metals & mining industry primer - sia

See Disclosure Appendix of this report for important Disclosures and Analyst Certifications

METALS & MINING

Paul Gait • Senior Analyst • +44-207-170-0599 • [email protected]

September 2019

mailto:[email protected]

Metals & Mining | 2

“Civilisation did not begin until metals became the material of tools, implements, and machines”

T. A. Rickard, “Man and Metals", 1932

"The total volume of workable mineral deposits is an insignificant fraction of the earth's crust, and each

deposit represents some geological accident in the remote past, each deposit has its limits; if worked it

must be exhausted. No second crop will materialise. Rich mineral deposits are a nation's most valuable but

ephemeral material possession."

T.S. Lovering, "Mineral Resources from the Land", 1969.

"Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its

standard of living over time depends almost entirely on its ability to raise its output per worker."

Paul Krugman, "The Age of Diminishing Expectations", 1994

Metals & Mining | 3

Contents

Demand – are we really at “peak metal”?

Supply – unpicking the real cause of the “super-cycle”.

Price – what will it take to deliver the required growth in supply?

Equities – why now is the time to buy.

Metals & Mining | 4

More than any other factor, the mass accumulation of metal is

responsible for the form of the modern economy

Source: WSA, Mitchell, Maddison, UN, IMF, Bernstein analysis

y = 266%xR² = 100%

0

10’000

20’000

30’000

40’000

50’000

60’000

70’000

80’000

90’000

100’000

0 5’000 10’000 15’000 20’000 25’000 30’000 35’000 40’000

GD

P -

US

$b

n

Stock of Steel - Mt

Global Steel Stock vs. Real Global GDP

The history of Global economic development is

the history of capital accumulation. But we must

remember what this capital is in reality; it is steel

and copper and nickel. It is the product of mining.

Metals & Mining | 5

Indeed, the stock level of metal in any country is probably the most

significant factor in determining the levels of prosperity


USA

China

Japan

Singapore

R² = 74%

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

- 2’000 4’000 6’000 8’000 10’000 12’000 14’000 16’000 18’000 20’000

GD

P/C

ap

ita

-R

ea

l P

PP

$

Steel Stock - kg/Capita

Stock of Steel vs GDP - 113 Country Analysis (Area = Annual Steel Demand per Capita)

Metals & Mining | 6

Moreover, while China’s demand is significant, it is far from being

anomalous from an historical perspective

Source: Wood Mackenzie, WBMS, Schmitz, USGS, Mitchell, Bernstein Analysis

0%

10%

20%

30%

40%

50%

60%

70%

1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Percentage of Global Copper Consumption

U.K. USA China

Metals & Mining | 7

And we see exactly the same pattern when we move to iron ore.

Source: Wood Mackenzie, WBMS, Schmitz, USGS, Mitchell, Bernstein Analysis & Estimates

0%

10%

20%

30%

40%

50%

60%

70%

80%

1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Percentage of Global Iron Ore Consumption

U.K. USA China

Metals & Mining | 8

To fulfil global growth ambitions and bridge the gap between

countries, the world economy must accumulate more metals.

Source: WSA, Mitchell, Maddison, UN, Bernstein analysis and estimates

0

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10’000

15’000

20’000

25’000

30’000

35’000

40’000

45’000

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

GD

P p

er

Pers

on -

US

$

Above Ground Stock of Steel per Person

The Development of The Global Economy (Bubble Size = Annual Steel Demand)

The Developed World

World Total

The continued development of the global economy will require significant further

production of iron ore and steel

Metals & Mining | 9

Achieving the UN’s Sustainable Development Goal #1 – “No Poverty”

Source: WSA, Mitchell, Maddison, UN, IMF, Bernstein analysis and estimates

The current stock of steel in the global economy stands at ~32 billion tonnes. This represents the cumulative total of all the

steel production, including recycling, that has taken place since the introduction of the Bessemer process in 1856

However, this is distributed in a largely uneven manner

The 32bn tonnes corresponds to ~4 tonnes per person as a global average

However in the West we have ~15 tonnes of steel per person, in most of Africa it is less than 1 tonne

In China today it is around 6.5 tonnes

The creation of wealth is synonymous with the creation of a physical infrastructure capable of supporting human wellbeing

We estimate that there will be no poverty when each of the world's 9.8bn people (i.e. the medium term, mid-growth case

population) have access to the goods and services that can be provided by 15 tonnes of steel

This equates to a 240% uplift global steel stocks today, and at least a 320% uplift by 2050!

14’723

4’285

844

0

2’000

4’000

6’000

8’000

10’000

12’000

14’000

16’000

Required Steel Stock(kg/capita)

Current Global SteelStock (kg/capita)

Africa (kg/capita)

kg/s

teel per

capita

Current vs. Required Stock of Steel

240% uplift in global average steel

stock will be required to create the

wealth the world needs.

0

20’000

40’000

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80’000

100’000

120’000

140’000

160’000

180’000

2017 GlobalStock

Required Stock -Low Growth

Required Stock -Medium Growth

Required Stock -High Growth

Mt

Ste

el

Steel Stock Implications of Global Economic Development

Making the world rich would

require an increase of between

320% and 420% in the global

stock of steel

Metals & Mining | 10

This means mining an additional 200 billion tonnes of iron ore


0

50’000

100’000

150’000

200’000

250’000

Global Reserve Base Required Iron Ore - LowGrowth

Required Iron Ore -Medium Growth

Required Iron Ore - HighGrowth

Mt

Iron O

re

Iron Ore Requirement vs Global Reserves

Global reserves of iron ore are below the level required to

meet the world's development needs. Even under the low

population growth scenario.

145’512

63’114

198’459

0

50’000

100’000

150’000

200’000

250’000

Global Reserves Brazil & Australia Reserves Future Requirement - Mid GrowthScenario

Mt

Iron O

re

Iron Ore Requirement vs Brazil & Australia Reserves The reality of achieving this development

goal is the extraction of additional 200bn

tonnes of iron ore

However, the total reserves of iron ore in

Australia and Brazil are about 63bn

tonnes

The key point we would make is that

addressing the problem of economic

growth in the face of finite reserves

requires investment in and by mining

companies

Thus a prohibitive cost of capital (i.e. low

valuations) applied to the mining industry

makes this problem far harder to solve

and, in the end, impossible

This drives are view that miners should be

seen as the quintessential ESG stock, rather

than their current status a ‘sin’ stock

A society that devotes its intellectual

energy, and capital, to the creation of new

"Apps" is not likely to be one where the

claim to desire the end of poverty


Our approach to calculating metal (steel) demand growth

Source: Bernstein Analysis

To consider the whole industry, we begin with an analysis of the flow of steel (and move onto stock and scrap later)

We arrive at our steel demand growth estimates using a simple but powerful and not widely appreciated identity that

relates the main macroeconomic variable in an economy to its consumption of steel

This is a purely analytic expression and must necessarily be true

What this says:

The percentage growth (or decline) in steel demand is equal to the percentage growth in population plus the percentage

growth in output per person (GDP per capita) plus the percentage growth rate in steel intensity (i.e. kilogrammes of steel per

thousand dollars of GDP).


