net debt (-)/cash (+) -10,144 -11,787 -11,072 -7,118 -4,171 -2,633 -1,805 -737
Accounting ratios
ROIC (%) 9.7 7.9 4.2 8.2 13.7 13.6 11.3 12.0
ROE (%) -2.8 -8.7 -26.2 9.0 15.1 14.6 11.1 11.5
Gross income/revenues (%) NA NA NA NA NA NA NA NA
EBITDA margin (%) 31.0 26.2 21.6 25.6 29.1 28.4 27.4 28.1
EBIT margin (%) 22.6 18.2 10.9 17.6 23.8 23.5 20.8 21.6
Revenue yoy growth (%) 2.3 -7.7 -24.4 4.5 22.8 3.3 -4.8 2.6
Rev. organic growth (%) 2.3 -7.7 -24.4 4.5 22.8 3.3 -4.8 2.6
EBITDA yoy growth (%) 15.7 -22.0 -37.8 23.8 39.6 0.9 -8.3 5.4
EBIT yoy growth (%) 5.9 -25.5 -54.9 69.4 65.9 1.9 -15.8 6.8
EPS (adj.) yoy growth (%) -8.0 -17.3 -62.8 165.6 48.9 7.9 -18.1 8.5
Dividend growth (%) 0.0 0.0 -62.4 -100.0 NA 62.9 -18.1 8.5
Cash conversion (%) -9.6 -27.4 nm 44.8 75.7 55.7 51.3 51.6
Net debt/equity (%) 27 37 52 29 14 8 6 2
FFO/net debt (%) 70.6 42.9 28.4 53.5 125.2 202.6 262.2 NM
Dividend paid/FCF (%) 270.2 NM NM NM 23.3 54.5 48.5 52.1
Source: SG Cross Asset Research/Equity
Coal 25.2%
Diamonds 20.4%
Iron ore and Manganese 20.4%
Platinum 17.7%
Copper 14.8%
Nickel 1.6%
Coal 36.4%
Iron ore and Manganese 31.7%
Copper 14.8%
Diamonds 14.0%
Platinum 8.2%
Corporate & other -5.0%
China 22.5%
Other Asia 19.2%
Europe 17.7%
India 12.7%
Other regions 12.2%
Japan 9.2%
South Africa 6.5%
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Metals & Mining
6 April 2018 33
Mining Rating upgrade United Kingdom @ Go to SG website
BHP Billiton plc The mining benchmark once again
Buy (from Hold) BHP Billiton shares should once again be considered the benchmark for
diversified miners on superior relative dividend yield and product mix.
A superior relative product mix with exposure to the electrification theme Iron ore
and coal (bulk products) should represent c.45% of EBITDA ex-shale oil in 2019 (to
end-June) vs c.60% at Rio Tinto, on our estimates, while copper earnings should
represent c.30% of EBITDA, vs less than 15% at Rio Tinto. Hence, at c.30% of NAV
(2019e), the copper division lessens the impact of weakening bulk prices on our
estimates, as our copper estimates are supportive thanks in part to the expectation of
higher demand for batteries (auto and energy storage). Overall, c.48% of the group’s NAV
is exposed to resilient underlying SGe prices (nickel, copper and oil), which contrasts in the
sector with the weaker price environment in the bulk products (iron ore and coal, on SGe).
Favourable oil conditions support a final exit from non-core shale Improving oil
fundamentals lead us to raise our long-term oil price assumption by 19% to c.$65/bbl (in line
with SG oil estimates), which supports BHP’s core conventional oil assets valuation (c.14%
of NAV). This also suggests that near-term divestment of the non-core shale operations is
increasingly likely, which could generate up to c.$10bn in cash (SGe c.135p per share),
equivalent to a c.10% yield. This could lead to a special dividend or a share buyback,
although management may consider a swap with conventional oil assets over cash. An exit
from the shale operations would also lower projected capex by c.15%.
Increased estimates and attractive dividend yield We are raising our EBITDA
estimates by 17% for 2018 (end-June) and 14% for 2019 to reflect higher commodities
price estimates, equivalent to +5% this year (2H18 fiscal) and +8% next year on a group
NAV-weighted base. Our EPS estimates are roughly in line with consensus data, but our
DPS expectations are c.59% ahead of consensus for 2019 at 138p, representing a c.7%
dividend yield (c.6% in 2018e). We assume an 80% FCF payout, consistent with our net
debt estimate of c.$11bn for end-June 2018, within management’s $15-10bn target.
TP +14% to £16, 20% TSR. Upgrade to Buy We still value the shares on an equally
weighted: 1) sum of divisional NPVs; and 2) 6.2x EV/EBITDA on the average of our 2019-
21 estimates plus the non-core onshore US operations at c.$10bn and minus a 9% risk
discount to reflect the potential impact of a 15% (was 10% previously) ‘black swan’
decline in the value of the group’s metals basket.
Price 05/04/18 1,410.0p
12m target 1,600.0p
Upside to TP 13.5%
12m f'cast div 85.2p
12m TSR 19.5%
Main changes since last report Target (p) 1600.0 (1404.0)
EPS 18e ($) 1.73 (1.19) +45.2%
EPS 19e ($) 1.48 (1.00) +48.4%
EPS 20e ($) 1.60 (1.09) +47.1% new vs (old) nc: no change
Preferred stock
MT NA, GLEN LN
Least preferred stock
VALE US
SG strategy team sector weighting
Overweight
Share price performance
Source: SG Cross Asset Research/Equity Perf. (%) 1m 3m 12m ytd
Share -0.2 -9.7 12.3 -7.4
Rel. index* 0.8 -5.0 11.1 -4.1
Rel. sector** 2.4 0.3 9.1 0.5
* MSCI World ($) ** MSCI World Metals & Mining ($)
RIC BLT.L, Bloom BLT LN
52-week range 1,660-1,117
EV 18 ($m) 116,747
Mkt cap. (£m) 75,266
Free float (%) 100.0
No. shares o/s (m) 5338
Avg vol. 3m (No. shares) 8,904,480
Equity analyst
Christian Georges +44 20 7762 5969 [email protected]
Equity analyst
Sergey Donskoy +44 20 7762 4594 [email protected]
Financial data 6/17 6/18e 6/19e 6/20e Ratios 6/17 6/18e 6/19e 6/20e
Revenues ($bn) 38.3 46.3 44.0 45.3 P/E (x) 12.5 11.5 13.4 12.4
Rev. yoy growth (%) 23.9 21.0 -4.9 2.9 FCF yield (/EV) (%) 11.5 11.9 9.1 9.8
EBIT margin (%) 32.4 36.1 32.0 33.4 Dividend yield (%) 6.4 6.0 7.0 7.3
Rep. net inc. ($bn) 5.89 7.19 7.92 8.56 Price/book value (x) 1.43 1.79 1.74 1.71
EPS (adj.) ($) 1.22 1.73 1.48 1.60 EV/revenues (x) 2.56 2.52 2.59 2.47
EPS yoy growth (%) NM 41.3 -14.1 8.1 EV/EBIT (x) 7.90 6.99 8.08 7.38
Dividend/share ($) 0.98 1.20 1.38 1.44 EV/IC (x) 1.2 1.5 1.4 1.4
Dividend yoy growth (%) 81.5 22.4 15.1 4.3 ROIC/WACC (x) 1.0 1.6 1.4 1.6
Payout (%) 80 69 93 90 Net Debt/EBITDA (x) 0.80 0.44 0.37 0.26
10.6
11.7
12.8
13.9
15
16.1
17.2
Apr Jun Aug Oct Dec Feb
Price
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6 April 2018 34
Earnings revisions and investment conclusion
Sharp earnings revisions…
We are raising our EBITDA estimates for BHP Billiton by 17% for 2018 and 14% for 2019
(year-end June) to reflect higher commodities price estimates near term (iron ore and copper
both +3%) and medium term (copper +8%; oil +19%). We update our commodities views in
the sector part of this report.
Our EPS estimates rise more markedly, by 45% and 48%, respectively, due to a lower
normalised tax rate, reduced from 35% to 30%, and somewhat lower interest costs. Hence,
alongside our increased EBITDA forecast, we lower our net debt expectations by 10% and
20% in 2018e and 2019e – including a delayed $1.3bn corporate tax payment in Australia in
the first financial half year.
BHP – Estimate changes and consensus* (to 30 June, $m)
6/2018e 6/2019e
New Old % ch. Cons.
SG vs
cons. New Old % ch. Cons.
SG vs
cons.
Revenue 46,306 41,392 12% 44,400 1% 44,025 40,389 9% 43,181 2%
EBITDA 24,987 21,270 17% 23,893 5% 22,317 19,640 14% 22,732 -2%
EPS ($) 1.73 1.19 45% 1.71 1% 1.48 1.00 48% 1.46 2%
DPS ($) 1.20 0.89 35% 1.08 11% 1.38 0.87 59% 0.95 45%
Net debt (11,090) (12,272) -10% (12,330) -10% (8,257) (10,303) -20% (8,009) 3%
Source: SG Cross Asset Research/Equity; * Bloomberg consensus estimates
In this context, we also lift our dividend estimates by 35% for the current year, to $1.20,
equivalent to a 2018e FCF c.65% payout. We raise this FCF payout to c.80% for 2019e (DPS
+59%) and thereafter (capped at 100% of EPS). Our new EBITDA estimates are 5% ahead of
consensus this year and marginally lower next year, but our dividends are more optimistic,
notably in 2019 (+45%). Our net debt expectation is slightly higher than the consensus for
2019, mostly due to the higher dividend.
… reflect increased raw material price estimates
The table below highlights the main changes to our expectations relative to our previous
review, notably with regard to iron ore and copper prices, which are the biggest contributors
to BHP’s earnings (see sensitivity calculations page 9). Our variations are equivalent to a 5%
and 8% increase in BHP’s NAV-weighted prices vs our previous forecast.
Vale – Key commodities estimates (SGe) and changes vs Bloomberg forward price* ($/t)
2H 2017/18e FY 2018/19e
New Old % ch.
Fwd
curve *
SG vs fwd
curve New Old % ch.
Fwd
curve *
SG vs fwd
curve
Iron ore** 67.2 65.0 3% 66.2 1% 60.0 60.0 0% 60.0 0%
Copper 6,979 6,750 3% 6,810 2% 7,000 6,500 8% 6,786 3%
Coking coal*** 224 200 12% 207 8% 145 130 12% 183 -21%
Thermal coal**** 89.6 80.0 12% 95.2 -6% 80.0 75.0 7% 87.1 -8%
Brent ($/bbl) 66.0 62.5 6% 67.0 -2% 65.5 55.0 19% 64.8 1%
NAV-weighted
5%
2%
8%
-2%
* Bloomberg; ** 62% Fe CFR China; *** Australia FOB; **** Newcastle 6,000kcal/kg FOB
Source: SG Cross Asset Research/Equity
We compare our new materials estimates with their respective Bloomberg forward curves in
order to provide an up-to-date relative stance for our estimates. But note that this should not
be perceived as consensus, which is also available on Bloomberg, but is in our view not
reliable enough due to an insufficient number of regular contributions.
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Metals & Mining
6 April 2018 35
Investment conclusion
Regaining the diversified mining benchmark status
In our view, BHP shares lost their reference status to Rio Tinto for diversified miners post the
end of the progressive dividend policy in early 2016 and the Samarco disaster (Brazil JV) at
the end of 2015. Hence, for the past two years Rio Tinto shares have outperformed BHP by
c.25% – although part of this may be due to the South32 spin-off.
We believe that a large number of factors support a resumption of BHP’s benchmark status
over Rio Tinto in the future due to: 1) reduced relative exposure to falling bulk products prices
(iron ore and coal), 2) superior relative exposure to firm pricing of electrification-exposed
metals (copper and nickel), with both these issues translating into 3) an attractive c.9% FCF
yield average over 2018-20e (10% in 2018e) vs c.7% at Rio Tinto, allowing 4) an attractive
dividend yield of c.7% over 2018-20e (6% in 2018e), superior to that of Rio Tinto at c.5.7%.
Supportive exposure to electrification theme
Iron ore and coal (bulk products) should represent c.45% of EBITDA ex-shale oil in 2019 (end-
June) vs c.60% at Rio Tinto on our estimates, while copper earnings should represent c.35%
of EBITDA vs c.15% at Rio Tinto. Hence, at c.30% of NAV (2019e), the copper division
lessens the impact of weakening bulk prices on our estimates, as our copper estimates are
supportive thanks in part to expected higher demand for batteries (auto and energy storage).
Favourable oil conditions
Improving oil fundamentals lead us to raise our price expectations by 6% short term and 19%
long term to c.$65/bbl (in line with SG oil estimates), which is supportive of the core conventional
oil assets representing most of the NAV balance at c.14%. When including nickel and copper,
c.48% of the group’s NAV is exposed to improving underlying prices, with a weaker environment
in bulk products. Meanwhile, these supportive oil price conditions suggest that a near-term
divestment of the non-core shale operations is increasingly likely. This could generate up to
c.$10bn in cash (c.134p per share) on our estimates, equivalent to a c.10% yield over the current
share price, keeping in mind that management may consider a swap with conventional oil
assets. An exit from the shale operations would also lower projected capex by c.15%.
Ahead of consensus on dividend expectations
We increase our EBITDA estimates by 17% for 2018 (to end-June) and 14% for 2019 to reflect
higher commodities price estimates, equivalent to +5% this year (2H18 fiscal) and +8% next
year on a group NAV-weighted base. Our EPS estimates are up c.45% on average over 2018
and 2019 due to the further supportive impact of lower interest expenses and taxes, but
roughly in line with Bloomberg consensus data. However, our DPS expectations are more
aggressive, notably for 2019, at 138p, c.59% ahead of consensus, for a c.7% dividend yield
(c.6% in 2018 fiscal). We assume an 80% FCF payout, consistent with our net debt estimate
at c.$11bn for end-June 2018, within management’s $15-10bn target.
Recommendation upgrade reflects supportive valuation
We apply our new estimates to our valuation, which equally weights: 1) a sum of divisional NPVs;
and 2) the group’s 2010-17 average EV/EBITDA of 6.2x on our 2019-21 estimates average. We
value the onshore US operations separately on a mix of NPV, peers and acreage multiples. We
also include a 9% risk discount to reflect the potential impact of a 15% (was 10% previously)
‘black swan’ decline in the value of the group’s metals basket. Our new TP of £16 is a 14%
increase over our earlier target, equivalent to a 14% share price upside and a 20% TSR. Buy.
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Metals & Mining
6 April 2018 36
Share price performance and valuation
Solid 12m performance, but near-term headwinds
BHP shares have performed in line with peer Rio Tinto over the past 12 months at c.+10%,
ahead of the FTSE index and material peers in the STOXX Europe 600 at respectively -2% and
+7% (see table below). Both Rio and BHP are down 7% YTD, in line with the FTSE, in our
view due to rising risk aversion on worries of a trade war materialising between China and the
US and damaging the global growth outlook.
BHP – Performance relative to indices (%)
BHP Rio Tinto FTSE100 STOXX Europe 600
Materials
1m (3) (1) 1 1
YTD (7) (7) (6) (4)
12m 10 12 (2) 7
Since June 2015 * 4 29 4 12
Source: SG Cross Asset Research/Equity; * South32 flotation
Renewed correlation with Rio Tinto shares
The split of some of BHP operations in May 2015 and the establishment of South32 in the
process renders an analysis of the group’s shares relative performance to peers, notably Rio
Tinto, somewhat confusing. The disaster at Samarco (Brazil) at the end of 2015 is another
source of distortion. Looking at the table above and the graphs below suggests that the Rio
Tinto outperformed BHP by c.25% since June 2015, post the South32 flotation. The graph
below right suggests that much of South32’s relative value adjustment to RioTinto took place
in 2014 and that the Samarco disaster was responsible for a c.15% relative negative impact.
BHP – Share price vs Rio Tinto & FTSE100 (index Jan 2015) BHP – Performance vs Rio Tinto (index Jan 2012)
Source: SG Cross Asset Research/Equity; Bloomberg Source: SG Cross Asset Research/Equity; Bloomberg
The two graphs below highlight the shares’ correlation with their respective sales-weighted
raw material price variations. Interestingly, both indices are down 20% since January 2012,
but whereas correlation appears constant at BHP, the Rio Tinto shares appear to have
outperformed their own index by c.20% since January 2017. To us, this suggests that the Rio
Tinto shares have been privileged over BHP’s by investors returning to the sector seeking
higher dividend yields associated with the completion of visible balance sheet strengthening.
50
60
70
80
90
100
110
120
130
140
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
BHP Rio Tinto Ftse100
60
70
80
90
100
110
120
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Relativ e share price Relativ e EV (inc. South 32 f rom May 2015)
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6 April 2018 37
BHP – Share price performance vs materials (index) Rio Tinto – Share price performance vs materials (index)
Source: SG Cross Asset Research/Equity; Bloomberg Source: SG Cross Asset Research/Equity; Bloomberg
Indeed, Rio Tinto’s deleveraging focus started earlier and completed almost one year ahead of
that of BHP. Therefore RioTinto’s management was able to resume paying attractive
dividends in 2016, in contrast with BHP’s management, which had to abandon its long-
standing progressive dividend policy at the time. In our view, this is when BHP lost its
benchmark status for diversified miners.
Relative yields render BHP more attractive
Dividend yields have been converging again through 2017 and BHP shares are set to offer a
more attractive c.6% yield this year when considering the calendar schedule (i.e. dividends for
2H18 to June and 1H19 to December 2018). The dividend for 1H18 was paid on 27 March,
equivalent to 73% payout vs the new minimum 50% target (of EPS). We set our payout
forecast at 80% of FCF (ex-working capital) for the future since the net debt target range
should be reached by June this year.
BHP & Rio Tinto – Dividend yield* BHP & Rio Tinto – FCF yield**
Source: SG Cross Asset Research/Equity; * BHP dividend yield over calendar (not fiscal) year Source: SG Cross Asset Research/Equity; * y/e June; ** excl. working capital vs market cap
In our view, the relative superiority of both its dividend and FCF yields (average 2018-21 yield
premium of c.25%; graph above right) suggest that BHP should be reinstated as the
benchmark for diversified miners – not least because of its exposure to diverse superior
relative materials; e.g. BHP’s exposure to a likely weakening of iron ore prices is less critical
as iron ore accounts for c.35% of EBITDA vs c.55% at Rio Tinto (and this is rising with recent
coal sales).
0
20
40
60
80
100
120
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
Sales weighted raw materials * BHP
-
20
40
60
80
100
120
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
Sales weighted raw materials * Rio Tinto
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
BHP* Rio Tinto
-10.0%
-7.5%
-5.0%
-2.5%
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e
BHP* Rio Tinto Vale
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Metals & Mining
6 April 2018 38
EV/EBITDA a more relevant measure than P/E
BHP’s P/E ratio has increased markedly over the decade, from c.10x on average in the first
five years and a c.30% discount to the FTSE100, to c.15x since 2015 and in line with the
FTSE100 (graph below right). The elimination of this historical discount to the FTSE is mirrors
a similar development for the STOXX 600 Materials index as a whole. This is consistent with
the improved outlook for metals in general, reflecting reduced exploration capex over the
decade vs likely high demand for automotive electrification materials.
Over the period from the financial crisis (2008) to 2016, an average c.20% premium to Rio
Tinto shares was the norm and this is again the case today – based on Bloomberg’s 24-month
forward consensus data. Over past years, this may have been a reflection of BHP’s June year-
end, recognising lower relative earnings, reflecting falling material prices. More recently, we
wonder whether this is instead a reflection of differing depreciation methods, notably for the
iron ore assets in the context of the market valuation moving away from P/E to favour
EV/EBITDA. We note that the relative dividend yield, with a higher dividend yield for BHP
(graph above left), confuses further the relative P/E picture.
Looking to EV/EBITDA, Rio Tinto and BHP Billiton have traded at respective historical
averages of 5.8x and 6.2x since January 2010 (graph below left), or a c.7% premium for BHP.
This premium is consistent with our perception of BHP as the historical benchmark for
diversified miners. At its current share price, BHP trades at a small discount to Rio Tinto
shares, or 5.5x vs 5.6x.
BHP – EV/EBITDA (12m) relative to Rio average BHP – P/E (24m forward blended) vs Rio & peers (3m rolling)
Source: SG Cross Asset Research/Equity; Bloomberg historical & consensus data Source: SG Cross Asset Research/Equity; Bloomberg
End of dual listing is a side-show
With regard to activist investors’ requests, we note that management has agreed to divest the
group’s shale operations but remains unconvinced that terminating the dual UK-Australia
listing would add value to shareholders. We do not believe that this issue is an overhang for
the shares, with the UK share price currently back to its long-term c.15% average discount
relative to the Australian listing (differential reflects mostly the franking credits available to
Australian shareholders).
Note that there is little to learn in our view from the current cancellation of Unilever’s dual UK-
Holland listing due to differing tax issues and strategic content (e.g. Unilever is seeking to
improve its ability to fight off hostile bids).
-10%
-5%
0%
5%
10%
15%
20%
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
BHP BHP av erage 2010-17 (6.2x) Dif f . vs Rio (rhs)
-10%
0%
10%
20%
30%
-
5.0
10.0
15.0
20.0
25.0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
BHP Ftse100 Premium to Rio Tinto (rhs)
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Metals & Mining
6 April 2018 39
Upgrading from Hold to Buy (TP £16; TSR 20%)
We are raising our target price to £16, a 14% increase over our earlier target, equivalent to
13.5% share price upside and a 19.5% TSR at the current share price. In our view, this new
TP is consistent with the BHP shares recovering their benchmark status for diversified miners on
both superior FCF yield and favourable material risk dispersion.
BHP – Target price calculation (£m)
Value (£m) Per share value (p) Weight Total (p)
EV/EBITDA multiple since 2010 * 88,751 1,663 50% 831
Divisional NPVs * 84,155 1,577 50% 788
Average, excl. US onshore 86,453 1,620 100% 1,620
US onshore (£m) 7,198 135 100% 135
Unadjusted share price target 93,651 1,754
Near-term risk discount** (8,429) -9.0% (158)
Share price target 85,222 1,600
Share price upside 13%
Dividend yield (fiscal 2018e) 6%
TSR 20%
* excludes US onshore assets; ** reflects the potential impact of a 15% decline of the metal basket post the LME price surge
Source: SG Cross Asset Research/Equity;
We apply our new estimates to our valuation, which equally weights: 1) a sum of divisional NPVs;
and 2) the group’s 2010-17 average EV/EBITDA of 6.2x (see graph above left) on our 2019-21e
estimates’ average (table below). We exclude the onshore US operations, which we value
separately on a mix of NPV, peers and acreage multiples (see next paragraph).
We also include a 9% risk discount (which we introduced at the end of last year) to reflect the
potential impact of a 15% ‘black swan’ decline (10% in our earlier valuation) in the value of
metals basket in the wake of the LME price surge over the past three to four months. We do
this by using the estimated beta of BHP vs the S&P Industrial Metals index, assuming a 50%
probability of such a correction occurring (See mining report).
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6 April 2018 40
BHP – Historical EV/EBITDA valuation ($m)
2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e
EBITDA* 24,404 21,520 22,394 22,560 22,523 22,384 22,695 23,117 23,228 23,286 23,286 23,287 23,290
Target EV/EBITDA (x) 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2
EV 151,302 133,425 138,840 139,874 139,643 138,781 140,707 143,323 144,015 144,376 144,375 144,381 144,395
Net debt (11,090) (8,257) (6,023) (4,371) (2,245) 437 2,738 5,546 7,953 10,319 12,596 14,889 17,200
Pension liabilities (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625) (1,625)
Minority interest (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468) (5,468)
Associates 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448 2,448
Equity 135,568 120,523 128,172 130,858 132,753 134,573 138,800 144,223 147,324 150,051 152,326 154,625 156,950
No. shares (m) 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338 5,338
Discount factor 1.00 1.09 1.20 1.31 1.43 1.57 1.72 1.88 2.06 2.25 2.46 2.69 2.95
Target equity ($) 25.40 22.58 24.01 24.51 24.87 25.21 26.00 27.02 27.60 28.11 28.54 28.97 29.40
PV of target equity ($) 25.40 20.63 20.05 18.71 17.34 16.07 15.14 14.38 13.42 12.49 11.59 10.75 9.97
Dividends** ($) 1.20 1.24 1.41 1.42 1.42 1.50 1.58 1.65 1.71 1.73 1.74 1.74 1.74
PV of dividends ($) 1.20 1.13 1.18 1.08 0.99 0.96 0.92 0.88 0.83 0.77 0.71 0.65 0.59
Equity + cumulative dividends ($) 26.60 22.97 23.56 23.30 22.93 22.61 22.60 22.72 22.59 22.43 22.24 22.04 21.86
Equity + cumulative dividends (£p) 1,900 1,640 1,683 1,664 1,638 1,615 1,615 1,623 1,614 1,602 1,588 1,575 1,561
Average 2019-21e (£p) 1,663
Source: SG Cross Asset Research/Equity; * y/e June, excludes US onshore and pension costs; ** announced in fiscal year
Our dividend assumptions discount an 80% FCF payout from 2019, which reflects the group’s
net debt falling to c.$11bn by June 2018, at the low-end of management $10-15bn target
range ($15.4bn in December 2017).
