European Metals and Mining ... 280513

Europe Equity Research
28 May 2013
European Metals & Mining

A tempered commodity outlook: GLEN XTA remains the top pick, AAL least preferred
In recent weeks our view on supply/demand balances for base and precious metals has deteriorated. We therefore adjust near-term commodity forecasts to reflect current trading, leading to FY14/15E EPS cuts of 0-5% for RIO and BHP and 20-30% for base heavy VED, GLEN and AAL, though weakening producer currencies provide some respite. With no changes to long-term forecasts the impact on NPVs is just 0-6% and all shares continue to trade at a steep discount. Though we do not expect an imminent equity re-rating towards NPV as commodity sentiment is muted, we continue to see value & our order of preference is intact: GLEN is our top pick and AAL our least preferred. Slower growth, lower prices: lower GDP growth assumptions have prompted revisions to supply & demand balances and we lower copper price forecasts in 2013-15 to US$3.50/3.48/3.58/lb, -4%/12%/13%. New aluminium prices are US$0.89//0.93/1.00/lb in 2013/14/15, -5%/12%/10%. With this review we also lower gold, and the other base metals. We cut our expectations for hard coking coal prices in 2013 from $173 to $168/t and for 2014 from $183 to $179/t. Sizeable 2014/15 earnings downgrades: weaker near-term producer FX forecasts (ZAR, AUD in particular) offset commodity price downgrades to an extent, but AAL, GLEN and VED see ~20-30% downgrades to FY1415E EPS, driven by our tempered view on copper. RIO's "over-reliance" on iron ore sees it suffer the smallest downgrades at just 1%, while BHPBs diversification also serves it well with a 5% cut to FY14-15E earnings. Small cuts to Price Targets, pecking order remains intact: with no changes to long-term price forecasts, the impact on our NPVs and price targets are more modest, falling 0-6% (including a roll-forward to Jun-14). GLEN XTA remains our top sector pick despite sizeable copper related EPS downgrades, combining best-in-sector FCF yield with a differentiated message on capital allocation and a high level of employee ownership. While premium near-term multiples are a headwind, we believe investors will increasingly look beyond these, assuming progress on key development projects remains on track. AAL continues to face a number of key structural issues and notwithstanding likely support in the run-up to Mark Cutifanis first results in July, remains our least preferred name.
European Metals, Mining & Steel Fraser Jamieson
AC
(44- 20) 7742-5930 fraser.jamieson@jpmorgan.com J.P. Morgan Securities plc
Dominic O'Kane
AC
(44-20) 7742-6729 dominic.j.okane@jpmorgan.com J.P. Morgan Securities plc
Roger Bell
AC
(44-20) 7134-5932 roger.m.bell@jpmorgan.com J.P. Morgan Securities plc
Lyndon Fagan
(61-2) 9003-8648 Lyndon.fagan@jpmorgan.com J.P. Morgan Securities Australia Limited
Ben Defay
(44-20) 7134-5936 ben.defay@jpmorgan.com J.P. Morgan Securities plc
James Bateman
(44-20) 7742-6588 james.p.bateman@jpmorgan.com J.P. Morgan Securities plc
For Specialist Sales advice, please contact James H McGeoch

(44-20) 7134-0690 james.h.mcgeoch@jpmorgan.com
Equity Ratings and Price Targets Company Anglo American Anglo American (AGLJ.J) BHP Billiton BHP Billiton (BILJ.J) Glencore Xstrata plc Rio Tinto plc Vedanta Resources Symbol AAL.L AGLJ.J BLT.L BILJ.J GLEN.L RIO.L VED.L Mkt Cap ($ mn) 28,389.88 28,505.89 61,426.41 157,982.60 66,569.45 80,631.17 5,291.00 Price CCY GBp ZAc GBp ZAc GBp GBp GBp Rating Price 1,557 22,635 1,923 27,845 332 2,867 1,281 Cur N UW N N OW OW OW Prev n/c n/c n/c n/c n/c n/c n/c Price Target Cur Prev 1,820 1,930 26,615 24,610 2,300 2,330 33,300 32,540 420 450 4,520 4,560 1,540 1,500
Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 24 May 13.