Analysing a century of growth in the demand for steel.


Global Steel CAGR SI GDP/Cap Pop. Steel

1900-1910 4.9% 1.8% 1.1% 7.8%

1910-1920 0.9% 0.5% 0.7% 2.0%

1920-1930 -0.6% 2.1% 1.1% 2.6%

1930-1940 2.1% 1.3% 1.0% 4.4%

1940-1950 0.2% 1.5% 1.0% 2.7%

1950-1960 1.6% 2.9% 1.9% 6.5%

1960-1970 0.6% 3.2% 2.0% 5.7%

1970-1980 -1.4% 1.8% 1.9% 2.3%

1980-1990 -1.5% 0.9% 1.7% 1.1%

1990-2000 -1.2% 1.5% 1.4% 1.7%

2000-2010 2.0% 2.2% 1.3% 5.5%

2010-2017 -0.5% 2.1% 1.2% 2.8%

1900-2017 0.6% 1.8% 1.4% 3.8%


Based on the UN population and IMF/World Bank GDP forecasts, the

lowest historical steel intensity decline rate would still yield a steel

demand growth rate of 1.9% to 2030! And the highest gives 5.5%!


Top Down Global Steel Source 2017-2030 Min 2017-2030 Max

Population UN 1.0% 1.0% As per latest UN Forecasts

GDP/Capita IMF/World Bank 2.5% 2.5% IMF/World Bank

Steel Intensity Global min/max -1.5% 2.0% Min/Max Range for Trend Global Steel Intensity

Steel Demand 1.9% 5.5%


How can we estimate what long run metal/steel intensity (SI) should

be? Of course, we have fairly robust estimates for both population and GDP growth, therefore the variable of interest for us is

steel intensity

The economic insight...as Karl Marx would have it (Das Kapital): “The wealth of those societies in which the capitalist

mode of production prevails, presents itself as an immense accumulation of commodities”

Steel is the capital stock of the modern industrial economy...it is the material basis upon which everything else is

predicated, this being so we can avail ourselves of the apparatus of neo-classical economic theory (and in

particular the AK model)

The steady state metal intensity of an economy is proportional to the rate of capital depreciation plus the level of economic

growth.


The importance of the world’s physical capital?


y = 266%xR² = 100%

0

10’000

20’000

30’000

40’000

50’000

60’000

70’000

80’000

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100’000

0 5’000 10’000 15’000 20’000 25’000 30’000 35’000 40’000

GD

P -

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$b

n

Stock of Steel - Mt

Global Steel Stock vs. Real Global GDP

The constant of proportionality between

steel intensity and GDP growth is given

by the slope of the line relating capital

and output.


Using our steady-state framework to forecast steel intensity

We use our steady-state relationship to estimate a level of steel intensity (SI) going forward


0

5

10

15

20

25

30

Ste

el In

tensity

-kg/'0

00$

Global Steel Intensity Forecast

Range of future steel

intensities for between

4.5% and 2.5% global

GDP growth.

Calculating Global Steel Intensity Low Growth Mid Growth High Growth

Global "Velocity" of Steel (V) 000US$/t 2.7 2.7 2.7

1/V t/'000US$ 0.4 0.4 0.4

Global GDP Growth Rate (a) % 2.5% 3.5% 4.5%

Depreciation (b) % 2.0% 2.0% 2.0%

Steel Intensity (1/V*(a+b))*1000 kg/'000$ 16.9 20.7 24.4

Current Steel Intensity kg/'000$ 21.5 21.5 21.5

Implied SI CAGR % (1.8%) (0.3%) 1.0%


So, what does the future hold?


Once we know the steel intensity that is

required for any level of economic growth,

and we also know the current level of

steel intensity, then we can calculate the

percentage change in steel intensity that

is required to ensure that we do not

depart from the historically observed

stock to output relationship

Given that we know the percentage

change in steel intensity, we use our

equation to calculate future steel demand

growth

This decomposition also shows us that

the second derivative of GDP is just as

important as the first when it comes to

determining the growth in steel (or any

metal) demand!

Of course, this also explains why recessionary

shocks (as seen in 2015/2016) are so often

misunderstood

y = 266%xR² = 100%

0

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40’000

60’000

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120’000

140’000

0 10’000 20’000 30’000 40’000 50’000 60’000

GD

P -

US

$bn

Stock of Steel - Mt

Global Steel Stock vs. Real Global GDP - Actual & Forecast

Actual 1900-2017 Forecast 2018-2030

Calculating Global Steel Intensity Low Growth Mid Growth High Growth

Global "Velocity" of Steel (V) 000US$/t 2.7 2.7 2.7

1/V t/'000US$ 0.4 0.4 0.4

Global GDP Growth Rate (a) % 2.5% 3.5% 4.5%

Depreciation (b) % 2.0% 2.0% 2.0%

Steel Intensity (1/V*(a+b))*1000 kg/'000$ 16.9 20.7 24.4

Current Steel Intensity kg/'000$ 21.5 21.5 21.5

Implied SI CAGR (c) % (1.8%) (0.3%) 1.0%

Population CAGR (d) % 0.9% 0.9% 0.9%

GDP/Capita CAGR (e) % 1.6% 2.6% 3.6%

Steel Demand Growth Rate (c+d+e) % 0.7% 3.2% 5.5%


Contents






The World Of Mining As it Used To Be…

Source: Henderson and 1858 Proceedings of the Institution of Civil Engineers.


Open Pit Mining: The Bingham Canyon copper mine in the United

States

Source: Corporate website.


Scale in mining…the same as the fleet used at Bingham.

Source: Corporate report.


