north america coal metals & mining and metals industry...

Deutsche Bank Markets Research

North America United States Industrials Metals & Mining

Industry

North America Coal and Metals

Date 13 October 2013

Industry Update

3Q13 preview - All eyes on CONSOL

3Q reports to bring mixed news; CNX update is most anticipated

________________________________________________________________________________________________________________

Deutsche Bank Securities Inc.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

David S Martin

Research Analyst (+1) 212 250-5580 [email protected]

Jorge Beristain, CFA

Research Analyst (+1) 203 863-2381 [email protected]

Key Changes

Company Target Price Rating

CNX.N 38.00 to 45.00(USD)

-

Source: Deutsche Bank

Top picks

CONSOL Energy (CNX.N),USD36.79 Buy

Constellium (CSTM.N),USD18.44 Buy

Steel Dynamics (STLD.OQ),USD16.85 Buy

Source: Deutsche Bank

Companies Featured

Arch Coal (ACI.N),USD3.86 HoldAK Steel (AKS.N),USD4.02 HoldAlpha Natural Resources (ANR.N),USD5.58

Buy

Alliance Resource L.P. (ARLP.OQ),USD75.85

Hold

Allegheny Technologies (ATI.N),USD30.87 BuyPeabody Energy (BTU.N),USD17.10 BuyCONSOL Energy (CNX.N),USD36.79 BuyConstellium (CSTM.N),USD18.44 BuyJames River Coal (JRCC.OQ),USD1.95 HoldArcelorMittal (MT.N),USD14.70 HoldNucor (NUE.N),USD48.78 HoldSteel Dynamics (STLD.OQ),USD16.85 BuyWalter Energy (WLT.N),USD14.36 HoldUS Steel (X.N),USD21.50 BuySource: Deutsche Bank

Coverage stock firmed in 3Q on certain macro drivers & industry developments such as rising steel & coal prices. However, fundamental & equities momentum has slowed and we expect mixed news in coming weeks. Here, coal reports should be more topical as industry continues to right-size & some major strategic announcements are anticipated. For CNX, any move to unlock value should be positive, however we still see this as inevitable & our PT is raised from $38 to $45. Our est changes are modest with ratings unchanged. Also, valuation favors Metal over Coal, & top picks = CNX, CSTM and STLD.

CNX to begin executing strategy implies multiple ways to ‘win’; PT to $45 Recent CNX comments have gone well beyond the ‘our shares are undervalued’ & indicate that CNX is reviewing (midstream) MLP options, the current coal-gas structure and other asset options. Also, the company indicated that meaningful news may be forthcoming as soon as its 3Q report. Coal asset sales are being considered (according to trade reports), but much of value accretion exists outside of coal mining where resource expansion is underway (Marcellus & Utica) and/or multiples are attractive (MLPs). Given that corporate action appears likely we have shifted to a SOTP-NAV valuation with a PT of $45. Our SOTP-NAV points to net value of $45-50/share with less than 50% of total value attributable to coal (which generated nearly 80% of operating earnings in 1H13) and up to $10b of value in gas. An MLP of its coal/gas infrastructure is a possible early move and more accretion is likely from the development of its gas resources. Risks are that CNX doesn’t deliver a ‘deal’ within 30 days but we continue to see multiple ways for investors to ‘win’ including strategic moves, resources & commodity momentum.

Steel price improvement has surprised but outlook unchanged US HRC prices have increased $70/st (12%), however, only a portion of the spot-price gain will be realized in 3Q. We expect that any US HRC pressure may be muted in the short-term but domestic premiums ($100+/t) remain excessive and we've left our '14 HRC forecast unchanged. 3Q questions will include the HRC sustainability, '14 contracts (we expect roll-over US pricing) and ’14 cost relief (ex. met coal). Lastly, only our MT ests are changed & overall DB ests for 2H13 & 2014 remain below Street.

Met coal recovery only partially complete but headwinds persist As stated in July, met prices only had 1-way to go and global prices increased ~$20/mt (15%). We do expect further gains but this recovery has slowed and the pace of improvement is uncertain given steel demand, domestic China discounts, FX changes etc. In 3Q, mine closures are widely anticipated as domestic contracts expire and exports slow. ’13 thermal coal exports should near 50m t and a meaningful amount of these tons (50%) are at risk in this environment. Our 2H13 & 2014 ests are lowered modestly but the changes are mixed (ANR & ACI up in 2H) & are below the Street in 2H and inline for 2014.

Valuation and risks Coverage stocks are trading at 11x and 7x our '13-14 EBITDA ests and our '14-based PTs translate to 9x for Coal and 7x for Metals/Steel. Key risks are FX rates, commodity demand & pricing, supply growth, operating costs, supply-chain inventories, public policy etc.

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Metals & Mining



Table Of Contents

Industry update ................................................................... 4 Equity performance and market fundamentals ................................................... 4 3Q13 reporting calendar ....................................................................................... 6 Estimate changes, price targets and ratings ........................................................ 6 CONSOL strategy implies multiple ways to ‘win’ ................................................ 8 Valuation ............................................................................................................... 9 Risks ................................................................................................................... 10

COAL ................................................................................. 11

ARLP: Investment Thesis ................................................... 12 Outlook ............................................................................................................... 12 Valuation ............................................................................................................. 12 Risks ................................................................................................................... 12 Financial update ................................................................................................. 14

ANR: Investment Thesis .................................................... 16 Outlook ............................................................................................................... 16 Valuation ............................................................................................................. 16 Risks ................................................................................................................... 16 Financial update ................................................................................................. 18

ACI: Investment Thesis ...................................................... 20 Outlook ............................................................................................................... 20 Valuation ............................................................................................................. 20 Risks ................................................................................................................... 20 Financial update ................................................................................................. 22

CNX: Investment Thesis .................................................... 24 Outlook ............................................................................................................... 24 Valuation ............................................................................................................. 24 Risks ................................................................................................................... 24 Financial update ................................................................................................. 26

JRCC: Investment Thesis ................................................... 28 Outlook ............................................................................................................... 28 Valuation ............................................................................................................. 28 Risks ................................................................................................................... 28 Financial update ................................................................................................. 30

BTU: Investment Thesis ..................................................... 32 Outlook ............................................................................................................... 32 Valuation ............................................................................................................. 32 Risks ................................................................................................................... 32 Financial update ................................................................................................. 34

WLT: Investment Thesis .................................................... 36 Outlook ............................................................................................................... 36 Valuation ............................................................................................................. 36 Risks ................................................................................................................... 36 Financial update ................................................................................................. 38

METALS ............................................................................. 39

AKS: Investment Thesis ..................................................... 40 Outlook ............................................................................................................... 40 Valuation ............................................................................................................. 40 Risks ................................................................................................................... 40 Financial update ................................................................................................. 42

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Table Of Contents Cont'd.

ATI: Investment Thesis ...................................................... 44 Outlook ............................................................................................................... 44 Valuation ............................................................................................................. 44 Risks ................................................................................................................... 44 Financial update ................................................................................................. 46

CSTM: Investment Thesis .................................................. 48 Outlook ............................................................................................................... 48 Valuation ............................................................................................................. 48 Risks ................................................................................................................... 48 Financial update ................................................................................................. 50

MT: Investment Thesis ...................................................... 52 Outlook ............................................................................................................... 52 Valuation ............................................................................................................. 52 Risks ................................................................................................................... 52 Financial update ................................................................................................. 54

NUE: Investment Thesis .................................................... 56 Outlook ............................................................................................................... 56 Valuation ............................................................................................................. 56 Risks ................................................................................................................... 56 Financial update ................................................................................................. 58

STLD: Investment Thesis ................................................... 60 Outlook ............................................................................................................... 60 Valuation ............................................................................................................. 60 Risks ................................................................................................................... 60 Financial update ................................................................................................. 62

X: Investment Thesis ......................................................... 64 Outlook ............................................................................................................... 64 Valuation ............................................................................................................. 64 Risks ................................................................................................................... 64 Financial update ................................................................................................. 66

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Industry update

Equity performance and market fundamentals

All coverage equities showed positive performance in 3Q, with an average increase of 17% and a range of 5% (ARLP) to 35% (WLT), which can be partially attributed to positive global economic data (China & Europe). Rising commodity prices and seasonal coal demand likely also helped to varying degrees.

More recently however, equity performance has varied as commodity momentum slowed and given US political uncertainty. Further, coal stocks have underperformed in recent weeks on growing concerns about further mine closures, export demand and utility retirements.

The coal outlook remains challenging and we remain selective with Buys on CNX and BTU given asset quality/value, market exposures or cost positions and we continue to rate ANR a Buy given its leverage to an anticipated improvement in met coal prices. In metals, preferred stocks are CSTM and STLD as a result of end-market growth leverage, cost competitiveness and valuation.

Figure 1: Stock price performance 10-Oct-13 1 month 3 months 3Q13 6 months YTD 1 year 3 years

Coal

Alliance Resource -4.3% 2.0% 5.0% 12.6% 28.5% 20.1% 20.4%

Alpha Natural -17.0% 2.0% 13.7% -30.4% -42.7% -23.7% -87.6%

Arch Coal -24.2% -2.3% 8.7% -30.6% -47.3% -43.7% -85.5%

CONSOL Energy 6.7% 34.6% 24.2% 8.9% 14.6% 12.0% -6.6%

James River -16.7% 6.6% 8.8% 1.6% -39.1% -39.1% -88.4%

Peabody Energy -8.9% 11.1% 17.8% -18.0% -35.7% -28.8% -67.0%

Walter Energy -7.9% 25.2% 34.9% -39.5% -60.0% -59.1% -83.2%

Coal Average -10.3% 11.3% 16.2% -13.6% -25.9% -23.2% -56.9%

Metals

AK Steel 1.3% 18.4% 23.4% 24.4% -14.6% -23.1% -72.9%

Arcelor-Mittal 4.3% 26.0% 22.1% 17.3% -15.9% 0.4% -57.8%

Allegheny Tech 5.4% 14.0% 16.0% -1.1% 1.1% -0.8% -37.3%

Constellium -7.6% 9.4% 20.1% NA NA NA NA

Nucor 0.9% 9.6% 13.2% 7.6% 12.0% 24.5% 21.2%

Steel Dynamics 1.9% 10.5% 12.1% 9.9% 22.4% 38.8% 14.7%

US Steel 9.4% 20.2% 17.5% 22.8% -8.3% 5.4% -52.3%

Metals Average 2.2% 15.4% 17.7% 13.5% -0.5% 7.5% -30.7%

S&P 500 Index 0.5% 2.4% 4.7% 6.6% 18.7% 18.1% 45.3%Source: Factset and Deutsche Bank

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Figure 2: Fundamental model drivers 3Q13 Avg* QoQ chg YoY chg YTD '13 YTD chg

Commodity Prices ($/mt):

US HRC 710 9% 1% 681 0%

EU HRC 595 -4% -8% 626 -2%

Seaborne Met Coal (Aus HCC) 142 -2% -21% 157 -5%

Seaborne Steam Coal (Newcastle) 77 -10% -10% 85 -14%

Steel Production (m mt):

US 7 1% 2% 67 -3%

EU 13 -11% -6% 109 -5%

Coal Production (m st):

US Total 86 7% -1% 747 -2%

Appalachian Region 23 0% -9% 212 -9%

Interior Region 15 0% 11% 135 5%

Western Region 48 14% 1% 399 -1%

Coal Exports (m mt):

VA/MD Ports 4.5 -12% -4% 46.0 -6%

Mobile Port 0.8 -7% 2% 7.7 12%

Ridley Port - Met Coal 0.7 4% 18% 6.0 19%

Queensland Port 16.1 3% -5% 135.3 20%

Newcastle Port 13.1 5% 7% 109.1 10%Source: CRU, Platts, Bloomberg Finance LP, EIA, WSA, McCloskey, Deutsche Bank

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3Q13 reporting calendar

Figure 3: 3Q13 earnings calendar and conference call details (where available) Company name 3Q13 results Time Con. Call Time Dial-in details (Passcode)

Steel Dynamics 16-Oct Post-market 17-Oct 10:00 AM 201-689-8040

Peabody Energy 17-Oct Pre-market 17-Oct 11:00 AM 800-288-8968

Nucor Corp. 17-Oct Pre-market 17-Oct 2:00 PM 800-768-6563 (3725507)

AK Steel 22-Oct Pre-market 22-Oct 11:00 AM 866-244-4526 (1622703)

Allegheny Tech 23-Oct Pre-market 23-Oct 8:30 AM 671-213-4847 (19448875)

US Steel 29-Oct Pre-market 29-Oct 3:00 PM 612-288-0329

CONSOL Energy 31-Oct Pre-market 22-Oct 10:00 AM 800-230-1085 (303313)

ArcelorMittal 7-Nov Pre-market 7-Nov NA NA*estimated dates and time of earnings; Source: Company websites and Deutsche Bank

Estimate changes, price targets and ratings

Most metal/steel companies have recently provided guidance or we remain comfortable with our assumptions and therefore our operating estimates are unchanged. Also, DB estimates overall for these players remain below the Street for 2H13 and 2014.

Meanwhile in coal, the changes reflect our interpretation of recent mine output & export data on each company vs prior DB assumptions. Forecasts changes are positive for ANR and ACI in 2H while elsewhere forecasts were reduced, and for 2014, forecasts are adjusted to reflect mostly lower domestic/export demand. Lastly, our coal estimates remain below the Street in 2H13 and inline for 2014.

Lastly, ratings remain unchanged and our only PT adjustment is for CONSOL, for which our PT is now $45 (was $38).

Figure 4: Price target and rating summary Company Ticker Recommen-

dation Current Price* Target Price Upside PT/NPV** Implied

EV/EBITDA

Coal

Alliance Resources ARLP.OQ Hold 74.63 73.00 -2% 1.0x 7.6x

Alpha Natural ANR.N Buy 5.58 7.50 34% 0.9x 8.8x

Arch Coal ACI.N Hold 3.86 5.00 30% 1.0x 9.5x

CONSOL Energy CNX.N Buy 36.79 45.00 22% 1.0x 10.0x

James River JRCC.OQ Hold 1.95 2.00 3% 1.0x nm

Peabody BTU.N Buy 17.10 22.00 29% 0.9x 8.5x

Walter Energy WLT.N Hold 14.36 14.50 1% 0.8x 9.8x

Coal Average 17% 1.0x 9.0x

Metals

AK Steel AKS.N Hold 3.93 3.50 -11% 1.2x 5.5x

Arcelor Mittal MT.N Hold 14.70 13.50 -8% 0.9x 5.5x

Allegheny Tech ATI.N Buy 30.68 35.00 14% 1.0x 8.5x

Constellium CSTM.N Buy 18.42 23.00 25% 1.0x 6.1x

Nucor NUE.N Hold 48.38 45.00 -7% 1.1x 8.0x

Steel Dynamics STLD.OQ Buy 16.80 18.00 7% 1.1x 6.8x

U.S. Steel X.N Buy 21.90 22.00 0% 1.0x 6.4x

Metals Average 3% 1.0x 6.7x*At Oct 10th closing prices; **NPV: Net Present Value calculated via Discounted Cash Flow methodology; Source: Deutsche Bank estimates and Factset

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Figure 5: DB Coal EBITDA and EPS estimates versus consensus Current % change to previous Consensus Current Difference DBe vs Cons. Cons. Change (60 days)

Company name 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E

EBITDA (US$mm)

Alliance Resource 685 662 0% 0% 690 711 -1% -7% 5% 4%

Alpha Natural 305 513 3% -6% 283 428 8% 20% -29% -24%

Arch Coal 395 534 4% 0% 395 495 0% 8% -1% -16%

CONSOL Energy 995 1,355 -1% -1% 1,021 1,417 -3% -4% -8% -6%

James River -19 -6 -1% nm -18 -6 -8% -3% 10% nm

Peabody Energy 976 1,336 -2% -5% 1,069 1,427 -9% -6% -6% -6%

Walter Energy 131 342 -2% 0% 150 395 -13% -14% -39% -17%

Simple average 0% -2% -4% -1% -10% -11%

EPS (US$)