See page 41 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com
Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com
Europe Equity Research 28 May 2013
Forecast changes
Commodity price changes
Table 2 shows a summary of the changes made to our commodity price forecasts. We have not made any changes to long-term forecasts; the key near-term changes are: Copper: -4% to $7,707/t ($3.50/lb) in CY13, -12% to $7,675/t ($3.48/lb) in CY14 and -14% to $7,900/t ($3.58/lb) in CY15; Aluminium: -5% to $1,963/t ($0.89/lb) in CY13, -12% to $2,050/t ($0.93/lb) in CY14 and -10% to $2,200/t ($1.00/lb) in CY15; Coal: coking coal -3% to $168 in 2013, -2% to $183 in FY14; no changes to thermal; Iron Ore: unchanged at $130/t for Q2, $125/t for Q3 and $120/t for Q4, leading to an average of $130/t for CY13, $115/t for CY14 and $105/t for CY15; Gold: -8% to $1,595 in 2013, -5% to $1,719oz in 2014. We have upgraded our long-term Silver price to reflect a 60:1 gold:silver ratio, in-line with the historical average. We have also made adjustments, predominantly marked-to-market, to our exchange rate forecasts, as shown below. Our revised forecasts are in line with J.P. Morgan official forecasts.
Table 1: FX forecast changes
A$/US$ New Old New vs old New QoQ % / YoY % Spot New vs spot New Old New vs old New QoQ % / YoY % Spot New vs spot New Old New vs old New QoQ % / YoY % Spot New vs spot New Old New vs old New QoQ % / YoY % Spot New vs spot Q1 13 1.04 1.04 0% 0.97 7% 1.01 1.01 0% 1.03 -3% 1.55 1.55 0% 1.51 3% 8.93 8.93 0% 9.53 -6% Q2 13 0.99 1.05 -6% -5% 0.97 2% 1.01 1.01 0% 0% 1.03 -2% 1.51 1.47 3% -3% 1.51 0% 9.12 8.90 2% 2% 9.53 -4% Q3 13 0.99 1.06 -7% 0% 0.97 2% 0.99 0.99 0% -2% 1.03 -4% 1.49 1.51 -1% -1% 1.51 -1% 9.00 8.80 2% -1% 9.53 -6% Q4 13 1.00 1.07 -7% 1% 0.97 3% 0.99 0.99 0% 0% 1.03 -4% 1.49 1.51 -1% 0% 1.51 -1% 9.00 8.50 6% 0% 9.53 -6% Q1 14 1.01 1.07 -6% 1% 0.97 4% 0.99 0.99 0% 0% 1.03 -4% 1.52 1.51 1% 2% 1.51 1% 9.06 8.60 5% 1% 9.53 -5% Q2 14 1.00 1.06 -5% -1% 0.97 3% 0.99 0.99 0% 0% 1.03 -5% 1.52 1.52 0% 0% 1.51 1% 9.16 8.70 5% 1% 9.53 -4% Q3 14 0.99 1.04 -5% -1% 0.97 2% 0.98 0.98 0% 0% 1.03 -5% 1.53 1.53 0% 0% 1.51 1% 9.27 8.80 5% 1% 9.53 -3% Q4 14 0.98 1.03 -5% -1% 0.97 1% 0.98 0.98 0% 0% 1.03 -5% 1.53 1.54 -1% 0% 1.51 1% 9.37 8.90 5% 1% 9.53 -2% 2013 1.00 1.05 -5% 0.97 4% 1.00 1.00 0% 1.03 -3% 1.51 1.51 0% 1.51 0% 9.01 8.78 3% 9.53 -5% 2014 1.00 1.05 -5% -1% 0.97 3% 0.99 0.99 0% -1% 1.03 -5% 1.53 1.53 0% 1% 1.51 1% 9.22 8.75 5% 2% 9.53 -3% 2015 0.96 1.00 -4% -4% 0.97 -1% 0.97 0.98 -1% -2% 1.03 -6% 1.54 1.55 -1% 1% 1.51 2% 9.68 9.15 6% 5% 9.53 1% LT Real 0.80 0.80 0% 0.97 1.05 1.05 0% 1.03 1.43 1.43 0% 1.51 11.21 10.20 10% 9.53
C$/US$
/US$
ZAR/US$
Source: J.P. Morgan estimates.