It was our great-grandfathers that built today’s copper industry

MineAnnual

ProductionDiscovery Year

Cerro Verde 515 1860

Los Bronces 363 1864

Morenci 509 1870

Antamina 430 1873

Collahuasi 496 1880

Tenke Fungurume SxEw 220 1890

Kansanshi 235 1905

Chuquicamata 397 1910

El Teniente 436 1910

Radomiro Tomic SxEw 215 1911

Buenavista del Cobre 444 1926

Norilsk 312 1930

Mutanda 212 1950

Andina 215 1966

Las Bambas 250 1966

Escondida 1,090 1981

Centinela 231 1983

PT Freeport Indonesia 645 1988

Mina Ministro Hales 199 1991

Los Pelambres 371 1996

Weighted Average Discovery Year 1928

1860

1864

1870

1873

1880

18901905

19101910

1911

1926

1930

195019661966

1981

1983

1988

1991

1996

0

200

400

600

800

1’000

1’200

An

nn

ual

Pro

du

cti

on

, kt

World's 20 largest copper mines' discovery date

Source: Wood Mackenzie, USGS and Bernstein analysis


The development of the world’s copper resource base

500

750

1000

1250

1500

1750

2000

1880 1900 1920 1940 1960 1980 2000 2020 2040

To

tal

"R

eso

urc

e B

ase" -

Mt

Cu

Total Global Copper "Resource Base" Evolution

Prehistory to 1910 1913 to 1960 1961 to 2000 2000 to 2016

Kamoa

Escondida

Pebble

Oyu Tolgoi, Grasberg

1.2% CAGR

0.48% CAGR

0.28% CAGR

Chuquicamata

0.35% CAGR

The chart shows the growth in the global copper

resource base…it shows the increase in total

estimated in situ copper as we now know the

deposit rather than at the time of discovery. For

example at Chuqui…

Deposit is over 6,500 ft long by several hundred feet

wide. Number of holes drilled 38. Average thickness of

ore developed 404ft, most of holes being stopped in

ore. Three are over 1,000ft and still in ore, giving

indication of large increase in tonnage. An estimate of

reserves April 5 1913 95,657,000 tons averaging 2.41 per

cent“

A little while later the following revision was made

"The developed ore reserves as of September 1 1914,

amounted to 280,855,000 tons averaging 2.13% copper.

The development to date has shown a length of about

7,000ft, an average width of over 800ft and a maximum

width of 1,555ft. Neither the full width nor the depth

have yet been determined. Total holes drilled – 57;

average depth of ore over 500ft; 9 holes are over 1,100ft

deep and still in ore, the lowest sections of these holes

being in ore considerably above average grade.“

Fast forward a hundred years to today

"Chuquicamata is a tertiary porphyry copper deposit

with minor molybdenum. The orebody spans 750m x

3,000m on the surface and extends to a depth of at least

1,000m. The PND 2014 reports for the Chuqui Division

resources of 9340 Mt with an average grade of

0.54%CuT at a cut off grade of 0.2% including resources

of the Chuqui mine, Cluster Toqui, ENMS and Mina Sur

Cola.

Source: Wood Mackenzie, USGS corporate reports and Bernstein analysis


The rate of discovery appears to be slowing…

Source: USGS, Wood Mackenzie, corporate reports, and Bernstein estimates and analysis

0.0%

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Growth Rate in Global Resources by Year of Asset Discovery

YoY Change in Resource Base 5 per. Mov. Avg. (YoY Change in Resource Base)


Resource life vs. reserve life…how have we been able to grow

output? It is all about productivity...

Source: USGS, Wood Mackenzie, Schmitz, corporate reports, and Bernstein estimates and analysis

R² = 95.0%

0

200

400

600

800

1000

1200

1400

1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Reso

ure

c B

ase R

ela

tive t

o A

nn

ual

Pro

du

cti

on

-Y

ears

Life of the Global Copper "Resource Base"

-2.2% CAGR

0.90%

1.73%

0.42%

0.37%

3.41%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Growth in Resource Basevia Discovery

Conversion of Resource toReserves via Grade

Reductions

Growth in Mined Outputvia Accelerated Production

Growth in Consumption viaIncreased Use of Scrap

Growth in CopperConsumption

116-Year CAGR in Copper Consumption by Origin

Almost by definition the reserve life of any

commodity is ~20 to 30 years, as this is the

NPV maximising LOM.

The growth in the resource base appears to

have been much slower than the growth in

output in copper, meaning that the majority of

the growth in output has come from resource to

reserve conversion. And this process is driven

by the interplay between productivity and price.

The resource life tells an interesting

picture…never before in human history has the

depletion rate of the existing asset base been

as high as it is today, yet the replenishment rate

of the resource base is slowing.

So how do we square decelerating productivity

in mining with a slowing rate of asset

replacement and a record high level of

depletion and a falling commodity price?

The ability to increase

the economic viability of

tonnes in the ground

has been the single

most important driver of

long run supply growth


Analysing productivity...the breakdown of “Moore’s Law in Mining”

Source: Wood Mackenzie, USGS, Schmitz, BLS, Corporate Reports, Bernstein Analysis & Estimates

R² = 98%

4.E+02

8.E+02

2.E+03

3.E+03

6.E+03

1.E+04

3.E+04

1880 1900 1920 1940 1960 1980 2000 2020

kt C

uDemand for Copper - 1900 to 2017

Can you spot the Chinese "super cycle"!?

or is it just a continuation of the trend line...?

1024

2048

4096

8192

16384

32768

65536

131072

1910 1930 1950 1970 1990 2010

Tonnes o

f R

ock P

er

Man

Moore's Law in Mining - From 1910 to 2000 and 2000 to 2017

It is in the supply-side where we see a

departure from long run trend.

The “super cycle” is more of a supply side

phenomenon then a demand side issue.


355

4’906

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

MarginalCopper Costs

in 1950

Increase inPower

Intensity

Increase inFreight Costs

Increase inPrice of MillingConsumables

Increase inPrice ofMining

Consumables

Increase inTC/RC Rates

Increase inPower Prices

Increase inOil/Diesel

Price

Increase inLabour Price

Increase inStripping Ratio

Decline inGrade

Increase inLabour

Productivity

MarginalCopper Costs

in 2016

US

$/t C

u

Copper Industry Marginal Cost Structure Waterfall 1950-2016

Since 1950, the trend increase in mining productivity has enabled the mining industry

to offset the inflationary effects of geological deterioration (i.e. stripping ratio

increases and grade declines). The cessation of this deflationary factor will lead to

Labour productivity gains have helped to offset the cost inflation

coming from geological deterioration

Source Maddison, World Economics; Mitchell, International Historical Statistics; Schmitz, World Non-Ferrous Metal Production; ICSG and Bernstein analysis:


Labour productivity gains are not gradual

1.4

2.4

4.4

11.710.8

9.3

11.3

18.9

24.727.3

32.1

41.5 42.539.4

107.7

134.2

112.6102.3

1

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128

256

1860 1870 1880 1889 1902 1909 1919 1929 1939 1954 1958 1963 1970 1980 1990 2000 2010 2015

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nn

es o

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-L

og

Scale

Labor Productivity in U.S. Copper Mining

Immediately post the first world war, gains are driven by the

mass electrification of the US copper industry and the

relative movement in the value of labour versus power

Source: Maddison, World Economics; Mitchell, International Historical Statistics; Schmitz, World Non-Ferrous Metal Production; ICSG and Bernstein analysis

Considering the long run data on labour productivity, we see extended periods of stasis punctuated by

infrequent bursts of activity that radically alter the competitive landscape.