Alliance Resource 7.16 6.12 0% 0% 7.34 7.09 -2% -14% 13% 6%

Alpha Natural -2.39 -1.76 1% -6% -2.49 -2.18 4% 19% -8% -18%

Arch Coal -1.32 -0.73 4% 0% -1.27 -1.07 -4% 32% 9% -15%

CONSOL Energy 0.39 1.72 -9% -2% 0.38 1.47 2% 18% -53% -19%

James River -5.01 -4.11 0% -9% -4.71 -4.18 -6% 2% 6% -4%

Peabody Energy 0.07 0.71 -44% -22% 0.15 0.62 -52% 14% 173% -30%

Walter Energy -3.19 -1.71 -1% 0% -2.90 -1.29 -10% -32% -17% -231%

Simple average -7% -6% -10% 6% 18% -44%Source: Factset and Deutsche Bank estimates

Figure 6: DB Metals EBITDA and EPS estimates versus consensus Current % change to previous Consensus Current Difference DBe vs Cons. Cons. Change (60 days)

Company name 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E

EBITDA (US$mm)

AK Steel 288 420 0% 0% 290 429 -1% -2% -6% -2%

ArcelorMittal 6,730 7,743 0% 0% 6,631 8,385 1% -8% -5% -3%

Allegheny Tech 348 611 0% 0% 330 573 6% 7% -25% -16%

Constellium (EUR) 277 328 0% 0% 277 325 0% 1% -1% 1%

Nucor 1,495 2,178 0% 0% 1,523 2,441 -2% -11% -5% -4%

Steel Dynamics 611 859 0% 0% 637 869 -4% -1% -3% -4%

US Steel 686 969 0% 0% 780 1,155 -12% -16% -2% -2%

Simple average 0% 0% -2% -4% -7% -4%

EPS (US$)

AK Steel -0.71 0.15 0% 0% -0.62 0.23 -16% -36% -31% -40%

ArcelorMittal -0.54 0.79 -21% 1% -0.22 0.99 -147% -20% -205% -8%

Allegheny Tech 0.41 1.68 0% 0% 0.21 1.39 92% 21% -74% -38%

Constellium (EUR) 0.85 1.85 0% 0% 1.43 1.82 -41% 2% 0% 0%

Nucor 1.30 2.51 0% 0% 1.36 3.21 -4% -22% -15% -8%

Steel Dynamics 0.76 1.40 0% 0% 0.84 1.47 -10% -4% -7% -4%

US Steel -1.67 0.58 0% nm -1.38 0.96 -21% -39% -18% -26%

Simple average -3% 0% -21% -14% -50% -18%Source: Factset and Deutsche Bank estimates

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CONSOL strategy implies multiple ways to ‘win’

In the past 18 months, CNX has sold assets valued at near $1b and has often expressed displeasure with its valuation. However, recent comments have gone well beyond the ‘undervalued’ argument & indicate that CNX is reviewing (midstream) MLP options, the current coal-gas structure and other asset options. Also, the company indicated that meaningful news may be forthcoming as soon as its 3Q report.

Coal asset sales are being considered according to trade reports, but much of value potential within CNX exists outside of coal mining where resource expansion is underway (Marcellus & Utica) and/or multiples are attractive (MLPs). Given that corporate action appears likely we have shifted to a SOTP-NAV valuation and our SOTP points to net value of $45-50/share with less than 50% of total value attributable to coal (which generated nearly 80% of operating earnings in 1H13) and up to $10b of value in gas.

An MLP of its coal/gas infrastructure assets may be an early move, and here, we agree with investor views that an MLP structure could derive benefits of $2-3/sh if EBITDA of $100+m can be attributed to these assets. However, more accretive is likely from the development of its gas resources. Lastly, we’d argue that its coal business is trading at 3-4x EBITDA (’14) if our remaining assets are appropriately valued.

The risks are that CNX doesn’t deliver a ‘deal’ in the next 30 days but we continue to see multiple ways for investors to ‘win’ with CNX and these include strategic moves, resource developments & seasonal commodity price momentum.

Figure 7: Sum of the parts / NAV analysis - CNX NAV Method Market Multiples Method (2014 based)

Asset Value ($m) Asset EBITDA Multiple Value ($m)

Coal 7,145 Coal 967 8.8x 8,458

Marcellus / CBM 6,466 Gas 389 10.5x 4,082

Utica 1,300 Utica 1,300

Others (PV of Carries) 2,049 Others (PV of Carries) 2,049

Baltimore Terminal 318 Baltimore Terminal 318

15% SOTP discount (2,592) 15% SOTP discount (2,431)

Firm value 14,686 Firm value 13,776

Net debt (less) 3,327 Net debt (less) 3,327

Equity value 11,359 Equity value 10,449

Shares Outstanding 229 Shares Outstanding 229

Value per share 49.66 Value per share 45.69 Source: Company data and Deutsche Bank estimates

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Valuation

We use EV/EBITDA multiples (between 5x and 10x), SOTPs and NPVs as our primary valuation tools in the sector. On average, our coverage is trading at 7x '14 EBITDA estimates and 0.9x NPV, and our PTs are predicated on average target EV/EBITDA multiples of 8x '14 EBITDA, which equate to 1.0x NPV.

Figure 8: Valuation Summary 10-Oct-13 Share Target Market Enterprise EV/EBITDA P/E

(US$) Rating Price Price Cap Value 2013E 2014E 2013E 2014E P/NPV EV/res*

Coal

Alliance Resources Hold 74.63 73.00 2,759 3,546 7.1x 7.7x 10.4x 12.2x 1.0x 3.9

Alpha Natural Buy 5.58 7.50 1,232 4,104 13.4x 8.0x nm nm 0.7x 0.9

Arch Coal Hold 3.86 5.00 819 4,853 12.3x 9.1x nm nm 0.8x 0.9

CONSOL Energy Buy 36.79 45.00 8,415 11,741 11.8x 8.7x 95.5x 21.4x 0.8x 2.8

James River Hold 1.96 2.00 69 422 nm nm nm nm 1.0x 1.2

Peabody Buy 17.10 22.00 4,574 10,075 10.3x 7.5x 242.8x 24.2x 0.7x 1.1

Walter Energy Hold 14.36 14.50 899 3,335 25.5x 9.8x nm nm 0.8x 8.3

Coal Average 13.4x 8.5x 116.2x 19.3x 0.8x 2.7

Metals

AK Steel Hold 3.93 3.50 534 2,384 8.3x 5.7x nm 26.9x 1.3x 404.3

Arcelor Mittal Hold 14.70 13.50 27,589 44,729 6.6x 5.8x nm 18.5x 1.0x 357.8

Allegheny Tech Buy 30.68 35.00 3,580 4,673 13.4x 7.6x 75.6x 18.3x 0.9x NA

Constellium Buy 18.42 23.00 1,935 2,216 5.9x 5.0x 16.0x 7.4x 0.8x NA

Nucor Hold 48.38 45.00 15,434 18,449 12.3x 8.5x 37.1x 19.3x 1.2x 761.7

Steel Dynamics Buy 16.79 18.00 3,998 5,526 9.0x 6.4x 22.0x 12.0x 1.0x 864.1

U.S. Steel Buy 21.90 22.00 3,381 6,227 9.1x 6.4x nm 37.6x 1.0x 234.3

Coal Average 9.2x 6.5x 37.7x 20.0x 1.0x 524.4*EV/res = EV/Reserves for Coal and EV/Capacity for Metals ; Source: Deutsche Bank estimates and Factset

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Risks

Key risks to our coal sector outlook include pullback in global economic growth, slowdown in energy and/or steel consumption, coal inventories at utility companies, direction of energy prices – which could translate to switching between fuels, changes in energy and/or carbon policy and consequent ramifications in fuel type usage. These dynamics tend to set the stage for global coal supply and demand fundamentals, and ultimately on the dynamics unfolding in the US. In general, the sustainability of current production and potential increases from current levels, depend on market conditions, volatility of currencies, definition of reserves, permitting, environmental requirements, staffing and equipment availability. Other risks include the direction of input costs, fiscal regime, mining legislation and contract pricing in place vis-à-vis the direction of spot prices. For company-specific risk, please refer to the relevant company section.

Key risks to our steel sector outlook include global economic growth that does not meet expectations, lower-than-expected metal prices that may result, raw material and other operating costs that may limit earnings growth, political moves or efforts from governments to influence metal prices, capital projects that do not progress as expected, and foreign exchange rates that do not match DB forecasts. For company-specific risk, please refer to the relevant company section.

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COAL

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ARLP: Investment Thesis

Outlook

Alliance Resource (ARLP), headquartered in Tulsa, Oklahoma, is the sixth largest U.S. coal producer and one of the few coal miners incorporated as a Master Limited Partnership in the US. It is a leading producer in the Illinois Basin (IB), which is a region positioned to benefit from the changing production profile in the US coal market and offers attractive growth potential for the company. As the company completes expansions, free cash flow generation should increase with production. ARLP follows a highly contracted business model and offers investors a dividend income stream. We view ARLP as a defensive investment in coal - via its contracted position and dividend payout - with more limited upside potential should market conditions tighten. We rate ARLP shares a Hold given limited upside to PT.

Valuation

Our price target is based on a 1.0x multiple to our dividend discount model for the company, which assumes a 10% Ke and 1% terminal growth rate (based on our knowledge of the asset base and expectations of long-term growth). This translates into an EV/EBITDA multiple of 8x based our adjusted EBITDA estimate for 2014. Our selected sample of NA coal companies should trade between 5x and 10x forward EBITDA, based on historical averages. We do acknowledge that its steady and healthy dividend stream could attract investors seeking income rather than capital appreciation. Nonetheless, it is this required dividend stream that tends to constrain the company's financial flexibility despite its ability to generate meaningful free cash flow.

Risks

Key upside/downside risks to our outlook include global economic growth, energy consumption, further coal inventory changes at utility companies, direction of energy prices, changes in energy and/or carbon policy changes and consequent ramifications in switching fuels. These dynamics tend to set the stage for global coal supply and demand fundamentals, and ultimately on the dynamics unfolding in the US Mining companies can face geologic and operational obstacles. In particular, Alliance Resource growth is contingent on the successful execution of its projects which could come on stream with results ahead of expectations or face delays and not lead to the expected increases in new production, as well as possibly require higher investments and/or face higher operating costs than expected. Other risks are associated with the direction of input costs, fiscal regime and mining legislation, and the successful execution of mining operations. Further risks for coal companies stem from contract pricing in place vis-à-vis the direction of spot prices.

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M odel updated: 30 September 2013 Fiscal year end 31-Dec 2010 2011 2012 2013E 2014E 2015E

Income Statement (US$m)Company Profile Sales 1,610 1,844 2,034 2,192 2,167 2,378

EBITDA 499 570 597 685 662 732EBIT 352 410 379 413 377 492Pre-tax profit 323 389 354 389 357 477

N et inco me 248 303 229 267 226 336

Cash Flow (US$m)C ash f lo w f ro m o perat io ns 521 574 609 683 642 704Net Capex -289 -320 -425 -385 -275 -225F ree cash f lo w 231 254 184 298 367 479Equity raised/(bought back) -1 -2 -2 0 0 0Dividends paid -118 -133 -153 -169 -177 -187Net inc/(dec) in borrowings 280 -19 82 -15 -18 -24Other investing/financing cash flows -74 -165 -303 -118 -127 -136N et cash f lo w 318 -66 -192 -4 44 133Change in working capital 18 3 -53 22 4 -8

Balance Sheet (US$m)Cash and cash equivalents 340 274 28 25 69 201Property, plant & equipment 949 1,181 1,530 1,642 1,632 1,617Goodwill 0 0 0 0 0 0Other assets 212 277 398 385 383 402T o tal assets 1,501 1,732 1,956 2,052 2,083 2,221Debt 722 707 811 796 777 753Other liabilities 323 401 440 449 451 462T o tal liabilit ies 1,045 1,108 1,251 1,245 1,228 1,216T o tal shareho lders' equity 456 624 705 807 856 1,005Net debt 383 434 782 771 709 552

Key Company MetricsSales growth (%) 30.8 14.5 10.3 7.8 -1.1 9.8

Gro wth & P ro f itability DB EPS growth (%) 88.3 21.6 -24.5 16.8 -14.5 48.5

Payout ratio (%) 47.5 44.0 67.1 63.2 78.4 55.5

EBITDA margin (%) 31.0 30.9 29.3 31.3 30.5 30.8EBIT margin (%) 21.8 22.2 18.6 18.8 17.4 20.7

ROE (%) 63.9 56.2 34.4 35.3 27.2 36.1

Net debt/equity (%) 84.0 69.5 110.9 95.6 82.8 54.9Net interest cover (x) 11.8 19.0 13.3 16.8 18.8 32.8

DuPont Analysis EBIT margin (%) 21.8 22.2 18.6 18.8 17.4 20.7x Asset turnover (x) 1.3 1.1 1.1 1.1 1.0 1.1x Financial cost ratio (x) 0.9 0.9 0.9 0.9 0.9 1.0x Tax and other effects (x) 0.8 0.8 0.7 0.7 0.6 0.7= R OA (po st tax) (%) 19.4 18.8 12.4 13.3 10.9 15.6x Financial leverage (x) 3.3 3.0 2.8 2.7 2.5 2.3= R OE (%) 63.9 56.2 34.4 35.3 27.2 36.1 annual growth (%) 48.0 -12.1 -38.7 2.5 -22.8 32.7x NTA/share (avg) (x) 10.6 14.7 18.0 20.5 22.5 25.2

David S. Martin = R epo rted EP S ($ ) 6.75 8.24 6.20 7.22 6.12 9.09 annual growth (%) 88.2 22.1 -24.7 16.3 -15.2 48.5

Source: Company data, Deutsche Bank estimates

Running the Numbers Financial SummaryNorth America DB EPS ($)

Reported EPS ($)US DPS ($)

6.68 8.12 6.13 7.16 6.12 9.096.75 8.24 6.20 7.22 6.12 9.093.21 3.63 4.16 4.56 4.80 5.05

Metals & Mining BVPS ($) 12.42 16.96 19.14 21.83 23.15 27.19

Valuation MetricsAlliance Resource L.P. Price/Sales (x) 1.5 1.5 1.1 1.3 1.3 1.2

P/E (DB) (x) 7.6 9.0 10.3 10.4 12.2 8.2Reuters: ARLP.OQ Bloomberg: ARLP US P/E (Reported) (x) 7.5 8.9 10.1 10.3 12.2 8.2

Hold P/BV (x) 5.3 4.5 3.0 3.4 3.2 2.7

FCF yield (%) 12.4 9.4 7.9 10.8 13.3 17.4Price (10 Oct 13) $74.63 Dividend yield (%) 6.3 5.0 6.6 6.1 6.4 6.8

Target price $73.00 EV/Sales 1.4 1.7 1.5 1.6 1.6 1.4

52-week Range: $53.06 – 78.75 EV/EBITDA 4.5 5.5 5.2 5.1 5.2 4.5EV/EBIT 6.4 7.6 8.2 8.5 9.2 6.7

M arket Cap $2,758m

Alliance Resource Partners (ARLP) is one of the veryfew publicly traded M aster Limited Partnershipsoperating in the US coal sector. ARLP is the sixthlargest US coal producer. ARLP sold 35m tons of coal in 2012. The company produces mostly high sulfursteam coal in its three regions - Illino is Basin (80%of2012 sales volume), Central Appalachia (6%), andNorthern Appalachia (13%). The Tulsa, Oklahomaheadquartered company is listed on the NASDAQunder the symbol ARLP.

1yr P rice P erfo rmance

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So lvency

+1 212 250 5580 [email protected]

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Alliance Resource L.P.

S & P 500 (Rebased)

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13 October 2013

Metals & Mining



Financial update

Figure 9: Summary income statement Current Previous

(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 2,034 2,192 2,167 2,034 2,192 2,167

EBITDA 597 685 662 597 685 662

EBITDA margin 29% 31% 31% 29% 31% 31%

Depreciation 218 273 285 218 273 285

EBIT 379 413 377 379 413 377

Interest income/(exp.) (28) (25) (20) (28) (25) (20)

Pre-tax income 354 389 357 354 389 357

Tax-rate 0% 0% 1% 0% 0% 1%

Net income 336 388 353 336 388 353

Net margin 16% 18% 16% 16% 18% 16%

Shares 37 37 37 37 37 37

EPS 6.13 7.16 6.12 6.13 7.16 6.12 Source: Deutsche Bank estimates and company data

Figure 10: Summary financial/operating highlights (US$m) 2009A 2010A 2011A 2012A 2013E 2014E

Financial highlights

EBITDA 339 499 570 597 685 662

Net earnings 192 321 389 336 388 353

EPS 3.55 6.68 8.12 6.13 7.16 6.12

Operating assumptions

Shipments ('000 tons) 24,975 30,296 31,925 35,170 39,010 39,000

Capex (US$m) 328 290 322 425 385 275

Revenue/ton (US$) 49.3 53.1 57.7 57.8 56.2 55.6

Cash cost/ton (US$) 35.7 36.7 39.9 40.9 38.6 38.6

EBITDA/ton (US$) 13.6 16.5 17.8 17.0 17.6 17.0Source: Deutsche Bank estimates and company data

13 October 2013

Metals & Mining



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13 October 2013

Metals & Mining



ANR: Investment Thesis

Outlook

Alpha Natural Resources (ANR), based in Abingdon, Virginia, is the third largest coal producer in the US and one of the largest met producers globally. Alpha Natural is the largest met coal exporter in the US and a leader in Central Appalachia. With its Northern Appalachia (NAPP) and Powder River Basin (PRB) assets, Alpha is well diversified geographically. Also, we believe the company is in a position to export a meaningful amount (with ample capacity to increase further) longer term if conditions warrant. We rate a Buy given leverage to potential recovery in met coal prices and upside to PT.