BHP – Historical NPV valuation (WACC 8.4%)
Divisions NPVs Implied NPV/EBITDA
2018e 2019e 2020e 2021e 2022e 2023e
Iron ore 44,568 4.9 6.2 6.0 6.0 6.0 6.0
Western Australia 44,568 - - - - - -
Samarco* - - - - - - -
Coal 21,250 4.6 7.2 7.1 7.0 7.0 7.0
Queensland 16,666 - - - - - -
Thermal coal 4,583 - - - - - -
Copper 39,022 6.8 6.7 6.1 5.8 5.7 5.5
Escondida 20,107 - - - - - -
Antamina 5,109 - - - - - -
Olympic Dam 9,347 - - - - - -
Other copper 4,459 - - - - - -
Oil 18,138 5.2 4.5 4.7 5.1 5.5 6.0
US on-shore** - - - - - -
Conventional 18,138 5.2 4.5 4.7 5.1 5.5 6.0
Nickel 3,932 18.7 12.8 9.6 7.8 7.8 7.8
Overheads (864) - - - - - -
Total NPVs 126,045 5.3 5.9 5.7 5.7 5.7 5.8
Net Debt (end 2019e) (8,257)
Pensions (1,625)
Minorities (ex-Escondida) (795)
Investments 2,448
Total value ($m) 117,817
NPV value (£m) 84,155
Value per share (p) 1,577
Source: SG Cross Asset Research/Equity; * assumes no restart of these operations; ** valued separately
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Key ratios
Comments on key ratio forecasts: 1) the NAV of bulk products (iron ore and coal) is c.52% vs
metals (copper & nickel) at 34% of total for 2019e; 2) R/NAV for bulk falls in 2019e due to
lower price estimates; 3) average FCF is over $8bn per annum from 2018e, and FCF yield is
c.9% on average over the same period; 4) copper is almost as critical to TP as iron ore.
BHP – Divisional NAV breakdown, 2019e BHP – Divisional R/NAV, 2018-19e
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity
BHP – FCF generation vs dividends & net debt, 2012-21e (m) BHP – FCF yield & net debt/EBITDA, 2012-21e
Source: SG Cross Asset Research/Equity; * excl. dividends to associates Source: SG Cross Asset Research/Equity; * excl. change in working capital
BHP – Capex by division, 2012-20e ($m) BHP – EBITDA and TP sensitivity to 10% material price var.
Source: SG Cross Asset Research/Equity; * division being divested Source: SG Cross Asset Research/Equity; * not included in our valuation method
Iron ore35%
Coal17%
Copper31%
Oil (conv entional)14%
Nickel3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Iron ore Coal Copper Oil (conv entional) Nickel
2018e 2019e
(30,000)
(25,000)
(20,000)
(15,000)
(10,000)
(5,000)
0(8,000)
(6,000)
(4,000)
(2,000)
0
2,000
4,000
6,000
8,000
10,000
12,000
2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e
Free cash f low Div idends paid *
Net (debt) / cash (rhs)
0.0
0.5
1.0
1.5
2.0
2.5
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e
FCF * y ield (v s. Market cap) Net debt / EBITDA (x; rhs)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0
2,500
5,000
7,500
10,000
12,500
15,000
17,500
20,000
2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
Iron ore CoalCopper Onshore oil *Conv entional oil Other (inc. nickel and potash)Capex / depreciation (x)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Iron ore Copper Australia $ Coking coal
Oil / NGLs Chilean Peso
Thermal coal
Natural gas
Nickel
on SG Target price on SOP (selected peers EV/EBITDA)*
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Non core US onshore – Update
We value the US onshore shale assets on an average of NPV, a peer average and acreage
value detailed below. More details on these calculations are available in a report we published
last year (BHP report, see pages13-15).
US onshore valuation ($m)
Valuations
NPV 7,983
Peers 7,804
Acreage 14,445
Average ($m) 10,077
Average (£m) 7,198
Source: SG Cross Asset Research/Equity
Crude oil & natural prices since 2004 BHP – US onshore implied value and operating control
Source: SG Cross Asset Research/Equity; Bloomberg
The improved NPV value reflects our raised long-term oil price of $65/boe, in line with the SG
Commodities team’s estimates. This is offset by a lower peer valuation, reflecting somewhat
reduced share prices vs improved earnings estimates.
Much of our confidence with regard to the oil price outlook is derived from continued
production restraint by key OPEC members and assumes a limited impact on trade from
expected growing tariff rhetoric between the US and China in coming weeks.
These favourable price conditions should increase the likelihood of a successful sale near our
c.$10bn target, a level which has been mentioned in various Reuters and Bloomberg articles
over the past few months and which would not lead to any write-downs, in our view. Note that
the Concho Resources deal last week ($9.5bn for 640k net acres) does not provide a positive
guideline. Located mostly in the higher-value Permian basin, it in fact suggests that the upper
end of our range ($14bn) is probably excessive.
Management has highlighted that it would be prepared to accept some swaps with assets in
conventional oil, suggesting that a deal may not necessarily include cash. Our $10bn estimate
converts into 134p, or a c.10% dividend yield, should full cash proceeds be returned to
shareholders. A share buyback programme is also a clear possibility, emulating recent
decisions by Rio Tinto in the process.
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
-
20
40
60
80
100
120
140
160
Crude oil (Brent; $/bl) Crude 15Y av erage
Natural gas (Henry Hub; $/mmbtu; rhs) Gas 15Y av erage (rhs)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-
5.0
10.0
15.0
20.0
25.0
30.0
Eagle Ford Permian Hay nesv ille Fay ettev ille Av erage
Implied price per acre $ 000' BHP operator (rhs)
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Divisional data
BHP – Iron ore division ($m)
Iron ore (ex-Samarco) 2015 2016 2017 2018e 2019e 2020e 1H17 2H17 1H18 2H18e
Iron ore price FOB Australia ($/tonne dry) 65 47 63 60 53 53 59 68 60 60
% change -43% -28% 36% -5% -12% 0% 30% 42% 2% -12%
Australian Iron Ore Lumps ($/tonne FOB dry) 76 54 71 72 63 63 69 73 74 71
% change -39% -29% 30% 3% -13% 0% 34% 27% 8% -3%
Lump premium 18% 17% 11% 21% 19% 19% 17% 7% 24% 17%
Realised price FOB ($/tonne dry) 61 44 59 57 49 49 55 62 57 58
% change -41% -29% 34% -2% -14% 0% 28% 41% 4% -7%
Total production (100% basis) 253,507 257,318 268,305 279,404 287,949 291,524 136,413 131,893 135,899 143,505
% change 12% 2% 4% 4% 3% 1% 4% 5% 0% 9%
Shipments (wet k tonne) 222,588 221,578 231,208 239,487 249,250 252,649 116,008 115,200 115,543 123,944
% change 17% 0% 4% 4% 4% 1% 3% 6% 0% 8%
Revenue ($m) 14,438 10,333 14,395 14,721 13,100 13,279 6,808 7,587 7,117 7,604
% change -31% -28% 39% 2% -10% 1% 30% 49% 5% 0%
EBITDA 8,297 5,492 9,001 8,987 7,211 7,345 4,117 4,884 4,265 4,722
EBITDA margin 57.5% 53.2% 62.5% 61.0% 55.0% 55.3% 60.5% 64.4% 59.9% 62.1%
Cash cost per tonne ($) 18.5 15.1 14.6 14.4 14.1 14.0 15.1 14.1 14.9 14.0
% change -32% -18% -3% -1% -2% -1% -1% -5% -1% -1%
% change A$ -24% -7% -6% -4% -1% -1% -5% -8% -4% -4%
Depreciation 1,716 1,859 1,880 1,830 1,955 2,005 932 948 877 953
Capex 1,930 1,061 805 1,141 1,998 2,021 929 944 873 950
Capex/depreciation 112% 57% 43% 62% 102% 101% 100% 100% 100% 100%
Source: SG Cross Asset Research/Equity
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BHP – Coal division ($m)
Coal 2015 2016 2017 2018e 2019e 2020e 1H17 2H17 1H18 2H18e
Newcastle spot thermal ($/tonne) 64 53 81 96 80 80 80 81 95 96
% change -18% -16% 51% 19% -16% 0% 44% 58% 19% 19%
Met coal contract ($/tonne) 116 87 193 202 150 150 146 239 181 224
% change -17% -25% 122% 5% -26% 0% 61% 190% 24% -7%
Realised price (implied; $) 70 58 111 126 99 99 113 109 118 134
% change -15% -17% 91% 14% -22% 0% 92% -4% 9% 13%
Total production (kt) 83,633 76,558 69,356 72,605 74,190 74,190 35,124 34,232 34,251 38,354
% change 4% -8% -9% 5% 2% 0% -13% -6% -2% 12%
Queensland coal 42,621 42,311 39,770 42,534 43,904 43,904 21,142 18,628 20,252 22,282
NSW coal 19,698 17,101 18,176 19,302 19,302 19,302 7,803 10,373 8,618 10,684
Other 21,314 17,146 11,410 10,769 10,984 10,984 6,179 5,231 5,381 5,388
Shipments (kt) 83,797 77,725 68,239 72,409 73,751 73,751 34,615 33,624 34,260 38,149
% change 6% -7% -12% 6% 2% 0% -16% -9% -1% 13%
Coking coal 42,289 42,809 38,846 42,353 43,465 43,465 20,716 18,130 20,516 21,837
% change 13% 1% -9% 9% 3% 0% -1% -17% -1% 20%
Thermal coal 41,508 34,916 29,393 30,056 30,286 30,286 13,899 15,494 13,744 16,313
% change -1% -16% -16% 2% 1% 0% -32% 3% -1% 5%
Coking coal / shipments 50% 55% 57% 58% 59% 59% 60% 54% 60% 57%
Revenue ($m) 5,885 4,518 7,578 9,154 7,272 7,272 3,927 3,651 4,047 5,107
% change -10% -23% 68% 21% -21% 0% 68% 67% 3% 40%
Queensland (BMA) 4,221 3,351 6,316 7,480 5,868 5,868 3,381 2,935 3,350 4,130
New South Wales 1,225 914 1,351 1,776 1,486 1,486 584 767 750 1,026
Other 439 253 (89) (102) (82) (82) (38) (51) (53) (49)
EBITDA 1,242 635 3,784 4,665 2,960 3,014 2,011 1,773 1,790 2,875
Queensland (BMA) 1,006 584 3,256 3,798 2,350 2,378 1,823 1,433 1,504 2,294
New South Wales 303 133 525 794 499 525 187 338 304 475
Other (67) (82) 3 72 111 111 1 2 (18) 90
EBITDA margin 21.1% 14.1% 49.9% 51.0% 40.7% 41.4% 51.2% 48.6% 44.2% 56.3%
Queensland (BMA) 23.8% 17.4% 51.6% 50.8% 40.0% 40.5% 53.9% 48.8% 44.9% 55.6%
New South Wales 24.7% 14.6% 38.9% 44.7% 33.6% 35.3% 32.0% 44.1% 40.5% 47.8%
Cash costs per tonne ($)
Queensland (BMA) 65.1 55.2 59.7 66.5 64.4 63.8 56.4 63.4 71.2 62.1
% change -23% -15% 8% 12% -3% -1% -5% 22% 26% -2%
% change (A$) -15% -3% 4% 8% -2% -1% -8% 19% 22% -5%
New South Wales n/a 41.0 41.0 46.5 45.5 44.1 46.0 36.0 48.0 45.3
% change n/a n/a 0% 13% -2% -3% n/a n/a 4% 26%
% change (A$) n/a n/a -3% 10% -1% -3% n/a n/a 1% 22%
Depreciation 893 899 734 723 765 765 383 351 354 369
Capital expenditure 729 298 246 312 368 426 103 143 185 127
Capex/depreciation 82% 33% 34% 43% 48% 56% 27% 41% 52% 35%
Source: SG Cross Asset Research/Equity
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BHP – Copper division ($m)
Base metals 2015 2016 2017 2018e 2019e 2020e 1H17 2H17 1H18 2H18e
Copper ($/tonne) 6,380 4,896 5,390 6,786 7,000 7,300 5,029 5,750 6,593 6,979
Copper (lb/t) 2.89 2.22 2.44 3.08 3.18 3.31 2.28 2.61 2.99 3.17
% change -9% -23% 10% 26% 3% 4% -1% 22% 31% 21%
Implied price ($/Cu-eq. lb) 2.80 2.14 2.54 3.31 3.16 3.32 2.40 2.70 3.18 3.42
% change -11% -24% 19% 30% -4% 5% 14% 25% 32% 27%
Implied price premium -3% -4% 4% 7% 0% 0% 5% 3% 6% 8%
US$/CLP 605 688 662 619 600 600 664 660 638 600
% change (inverted) -12% -12% 4% 7% 3% 0% 4% 4% 4% 10%
Copper production (kt) 1,708 1,580 1,326 1,731 1,872 1,930 712 614 848 883
% change -1% -8% -16% 31% 8% 3% -7% -25% 19% 44%
Shipments (total in t eq.cu) 1,854 1,752 1,486 1,872 2,059 2,122 794 693 909 963
% change 1% -6% -15% 26% 10% 3% -5% -24% 15% 39%
Copper 1,724 1,577 1,317 1,709 1,872 1,930 702 615 825 883
% change 1% -8% -17% 30% 8% 3% -7% -25% 18% 44%
Other metals (t eq.cu) 131 175 169 163 187 192 92 79 84 79
Other metals in % of shipments 7% 10% 11% 9% 9% 9% 12% 11% 9% 8%
Revenue ($m) 11,453 8,249 8,335 13,640 14,537 15,517 4,209 4,126 6,381 7,259
% change -10% -28% 1% 64% 5% 8% 8% -5% 52% 76%
Escondida 7,819 4,881 4,544 9,169 9,116 9,803 2,467 2,077 4,322 4,847
Pampa Norte 1,437 1,098 1,401 1,753 1,802 1,834 624 777 860 893
Olympic Dam 1,244 1,432 1,287 1,114 2,012 2,346 611 676 479 635
Other / third party 953 838 1,103 1,604 1,427 1,534 507 596 720 884
EBITDA 5,205 2,619 3,545 6,907 6,907 7,681 1,744 1,801 3,195 3,712
Escondida 4,064 1,743 2,397 5,362 4,956 5,538 1,257 1,140 2,518 2,844
Pampa Norte 762 401 620 923 1,019 1,070 255 365 428 495
Olympic Dam 280 385 284 191 572 730 123 161 27 164
Other / third party 99 90 244 432 360 343 109 135 222 210
EBITDA margin 45.4% 31.7% 42.5% 50.6% 48.1% 49.5% 41.4% 43.7% 50.1% 51.1%
Escondida 52.0% 35.7% 52.8% 58.5% 54.4% 56.5% 51.0% 54.9% 58.3% 58.7%
Pampa Norte 53.0% 36.5% 44.3% 52.6% 56.5% 58.3% 40.9% 47.0% 49.8% 55.4%
Olympic Dam 22.5% 26.9% 22.1% 17.1% 28.4% 31.1% 20.1% 23.8% 5.6% 25.8%
Cash costs per lb ($) 1.28 1.35 1.31 1.35 1.43 1.44 1.26 1.37 1.33 1.37
Escondida 1.03 1.15 0.93 1.10 1.13 1.12 0.89 0.98 1.06 1.14
% change -2% 12% -19% 18% 3% -1% -42% 18% 19% 15%
% change CLP 11% 27% -22% 11% 0% -1% -44% 13% 15% 5%
Pampa Norte 1.19 1.26 1.40 1.37 1.38 1.38 1.48 1.33 1.33 1.39
% change -39% 7% 11% -3% 1% 0% 41% -10% -10% 4%
% change CLP -31% 21% 7% -9% -2% 0% 36% -14% -14% -5%
Olympic Dam 3.43 2.34 2.78 3.01 3.01 3.07 2.81 2.75 3.67 2.92
% change -7% -32% 19% 8% 0% 2% 17% 21% 30% 6%
% change A$ 3% -22% 15% 5% 1% 2% 13% 18% 26% 3%
Depreciation 1,852 1,577 1,539 1,926 1,733 1,789 830 709 1,143 783
Capex 3,822 2,786 1,479 2,078 2,200 2,350 830 649 991 1,084
Capex/depreciation 206% 177% 96% 108% 127% 131% 100% 92% 87% 138%
Source: SG Cross Asset Research/Equity
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BHP – Petroleum division ($m)
Petroleum 2015 2016 2017 2018e 2019e 2020e 1H17 2H17 1H18 2H18e
Crude Oil WTI Cushing ($/barrel) 69.3 41.9 48.5 56.2 62.2 62.2 47.0 49.9 51.7 60.7
% change -32% -40% 16% 16% 11% 0% 6% 26% 10% 22%
Crude Oil Brent ($/barrel) 73.5 43.5 49.7 61.4 65.5 65.5 47.7 51.7 56.8 66.0
% change -33% -41% 14% 23% 7% 0% 1% 29% 19% 28%
Natural Gas Henry Hub ($/mmbtu) 3.32 2.24 2.98 2.89 3.11 3.11 2.93 3.02 2.90 2.88
% change -22% -33% 33% -3% 8% 0% 21% 47% -1% -5%
WTI / Brent 94% 96% 98% 92% 95% 95% 99% 97% 91% 92%
Total petroleum production ('000 boe) 255,678 240,155 208,379 190,094 187,655 184,144 105,925 102,454 98,678 91,416
% change 4% -6% -13% -9% -1% -2% -15% -11% -7% -11%
Conventional (‘000 boe) 130,019 131,225 128,175 123,067 117,277 110,247 65,877 62,298 63,859 59,208
% change -6% 1% -2% -4% -5% -6% -1% -4% -3% -5%
Liquid 68,952 67,858 62,708 59,472 56,862 52,852 31,727 30,981 29,959 29,513
Gas 61,067 63,367 65,467 63,595 60,416 57,395 34,150 31,317 33,900 29,695
Shale (‘000 boe) 125,659 108,930 80,204 67,026 70,378 73,897 40,048 40,157 34,819 32,208
% change 16% -13% -26% -16% 5% 5% -31% -21% -13% -20%
Liquid 55,626 48,180 34,371 28,386 29,805 31,295 16,431 17,940 14,502 13,884
Gas 70,033 60,750 45,833 38,641 40,573 42,602 23,617 22,217 20,317 18,324
Shale in % of total 49% 45% 38% 35% 38% 40% 38% 39% 35% 35%
Revenue ($m) 11,447 6,894 6,872 7,414 7,947 7,783 3,302 3,570 3,583 3,831
% change -23% -40% 0% 8% 7% -2% -13% 15% 9% 7%
Crude oil / Condensate & NGL 7,257 3,949 4,067 4,508 4,916 4,828 1,909 2,158 2,147 2,361
% change -24% -46% 3% 11% 9% -2% -14% 24% 12% 9%
Natural gas / LNG 3,855 2,625 2,654 2,728 2,826 2,753 1,311 1,343 1,343 1,385
% change -19% -32% 1% 3% 4% -3% -7% 11% 2% 3%
Other 335 320 151 178 205 202 82 69 93 85
Conventional (implied) 7,272 4,581 4,729 5,459 5,767 5,494 2,291 2,438 2,591 2,868
% change -31% -37% 3% 15% 6% -5% -7% 15% 13% 18%
Shale 4,175 2,313 2,143 1,955 2,179 2,288 1,011 1,132 992 963
% change -2% -45% -7% -9% 11% 5% -24% 16% -2% -15%
Shale in % of total revenue 36% 34% 31% 26% 27% 29% 31% 32% 28% 25%
EBITDA 7,201 3,658 4,063 4,456 5,217 5,095 2,000 2,063 2,035 2,421
% change -25% -49% 11% 10% 17% -2% -10% 43% 2% 17%
Conventional (implied) 5,165 2,966 3,059 3,502 4,067 3,867 1,552 1,507 1,568 1,934
Shale 2,036 692 1,004 954 1,150 1,229 448 556 467 487
EBITDA margin 62.9% 53.1% 59.1% 60.1% 65.7% 65.5% 60.6% 57.8% 56.8% 63.2%
Conventional (implied) 71.0% 64.7% 64.7% 64.1% 70.5% 70.4% - - - -
Shale 48.8% 29.9% 46.9% 48.8% 52.7% 53.7% - - - -
Conventional cash costs per boe 12.5 10.2 9.3 10.2 10.2 10.2 7.3 11.5 12.8 7.5
% change -35% -18% -9% 10% 0% 0% -20% 1% 76% -35%
Shale cash costs per boe 17.0 14.9 14.2 14.9 14.6 14.3 14.1 14.3 15.1 14.8
% change -8% -13% -5% 5% -2% -2% -4% -5% 7% 3%
Depreciation 5,215 4,195 3,497 3,580 3,517 3,316 1,640 1,857 1,847 1,733
Capex including acquisition 5,023 2,517 1,472 1,902 2,163 2,027 845 627 612 1,290
Capex/depreciation 96% 60% 42% 53% 62% 61% 52% 34% 33% 74%
Source: SG Cross Asset Research/Equity
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Metals & Mining
6 April 2018 47
BHP Billiton plc Sales/division 17
EBIT/division 17
Sales/region 17
Major shareholders (%)
Blackrock 6.6
Vanguard 4.1
Elliott 1.8
Standard Life Aberdeen 1.1
Valuation ($m) 6/13 6/14 6/15 6/16 6/17 6/18e 6/19e 6/20e
No. of shares basic year end/outstanding 5,322 5,321 5,318 5,322 5,323 5,323 5,323 5,323
Share price: avg (hist. yrs) or current (p) 1,961 1,873 1,610 909 1,208 1,410 1,410 1,410
Average market cap. (SG adjusted) (1) 163,557 161,944 134,655 71,671 81,526 105,657 105,657 105,657
Restated net debt (-)/cash (+) (2) -27,520 -25,786 -24,417 -26,102 -16,321 -11,090 -8,257 -6,023
Value of minorities (3) NA NA NA NA NA NA NA NA
Value of financial investments (4)
Other adjustment (5)
EV = (1) - (2) + (3) - (4) + (5) 191,077 187,730 159,072 97,773 97,847 116,747 113,914 111,680
P/E (x) 12.5 12.0 23.8 80.3 12.5 11.5 13.4 12.4
Price/cash flow (x) 7.6 7.5 7.5 7.7 5.4 5.7 6.4 6.3
Price/free cash flow (x) 554 26.7 22.4 34.6 7.67 8.44 11.5 11.0
Price/book value (x) 2.32 2.05 2.08 1.32 1.43 1.79 1.74 1.71
EV/revenues (x) 2.90 3.31 3.56 3.16 2.56 2.52 2.59 2.47
EV/EBITDA (x) 6.3 6.2 7.3 7.9 4.8 4.7 5.1 4.8
Dividend yield (%) 3.8 4.0 3.1 4.0 6.4 6.0 7.0 7.3
Per share data ($)
SG EPS (adj.) 2.46 2.54 1.06 0.17 1.22 1.73 1.48 1.60
Cash flow 4.06 4.05 3.40 1.76 2.86 3.49 3.08 3.17
Book value 13.2 14.8 12.1 10.2 10.7 11.1 11.4 11.6
Dividend 1.16 1.21 0.78 0.54 0.98 1.20 1.38 1.44
Income statement ($m)
Revenues 65,953 56,762 44,636 30,912 38,285 46,306 44,025 45,285
Gross income 31,529 31,019 22,522 12,770 20,908 24,987 23,066 24,030
EBITDA 30,503 30,321 21,852 12,340 20,296 24,987 22,317 23,260
Depreciation and amortisation -7,185 -7,809 -9,986 -8,871 -7,907 -8,289 -8,216 -8,122
EBIT 23,318 22,512 11,866 3,469 12,389 16,699 14,102 15,138
Impairment losses -2,253 -478 -2,368 -7,184 -5.00 0.00 0.00 0.00
Net interest income -2,199 -1,428 -1,518 -1,269 -1,598 -1,249 -1,027 -915
Exceptional & non-operating items -245 884 -2,340 -2,520 -631 -2,038 0.00 0.00
Taxation -5,801 -6,266 -2,762 1,297 -3,933 -5,045 -4,017 -4,363
Minority interests -1,597 -1,392 -968 -178 -332 -1,181 -1,138 -1,301
Reported net income 11,223 13,832 1,910 -6,385 5,890 7,187 7,920 8,559
SG adjusted net income 13,123 13,536 5,671 893 6,526 9,225 7,920 8,559
Cash flow statement ($m)
EBITDA 30,503 30,321 21,852 12,340 20,296 24,987 22,317 23,260
Change in working capital -519 -1,338 592 580 -27 -311 62 -35
Other operating cash movements -8,280 -7,386 -4,336 -3,567 -5,000 -6,025 -5,914 -6,320
Cash flow from operating activities 21,704 21,597 18,108 9,353 15,269 18,652 16,465 16,905
Net capital expenditure -21,408 -15,512 -12,093 -7,281 -4,608 -6,096 -7,230 -7,304
Free cash flow 296 6,085 6,015 2,072 10,661 12,556 9,235 9,601
Cash flow from investing activities 3,260 -526 146 -4 681 407 0 0
Cash flow from financing activities -7,527 -3,825 -4,792 -3,753 -1,561 -7,731 -6,403 -7,366
Net change in cash resulting from CF -3,971 1,734 1,369 -1,685 9,781 5,231 2,833 2,234
Balance sheet ($m)
Total long-term assets 120,225 129,117 108,211 101,239 95,950 93,350 92,365 91,547
of which intangible 0 0 0 0 0 0 0 0
Working capital 607 2,195 1,640 1,473 -1,263 -1,939 -2,269 -2,494
Employee benefit obligations 0 0 1,917 1,514 1,625 1,625 1,625 1,625
Shareholders' equity 70,667 79,143 64,768 54,290 57,258 59,213 60,730 61,923
Minority interests 4,624 6,239 5,777 5,781 5,468 5,468 5,468 5,468
Provisions 10,550 12,395 7,065 8,632 8,779 8,779 8,779 8,779
Net debt (-)/cash (+) -27,520 -25,786 -24,417 -26,102 -16,321 -11,090 -8,257 -6,023
Accounting ratios
ROIC (%) 17.6 14.9 8.9 2.9 9.0 14.3 12.5 13.6
ROE (%) 16.4 18.5 2.7 -10.7 10.6 12.3 13.2 14.0
Gross income/revenues (%) 47.8 54.6 50.5 41.3 54.6 54.0 52.4 53.1
EBITDA margin (%) 46.2 53.4 49.0 39.9 53.0 54.0 50.7 51.4
EBIT margin (%) 35.4 39.7 26.6 11.2 32.4 36.1 32.0 33.4
Revenue yoy growth (%) -8.7 -13.9 -21.4 -30.7 23.9 21.0 -4.9 2.9
Rev. organic growth (%) -8.7 -13.9 -21.4 -30.7 23.9 21.0 -4.9 2.9
EBITDA yoy growth (%) -9.6 -0.6 -27.9 -43.5 64.5 23.1 -10.7 4.2
EBIT yoy growth (%) -14.4 -3.5 -47.3 -70.8 NM 34.8 -15.6 7.3
EPS (adj.) yoy growth (%) -27.2 3.2 -58.1 -84.2 NM 41.3 -14.1 8.1
Dividend growth (%) 3.6 4.3 -35.5 -30.8 81.5 22.4 15.1 4.3
Cash conversion (%) 36.8 59.8 87.2 nm 126.4 111.3 107.4 105.2
Net debt/equity (%) 37 30 35 43 26 17 12 9
FFO/net debt (%) 81.8 87.7 72.0 47.4 90.5 168.6 209.2 298.6
Dividend paid/FCF (%) 2083.4 105.0 108.0 199.3 27.4 41.7 69.3 76.7
Source: SG Cross Asset Research/Equity
Iron Ore 38.2%
Copper 21.8%
Coal 19.8%
Petroleum 17.9%
Group and unallocated 2.3%
Iron Ore 56.3%
Coal 23.9%
Copper 15.7%
Petroleum 4.4%
Group and unallocated -0.3%
China 42.6%
Others 20.8%
North. America 14.5%
Japan 9.5%
Autralia/NZ 6.0%
Europe 3.8%
Latin America 2.9%
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Metals & Mining
6 April 2018 48
Mining 12m target downgrade United Kingdom @ Go to SG website
Glencore Buy rating reiterated despite increased DRC risks
Buy We are trimming our target price to £4.20 from £4.70 on the stronger GBP,
higher cost of capital and risk of higher commodity price volatility, as our
now-higher coal and copper price assumptions are offset by political and
regulatory risks in the DRC. However, the stock remains our favourite in
the sector, reflecting attractive commodity exposure and strong cash flow
yields, which we think are still not adequately discounted by the market.