Gains in the 1980s/90s driven by a change in the nature of the

capital equipment used in mining, in particular by an increase in

the physical dimensions of this equipment


The History of Scale in Mining Equipment

Source: Corporate reports, and Bernstein estimates (2016-40) and analysis.

0

10

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70

1900 1920 1940 1960 1980 2000 2020 2040

Ro

pe S

ho

vel

Ca

pacit

y -

Cu

bic

Yard

s

Bucyrus/Caterpillar Rope Shovel Scale

Maximum Shovel Capacity

Each data point represents the year and size of the

introduction of a distinct Bucyrus shovel design

The technological frontier in mining

0

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1960 1970 1980 1990 2000 2010 2020

Hau

l T

ruck C

ap

acit

y -

Sh

ort

To

ns

Caterpillar Haul Truck Scale

Maximum Truck Capacity

The two charts of the left show a history of the

mining capital equipment offered by

Bucyrus/Caterpillar over the last century.

We look at two items, Rope Shovels (and their

steam shovel predecessors) as well as

specialist mining haul trucks.

Each dot in the scatter plots represents the

introduction of new model of either truck or

shovel. The scatter plot then shows the size of

the equipment versus the time of introduction.

The line shows and “efficient frontier” being the

technological limit of the equipment that is

available to the industry.

As the scale of mining equipment increases the

requirement for labour decreases, thus we

double the size of the trucks in the mining fleet

and we halve the number of drivers required per

tonne of ore.

Again we see productivity as the action of

capital (mechanisation) displacing labour as a

factor in production.


The End of Innovation? No, But It Will Get Harder.

98

45

22

9

17

810

57

0

0

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50

1900 to1915

1915 to1925

1925 to1935

1935 to1945

1945 to1955

1955 to1965

1965 to1975

1975 to1985

1985 to1995

1995 to2005

2005 to2015

Nu

mb

er

Number of New Product Launches of Rope Shovel Designs by Decade

Rapidly declining pace of innovation as we approach optimal

configuration of equipment

Source: Wood Mackenzie, and Bernstein analysis

0

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30

35

40

0.0

10.0

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1900 1920 1940 1960 1980 2000 2020 2040

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mb

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of

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ep

en

de

nt

Mo

de

ls

Ma

xim

um

Sh

ove

l S

ize

-C

ub

ic Y

ard

s

The Innovation of the 1980s at Bucyrus/Caterpillar

Maximum Rope Shovel Scale Number of Rope Shovel Models

A critical question in the industry is just how "normal" the 1980s were as a guide to real costs and prices

in mining.

We then conduct a further piece of analysis for

these capital items. In this we look at the total

number of different designs on the market at

any one point. So we look at when the design

was introduced and when it was withdrawn.

We then look at the number of new design

launches by decade. What this analysis

highlights is that the period of technical

innovation in mining capital equipment, at least

as far as simple scale is concerned, is behind

us.

While not a fan of biological metaphors, it

appears that the adaptations to the nature of

capital equipment employed have reached

something of an evolutionary dead end.


The 1980s Deflation Explained…

0

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0

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1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

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t H

au

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ize -

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ock p

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Y

ear

Mining Productivity and Scale of Capital Equipment - Caterpillar Trucks

Best Fit Gompertz "S-Curve" for Truck Size Productivity Actual Truck Size

Source: U.S. Census, BLS, Schmitz, Wood Mackenzie, corporate reports, and Bernstein analysis.

0

50

100

150

200

250

300

350

400

450

0 200 400 600 800 1000 1200 1400 1600 1800 2000

Pro

du

cti

on

by M

ine -

kt

Cumulative Production - kt

U.S. Copper Production Summary - The Rise of Super Pits

1975 1985

If we look at the productivity of the mining

industry over the 1980s and 1990s we see a

truly dramatic increase, the tonnes of rock (ore

and waste) moved per man year of labour

underwent a tectonic shift.

Thus mining was able to keep costs flat in

nominal terms as the increases in productivity

more than offset the inflationary increases in the

prices of the factor inputs into mining. Thus in

real terms costs fell and the price of

commodities tracked the cost structure down.

But we can now see the driver of the

deflationary productivity gain writ large in the

scale of the equipment being used on the

mines. Labour became more efficient due to the

vast increase in the size of mining equipment.

At the same time, the increase in the scale of

mining equipment drove both a consolidation of

the mining industry and an increase in the size

of mines. Those mines with the geology to take

advantage of the new technology grew while

those that could not shut.


So what about the ever-present “wall of supply”?

0

5’000

10’000

15’000

20’000

25’000

30’000

35’0002006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Su

pp

ly (

kt)

2006 - 2017 Supply Forecast

Existing Mines Highly Probable Projects

Probable Projects Possible Projects

0

5’000

10’000

15’000

20’000

25’000

30’000

35’000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Su

pp

ly (

kt)

2006-2017 Actual Supply

Existing Mines Highly Probable Projects

Probable Projects Possible Projects

0

10

20

30

40

50

60

Forecast in 2006 Actual by 2017

Mt

of

Co

pp

er

Cumulative Copper Production (2006-2017)

Highly Probable Probable Possible

60%% below

forecast

81%% below

forecast93%% below

forecast

Source: Brook Hunt, Wood Mackenzie and Bernstein analysis


Cyclical considerations...from feast to famine.

1.0x ratio

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

-

10’000

20’000

30’000

40’000

50’000

60’000

70’000

80’000

90’000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Cap

ex

-to

-D&

A R

ati

o

US

$m

Total Industry - Capex vs. D&A

Capex D&A Capex-to-D&A Ratio


Understanding the implications of underinvestment.