Valuation

Our price target for ANR is based on 9x our EBITDA estimate for 2014 and 0.9x our NAV calculated under a DCF methodology (9.2% WACC with 10.7% Ke and 5.6% post-tax Kd, and a 1.0% terminal growth rate [based on our knowledge of the asset base and expectations of long-term growth]). Our selected sample of NA coal companies should trade between 5x and 10x forward EBITDA, based on historical averages.

Risks

Key downside risks to our outlook include a pullback in global economic growth, slowdown in energy consumption and/or slowdown in steel consumption, further coal inventory increase at utility companies, direction of energy prices, changes in energy and/or carbon policy changes and consequent ramifications in switching fuels. These dynamics tend to set the stage for global coal supply and demand fundamentals, and ultimately on the dynamics unfolding in the US. Mining companies can face geologic and operational obstacles. Other risks are associated with the direction of input costs, fiscal regime and mining legislation, and the successful execution of mining operations. Further risks for coal companies stem from contract pricing in place vis-à-vis the direction of spot prices.

13 October 2013

Metals & Mining



Model updated:09 October 2013

Running the numbers

North America

United States

Metals & Mining

Alpha Natural Resources Reuters: ANR.N Bloomberg: ANR UN

Buy Price (10 Oct 13) USD 5.58

Target Price USD 7.50

52 Week range USD 4.92 - 10.60

Market Cap (m) USDm 1,232

EURm 911

Company Profile

Alpha Natural Resources (ANR) is the third largest coal producer in the US. Additionally, ANR is the largest metallurgical coal exporter in the US. ANR sold 109 tons of coal in 2012. The company produces and trades steam (81% of shipments in '12) and metallurgical coal (19% in '12) through its operating units which are Powder River Basin (43% of '12), Eastern steam (38% in '12) and Eastern metallurgical (19% in '12). The company is listed on the NYSE under the symbol ANR and is headquartered in Abingdon, Virginia.

Price Performance

01530456075

Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13

Alpha Natural ResourcesS&P 500 INDEX (Rebased)

Margin Trends

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0102030

10 11 12 13E 14E 15E

EBITDA Margin EBIT Margin

Growth & Profitability

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-40-20

020406080

100

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Solvency

012345

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80

10 11 12 13E 14E 15E


David Martin +1 212 250-5580 [email protected]

Fiscal year end 31-Dec 2010 2011 2012 2013E 2014E 2015E

Financial Summary

DB EPS (USD) 2.16 1.89 -0.95 -2.39 -1.76 -0.15Reported EPS (USD) 0.78 -3.74 -11.07 -2.67 -1.76 -0.15DPS (USD) 0.00 0.00 0.00 0.00 0.00 0.00BVPS (USD) 22.17 41.24 22.55 19.83 18.06 17.91

Valuation MetricsPrice/Sales (x) 1.4 1.0 0.4 0.2 0.2 0.2P/E (DB) (x) 20.5 21.7 nm nm nm nmP/E (Reported) (x) 56.5 nm nm nm nm nmP/BV (x) 2.7 0.5 0.4 0.3 0.3 0.3

FCF yield (%) 6.6 1.3 0.8 nm 6.0 7.6Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0

EV/Sales 1.4 1.4 0.7 0.8 0.7 0.6EV/EBITDA 7.0 7.6 6.6 13.3 7.8 5.3EV/EBIT 28.6 15.4 nm nm nm 27.6

Income Statement (USDm)

Sales 3,917 7,100 6,975 5,182 5,370 6,149EBITDA 790 1,289 797 306 513 741EBIT 193 636 -170 -601 -337 141Pre-tax profit 100 -714 -2,987 -913 -557 -49Net income 96 -673 -2,437 -589 -390 -34

Cash Flow (USDm)

Cash flow from operations 694 687 518 126 424 444Net Capex -341 -593 -498 -300 -350 -350Free cash flow 353 93 20 -174 74 94Equity raised/(bought back) -42 -212 -8 0 0 0Dividends paid 0 0 0 0 0 0Net inc/(dec) in borrowings -65 699 308 35 -15 -19Other investing/financing cash flows -157 -549 -176 0 0 0Net cash flow 89 31 145 -139 59 75Change in working capital -92 27 78 -192 -37 -122

Balance Sheet (USDm)

Cash and cash equivalents 555 586 731 591 650 725Property, plant & equipment 1,132 2,821 2,219 1,612 1,112 862Goodwill 382 2,251 568 568 568 568Other assets 3,110 10,853 9,572 9,746 9,781 9,930Total assets 5,179 16,511 13,090 12,517 12,111 12,085Debt 754 2,968 3,386 3,421 3,406 3,387Other liabilities 1,769 6,115 4,736 4,717 4,716 4,743Total liabilities 2,523 9,083 8,122 8,138 8,122 8,130Total shareholders' equity 2,656 7,428 4,968 4,379 3,989 3,955Net debt 199 2,382 2,655 2,830 2,756 2,662

Key Company Metrics

Sales growth (%) 57.0 81.2 -1.8 -25.7 3.6 14.5DB EPS growth (%) 14.9 -12.5 na -151.1 26.0 91.3

Payout ratio (%) 0.0 nm nm nm nm nm

EBITDA Margin (%) 20.2 18.2 11.4 5.9 9.6 12.1EBIT Margin (%) 4.9 9.0 -2.4 -11.6 -6.3 2.3

ROE (%) 3.6 -13.4 -39.3 -12.6 -9.3 -0.9

Net debt/equity (%) 7.5 32.1 53.5 64.6 69.1 67.3Net interest cover (x) 2.8 4.6 nm nm nm 0.7

DuPont Analysis

EBIT margin (%) 4.9 9.0 -2.4 -11.6 -6.3 2.3x Asset turnover (x) 0.8 0.7 0.5 0.4 0.4 0.5x Financial cost ratio (x) 0.6 0.8 2.1 1.4 1.7 -0.3x Tax and other effects (x) 0.8 -1.4 6.7 0.7 0.7 0.7= ROA (post tax) (%) 1.9 -6.2 -16.5 -4.6 -3.2 -0.3x Financial leverage (x) 2.0 2.2 2.4 2.7 2.9 3.0= ROE (%) 3.6 -13.4 -39.3 -12.6 -9.3 -0.9annual growth (%) 4.1 na -194.5 67.9 26.1 90.8x NTA/share (avg) (x) 21.5 28.0 28.1 21.2 18.9 18.0

= Reported EPS 0.78 -3.74 -11.07 -2.67 -1.76 -0.15annual growth (%) 24.1 na -196.0 75.9 33.8 91.3


13 October 2013

Metals & Mining



Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 6,975 5,182 5,370 6,975 5,155 5,659

EBITDA 797 305 513 797 296 545

EBITDA margin 11% 6% 10% 11% 6% 10%

Depreciation 968 907 850 968 907 850

EBIT (170) (601) (337) (170) (611) (305)


Pre-tax income (2,987) (913) (557) (2,987) (922) (525)

Tax-rate 18% 35% 30% 18% 35% 30%

Net income (2,437) (589) (390) (2,437) (595) (367)

Net margin -35% -11% -7% -35% -12% -6%

Shares 220 221 221 220 221 221

EPS (0.95) (2.39) (1.76) (0.95) (2.41) (1.66)Source: Deutsche Bank estimates and company data



EBITDA 497 790 1,289 797 305 513

Net earnings 58 96 (673) (2,437) (589) (390)

EPS 1.88 2.16 1.89 (0.95) (2.39) (1.76)


Shipments ('000 tons) 47,200 84,849 106,318 108,796 89,062 89,500

Capex (US$m) 187 345 593 498 300 350

Revenue/ton (US$) 52.9 46.2 66.8 64.1 58.2 60.0

Cash cost/ton (US$) 42.3 36.9 54.6 56.8 54.8 54.3


13 October 2013

Metals & Mining




13 October 2013

Metals & Mining



ACI: Investment Thesis

Outlook

Arch Coal (ACI), based in St. Louis, Missouri, is the second largest publicly traded coal producer in the US. It is a leading producer in the PRB and Appalachia and also has operations in the ILB and WBIT regions. It is a major met coal producer, with production potentially increasing should demand in steel markets warrant a production ramp (previously it was targeting 15m tpy of capacity). We rate ACI shares a Hold on limited upside potential and our preference towards other coal equities.

Valuation

Our PT is based on 10x our EBITDA estimate for 2014 and 1x our NAV calculated under a DCF methodology (9.2% WACC with 10.7% Ke and 5.6% post-tax Kd, and a 1.0% terminal growth rate [based on our knowledge of the asset base and expectations of long-term growth]). We value most companies that we follow at 5x to 10x forward EBITDA, based on historical averages and we believe ACI should trade at the high-end of the peer group given the cyclical pressures on earnings relative to some others, its size and location of asset base, operations and mining projects, growth prospects, etc.

Risks

Key downside risks include a pullback in global economic growth, slowdown in energy consumption, further coal inventory increase at utility companies, direction of energy prices, changes in energy and/or carbon policy changesand subsequent ramifications in switching fuels. These dynamics tend to set the stage for global coal supply and demand fundamentals. Also, mining companies can face geologic and operational obstacles, and Arch Coal is exposed to its ability to implement its growth plans in met coal. Other risks are associated with the direction of input costs, fiscal regime and mining legislation. Further risks for coal companies stem from contract pricing in place vis-à-vis the direction of spot prices.

13 October 2013

Metals & Mining




Running the numbers

North America

United States

Metals & Mining

Arch Coal Reuters: ACI.N Bloomberg: ACI UN

Hold Price (10 Oct 13) USD 3.86



Market Cap (m) USDm 819

EURm 605

Company Profile

Arch Coal (ACI) is the second largest coal producer in the US, selling 141m tons of coal in 2012. Its main operations include Powder River Basin (74% of '12 shipments), Central Appalachia (13%) and Western Bituminous (11%). The company is listed on the NYSE under the symbol ACI and is headquartered in St. Louis, MO.

Price Performance

01020304050


Arch Coal S&P 500 INDEX (Rebased)

Margin Trends

-4048

12162024

10 11 12 13E 14E 15E



-25-20-15-10-50510

-30-20-10

010203040

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Solvency

011223

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Financial Summary

DB EPS (USD) 0.98 1.17 -0.40 -1.32 -0.73 0.21Reported EPS (USD) 0.97 0.74 -3.24 -1.36 -0.73 0.21DPS (USD) 0.39 0.43 0.20 0.12 0.12 0.12BVPS (USD) 13.78 18.82 13.50 11.98 11.13 11.22

Valuation MetricsPrice/Sales (x) 1.3 1.1 0.4 0.3 0.2 0.2P/E (DB) (x) 25.6 21.6 nm nm nm 18.3P/E (Reported) (x) 25.8 34.1 nm nm nm 18.3P/BV (x) 2.5 0.8 0.5 0.3 0.3 0.3

FCF yield (%) 9.4 2.6 nm 35.8 nm 19.5Dividend yield (%) 1.6 1.7 2.3 3.1 3.1 3.1

EV/Sales 1.8 2.0 1.5 1.5 1.5 1.3EV/EBITDA 8.2 9.5 9.3 12.4 9.2 6.7EV/EBIT 17.6 19.5 43.7 nm 43.1 14.5


Sales 3,186 4,286 4,159 3,215 3,397 3,789EBITDA 683 913 668 395 534 715EBIT 318 446 142 -76 114 330Pre-tax profit 177 241 -145 -425 -206 60Net income 159 142 -684 -288 -154 45

Cash Flow (USDm)

Cash flow from operations 697 642 333 148 229 360Net Capex -314 -515 -372 145 -250 -200Free cash flow 383 127 -40 293 -21 160Equity raised/(bought back) 2 1,270 5 0 0 0Dividends paid -63 -81 -42 -25 -25 -25Net inc/(dec) in borrowings -202 1,825 1,051 -440 4 -32Other investing/financing cash flows -87 -3,086 -334 0 0 0Net cash flow 32 55 640 -172 -42 102Change in working capital 86 -74 -49 -35 -36 -70


Cash and cash equivalents 94 148 788 616 574 676Property, plant & equipment 3,309 7,949 7,337 6,721 6,551 6,366Goodwill 115 596 265 265 265 265Other assets 1,363 1,520 1,616 1,597 1,636 1,719Total assets 4,881 10,214 10,007 9,199 9,026 9,026Debt 1,610 4,043 5,119 4,679 4,683 4,651Other liabilities 1,023 2,581 2,033 1,980 1,982 1,995Total liabilities 2,633 6,624 7,152 6,659 6,665 6,645Total shareholders' equity 2,248 3,590 2,855 2,541 2,361 2,380Net debt 1,516 3,895 4,331 4,063 4,109 3,975

Key Company Metrics

Sales growth (%) 23.7 34.5 -3.0 -22.7 5.7 11.5DB EPS growth (%) 164.9 19.4 na -229.6 44.9 na

Payout ratio (%) 39.9 57.7 nm nm nm 56.9

EBITDA Margin (%) 21.4 21.3 16.0 12.3 15.7 18.9EBIT Margin (%) 10.0 10.4 3.4 -2.4 3.4 8.7

ROE (%) 7.3 4.9 -21.3 -10.7 -6.3 1.9

Net debt/equity (%) 67.4 108.5 151.7 159.9 174.0 167.0Net interest cover (x) 2.3 2.0 0.5 nm 0.4 1.2

DuPont Analysis

EBIT margin (%) 10.0 10.4 3.4 -2.4 3.4 8.7x Asset turnover (x) 0.7 0.6 0.4 0.3 0.4 0.4x Financial cost ratio (x) 0.6 0.5 -1.2 5.6 -1.8 0.2x Tax and other effects (x) 0.9 0.6 4.0 0.7 0.7 0.8= ROA (post tax) (%) 3.3 1.9 -6.8 -3.0 -1.7 0.5x Financial leverage (x) 2.2 2.6 3.1 3.6 3.7 3.8= ROE (%) 7.3 4.9 -21.3 -10.7 -6.3 1.9annual growth (%) 232.7 -33.2 na 49.7 41.1 nax NTA/share (avg) (x) 13.3 15.2 15.2 12.7 11.6 11.2

= Reported EPS 0.97 0.74 -3.24 -1.36 -0.73 0.21annual growth (%) 249.2 -23.7 na 58.0 46.5 na


13 October 2013

Metals & Mining



Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 4,159 3,215 3,397 4,159 3,183 3,362

EBITDA 668 395 534 668 380 534

EBITDA margin 16% 12% 16% 16% 12% 16%

Depreciation 526 471 420 526 471 420

EBIT 142 (76) 114 142 (91) 114


Pre-tax income (145) (425) (206) (145) (440) (206)

Tax-rate 230% 39% 25% 230% 39% 25%

Net income (684) (288) (154) (684) (299) (154)

Net margin -16% -9% -5% -16% -9% -5%

Shares 211 212 212 211 212 212




EBITDA 445 683 913 668 395 534

Net earnings 42 159 142 (684) (288) (154)

EPS 0.37 0.98 1.17 (0.40) (1.32) (0.73)


Shipments ('000 tons) 125,008 161,271 155,292 140,683 138,991 138,000

Capex (US$m) 323 315 541 395 290 250

Revenue/ton (US$) 20.6 19.8 27.6 29.6 23.1 24.6

Cash cost/ton (US$) 17.0 15.5 21.7 24.8 20.3 20.7


13 October 2013

Metals & Mining




13 October 2013

Metals & Mining



CNX: Investment Thesis

Outlook

CONSOL Energy, based in Canonsburg, Pennsylvania, is the 5th-largest coal producer in the US, with 56.9m tons of volumes in 2012. CNX is also the largest gas producer in Appalachia (with 2012 volumes of 156.3bcf) and the largest coal exporter in the US (~22% of 2012 coal revenues). CNX currently operates 16 mining complexes, with 4.3b tons of coal reserves and 4.0 Tcf of proved natural gas reserves. Given its high-quality assets, competitive cost structure, defensible sales of low-vol met coal, growth prospects (especially in natgas), and solid financial position, we maintain a positive view on CNX. Werate the shares Buy.