More constructive on coal and copper We are increasing our long-term price
assumptions for coal and copper, the two commodities that matter most at Glencore
(44% and 17% of 2019e EBITDA). We now also incorporate higher capex guidance for
2018-19, and a more cautious view on taxes (reflecting 2017 results) and cost of debt
(reflecting rising yields). As a result, we lower our expectations for net income and FCF in
2018-19, but raise them for later periods. Our forecasts remain above consensus.
Dividend story in the making We estimate that Glencore offers some of the strongest
FCF yields in the sector (12% in 2018, 13+% in 2019-22) with positive momentum into
2019e, in contrast to peers. The company’s FY17 dividends exceeded the minimum
level, as per the dividend policy, and we think Glencore could further increase cash
returns with 1H18 results. Our 2018 dividend forecast is c.40% above consensus.
Three themes for 2018 The key themes for the stock this year are the political and
regulatory uncertainty in the Democratic Republic of the Congo (DRC: home to the
Katanga and Mutanda mines, i.e., c.30% of the Industrial department NPV); thermal coal
price volatility (as Chinese authorities’ seek to strike a balance between adequate coal
supply and healthy profitability in coalmining); and M&A, which will be a constraining factor
for cash returns.
TP lowered on GBP strength and rising interest rates The cut in our TP reflects a
stronger GBP and rising UST yields. We are introducing a 15% discount for the NPV of
African Copper and trimming our target EV/EBITDA assumption for the Industrial department
from 6.0x to 5.5x to reflect increased risks in the DRC. Without DRC-related adjustments, our
TP would be around £4.40-4.50, implying c.30% TSR. GLEN is trading at a 2018 P/E of less
than 10x (adjusted for overstated depreciation) vs 11.1x for Rio Tinto and 13.1x for BHP
Billiton, while it offers superior FCF yields and stronger earnings momentum.
Price 05/04/18 358.8p
12m target 420.0p
Upside to TP 17.1%
12m f'cast div 18.4p
12m TSR 22.2%
Main changes since last report Target (p) 420.0 (470.0)
EPS 18e ($) 0.462 (0.493) -6.3%
EPS 19e ($) 0.505 (0.541) -6.7%
EPS 20e ($) 0.545 nc new vs (old) nc: no change
Preferred stock
MT NA, GLEN LN
Least preferred stock
VALE US
SG strategy team sector weighting
Overweight
Share price performance
Source: SG Cross Asset Research/Equity Perf. (%) 1m 3m 12m ytd
Share -1.6 -8.2 12.1 -8.0
Rel. index* 4.7 12.5 20.3 5.6
Rel. sector** 4.0 4.7 19.4 4.6
* MSCI World ($) ** MSCI World Metals & Mining ($)
RIC GLEN.L, Bloom GLEN LN
52-week range 415.0-276.6
EV 18 ($m) 98,318
Mkt cap. (£m) 51,182
Free float (%) 70.0
No. shares o/s (m) 14265
Avg vol. 3m (No. shares) 45,096,548
Equity analyst
Sergey Donskoy +44 20 7762 4594 [email protected]
Equity analyst
Christian Georges +44 20 7762 5969 [email protected]
Financial data 12/17 12/18e 12/19e 12/20e Ratios 12/17 12/18e 12/19e 12/20e
Revenues ($bn) 205 218 219 222 P/E (x) 11.4 10.9 10.0 9.3
Rev. yoy growth (%) 34.3 6.2 0.2 1.4 FCF yield (/EV) (%) 1.5 8.3 8.7 10.6
EBIT margin (%) 4.2 5.2 5.4 5.5 Dividend yield (%) 4.3 5.8 6.8 7.7
Rep. net inc. ($bn) 5.78 6.59 7.20 7.77 Price/book value (x) 1.33 1.37 1.30 1.24
EPS (adj.) ($) 0.41 0.46 0.50 0.54 EV/revenues (x) 0.48 0.45 0.43 0.40
EPS yoy growth (%) 318.0 14.0 9.3 7.9 EV/EBIT (x) 11.4 8.59 7.87 7.21
Dividend/share ($) 0.20 0.30 0.34 0.39 EV/IC (x) 1.2 1.2 1.2 1.1
Dividend yoy growth (%) NM 47.6 15.6 14.0 ROIC/WACC (x) 1.0 1.3 1.4 1.4
Payout (%) 49 64 68 71 Net Debt/EBITDA (x) 2.15 1.46 1.12 0.80
2.6
2.9
3.2
3.5
3.8
4.1
4.4
Apr Jun Aug Oct Dec Feb
Price
P
R
E
M
I
U
M
L
I
S
T
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Investment summary
Summary changes
(Buy, £4.20) vs (Buy, £4.70) 2018e 2019e
New Old Chg Cons. SG vs cons. New Old Chg Cons. SG vs cons.
Revenue ($m) 218,121 190,566 14% 220,100 -1% 218,509 199,231 10% 225,721 -3%
EBITDA ($m) 18,012 17,802 1% 18,120 -1% 19,110 18,697 2% 17,882 7%
EPS ($) 0.46 0.49 -6% 0.47 -2% 0.50 0.54 -7% 0.44 15%
DPS ($) 0.30 0.34 -13% 0.20 48% 0.34 0.38 -9% 0.22 58%
Source: Bloomberg, SG Cross Asset Research/Equity
Main changes
We are increasing our 2018-19 revenue and to a much lesser extent, our EBITDA forecasts to
reflect primarily higher price assumptions for thermal coal and copper, as well as the strong
financial performance demonstrated by the marketing department in 2017, which we think can
be sustained in the coming years.
At the same time, we are trimming our 2018-19 forecasts at the net income level as positive
changes above the operating income level are offset by a higher effective tax rate (reflecting
2017 results) and a higher cost of debt on the back of rising interest rates and higher readily
marketable inventories (“RMI”) in the Marketing department (largely reflecting higher
commodity prices).
We also incorporate the increased medium-term capex guidance leading to a cut in FCF and
dividend forecasts in 2018-19, although our expectations remain above the consensus and
imply a 6-7% dividend yield (assuming a 50% payout of the Industrial FCF).
At the same time, our capex forecast beyond 2019 does not change that much, which,
together with a stronger earnings outlook, leads to higher FCF and dividends in the longer
term, as illustrated in the table below.
Glencore: Changes to our financial forecasts
$m 2018e 2019e 2020e 2021e 2022e
EBITDA 18,012 19,110 19,679 20,076 19,705
o/w Marketing 3,062 3,043 3,090 3,133 3,145
o/w Industrial 14,950 16,067 16,589 16,943 16,561
EBIT 11,449 11,873 12,187 12,443 12,060
Net income 6,590 7,203 7,769 8,336 8,513
EPS ($) 0.46 0.50 0.54 0.58 0.60
Capex 4,986 4,921 4,365 4,276 4,284
FCF* 8,424 9,738 11,097 11,883 12,045
DPS ($) 0.30 0.34 0.39 0.42 0.42
Changes (%)
EBITDA 1% 2% 4% 7% 11%
o/w Marketing 5% 4% 4% 4% 4%
o/w Industrial 0% 2% 4% 7% 13%
EBIT 3% 2% 4% 7% 14%
Net income -6% -6% -4% 0% 6%
EPS ($) -6% -7% -5% -1% 6%
Capex 23% 20% 7% -5% 7%
FCF -13% -9% -1% 7% 8%
DPS ($) -13% -9% -1% 7% 8%
Source: SG Cross Asset Research/Equity *Excluding WC changes, M&A and disposals
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We are trimming our TP from £4.70 to £4.20 per share (-10.6%) to reflect GBP appreciation, a
higher cost of capital on the back of rising US treasury yields (up c.50bp for 10y UST since
early November) and the risk of higher commodity price volatility. Perhaps more importantly,
we take into consideration increased political and tax risks in the DRC, which represents (on
our analysis) c.30% of the unadjusted NPV of the Industrial department. Without the DRC-
related discount, our TP would be in the £4.40-4.50 range. Taking into account our revised
12m dividend estimate ($0.26), and following the recent market correction, we now see a TSR
of c.20%, which supports our constructive stance and our Buy rating.
Main reasons for our recommendation
SG Equity Research view
Glencore remains our favourite name in the mining sector reflecting the company’s strong
cashflow generation with a FCF yield of 12% in 2018 and 13-17% over 2019-22, and
favourable positioning in the commodity space with prevalent exposure to base metals and
thermal coal (respectively c.80% and c.20% of 2019e Industrial EBITDA). Although thermal
coal prices are probably not sustainable at current levels, we think they are more likely to
surprise by staying ‘stronger for longer’ than iron ore or coking coal prices.
Diversified miners’ EBITDA exposure (2018e) Glencore FCF outlook ($bn)
Source: SG Cross Asset Research/Equity Source: Company, SG Cross Asset Research/Equity *Based on historical market cap until 2018
The marketing department remains the company’s unique advantage as it is still not fully
discounted in the share price, in our view. We expect marketing activities to generate $3.0-
3.1bn in EBITDA over 2018-22e while requiring very light capex ($0.2bn p.a.). We note that
Glencore has now practically completed its deleveraging with end-2017 Net debt/EBITDA of
0.7x. The company is therefore logically in a position to exceed the minimum cash returns as
per its dividend policy ($1bn from Marketing plus 25% of Industrial FCF) and has the potential
to become the most exciting dividend story in the M&M sector.
Valuation summary
Our TP is a 50:50 combination of NPV (using a 7.8% WACC) and target multiple-based
estimates of respectively £4.42 and £5.00 (the latter is based on a 15.0x target P/E multiple for
the marketing operations and a 5.5x EV/EBITDA multiple for the industrial operations). The
NPV valuation includes a 15% discount to the NPV of African Copper reflecting the increased
political and regulatory risks, which is also the reason for our lower target EV/EBITDA
assumption (previously 6.0x).
22%
59%
17%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
GLEN AAL BLT RIO VALE
Iron ore Coal Base metals PGM
Diamonds Oil Other Marketing
-3%
0%
3%
6%
9%
12%
15%
18%
21%
-2
0
2
4
6
8
10
12
14
2015 2016 2017e 2018e 2019e 2020e 2021e 2022e
Marketing Industrial FCF y ield* (%, rhs)
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6 April 2018 51
The average of the two yields a valuation of £4.70, to which we apply an adjusting factor of
0.90 (based on 1.40x adjusted beta vs S&P Industrial Metals and assumption of a 15%
correction in the base metals index) to obtain our TP of £4.20. Excluding the effect of GBP
appreciation, our TP would be cut by about 3%. We expect a 12m dividend of $0.26, resulting
in 12m TSR of c.20%; hence our Buy recommendation (unchanged).
Glencore – Sum-of-the-parts NPV valuation
$m EV/ EV/EBITDA (x)
Equity 2018e 2019e 2020e 2021e 2022e
Industrial activities
Copper 45,557 6.8 5.5 5.3 5.3 5.3
Zinc 12,120 4.1 3.9 3.9 3.8 3.9
Nickel 6,815 7.1 6.8 5.5 4.8 6.2
Alloys 4,233 6.9 7.3 6.5 5.9 5.9
Coal 21,380 5.5 6.6 6.6 6.6 6.6
Oil 778 4.2 3.7 3.3 3.1 3.1
Overheads (2,853)
EV - Industrial 88,031 5.9 5.5 5.3 5.2 5.3
Net funding (13,861)
Minority interest (6,518)
Equity value - Industrial 67,651
Equity value - Marketing 18,932
Total equity w/o investments 86,583
Investments 1,789
Total equity value 88,372
Equity ($) 6.2
Equity (£) 4.42
Source: SG Cross Asset Research/Equity
Glencore – Target multiple valuation
Average 2018e 2019e 2020e 2021e 2022e
Industrial activities
Industrial EBITDA* 16,067 16,589 16,943 16,561 16,148
Target EV/EBITDA (x) 5.5 5.5 5.5 5.5 5.5
EV of industrial activities 88,371 91,241 93,186 91,084 88,813
Net funding (13,861) (8,883) (3,080) 2,920 8,861
Minority interest (6,518) (6,451) (6,273) (6,027) (5,768)
Equity value - Industrial 67,991 75,907 83,833 87,977 91,905
Marketing activities
Marketing net income* 1,993 2,034 2,066 2,073 2,084
Target P/E for marketing 15.0 15.0 15.0 15.0 15.0
Equity value - Marketing 29,891 30,507 30,985 31,090 31,267
Consolidated
Total equity ex investments 97,882 106,414 114,818 119,067 123,172
Investments 1,789 1,789 1,789 1,789 1,789
Equity value at end of period 99,670 108,203 116,607 120,856 124,961
Discount factor 1.00 1.11 1.24 1.38 1.53
Target equity ($) 7.0 7.6 8.2 8.5 8.8
PV of target equity ($) 7.0 6.8 6.6 6.2 5.7
Dividends ($) 0.3 0.4 0.4 0.4
PV of dividends ($) 0.3 0.3 0.3 0.3
Equity + cumulative dividends ($) 7.0 7.1 7.2 7.0 6.8
Equity + cumulative dividends (£) 5.00 4.98 5.06 5.11 4.99 4.87
Source: SG Cross Asset Research/Equity *Following period **Payable during calendar year
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Key themes for 2018
DRC: peace and a smooth transition is more important than regulation
The DRC is a very important place for Glencore as it represents c.30% of the NPV of the
Industrial department on our estimates (before risk adjustments). Not only are the Katanga and
Mutanda mines among the biggest in the company’s copper portfolio, but with cobalt prices
soaring they are very likely also by far the most profitable (in the future tense in Katanga’s
case, as the mine is currently in a ramp-up phase following a two-year refurbishment).
Furthermore, we believe that, including revenue from cobalt, both mines should have negative
cash costs.
This value is now under threat from two developments. One is the new Mining Code awaiting
President Kabila’s signature after passing the senate. The Code is likely to significantly
increase GLEN’s tax burden, ratcheting up the royalties on copper and cobalt from 2%
currently to 3.5% and 10%, respectively, and introducing a 50% tax on ‘super profits’ defined
as operating income earned when commodity prices exceed the levels assumed in the
bankable feasibility study by 25%.
In our view, the higher royalty rates alone do not pose a great threat to Glencore’s profitability.
Even after the increase, the royalty rate paid for copper should remain below the level in
neighbouring Zambia. And even though the 10% royalty on cobalt looks extreme it should be
viewed in the context of the c.240% price rally over the past two years. What poses a bigger
risk (and where we think a compromise could be sought by miners) is the taxation of ‘super
profits’, which looks to be not only draconian but also unfair as it penalises companies with
long-life assets and those making investment decisions based on conservative commodity
price assumptions.
Glencore: Industrial department NPV breakdown Copper: World mine production (2017)
Source: SG Cross Asset Research/Equity *Before additional political & regulatory
discount
Source: USGS, SG Cross Asset Research/Equity
Another threat is the risk of a violent change in the political leadership, with President Joseph
Kabila’s popularity in decline. The situation in parts of the country is reportedly unstable, with
local militia vying for influence with pro-government forces. In a worst case scenario, further
escalation of the conflict could lead to another civil war (the previous one lasted five years,
ending in 2003, and was one of the bloodiest on the continent). Even if the worst is avoided,
Kabila’s displacement could lead to a review of the existing license agreements and
ownership rights, with unpredictable results.
31%
23%13%
8%
23%
2% Af rican copper*
Other copper
Zinc
Nickel
Coal
Other ops and ov erheads
27%
12%
9%7%
5%4%
36%
Chile
Peru
China
US
Australia
DRC
Other
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6 April 2018 53
It is difficult to say to what extent these risks are already discounted in the share price. For our
own part we reflect them by applying an additional 15% discount to the NPV of African
copper and lowering the target EV/EBITDA for the Industrial department from 6.0x to 5.5x.
However, we note that any serious disruptions in the supply of copper caused by political
instability or regulatory changes (the DRC accounts for c.4% of the world mine supply) would
lend support to commodity prices and boost the profits of Glencore’s other copper mines.
Nevertheless, given the importance of the DRC operations for the group, any serious risk to
the ownership rights or stability of production would probably be a net negative for its
valuation.
Coal - The biggest swing factor
Coal market performance over the past two years has been one of the most remarkable
comeback stories in the commodities universe. Entering 2018 with the Newcastle benchmark
above $100/t, we estimate that Glencore’s coal division should currently be enjoying c.40%
EBITDA margins and strong cash flows. Whatever happens in the next nine months will be of
high significance for 2018 financial results: with 130+mt of consolidated production, we
calculate that each $10/t shift in coal prices means a 6% change in EBITDA and an 8%
change in FCF.
We expect coal prices to correct by $10-15/t by the end of 2018e (with Newcastle declining to
$80/t on SGe from $90-95/t today), but what matters is not just the magnitude of the move but
equally the trajectory. Given the low inventory levels in late 2017 and extreme temperatures
affecting large parts of Europe, China and North America, we think that without a meaningful
supply increase prices will remain well bid.
Glencore: NPV sensitivity to 10% change in LT prices World thermal coal market: imports (bt)
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity
China to play a crucial role
After shutting down about 450mt of coalmining capacity over the past two years the Chinese
authorities are still determined to bring the number up to 500mt (most likely by the end of this
year) but we expect further reductions to be partly or fully offset by new capacity. The
resulting balance will matter a great deal for the seaborne market, in our view, given China’s
role as the world’s biggest importer, with a 19% share in 2017.
We believe that over the medium term coal prices are likely to find support at around $80/t
FOB Australia, which by our estimates corresponds to a Chinese FOB benchmark of
0%
1%
2%
3%
4%
5%
6%
7%
8%
Coal Copper Nickel & cobalt
Nickel Cobalt Zinc Precious metals
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2011 2012 2013 2014 2015 2016 2017e
China Taipei India Japan Korea Other Asia Europe Other
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6 April 2018 54
CNY540/t, the middle of the CNY500-580/t ‘comfort range’ sought by Chinese authorities
(price high enough to ensure healthy profitability of domestic coal producers, but not too high
to hurt utilities). That said, prices could be prone to significant swings over short periods and
we see thermal coal as possibly the biggest swing factor for 2018 earnings.
M&A - A careful balancing act
Glencore has been more active in the M&A field in the last two years than any other diversified
miner. Given the positive long-term consensus view of the base metal universe and favourable
trading conditions for energy commodities in the near to medium term, we think it is probably
still on the lookout for opportunities. In view of the strong financial outlook (2018 is likely to be
a record year for Glencore in terms of cash flows) management may find it especially difficult
to pass up any attractive opportunities.
This is the area in which a careful balance is required in view of investors' cautious attitude to
inorganic growth (not entirely unjustified given Glencore's track record) and expectations of
strong cash returns. Given the dearth of quality assets for sale in the base metals universe, the
chances are that Glencore will continue to strengthen its coal mining arm. This is something
that may not be readily appreciated by all investors. The 'right' valuation will therefore be more
important than ever.
Hail Creek The first deal (announced 20 March 2018) was not long in coming. The $1.7bn
acquisition of an 82% interest in the Hail Creek coal mine from Rio Tinto was an obvious
possibility. Hail Creek has a production capacity of 9-10mt producing a 60:40 mix of hard
coking and thermal coal. The mine has reserve life of c.15 years but, based on known
resources, we estimate that it could remain in operation for c.60 years. In addition, Glencore is
also acquiring 71.2% in untapped Valeria coal deposits with resources of 762mt.
The market did not seem very pleased with the deal, with Rio Tinto outperforming Glencore on
the day of the announcement. We think the acquisition could in fact be value accretive for
Glencore, however. Based on our long-term price assumptions, we estimate that Glencore is
paying normalised EV/EBITDA of about 6.0x, which lies within the valuation range of listed
peers even leaving Valeria out of consideration. The price also translates into normalised P/E
of 9.0x compared with Glencore’s own (adjusted) 2019e P/E of 9.2x.
Drummond Colombia: key financials and shipments Colombian coal exports (2017e)
Source: SG Cross Asset Research/Equity Source: McCloskey, SG Cross Asset Research/Equity *Joint operation of Anglo American, BHP
Billiton and Glencore **100% Glencore
0
5
10
15
20
25
30
35
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2014 2015 2016 2017e 2018e 2019e
EBITDA ($bn) Rev enue ($bn) Sales (mt, rhs)
40%
19%
41% Cerrejon*
Prodeco**
Drummond
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Drummond Another possible target is Drummond's Colombian coal business (20%-co-
owned by Itochu), one of the world's biggest coalmining complexes with annual production of
32-33mt. According to media reports (e.g. McCloskey) Drummond is “exploring investment
options” for the assets and has already been approached by potential suitors. We estimate
that in spot economics the mine could generate EBITDA of c.$800m and possibly fetch a
valuation of $3.0-4.0bn. Such an acquisition (even excluding Itochu’s stake) could be too big
for Glencore to go it alone, so in that event it may need to look for a partner.