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Implied Industry Growth Rate Given Investment Rate

Implied LT Demand Growth Rate or Industry Historic Demand Growth Rate

Under-investment

i.e. bottom of the

Under-investment

i.e. bottom of the

cycle

Over-investment i.e.

top of the cycle

5.8%

4.4% 4.3%

3.5%3.3%

2.8%

1.8%

4.0%

1.7%

-0.9%

0.3%0.1%

1.1%

0.0%

-0.9%

0.3%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Aluminium Coal - Seaborne Nickel Iron Ore Copper Zinc Coal - Total IndustryAverage

Implied vs Historical Growth Rates by Commodity

1950-2017 Actual Demand Growth CAGR Implied Forecast Volume Growth Given Current Investment Rate


Contents






The Long Term Trends…A Few Historical “Facts”

y = 352%e4%x

R² = 99%

1

10

100

1,000

10,000

100,000

17

71

17

81

17

91

18

01

18

11

18

21

18

31

18

41

18

51

18

61

18

71

18

81

18

91

19

01

19

11

19

21

19

31

19

41

19

51

19

61

19

71

19

81

19

91

20

01

20

11

Min

ed

Co

pp

er

Su

pp

ly -

kt

(lo

g s

cale

)

Long-Term Copper Mine Supply

Source: Wood Mackenzie, Schmitz, and Bernstein estimates and analysis

100

1,000

10,000

17

71

17

81

17

91

18

01

18

11

18

21

18

31

18

41

18

51

18

61

18

71

18

81

18

91

19

01

19

11

19

21

19

31

19

41

19

51

19

61

19

71

19

81

19

91

20

01

20

11

US

$/t

(lo

g s

cale

)

Long-Term Nominal Copper Price

1933...the end of price stability...

So much in the industry is a matter of

interpretation, everyone has an opinion on what

data is important and on what that data means.

We present what we believe are the two most

basic economic “facts” in the industry.

In the first place, demand for commodities (in a

trend sense) grows over time. The development

of the global economy is, we believe,

synonymous with the growth in output of raw

materials. Raw materials represent the

beginning of the productive process that

culminates in the provision of consumer

services and goods. No growth in raw material

output implies no growth in these goods and

services.

In the second place – nominal commodity

prices rise over time (at least they have since

we abandoned the gold standard).

“Real” prices are of course important but theses

real prices tell us as much about the choice of

deflator as the price series we look to analyze.


Price and Volume…The Value of The Commodity Markets

y = 168.2%e3.5%x

R² = 95.7%

y = 0.3%e7.1%x

R² = 96.7%

0

0

0

1

10

100

1,000

10,000

100,000

1,000,000

17

71

17

81

17

91

18

01

18

11

18

21

18

31

18

41

18

51

18

61

18

71

18

81

18

91

19

01

19

11

19

21

19

31

19

41

19

51

19

61

19

71

19

81

19

91

20

01

20

11

Valu

e o

f G

lob

al

Co

pp

er

Mark

et

-U

S$m

(L

og

Scale

)

Growth in Value of Global Copper Market

Source: Wood Mackenzie, Schmitz, and Bernstein estimates and analysis


30 Year History of Commodity Performance

The rank ordering of commodities is clear and reflects the underlying geological and capital barriers to entry.

High margins are required for geologically complex commodities, low margins where this complexity is absent.

The rank ordering is, essentially, a measure of the commodities that China is short versus long.

Source: Bloomberg, Wood Mackenzie, AME, CRU, Bernstein Analysis & Estimates

China Short China Long

48.4% 48.2%

40.8%

37.8%

33.6%

29.4%

24.4%

20%

25%

30%

35%

40%

45%

50%

Iron Ore Cu Ni Met Thermal Zn Al

Average 30-Year EBITDA Margin


Copper has very rarely traded at marginal cash costs, it has averaged

42% above marginal cash costs on a month by month basis since 1985

Source: Bloomberg, CRU, AME, Bernstein Analysis & Estimates

6,232

4,316

7,503

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Spot Price 90th Percentile 15% ROCE

US

$/t

Copper Price Summary

7,503

6,319

5,134

7,712

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

15% ROCE 10% ROCE 5% ROCE LT AverageU

S$/t

Copper Price by Industry Return

500

1,000

2,000

4,000

8,000

16,000

198

5

19

86

198

7

19

88

19

89

199

0

19

91

19

92

199

3

19

94

19

95

199

6

19

97

19

98

199

9

20

00

20

01

200

2

20

03

20

04

200

5

20

06

20

07

200

8

20

09

20

10

201

1

20

12

201

3

20

14

20

15

201

6

20

17

20

18

201

9No

min

al

Cu

Pri

ce -

US

$/t

(L

og

Sca

le)

Copper Price vs. C1 Cash Costs

C(25) C(50) C(75) C(90) Price

50%

100%

150%

200%

250%

300%

19

85

198

6

198

7

19

88

19

89

19

90

199

1

199

2

19

93

19

94

199

5

199

6

19

97

19

98

19

99

200

0

200

1

20

02

20

03

200

4

200

5

20

06

20

07

20

08

200

9

201

0

20

11

20

12

201

3

201

4

20

15

20

16

20

17

201

8

201

9

Cu

Pri

ce a

s %

of

C(9

0)

Co

sts

Copper Price Relative to 90th Percentile of Cost Curve

Cu Price Relative to C(90) LT Average Premium 100% = C(90)


Aluminium is the commodity with the lowest premium above

marginal costs historically at 9%

Source: Bloomberg, CRU, AME, Bernstein Analysis & Estimates

1,876

2,136

2,319

0

500

1,000

1,500

2,000

2,500

Spot Price 90th Percentile 15% ROCE

US

$/t

Aluminium Price Summary

2,319

2,188

2,056

2,418

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

15% ROCE 10% ROCE 5% ROCE LT AverageU

S$/t

Aluminium Price by Industry Return

500

1,000

2,000

4,000

198

5

198

6

198

7

198

8

198

9

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9No

min

al

Al

Pri

ce -

US

$/t

(L

og

Scale

)

Aluminium Price vs. C1 Cash Costs

C(25) C(50) C(75) C(90) Price

50%

100%

150%

200%

250%

300%

19

85

198

6

19

87

198

8

19

89

199

0

19

91

199

2

19

93

199

4

19

95

199

6

19

97

199

8

19

99

20

00

20

01

20

02

200

3

20

04

200

5

20

06

200

7

20

08

200

9

20

10

201

1

20

12

201

3

20

14

201

5

20

16

201

7

20

18

20

19

Al

Pri

ce

as

% o

f C

(90

) C

os

ts

Aluminium Price Relative to 90th Percentile of Cost Curve

Al Price Relative to C(90) LT Average Premium 100% = C(90)


Price formation…not supply=demand, but supply growth = demand

growth.

Source: Bernstein, Wikimedia Commons


…price volatility and demand growth expectations.