Valuation

Our 12-month price target is based on ~1.0x our SOTP-NAV. As a valuation crosscheck, we note that our PT equates with 10x 2014E EBITDA. Our selected sample of NA coal companies should trade between 5x and 10x forward EBITDA, based on historical averages.

Risks

Key risks to our outlook include a pullback in global economic growth, slowdown in energy consumption, further coal inventory increase at utility companies, direction of energy prices, changes in energy and/or carbon policy changes and consequent ramifications in switching fuels. CONSOL Energy's growth is contingent on the successful execution of its BMX mine (NAPP), which could face delays caused by unforeseen geological or operational challenges. Lower natural gas prices could dampen margins and provisions in joint ventures with key partners. Other risks are associated with the direction of input costs, fiscal regime and mining legislation, geological risks, and the successful execution of mining operations. Further risks for coal companies stem from contract pricing in place vis-à-vis the direction of spot prices.

13 October 2013

Metals & Mining




Running the numbers

North America

United States

Metals & Mining

CONSOL Energy Reuters: CNX.N Bloomberg: CNX US



52 Week range USD 26.51 - 36.79


EURm 6,220

Company Profile

CONSOL Energy, based in Canonsburg, PA, is the 4th largest coal producer in the US, with 57m tons of production in 2012. Its produces and sells both coal and gas the power generation industry in the US and it has a sizable coking coal operation, with the Buchanan mine being its cornerstone complex. CNX currently operates 13 mining complexes, with 4.2b tons of coal reserves, and it has 3.5 Tcf of proven natural gas reserves.

Price Performance

20

30

40

50

60


CONSOL Energy S&P 500 INDEX (Rebased)

Margin Trends

48

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0510152025

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10 11 12 13E 14E 15E


Solvency

01234567

020406080

100120140

10 11 12 13E 14E 15E




Financial Summary

DB EPS (USD) 2.28 3.02 1.11 0.39 1.72 2.65Reported EPS (USD) 1.60 2.76 1.70 0.16 1.72 2.65DPS (USD) 0.40 0.43 0.63 0.38 0.50 0.50BVPS (USD) 13.70 15.93 17.37 17.08 18.30 20.45

Valuation MetricsPrice/Sales (x) 1.7 1.7 1.4 1.7 1.5 1.3P/E (DB) (x) 18.3 15.3 29.4 95.5 21.4 13.9P/E (Reported) (x) 26.1 16.7 19.3 224.6 21.4 13.9P/BV (x) 3.6 2.3 1.8 2.2 2.0 1.8

FCF yield (%) 0.4 8.5 nm 0.0 nm 2.3Dividend yield (%) 1.0 0.9 1.9 1.0 1.4 1.4

EV/Sales 2.4 2.2 2.0 2.4 2.2 1.9EV/EBITDA 9.7 7.4 9.3 11.8 9.0 7.5EV/EBIT 17.1 11.2 20.4 33.1 17.4 12.5


Sales 5,236 6,117 5,340 4,951 5,481 6,255EBITDA 1,306 1,802 1,145 995 1,355 1,623EBIT 738 1,183 522 354 705 973Pre-tax profit 533 935 302 144 525 808Net income 347 632 388 37 394 606

Cash Flow (USDm)

Cash flow from operations 1,131 1,528 728 1,001 976 1,189Net Capex -1,094 -634 -929 -1,000 -1,400 -1,000Free cash flow 37 893 -201 1 -424 189Equity raised/(bought back) 1,835 9 -1 0 0 0Dividends paid -86 -96 -142 -86 -114 -114Net inc/(dec) in borrowings 2,700 -511 53 100 285 -38Other investing/financing cash flows -4,519 48 -63 0 0 0Net cash flow -33 343 -354 15 -254 37Change in working capital 32 61 -30 323 -68 -66


Cash and cash equivalents 33 376 22 37 -217 -180Property, plant & equipment 10,129 9,326 10,191 10,550 11,300 11,650Goodwill 0 0 0 0 0 0Other assets 1,909 2,824 2,458 2,120 2,208 2,337Total assets 12,071 12,526 12,671 12,707 13,292 13,808Debt 3,695 3,198 3,251 3,351 3,636 3,598Other liabilities 5,440 5,717 5,466 5,451 5,471 5,533Total liabilities 9,135 8,915 8,717 8,802 9,106 9,131Total shareholders' equity 2,936 3,611 3,954 3,905 4,185 4,677Net debt 3,662 2,822 3,229 3,314 3,853 3,778

Key Company Metrics

Sales growth (%) 13.3 16.8 -12.7 -7.3 10.7 14.1DB EPS growth (%) -22.7 32.5 -63.2 -65.4 347.1 53.7

Payout ratio (%) 24.8 15.2 36.6 228.9 29.0 18.9

EBITDA Margin (%) 24.9 29.4 21.4 20.1 24.7 25.9EBIT Margin (%) 14.1 19.3 9.8 7.2 12.9 15.5

ROE (%) 14.7 19.3 10.3 1.0 9.7 13.7


DuPont Analysis

EBIT margin (%) 14.1 19.3 9.8 7.2 12.9 15.5x Asset turnover (x) 0.5 0.5 0.4 0.4 0.4 0.5x Financial cost ratio (x) 0.7 0.8 0.6 0.4 0.7 0.8x Tax and other effects (x) 0.7 0.7 1.3 0.3 0.7 0.8= ROA (post tax) (%) 3.5 5.1 3.1 0.3 3.0 4.5x Financial leverage (x) 4.2 3.8 3.3 3.2 3.2 3.1= ROE (%) 14.7 19.3 10.3 1.0 9.7 13.7annual growth (%) -55.9 31.6 -46.8 -90.7 922.0 40.3x NTA/share (avg) (x) 10.9 14.3 16.5 17.2 17.7 19.4

= Reported EPS 1.60 2.76 1.70 0.16 1.72 2.65annual growth (%) -45.9 72.9 -38.6 -90.3 951.7 53.7


13 October 2013

Metals & Mining



Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 5,340 4,951 5,481 5,340 4,967 5,517

EBITDA 1,145 995 1,355 1,145 1,006 1,367

EBITDA margin 21% 20% 25% 21% 20% 25%

Depreciation 623 641 650 623 641 650

EBIT 522 354 705 522 365 717


Pre-tax income 302 144 525 302 155 537

Tax-rate 36% 22% 25% 36% 23% 25%

Net income 388 37 394 388 46 403

Net margin 7% 1% 7% 7% 1% 7%

Shares 229 229 229 229 229 229




EBITDA 1,257 1,306 1,802 1,145 995 1,355

Net earnings 540 347 632 388 37 394

EPS 2.95 2.28 3.02 1.11 0.39 1.72


Capex (US$m) 920 1,154 1,382 1,575 1,500 1,400

Coal assumptions:

Shipments (m tons) 58.1 63.9 63.8 56.9 58.1 61.0

Revenue/ton (US$) 61.2 63.0 75.2 69.4 62.9 65.4

Cash cost/ton (US$) 46.5 49.0 54.4 50.9 51.2 49.5

EBTDA/ton (US$) 14.7 14.0 20.8 18.5 11.7 16.0

Gas assumptions:

Shipments (bcf) 94.4 127.9 153.5 156.3 169.9 202.5

Revenue per mcf (US$) 7.2 6.4 5.4 4.6 4.7 4.8

Cash cost per mcf (US$) 3.3 3.5 3.2 3.0 3.2 2.8

EBTDA per mcf (US$) 3.9 2.9 2.2 1.6 1.5 1.9Source: Deutsche Bank estimates and company data

13 October 2013

Metals & Mining




13 October 2013

Metals & Mining



JRCC: Investment Thesis

Outlook

James River is a top-15 coal producer in the US. It produces steam and industrial-grade coal and now is a major met producer following its acquisition of International Resource Partners (IRP). We rate JRCC shares a Hold given weak FCF outlook, reduced financial flexibility, limited upside to PT and preference to other companies under our coverage.

Valuation

Our 12-month price target is based on ~1.0x NAV, in line with peers. We generally value coal companies based on forward EBITDA and NAV. However, for James River we rely on NAV considering the weak operating performance that we forecast in the upcoming year & the related impacts on EV/EBITDA multiples. Our NAV is calculated under a DCF methodology (9.4% WACC with 10.7% Ke and 6.4% post-tax Kd, and a 1.0% terminal growth rate [based on our knowledge of the asset base and expectations of long-term growth]).

Risks

Key upside/downside risks include an acceleration/pullback in global economic growth, acceleration/slowdown in energy consumption, further coal inventory decrease/increase at utility companies, direction of energy prices, changes in energy and/or carbon policy changes and consequent ramifications in switching fuels. These dynamics tend to set the stage for global coal supply and demand fundamentals, and ultimately on the dynamics unfolding in the US. Also, mining companies can face geologic and operational obstacles. Other risks are associated with the direction of input costs, fiscal regime and mining legislation, and the successful execution of mining operations. Further risks stem from contract pricing in place vis-à-vis the direction of spot prices.

13 October 2013

Metals & Mining




Running the numbers

North America

United States

Metals & Mining

James River Coal Reuters: JRCC.OQ Bloomberg: JRCC US





EURm 50

Company Profile

James River, based in Richmond, VA, is a top 15 US coal producer (~12m tons in 2012). Further, JRCC is also a top producer in Central Appalachia (9m tons in 2012) and the third-largest in the Illinois Basin (2.3m tons). It produces steam and industrial-grade coal and began selling met coal from 2011. The company is headquartered in Richmond, VA.

Price Performance

0

10

20

30


James River Coal S&P 500 INDEX (Rebased)

Margin Trends

-20-10

0102030

10 11 12 13E 14E 15E



-100-80-60-40-200204060

-60-40-20

020406080

10 11 12 13E 14E 15E


Solvency

01122334

0100200300400500

10 11 12 13E 14E 15E




Financial Summary

DB EPS (USD) 2.02 0.13 -4.01 -5.01 -4.11 -1.88Reported EPS (USD) 2.82 -1.18 -3.99 -2.27 -4.11 -1.88DPS (USD) 0.00 0.00 0.00 0.00 0.00 0.00BVPS (USD) 9.20 12.00 7.31 7.30 3.19 1.31

Valuation MetricsPrice/Sales (x) 0.7 0.5 0.1 0.1 0.1 0.1P/E (DB) (x) 8.9 126.5 nm nm nm nmP/E (Reported) (x) 6.4 nm nm nm nm nmP/BV (x) 2.8 0.6 0.4 0.3 0.6 1.5

FCF yield (%) 15.3 4.7 nm nm nm nmDividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0

EV/Sales 0.8 0.8 0.5 0.7 0.8 0.7EV/EBITDA 3.9 6.2 10.2 nm nm 18.5EV/EBIT 7.0 22.6 nm nm nm nm


Sales 701 1,178 1,100 690 708 814EBITDA 148 150 55 -19 -6 33EBIT 84 41 -77 -138 -106 -47Pre-tax profit 55 -24 -138 -85 -144 -82Net income 78 -39 -139 -86 -144 -66

Cash Flow (USDm)

Cash flow from operations 169 164 32 -4 -45 8Net Capex -95 -138 -81 -50 -55 -60Free cash flow 74 25 -48 -54 -100 -52Equity raised/(bought back) 0 171 0 0 0 0Dividends paid 0 0 0 0 0 0Net inc/(dec) in borrowings 0 355 -24 -76 30 40Other investing/financing cash flows -1 -532 0 87 0 0Net cash flow 72 19 -72 -43 -70 -12Change in working capital -10 52 7 45 -1 -7


Cash and cash equivalents 180 200 127 84 14 3Property, plant & equipment 386 909 855 787 742 722Goodwill 26 26 0 0 0 0Other assets 192 269 222 255 257 270Total assets 785 1,405 1,204 1,126 1,014 995Debt 284 582 546 471 501 541Other liabilities 253 426 403 400 402 408Total liabilities 537 1,008 949 871 902 949Total shareholders' equity 247 397 255 255 111 46Net debt 104 382 419 387 486 539

Key Company Metrics

Sales growth (%) 2.9 68.0 -6.6 -37.2 2.6 15.0DB EPS growth (%) 5.2 -93.6 na -24.9 17.9 54.2

Payout ratio (%) 0.0 nm nm nm nm nm

EBITDA Margin (%) 21.1 12.7 5.0 -2.8 -0.8 4.0EBIT Margin (%) 12.0 3.5 -7.0 -19.9 -14.9 -5.8

ROE (%) 37.4 -12.1 -42.7 -33.7 -78.4 -83.7

Net debt/equity (%) 41.9 96.4 164.6 151.5 436.3 nmNet interest cover (x) 2.9 0.8 nm nm nm nm

DuPont Analysis

EBIT margin (%) 12.0 3.5 -7.0 -19.9 -14.9 -5.8x Asset turnover (x) 1.0 1.1 0.8 0.6 0.7 0.8x Financial cost ratio (x) 0.7 -0.2 1.7 1.3 1.4 1.7x Tax and other effects (x) 1.4 4.5 1.1 0.5 1.0 0.8= ROA (post tax) (%) 10.8 -3.6 -10.6 -7.4 -13.4 -6.5x Financial leverage (x) 3.5 3.4 4.0 4.6 5.8 12.8= ROE (%) 37.4 -12.1 -42.7 -33.7 -78.4 -83.7annual growth (%) -13.5 na -251.4 21.0 -132.6 -6.8x NTA/share (avg) (x) 7.5 9.7 9.4 6.7 5.2 2.2

= Reported EPS 2.82 -1.18 -3.99 -2.27 -4.11 -1.88annual growth (%) 52.3 na -237.3 43.2 -81.3 54.2


13 October 2013

Metals & Mining



Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 1,100 690 708 1,100 720 787

EBITDA 55 (19) (6) 55 (19) 8

EBITDA margin 5% -3% -1% 5% -3% 1%

Depreciation 132 118 100 132 118 100

EBIT (77) (138) (106) (77) (137) (92)


Pre-tax income (138) (85) (144) (138) (85) (132)

Tax-rate 0% -1% 0% 0% -1% 0%

Net income (139) (86) (144) (139) (86) (132)

Net margin -13% -12% -20% -13% -12% -17%

Shares 35 38 35 35 38 35




EBITDA 133 148 150 55 (19) (6)

Net earnings 51 78 (39) (139) (86) (144)

EPS 1.92 2.02 0.13 (4.01) (5.01) (4.11)


Shipments ('000 tons) 9,623 8,919 11,801 11,728 9,000 8,550

Capex (US$m) 72 95 138 82 50 55

Revenue/ton (US$) 70.8 78.6 99.8 93.8 76.7 82.8

Cash cost/ton (US$) 57.0 62.0 87.1 89.1 78.9 83.5

EBITDA/ton (US$) 13.8 16.6 12.7 4.7 -2.1 -0.7Source: Deutsche Bank estimates and company data

13 October 2013

Metals & Mining




13 October 2013

Metals & Mining



BTU: Investment Thesis

Outlook

Peabody Energy (BTU), based in St. Louis, Missouri, is the world's largest private-sector coal company, with operations in the US and Australia. It is the leading producer in the Powder River Basin (PRB) and also one of the largest met coal producers contributing to the seaborne market. Given current valuation of BTU's share price and asset quality, we rate the shares Buy.

Valuation

Our 12-month price target is based on 9x 2014 EBITDA. Our selected sample of NA coal companies should trade between 5x and 10x forward EBITDA, based on historical averages, and we value BTU near this mid-point. As a valuation cross-check, we note that our PT equates with ~0.9x our NAV calculated under a DCF methodology (9.2% WACC with 10.7% Ke and 5.6% post-tax Kd, and a 2.0% terminal growth rate [based on our knowledge of the asset base and expectations of long-term growth].)