Bunge Yet another possibility, which has already received (possibly too) much attention, is a
possible takeover of agri group Bunge. In May 2017, Glencore ‘made an informal approach’ to
its rival ‘regarding a possible consensual business combination’, which was reportedly
rejected at the time by Bunge’s management. However, we believe that Glencore remains
interested in expanding the agricultural side of its marketing business, which currently
represents just c.10% of the department’s EBITDA.
That said, we are not convinced that a full-blown takeover is what Glencore has in mind.
Bunge’s financial performance in the past three years has been disappointing, with EBITDA
falling 35% since 2014. It is largely thanks to recurring takeover speculation that the share
price has not been seriously hurt. The company has been struggling to deliver a turnaround,
which recently pushed it towards merger talks with rival ADM (talks have reportedly stalled,
however). Meanwhile, the US grain market (to which Glencore is keen to gain exposure)
accounts for less than one-third of Bunge’s operating income (see left-hand chart below).
Bunge EBIT by segment (2017) Bunge EBITDA and share performance
Source: Company, SG Cross Asset Research/Equity Source: Company, SG Cross Asset Research/Equity
In view of the above, we think that Glencore could prefer to build a consortium with a view to
splitting up Bunge and retaining only select parts rather than the entire business, which at
today’s market valuation of more than $10bn (before any takeover premium) would make it
difficult for Glencore to digest alone.
37%
20%
39%
1%3%
Oilseeds
Grains
Food & ingredients
Sugar & bioenergy
Fertilizer
0
20
40
60
80
100
0.0
0.5
1.0
1.5
2.0
2.5
Dec' 10 Dec' 11 Dec' 12 Dec' 13 Dec' 14 Dec' 15 Dec' 16 Dec' 17
12m trailing EBITDA Share price ($, rhs)
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6 April 2018 56
Glencore Sales/division 16
EBIT/division 16
Sales/region 16
Major shareholders (%)
Management and employees 30.0
Valuation ($m) 12/13 12/14 12/15 12/16 12/17 12/18e 12/19e 12/20e
No. of shares basic year end/outstanding 13,122 12,985 14,220 14,228 14,265 14,265 14,265 14,265
Share price: avg (hist. yrs) or current (p) 332 330 210 176 329 359 359 359
Average market cap. (SG adjusted) (1) 68,087 70,532 45,700 33,817 60,442 72,052 72,052 72,052
Restated net debt (-)/cash (+) (2) -52,288 -49,838 -41,303 -30,700 -31,810 -26,267 -21,343 -15,806
Value of minorities (3) NA NA NA NA NA NA NA NA
Value of financial investments (4)
Other adjustment (5)
EV = (1) - (2) + (3) - (4) + (5) 120,375 120,370 87,003 64,517 97,896 98,318 93,395 87,858
P/E (x) 15.7 31.0 NM 24.5 11.4 10.9 10.0 9.3
Price/cash flow (x) 5.9 7.7 3.2 6.0 11.2 5.3 5.3 5.0
Price/free cash flow (x) 142 174 5.31 12.4 25.5 7.62 7.60 6.71
Price/book value (x) 1.17 1.47 1.04 0.76 1.33 1.37 1.30 1.24
EV/revenues (x) 0.52 0.54 0.51 0.42 0.48 0.45 0.43 0.40
EV/EBITDA (x) 11.5 9.4 10.0 6.3 6.6 5.5 4.9 4.5
Dividend yield (%) 3.2 3.3 1.9 2.9 4.3 5.8 6.8 7.7
Per share data ($)
SG EPS (adj.) 0.33 0.18 -0.37 0.097 0.41 0.46 0.50 0.54
Cash flow 0.88 0.70 1.01 0.40 0.41 0.95 0.95 1.00
Book value 4.45 3.69 3.10 3.11 3.49 3.69 3.89 4.09
Dividend 0.17 0.18 0.060 0.070 0.20 0.30 0.34 0.39
Income statement ($m)
Revenues 232,694 221,073 170,497 152,948 205,476 218,121 218,509 221,649
Gross income 11,672 14,068 9,965 11,370 16,072 19,322 20,420 20,989
EBITDA 10,466 12,764 8,694 10,268 14,762 18,012 19,110 19,679
Depreciation and amortisation -5,637 -6,058 -6,522 -6,338 -6,210 -6,563 -7,237 -7,493
EBIT 4,829 6,706 2,172 3,930 8,552 11,449 11,873 12,187
Impairment losses NA NA NA NA NA NA NA NA
Net interest income -1,388 -1,471 -1,394 -1,533 -1,451 -1,397 -1,035 -673
Exceptional & non-operating items NA NA NA NA NA NA NA NA
Taxation -254 -1,809 -98.0 -638 -1,759 -2,446 -2,606 -2,707
Minority interests -104 -136 3,150 443 615 -215 -224 -230
Reported net income -7,402 2,308 -4,964 1,379 5,777 6,590 7,203 7,769
SG adjusted net income 3,666 2,308 -4,964 1,379 5,777 6,590 7,203 7,769
Cash flow statement ($m)
EBITDA 10,466 12,764 8,694 10,268 14,762 18,012 19,110 19,679
Change in working capital 2,599 -703 7,525 -1,201 -4,965 1,030 -264 -358
Other operating cash movements -3,330 -2,796 -2,761 -3,416 -3,899 -5,475 -5,329 -5,029
Cash flow from operating activities 9,735 9,265 13,458 5,651 5,898 13,568 13,517 14,292
Net capital expenditure -9,329 -8,854 -5,404 -2,920 -3,304 -4,113 -4,042 -3,553
Free cash flow 406 411 8,054 2,731 2,594 9,454 9,474 10,739
Cash flow from investing activities 2,083 3,694 -113 5,699 -310 -67 -67 -67
Cash flow from financing activities -2,422 -4,130 -9,073 -5,029 -2,665 -4,801 -4,542 -4,992
Net change in cash resulting from CF 67 -25 -1,132 3,401 -381 4,587 4,865 5,680
Balance sheet ($m)
Total long-term assets 95,570 98,986 86,287 81,188 85,867 84,146 81,687 78,417
of which intangible 8,196 7,904 6,554 5,754 5,825 5,825 5,824 5,823
Working capital 26,542 18,422 9,697 7,557 12,590 11,455 11,605 11,840
Employee benefit obligations NA NA NA NA NA NA NA NA
Shareholders' equity 49,313 48,542 41,254 44,243 49,755 52,650 55,510 58,274
Minority interests 3,368 2,938 89 -462 -300 -85 139 369
Provisions 8,064 7,555 5,923 5,931 7,094 7,094 7,094 7,094
Net debt (-)/cash (+) -52,288 -49,838 -41,303 -30,700 -31,810 -26,267 -21,343 -15,806
Accounting ratios
ROIC (%) 4.9 5.1 3.0 4.1 8.0 10.1 10.7 11.3
ROE (%) -18.4 4.7 -11.1 3.2 12.3 12.9 13.3 13.7
Gross income/revenues (%) 5.0 6.4 5.8 7.4 7.8 8.9 9.3 9.5
EBITDA margin (%) 4.5 5.8 5.1 6.7 7.2 8.3 8.7 8.9
EBIT margin (%) 2.1 3.0 1.3 2.6 4.2 5.2 5.4 5.5
Revenue yoy growth (%) 8.5 -5.0 -22.9 -10.3 34.3 6.2 0.2 1.4
Rev. organic growth (%) 8.5 -5.0 -22.9 -10.3 34.3 6.2 0.2 1.4
EBITDA yoy growth (%) 76.1 22.0 -31.9 18.1 43.8 22.0 6.1 3.0
EBIT yoy growth (%) 8.0 38.9 -67.6 80.9 NM 33.9 3.7 2.6
EPS (adj.) yoy growth (%) 130.0 -46.9 -312.4 126.0 318.0 14.0 9.3 7.9
Dividend growth (%) 4.8 9.1 -66.7 16.7 NM 47.6 15.6 14.0
Cash conversion (%) 40.3 21.2 nm 95.3 42.1 106.1 101.2 106.4
Net debt/equity (%) 99 97 100 70 64 50 38 27
FFO/net debt (%) 16.9 19.0 17.4 26.4 36.3 53.9 72.5 103.1
Dividend paid/FCF (%) 533.0 570.6 9.6 36.5 110.0 44.6 51.4 51.7
Source: SG Cross Asset Research/Equity
Mining 12m target downgrade United Kingdom @ Go to SG website
Energy products 49.3%
Metals & Minerals 36.8%
Agricultural products 13.7%
Corporate 0.1%
Metals & Minerals 72.5%
Agricultural products 24.7%
Energy products 22.4%
Corporate -19.6%
Asia 39.2%
Europe 31.9%
Americas 21.4%
Oceania 3.8%
Africa 3.7%
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6 April 2018 57
Rio Tinto Price correction brings back value
Buy We raise our earnings estimates on higher commodity price assumptions
and also incorporate higher capex guidance. We see Rio Tinto generating a
7-8% FCF yield in 2018-21e, with 2018-19e EV/EBITDA close to the
historical average. In terms of valuation, positive changes to earnings
forecast are wiped out by the strengthening GBP, a higher cost of capital
and higher capex, leading to an 8% cut in our TP from £44.00 to £40.50.
However, we maintain our Buy rating following the recent price correction.
FY17 results support SG view Rio’s FY results did not surprise much apart from a major
drop in net debt due to a $1.2bn tax deferral. Our adjustments to financial forecasts thus
reflect an improved view of the commodity price outlook (stronger iron ore near term,
stronger copper long term) as well as higher capex as per management’s updated
guidance. These changes do not alter our view of Rio Tinto generating $6bn+ of FCF in a
$60/t iron ore environment, which translates into a 7-8% FCF yield over 2018-21.
A low-beta name for turbulent times We expect the commodity complex to lose much
of its price momentum this year with base metals range-bound near spot levels and bulk
commodities under pressure. While such an environment does not favour mining stocks,
we think that Rio Tinto is one of the safer investments in the sector given its balance
sheet strength, excellent operating track record and low market beta vs peers.
More asset disposals on the cards We expect Rio Tinto to continue slimming down its
asset portfolio with the possible divestment of Grasberg and Pacific Aluminium. Together
with other disposals announced YTD, we estimate proceeds could reach $8bn, much of
which we would expect to go to further buybacks. That said, divesting Grasberg would
seriously erode the group’s growth outlook, which could prompt the company to take a
more constructive stance on M&A.
Factoring in a stronger GBP and higher rates Our TP is a 50:50 mix of an NPV and a
target EV/EBITDA valuation, adjusted for a 10% risk discount (reflecting a 15%
correction in the commodity index on a 12m horizon). The combination of a stronger
GBP and an upward move in UST yields offsets higher profit expectations, leading to an
8% cut in the TP. However, following the recent share price correction, the stock
remains in 15%+ TSR territory, which means that it is still at a Buy rating.
Price 05/04/18 3,645.5p
12m target 4,050.0p
Upside to TP 11.1%
12m f'cast div 205p
12m TSR 16.7%
Main changes since last report Target (p) 4050.0 (4400.0)
EPS 18e ($) 4.77 (4.03) +18.4%
EPS 19e ($) 4.29 (3.90) +10.0%
EPS 20e ($) 4.48 nc new vs (old) nc: no change
Preferred stock
MT NA, GLEN LN
Least preferred stock
VALE US
SG strategy team sector weighting
Overweight
Share price performance
Source: SG Cross Asset Research/Equity Perf. (%) 1m 3m 12m ytd
Share 0.2 -8.6 11.7 -7.5
Rel. index* 0.8 -4.1 10.1 -4.6
Rel. sector** 2.4 1.2 8.0 0.0
* MSCI World ($) ** MSCI World Metals & Mining ($)
RIC RIO.L, Bloom RIO LN
52-week range 4,172-2,910
EV 18 ($m) 96,320
Mkt cap. (£m) 67,315
Free float (%) 91.0
No. shares o/s (m) 1799
Avg vol. 3m (No. shares) 4,464,554
Equity analyst
Sergey Donskoy +44 20 7762 4594 [email protected]
Equity analyst
Christian Georges +44 20 7762 5969 [email protected]
Financial data 12/17 12/18e 12/19e 12/20e Ratios 12/17 12/18e 12/19e 12/20e
Revenues ($bn) 41.9 42.7 41.6 42.4 P/E (x) 10.0 10.8 12.0 11.4
Rev. yoy growth (%) 18.5 2.1 -2.7 2.0 FCF yield (/EV) (%) 9.6 5.6 6.1 6.2
EBIT margin (%) 33.9 32.9 30.6 30.7 Dividend yield (%) 6.0 5.6 5.1 5.3
Rep. net inc. ($bn) 8.76 8.29 7.34 7.67 Price/book value (x) 1.93 1.98 1.84 1.73
EPS (adj.) ($) 4.79 4.77 4.29 4.48 EV/revenues (x) 2.16 2.25 2.28 2.19
EPS yoy growth (%) 70.0 -0.5 -10.1 4.5 EV/EBIT (x) 6.38 6.84 7.46 7.14
Dividend/share ($) 2.90 2.88 2.59 2.71 EV/IC (x) 1.1 1.2 1.1 1.1
Dividend yoy growth (%) 70.6 -0.6 -10.1 4.5 ROIC/WACC (x) 1.5 1.5 1.3 1.3
Payout (%) 60 60 60 60 Net Debt/EBITDA (x) 0.30 0.39 0.34 0.22
27
30
33
36
39
42
Apr Jun Aug Oct Dec Feb
Price
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Investment summary
Summary changes
(Buy, £40.50) vs (Buy, £44.00) 2018e 2019e
New Old Chg Cons. SG vs cons. New Old Chg Cons. SG vs cons.
Revenue ($m) 42,720 40,436 6% 38,978 10% 41,576 40,268 3% 38,456 8%
EBITDA ($m) 18,620 16,576 12% 18,304 2% 17,344 16,116 8% 17,160 1%
EPS ($) 4.81 4.06 19% 4.86 -1% 4.33 3.92 10% 4.48 -3%
DPS ($) 2.89 2.43 19% 2.94 -2% 2.60 2.35 10% 2.62 -1%
Source: Bloomberg, SG Cross Asset Research/Equity
Main changes
We upgrade our 2018 estimates on the back of a more constructive commodity prices stance,
in particular for iron ore (+5%, reflecting the robust 1Q18) and copper (+5%, as we expect
$6,500/t to be a support level on LME). Our forecast still includes the contribution from
divested aluminium and coal assets as we wait for the deals to be completed. This translates
into a 12% upgrade in EBITDA and an 18% upgrade in underlying earnings. As we leave our
iron ore price forecast unchanged beyond this year, the upgrade in 2019 estimates is less
significant (+8% to EBITDA and +9% to underlying earnings).
We adjust our capex forecast, aligning it with management’s guidance, resulting in a modest
increase in 2018 (+4%) and more significant in 2019 (+10%). As a result, we slightly increase
our FCF forecast for this year (+5%) but expect weaker FCF in 2019 (-8%). A higher net debt
forecast (+$2.0bn in 2018) reflects a combination of higher dividends, an additional $1bn
share buyback announced in February and $1.2bn of Australian tax carryover from the
previous year, which more than offset a slight increase in FCF. Apart from what was
mentioned above, proceeds from asset disposals are not yet included in our model. Even so,
the net debt/EBITDA ratio is likely to remain very low (0.4x at end-2018).
We raise our dividend expectations largely in line with EPS as we expect Rio Tinto to maintain
the payout ratio at the maximum level (60%).
Rio Tinto – changes to financial forecasts
$m 2018e 2019e 2020e
New Old Chg (%) New Old Chg (%) New Old Chg (%)
Revenue 42,720 40,436 6% 41,576 40,268 3% 42,414 41,398 2%
EBITDA 18,620 16,576 12% 17,344 16,116 8% 17,683 16,626 6%
Underlying earnings 8,295 7,043 18% 7,335 6,745 9% 7,667 7,190 7%
Capex 5,503 5,281 4% 5,926 5,377 10% 5,932 5,162 15%
FCF* 7,493 7,157 5% 6,246 6,574 -5% 6,472 7,136 -9%
Net debt** 6,477 4,425 46% 4,952 2,064 140% 3,051 (813) na
DPS ($) 2.89 2.43 19% 2.60 2.35 10% 2.71 2.51 8%
Source: SG Cross Asset Research/Equity *Excluding WC changes **Excluding pensions
On the back of these changes we reduce our TP by 8%, from £44.00 to £40.50, mainly
reflecting GBP strengthening since our previous update, a higher cost of capital (as a result of
the upward move in US treasury yields) and higher capex as mentioned above. Excluding the
FX adjustment, this amounts to a minor 1% TP cut. Now that the share price has dropped
below where it was in early November, and with a higher 12m dividend ($2.9 vs $2.5), 12m
TSR remains in the 15%+ zone, so our Buy recommendation remains unchanged.
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6 April 2018 59
Main arguments for our recommendation
SG Equity Research view
Following the latest share price correction, Rio Tinto again offers relatively inexpensive and
high-quality exposure to the M&M sector. The average of 2018-19 EV/EBITDA multiples is
largely in line with the historical average, while the company’s strong balance sheet does not
stand out as peers are all making strides towards deleveraging. On the other hand, worth
noting is the organic growth in copper and upside to base metal prices.
Our FCF forecast (excl. WC changes and disposals) translates into an 8% yield for 2018 and
7% for the medium term, with yields of 10%+ beyond a five-year horizon (mainly on the back
of the Oyu Tolgoi ramp-up and a recovery in aluminium and copper prices). We believe that
higher yields in the longer term look attractive for a low-beta name, although relatively low
yields in the near term (vs peers) make the stock more sensitive to increased market volatility.
Over 2016-17, Rio Tinto generated FCF of $19.2bn (excl. WCR), including $15.3bn from
operations and $3.9bn from asset disposals. At the same time it repaid $7.7bn of debt (net of
new borrowings), declared dividends of $8.2bn and announced buybacks totalling $5.0bn.
This is tantamount to returning to shareholders 100% of FCF after financing, which we think
will remain the company’s policy going forward.
Rio Tinto: cash generation and uses in 2016-17* ($bn) Rio Tinto: EBITDA composition*
Source: Company. SG Cross Asset Research/Equity *Incl. dividend payments and buybacks to
be completed in 2018
Source: Company, SG Cross Asset Research/Equity *Incl. Grasberg
Iron ore remains the company’s single biggest earnings driver, although its relative
contribution is declining on the back of the price recovery in the base metals complex. We
expect the share of iron ore in 2018 EBITDA to drop to 57% from 66% last year (chart above
right). Realistically, however, Rio Tinto needs more growth in other areas – organic or not – to
become a truly diversified company, especially in light of the likely disposal of Grasberg
(10%+ of FCF starting from 2024 in our financial model).
Trump’s war on aluminium imports: a blessing in disguise?
On the face of it Rio Tinto is one of the main targets of Trump’s attack on aluminium imports: if
the US administration goes ahead with the blanket 10% tariff on foreign metal, the measure
could affect as much as 60% of the company’s sales (on a pro forma basis, excl. Dunkerque
and ISAL). Importantly, it will affect Rio’s most profitable Canadian smelters, which we think
generated more than 40% of 2017 EBITDA at the entire Aluminium segment.
0
5
10
15
20
25
FCF* Cash returns and debt repay ment
Operations Disposals Debt reduction Div idends Buy backs
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2014 2016 2018e 2020e 2022e 2024e 2026e
Iron ore Aluminium Copper Other
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6 April 2018 60
In reality the fallout may be much less damaging than one would think as the cost of it will be
shared (if not fully absorbed) by US consumers. We believe that the US has mothballed
smelter capacity in the ballpark of 1mt, of which perhaps 50-70% could realistically be
restarted over the next two years. This will still leave the economy heavily dependent on
imported metal and not upset the global supply-demand balance too much given the growth
in ex-China consumption of primary aluminium of c.1mt per annum.
Canadian aluminium industry in 2017 (kt) Aluminium: geographic premiums in key markets ($/t)
Source: Company, USGS, SG Cross Asset Research/Equity Source: Bloomberg, USGS, SG Cross Asset Research/Equity
Meanwhile, US premiums are soaring, up c.$200/t since December: initially buoyed by
inclement weather, they are being lately spurred by pre-emptive stockpiling as traders and
consumers are scrambling to use their chance before tariffs are imposed. Moreover, the surge
in demand is sucking in metal from other markets as far as Japan, leading to a knock-on
increase in premiums around the world. Although likely a temporary phenomenon, this rally
should (ironically) help non-US aluminium producers’ performance.
Valuation summary
Our TP is based on a 50:50 combination of: 1) a £45.36 SOP NPV valuation inputting an 8.1%
WACC, covering the mine lives of the existing operations and projects; 2) an EV/EBITDA-
based valuation with a 6.1x target multiple applied to 2023e EBITDA, resulting in equity value
plus accrued dividends discounted to end-2018e using 9.3% CoE, which yields £44.39.
As explained in the accompanying sector report, we then apply an adjusting factor of 0.90
(1.30x adjusted beta vs S&P Industrial Metals and 15% commodity price downside) to
account for the risk of a technical correction in commodity prices on a 12m horizon. After
minor rounding, this yields us our £40.50 TP, representing an 8% decrease.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Output Exports to US US imports (net)
Rio Tinto Other producers
0
50
100
150
200
250
300
350
400
450
Dec' 15 Jun' 16 Dec' 16 Jun' 17 Dec' 17
Europe Japan US (rhs)
From blizzard to Trump...
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Rio Tinto – Sum-of-the-parts NPV valuation
$m NPV EV/EBITDA (x)
2017 2018e 2019e 2020e 2021e
Iron ore 63,316 5.2 6.0 6.3 6.3 6.3
Aluminium 32,318 9.4 7.9 8.1 7.4 7.2
Copper 23,763 14.7 9.8 10.1 10.3 8.5
Diamonds and Minerals 6,642 6.1 5.2 5.8 5.9 6.2
Energy 4,359 3.5 4.0 6.3 6.1 5.8
Overheads (6,195)
Total 124,202 6.7 6.7 7.2 7.0 6.8
Net debt (6,477)
Pension liabilities (2,160)
Minorities (3,944)
Equity 111,621
Equity ($) 63.62
Equity (£) 45.36
Source: SG Cross Asset Research/Equity *Coal portfolio valuation based on agreed disposal prices
Rio Tinto – Target multiple valuation
$m 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e
EBITDA* 16,744 17,083 17,691 19,467 21,010 22,133 22,421 22,718 22,585
Less assets for sale (1,085) (1,122) (1,235) (1,874) (2,412) (2,950) (2,991) (2,991) (2,991)
EBITDA of core operations 15,659 15,960 16,456 17,593 18,598 19,183 19,430 19,726 19,594
Target EV/EBITDA (x) 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1
EV 95,519 97,358 100,383 107,318 113,448 117,014 118,524 120,331 119,522
Net debt (6,477) (4,952) (3,051) (1,164) 1,927 5,615 9,515 13,534 17,894
Pension liabilities (2,160) (1,821) (1,482) (1,143) (804) (465) (126) - -
Minority interest (6,438) (6,543) (6,511) (6,474) (6,708) (6,990) (7,298) (7,600) (8,066)
Equity 80,443 84,041 89,339 98,537 107,863 115,174 120,615 126,266 129,350
Discount factor 1.00 1.09 1.19 1.31 1.43 1.56 1.71 1.86 2.04
Target equity ($) 47.39 49.51 52.63 58.05 63.55 67.85 71.06 74.39 76.21
PV of target equity ($) 47.39 45.30 44.05 44.45 44.52 43.49 41.67 39.90 37.40
Dividends** ($) 2.80 2.64 2.75 2.89 3.09 3.28 3.40 3.42
PV of dividends ($) 2.56 2.21 2.10 2.02 1.98 1.92 1.83 1.68
Equity + cumulative dividends ($) 47.39 47.86 48.82 51.32 53.41 54.36 54.46 54.53 53.70
Equity + cumulative dividends (£) 33.79 34.12 34.81 36.59 38.08 38.76 38.83 38.88 38.29
Assets for sale ($) 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63
Total equity (£) 39.42 39.75 40.44 42.22 43.71 44.39 44.46 44.50 43.91
Source: SG Cross Asset Research/Equity *Following period **Payable during calendar year
Strategy: will there be more growth?
More asset disposals on the cards...
The company continues to slim down its asset portfolio after having reaped more than $3.4bn
from disposals over 2016-17. There are a number of deals that have varying probabilities of
being concluded this year, including three where binding offers have already been received:
Aluminium Dunkerque. Liberty House (which already purchased Rio’s Lochaber smelter in
2016) made a $500m offer for the 280kt French smelter, powered by nuclear energy supplied
by EDF.