Inverting the neo-classical growth model allows the derivation of the following equation to

give the equilibrium price level. This is given credence by the close relationship between

implied and actual growth rates in reality

Source: IMF, World Bank, Wood Mackenzie, ICSG, corporate reports, and Bernstein analysis

-10%

-5%

0%

5%

10%

15%

20%

Ja

n 8

5

Sep

85

Mai 8

6

Ja

n 8

7

Sep

87

Mai 8

8

Ja

n 8

9

Sep

89

Mai 9

0

Ja

n 9

1

Sep

91

Mai 9

2

Ja

n 9

3

Sep

93

Mai 9

4

Ja

n 9

5

Sep

95

Mai 9

6

Ja

n 9

7

Sep

97

Mai 9

8

Ja

n 9

9

Sep

99

Mai 0

0

Ja

n 0

1

Sep

01

Mai 0

2

Ja

n 0

3

Sep

03

Mai 0

4

Ja

n 0

5

Sep

05

Mai 0

6

Ja

n 0

7

Sep

07

Mai 0

8

Ja

n 0

9

Sep

09

Mai 1

0

Ja

n 1

1

Sep

11

Mai 1

2

Ja

n 1

3

Sep

13

Mai 1

4

Ja

n 1

5

Sep

15

Mai 1

6

Actual vs. Implied Growth Rates

Growth Rate Implied by Copper Price Actual Growth Rate


Mean reversion in mining…margins and returns.

Source: Wood Mackenzie, AME, CRU, Bloomberg L.P., and Bernstein estimates and analysis.

We reached the nadir of EBIT margin

generation in December 2015, when

margins reached a record low of -

1.3%. Subsequently, we saw some

cost taken out across the industry, as

we had expected we would, and then

a rebound in commodity prices which

saw EBIT margins jump back

dramatically

Since the beginning of 1985, the

mining industry has generated a

nominal return on capital of 14.5%,

the distribution of those returns is

largely clustered around the 6-12%

range, but with a long tail of much

higher returns from various points in

time. As such, the median nominal

ROCE over this period is much lower

than the mean, at 11.2%

-10%

0%

10%

20%

30%

40%

50%

60%

19

85

19

86

198

7

19

88

198

9

19

90

19

91

199

2

19

93

199

4

19

95

19

96

199

7

19

98

199

9

20

00

20

01

200

2

20

03

200

4

20

05

20

06

200

7

20

08

200

9

201

0

20

11

201

2

20

13

201

4

201

5

20

16

201

7

20

18

20

19

Ind

us

try

Av

era

ge

RO

CE

Mining Industry Average ROCE

Industry ROCE Average Industry ROCE +1 Std.Dev -1 Std.Dev

Average = 14.5%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

19

85

198

6

198

7

198

8

198

9

19

90

19

91

19

92

19

93

199

4

199

5

199

6

19

97

19

98

19

99

20

00

20

01

200

2

200

3

200

4

20

05

20

06

20

07

20

08

200

9

201

0

201

1

201

2

20

13

20

14

20

15

20

16

201

7

201

8

201

9

Ind

ustr

y A

vera

ge E

BIT

Marg

in

Mining Industry Average EBIT Margin

Industry Margin Average Industry Margin +1 Std.Dev -1 Std.Dev


Contents






Mining versus the market...the 100 year perspective

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

0

10

20

30

40

50

60

70

De

z 2

5

De

z 2

7

De

z 2

9

De

z 3

1

De

z 3

3

De

z 3

5

De

z 3

7

De

z 3

9

De

z 4

1

De

z 4

3

De

z 4

5

De

z 4

7

De

z 4

9

De

z 5

1

De

z 5

3

De

z 5

5

De

z 5

7

De

z 5

9

De

z 6

1

De

z 6

3

De

z 6

5

De

z 6

7

De

z 6

9

De

z 7

1

De

z 7

3

De

z 7

5

De

z 7

7

De

z 7

9

De

z 8

1

De

z 8

3

De

z 8

5

De

z 8

7

De

z 8

9

De

z 9

1

De

z 9

3

De

z 9

5

De

z 9

7

De

z 9

9

De

z 0

1

De

z 0

3

De

z 0

5

De

z 0

7

De

z 0

9

De

z 1

1

De

z 1

3

De

z 1

5

De

z 1

7

Cyc

lically

Adju

ste

d P

E

Mining CAPE vs S&P CAPE Since 1925

Mining Market (S&P) LT Interest Rate


A repeat of the Dot Com bubble?

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Jan 80Jan 81Jan 82Jan 83Jan 84Jan 85Jan 86Jan 87Jan 88Jan 89Jan 90Jan 91Jan 92Jan 93Jan 94Jan 95Jan 96Jan 97Jan 98Jan 99Jan 00Jan 01Jan 02Jan 03Jan 04Jan 05Jan 06Jan 07Jan 08Jan 09Jan 10Jan 11Jan 12Jan 13Jan 14Jan 15Jan 16Jan 17Jan 18Jan 19

Cyc

lically

Adju

ste

d P

E

Mining CAPE vs S&P CAPE Since 1980

Mining Market (S&P)

Dot Com

Bubble

1980s

recession

Facebook

Bubble


Valuations disconnect (on Schiller PE) has never been wider...

0.00

0.50

1.00

1.50

2.00

2.50

De

z 2

5

De

z 2

7

De

z 2

9

De

z 3

1

De

z 3

3

De

z 3

5

De

z 3

7

De

z 3

9

De

z 4

1

De

z 4

3

De

z 4

5

De

z 4

7

De

z 4

9

De

z 5

1

De

z 5

3

De

z 5

5

De

z 5

7

De

z 5

9

De

z 6

1

De

z 6

3

De

z 6

5

De

z 6

7

De

z 6

9

De

z 7

1

De

z 7

3

De

z 7

5

De

z 7

7

De

z 7

9

De

z 8

1

De

z 8

3

De

z 8

5

De

z 8

7

De

z 8

9

De

z 9

1

De

z 9

3

De

z 9

5

De

z 9

7

De

z 9

9

De

z 0

1

De

z 0

3

De

z 0

5

De

z 0

7

De

z 0

9

De

z 1

1

De

z 1

3

De

z 1

5

De

z 1

7

Min

ing C

AP

E R

ela

tive t

o S

&P

CA

PE

Mining vs Market (S&P) - Relative CAPE Multiple Since 1925

Relative CAPE Average Avg +1 Stdev Avg - 1 Stdev


Rio Tinto's total return since September 1988 is ~5.5x the return of

FTSE100

Source: Bloomberg, Bernstein Analysis & Estimates

-500%

0%

500%

1000%

1500%

2000%

2500%

3000%

3500%

4000%

Se

p-8

8

Se

p-8

9

Se

p-9

0

Se

p-9

1

Se

p-9

2

Se

p-9

3

Se

p-9

4

Se

p-9

5

Se

p-9

6

Se

p-9

7

Se

p-9

8

Se

p-9

9

Se

p-0

0

Se

p-0

1

Se

p-0

2

Se

p-0

3

Se

p-0

4

Se

p-0

5

Se

p-0

6

Se

p-0

7

Se

p-0

8

Se

p-0

9

Se

p-1

0

Se

p-1

1

Se

p-1

2

Se

p-1

3

Se

p-1

4

Se

p-1

5

Se

p-1

6

Se

p-1

7

Se

p-1

8

To

tal

sh

are

ho

lde

r re

turn

s [

%]