Risks

Key downside risks to our outlook include a pullback in global economic growth, slowdown in energy consumption, further coal inventory increase at utility companies, direction of energy prices, changes in energy and/or carbon policy changes, and switching fuels. These dynamics tend to set the stage for global coal supply and demand fundamentals, and ultimately on the dynamics unfolding in the US. Mining companies can face geologic and operational obstacles. Project execution risk at several projects in Australia in the form of delays could result in a lower growth profile than currently envisioned for Peabody, and could possibly lead to higher investments and/or higher operating expenses. Other risks are associated with the direction of input costs, fiscal regime and mining legislation, and the successful execution of mining operations. Further risks for coal companies stem from contract pricing in place vis-à-vis the direction of spot prices.

13 October 2013

Metals & Mining




Running the numbers

North America

United States

Metals & Mining

Peabody Energy Reuters: BTU.N Bloomberg: BTU UN



52 Week range USD 14.54 - 29.28


EURm 3,375

Company Profile

Peabody Energy Corporation (BTU) is the world's largest private-sector coal producer with operations in the US and Australia. BTU sold 249m tons of coal and controlled ~9.0bn tons of coal reserves at the end of '12. BTU operations include Western US (73% of '12 volume), Mid-western US (12%) and Australia (15%). It also has a Trading and Brokerage Operations segment. BTU produces steam coal (97%) in the US and Australia and metallurgical coal (3%) in Australia.

Price Performance

0153045607590


Peabody Energy S&P 500 INDEX (Rebased)

Margin Trends

048

1216202428

10 11 12 13E 14E 15E



-15-10-50510152025

-15-10

-505

101520

10 11 12 13E 14E 15E


Solvency

0

2

4

6

8

020406080

100120140

10 11 12 13E 14E 15E




Financial Summary

DB EPS (USD) 3.07 3.76 2.05 0.07 0.71 1.90Reported EPS (USD) 2.88 3.54 -2.19 0.04 0.71 1.90DPS (USD) 0.30 0.34 0.34 0.34 0.34 0.34BVPS (USD) 17.34 20.38 18.30 18.08 18.44 20.01

Valuation MetricsPrice/Sales (x) 1.9 1.8 0.9 0.6 0.6 0.5P/E (DB) (x) 15.6 14.2 13.3 242.8 24.2 9.0P/E (Reported) (x) 16.7 15.0 nm 421.8 24.2 9.0P/BV (x) 3.7 1.6 1.5 0.9 0.9 0.9

FCF yield (%) 4.3 5.8 5.3 6.8 8.0 12.8Dividend yield (%) 0.6 0.6 1.2 2.0 2.0 2.0

EV/Sales 2.1 2.5 1.6 1.4 1.3 1.1EV/EBITDA 8.3 9.6 7.5 10.3 7.3 5.7EV/EBIT 11.1 12.5 12.0 41.2 15.4 8.7


Sales 6,860 7,974 8,078 7,039 7,716 8,549EBITDA 1,738 2,103 1,752 976 1,336 1,643EBIT 1,297 1,621 1,089 245 636 1,068Pre-tax profit 1,113 1,459 725 -151 266 718Net income 774 958 -586 11 189 509

Cash Flow (USDm)

Cash flow from operations 1,087 1,633 1,515 709 865 1,084Net Capex -538 -807 -1,125 -400 -500 -500Free cash flow 549 826 390 309 365 584Equity raised/(bought back) 16 -19 -108 0 0 0Dividends paid -79 -92 -92 -91 -91 -91Net inc/(dec) in borrowings -17 3,838 -415 -62 -73 -117Other investing/financing cash flows -163 -5,049 -15 0 0 0Net cash flow 306 -496 -240 156 201 377Change in working capital 66 -188 -70 -33 -24 1


Cash and cash equivalents 1,295 799 559 715 916 1,292Property, plant & equipment 7,426 11,363 11,802 11,470 11,270 11,195Goodwill 0 0 0 0 0 0Other assets 2,642 4,571 3,449 3,318 3,429 3,566Total assets 11,363 16,733 15,809 15,504 15,615 16,054Debt 2,750 6,658 6,253 6,191 6,118 6,001Other liabilities 3,924 4,560 4,617 4,454 4,541 4,678Total liabilities 6,674 11,217 10,870 10,645 10,659 10,679Total shareholders' equity 4,689 5,516 4,939 4,859 4,957 5,374Net debt 1,455 5,858 5,694 5,476 5,202 4,709

Key Company Metrics

Sales growth (%) 14.1 16.2 1.3 -12.9 9.6 10.8DB EPS growth (%) 60.7 22.5 -45.5 -96.6 902.4 169.4

Payout ratio (%) 10.2 9.6 nm 837.3 48.1 17.8

EBITDA Margin (%) 25.3 26.4 21.7 13.9 17.3 19.2EBIT Margin (%) 18.9 20.3 13.5 3.5 8.2 12.5

ROE (%) 18.4 18.9 -11.3 0.2 3.9 9.9


DuPont Analysis

EBIT margin (%) 18.9 20.3 13.5 3.5 8.2 12.5x Asset turnover (x) 0.6 0.6 0.5 0.4 0.5 0.5x Financial cost ratio (x) 0.8 0.9 0.7 -0.6 0.4 0.7x Tax and other effects (x) 0.7 0.7 -0.8 -0.1 0.7 0.7= ROA (post tax) (%) 7.3 6.8 -3.6 0.1 1.2 3.2x Financial leverage (x) 2.5 2.8 3.1 3.2 3.2 3.1= ROE (%) 18.4 18.9 -11.3 0.2 3.9 9.9annual growth (%) 36.6 2.6 na na 1,639.1 155.9x NTA/share (avg) (x) 15.6 18.8 19.4 18.2 18.2 19.2

= Reported EPS 2.88 3.54 -2.19 0.04 0.71 1.90annual growth (%) 71.9 23.0 na na 1,641.3 169.4


13 October 2013

Metals & Mining



Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 8,078 7,039 7,716 8,078 7,102 7,776

EBITDA 1,752 976 1,336 1,752 994 1,403

EBITDA margin 22% 14% 17% 22% 14% 18%

Depreciation 663 731 700 663 731 700

EBIT 1,089 245 636 1,089 263 703


Pre-tax income 725 (151) 266 725 (130) 343

Tax-rate 36% 158% 28% 36% 179% 28%

Net income (586) 11 189 (586) 26 243

Net margin -7% 0% 2% -7% 0% 3%

Shares 268 267 268 268 267 268




EBITDA 1,296 1,738 2,103 1,752 976 1,336

Net earnings 448 774 958 (586) 11 189

EPS 1.91 3.07 3.76 2.05 0.07 0.71


Shipments ('000 tons) 243,600 245,900 250,600 248,500 242,900 252,000

Capex (US$m) 384 557 847 1,273 400 500

Revenue/ton (US$) 24.7 27.9 31.8 32.5 29.0 30.6

Cash cost/ton (US$) 19.4 20.8 23.4 25.5 25.0 25.3


13 October 2013

Metals & Mining




13 October 2013

Metals & Mining



WLT: Investment Thesis

Outlook

Walter Energy (WLT) is a leading exporter of met coal and has total coal reserves of approximately 375m tonnes and we estimate it will ship 13m and 15m tonnes in 2013-14, of which 11m and 13m tonnes will be met coal. The company has met coal assets in Canada and the US, as well as thermal, coke, and natgas production in the US. We rate WLT shares a Hold.

Valuation

Our 12-month price target for Walter Energy is based on 10x 2014E EBITDA. Our selected sample of NA coal companies should trade between 5x and 10x forward EBITDA, based on historical averages. We believe that WLT should trade at the high-end of the peer group given its leverage to a met coal recovery and growth potential. As a valuation cross-check, we note that our PT equates to ~0.8x our NAV calculated under a DCF methodology (9.0% WACC with 10.7% Ke and 5.1% post-tax Kd, and a 1.0% terminal growth rate [based on our knowledge of the asset base and expectations of long-term growth]).

Risks

Key upside/downside risks to our outlook include acceleration/pullback in global economic growth, increase/slowdown in energy consumption/or increase/slowdown in steel consumption, coal inventory increase/decrease at utility companies, direction of energy prices, bottlenecks at ports it relies on for exports, production concentration at a few mines, the completion of leasing Blue Creek coal reserves, and/or carbon policy changes and consequent ramifications in switching fuels.

13 October 2013

Metals & Mining




Running the numbers

North America

United States

Metals & Mining

Walter Energy Reuters: WLT.N Bloomberg: WLT UN



52 Week range USD 10.04 - 40.14


EURm 665

Company Profile

Walter Energy (WLT) is a top-10 global met coal producer. WLT controls 375m tonnes of recoverable reserves and sold over 13m tonnes of coal in 2012. Its operations include Appalachia (68% of 2013e shipments) and Canada (32%). The company is listed on the NYSE under the symbol WLT and is headquartered in Birmingham, AL.

Price Performance

0

40

80

120

160


Walter Energy S&P 500 INDEX (Rebased)

Margin Trends

-150

1530

45

10 11 12 13E 14E 15E



-100

-50

0

50

100

-40-20

020406080

10 11 12 13E 14E 15E


Solvency

0

10

20

30

40

-1000

100200300400

10 11 12 13E 14E 15E




Financial Summary

DB EPS (USD) 7.46 6.44 0.51 -3.19 -1.71 1.18Reported EPS (USD) 7.18 5.76 -16.96 -3.34 -1.71 1.18DPS (USD) 0.48 0.50 0.50 0.16 0.04 0.04BVPS (USD) 11.19 35.22 16.16 12.64 10.89 12.03

Valuation MetricsPrice/Sales (x) 2.8 2.4 1.2 0.5 0.4 0.3P/E (DB) (x) 11.1 15.9 93.0 nm nm 12.2P/E (Reported) (x) 11.6 17.8 nm nm nm 12.2P/BV (x) 11.4 1.7 2.2 1.1 1.3 1.2

FCF yield (%) 9.3 4.4 nm nm nm nmDividend yield (%) 0.6 0.5 1.1 1.1 0.3 0.3

EV/Sales 2.7 3.3 2.2 1.8 1.5 1.2EV/EBITDA 6.1 9.7 12.6 25.3 10.1 6.0EV/EBIT 7.1 13.6 52.5 nm 82.2 11.1


Sales 1,588 2,571 2,400 1,883 2,348 2,824EBITDA 701 860 417 131 342 578EBIT 602 614 100 -179 42 313Pre-tax profit 586 535 -51 -394 -178 123Net income 386 349 -1,060 -209 -107 74

Cash Flow (USDm)

Cash flow from operations 568 707 330 58 85 221Net Capex -157 -437 -392 -150 -225 -240Free cash flow 410 270 -62 -92 -140 -19Equity raised/(bought back) -65 0 0 0 0 0Dividends paid -25 -30 -31 -10 -3 -3Net inc/(dec) in borrowings -27 1,989 70 9 164 2Other investing/financing cash flows -165 -2,394 11 0 0 0Net cash flow 128 -165 -12 -93 21 -19Change in working capital -40 10 16 -43 -108 -117


Cash and cash equivalents 293 128 117 24 45 26Property, plant & equipment 790 4,583 4,698 4,538 4,463 4,438Goodwill 0 1,125 0 0 0 0Other assets 574 976 954 971 1,092 1,222Total assets 1,658 6,812 5,768 5,532 5,601 5,686Debt 168 2,326 2,416 2,425 2,589 2,591Other liabilities 894 2,364 2,342 2,315 2,329 2,341Total liabilities 1,063 4,690 4,758 4,741 4,918 4,932Total shareholders' equity 595 2,122 1,011 792 682 754Net debt -125 2,197 2,300 2,402 2,544 2,565

Key Company Metrics

Sales growth (%) 64.2 62.0 -6.7 -21.5 24.7 20.2DB EPS growth (%) 204.5 -13.7 -92.1 na 46.5 na

Payout ratio (%) 6.5 8.6 nm nm nm 3.4

EBITDA Margin (%) 44.1 33.4 17.4 6.9 14.6 20.5EBIT Margin (%) 37.9 23.9 4.2 -9.5 1.8 11.1

ROE (%) 90.3 25.7 -67.7 -23.2 -14.5 10.3

Net debt/equity (%) -21.0 103.5 227.6 303.3 372.9 340.4Net interest cover (x) 36.6 6.4 0.7 nm 0.2 1.6

DuPont Analysis

EBIT margin (%) 37.9 23.9 4.2 -9.5 1.8 11.1x Asset turnover (x) 1.1 0.6 0.4 0.3 0.4 0.5x Financial cost ratio (x) 1.0 0.8 -0.4 2.2 -4.2 0.4x Tax and other effects (x) 0.7 0.7 27.8 0.5 0.6 0.6= ROA (post tax) (%) 26.5 8.2 -16.9 -3.7 -1.9 1.3x Financial leverage (x) 3.4 3.1 4.0 6.3 7.6 7.9= ROE (%) 90.3 25.7 -67.7 -23.2 -14.5 10.3annual growth (%) 192.9 -71.5 na 65.7 37.5 nax NTA/share (avg) (x) 8.0 22.4 25.0 14.4 11.8 11.5

= Reported EPS 7.18 5.76 -16.96 -3.34 -1.71 1.18annual growth (%) 181.9 -19.8 na 80.3 48.9 na


13 October 2013

Metals & Mining



Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 2,400 1,883 2,348 2,400 1,906 2,347

EBITDA 417 131 342 417 134 342

EBITDA margin 17% 7% 15% 17% 7% 15%

Depreciation 316 310 300 316 310 300

EBIT 100 (179) 42 100 (176) 42


Pre-tax income (51) (394) (178) (51) (391) (178)

Tax-rate 193% 51% 40% 193% 51% 40%

Net income (1,060) (209) (107) (1,060) (207) (107)

Net margin -44% -11% -5% -44% -11% -5%

Shares 63 63 63 63 63 63

EPS 0.51 (3.19) (1.71) 0.51 (3.16) (1.71)Source: Deutsche Bank estimates and company data



EBITDA 279 701 860 417 131 342

Net earnings 137 386 349 (1,060) (209) (107)

EPS 2.45 7.46 6.44 0.51 (3.19) (1.71)


Shipments ('000 tons) 7,318 8,641 13,748 15,076 14,198 16,254

Capex (US$m) 96 157 437 392 150 225

Revenue/ton (US$) 132.1 183.7 187.0 159.2 132.6 144.5

Cash cost/ton (US$) 94.0 102.6 124.5 131.6 123.4 123.4


13 October 2013

Metals & Mining



METALS

13 October 2013

Metals & Mining



AKS: Investment Thesis

Outlook

AK Steel is a leading producer of flat-rolled carbon sheets in North America. Its flat-rolled sales are weighted to coated and cold-rolled products. AK is also a major stainless/electrical steel producer with normalized shipments of ~1 million tpy. We rate AK Steel a Hold given lower expectations for its carbon and electrical steel businesses, perceived earnings risk, and continued concerns over its financial profile & pension obligations.

Valuation

We use a blend of forward EV/EBITDA multiples and NPVs as our primary valuation tools in the sector. Our selected sample of NA Steel companies should trade between 5x and 10x forward EBITDA, based on historical averages. Our PT is derived from 6x 2014E EBITDA and 1.2x NPV (9.0% WACC, using 1.1 industry beta, 7% market risk premium, 3% risk-free rate [company capital structure] and a 1% terminal growth rate, which we use for North American companies). These multiples are below peer averages but justified in our view given the company's cost position, legacy liabilities and scale.

Risks

Key upside/downside risks include metal prices (mainly carbon, stainless & electrical steels for AK) that do not meet expectations, changes in industry supply and demand dynamics that lead to changes in steel prices, raw materials costs that don't match forecasts given that AK is not integrated, and changes in funding requirements for AK's pension plan.