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ISAL, Aluchemie and Alufluor. A binding offer of $345m submitted by Norsk Hydro for the
portfolio, including Rio’s wholly owned ISAL smelter (210kt), a 53.3% interest in Aluchemie
anode plant and a 50% interest in Alufluor fluoride plant.
Subject to consultations with the employees and other stakeholders, both transactions are
expected to be completed in 2Q18.
Rising energy costs are the principal reason for Rio Tinto to seek to offload the aluminium
assets. Based on our understanding, ISAL is currently enjoying a competitive price in the
ballpark of $35-36/MWh under a 25-year contract signed in 2010 with Landsvirkjun. However,
the tariff is linked to the US consumer price index, which means that by 2035 it could be more
than 40% higher than today (assuming 2% CPI), potentially adding $200/t to production
costs.
Although we do not know the power tariff paid by the Dunkerque smelter, given that its 25-
year long supply agreement with EDF expired in 2016, one may assume that the resulting
increase in power costs last year was quite substantial. This should be considered in the
context of the relatively low energy efficiency of the plant constructed in 1991 (Rio’s state-of-
the-art AP60 technology requiring c.10% less electricity per tonne of aluminium).
This explains the relatively low price offered by Liberty House (and accepted by Rio Tinto),
translating into slightly less than $1,800 per tonne, compared with the capital cost of new
capacity ex-China, which we see in the ballpark of $5,000/t. We believe that in the current
price environment, the Dunkerque smelter could be generating EBITDA of $70-100m, which
would imply EV/EBITDA of 5-7x, largely in line with multiples of listed aluminium producers.
Australian coal. Rio Tinto has signed binding offers for the disposal of the remaining bits of
its Australian coal portfolio:
With Glencore in respect of an 82% interest in Hail Creek (2017 output of 9.4mt, 55:45 mix
of coking and thermal coal, c.15 year reserve life), together with a 71.2% interest in Valeria
coal resource (762mt of thermal coal). The price was agreed at $1.7bn.
With Whitehaven Coal in respect of Winchester South, an undeveloped coal deposit (mineral
resources of 356mt, a mix of coking and thermal blends) amenable to open-pit mining with
potential output of 3.5-7.5mt. The price has been set at $200m.
With a consortium of Adaro and EMR with respect to an 80% interest in Kestrel (80% equity
interest, 2017 output of 5.1mt of mostly hard coking coal). The price was agreed at $2.25bn.
Together these disposals will generate cash proceeds of $4.15bn before taxes of $0.5bn
according to the company’s preliminary estimates. Subject to regulatory approvals the deals
are supposed to be completed in 2H18.
This is not all that Rio Tinto could unload however. In fact, some of the biggest non-core
assets are still waiting for buyers to snap them up:
Pacific Aluminium. The unloved part of the aluminium business has been up for sale for
some time. Surging electricity costs in Australia (spot prices up more than 100% since 2015)
are the main rationale for Rio Tinto to dispose of the division comprising four smelters with
combined output of more than 1.0mt. We estimate that at spot aluminium prices, the division
could generate EBITDA in the ballpark of $400m and possibly fetch a price tag of $2-2.5bn.
Grasberg. Rio Tinto is getting increasingly frustrated with the long-lasting saga surrounding
one of the world’s most challenging copper mines in which it has an unenviable role of a
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supernumerary. Rio’s exit via the sale of its interest to Indonesia would be a boon for its
partner Freeport-McMoRan, which as a result would be able to retain its equity in the mine
almost unchanged. We estimate Grasberg’s fair value in the ballpark of $7.5-8bn but assume
that Rio Tinto will only be able to monetise c.50% of it, i.e. $3.5-4.0bn.
Iron Ore Company of Canada. Last but not least, Rio Tinto has ‘unfinished business’ with
IOC, which is in respect to the company’s world-class Pilbara operations about the same as
Pacific Aluminium is to the excellent Canadian smelters. The management team has always
been cautious about the probability of selling IOC, which we think is not high on the
company’s list of priorities. We estimate the value of Rio’s 58.7% interest in the miner in the
ballpark of $2.0bn.
There have been media reports (e.g. Bloomberg on 11 February) speculating that Rio Tinto
might consider an IPO of Pacific Aluminium rather than an outright sale of the division,
although such deliberations are allegedly at an early stage. We do not see much logic in such
a move, especially given that Rio Tinto has hitherto eschewed such a route and continue to
see a disposal as the most likely outcome.
Rio Tinto: possible proceeds from asset sales ($bn) Rio Tinto EBITDA pro forma (2019e)
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity *No contribution to EBITDA in 2019
Assuming that the already announced deals are likely to be completed, Rio Tinto could raise
anything from $4.5bn to $12-13bn (pre tax), comparable to its EBITDA in 2015-16. In reality
we think that Grasberg has the highest probability to be sold, with Pacific Aluminium coming
second. We therefore put the expected proceeds from asset disposals for 2018 at c.$8bn, still
an impressive number in any way.
... but more share buybacks would not help the share price
Asset sales often attract more attention and cause more excitement than they deserve. It is
important not to forget that unless the buyer is overpaying, no value is being created as a
result of disposals: all value was created when the assets were built or purchased (if at the
right price). There is therefore scarcely a debate about the use of proceeds: with share price
being the key determinant of management's decisions, the company usually has little choice
but to shrink the share capital to align it with the reduced asset base.
For the same reason, it would be optimistic to expect such buybacks to have an impact on the
valuation: their real purpose is to prevent the share price from going down, which would be
the case if proceeds were distributed in the form of dividends. Grasberg may be an exception
0 2 4 6 8 10 12 14
Dunkerque
ISAL
Australian Coal
Grasberg
Pacif ic Aluminium
Iron Ore of Canada
Total
Disposals agreed YTD
2%
4%
2%3%
89%
Dunkerque and ISAL
Coal
Pacif ic Aluminium
Grasberg*
IOC
Core operations
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to the rule: with the mine contributing almost nothing to Rio’s EBITDA but consuming capex of
about $170m per annum, its value may indeed be overlooked by the market.
Alternatively the company could redeploy the cash received from disposals in other areas. In
fact the idea of investing in growth, organic or otherwise, no longer seems to cause
consternation among investors in view of the improving demand outlook for base metals as
well as more exotic commodities such as lithium and graphite. This is especially relevant for
Rio Tinto given that the likely divestment of Grasberg will significantly weaken the growth
dimension of investment case. In our base-case scenario the mine accounts for 40%+ of
incremental EBITDA over 2017-26 (chart below left).
There are not many obvious growth opportunities within Rio’s existing asset portfolio. One is
the third phase of the Alouette aluminium smelter (600kt) where Rio Tinto owns a 40% stake
(other significant holders being Norsk Hydro and AMAG, each with a 20% interest). The long-
delayed project would add 400kt of capacity (using the state-of-the-art AP60 pot technology)
at a capital cost of $2-3bn, which we think means $400m+ of incremental EBITDA on a 100%
basis in today’s economics. However, such expansion could be problematic given the risk of
US tariffs, not to mention questions about its viability at spot aluminium prices.
Rio Tinto EBITDA: contribution from growth projects ($bn) Rio Tinto: NPV sensitivity to 10% var. in LT commodity prices
Source: Company, SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity
Otherwise Rio Tinto will probably have to overcome its aversion to inorganic growth and look
around for early-stage projects that could be acquired at a reasonable cost, or possibly some
operating mines in need of investment. Copper and diamonds are the most obvious areas,
although we would not be entirely surprised to see Rio Tinto venture into gold mining as well.
In any case, with Amrun on track to start production just about a year from now, pressure
must be mounting on the management team to come up with the ‘next big thing’.
Persisting with share buybacks may not help boost investors’ confidence in the stock very
much. Although we do see the negative volatility in iron ore prices mitigated by pro-active
supply management on the part of leading producers (in particular Vale), Rio Tinto’s reliance
on iron ore for the bulk of its free cash flow (c.65% in 2018 as per our analysis) is leaving the
company overly exposed to the risk of unfavourable changes in the Chinese macro
environment (especially construction) and hobbling growth.
0
5
10
15
20
25
2017 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e
Other operations Amrun Oy u Tolgoi Grasberg
0% 2% 4% 6% 8% 10% 12%
Iron ore
Aluminium
Copper
Titanium
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Rio Tinto Sales/division 17
EBIT/division 17
Sales/region 17
Major shareholders (%)
Chinalco 9.0
Valuation ($m) 12/13 12/14 12/15 12/16 12/17 12/18e 12/19e 12/20e
No. of shares basic year end/outstanding 1,413 1,414 1,374 1,374 1,374 1,374 1,374 1,374
Share price: avg (hist. yrs) or current (p) 3,147 3,195 2,615 2,317 3,412 3,646 3,646 3,646
Average market cap. (SG adjusted) (1) 95,174 98,750 72,059 58,261 77,828 88,965 88,965 88,965
Restated net debt (-)/cash (+) (2) -18,335 -12,796 -14,258 -10,191 -5,502 -7,353 -5,828 -3,927
Value of minorities (3) NA NA NA NA NA NA NA NA
Value of financial investments (4)
Other adjustment (5)
EV = (1) - (2) + (3) - (4) + (5) 113,499 111,565 86,318 68,460 90,599 96,320 94,795 92,893
P/E (x) 8.9 10.5 16.0 11.1 10.0 10.8 12.0 11.4
Price/cash flow (x) 6.1 6.8 7.8 6.7 6.2 7.7 7.1 7.1
Price/free cash flow (x) 42.1 14.2 15.2 9.72 9.08 14.4 13.6 13.3
Price/book value (x) 1.99 2.11 1.95 1.44 1.93 1.98 1.84 1.73
EV/revenues (x) 2.08 2.23 2.35 1.94 2.16 2.25 2.28 2.19
EV/EBITDA (x) 5.3 5.7 6.8 5.1 4.9 5.2 5.5 5.3
Dividend yield (%) 3.9 4.1 5.4 5.4 6.0 5.6 5.1 5.3
Per share data ($)
SG EPS (adj.) 5.50 5.01 2.49 2.82 4.79 4.77 4.29 4.48
Cash flow 8.12 7.69 5.15 4.68 7.72 6.64 7.19 7.26
Book value 24.7 24.9 20.5 21.7 24.8 25.9 27.8 29.7
Dividend 1.92 2.15 2.15 1.70 2.90 2.88 2.59 2.71
Income statement ($m)
Revenues 54,575 50,041 36,784 35,318 41,857 42,720 41,576 42,414
Gross income NA NA NA NA NA NA NA NA
EBITDA 21,509 19,665 12,621 13,510 18,580 18,620 17,344 17,683
Depreciation and amortisation -4,791 -4,860 -4,645 -4,794 -4,375 -4,545 -4,637 -4,674
EBIT 16,718 14,805 7,976 8,716 14,205 14,075 12,707 13,009
Impairment losses NA NA NA NA NA NA NA NA
Net interest income -425 -585 -698 -718 -527 -218 -231 -234
Exceptional & non-operating items NA NA NA NA NA NA NA NA
Taxation NA NA NA NA NA NA NA NA
Minority interests NA NA NA NA NA NA NA NA
Reported net income 3,665 6,527 -866 4,617 8,762 8,295 7,335 7,667
SG adjusted net income 10,217 9,305 4,540 5,100 8,627 8,295 7,335 7,667
Cash flow statement ($m)
EBITDA 21,509 19,665 12,621 13,510 18,580 18,620 17,344 17,683
Change in working capital 557 1,519 1,499 -273 -199 -249 115 2
Other operating cash movements -4,262 -4,301 -2,409 -2,562 -2,387 -3,932 -2,434 -2,433
Cash flow from operating activities 15,078 14,286 9,383 8,465 13,884 11,547 12,286 12,406
Net capital expenditure -12,907 -7,421 -4,586 -2,646 -4,362 -5,345 -5,822 -5,821
Free cash flow 2,171 6,865 4,797 5,819 9,522 6,202 6,464 6,585
Cash flow from investing activities 1,961 918 -14 542 1,989 300 100 100
Cash flow from financing activities -934 -5,436 -7,670 -7,491 -9,141 -10,184 -5,985 -4,532
Net change in cash resulting from CF 2,937 2,191 -3,046 -1,165 2,358 -3,682 579 2,153
Balance sheet ($m)
Total long-term assets 88,743 86,702 76,010 74,177 76,554 76,923 77,868 78,783
of which intangible 5,421 5,880 3,336 3,279 3,119 3,119 3,119 3,119
Working capital 621 -1,194 -1,485 -1,593 -1,823 -374 -489 -491
Employee benefit obligations NA NA NA NA NA NA NA NA
Shareholders' equity 45,886 46,285 37,349 39,290 44,711 44,983 47,571 50,757
Minority interests 7,616 8,309 6,779 6,440 6,404 6,438 6,543 6,511
Provisions 12,343 13,303 11,876 12,479 13,367 13,028 12,689 12,350
Net debt (-)/cash (+) -18,335 -12,796 -14,258 -10,191 -5,502 -7,353 -5,828 -3,927
Accounting ratios
ROIC (%) 11.2 10.7 6.4 7.7 12.6 12.1 10.7 10.8
ROE (%) 7.9 14.2 -2.1 12.0 20.9 18.5 15.9 15.6
Gross income/revenues (%) NA NA NA NA NA NA NA NA
EBITDA margin (%) 39.4 39.3 34.3 38.3 44.4 43.6 41.7 41.7
EBIT margin (%) 30.6 29.6 21.7 24.7 33.9 32.9 30.6 30.7
Revenue yoy growth (%) -1.8 -8.3 -26.5 -4.0 18.5 2.1 -2.7 2.0
Rev. organic growth (%) 0.4 -6.9 -26.9 -3.0 18.5 0.6 -2.5 1.9
EBITDA yoy growth (%) 11.8 -8.6 -35.8 7.0 37.5 0.2 -6.9 2.0
EBIT yoy growth (%) 14.3 -11.4 -46.1 9.3 63.0 -0.9 -9.7 2.4
EPS (adj.) yoy growth (%) 9.7 -9.0 -50.3 13.2 70.0 -0.5 -10.1 4.5
Dividend growth (%) 15.0 12.0 0.0 -20.9 70.6 -0.6 -10.1 4.5
Cash conversion (%) 54.8 93.0 119.5 121.5 98.7 92.6 91.6 91.2
Net debt/equity (%) 34 23 32 22 11 14 11 7
FFO/net debt (%) 115.0 149.1 83.6 125.5 328.1 250.3 293.6 444.4
Dividend paid/FCF (%) 163.4 57.9 81.8 52.5 54.4 80.2 68.1 69.9
Source: SG Cross Asset Research/Equity
Iron Ore 48.0%
Aluminium 26.3%
Copper 9.9%
Energy 8.7%
Other 7.0%
Iron Ore 73.8%
Aluminium 15.7%
Energy 7.4%
Copper 2.1%
Other 1.0%
China 44.2%
North. America 17.1%
Other Asia 12.8%
Japan 11.7%
Europe 8.6%
Other 5.6%
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Mining 12m target upgrade Brazil @ Go to SG website
Vale Reclaiming past leadership
Hold Vale shares have performed strongly over the past 12 months and now
trade deservedly close to the leading mining peers.
The leading iron ore name once again The ongoing ramp-up of low-cost iron ore is
set to restore Vale’s global leadership over Australian peers, even excluding an
additional 50Mt of mothballed production capacity readily available from 2019 onwards.
In parallel, the build-up of appropriately blended shipments should maximise the group’s
high concentration ore value in the current high-quality premium context. It also brings a
unique ability to slow or accelerate ore supply to the market in order to ensure that the
iron ore price remains in a $60-70/t range, which CEO Schwartzman sees as ideal to
ensure that the group reduces debt and pays a satisfactory dividend.
EBITDA c.25% exposed to electrification theme (Cu & Ni) The benefit of ongoing cost
rationalisation across the group’s nickel operations (after the cancellation of planned
capacity expansion) should help improve profitability further in the coming quarters. We
expect copper and nickel production – critical to current leading battery technologies – to
account for c.25% of EBITDA by 2020e, vs management’s target of 30% by 2019. This
does not include spare production capacity available at a relatively low cost should
supply/demand conditions tighten on a surge in demand for battery materials.
Sharp TP increase now an 11% TSR with overhang risk Bulk materials and nickel
prices have proven to be a lot stronger than SGe over the past 12 months, translating
into a strong share price increase of c.35% over this period. Accordingly, we increase
our EBITDA estimates by 87% for 2018 and 19% for 2019, marginally ahead of the
Bloomberg consensus. With the Group’s deleveraging now close to completion, our
valuation now includes a DCF over 2019-30e at 50% weight in order to mitigate the
impact of near-term multiples in our existing SOP (now 50% weight also) using peer
EV/EBITDA multiples per division for our 2018-19 estimates average. Our TP jumps to
$13.50 (from $4.86), which is consistent with our view that the shares should trade near
par with leading Australian diversified miners, or c.5.5x FY EBITDA at present. This
implies a 12m TSR of 11%, leading us to maintain our Hold rating.
We expect net debt to drop near management’s target of $10m by 2019, allowing for
strong dividend growth, which we think the consensus underestimates. However, in our
view, this positive factor is offset by a potential share overhang equivalent to c.17% of
the capital base as a consequence of last year’s elimination of preferred shares.
Price 05/04/18 $13.0
12m target $13.5
Upside to TP 4.2%
12m f'cast div $0.88
12m TSR 11.0%
Main changes since last report Target ($) 13.5 (4.86)
EPS 18e ($) 1.38 (0.512) +169.7%
EPS 19e ($) 1.30 nc
EPS 20e ($) 1.42 nc new vs (old) nc: no change
Preferred stock
MT NA, GLEN LN
Least preferred stock
VALE US
SG strategy team sector weighting
Overweight
Share price performance
Source: SG Cross Asset Research/Equity Perf. (%) 1m 3m 12m ytd
Share -3.3 0.9 31.3 5.9
Rel. index* -4.2 2.5 15.1 5.5
Rel. sector** -2.7 8.2 13.0 10.7
* MSCI World ($) ** MSCI World Metals & Mining ($)
RIC VALE.N, Bloom VALE US
52-week range 14.7-7.77
EV 18 ($m) 83,239
Mkt cap. ($m) 68,434
Free float (%) 58.7
No. shares o/s (m) 5284
Avg vol. 3m (No. shares) 6,256,132
Equity analyst
Christian Georges +44 20 7762 5969 [email protected]
Equity analyst
Sergey Donskoy +44 20 7762 4594 [email protected]
Financial data 12/17 12/18e 12/19e 12/20e Ratios 12/17 12/18e 12/19e 12/20e
Revenues ($bn) 34.0 35.8 35.5 36.3 P/E (x) 6.7 9.4 10.0 9.1
Rev. yoy growth (%) 23.6 5.3 -0.9 2.3 FCF yield (/EV) (%) 12.6 8.4 9.0 10.2
EBIT margin (%) 34.3 33.0 30.8 32.3 Dividend yield (%) 2.8 6.8 6.5 8.5
Rep. net inc. ($bn) 5.93 7.30 6.87 7.49 Price/book value (x) 1.18 1.46 1.39 1.34
EPS (adj.) ($) 1.46 1.38 1.30 1.42 EV/revenues (x) 2.15 2.33 2.29 2.19
EPS yoy growth (%) 0.5 -5.4 -5.9 9.0 EV/EBIT (x) 6.26 7.05 7.41 6.79
Dividend/share ($) 0.27 0.88 0.84 1.10 EV/IC (x) 1.0 1.2 1.2 1.2
Dividend yoy growth (%) -17.8 NM -4.5 31.0 ROIC/WACC (x) 1.8 1.4 1.3 1.4
Payout (%) 19 64 65 78 Net Debt/EBITDA (x) 1.18 0.74 0.64 0.50
7.3
8.6
9.9
11.2
12.5
13.8
15.1
Apr Jun Aug Oct Dec Feb
Price
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Earnings revisions and investment conclusion
Sharp earnings revisions
In this report, we update our estimates for Vale after a 12m lag during which time both iron ore
and nickel prices recovered to a higher level and for a longer period than we had been
anticipating in early 2017.
As a consequence, we lift our 2018 sales and EBITDA estimates materially (44% and 87%,
respectively), which translates into a 171% EPS estimate increase and a much higher dividend
for the year at 88c, versus 10c earlier. Our 2019 estimates increase to a lesser degree, with our
sales forecast rising 51%, EBITDA 19% and EPS 30% (dividend 84c, vs 25c before).
Vale – Estimates changes and consensus* (to 31 December; $m)
2018e 2019e
new old %chg. Cons. SG vs
cons.
new old %chg. Cons. SG vs
cons.
Revenue 35,776 24,786 44% 34,530 4% 35,467 23,550 51% 34,090 4%
EBITDA 15,711 8,383 87% 15,340 2% 14,930 12,500 19% 14,500 3%
EPS 1.38 0.51 171% 1.37 1% 1.30 1.00 30% 1.30 0%
DPS** 0.88 0.10 780% 0.43 105% 0.84 0.25 236% 0.66 27%
Net debt (11,535) (18,145) -36% (10,000) 16% (9,493) (10,000) -5% (8,175) 16%
Source: SG Cross Asset Research/Equity; * Bloomberg consensus estimates; **reflects 2 payments in September Y and March Y+1
Our revised EBITDA estimates are marginally ahead of consensus in 2018 and 2019 (+2% and
+3%) and our EPS estimates are in line. But we are significantly ahead of consensus with our
DPS estimates, which are 105% and 27% ahead of consensus in 2018 and 2019,
respectively, equivalent to 75% and 67% of corresponding SGe free cash flows. This is
equivalent to 30% of respective EBITDA as per the Group’s new policy of a minimum 30%.
Note that the group pays two dividends per annum (March and September as per the new
policy), which we think brings a degree of inaccuracy to consensus data (depending on
analysts’ accounting methods). Looking at the two dividends payments for calendar years, our
DPS for 2018 and 2019 would be 61c and 84c (rather than 88c and 84c on a fiscal basis).
Vale – Key commodities estimates (SGe) and changes vs Bloomberg forward price* ($/t)
2018e 2019e
new old % chg Fwd
curve *
SG vs fwd
curve
new old % chg Fwd
curve *
SG vs fwd
curve
Iron ore ** 63.1 60.0 5% 64.7 -2% 60.0 60.0 0% 58.2 3%
Nickel 13,450 12,000 12% 13,209 2% 14,000 13,000 8% 13,360 5%
Copper 6,856 6,500 5% 6,802 1% 7,000 7,000 0% 6,835 2%
Coking coal*** 196 140 40% 202 -3% 150 125 20% 173 -14%
Thermal coal**** 89.4 80.0 12% 93.4 -4% 80.0 75.0 7% 82.6 -3%
Source: SG Cross Asset Research/Equity; * not consensus; ** 62% Fe CFR China; *** Australia FOB; **** Newcastle 6,000kcal/kg FOB
The table above highlights the main changes to our expectations relative to our previous
company review, notably with regards to iron ore and nickel prices (+5% and +12% in 2018),
which are the largest contributors to earnings.
We compare our new materials estimates with their respective Bloomberg forward curves in
order to provide an up-to-date investment stance relative to our estimates, rather than versus
consensus data, which we do not find reliable enough (insufficient number of contributions).
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Investment conclusion
Reviewing Vale business after 12 months
Having kept a neutral stance on the shares, we are looking back at Vale roughly one year after
the arrival of new CEO Fabio Schwartzman (ex-CEO of Klabin), who inherited the benefits of
the rationalisation of Vale preferred shares into one single class of common shares, providing
an improved guarantee of independence, notably from government influence. Over the period,
bulk materials prices (iron ore and coal) have proven a lot more resilient than we were
anticipating last summer, and the nickel price has recovered in excess of our expectations,
translating into a strong 12m share price performance for Vale at c.+35%, versus the S&P
Europe 600 Materials at +6%.
The leading iron ore play once again
The ongoing ramp-up of low-cost iron ore in northern Brazil (Carajas) is set to restore Vale’s
global leadership over Australian peers, not just in terms of seaborne ore market share, but
also in terms of additional production capacity readily available to market, equivalent to
c.50Mt mothballed from 2019 onwards. In parallel, the ongoing build-up of appropriately
blended ore (c.100Mt by 2019) provides a much improved realisation of the group’s superior
ore concentration in the current high-quality price premium context. It also brings a unique
ability to slow or accelerate ore supply to the market in order to ensure that the iron ore price
remains in a $60-70/t range, which CEO Schwartzman sees as ideal to ensure that the group
reduces debt and pays a satisfactory dividend, while keeping new competing projects at bay.