Rio Tinto's versus FTSE100's TSR since Sep 1988

RIO LN Equity UKX Index

An investor in Rio would be ~5.5x more wealthy today than a passive FTSE100 investor


Rio is one of 17 companies which have remained in the FTSE100

index continuously since its foundation

1710

122

90

57

5

0

20

40

60

80

100

120

140

Orig inal members

which remained in the

index continuously

since 1984

Orig inal members still

in FTSE100 today, but

have dropped out and

reentered at least

once

Former FTSE100

constituent (acquired)

Former FTSE100

constituent (market

capitalisation fell too

low)

Former FTSE100

constituent (corporate

reorganisation)

Former FTSE100

constituent (collapsed)

Evolution of FTSE constituents since foundation in 1984

Number of companies

Rio belongs in this group

Source: Bloomberg, FTSE, Bernstein Analysis & Estimates


Within this group of “FTSE100 survivors”, Rio has a top-quartile total

shareholder return (TSR)…

Source: Bloomberg, Bernstein Analysis & Estimates

Company name Ticker Sector

TSR since

Sep 1988

Annualised

TSR since

Sep 1988 P/E EV/ EBITDA P/B

Unilever ULVR LN Equity Consumer, Non-cyclical 3,828% 12.8% 18.4 14.0 11.1

Reckitt Benckiser Group RB/ LN Equity Consumer, Non-cyclical 3,689% 12.7% 16.9 13.1 2.9

Legal & General Group LGEN LN Equity Financial 3,506% 12.5% 9.5 - 2.1

Rio Tinto RIO LN Equity Basic Materials 3,358% 12.3% 10.3 5.7 2.2

Prudential PRU LN Equity Financial 2,939% 11.9% 10.9 - 2.6

Smith & Nephew SN/ LN Equity Consumer, Non-cyclical 2,087% 10.7% 18.7 11.9 3.5

Reed Elsevier REL LN Equity Consumer, Non-cyclical 1,783% 10.1% 18.2 13.8 14.0

BP BP/ LN Equity Energy 1,462% 9.5% 13.0 4.9 1.4

Tesco TSCO LN Equity Consumer, Non-cyclical 1,046% 8.3% 16.4 7.8 1.6

FTSE100 UKX Index - 629% 6.7% 12.7 7.7 1.7

Barclays BARC LN Equity Financial 597% 6.6% 8.0 - 0.5

Pearson PSON LN Equity Communications 593% 6.6% 14.8 8.9 1.4

Royal Dutch Shell RDSB LN Equity Energy 555% 6.4% 10.7 6.0 1.3

Land Securities Group LAND LN Equity Financial 455% 5.8% 15.3 19.5 0.7

Marks & Spencer Group MKS LN Equity Consumer, Cyclical 399% 5.4% 11.3 5.4 1.6

Lloyds Banking Group LLOY LN Equity Financial 384% 5.3% 8.8 - 1.0

J Sainsbury SBRY LN Equity Consumer, Non-cyclical 259% 4.3% 10.6 3.8 0.7

RBS Group RBS LN Equity Financial 53% 1.4% 9.3 - 0.7


Disclosure Appendix


Ticker Table

Ticker

Ratin

g

May 13, 2019

Closing

Price

Target

Price

Rel.

Perf.

EPS Adjusted EV/EBITDA

2017A 2018E 2019E 2017A 2018E 2019E

AAL.LN O GBp 1,892.80 2,650.00 6.5% USD 2.62 3.06 3.20 4.37 4.06 4.02

ANTO.LN M GBp 835.60 1,100.00 (16.3)% USD 0.56 0.91 1.03 5.95 4.82 4.38

BHP M USD 51.87 46.41 1.7% USD 4.06 5.99 7.51 6.84 5.99 5.53

BHP.AU M AUD 36.93 36.70 25.8% USD 2.03 3.00 3.75 6.81 5.97 5.51

BBL M USD 46.00 52.09 (0.6)% USD 6.19 9.12 11.43 7.18 6.29 5.80

BHP.LN M GBp 1,743.00 1,800.00 11.6% USD 1.23 1.81 2.38 6.81 5.97 5.51

FM.CN O CAD 12.45 26.00 (45.9)% USD (0.16) 0.74 1.05 11.90 7.74 5.77

GLEN.LN O GBp 280.85 500.00 (19.5)% USD 0.39 0.46 0.65 5.59 4.93 4.07

RIO.LN O GBp 4,412.00 5,000.00 14.3% USD 4.85 5.44 5.95 5.28 5.44 5.17

RIO O USD 58.87 71.62 1.5% USD 4.85 5.44 5.95 5.36 5.52 5.25

S32.AU M AUD 3.34 3.45 (5.1)% AUD 0.31 0.37 0.44

S32.LN M GBp 177.00 190.00 (13.2)% USD 0.22 0.26 0.31 4.58 4.39 3.93

S32.SJ M ZAr 3,249.00 3,143.39 (3.5)% ZAR 2.83 3.33 3.98

VALE3.BZ O BRL 49.46 70.00 5.2% USD 1.23 1.35 2.05 5.23 4.84 4.55

VALE O USD 12.47 18.90 (20.3)% USD 1.23 1.35 2.05 5.22 4.83 4.55

IVN.CN O CAD 3.25 16.00 (4.4)% USD 0.22 (0.07) (0.04) 9.18 (29.72) 22.35

MSDLE15 1,554.07 101.45 107.57 112.57 15.32 14.45 13.80

MXAPJ 518.47 36.60 38.29 43.05 14.17 13.54 12.04

MXEF 1,033.44 80.25 85.40 96.87 12.88 12.10 10.67

SPX 2,881.40 128.74 159.60 164.91 22.38 18.05 17.47

O - Outperform, M - Market-Perform, U - Underperform, N – Not Rated

AAL.LN,ANTO.LN base year is 2018;. AAL.LN,ANTO.LN,BHP,BBL,BHP.LN,FM.CN,GLEN.LN,RIO.LN,RIO,S32.LN,S32.SJ,VALE3.BZ,VALE,IVN.CN

close date is 05/10/2019;.


Disclosure Appendix - Valuation Methodology

European Metals & Mining

Our price targets are based on a sum of the parts and DCF analysis. We forecast FCF per business unit for each company in our coverage, using our own

commodity price forecasts, and aggregate the numbers into a DCF.