13 October 2013

Metals & Mining



M odel updated: 20 September 2013 Fiscal year end 31-Dec 2010 2011 2012 2013E 2014E 2015E


EBITDA 136 252 221 288 420 515EBIT -61 67 29 95 235 340Pre-tax profit -102 14 -51 -22 135 265

N et inco me -129 -156 -1,027 -97 20 97

Cash Flow (US$m)C ash f lo w f ro m o perat io ns -132 -181 -271 -107 143 213Net Capex -266 -296 -64 -80 -150 -100F ree cash f lo w -399 -477 -335 -187 -7 113Equity raised/(bought back) -7 -1 95 0 0 0Dividends paid -22 -22 -11 0 0 0Net inc/(dec) in borrowings 32 239 527 37 1 -23Other investing/financing cash flows 151 86 -91 0 0 0N et cash f lo w -245 -175 185 -149 -5 90Change in working capital -121 -152 -188 -203 -62 -59

Balance Sheet (US$m)Cash and cash equivalents 217 42 227 78 72 163Property, plant & equipment 2,033 2,170 2,012 1,899 1,864 1,789Goodwill 37 37 37 37 37 37Other assets 1,902 2,201 1,627 1,744 1,829 1,911T o tal assets 4,189 4,450 3,903 3,757 3,802 3,899Debt 651 901 1,412 1,449 1,451 1,428Other liabilities 2,896 3,172 2,582 2,496 2,519 2,543T o tal liabilit ies 3,548 4,073 3,994 3,945 3,970 3,971T o tal shareho lders' equity 641 377 -91 -188 -168 -71Net debt 435 859 1,185 1,372 1,378 1,265

Key Company MetricsSales growth (%) 46.4 8.4 -8.3 -4.2 7.1 6.4

Gro wth & P ro f itability DB EPS growth (%) 34.9 nm nm -27.6 nm 390.1

Payout ratio (%) nm nm nm nm 0.0 0.0

EBITDA margin (%) 2.3 3.9 3.7 5.1 6.9 8.0EBIT margin (%) -1.0 1.0 0.5 1.7 3.9 5.3

ROE (%) -16.9 -30.1 nm nm -3.3 -18.2

Net debt/equity (%) 67.8 227.7 nm nm nm nm

Net interest cover (x) nm 1.4 0.3 0.8 2.1 3.8

DuPont Analysis EBIT margin (%) -1.0 1.0 0.5 1.7 3.9 5.3x Asset turnover (x) 1.4 1.5 1.4 1.5 1.6 1.7x Financial cost ratio (x) 1.5 0.3 -2.0 -0.3 0.5 0.7x Tax and other effects (x) 1.4 -8.1 17.9 3.4 0.2 0.4= R OA (po st tax) (%) -3 .0 -3 .6 -24.6 -2 .5 0.5 2.5x Financial leverage (x) 5.5 8.4 -71.5 -6.9 -6.4 -7.2= R OE (%) -16.9 -30.1 1759.1 17.5 -3 .3 -18.2 annual growth (%) -109.4 -78.2 nm -99.0 nm -443.8x NTA/share (avg) (x) 7.0 4.7 -0.5 -4.1 -4.4 -3.9

David S. Martin = R epo rted EP S ($ ) -1.18 -1.42 -9.09 -0.72 0.15 0.72 annual growth (%) -71.8 -20.5 -541.5 92.1 nm 390.1




-0.44 0.16 -0.56 -0.71 0.15 0.72-1.18 -1.42 -9.09 -0.72 0.15 0.720.20 0.20 0.10 0.00 0.00 0.00

Metals & Mining BVPS ($) 5.88 3.54 -4.47 -4.44 -4.29 -3.57

Valuation MetricsAK Steel Price/Sales (x) 0.3 0.1 0.1 0.1 0.1 0.1

P/E (DB) (x) nm 76.9 nm nm 26.9 5.5Reuters: AKS.N Bloomberg: AKS UN P/E (Reported) (x) nm nm nm nm 26.9 5.5

Hold P/BV (x) 2.8 2.3 nm nm nm nm

FCF yield (%) nm nm nm nm nm 21.2Price (10 Oct 13) $3.93 Dividend yield (%) 1.2 1.6 1.6 0.0 0.0 0.0


52-week Range: $2.82 – 5.79 EV/EBITDA 16.6 8.7 10.4 8.1 5.5 4.3EV/EBIT nm 32.9 79.0 24.5 9.9 6.5

M arket Cap $534m

AK Steel is a leading producer of flat-ro lled carbonsheets in North America. Its flat-ro lled sales areweighted to coated and co ld-ro lled products. AK isalso a major stainless/electrical steel producer withnormalized shipments of 1 million tpy.


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Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 5,934 5,685 6,087 5,934 5,685 6,087

EBITDA 221 288 420 221 288 420

EBITDA margin 3.7% 5.1% 6.9% 3.7% 5.1% 6.9%

Depreciation 192 194 185 192 194 185

EBIT 29 95 235 29 95 235


Pre-tax income (51) (22) 135 (51) (22) 135

Tax-rate -1540.0% -60.9% 37.0% -1540.0% -60.9% 37.0%

Net income (1,027) (97) 20 (1,027) (97) 20

Net margin -17.3% -1.7% 0.3% -17.3% -1.7% 0.3%

Shares 113 136 136 113 136 136

EPS (0.56) (0.71) 0.15 (0.56) (0.71) 0.15 Source: Deutsche Bank estimates and company data



EBITDA 135 136 252 221 288 420

Net earnings (75) (129) (156) (1,027) (97) 20

EPS (0.68) (0.44) 0.16 (0.56) (0.71) 0.15


Shipments ('000 tons) 3,936 5,661 5,699 5,431 5,348 5,652

Revenue/ton (US$) 1,036 1,054 1,135 1,093 1,063 1,077

Cash cost/ton (US$) 1,002 1,030 1,091 1,052 1,009 1,003

EBITDA/ton (US$) 34 24 44 41 54 74

Capex (US$m) 134 266 296 64 80 150 Source: Deutsche Bank estimates and company data

13 October 2013

Metals & Mining




13 October 2013

Metals & Mining



ATI: Investment Thesis

Outlook

Allegheny Technologies is one of the largest specialty steel producers in the world. Its products include titanium and titanium alloys, nickel-based alloys, stainless and specialty steel alloys, electric steel. What makes this company unique is these niche products and its end-market exposures of aerospace/defense, chemical processing, oil/gas, and electrical energy markets. We find ATI's end-market exposures, long-term growth potential and financial position (balance sheet/pension) attractive. We rate the shares Buy.

Valuation

We use a blend of forward EV/EBITDA multiples and NPVs as our primary valuation tools in the sector. Our PT on ATI translates to 8x 2014e EBITDA and 1.0x NPV (NPV derived using 9% WACC, 1.1 industry beta, 7% market risk premium, 3% risk-free rate and a 3% terminal growth rate, based on company growth prospects), in line with sector multiples and supported by the company's growth potential and market exposures.

Risks

Key downside risks are project costs and timing given that the company has committed considerable capital to grow its business, metal prices that don't meet expectation due to changes in supply and demand, operating costs, currency fluctuations given Allegheny's U.S. manufacturing base and international sales exposure, and that titanium demand from the commercial aerospace market doesn't match expectations.

13 October 2013

Metals & Mining



M odel updated: 08 October 2013 Fiscal year end 31-Dec 2010 2011 2012 2013E 2014E 2015E


EBITDA 327 606 522 348 611 883EBIT 185 431 328 153 411 708Pre-tax profit 126 339 257 78 319 623

N et inco me 71 214 158 47 196 387

Cash Flow (US$m)C ash f lo w fro m o perat io ns 27 297 428 472 228 369Net Capex -217 -276 -379 -575 -200 -175F ree cash f lo w -190 21 49 -103 28 194Equity raised/(bought back) 1 2 2 0 0 0Dividends paid -71 -82 -77 -81 -84 -84Net inc/(dec) in borrowings -8 348 -27 521 -6 -39Other investing/financing cash flows -9 -341 -23 0 0 0N et cash f lo w -277 -52 -76 337 -62 71Change in working capital -267 -256 -47 230 -168 -193

Balance Sheet (US$m)Cash and cash equivalents 432 381 305 641 580 650Property, plant & equipment 1,989 2,369 2,560 2,940 2,940 2,940Goodwill 207 738 740 740 740 740

Other assets 1,865 2,560 2,643 2,402 2,598 2,822T o tal assets 4,494 6,047 6,248 6,723 6,858 7,153Debt 1,063 1,509 1,480 2,001 1,995 1,956Other liabilities 1,301 1,966 2,181 2,170 2,198 2,228T o tal liabilit ies 2,364 3,475 3,661 4,170 4,193 4,185T o tal shareho lders ' equity 2,129 2,572 2,587 2,553 2,665 2,968Net debt 631 1,129 1,176 1,359 1,416 1,306


Gro wth & P ro f itability DB EPS growth (%) 73.9 178.8 -32.7 -72.9 313.9 97.3

Payout ratio (%) 99.3 34.4 48.2 165.0 39.2 19.9


ROE (%) 3.5 9.5 6.4 1.9 7.8 14.3


DuPont Analysis EBIT margin (%) 4.6 8.3 6.5 3.2 7.7 12.0x Asset turnover (x) 0.9 1.0 0.8 0.7 0.8 0.8x Financial cost ratio (x) 0.7 0.8 0.8 0.5 0.8 0.9x Tax and other effects (x) 0.6 0.6 0.6 0.6 0.6 0.6= R OA (po st tax) (%) 1.6 4.1 2.6 0.7 2.9 5.5x Financial leverage (x) 2.2 2.3 2.5 2.6 2.7 2.6= R OE (%) 3.5 9.5 6.4 1.9 7.8 14.3 annual growth (%) 118.7 172.0 -32.6 -70.4 314.2 82.2x NTA/share (avg) (x) 20.5 19.8 21.2 22.0 21.4 23.2

David S. Martin = R epo rted EP S ($ ) 0 .72 1.88 1.36 0.42 1.68 3.31 annual growth (%) 121.7 162.7 -27.8 -69.4 303.6 97.3




0.80 2.23 1.50 0.41 1.68 3.310.72 1.88 1.36 0.42 1.68 3.310.72 0.72 0.72 0.72 0.72 0.72


Valuation MetricsAllegheny Technologies Price/Sales (x) 1.3 0.9 0.6 0.7 0.6 0.6

P/E (DB) (x) 61.6 25.2 23.6 75.6 18.3 9.3Reuters: ATI.N Bloomberg: ATI UN P/E (Reported) (x) 68.8 29.8 26.1 73.7 18.3 9.3

Buy P/BV (x) 2.6 2.0 1.3 1.3 1.3 1.1

FCF yield (%) nm 0.4 1.3 nm 0.8 5.9Price (10 Oct 13) $30.68 Dividend yield (%) 1.5 1.3 2.0 2.3 2.3 2.3



M arket Cap $3,275m

ATI is one of the largest specialty steel producers inthe world. Its products include titanium and titaniumalloys, nickel-based alloys, stainless and specialtysteel alloys, electric steel, etc. What makes thiscompany unique is these niche products and its end-market exposures - - - aerospace/defense, chemicalprocessing, o il/gas, and electrical energy markets.


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Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 5,032 4,829 5,326 5,032 4,829 5,326

EBITDA 522 348 611 522 348 611

EBITDA margin 10.4% 7.2% 11.5% 10.4% 7.2% 11.5%

Depreciation 194 195 200 194 195 200

EBIT 328 153 411 328 153 411


Pre-tax income 257 78 319 257 78 319

Tax-rate 29.6% 31.5% 36.0% 29.6% 31.5% 36.0%

Net income 158 47 196 158 47 196

Net margin 3.1% 1.0% 3.7% 3.1% 1.0% 3.7%

Shares 117 112 117 117 112 117




EBITDA 225 327 605 522 348 611

Net earnings 32 71 214 158 47 196

EPS 0.46 0.80 2.23 1.50 0.41 1.68


Shipments ('000 tons) 452 582 582 608 619 639

Revenue/ton (US$) 6,763 6,954 8,911 8,274 7,801 8,338

Cash cost/ton (US$) 6,265 6,392 7,870 7,415 7,239 7,381

EBITDA/ton (US$) 499 562 1,041 859 563 957


13 October 2013

Metals & Mining




13 October 2013

Metals & Mining



CSTM: Investment Thesis

Outlook

Constellium is a leading producer of downstream aluminum products, including aerospace sheet & plate, auto structures and can body stock, and it supports customers throughout the world primarily in the aerospace, automotive and packaging industries. What makes this company unique is its exposure to attractive end markets, where aluminum consumption is growing via strong demand and/or material substitution, good business visibility and limited metal price risk as a downstream converter. Other positive attributes include quality assets with proven track record, expected earnings improvement, anticipated restructuring benefits, management incentives are aligned with shareholders, an emerging market footprint, solid deleveraging potential via FCF & working capital release and valuation (upside potential to PT). As a result, we rate CSTM as a Buy.

Valuation

We use a blend of forward EV/EBITDA multiples and NPVs as key valuation tools in the sector. Given the outlook for a cyclical recovery, we rely heavily on EV/EBITDA multiples with a particular focus on how companies are valued on 2014 estimates, and also, our PTs are supported by multiples to NPV with the understanding that our coverage stocks have historically traded either above or below these valuations based on the economic outlook. Our PT on CSTM translates to 6x 2014e EBITDA and 1.0x NPV (NPV derived using 9% WACC, 1.1 industry beta, 7% market risk premium, 3% risk-free rate and a 3% terminal growth rate, based on company growth prospects), toward the lower end of sector multiples as a result of shareholder structure, legacy liabilities and lower leverage to any commodity price appreciation.

Risks

Key downside risks include limited share liquidity, potential share sales by controlling shareholders, cyclicality of end markets, aluminum price volatility, moves by competitors to capture market share, non-accretive acquisitions, operating costs and FX rates given its global manufacturing facilities.

13 October 2013

Metals & Mining



M odel updated: 29 August 2013 Fiscal year end 31-Dec 2010 2011 2012 2013E 2014E 2015E

Income Statement (€m)Company Profile Sales 2,957 3,556 3,610 3,704 3,918 4,177

EBITDA 48 160 228 277 328 368EBIT 10 158 214 258 302 336Pre-tax pro fit -251 -200 194 128 278 318

N et inco me -207 -174 134 88 194 222

Cash Flow (€m)C ash f lo w fro m o perat io ns -66 -29 246 96 193 230Net Capex -51 -97 -126 -140 -135 -135F ree cash f lo w -117 -126 120 -44 58 95Equity raised/(bought back) 0 98 0 163 0 0Dividends paid 0 0 0 -250 0 0Net inc/(dec) in borrowings -141 117 12 173 -6 -9Other investing/financing cash flows 266 9 -103 0 0 0N et cash f lo w 8 98 29 42 52 85Change in working capital -86 32 117 8 -18 -17

Balance Sheet (€m)Cash and cash equivalents 15 113 142 184 237 322Property, plant & equipment 214 198 302 423 532 635Goodwill 0 0 0 0 0 0Other assets 1,608 1,301 1,187 1,211 1,271 1,340T o tal assets 1,837 1,612 1,631 1,818 2,039 2,296Debt 2 217 171 345 339 329Other liabilities 1,636 1,508 1,507 1,521 1,553 1,597T o tal liabilit ies 1,638 1,725 1,678 1,865 1,892 1,927T o tal shareho lders ' equity 199 -113 -47 -47 147 370Net debt -13 104 29 160 102 7

Key Company MetricsSales growth (%) 29.0 20.3 1.5 2.6 5.8 6.6

Gro wth & P ro f itability DB EPS growth (%) 5.1 16.0 nm -97.6 117.5 14.3

Payout ratio (%) nm nm 0.0 0.0 0.0 0.0


ROE (%) -135.7 -426.1 -160.4 -171.9 418.8 87.2

Net debt/equity (%) -6.5 nm nm nm 69.3 2.0Net interest cover (x) 1.4 6.6 11.9 5.9 16.8 22.4

DuPont Analysis EBIT margin (%) 0.3 4.4 5.9 7.0 7.7 8.1x Asset turnover (x) 1.5 2.1 2.2 2.1 2.0 1.9x Financial cost ratio (x) 0.3 0.8 0.9 0.8 0.9 1.0x Tax and other effects (x) -79.0 -1.3 0.7 0.4 0.7 0.7= R OA (po st tax) (%) -10.7 -10.1 8.2 5.1 10.1 10.3x Financial leverage (x) 12.7 42.3 -19.5 -33.8 41.5 8.5= R OE (%) -135.7 -426.1 -160.4 -171.9 418.8 87.2 annual growth (%) 32.8 -214.0 62.4 -7.2 nm -79.2x NTA/share (avg) (x) 41.4 11.1 -22.0 -0.5 0.4 2.4

David S. Martin = R epo rted EP S (€) -56.17 -47.16 35.28 0.89 1.85 2.12 annual growth (%) 5.1 16.0 nm -97.5 108.3 14.3


Running the Numbers Financial SummaryNorth America DB EPS (€)

Reported EPS (€)US DPS (€)

-56.17 -47.16 35.28 0.85 1.85 2.12-56.17 -47.16 35.28 0.89 1.85 2.12

0.00 0.00 0.00 0.00 0.00 0.00

Metals & Mining BVPS (€) 53.46 -31.33 -13.51 -0.51 1.37 3.48

Valuation MetricsConstellium Price/Sales (x) na na na 0.4 0.3 0.3

P/E (DB) (x) na na na 16.0 7.4 6.4Reuters: CSTM .N Bloomberg: CSTM UN P/E (Reported) (x) na na na 15.3 7.4 6.4

Buy P/BV (x) na na na nm 10.0 3.9

FCF yield (%) na na na nm 4.0 6.6Price (10 Oct 13) $18.42 Dividend yield (%) na na na 0.0 0.0 0.0

Target price $23.00 EV/Sales na na na 0.4 0.4 0.3

52-week Range: $14.53 – 20.13 EV/EBITDA na na na 5.4 4.4 3.7EV/EBIT na na na 5.8 4.8 4.0

M arket Cap $1,817m

Constellium N.V. (CSTM ) is one of the leadingproducers of aluminum ro lled and extruded products,for a broad range of applications in different industries,such as aerospace, automotive, packaging, buildingetc. It has the leading position world-wide in aerospaceplates and is a #1player in Europe for can body stock,large extruded profiles and hard alloys extrusions.CSTM sold ~1,033k tons of aluminum products in2012. CSTM is listed on NYSE under the symbolCSTM and is headquartered in Paris.