Relevant exposure to electrification, with c.25% of EBITDA in nickel and copper
The benefit of ongoing cost rationalisation across the group’s nickel operations (Vale is the
largest ferronickel producer with a c.14% market share) was evident in 2H17, notably in New
Caledonia. Given the current nickel price recovery and CEO Schwartzman’s cancellation of the
planned capacity expansion, profitability should improve further in the coming quarters. We
expect nickel and copper – both critical to current leading battery technologies – to account for
c.25% of EBITDA by 2020e, vs management’s target of 30% by 2019. This does not include
spare production capacity in both nickel and copper, which is available at a relatively low cost,
should supply/demand conditions tighten on a surge in demand for battery materials.
Hold maintained: Vale shares now trade close to diversified mining peers
We increase our EBITDA estimates by 87% for 2018 and 19% for 2019 to reflect these much
improved conditions since our last review, which positions us marginally ahead of the
Bloomberg consensus in both years. Our valuation method now includes a DCF over 2019-
30e at 50% weight, alongside our existing SOP valuation using peer EV/EBITDA multiples per
division on our 2018-19 estimates. Our TP jumps to $13.5 (from $4.9) on this basis, which is
consistent with our view that the shares should trade close to leading Australian diversified
miners at c.5.5x FY EBITDA. Our new TP implies an upside of 7% only (TSR 11%), which
leads us to maintain our Hold recommendation.
Negative iron ore price momentum offsets potential dividend surprise, in our view
Based on our estimates, the group’s FCF yield jumps to c.11% over the next three to four years,
with net debt falling near management’s target of $10bn by end-2019e, allowing for strong
dividend growth (30% EBITDA payout as per the new guidance), which we think the consensus
underestimates. However, we think this favourable factor is offset by the iron ore price’s negative
momentum in the current context of a Chinese marginal slowdown and rising trade war-related
uncertainties. As such, we keep Vale as our least preferred stock for the time being.
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Share price performance and valuation
Solid 12m performance
Vale shares have performed roughly in line with the Brazilian stock index over the past 12
months, and have significantly outperformed both the S&P 500 and the Europe 600 STOXX
Material index over this period (table below).
Vale – Performance relative to indices (%)
Vale Ibovespa S&P
500
STOXX Europe
600 Materials
1m (4) (1) (2) 1
Ytd 3 8 (1) (4)
12m 34 30 12 7
5y (27) 53 69 16
Source: SG Cross Asset Research/Equity
Although the share price has increased c.3% ytd, it is still some 15% below its ytd peak,
primarily due to weakness in the iron ore price in recent weeks. That said, the close correlation
to the iron ore price appears to be increasingly mitigated by the recovery of both nickel and
copper (graph below right). We also note that the shares have outperformed peer Rio Tinto
since January 2016, as well as Fortescue, to which it was more closely correlated over the
preceding period (graph below left).
Vale – Share price vs Australian peers (indexed Jan 2014) Vale – Share price vs key materials (indexed Jan 2014)
Source: SG Cross Asset Research/Equity; Bloomberg Source: SG Cross Asset Research/Equity; Bloomberg
Persistent, but now unwarranted, discount to peers
Vale shares have dropped to a c.5% discount to their 5y P/E average of c.10.4x, whereas peers
are currently at a c.5% relative average premium, based on Bloomberg’s blended 24m forward
estimates, which we think best reflects best the group’s improving debt and costs conditions
(graph below right). The current P/E discount to peers is c.25% (c.15% vs Rio alone).
On EV/EBITDA, Rio Tinto and BHP Billiton are trading at an average of 5.5x, vs Vale at 5.3x, or
a 4% discount versus respective averages since January 2010 of 6.0x and 5.5x. To us, this
suggests limited additional upside for Vale shares.
0
20
40
60
80
100
120
Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18
VALE US Equity RIO US Equity
Fortescue (in $) BHP US Equity
0
20
40
60
80
100
120
Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18
VALE US Equity Iron ore 62% Fe, CFR
Nickel LME (3mo) Copper LME (3mo)
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Vale – EV/EBITDA relative to Rio-BHP average Vale – P/E (24m forward blended) vs peers (3m rolling)
Source: SG Cross Asset Research/Equity; Bloomberg historical & consensus data Source: SG Cross Asset Research/Equity; Bloomberg (5Y average in parenthesis)
Vale – Relative valuation details (x)
Vale Average
Rio-BHP
Rio Rinto BHP Billiton Anglo American
P/E * current 10.2 12.9 11.5 14.2 11.0
Vale (discount)/premium - -21% -12% -28% -8%
P/E * avg since March 2013 (5y) 10.4 12.4 11.4 13.4 10.0
Vale (discount)/premium - -16% -8% -22% 4%
EV/EBITDA current 5.3 5.5 5.6 5.5 4.4
Vale (discount)/premium - -4% -10% -8% 15%
EV/EBITDA avg since Jan 2010 5.5 6.0 5.8 6.2 5.0
Vale (discount)/premium - -7% -4% -10% 11%
Source: SG Cross Asset Research/Equity; Bloomberg; * 24mo forward blended consensus earnings
Hold maintained ($13.5; TSR 11%)
We raise our TP to $13.50 from $4.86 through most of last year, which did not discount the
sustained iron ore and coal prices over the period, nor the sharp nickel price recovery of more
recent months.
In our view, the 6% potential upside we calculate (11% TSR) is consistent with a rating close to
peers Rio and BHP at 5.5x EV/EBITDA on average, versus c.5.3x. As per our investment
conclusions above, we believe this is consistent with the group’s attractive underlying growth
potential, favourable exposure to the increasingly supportive electrification theme (batteries) and
superlative FCF generation, allowing for large dividend payments under a newfound independent
model (preferred shares eliminated last year).
Note that our dividend assumption reflects an aggressive payout of c.80% of FCF in 2020
(37% of EBITDA versus minimum 30% guidance) – since the $10bn net debt target is reached
in 2019 in our estimates – or $1.10 per share, equivalent to a c.9% dividend yield.
For 2019e, a transitional 67% FCF payout translates into 84c, which is c.27% ahead of
consensus and equivalent to a 6.6% yield. We are more aggressive on 2018e at 88c (yield
6.9%; roughly twice consensus).
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
Vale Vale av erage 2010-18 (5.5x) Av erage Rio-BHP (unweighted; 6.0x av ge 2010-18)
6
8
10
12
14
16
18
20
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
Vale (av ge 10.4x) Rio Tinto (av ge 11.4x)
BHP (av ge 13.4x) Anglo American (av ge 10.0x)
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Valuation details
We apply our new estimates to our new valuation method, which equally weights a DCF
calculation from 2019 to 2030, and peer consensus EV/EBITDA average multiples per key
divisions (iron ore, nickel/copper and coal) for our 2018-19 estimates. We previous relied solely
on the SOP method, but we have added the DCF valuation method to mitigate near-term
multiples. The two tables on page 7 provide details of our SOP calculation and the list of relevant
peers used for each division. The table on page 8 gives the details of our DCF valuation, notably
post-tax WACC at 8.7% and terminal growth at 0%.
Our target price calculation, illustrated in the table below, includes the value of a 9.7% stake in
Mosaic (part of last year’s fertilisers sale) and a risk discount, which we apply to all our mining
stocks, in this case equivalent to c.12% of gross value.
This risk discount (which we introduced at the end of last year) reflects the potential impact of
a 15% ‘black swan’ decline in the value of metals basket in the wake of the LME price surge
over the past 3-4 months. We do this by using the estimated beta of Vale vs the S&P Industrial
Metals index, assuming a 50% probability of such a correction occurring.
Vale – Target price calculation
SOP DCF Weighted average
Implied value ($m) 84,589 93,400 88,995
Net debt, 2019e (9,498) (9,498) (9,498)
Pensions, 2016a (2,437) (2,437) (2,437)
Net minorities/investments, 2017p 1,714 1,714 1,714
Gross value (GV) 74,368 83,180 78,774
Mosaic 9.7% stake 800 800 800
Net value per share ($) 14.5 16.2 15.3
SG risk discount (12% GV) * (8,924) (9,982) (9,453)
SG adj. net value 66,244 73,998 70,121
Number of shares (m)*** 5,187 5,187 5,187
Equity value / target price ($)** 12.8 14.3 13.5
Weighting 50% 50% -
Upside 1% 12% 6%
TSR - - 11%
Source: SG Cross Asset Research/Equity; Source: SG Cross Asset Research/Equity; * both SOP and DCF reflect estimates in or from 2019; ** reflects
the potential impact of a 15% decline of the metal basket post the LME price surge of the past 3-4 months (equity value is $16.7 otherwise); *** excl.
treasury stocks
Vale – Share price sensitivity to iron ore and metcoal prices ($)
Coal (v, $/t) /
iron ore (h, $/t)
45 50 55 60 65 70 75
120 7.4 9.3 11.2 13.1 15.0 16.9 18.9
135 7.6 9.5 11.4 13.3 15.2 17.2 19.1
150 7.8 9.7 11.6 13.5 15.4 17.4 19.3
165 8.0 9.9 11.8 13.7 15.7 17.6 19.5
180 8.2 10.1 12.0 13.9 15.9 17.8 19.8
Source: SG Cross Asset Research/Equity
Vale – Share price sensitivity to copper and nickel prices ($)
Copper (v, $/t) /
Nickel (h, $/t)
9,500 11,000 12,500 14,000 15,500 17,000 18,500
5,500 11.3 11.9 12.5 13.1 13.7 14.3 14.8
6,250 11.5 12.1 12.7 13.3 13.9 14.5 15.1
7,000 11.8 12.3 12.9 13.5 14.1 14.7 15.3
7,750 12.0 12.6 13.1 13.7 14.3 14.9 15.5
8,500 12.2 12.8 13.4 14.0 14.5 15.1 15.7
Source: SG Cross Asset Research/Equity
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Vale – Comparative valuation table (Bloomberg consensus)
Market cap. P/E EV/EBITDA EV/sales P/BV Net debt/
EBITDA
Net yield
($m) 2018e 2019e 2018e 2019e 2018e 2019e 2018e 2018e 2018e
New Hope 1,325 7.6 9.2 3.1 3.5 128% 134% 71% 0% 5.0%
Exxaro 3,381 7.2 8.1 6.0 6.5 175% 170% 8% 0% 4.9%
Whitehaven Coal 3,358 9.9 12.1 5.1 5.9 188% 188% 102% 0% 7.9%
Coal average 2,688 8.2 9.8 4.7 5.3 164% 164% 61% 0% 6.0%
Cliffs 2,040 5.5 7.3 5.6 6.7 142% 159% 0% 260% 0.0%
Ferrexpo 1,955 5.8 6.7 4.3 4.9 180% 188% 328% 39% 3.7%
Fortescue 10,110 8.0 8.7 3.6 3.7 176% 170% 104% 75% 6.9%
Kumba 7,537 11.6 13.1 5.4 6.0 201% 200% 260% -60% 5.8%
Rio Tinto 89,359 10.3 12.0 5.7 5.8 268% 265% 200% 29% 5.8%
Iron ore average * 22,200 8.2 9.6 5.1 5.8 198% 203% 197% 67% 3.8%
Antofagasta 12,910 15.3 14.5 5.7 5.3 306% 283% 176% 14% 2.8%
First Quantum 10,266 11.6 8.3 6.0 406% 309% 115% 271% 0.0%
Freeport McMoran 25,108 8.1 13.2 4.2 179% 205% 315% 64% 1.2%
KAZ Minerals 5,485 8.2 5.6 5.1 325% 298% 394% 213% 0.0%
Copper average 19,334 11.7 11.9 6.0 5.5 304% 274% 250% 140% 1.0%
Norilsk 31,857 13.4 9.8 7.0 7.1 347% 351% 351% 130% 8.0%
Sherritt Intl 274 - - 5.6 5.8 158% 156% 156% 44% 5.3%
Nickel average 31,857 13.4 9.8 6.3 6.5 253% 254% 254% 87% 6.6%
Nickel -copper average 12.5 10.8 6.1 5.9 278% 264% 252% 114% 3.8%
NAV weighted average ** 9.2 9.9 5.4 5.9 214% 215% 204% 75% 3.9%
Vale (SGe) 66,748 8.8 9.7 5.2 5.4 222% 219% 148% 65% 4.0%
Differential -4% -2% -4% -8% 4% 2%
Source: SG Cross Asset Research/Equity; Bloomberg; * excludes Fortescue; ** Iron ore 74%; Nickel/copper 22%; Coal 4%
Vale – SOP valuation (2018-19e EBITDA-based)
2018e 2019e Average 18-19e
Iron Ore 12,403 11,598 11,598
Coal 697 448 448
Nickel/Copper 2,931 3,209 3,209
Other (320) (325) (325)
Multiples (x)
Iron Ore 5.1 5.8 5.6
Coal 4.7 5.3 6.3
Nickel/Copper 6.1 5.9 5.7
Other 5.3 5.6 5.4
Value ($m)
Iron Ore 63,707 66,713 65,210
Coal 3,293 2,361 2,827
Nickel/Copper 17,772 18,862 18,317
Other (1,699) (1,831) (1,765)
Gross value ($m) 83,074 86,104 84,589
Net debt at end-2019e (9,498)
Net Minorities/Investments 1,714
Pensions at end-2016 (2,437)
Implied value 74,368
Value per share ($) 14.3
Source: SG Cross Asset Research/Equity
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Vale – DCF valuation details, 2019-30e ($m)
WACC 8.7% Risk-free rate (10y UST) 2.8%
Terminal growth 0.0% EM risk premium 0.0%
Equity-risk premium 5.7%
NPVs sum (12y) 60,682 Levered beta 1.4
Terminal value (TV) 32,718
TV as % of total value 35% Inflation-adjusted cost of equity 9.1%
Net debt at end 2019e (9,498) After-tax cost of debt 5.2%
Net minorities/investments 1,714 Equity 87%
Pensions at end-2016 (2,437) Debt 13%
Total value 83,180 WACC 8.7%
Implied value per share ($) 16.0 *
Source: SG Cross Asset Research/Equity; * $16.2 inc. Mosaic stake
Near-term c.17% overhang for improved liquidity
Under the group’s new governance, initiated by the previous management, a new shareholder
agreement has been introduced with Valepar (a group of stable shareholders), which
eliminates past control blocks and authorised the conversion of preferred shares into the
existing single class of commons shares in 2H17.
Under the new agreement, any holder of 25% of the shares has to make an offer for the
entirety of the capital, with the government retaining a golden share to oppose hostile
developments on the stock.
Additionally, Valepar shareholders will retain 20% of the capital over three years (until 2020)
and are allowed to divest the balance of their shareholding equivalent to a potential 16.72% of
the capital (excluding 1.67% treasury shares), or c.$11bn. This would translate into a free float
increase from c.59% (SGe) to up to c.76%.
Vale – Shareholder** breakdown February 2018 Vale – Shareholder* breakdown (overhang) February 2018
Source: SG Cross Asset Research/Equity; * part of Valepar agreement; ** excl. treasury stock Source: SG Cross Asset Research/Equity; * excl. treasury stock
Litel *21%
Bradespar *6%
BNDES *4%
Mitsui *6%
BNDES (Brazil Gov ernment)
4%
Current f ree f loat59%
Valepar - until 202020%
BNDES (Brazil Gv t)4%
Valepar - post lock-up period
17%
Capital 8%
Blackrock7%
Aberdeen3%
Other f ree f loat41%
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Key ratios
We highlight the following as regards our key ratio forecasts: 1) the NAV of base metals (nickel
and copper), at c.23% of the total in 2019e (unchanged 2018e), rather than the c.30%
management target; 2) lower average prices yoy for iron ore and coal impact R/NAV in 2019e;
3) average FCF is over $7bn per annum from 2018e, and the FCF yield is c.11% on average
over the same period; 4) dividends are 75% of 2018e FCF and 80% from 2020e.
Vale – Divisional NAV breakdown 2019e Vale – Divisional R/NAV 2018-19e
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity
Vale – FCF generation vs dividends & net debt, 2012-21e ($m) Vale – FCF yield & net debt/EBITDA, 2012-21e
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity; * exc. working capital
Vale – Capex by division, 2012-20e ($m) Vale – EBITDA and TP sensitivity to 10% material price var.
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity
Iron ore 74%
Coal4%
Nickel/Copper22%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Iron ore Coal Nickel/Copper
2018e 2019e
(25,000)
(20,000)
(15,000)
(10,000)
(5,000)
0
5,000
10,000
15,000
20,000(8,000)
(6,000)
(4,000)
(2,000)
0
2,000
4,000
6,000
8,000
2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e
Free cash f low Div idends paid
Net (debt) / cash (rhs)
(0.5)
0.5
1.5
2.5
3.5
-2.5%
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
17.5%
2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e
FCF * y ield (v s. Market cap) Net debt / EBITDA (x; rhs)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0
2,500
5,000
7,500
10,000
12,500
15,000
17,500
20,000
2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
Iron ore Coal Metals Other Capex / depreciation (x)
0%
5%
10%
15%
20%
25%
Iron ore Coking coal Nickel Copper
On share price target On EBITDA (2018-19e av erage)
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Divisional updates
Iron ore update
Reclaiming the iron ore leadership
When the current ramp-up of the group’s northern Brazil mine (Carajas) is completed in 2019,
Vale should control roughly 25% of the global seaborne iron ore market (from c.23% at
present; graph below left). The target is to increase production from 365kt/y in 2017 to 400kt/y
by 2019 and maximise low-cost production (in the north) while keeping 50kt/y mothballed,
mostly in the relatively higher-cost Southern system (see graph below right).
In parallel, the group is building 100kt of blended inventories in 2018, from 75kt last year, in
order to provide appropriately priced products for customers (mostly 62% Fe content) rather
than high ore content at a discount, as was often the case in the past. This blended
production should represent c.35% of shipments in 2018, or c.135Mt, equivalent to a c.40Mt
increase over 2017 (graph below right) and c.10% of 2018e ore production.
Iron ore – Market shares ex-China (2017p) Vale – Iron ore fines production breakdown (%)
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity; Vale strategy presentation (12/17)
With peers BHP and Rio Tinto both currently running near existing nominal capacity levels,
this suggests that Vale has become the key single supplier of additional ore tonnage in the
seaborne market, representing roughly 50% of overall additions to 2020e, we estimate.
The group is also lifting its iron ore pellet production capacity throughout 2018 in order to
offset the ongoing absence of production at Samarco by reopening of three idled pellet plants
in Brazil (Sao Luis & Tubarao 1-2; idled in 2012 due to low demand). This is consistent with the
particularly high demand for pellets (notably from Europe) and the need to reduce the pressure
on market supplies. Hence, the pellet premium to fine is currently c.$50/t, twice the $25/t
long-term average (65% Fe).
We do not include a restart of Samarco in our estimates due to ongoing uncertainty with
regards to the timing and likely subsequent re-idling of some of the current restarted capacity.
Critical pricing power
In this context, and assuming relatively steady demand in 2018 (we assume a c.1% yoy drop),
Vale has the flexibility to lift or reduce shipment intensity to manage the iron ore price, without
impacting the ramp-up of low-cost tonnage in north Brazil. We see potential for c.75Mt in
23%
24%
18%
11%
24%Vale
Rio Tinto
BHP Billiton
Fortescue
Other
5
14 25
35
25
2219
8
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2015 2016 2017p 2018e
Carajas (North sy stem) Blended ore Southeastern sy stem South sy stem Other
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excess supply in 2018, which Vale could bring under control relatively easily without
excessively damaging our positive stance on the shares (see valuation).
CEO Schwartzman has confirmed in recent presentations that he would maintain the group’s
policy of reducing net debt to below $10bn ($18.2bn at end-December 2017) and providing
attractive dividends to shareholders. The iron ore price band that he suggested as reasonable
to achieve this goal is $60-70/t (based on USD/BRL at c.3.25 in 4Q17). This is the basis for our
$60/t long-term estimate, which we highlight in our sector review and provides the
background for our perceived relatively high price visibility.
To be clear, we expect management to slow volume flows into the seaborne market when prices
fall below $60/t and, conversely, raise shipments when the price passes $70/t. The lower end is
also consistent with an historical apparent price reaction around BRL140/t FOB Brazil, close to
our $60/t long-term price level at current FX and transport costs (graph below left).
Please see our sector report (link) produced alongside this review for more details on iron ore.
Iron ore price – Vale perspective (BRL/t) Principal iron ore benchmarks ($/t CFR China)
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity
The upper price limit serves both to satisfy the Chinese authorities that the group is not taking
advantage of its strong position (with peers BHP and Rio) in the seaborne market while
ensuring that large new projects are kept at bay due to the prospects of unattractive returns.
The key project here is Samandou in Guinea, which offers both high-quality ore (equivalent to
Vale’s Carajas) and large reserves, but requires very substantial infrastructure investments in
railway and port facilities. The advantageous current premium conditions (i.e. 65% Fe content
premium over low-grade ores) and a $60/t iron ore price tag may provide sufficient IRR to
justify an investment. However, a number of factors suggest that we are not near any
investment decision at Simandou: 1) we are not certain that Rio Tinto has finalised the transfer
of full control of the assets (Simfer) to Chinalco; 2) we have seen no evidence that Chinalco
has been seeking to revive the project; and 3) we believe that the ongoing enquiries by both
the SFO in the UK and the US Justice Department on past alleged corruption should dissuade
the Chinese authorities from going ahead with any capital commitment.
100
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250
300
350
Dec ’11 Dec ’12 Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17
CFR China FOB Brazil
20
40
60
80
100
120
140
160
Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17
62% Fe 65% Fe 58% Fe low alumina
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Increased relative competitiveness in Asia
The cost efficiency of Vale’s shipments in Asia has been improving steadily in recent quarters,
notably as a result of 1) rising low-cost production in Carajas (S11D system); 2) the ongoing
delivery of (increasingly efficient) 400kt Valemax ore carriers associated with favourable, very
long-term contracts with Chinese operators; and 3) the strong high-grade ore premium that
has predominated for the past 18 months or so (graph above right).
Many – including Vale’s management, BHP’s management and us – expect this premium to
persist (albeit perhaps at a lower level) due to the changing nature of Chinese steelmaking
with regards to furnaces’ ore quality requirements and availability (modern furnaces with
efficient port access), together with efficiency issues in terms of pollution and productivity.
The Valemax fleet of roughly 36 vessels thus far should increase by c.30 over the next two to
three years on 25y supply contracts (see here), suggesting that Vale’s transport cost efficiency
could improve further (depending in part on future bunker oil price conditions). Our estimates
assume a slightly lower cost per tonne in the future at 1H17 levels for iron ore fines, which
could prove too conservative.
Finally, we assume a slow, steady drop in cash costs to $14/t by 2020 for ore fines (2017
$14.8/t) and $17.5/t for pellets ($18.2/t in 2017, increasing slightly in 2018 to reflect capacity
restarts). These assumptions are well within management’s guidance at current FX levels (see
graphs below).
Vale – Iron ore fines cash cost targets ($/t) Vale – Iron ore pellets cash cost targets
Source: SG Cross Asset Research/Equity; Vale strategic presentation 12/17; 2. 3Q17; 3. Carajas
ex-S11D system; 4. S11D full ramp-up (BRL/$ at 3.35)
Source: SG Cross Asset Research/Equity; Vale strategic presentation 12/17; 1. vs 2017
On a relative basis to Australian peers, we note that the impact of the ore grade premium is
now visible against lower-grade producers, such as Fortescue (graph below left) or nearby
newcomer Roy Hill, which have been unable to benefit from the standard 62%Fe iron ore
price resilience of the past 12 months or so.
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Iron ore – Implied selling price ($/t) Iron ore – Implied EBITDA/t (ex-royalties & shipping; $/t)
Source: SG Cross Asset Research/Equity; * excl. iron ore pellets Source: SG Cross Asset Research/Equity; * excl. iron ore pellets
Both graphs above also suggest that Vale’s relative lag to key Australian peers’ profitability
has disappeared under the current market conditions and that a likely reduction in the
currently high ore premiums in the coming quarters should be steadily offset by lower cash
costs over the next two to three years.
Nickel & copper update
Renewed focus on nickel costs
One of the first decisions of CEO Schwartzman as head of Vale (early 2017) was to cancel
planned expansions across the group’s nickel (graph below left) production systems, order a
renewed focus on cost reduction targets, and appoint a new CEO of Base Metals, Eduardo de
Salles (an experienced member of Vale’s Board of Directors kept away from divisional
responsibility under previous CEO Ferreira).
We like this direction, which contrasts with the previous strategy based on hopes of improving
profitability of marginal additional production and rising nickel prices as high-cost producers
shut down.
Vale – Reduction of nickel production guidance (kt) Ferronickel – Key producers 2018e (volume)
Source: SG Cross Asset Research/Equity; Vale strategic presentation 12/17 Source: SG Cross Asset Research/Equity
The benefits of this renewed focus were evidenced in 4Q17 at high-cost nickel locations in
Brazil (Onca puma) and New Caledonia (VNC), where costs fell a respective 6% and 15%. In
fact, VNC was slightly cash positive for the first time in many quarters.