Disclosure Appendix - Risks

European Metals & Mining

The four most significant risks facing the major mining houses are lack of capital discipline, operating cost inflation, a sustained downturn in the Chinese

economy and resource nationalism.

Capital discipline. Capital discipline is perhaps the most important mechanism by which the mining industry can create value. We have seen lapses in

capital discipline before, and a return of such periods would lend downward pressure to prices.

Operating cost inflation. Following 10 years of double-digit US dollar-denominated cost inflation in the industry, unit costs have come down in recent years

as commodity prices have fallen. We expect to see a return of cost inflation, but should this be stronger than we expect, then it has the capacity to erode

value.

Chinese economic risks. China is important in commodities as both the major source of demand growth and as the location of the marginal units of supply.

The market has become extremely sensitive to sentiment regarding the Chinese economy, with the level of leverage of particular concern.

Resource nationalism. Finally, we note with concern the trend toward global fragmentation and the ever greater desire to extract value from the mining

sector. We believe that this is ultimately a self-defeating strategy by host governments, but it is one with an impressively long pedigree. Persistent

macroeconomic headwinds will make this an ever more attractive option.

Anglo American PLC

For Anglo American in particular, inability to improve the efficiency of its platinum operations and continued margin pressure arising from South African labour

inflation poses downside risk, as does the potential for increased union militancy in South Africa (and again in platinum in particular). A continued deterioration

in labor unrest along with the attendant physical hazards, delays and expenses could weigh on results. Further delays at the Minas Rio iron ore project in

Brazil would also be a significant negative catalyst, whilst cost overruns, execution issues and delays at Quellaveco would also impact value.

Antofagasta PLC

We continue to like copper, and of course as a copper pure play, Antofagasta is poised to benefit from the upside we see in the commodity. However, the

main incremental risks for Anto are probably structural, long-term Chilean specific ones, i.e. water, labour and investment opportunities. Water scarcity is a

huge problem in many mining jurisdictions but particularly Chile, and this is of course why the Los Pelambres expansion needs the desalination plant which of

course adds to the capital intensity of the project. In terms of labour, wage rates in Chile have been rising for some time now, and we have seen a lot of

manifestations of industrial unrest in the very recent past with the strikes at other major mines in the country. Finally, in terms of investment opportunities (and

of course both water and labour feed into this) we are seeing Chile as a less and less attractive destination for investment itself, and increasingly see the “new

world” sources of production (the DRC, Zambia) as the way forward for the industry, rather than Chile.

BHP Billiton PLC

In the case of BHP Billiton, company specific risks include continued weakness in the price of natural gas in the US and iron ore. Repeats of the weather

induced volume losses in BHP’s metallurgical coal operations as well as continued labour related disruptions in these assets could also prove an impediment

to our price target.

First Quantum Minerals Ltd

First Quantum must handle four key risks or challenges:

1) Country risk. Half of First Quantum's current revenue and reserves come from Zambia, a country that has experienced severe political instability in the past

years.


Disclosure Appendix - Risks

2) Complexity of portfolio. First Quantum operates in 12 countries! The company's assets are located in Zambia, Spain, Mauritania, Australia, Finland, Turkey,

Panama, Peru and Argentina. The company is registered in Vancouver, Canada, and has representative offices in Perth (Australia), London (UK),

Johannesburg (South Africa) and Toronto (Canada). This involves complexity in the portfolio, significant FX, political and fiscal risks.

3) High leverage.

4) Risks associated with the ramp-up at Cobre Panama, including the uncertainty posed by the Supreme Court's ruling on the invocation of Law 9. Though the

company has received vocal support from the Government of Panama and continues to develop the mine, the current lack of clarity surrounding the issue is

clearly a headwind for the stock.

Glencore PLC

In the case of the mining division, company specific risks include continued weakness in commodity prices. Operationally, the biggest challenge is the

transition required to replace some older assets towards the end of their LOM with newer assets (e.g. in copper Tintaya and Antappacay).

The trading business requires high levels of working capital and remains vulnerable to large swings in cash-flow generation as a result. We note as a result

of its operations in frontier jurisdictions, as well as the unknown nature of embedded risk and persistence of edge in the marketing book, headline risk remains

a significant concern.

Rio Tinto PLC

In the case of Rio Tinto, company specific risks include any sustained down turn in the price of iron ore will negatively impact Rio as the company is the

second most exposed of our coverage group to iron ore (after Vale). Any relaxation of capital discipline particularly around the Simandou project in Guinea

would also be, in our view, a negative catalyst. Execution delays in the commissioning of the Oyu Tolgoi copper project in Mongolia or significant revenue

grabs from the Mongolians could also be a risk.

South32 Ltd

In the case of South32, company specific risks include continued weakness in the price of manganese and aluminium. In addition, if the company seeks to

acquire growth, given the lack of organic growth in its portfolio, then any premium paid for either copper or iron ore assets would represent a pure transfer of

value away from S32 shareholders. On the upside, there is still a possibility that a bidder comes in to take out South32, particularly as the company has sold-

off significantly since listing.

Vale SA

In the case of Vale, company specific risks include any sustained down-turn in the price of iron ore as the company derives nearly the entirety of its value

from exposure to iron ore. The continuation of disruptions to the output of nickel and attendant cost pressures are also a risk. The commissioning of Goro

(VNC) is an issue that needs to be addressed, as is the performance at Onca Puma.

Ivanhoe Mines Ltd

For Ivanhoe specifically, the major risk remains country risk, given that the three assets in the company's portfolio are located in Africa and that 90% of

enterprise value comes from Congolese assets.


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12-Month Rating History as of 05/ 14/ 2019

Ticker Rating Changes

AAL.LN O (IC) 09/ 05/ 12

ANTO.LN M (RC) 04/ 17/ 19 O (RC) 11/ 26/ 14

BBL M (RC) 01/ 22/ 18

BHP M (RC) 01/ 22/ 18

BHP.AU M (RC) 01/ 22/ 18

BHP.LN M (RC) 01/ 22/ 18

FM.CN O (IC) 06/ 02/ 15

GLEN.LN O (RC) 02/ 13/ 13

IVN.CN O (IC) 12/ 09/ 16

RIO O (IC) 09/ 05/ 12

RIO.LN O (IC) 09/ 05/ 12

S32.AU M (RC) 08/ 20/ 15

S32.LN M (RC) 08/ 20/ 15

S32.SJ M (RC) 08/ 20/ 15

VALE O (RC) 01/ 25/ 17

VALE3.BZ O (RC) 01/ 25/ 17

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated

Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

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