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Financial update


(EURm) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 3,610 3,704 3,918 3,610 3,704 3,918

EBITDA 228 277 328 228 277 328

EBITDA margin 6.3% 7.5% 8.4% 6.3% 7.5% 8.4%

Depreciation 14 19 26 14 19 26

EBIT 214 258 302 214 258 302


Pre-tax income 194 128 278 194 128 278

Tax-rate 24.2% 30.8% 30.0% 24.2% 30.8% 30.0%

Net income 134 88 194 134 88 194

Net margin 3.7% 2.4% 5.0% 3.7% 2.4% 5.0%

Shares 4 99 105 4 99 105


Figure 28: Summary financial/operating highlights (EURm) 2009A 2010A 2011A 2012A 2013E 2014E


EBITDA (94) 48 160 228 277 328

Net earnings (218) (207) (174) 134 88 194

EPS (59.16) (56.17) (47.16) 35.28 0.85 1.85


Shipments ('000 tons) na 972 1,058 1,033 1,070 1,102

Revenue/ton (EUR) na 3,041 3,361 3,496 3,461 3,556

Cash cost/ton (EUR) na 2,992 3,210 3,275 3,202 3,259

EBITDA/ton (EUR) na 49 151 221 259 298

Capex (EURm) 61 51 97 126 140 135 Source: Deutsche Bank estimates and company data

13 October 2013

Metals & Mining




13 October 2013

Metals & Mining



MT: Investment Thesis

Outlook

ArcelorMittal is the global steel leader with production on five continents. Its product exposure spans both flat and long steels and it has a leading global position in value-added and attractive markets, such as automotive. Mittal owns and operates iron ore mines in Kazakhstan, Ukraine and North America, which, along with strategic contracts, supply nearly 50% of its iron ore requirements (at normalized production levels). Its mining position (including coal) provides the company with significant leverage to rising steel prices. We believe management has done a good job in selling non-core assets and the recapitalization of the balance sheet has removed a significant concern in the market. Also, Mittal is the largest beneficiary among European peers, should iron ore prices come in above the scenarios of our commodities team. We believe the company offers good leverage to the cycle in a recovery scenario. We rate Mittal as Hold given a balanced risk-reward and limited upside potential to our price target.

Valuation

We use an equal blend of forward EBITDA (6x 2014E) and DCF as our primary valuation. DCF assumptions are (9% WACC using 1.1 industry beta, 7% market risk premium, a 3% risk-free rate and 2% terminal growth to reflect limited growth prospects for the industry). This valuation places MT towards the lower-end of sector valuations (5-10x) which we see as justified given its legacy liabilities, debt and market exposures.

Risks

Key upside/downside risks are economic growth that doesn't meet expectations, steel prices that don't match forecasts, raw materials costs that differ from our estimates, project timing and costs given ArcelorMittal's expansion plans, and foreign exchange rates that don't match DB forecasts. Also, the company is in a phase of balance sheet restructuring which might impact the capital structure and strategy.

13 October 2013

Metals & Mining




Running the numbers

North America

United States

Metals & Mining

ArcelorMittal Reuters: MT.N Bloomberg: MT US



52 Week range USD 11.06 - 17.95


EURm 19,334

Company Profile

ArcelorMittal is the global steel leader with production on five continents. Its product exposure spans both flat and long steels and has strong position in value-added and attractive markets such as automotive. MT owns and operates iron ore mines in Kazakhstan, Ukraine and North America which, along with strategic contracts, supply nearly 50% of its iron ore requirements. Its mining position provides the company with significant leverage to rising steel prices.

Price Performance

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Financial Summary

DB EPS (USD) 1.84 0.65 -0.19 -0.54 0.79 1.61Reported EPS (USD) 1.82 1.40 -2.40 -0.51 0.79 1.61DPS (USD) 0.79 0.74 0.77 0.20 0.30 0.40BVPS (USD) 41.3 36.6 33.4 27.0 27.4 28.7

Weighted average shares (m) 1,512 1,549 1,549 1,779 1,788 1,788Average market cap (USDm) 54,120 43,743 26,085 26,144 26,144 26,144Enterprise value (USDm) 77,509 70,043 51,327 47,704 48,734 48,606

Valuation MetricsP/E (DB) (x) 19.5 43.4 nm nm 18.5 9.1P/E (Reported) (x) 19.6 20.1 nm nm 18.5 9.1P/BV (x) 0.92 0.50 0.52 0.54 0.54 0.51

FCF Yield (%) 1.3 nm 2.3 8.8 nm 3.2Dividend Yield (%) 2.2 2.6 4.6 1.4 2.0 2.7

EV/Sales (x) 1.0 0.7 0.6 0.6 0.6 0.5EV/EBITDA (x) 9.1 6.9 7.2 7.1 6.3 5.0EV/EBIT (x) 21.5 13.7 21.4 21.6 13.8 8.7


Sales revenue 78,025 93,973 84,213 80,184 86,608 94,286Gross profit 8,525 10,117 7,080 6,730 7,743 9,686EBITDA 8,525 10,117 7,080 6,730 7,743 9,686Depreciation 4,920 5,000 4,684 4,516 4,202 4,104Amortisation 0 0 0 0 0 0EBIT 3,605 5,117 2,396 2,213 3,541 5,582Net interest income(expense) -2,200 -3,057 -2,737 -2,813 -1,826 -1,753Associates/affiliates 451 620 194 193 357 404Exceptionals/extraordinaries -330 461 -5,622 -212 0 0Other pre-tax income/(expense) 0 0 0 0 0 0Profit before tax 1,856 2,680 -147 -407 2,072 4,233Income tax expense -1,479 882 -1,925 256 414 847Minorities 89 -4 -118 51 169 364Other post-tax income/(expense) 0 0 0 0 0 0Net profit 2,916 2,263 -3,726 -926 1,489 3,023

DB adjustments (including dilution) 28 -1,216 3,432 -66 0 0DB Net profit 2,944 1,047 -295 -992 1,489 3,023

Cash Flow (USDm)

Cash flow from operations 4,015 1,777 5,294 6,089 3,757 5,343Net Capex -3,308 -4,838 -4,683 -3,800 -4,250 -4,500Free cash flow 707 -3,061 611 2,289 -493 843Equity raised/(bought back) 0 0 0 2,850 0 0Dividends paid -1,257 -1,194 -1,191 -358 -536 -715Net inc/(dec) in borrowings 1,992 787 306 -840 49 -84Other investing/financing cash flows -1,162 1,084 905 0 0 0Net cash flow 280 -2,384 631 3,942 -980 44Change in working capital -2,531 -3,825 2,829 2,499 -1,934 -1,783


Cash and other liquid assets 6,289 3,905 4,536 8,478 7,497 7,541Tangible fixed assets 54,344 54,251 53,834 53,118 53,166 53,562Goodwill/intangible assets 14,373 14,053 9,581 9,581 9,581 9,581Associates/investments 0 0 0 0 0 0Other assets 55,898 49,671 46,622 44,947 47,783 50,522Total assets 130,904 121,880 114,573 116,124 118,027 121,206Interest bearing debt 26,008 26,418 26,304 25,464 25,513 25,429Other liabilities 38,796 34,985 33,072 37,986 38,888 39,844Total liabilities 64,804 61,403 59,376 63,450 64,401 65,273Shareholders' equity 62,430 56,690 51,723 48,099 49,052 51,359Minorities 3,670 3,787 3,474 4,574 4,574 4,574Total shareholders' equity 66,100 60,477 55,197 52,673 53,626 55,933Net debt 19,719 22,513 21,768 16,986 18,016 17,888

Key Company Metrics

Sales growth (%) 19.8 20.4 -10.4 -4.8 8.0 8.9DB EPS growth (%) na -64.7 na -186.3 na 103.0EBITDA Margin (%) 10.9 10.8 8.4 8.4 8.9 10.3EBIT Margin (%) 4.6 5.4 2.8 2.8 4.1 5.9Payout ratio (%) 40.7 50.7 nm nm 36.0 23.7ROE (%) 4.7 3.8 -6.9 -1.9 3.1 6.0Capex/sales (%) 4.2 5.1 5.6 4.7 4.9 4.8Capex/depreciation (x) 0.7 1.0 1.0 0.8 1.0 1.1Net debt/equity (%) 29.8 37.2 39.4 32.2 33.6 32.0Net interest cover (x) 1.6 1.7 0.9 0.8 1.9 3.2


13 October 2013

Metals & Mining



Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 84,213 80,184 86,608 84,213 79,521 87,771

EBITDA 7,080 6,730 7,743 7,080 6,714 7,740

EBITDA margin 8.4% 8.4% 8.9% 8.4% 8.4% 8.8%

Depreciation 4,684 4,516 4,202 4,684 4,474 4,184

EBIT 2,396 2,213 3,541 2,396 2,241 3,556

Interest income/(exp.) (2,737) (2,813) (1,826) (2,737) (2,588) (1,859)

Pre-tax income (147) (407) 2,072 (147) (154) 2,059

Tax-rate 1309.5% -63.0% 20.0% 1309.5% -198.9% 20.0%

Net income (3,726) (926) 1,489 (3,726) (747) 1,479

Net margin -4.4% -1.2% 1.7% -4.4% -0.9% 1.7%

Shares 1,550 1,823 1,877 1,550 1,823 1,877

EPS (0.19) (0.54) 0.79 (0.19) (0.45) 0.79 Source: Deutsche Bank estimates and company data



EBITDA 3,779 8,525 10,117 7,080 6,730 7,743

Net earnings 118 2,916 2,263 (3,726) (926) 1,489

EPS (0.07) 1.84 0.65 (0.19) (0.54) 0.79


Shipments ('000 tons) 71,071 84,952 85,757 83,775 84,403 88,450

Revenue/ton (US$) 916 918 1,096 1,005 950 979

Cash cost/ton (US$) 863 818 978 921 870 892

EBITDA/ton (US$) 53 100 118 85 80 88

Capex (US$m) 2,792 3,308 4,838 4,683 3,800 4,250 Source: Deutsche Bank estimates and company data

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Metals & Mining




13 October 2013

Metals & Mining



NUE: Investment Thesis

Outlook

Nucor is one of the largest steel producers in North America with annual steelmaking capacity of 26+m tpy. It produces bar, structural and sheet products, and Nucor is #1 in longs and #3 in sheets in the region. The company also produces downstream steel products, including steel joists and decking, and it is the largest scrap recycler in North America. The company maintains a diversified steel portfolio and a highly variable cost structure. It is also a leading beneficiary of a construction market recovery as it materializes in the coming years. We rate Nucor a Hold based on valuation and preference for other stocks in the sector.

Valuation

We use a blend of forward PE and EV/EBITDA multiples and NPVs as our primary valuation tools in the sector. Our selected sample of NA Steel companies should trade between 5x and 10x forward EBITDA, based on historical averages. Our PT is based on 8x 2014 EBITDA estimates and 1.1x NPV (9% WACC using a 1.1 industry beta, 7% market risk premium, 3% risk-free rate, company capital structure and a 1% terminal growth rate which we use for developed markets/North American companies); which places its valuation in line with its peers.

Risks

Key upside/downside risks include steel product prices that differ from expectations due to changing demand and supply trends, operating costs that don't meet expectations given that Nucor is heavily exposed to scrap and pig iron costs. Also, the company has significant capital spending plans in the coming years and its execution here may differ from expectations.

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Metals & Mining



M odel updated: 31 July 2013 Fiscal year end 31-Dec 2010 2011 2012 2013E 2014E 2015E


EBITDA 1,003 2,028 1,745 1,495 2,178 2,802EBIT 420 1,438 1,138 889 1,548 2,302Pre-tax profit 267 1,272 880 735 1,388 2,172

N et inco me 134 798 531 417 801 1,253

Cash Flow (US$m)C ash f lo w fro m o perat io ns 873 1,053 1,227 1,368 1,248 1,499Net Capex -345 -441 -948 -1,100 -750 -500F ree cash f lo w 528 612 279 268 498 999Equity raised/(bought back) 5 8 11 0 0 0Dividends paid -457 -462 -466 -469 -469 -469Net inc/(dec) in borrowings 1,201 -11 -622 973 -50 -100Other investing/financing cash flows -1,968 -252 677 0 0 0N et cash f lo w -692 -105 -121 773 -21 430Change in working capital -129 -536 -86 346 -183 -255

Balance Sheet (US$m)Cash and cash equivalents 1,325 1,201 1,053 1,825 1,805 2,235Property, plant & equipment 3,852 3,756 4,283 4,777 4,897 4,897Goodwill 1,836 1,831 2,005 2,005 2,005 2,005Other assets 6,908 7,783 6,747 6,375 6,575 6,881T o tal assets 13,922 14,570 14,088 14,982 15,281 16,017Debt 4,294 4,282 3,660 4,633 4,583 4,484Other liabilities 2,298 2,582 2,542 2,516 2,533 2,584T o tal liabilit ies 6,591 6,864 6,202 7,149 7,116 7,068T o tal shareho lders' equity 7,331 7,707 7,885 7,833 8,165 8,950Net debt 2,968 3,081 2,607 2,808 2,778 2,249


Gro wth & P ro fitability DB EPS growth (%) nm 440.9 -25.2 -26.8 92.6 56.5

Payout ratio (%) 339.3 57.6 87.4 112.5 58.5 37.4


ROE (%) 1.8 10.9 7.0 5.5 10.3 15.1

Net debt/equity (%) 40.5 40.0 33.1 35.8 34.0 25.1

Net interest cover (x) 2.7 8.7 7.0 5.7 9.7 17.7

DuPont Analysis EBIT margin (%) 2.7 7.2 5.9 4.7 7.8 10.7x Asset turnover (x) 1.2 1.4 1.4 1.3 1.3 1.4x Financial cost ratio (x) 0.6 0.9 0.9 0.8 0.9 0.9x Tax and other effects (x) 0.5 0.6 0.5 0.6 0.6 0.6= R OA (po st tax) (%) 1.0 5.6 3.7 2.9 5.3 8.0x Financial leverage (x) 1.8 2.0 1.9 1.9 2.0 1.9= R OE (%) 1.8 10.9 7.0 5.5 10.3 15.1 annual growth (%) nm 491.9 -35.7 -22.1 88.7 46.0x NTA/share (avg) (x) 22.9 23.0 23.8 23.9 24.3 26.1

David S. Martin = R epo rted EP S ($ ) 0.42 2.51 1.67 1.31 2.51 3.93 annual growth (%) nm 493.3 -33.6 -21.7 92.2 56.5




0.44 2.38 1.78 1.30 2.51 3.930.42 2.51 1.67 1.31 2.51 3.931.44 1.45 1.46 1.47 1.47 1.47


Valuation MetricsNucor Price/Sales (x) 0.9 0.6 0.7 0.8 0.8 0.7

P/E (DB) (x) 95.0 17.1 22.6 37.1 19.3 12.3Reuters: NUE.N Bloomberg: NUE UN P/E (Reported) (x) 98.7 16.2 24.1 37.0 19.3 12.3

HoldP/BV (x) 1.9 1.7 1.8 2.0 1.9 1.8




M arket Cap $15,426m

Nucor is one of the largest steel producers in NorthAmerica with annual steelmaking capacity of 26+M Mtpy. It produces bar, structural and sheet products, andNucor is #1in longs and #3 in sheets in the region. Thecompany also produces downstream steel products,including steel jo ists and decking, and it is the largestscrap recycler in North America.