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
1H15 2H15 1H16 2H16 1H17 2H17
Vale* Fortescue BHP Billiton Rio Tinto
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
1H15 2H15 1H16 2H16 1H17 2H17
Vale* Fortescue BHP Billiton Rio Tinto
Vale14%
Norilsk*12%
Jinchuan7%
Glencore7%
BHP5%
Sherritt/Sumitomo**
4%
Eramet3%
Anglo 2%
Other46%
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More improvement on costs is needed in the coming quarters; otherwise, management has
indicated that the mine would be put under care and maintenance. Further investments should
only be carried out once a partner is found in the context of attractive future nickel demand
given the widely expected proliferation of electric vehicle batteries.
The potential favourable impact of such a development is becoming visible already, as we
explain in our mining report and in a recent Eramet report. Hence, inventories remain excessive
but have been falling steadily in recent weeks to under three months of ore-equivalent
production (graph below left). All this leads us to lift our price expectations for 2018 and 2019
(see page 2), with the long-term price forecast still $16,000/t for now.
Nickel inventories since 2010 (kt) Vale – Copper production projects
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity; Vale strategic presentation 12/17
Electrification theme could account for over 25% of EBITDA in near term
Although production volumes are capped at c.265kt for nickel and c.430kt for copper for the
next three to four years, this division’s contribution to EBITDA should rise to c.25% by 2020,
we estimate (c.15% in 2017), which is more cautious than management’s target of c.30% or
more. This still suggests that the shares offer attractive exposure to the increasingly supported
electrification theme (i.e. exposure to materials involved in electric vehicle batteries).
In nickel, c.50kt/y of additional production is readily available for under $2bn of capex
equivalent, and the group also has the potential to expand in copper, notably in two key
projects in Brazil and Canada (chart above right) equivalent to c.100kt/y (the capex estimate is
not available, but we believe it should be a fraction of a standard copper mining project due to
existing investment in both cases).
Coal update
The group’s coal operations are now entirely located in Mozambique after it completed the
disengagement from Australia at end-2016, a decision which no longer looks very prudent,
given the improved price context. Peter Poppinga (head of iron ore) has taken over the
management of the Mozambique coal operations on the realistic view that open cast iron ore
and coal production techniques are comparable.
The ramp-up of both tranches of the Moatize mine is now well advanced and should reach
20Mt by 2021, vs 12Mt in 2016 and 16Mt in 2018e (guidance). Another 5Mtpa is potentially
50
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100
110
120
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100
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300
400
500
600
700
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
LME Shanghai
Laterite China (@1.5% av erage Ni content) In day s of equiv alent global Ni production (rhs)
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available, should a scenario of gradual global mine depletion and an absence of relevant
investment lead to coal shortages and accompanying price inflation.
Mitsui is a key partner in this operation with a 15% stake in the mine (Vale 80%; Mozambique
government 5%) and a 35% stake in the train line to the terminal port of Nacala (Vale 35%;
others, including Mozambique government, 30%). We expect this to produce roughly $3.5bn
in cash proceeds in 1H18, from a mix of project financing with Japanese banks and the last
payment from Mitsui.
Vale – Mozambique coal production costs Vale – Mozambique coal production costs
Source: SG Cross Asset Research/Equity Source: SG Cross Asset Research/Equity; Vale strategic presentation 12/17; 1. Includes logistics
costs; 2. Includes Nacala corridor tariff
As a consequence, the group will be paying a fee to use the Nacala corridor, which
management estimates at c.$20/t, compared with cash costs at the mine of below $60/t by
2021e. EBITDA was $330m in 2017 (after c.$2bn in accumulated losses since 2012) at an
average implied coal price of $133/t.
Looking forward, we assume a long-term average price of c.$125/t, reflecting metcoal at $150/t
and thermal coal at $80/t on a 75:25 shipment ratio. As per our sector report published with this
review, we expect near-term price strength due to relatively low Chinese coal production, supply
interference in India (Coal India), and generally adverse seasonal weather in 1H18 in East
Australia (related to risks of further rail track maintenance problems). Ongoing control over
Chinese coal production levels, together with gradual mine depletion, leads us to turn more
positive with our long-term coal price estimates: $150/t for metcoal and $80/t for thermal coal,
compared with $125/t and $75/t previously). These forecasts remain below the 2019e forward
curve (see p.2), suggesting upside risk – albeit marginal given the division’s relative size.
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Financial data
Vale – Iron ore division ($m)
18Q1e 18Q2e 18Q3e 18Q4e FY15 FY16 FY17 FY18e FY19e FY20e FY21e FY22e
FX - BRL/USD 3.23 3.20 3.20 3.20 3.33 3.49 3.19 3.21 3.20 3.20 3.20 3.20
yoy 3% -1% 1% -2% 42% 5% -9% 0% 0% 0% 0% 0%
Iron ore fines
Turnover 5,276 4,244 4,505 4,644 12,493 15,824 18,562 18,669 18,493 18,727 18,727 18,727
yoy 9% 19% -12% -8% -36% 27% 17% 1% -1% 1% 0% 0%
Price -8% 9% -18% -12% -41% 25% 18% -8% -6% 0% 0% 0%
Volume 18% 10% 7% 5% 7% 2% -1% 10% 5% 1% 0% 0%
Shipments (kt) 77,080 76,000 82,450 84,150 288,662 293,436 291,329 319,680 335,750 340,000 340,000 340,000
Average Realised Price (US$/t) 68.5 55.8 54.6 55.2 43.3 53.9 63.7 58.4 55.1 55.1 55.1 55.1
Market price (IODEX 62% Fe) 72.5 60.0 60.0 60.0 55.1 58.6 71.4 63.1 60.0 60.0 60.0 60.0
IODEX premium 6% 7% 10% 9% 27% 9% 12% 8% 9% 9% 9% 9%
EBITDA costs ($/t) (30.1) (28.7) (28.4) (28.4) (29.0) (25.0) (29.2) (28.9) (28.3) (28.0) (27.8) (27.8)
yoy 14% -3% -3% -9% -32% -14% 17% -1% -2% -1% -1% 0%
Reported C1 costs (14.7) (14.9) (14.6) (14.6) n/a (13.0) (14.8) (14.7) (14.4) (14.1) (14.0) (14.0)
Royalty (1.7) (1.4) (1.4) (1.4) (1.2) (1.4) (1.5) (1.4) (1.4) (1.4) (1.4)
Other expenses (2.2) (2.2) (2.2) (2.2) (2.5) (2.0) (2.2) (2.2) (2.2) (2.2) (2.2)
Freight (11.7) (10.5) (10.5) (10.5) (8.3) (11.4) (10.8) (10.5) (10.5) (10.5) (10.5)
Adjustments 0.2 0.2 0.2 0.2 (0.0) 0.5 0.2 0.2 0.2 0.2 0.2
Reported Production 94,000 95,000 97,000 99,000 345,879 348,846 366,512 385,000 395,000 400,000 400,000 400,000
Shipments in % of production 82% 80% 85% 85% 83% 84% 79% 83% 85% 85% 85% 85%
EBITDA 2,955 2,062 2,164 2,280 4,157 8,486 10,089 9,462 9,023 9,235 9,283 9,283
Depreciation (300) (300) (300) (300) (1,116) (1,044) (1,093) (1,200) (1,230) (1,261) (1,261) (1,261)
EBIT 2,655 1,762 1,864 1,980 3,041 7,442 8,996 8,262 7,793 7,974 8,022 8,022
EBITDA Margin 56.0% 48.6% 48.0% 49.1% 33.3% 53.6% 54.4% 50.7% 48.8% 49.3% 49.6% 49.6%
Iron ore pellets
Turnover 1,610 1,397 1,429 1,449 3,717 3,828 5,653 5,886 5,736 5,784 5,784 5,784
Variation 10% 5% -1% 2% -31% 3% 48% 4% -3% 1% 0% 0%
Price 10% -1% -8% -8% -35% 0% 36% -2% -10% 0% 0% 0%
Volume 0% 6% 8% 11% 6% 3% 9% 6% 9% 1% 0% 0%
Volume Sold 12,597 13,181 14,150 15,096 46,284 47,709 51,775 55,024 59,750 60,250 60,250 60,250
Average Realised Price ($/t) 127.8 106.0 101.0 96.0 80.3 80.2 109.2 107.0 96.0 96.0 96.0 96.0
Premium over IODEX 76% 77% 68% 60% 46% 37% 53% 69% 60% 60% 60% 60%
EBITDA cash costs ($/t) (57.1) (54.4) (53.5) (52.8) (48.8) (43.0) (57.3) (54.5) (52.8) (51.8) (51.2) (50.7)
Production costs (45.1) (42.9) (42.5) (42.3) (44.0) (41.9) (51.2) (43.2) (42.3) (41.8) (41.7) (41.7)
C1, royalty & other opex (18.6) (18.4) (18.1) (18.1) (16.7) (16.7) (18.2) (18.3) (18.0) (17.7) (17.5) (17.5)
Implied freight (7.8) (6.0) (6.0) (6.0) (1.8) 0.1 (4.3) (6.5) (6.0) (6.0) (6.0) (6.0)
Implied pelletising cost (18.8) (18.4) (18.4) (18.2) (25.5) (25.3) (28.7) (18.4) (18.3) (18.1) (18.1) (18.1)
Other costs (12.0) (11.5) (11.0) (10.5) (4.8) (1.0) (6.1) (11.3) (10.5) (10.0) (9.5) (9.0)
EBITDA 792 651 587 591 1,685 1,880 2,767 2,622 2,274 2,351 2,390 2,420
Vale 792 601 587 561 1,460 1,767 2,686 2,542 2,224 2,301 2,340 2,370
Samarco & other pellet dividends 0 50 0 30 225 113 81 80 50 50 50 50
Depreciation (175) (175) (175) (175) (553) (572) (672) (700) (720) (734) (734) (734)
EBIT 617 476 412 416 1,132 1,308 2,095 1,922 1,554 1,617 1,655 1,685
EBITDA Margin 49.2% 43.0% 41.1% 38.7% 39.3% 46.2% 47.5% 43.2% 38.8% 39.8% 40.4% 41.0%
Source: SG Cross Asset Research/Equity
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Vale – Base metals division ($m)
1Q18e 2Q18e 3Q18e 4Q18e FY15 FY16 FY17 FY18e FY19e FY20e FY21e FY22e
Turnover 1,900 1,873 1,889 1,905 6,163 6,140 6,871 7,567 7,827 8,372 8,788 9,176
Nickel 891 871 904 937 3,412 3,051 3,139 3,604 3,750 4,015 4,280 4,603
Copper 692 690 670 650 1,728 1,915 2,530 2,702 2,773 2,962 3,044 3,044
Other 317 312 315 317 1,023 1,174 1,202 1,261 1,305 1,395 1,465 1,529
Nickel 17% 27% 20% 0% -24% -11% 3% 15% 4% 7% 7% 8%
Price 27% 36% 29% 20% -29% -16% 9% 27% 4% 7% 7% 0%
Volume -8% -7% -7% -17% 7% 7% -5% -10% 0% 0% 0% 8%
Copper 22% 29% -2% -13% -19% 11% 32% 7% 3% 7% 3% 0%
Price 22% 33% 8% -3% -28% 2% 34% 13% 2% 4% 3% 0%
Volume 0% -3% -9% -10% 13% 8% -1% -6% 0% 2% 0% 0%
Vale prices ($/t)
Nickel 13,450 13,150 13,650 14,150 11,725 9,810 10,673 13,600 14,150 15,150 16,150 16,150
Copper 6,925 6,900 6,700 6,500 4,353 4,453 5,971 6,756 6,900 7,200 7,400 7,400
Underlying prices ($/t)
Nickel 3mo 13,300 13,000 13,500 14,000 11,678 9,645 10,419 13,450 14,000 15,000 16,000 16,000
Copper 3mo 7,025 7,000 6,800 6,600 5,500 4,872 6,188 6,856 7,000 7,300 7,500 7,500
Nickel premium 1% 1% 1% 1% 0% 2% 2% 1% 1% 1% 1% 1%
Copper premium -1% -1% -1% -2% -21% -9% -4% -1% -1% -1% -1% -1%
Shipments 166 166 166 166 688 741 718 665 667 676 676 696
Nickel 66 66 66 66 291 311 294 265 265 265 265 285
Copper 100 100 100 100 397 430 424 400 402 411 411 411
EBITDA 699 732 730 771 1,158 1,698 2,171 2,931 3,209 3,679 4,026 4,200
Nickel 362 332 392 475 632 985 986 1,561 1,748 2,033 2,298 2,472
Copper 338 399 337 296 526 713 1,185 1,370 1,461 1,646 1,728 1,728
Depreciation (415) (415) (415) (415) (1,840) (1,658) (1,615) (1,660) (1,700) (1,725) (1,725) (1,725)
EBIT 284 317 315 356 (682) 40 556 1,271 1,509 1,954 2,301 2,475
EBITDA margin 36.8% 39.1% 38.6% 40.5% 18.8% 27.7% 31.6% 38.7% 41.0% 43.9% 45.8% 45.8%
Nickel 40.6% 38.1% 43.4% 50.7% 18.5% 32.3% 31.4% 43.3% 46.6% 50.6% 53.7% 53.7%
Copper 48.8% 57.9% 50.4% 45.5% 30.4% 37.2% 46.8% 50.7% 52.7% 55.6% 56.8% 56.8%
Implied cash costs ($/t) (7,225) (6,867) (6,975) (6,821) (7,275) (5,995) (6,548) (6,972) (6,925) (6,939) (7,041) (7,147)
Variation 8% 6% 5% 7% -12% -18% 9% 6% -1% 0% 1% 1%
Nickel (7,992) (8,134) (7,731) (6,974) (9,553) (6,643) (7,321) (7,708) (7,553) (7,478) (7,478) (7,478)
Variation 5% 5% 5% 5% 4% -30% 10% 5% -2% -1% 0% 0%
Copper (3,549) (2,905) (3,325) (3,544) (3,028) (2,795) (3,174) (3,331) (3,264) (3,199) (3,199) (3,199)
Variation 5% 5% 5% 5% -32% -8% 14% 5% -2% -2% 0% 0%
Source: SG Cross Asset Research/Equity
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Vale – Coal division ($m)
18Q1e 18Q2e 18Q3e 18Q4e FY15 FY16 FY17 FY18e FY19e FY20e FY21e FY22e
Turnover 558 563 672 650 526 838 1,567 2,443 2,248 2,248 2,498 2,498
Metcoal 466 477 586 569 479 586 1,240 2,098 1,924 1,924 2,138 2,138
Thermal Coal 92 86 86 81 47 252 327 346 324 324 360 360
Metcoal variation (yoy) 83% 15% 120% 86% -28% 22% 112% 69% -8% 0% 11% 0%
Price 25% -11% 23% -15% -18% 40% 45% 1% -18% 0% 0% 0%
Volume 46% 29% 79% 119% -11% -13% 46% 67% 13% 0% 11% 0%
Thermal coal variation (yoy) 32% 28% -8% -16% -39% 436% 30% 6% -6% 0% 11% 0%
Price 21% 21% 4% -8% -21% -12% 54% 8% -6% 0% 0% 0%
Volume 9% 6% -12% -8% -23% 513% -16% -2% 0% 0% 11% 0%
Vale prices
Metcoal 207 180 175 152 85 119 173 175 143 143 143 143
Thermal Coal 82.1 76.5 76.5 72.0 52.7 46.2 71.1 76.8 72.0 72.0 72.0 72.0
Underlying prices
Australia FOB Coking 230 200 190 165 90 142 187 196 150 150 150 150
Australia FOB Thermal 103 90 85 80 59 66 89 89 80 80 80 80
Metcoal premium -10% -10% -8% -8% -5% -16% -8% -11% -5% -5% -5% -5%
Thermal coal premium -20% -15% -10% -10% -10% -30% -20% -14% -10% -10% -10% -10%
Volume 3,375 3,775 4,475 4,875 6,505 10,364 11,780 16,500 18,000 18,000 20,000 20,000
Metcoal 2,250 2,650 3,350 3,750 5,614 4,906 7,178 12,000 13,500 13,500 15,000 15,000
Thermal Coal 1,125 1,125 1,125 1,125 891 5,458 4,602 4,500 4,500 4,500 5,000 5,000
EBITDA 187 155 202 153 (536) (54) 330 697 448 538 698 698
Depreciation (75) (75) (75) (75) (192) (190) (297) (300) (300) (300) (300) (300)
EBIT 112 80 127 78 (660) (244) 33 397 148 238 398 398
EBITDA Margin 33.5% 27.6% 30.0% 23.5% nm -6.4% 21.1% 28.5% 19.9% 23.9% 27.9% 27.9%
Implied Cash Costs ($/t) (110) (108) (105) (102) (163) (86) (105) (106) (100) (95) (90) (90)
yoy 7% 4% 5% -11% -13% -47% 22% 1% -6% -5% -5% 0%
Source: SG Cross Asset Research/Equity
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Vale – Divisional breakdown ($m)
18Q1e 18Q2e 18Q3e 18Q4e FY15 FY16 FY17 FY18e FY19e FY20e FY21e FY22e
Ferrous metals 7,112 5,855 6,142 6,299 16,562 20,351 25,129 25,408 25,037 25,304 25,308 25,312
Base Metals 1,900 1,873 1,889 1,905 6,163 6,140 6,871 7,567 7,827 8,372 8,788 9,176
Coal 558 563 672 650 526 838 1,567 2,443 2,248 2,248 2,498 2,498
Other (inc. discontinued) 97 84 88 89 133 159 400 358 355 363 370 374
Turnover 9,667 8,375 8,790 8,944 23,384 27,488 33,967 35,776 35,467 36,286 36,964 37,359
yoy 14% 16% -3% -2% -38% 18% 24% 5% -1% 2% 2% 1%
Ferrous metals 3,831 2,794 2,829 2,948 5,899 10,539 13,192 12,403 11,598 11,880 11,967 11,997
Base Metals 699 732 730 771 1,158 1,698 2,171 2,931 3,209 3,679 4,026 4,200
Coal 187 155 202 153 (536) (54) 330 697 448 538 698 698
Other (inc. discontinued) (80) (80) (80) (80) 330 (2) (323) (320) (325) (325) (325) (325)
EBITDA 4,637 3,601 3,680 3,792 6,851 12,181 15,370 15,711 14,930 15,772 16,366 16,569
yoy 7% 32% -12% -8% -49% 78% 26% 2% -5% 6% 4% 1%
Ferrous metals 53.9% 47.7% 46.1% 46.8% 35.6% 51.8% 52.5% 48.8% 46.3% 47.0% 47.3% 47.4%
Base Metals 36.8% 39.1% 38.6% 40.5% 18.8% 27.7% 31.6% 38.7% 41.0% 43.9% 45.8% 45.8%
Coal 33.5% 27.6% 30.0% 23.5% nm -6.4% 21.1% 28.5% 19.9% 23.9% 27.9% 27.9%
EBITDA Margin 48.0% 43.0% 41.9% 42.4% 29.3% 44.3% 45.2% 43.9% 42.1% 43.5% 44.3% 44.4%
Ferrous metals (475) (475) (475) (475) (1,669) (1,616) (1,765) (1,900) (1,950) (1,995) (1,995) (1,995)
Base Metals (415) (415) (415) (415) (1,840) (1,658) (1,615) (1,660) (1,700) (1,725) (1,725) (1,725)
Coal (75) (75) (75) (75) (192) (190) (297) (300) (300) (300) (300) (300)
Other (10) (10) (10) (10) (328) (24) (31) (40) (40) (40) (40) (40)
Depreciation (975) (975) (975) (975) (4,029) (3,488) (3,708) (3,900) (3,990) (4,060) (4,060) (4,060)
yoy 7% 8% 6% 0% -6% -13% 6% 5% 2% 2% 0% 0%
Ferrous metals 3,356 2,319 2,354 2,473 4,230 8,923 11,427 10,503 9,648 9,885 9,972 10,002
Base Metals 284 317 315 356 (682) 40 556 1,271 1,509 1,954 2,301 2,475
Coal 112 80 127 78 (728) (244) 33 397 148 238 398 398
Other (90) (90) (90) (90) 2 (26) (354) (360) (365) (365) (365) (365)
EBIT 3,662 2,626 2,705 2,817 2,822 8,693 11,662 11,811 10,940 11,712 12,306 12,509
Source: SG Cross Asset Research/Equity
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6 April 2018 85
Vale Sales/division 17
EBIT/division 17
Sales/region 17
Major shareholders (%)
Litel 21.3
Capital 8.4
BNDESPAR 8.0
Blackrock 7.1
Bradespar 6.4
Mitsui 5.5
Aberdeen 3.1
Valuation ($m) 12/13 12/14 12/15 12/16 12/17 12/18e 12/19e 12/20e
No. of shares basic year end/outstanding 5,153 5,153 5,153 5,153 5,153 5,187 5,187 5,187
Share price: avg (hist. yrs) or current 16.3 12.4 5.74 5.17 9.78 13.0 13.0 13.0
Average market cap. (SG adjusted) (1) 83,775 64,156 29,581 26,618 50,394 67,177 67,177 67,177
Restated net debt (-)/cash (+) (2) -24,121 -24,685 -25,234 -25,060 -18,161 -11,643 -9,498 -7,931
Value of minorities (3) 1,611 1,199 2,115 1,982 1,982 1,982 1,982 1,982
Value of financial investments (4)
Other adjustment (5) 2,198 2,236 1,818 2,437 2,437 2,437 2,437 2,437
EV = (1) - (2) + (3) - (4) + (5) 111,705 92,276 58,748 56,097 72,974 83,239 81,094 79,527
P/E (x) 8.2 17.6 NM 3.6 6.7 9.4 10.0 9.1
Price/cash flow (x) 6.5 4.7 7.8 2.8 3.6 6.3 6.2 5.9
Price/free cash flow (x) 157 29.8 NM 7.59 5.37 9.45 9.02 8.17
Price/book value (x) 1.32 1.16 0.88 0.68 1.18 1.46 1.39 1.34
EV/revenues (x) 2.39 2.46 2.29 2.04 2.15 2.33 2.29 2.19
EV/EBITDA (x) 5.0 6.9 8.6 4.6 4.7 5.3 5.4 5.0
Dividend yield (%) 5.2 4.9 1.7 6.5 2.8 6.8 6.5 8.5
Per share data ($)
SG EPS (adj.) 1.98 0.71 -0.73 1.45 1.46 1.38 1.30 1.42
Cash flow 2.50 2.62 0.74 1.85 2.71 2.07 2.10 2.21
Book value 12.3 10.7 6.52 7.58 8.29 8.87 9.33 9.64
Dividend 0.84 0.61 0.097 0.33 0.27 0.88 0.84 1.10
Income statement ($m)
Revenues 46,767 37,539 25,609 27,488 33,967 35,776 35,467 36,286
Gross income 22,435 13,353 6,851 12,181 15,370 15,711 14,930 15,772
EBITDA 22,435 13,353 6,851 12,181 15,370 15,711 14,930 15,772
Depreciation and amortisation -4,150 -4,288 -4,029 -3,488 -3,708 -3,900 -3,990 -4,060
EBIT 18,285 9,065 2,822 8,693 11,662 11,811 10,940 11,712
Impairment losses -3,017 -1,633 -11,229 -2,294 -1,323 0.00 0.00 0.00
Net interest income -1,722 -2,535 -844 -2,507 -2,370 -1,344 -1,084 -973
Exceptional & non-operating items -12,445 -5,499 -9,887 3,893 187 0.00 0.00 0.00
Taxation -1,160 450 6,957 -2,682 -1,495 -3,170 -2,987 -3,252
Minority interests 178 304 491 6.00 -21.0 -100 -100 -100
Reported net income 586 657 -12,129 4,191 5,932 7,297 6,869 7,487
SG adjusted net income 10,216 3,637 -3,760 7,482 7,539 7,297 6,869 7,487
Cash flow statement ($m)
EBITDA 22,435 13,353 6,851 12,181 15,370 15,711 14,930 15,772
Change in working capital 1,262 2,634 1,783 -1,743 897 -455 25 -67
Other operating cash movements -8,932 -1,852 -2,034 -1,451 -3,020 -4,314 -3,871 -4,025
Cash flow from operating activities 14,765 14,135 6,600 8,987 13,247 10,941 11,084 11,680
Net capital expenditure -14,233 -11,979 -8,401 -5,482 -3,848 -3,700 -3,500 -3,300
Free cash flow 532 2,156 -1,801 3,505 9,399 7,241 7,584 8,380
Cash flow from investing activities 3,930 1,246 3,315 1,087 922 3,500 0 0
Cash flow from financing activities -4,392 -3,967 -2,064 -4,418 -3,423 -4,224 -5,439 -6,813
Net change in cash resulting from CF 71 -564 -549 175 6,898 6,518 2,145 1,567
Balance sheet ($m)
Total long-term assets 100,220 96,255 73,019 76,447 80,230 76,530 76,040 75,280
of which intangible 2,731 3,060 2,368 3,790 3,790 3,790 3,790 3,790
Working capital 11,216 6,794 3,815 8,733 4,964 5,419 5,394 5,461
Employee benefit obligations 2,198 2,236 1,818 2,437 2,437 2,437 2,437 2,437
Shareholders' equity 63,325 55,122 33,589 39,042 42,790 46,863 49,293 50,967
Minority interests 1,611 1,199 2,115 1,982 1,982 1,982 1,982 1,982
Provisions 10,331 10,378 7,292 8,272 8,188 7,688 7,188 6,688
Net debt (-)/cash (+) -24,121 -24,685 -25,234 -25,060 -18,161 -11,643 -9,498 -7,931
Accounting ratios
ROIC (%) 15.8 8.0 3.0 10.9 15.4 12.1 11.4 12.3
ROE (%) 0.9 1.1 -27.3 11.5 14.5 16.3 14.3 14.9
Gross income/revenues (%) 48.0 35.6 26.8 44.3 45.2 43.9 42.1 43.5
EBITDA margin (%) 48.0 35.6 26.8 44.3 45.2 43.9 42.1 43.5
EBIT margin (%) 39.1 24.1 11.0 31.6 34.3 33.0 30.8 32.3
Revenue yoy growth (%) 0.5 -19.7 -31.8 7.3 23.6 5.3 -0.9 2.3
Rev. organic growth (%) 0.5 -19.7 -31.8 7.3 23.6 5.3 -0.9 2.3
EBITDA yoy growth (%) 24.0 -40.5 -48.7 77.8 26.2 2.2 -5.0 5.6
EBIT yoy growth (%) 31.2 -50.4 -68.9 NM 34.2 1.3 -7.4 7.1
EPS (adj.) yoy growth (%) -2.6 -64.4 -203.4 299.0 0.5 -5.4 -5.9 9.0
Dividend growth (%) -17.1 -28.1 -84.1 NM -17.8 NM -4.5 31.0
Cash conversion (%) 13.3 37.1 nm 67.1 106.5 93.6 100.1 101.6
Net debt/equity (%) 37 44 71 61 41 24 19 15
FFO/net debt (%) 81.1 45.6 51.4 27.9 63.4 96.2 114.3 145.6
Dividend paid/FCF (%) 845.9 194.8 NM 7.1 22.5 44.5 58.5 69.4
Source: SG Cross Asset Research/Equity
Iron ore 74.0%
Base Metals 20.2%
Coal 4.6%
Other 1.2%
Iron ore 85.8%
Base Metals 14.1%
Coal 2.1%
Other -2.1%
China 46.4%
Europe 16.9%
Others 10.5%
Rest of Asia 8.7%
Brazil 7.5%
Japan 6.3%
North America 3.7%
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Report completed on 6 Apr. 2018 17:15 CET
APPENDIX
COMPANIES MENTIONED
Actavis (ACT.N, No Reco)
African Copper Plc (ACU.L, No Reco)
Alcoa (AA US, No Reco)
Alrosa (ALRS RM, Sell)
Aluminum Corp of China (2600 HK, No Reco)