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Metals & Mining



Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 19,429 18,862 19,914 19,429 18,862 19,914

EBITDA 1,719 1,495 2,178 1,719 1,495 2,178

EBITDA margin 8.8% 7.9% 10.9% 8.8% 7.9% 10.9%

Depreciation 607 606 630 607 606 630

EBIT 1,112 889 1,548 1,112 889 1,548


Pre-tax income 853 735 1,388 853 735 1,388

Tax-rate 30.5% 31.0% 32.5% 30.5% 31.0% 32.5%

Net income 505 417 801 505 417 801

Net margin 2.6% 2.2% 4.0% 2.6% 2.2% 4.0%

Shares 318 319 319 318 319 319




EBITDA 290 1,003 2,008 1,719 1,495 2,178

Net earnings (294) 134 778 505 417 801

EPS (0.94) 0.44 2.38 1.78 1.30 2.51


Shipments ('000 tons) 13,933 17,846 18,964 19,096 19,504 20,200

Revenue/ton (US$) 803 888 1,056 1,017 967 986

Cash cost/ton (US$) 782 832 950 927 890 878

EBITDA/ton (US$) 21 56 106 90 77 108

Capex (US$m) 391 345 441 948 1,100 750 Source: Deutsche Bank estimates and company data

13 October 2013

Metals & Mining




13 October 2013

Metals & Mining



STLD: Investment Thesis

Outlook

Steel Dynamics, based in Fort Wayne, Indiana is the 5th largest carbon steel producer in the US, with 6.4m tons of steelmaking capacity. Also STLD is the 2nd largest ferrous scrap recycler in the US with 7.0m tons of capacity. The company has 5 electric arc furnace mini-mills, 6 finishing facilities, 6 fabrication plants and 11 scrap shredders with more than 70 metal collection and processing sites. We rate Steel Dynamics a Buy, citing favorable cost structure, upstream growth, attractive markets exposure, solid FCF yield, financial stability, and valuation as key components of our investment thesis.

Valuation

Our 12-month price target for Steel Dynamics is based on a 7x 2014E EBITDA. Our selected sample of NA Steel companies should trade between 5x and 10x forward EBITDA, based on historical averages. We believe Steel Dynamics should trade should trade in line with its peer group given the size and location of its asset base and operations, and further, we believe its position in the steel market bodes well for the company's earnings potential in the future. As a valuation cross-check, we note that our PT equates to ~1.1x our NAV/share calculated under a DCF methodology (% WACC with % 10.7 Ke and 4.7% post-tax Kd, and a 1.5% terminal growth rate [based on our knowledge of the asset base and expectations for long-term growth]).

Risks

Key downside risks include steel product prices that differ from expectations due to changing demand and supply trends, operating costs that don't meet expectations given that Steel Dynamics is heavily exposed to scrap and pig iron costs, debt levels, and expansion of its mining business. Further risks for steel companies stem from contract pricing in place vis-à-vis the direction of spot prices.

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Metals & Mining



M odel updated: 24 July 2013 Fiscal year end 31-Dec 2010 2011 2012 2013E 2014E 2015E


EBITDA 602 807 625 611 859 1,076EBIT 378 585 399 385 649 926Pre-tax profit 213 424 212 261 542 841

N et inco me 141 278 164 178 335 519

Cash Flow (US$m)C ash f lo w fro m o peratio ns 169 486 446 279 438 539Net Capex -133 -167 -224 -200 -150 -125F ree cash f lo w 36 319 223 79 288 414Equity raised/(bought back) 14 13 3 0 0 0Dividends paid -65 -82 -88 -101 -105 -105Net inc/(dec) in borrowings 203 -5 -223 -100 -58 -83Other investing/financing cash flows -10 43 16 -11 0 0N et cash f lo w 178 289 -68 -133 125 227Change in working capital -386 -130 67 -125 -107 -130

Balance Sheet (US$m)Cash and cash equivalents 187 476 407 275 400 627Property, plant & equipment 2,213 2,194 2,231 2,205 2,145 2,120Goodwill 752 745 739 739 739 739

Other assets 2,438 2,565 2,438 2,571 2,688 2,836T o tal assets 5,590 5,979 5,815 5,790 5,972 6,321Debt 2,387 2,380 2,202 2,102 2,045 1,962Other liabilities 1,126 1,299 1,235 1,233 1,243 1,260T o tal liabilit ies 3,513 3,679 3,438 3,335 3,288 3,222T o tal shareho lders' equity 2,077 2,300 2,378 2,455 2,685 3,099Net debt 2,200 1,905 1,795 1,828 1,645 1,335


Gro wth & P ro f itability DB EPS growth (%) nm 83.6 -39.0 1.5 84.5 55.2

Payout ratio (%) 46.2 31.4 53.6 53.4 29.0 18.7


ROE (%) 6.9 12.6 6.9 7.3 12.9 17.8

Net debt/equity (%) 105.9 82.8 75.5 74.5 61.3 43.1

Net interest cover (x) 2.2 3.3 2.5 3.0 5.4 9.3

DuPont Analysis EBIT margin (%) 6.0 7.3 5.5 5.4 8.6 11.4x Asset turnover (x) 1.2 1.4 1.2 1.2 1.3 1.3x Financial cost ratio (x) 0.5 0.7 0.6 0.7 0.8 0.9x Tax and o ther effects (x) 0.7 0.7 0.7 0.7 0.6 0.6= R OA (po st tax) (%) 2.6 4.8 2.8 3.1 5.7 8.4x Financial leverage (x) 2.6 2.6 2.5 2.4 2.3 2.1= R OE (%) 6.9 12.6 6.9 7.3 12.9 17.8 annual growth (%) nm 83.0 -45.1 4.9 77.3 38.1x NTA/share (avg) (x) 8.7 9.3 10.0 10.4 10.9 12.3

David S. Martin = R epo rted EP S ($ ) 0.60 1.18 0.69 0.76 1.40 2.18 annual growth (%) nm 96.6 -41.4 9.8 85.2 55.2




0.67 1.23 0.75 0.76 1.40 2.180.60 1.18 0.69 0.76 1.40 2.180.30 0.40 0.40 0.43 0.44 0.44


Valuation MetricsSteel Dynamics Price/Sales (x) 0.6 0.4 0.4 0.5 0.5 0.5

P/E (DB) (x) 23.4 12.5 17.4 22.1 12.0 7.7Reuters: STLD.OQ Bloomberg: STLD US P/E (Reported) (x) 26.1 13.0 18.9 22.1 12.0 7.7

BuyP/BV (x) 1.9 1.2 1.3 1.5 1.4 1.2




M arket Cap $3,702m

Steel Dynamics, based in Fort Wayne, Indiana is the 5th largest carbon steel producer in the US, with 6.4m tonsof steelmaking capacity. Also STLD is the 2nd largestferrous scrap recycler in the US with 7.0m tons ofcapacity. The company has 5 electric arc furnace mini-mills, 6 finishing facilities, 6 fabrication plants and 11scrap shredders with more than 70 metal collectionand processing sites.


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Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 7,290 7,164 7,590 7,290 7,164 7,590

EBITDA 625 611 859 625 611 859

EBITDA margin 8.6% 8.5% 11.3% 8.6% 8.5% 11.3%

Depreciation 225 226 210 225 226 210

EBIT 399 385 649 399 385 649


Pre-tax income 212 261 542 212 261 542

Tax-rate 29.1% 36.8% 37.0% 29.1% 36.8% 37.0%

Net income 164 178 335 164 178 335

Net margin 2.2% 2.5% 4.4% 2.2% 2.5% 4.4%

Shares 237 234 238 237 234 238




EBITDA 341 602 807 625 611 859

Net earnings (8) 141 278 164 178 335

EPS (0.14) 0.67 1.23 0.75 0.76 1.40


Shipments ('000 tons) 3,938 5,114 5,637 5,718 5,841 6,032

Revenue/ton (US$) 1,005 1,232 1,419 1,275 1,227 1,258

Cash cost/ton (US$) 919 1,114 1,276 1,166 1,122 1,116

EBITDA/ton (US$) 87 118 143 109 105 142


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Metals & Mining




13 October 2013

Metals & Mining



X: Investment Thesis

Outlook

U.S. Steel is a leading global integrated producer of flat-rolled steel (#2 in North America) and the largest producer of tubular products in North America. It has annual crude steelmaking capacity of 29m tpy in the U.S., Canada and Central Europe. We see U.S. Steel as a leading beneficiary in our coverage of stubbornly high steelmaking raw material costs via its integrated business model. We rate the shares a Buy.

Valuation

We use a blend of forward EV/EBITDA multiples and NPVs as our primary valuation tools in the sector. Our selected sample of NA Steel companies should trade between 5x and 10x forward EBITDA, based on historical averages. Our PT is based on 6x 2014 EBITDA estimates and 1.0x NPV (9% WACC, 1.1 industry beta, 7% market risk premium, 3% risk-free rate, company capital structure and a 1% terminal growth rate - this is the standard growth rate we use for Developed Market companies and is consistent with historical growth), which places its valuation in line with relevant peers.

Risks

Key downside risks are metal prices (flat carbon and tubular steels for U.S. Steel) that do not meet expectations due to changes in economic growth and/or supply growth, raw material and operating costs that do not meet expectations, a high fixed-cost structure, currency fluctuations given U.S. Steel has operations in non-USD base economies such as Eastern Europe, and Tubular imports which have risen in recent years and are a threat to X's Tubular business.

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Metals & Mining



M odel updated: 18 September 2013 Fiscal year end 31-Dec 2010 2011 2012 2013E 2014E 2015


EBITDA 505 825 1,064 686 969 1,26EBIT -153 144 403 1 299 63Pre-tax pro fit -392 2 335 -275 129 51

N et inco me -482 -53 -124 -264 90 357

Cash Flow (US$m)C ash f lo w f ro m o perat io ns -379 168 1,135 991 613 742Net Capex -507 -807 -568 -700 -500 -40F ree cash f lo w -886 -639 567 291 113 342Equity raised/(bought back) 5 3 0 0 0Dividends paid -29 -29 -29 -29 -31 -3Net inc/(dec) in borrowings 359 502 36 49 -23 -6Other investing/financing cash flows -89 -7 -412 -47 0N et cash f lo w -640 -170 162 265 60 243Change in working capital -765 -552 335 570 -147 -239

Balance Sheet (US$m)Cash and cash equivalents 578 408 570 835 894 1,13Property, plant & equipment 6,486 6,579 6,408 6,423 6,253 6,02Goodwill 1,760 2,045 2,075 2,075 2,075 2,07

Other assets 6,526 7,041 6,164 5,763 5,989 6,39T o tal assets 15,350 16,073 15,217 15,096 15,212 15,63Debt 3,733 4,228 3,938 3,987 3,965 3,89Other liabilities 7,765 8,344 7,801 7,924 8,003 8,16T o tal liabilit ies 11,498 12,572 11,739 11,911 11,968 12,062T o tal shareho lders' equity 3,852 3,501 3,478 3,185 3,244 3,570Net debt 3,155 3,820 3,368 3,153 3,070 2,759

Key Company MetricsSales growth (%) 57.3 14.4 -2.8 -7.0 5.4 9

Gro wth & P ro f itability DB EPS growth (%) 75.6 86.7 nm nm nm 296.

Payout ratio (%) nm nm nm nm 32.1 8

EBITDA margin (%) 2.9 4.1 5.5 3.8 5.1 6EBIT margin (%) -0.9 0.7 2.1 0.0 1.6 3

ROE (%) -11.3 -1.4 -3.6 -7.9 2.8 10.

Net debt/equity (%) 81.9 109.1 96.8 99.0 94.7 77.

Net interest cover (x) nm 0.6 1.7 0.0 1.4 3.

DuPont Analysis EBIT margin (%) -0.9 0.7 2.1 0.0 1.6 3x Asset turnover (x) 1.1 1.3 1.2 1.2 1.3 1.x Financial cost ratio (x) 2.8 -0.7 0.4 -252.7 0.3 0.x Tax and o ther effects (x) 1.1 0.6 -0.8 0.9 1.1 0.= R OA (po st tax) (%) -3.1 -0.3 -0.8 -1.7 0.6 2.3x Financial leverage (x) 3.6 4.3 4.5 4.6 4.7 4.= R OE (%) -11.3 -1.4 -3.6 -7.9 2.8 10.5 annual growth (%) 61.4 87.2 -146.5 -123.4 nm 273.9x NTA/share (avg) (x) 29.7 25.5 24.2 23.1 20.8 22

David S. Martin = R epo rted EP S ($ ) -3.36 -0.37 -0.86 -1.83 0.58 2.3 annual growth (%) 67.8 89.0 -133.5 -112.9 nm 296.3




-2.70 -0.36 1.09 -1.67 0.58 2.3-3.36 -0.37 -0.86 -1.83 0.58 2.30.20 0.20 0.20 0.20 0.20 0.2


Valuation MetricsUS Steel Price/Sales (x) 0.5 0.2 0.2 0.2 0.2 0.

P/E (DB) (x) nm nm 21.8 nm 37.6 9.Reuters: X.N Bloomberg: X UN P/E (Reported) (x) nm nm nm nm 37.6 9.

BuyP/BV (x) 2.2 1.1 1.0 1.0 1.0 0.

FCF yield (%) nm nm 16.5 9.2 3.6 10.Price (10 Oct 13) $21.90 Dividend yield (%) 0.4 0.5 0.8 0.9 0.9 0.

Target price $22.00 EV/Sales 0.6 0.5 0.4 0.4 0.3 0.

52-week Range: $16.18 – 25.89 EV/EBITDA 20.5 11.7 6.4 9.2 6.4 4.EV/EBIT nm 66.8 16.9 nm 20.9 9.

M arket Cap $3,163m

U.S. Steel is a leading global integrated producer of flat-ro lled steel (#2 in North America) and the largestproducer of tubular products in North America. It hasannual crude steelmaking capacity of 30M M tpy in theU.S., Canada and Central Europe.


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Financial update


(US$m) 2012A 2013E 2014E 2012A 2013E 2014E

Sales 19,328 17,983 18,954 19,328 17,983 18,954

EBITDA 1,064 686 969 1,064 686 969

EBITDA margin 5.5% 3.8% 5.1% 5.5% 3.8% 5.1%

Depreciation 661 685 670 661 685 670

EBIT 403 1 299 403 1 299


Pre-tax income 335 (275) 129 335 (275) 129

Tax-rate 39.1% 3.8% 30.0% 39.1% 3.8% 30.0%

Net income (124) (264) 90 (124) (264) 90

Net margin -0.6% -1.5% 0.5% -0.6% -1.5% 0.5%

Shares 144 144 154 144 144 154

EPS 1.09 (1.67) 0.58 1.09 (1.67) 0.58 Source: Deutsche Bank estimates and company data



EBITDA (1,167) 505 825 1,064 686 969

Net earnings (1,401) (482) (53) (124) (264) 90

EPS (11.06) (2.70) (0.36) 1.09 (1.67) 0.58


Shipments ('000 tons) 14,981 22,316 22,253 21,676 21,299 22,300

Revenue/ton (US$) 737 779 894 892 844 850

Cash cost/ton (US$) 815 756 856 843 812 807

EBITDA/ton (US$) (78) 23 37 49 32 43


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Metals & Mining



Research Contribution

The author of this report wishes to acknowledge the contribution made by Anshul Agrawal and Eswanth Ponnuru, the employees of Irevna, a division of CRISIL Ltd, a third-party provider to Deutsche Bank of offshore research support services.

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Metals & Mining



Appendix 1

Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. David Martin Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

46 %51 %

2 %

55 % 45 %

39 %0

50100150200250300350400450500

Buy Hold Sell

North American Universe

Companies Covered Cos. w/ Banking Relationship

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Metals & Mining



Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures

Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless “Japan” or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of Deutsche Securities Inc. (DSI) are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

David Folkerts-Landau

Group Chief Economist Member of the Global Executive Committee

Guy Ashton

Global Chief Operating Officer Research

Marcel Cassard Global Head

FICC Research & Global Macro Economics

Richard Smith and Steve Pollard Co-Global Heads Equity Research

Michael Spencer Regional Head

Asia Pacific Research

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Deutsche Bank Research, Germany

Andreas Neubauer Regional Head

Equity Research, Germany

Steve Pollard Regional Head

Americas Research

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