Amadeus IT Holding (AMS SM, No Reco)
Anglo American (AAL LN, Buy)
Antofagasta (ANTO LN, No Reco)
ArcelorMittal (MT NA, Buy)
Archer Daniels Midland (ADM.N, No Reco)
Australia and New Zealand Banking Group (, No Reco)
Banpu (, No Reco)
Bay Hotels & Leisure (, No Reco)
Bayer AG (BAYN GR, Hold)
BBG (, No Reco)
BHP Billiton plc (BLT LN, Hold)
BT Group (BT/A LN, Buy)
Bukit Asam Persero Tbk PT (PTBA IJ, No Reco)
Bunge Ltd (BG US, No Reco)
Century Aluminium (CENX.OQ, No Reco)
CHALCO (2600.HK, No Reco)
China Railway (, No Reco)
Choice Hotels International Inc (CHH US, No Reco)
Chunghwa Telecom Co Ltd (2412 TT, No Reco)
Cleveland Cliffs (, No Reco)
Cliffs Natural Resources Inc (CLF.N, No Reco)
COAL INDIA (, No Reco)
Concho Resources (CXO US, No Reco)
DRC (, No Reco)
EDF (EDF FP, Buy)
Egypt Aluminium (, No Reco)
Eramet (ERA FP, Buy)
Exxaro Resources (, No Reco)
Ferrexpo plc (FXPO.L, No Reco)
First Quantum Minerals Ltd (FM CN, No Reco)
Fortescue Metals Gp (, No Reco)
Freeport-McMoRan Copper & Gold (FCX US, No Reco)
Genomic Vision (GV FP, No reco)
Glencore (GLEN LN, Buy)
Global Telecom Holding SAE (GTHE EY, No Reco)
HALCON RESOURCES (XHK US, No Reco)
Hindalco (, No Reco)
Impala Platinum (IMPJ.J, No Reco)
Impress (1174Z NA, No Reco)
ITOCHU CORP (8001 JT, No Reco)
Kaz Minerals (, No Reco)
KGHM (KGH PW, No reco)
Klepierre (LI FP, Buy)
KT (, No Reco)
Kumba Iron Ore (, No Reco)
LEG Immobilien AG (LEG GR, Hold)
Lucara Diamond Corp (LUC.TO, No Reco)
Mahindra & Mahindra Ltd (MM IN, No Reco)
MetLife Inc (MET US, No Reco)
MITSUI (, No Reco)
Mitsui & Co (8031.T, No Reco)
Mosaic (MOS US, No Reco)
MSCI (, No Reco)
Neinor Homes (HOME SM, Hold)
New Hope (, No Reco)
Norilsk Nickel (MNOD LI, Hold)
Norsk Hydro (NHY NO, No Reco)
Northam Platinum (NHMJ.J, No Reco)
Petra Diamonds (PDL.L, No Reco)
Puma (PUM GR, No Reco)
Quintiles IMS Inc (, No Reco)
Rio Tinto (RIO LN, Buy)
Roy Hill (, No Reco)
Saga (, No Reco)
Samarco (, No Reco)
Semirara Mining & Pozer Corp (SCC PM, No Reco)
Shanghai Airport (, No Reco)
Siemens Gamesa RE (GAM SM, Buy)
South32 (S32 LN, Hold)
Southern Copper Corporation (SCCO US, No Reco)
Standard Life Aberdeen Plc (SLA LN, Buy)
Stornoway Diamond Corp (SWY.TO, No Reco)
Teck Resources Ltd (TECK/B CN, No Reco)
Telefonica Brasil SA (VIVT4 BZ, No Reco)
Thompson Creek Metals (TCM.TO, No Reco)
Thomson Reuters (TRIL LN, No Reco)
UC Rusal Plc (486 HK, Buy)
UniCredit SpA (UCG IM, Hold)
Unilever NV (UNA NA, Buy)
Vale (VALE US, Hold)
Varian (, No Reco)
Venture (, No Reco)
Warrior Coal (, No Reco)
Whitehaven Coal (WHC.AX, No Reco)
ANALYST CERTIFICATION
The following named research analyst(s) hereby certifies or certify that (i) the views expressed in the research report accurately reflect his or
her or their personal views about any and all of the subject securities or issuers and (ii) no part of his or her or their compensation was, is, or
will be related, directly or indirectly, to the specific recommendations or views expressed in this report: Sergey Donskoy
The analyst(s) who author research are employed by SG and its affiliates in locations, including but not limited to, Paris, London, New York,
Hong Kong, Tokyo, Bangalore, Frankfurt, Madrid, Milan, Geneva, Seoul, Warsaw and Moscow
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Historical Price: Anglo American (AAL.L) 2015/2016 Change 2017/2018 Change (Paris time)
02/01/15 New Rating: Sell 05/04/17 17:37 New Rating: Buy
02/01/15 New Target: 1300.0 05/04/17 17:37 New Target: 1550.0
27/01/15 New Rating: Buy 08/11/17 18:15 New Target: 1650.0
27/01/15 New Target: 1385.0
25/02/15 New Target: 1540.0
09/06/15 New Rating: Hold
09/06/15 New Target: 1090.0
17/07/15 New Target: 950.0
05/10/15 New Target: 530.0
16/12/15 New Rating: Sell
16/12/15 New Target: 250.0
18/02/16 New Target: 390.0
22/07/16 New analyst : Sergey
Donskoy
Source: SG Cross Asset Research/Equity
Historical Price: BHP Billiton plc (BLT.L) 2015/2016 Change 2017/2018 Change (Paris time)
02/01/15 New Rating: Hold 08/11/17 18:06 New Target: 1404.0
02/01/15 New Target: 1850.0
27/01/15 New Target: 1550.0
25/02/15 New Target: 1700.0
09/06/15 New Rating: Buy
09/06/15 New Target: 1600.0
05/10/15 New Rating: Hold
05/10/15 New Target: 1050.0
26/11/15 New Target: 915.0
04/02/16 New Target: 700.0
22/07/16 New analyst : Sergey
Donskoy
Source: SG Cross Asset Research/Equity
Historical Price: Glencore (GLEN.L) 2015/2016 Change 2017/2018 Change (Paris time)
02/01/15 New Rating: Buy 03/03/17 18:42 New Target: 400.0
02/01/15 New Target: 390.0 08/11/17 18:10 New Target: 470.0
25/02/15 New Rating: Buy
25/02/15 New Target: 310.0
12/05/15 New Target: 315.0
12/08/15 New Target: 190.0
21/08/15 New Target: 175.0
05/10/15 New Target: 130.0
16/12/15 New Target: 100.0
10/02/16 New analyst : Sergey
Donskoy
10/02/16 New Rating: Hold
19/04/16 New Target: 160.0
01/08/16 21:38 New Rating: Buy
01/08/16 21:38 New Target: 230.0
14/09/16 07:04 New Target: 240.0
Source: SG Cross Asset Research/Equity 11/10/16 07:13 New Target: 275.0
02/12/16 07:41 New Rating: Hold
13/12/16 07:13 New Rating: Buy
13/12/16 07:13 New Target: 370.0
209
409
609
809
1009
1209
1409
1609
1809
01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18
Price Target MA100 Change Reco
551
751
951
1151
1351
1551
1751
01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18
Price Target MA100 Change Reco
65
115
165
215
265
315
365
415
465
01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18
Price Target MA100 Change Reco
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Metals & Mining
6 April 2018 88
Historical Price: Rio Tinto (RIO.L) 2015/2016 Change 2017/2018 Change (Paris time)
02/01/15 New Rating: Buy 15/02/17 19:16 New Target: 3600.0
02/01/15 New Target: 3600.0 08/11/17 18:12 New Rating: Buy
27/01/15 New Target: 3550.0 08/11/17 18:12 New Target: 4400.0
25/02/15 New Target: 4000.0
09/06/15 New Rating: Hold
09/06/15 New Target: 3100.0
05/10/15 New Rating: Buy
05/10/15 New Target: 2450.0
04/02/16 New Target: 1980.0
16/02/16 New Target: 2100.0
20/07/16 New analyst : Sergey
Donskoy
20/07/16 17:44 New Rating: Hold
20/07/16 17:44 New Target: 2500.0
18/11/16 17:41 New Target: 2900.0
24/11/16 17:24 New Target: 3000.0
Source: SG Cross Asset Research/Equity
Historical Price: Vale (VALE.N) 2015/2016 Change 2017/2018 Change (Paris time)
02/01/15 New Rating: No Reco
21/01/15 New Rating: Buy
21/01/15 New Target: 11.8
25/02/15 New Target: 11.2
09/06/15 New Target: 8.0
09/05/16 New Rating: Hold
09/05/16 New Target: 4.86
20/07/16 New analyst : Sergey
Donskoy
Source: SG Cross Asset Research/Equity
VALUATION METHODOLOGY AND RISKS TO RATING, RECOMMENDATION AND PRICE TARGET
Valuation Methodology Anglo American
Our TP is derived from a 50:50 combination of a sum-of-the-parts NPV valuation (inputting a 8.7% WACC, covering the mine lives of the
existing operations and projects) and a multiple-based valuation based on a 6.0x target EV/EBITDA and medium-term average EBITDA. The
figure is then adjusted for an 12% risk discount reflecting the likelihood of increased volatility in the commodity index on a 12m horizon.
Risks
Upside – 1) Stronger-for-longer prices for bulk commodities (we expect them to normalise in 2019). 2) Recurring speculation about Agarwal
playing a more active part in the company's strategy. 3) Further improvements in investor sentiment towards South Africa (represents 30-35%
of 2018e-21e EBITDA).
Downside – 1) Politics and regulations in South Africa. 2) Possibility of Agarwal's real motives conflicting with the interests of other
shareholders. 3) Higher capital expenditure than we forecast.
Currency volatility (especially ZAR) is the key swing factor.
Valuation Methodology BHP Billiton plc
Our TP is based on the equally weighted average of: 1/ a sum of NPVs by division; and 2/ the implied current average value of the group's
6.2x EV/EBITDA (weekly average since January 2010), which we apply to our 2019-21 average estimates. We subsequently apply a 9% risk
discount, reflecting a 15% correction risk in the commodity index on a 12m horizon. We exclude the non-core US onshore operations from
these calculations and value this business separately on an average of NPV, peer multiples and estimated acreage value.
Risks
Downside risks include: lower commodity prices than we expect (notably for iron ore and copper, which together account for c.65% of BHP’s
FY18e EBITDA); higher costs than we estimate; technical/operating setbacks, such as adverse weather conditions at Australian ports/mines
and personnel strikes, notably in South America.
1498
1998
2498
2998
3498
3998
4498
01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18
Price Target MA100 Change Reco
2
4
6
8
10
12
14
16
01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18
Price Target MA100 Change Reco
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Valuation Methodology Glencore
Our target price is a 50:50 combination of a sum-of-the-parts NPV (inputting a 7.8% real WACC, zero terminal growth plus an extra 15%
discount for African Copper), and an estimate based on target multiples in line with peers (15.0x P/E for marketing and 5.5x EV/EBITDA for
the group's mining operations). The number is subsequently adjusted for a 10% risk discount reflecting the likelihood of increased volatility in
the commodity index on a 12m horizon.
Risks
Downside: 1) failure to achieve the targeted deleveraging; 2) underperformance of the marketing division (Glencore expects 2018 EBIT of
$2.2-3.2bn vs SGe of $2.9bn); 3) project execution (African Copper, Zhairem); 4) cost inflation and/or currency appreciation in the absence of
a positive momentum in commodity prices; 5) renewed concerns about the China ‘hard landing’; 6) political instability, changes to tax regime
(especially in DRC).
Valuation Methodology Rio Tinto
Our TP is derived from a 50/50 combination of a sum-of-the-parts NPV valuation (inputting an 8.1% WACC, covering the mine lives of the
existing operations and projects) and an EV/EBITDA-based valuation (with a 6.1x target multiple applied to 2023e EBITDA, and with the
resulting equity value discounted to end-2018 using a 9.3% CoE). The number is subsequently adjusted for a 10% risk discount reflecting the
likelihood of increased volatility in the commodity index on a 12m horizon.
Risks
Downside - 1) Weaker commodity prices (especially iron ore) than we forecast as a result of a deteriorating demand outlook (China hard
landing, global growth slowdown) and/or excessive supply (iron ore, aluminium). 2) Disputes with authorities on taxation, licence agreements
etc. 3) Execution delays, capex overruns and start-up difficulties, especially with respect to Oyu Tolgoi (7% of the EV). 4) Higher operating
costs and capex than we estimate (we forecast capex at $5.5-6.0bn per year). 5) Legal risks in the context of fraud charges stemming from an
ill-fated investment in Mozambique coal assets.
Valuation Methodology Vale
Our TP is derived from an average of an SOP valuation based on average 2018-19e EV/EBITDA multiples for relevant sector peers applied to
key divisions (iron ore, nickel and copper, and coal) and a DCF over 2019-30e, using a post-tax WACC at 8.7% and terminal growth at 0%.
Risks
Downside: 1) general raw material price weakness, notably from China in a context of slowing economic growth affecting iron ore profitability;
2) excessive global nickel production pushing the nickel price back to recent trough level, again undermining profitability; 3) higher litigation
costs than we anticipate after the disaster at the 50% JV Samarco.
Upside: 1) rising iron ore demand in China in 2018, reflecting stronger economic conditions than we forecast and benefiting iron ore
profitability; 2) a significant surge in demand for nickel and copper leading to significantly higher prices than we estimate in the context of
rising electric battery development expectations and lifting our earnings outlook in the metals division.
SG EQUITY RESEARCH RATINGS on a 12 month period
BUY: absolute total shareholder return forecast of 15% or more
over a 12 month period.
HOLD: absolute total shareholder return forecast between 0%
and +15% over a 12 month period.
SELL: absolute total shareholder return forecast below 0% over a
12 month period.
Total shareholder return means forecast share price appreciation
plus all forecast cash dividend income, including income from
special dividends, paid during the 12 month period. Ratings are
determined by the ranges described above at the time of the
initiation of coverage or a change in rating (subject to limited
management discretion). At other times, ratings may fall outside of
these ranges because of market price movements and/or other
short term volatility or trading patterns. Such interim deviations
from specified ranges will be permitted but will become subject to
review by research management.
Sector Weighting Definition on a 12 month period:
The sector weightings are assigned by the SG Equity Research
Strategist and are distinct and separate from SG equity research
analyst ratings. They are based on the relevant MSCI.
OVERWEIGHT: sector expected to outperform the relevant broad
market benchmark over the next 12 months.
NEUTRAL: sector expected to perform in-line with the relevant
broad market benchmark over the next 12 months.
UNDERWEIGHT: sector expected to underperform the relevant
broad market benchmark over the next 12 months.
The Preferred and Least preferred stocks are selected by the
covering analyst based on the individual analyst’s coverage
universe and not by the SG Equity Research Strategist.
Equity rating and dispersion relationship
Source: SG Cross Asset Research/Equity
46%
41%
13%23%
16%
14%
0
50
100
150
200
250
300
Buy Hold Sell
Updated on 03/04/18
Companies Covered Cos. w/ Banking Relationship
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Metals & Mining
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All pricing information included in this report is as of market close, unless otherwise stated.
MSCI DISCLAIMER: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without
prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or
used to create any financial products, including any indices. This information is provided on an “as is” basis. The user assumes the entire
risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the
information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular
purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any
third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan
Stanley Capital International and the MSCI indexes are service marks of MSCI and its affiliates or such similar language as may be
provided by or approved in advance by MSCI.
IMPORTANT DISCLOSURES
ArcelorMittal SG acted as joint bookrunner in ArcelorMittal's bond issue (EUR, 5yr).
BHP Billiton plc SG acted as joint dealer manager in BHP Billiton's bonds tender (XS0787785715; XS1224953452; XS0834386228;
XS1225004461; XS0787786440; XS0834399635; US055451AU28; US055451AQ16; US055451AL29).
BHP Billiton plc SG acted as co-manager in BHP Billiton's bond tender offer (US055451AH17, US055451AL29,US055451AQ16,
US055451AU28).
BT Group SG acted as Passive Joint Bookrunner in British Telecom's Bond issue (EUR& GBP; 7yr/14yr/30yr; RegS)
BT Group SG acted as passive bookrunner in BT's triple tranche bond issue (EUR 5y, 7y, 10y).
Bunge Ltd SG acted as co-manager on Bunge Ltd's bond issue (5y and 10y SEC sr).
CHALCO SG acted as joint bookrunner in Aluminum Corporation of China's bond issue (5yr, USD, RegS).
EDF SG acted as Financial advisor to EDF in the disposal of its stake in EDF Polska (exclusing Rybnik) and Zec
Kogeneracja.
EDF SG acted as financial advisor in the potential acquisition of Areva NP by EDF.
EDF SG acted as Joint Global Coordinator in EDF's right issue
Eramet SG acted as joint dealer manager and joint bookrunner on Eramet's tender offer (ISIN: FR0011615699) and new issue
(EUR, 7-6yr).
First Quantum
Minerals Ltd
SG acted as Joint Global Coordinator and Joint Bookrunner in First Quantum Minerals Ltd's high yield bond issue
(USD, 6y/8y, Senior, 144A/RegS)
Glencore SG acted as joint bookrunner in Glencore's bond issue (USD, 5-10yr)
Klepierre SG acted as dealer manager in Klepierre's debts tender
offer(FR0011321405,XS0896119384,FR0011019397,XS0864386825) and potential new bond issue
MetLife Inc SG acted as Co-manager in Metlife's new bond issue(SEC registered US$ benchmark $1000 par PerpNC10 fxd-to-flt
pfd).
Norilsk Nickel SG acted as Joint lead manager and Joint Bookrunner in Norilsk Nickel's Bond issue (USD;RegS;5y)
Norilsk Nickel SG acted as global coordinator and joint bookrunner in PJSC MMC Norilsk Nickel's bond issue (RegS, 6yr, USD)
Rio Tinto SG acted as dealer manager in Rio Tinto Finance USA's tender offer (XS0863129135;XS0863127279).
Standard Life
Aberdeen Plc
SG acted as joint bookrunner in Standard Life Aberdeen's bond issue (USD, RegS)
UniCredit SpA SG acted as Joint Bookrunner in Unicredit SpA's Bond issue (Senior;EUR;5yr)
UniCredit SpA SG acted as Joint Bookrunner in Unicredit's Bond issue (USD;RegS;15y)
During the past 12 months, SG and/or its affiliate(s) received compensation for products and services other than investment banking related
services, or had a non-investment banking, non-securities services related client relationship: Alcoa, Alrosa, Amadeus IT Holding,
ArcelorMittal, Archer Daniels Midland, BHP Billiton plc, BT Group, Bayer AG, Bunge Ltd, CHALCO, Concho Resources, EDF, Eramet,
Freeport-McMoRan Copper & Gold, Genomic Vision, Glencore, Impress, KGHM, Klepierre, LEG Immobilien AG, Mahindra & Mahindra Ltd,
MetLife Inc, Neinor Homes, Norilsk Nickel, Norsk Hydro, Rio Tinto, Siemens Gamesa RE, South32, Standard Life Aberdeen Plc, UC Rusal Plc,
Unilever NV, Vale.
During the past 12 months, SG and/or its affiliate(s) received compensation for products and services other than investment banking related
services, or had a non-investment banking, non-securities services related client relationship: First Quantum Minerals LTD..
During the past 12 months, SG and/or its affiliate(s) received compensation for products and services other than investment banking related
services, or had a non-investment banking, non-securities services related client relationship: THOMPSON CREEK METALS CO INC...
SG and its affiliates beneficially own 1% or more of any class of common equity of Bayer AG, Eramet.
SG and/or its affiliates act as market maker or liquidity provider in the debt securities of Anglo American, ArcelorMittal, Archer Daniels
Midland, BHP Billiton plc, BT Group, Bayer AG, Concho Resources, EDF, Eramet, Freeport-McMoRan Copper & Gold, Glencore, Impress,
Klepierre, LEG Immobilien AG, Norilsk Nickel, Rio Tinto, Siemens Gamesa RE, South32, Standard Life Aberdeen Plc.
SG and/or its affiliates act as market maker or liquidity provider in the equities securities of Amadeus IT Holding, Anglo American,
Antofagasta, ArcelorMittal, Archer Daniels Midland, BHP Billiton plc, BT Group, Bayer AG, EDF, Eramet, Glencore, Klepierre, LEG Immobilien
AG, MetLife Inc, Norsk Hydro, Rio Tinto, Siemens Gamesa RE, Standard Life Aberdeen Plc, UniCredit SpA, Unilever NV.
SG or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months from Bayer AG,
EDF, Glencore, Klepierre, Norilsk Nickel, UC Rusal Plc.
SG or its affiliates had an investment banking client relationship during the past 12 months with ArcelorMittal, BHP Billiton plc, BT Group,
Bunge Ltd, CHALCO, EDF, Eramet, Glencore, Klepierre, MetLife Inc, Norilsk Nickel, Rio Tinto, Standard Life Aberdeen Plc, UniCredit SpA.
SG or its affiliates had an investment banking client relationship during the past 12 months with First Quantum Minerals LTD..
SG or its affiliates have received compensation for investment banking services in the past 12 months from ArcelorMittal, BHP Billiton plc, BT
Group, Bunge Ltd, CHALCO, EDF, Eramet, Glencore, Klepierre, MetLife Inc, Norilsk Nickel, Rio Tinto, Standard Life Aberdeen Plc, UniCredit
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Metals & Mining
6 April 2018 91
SpA.
SG or its affiliates have received compensation for investment banking services in the past 12 months from First Quantum Minerals LTD..
SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of ArcelorMittal, BHP Billiton plc, BT Group,
Bunge Ltd, CHALCO, EDF, Eramet, Glencore, Klepierre, MetLife Inc, Norilsk Nickel, Rio Tinto, Standard Life Aberdeen Plc, UniCredit SpA.
SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of First Quantum Minerals LTD..
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