Table 2: Commodity price forecast changes

Al New Old New vs old New QoQ % / YoY % Spot New vs spot New Old New vs old New QoQ % / YoY % Spot New vs spot New Old New vs old New QoQ % / YoY % Spot New vs spot New US$/t US$/lb US$/t % % US$/t % US$/t US$/lb US$/t % % US$/t % US$/t US$/lb US$/t % % US$/t % US$/t US$/lb US$/t % % US$/t % US$/t US$/t % % US$/t % US$/t US$/t % % US$/t % US$/oz US$/oz % % US$/oz % US$/oz US$/oz % % US$/oz % US$/oz US$/oz % % US$/oz % US$/t US$/t % % US$/t % Q1 13 2,002 0.91 2,002 0% 1,852 8% 7,927 3.60 7,927 0% 7,280 9% 17,311 7.85 17,311 0% 14,903 16% 2,030 0.92 2,030 0% 1,855 9% 1,631 1,631 0% 1,379 18% 30.05 30.05 0% 22.33 35% 1,631 1,611 1% 1,457 12% 742 700 6% 741 0% 1,199 1,100 9% 1,115 8% 165 165 0% 140 18% Q2 13 1,900 0.86 2,050 -7% -5% 1,852 3% 7,300 3.31 7,600 -4% -8% 7,280 0% 15,500 7.03 16,900 -8% -10% 14,903 4% 1,880 0.85 2,050 -8% -7% 1,855 1% 1,450 1,775 -18% -11% 1,379 5% 25.00 30.00 -17% -17% 22.33 12% 1,475 1,611 -8% -10% 1,457 1% 700 700 0% -6% 741 -6% 1,200 1,100 9% 0% 1,115 8% 172 172 0% 4% 140 23% Q3 13 1,950 0.88 2,100 -7% 3% 1,852 5% 7,700 3.49 8,100 -5% 5% 7,280 6% 14,500 6.58 17,350 -16% -6% 14,903 -3% 2,000 0.91 2,150 -7% 6% 1,855 8% 1,600 1,800 -11% 10% 1,379 16% 27.00 30.00 -10% 8% 22.33 21% 1,500 1,611 -7% 2% 1,457 3% 725 700 4% 4% 741 -2% 1,200 1,100 9% 0% 1,115 8% 165 172 -4% -4% 140 18% Q4 13 2,000 0.91 2,150 -7% 3% 1,852 8% 7,900 3.58 8,500 -7% 3% 7,280 9% 15,200 6.89 18,250 -17% 5% 14,903 2% 2,100 0.95 2,200 -5% 5% 1,855 13% 1,700 1,775 -4% 6% 1,379 23% 29.50 30.00 -2% 9% 22.33 32% 1,525 1,611 -5% 2% 1,457 5% 750 700 7% 3% 741 1% 1,200 1,100 9% 0% 1,115 8% 170 180 -6% 3% 140 22% Q1 14 2,100 0.95 2,200 -5% 5% 1,852 13% 7,600 3.45 8,400 -10% -4% 7,280 4% 16,700 7.57 19,150 -13% 10% 14,903 12% 2,250 1.02 2,250 0% 7% 1,855 21% 1,700 1,800 -6% 0% 1,379 23% 30.00 30.00 0% 2% 22.33 34% 1,575 1,750 -10% 3% 1,457 8% 775 881 -12% 3% 741 5% 1,350 1,750 -23% 13% 1,115 21% 175 180 -3% 3% 140 25% Q2 14 1,900 0.86 2,350 -19% -10% 1,852 3% 7,500 3.40 8,650 -13% -1% 7,280 3% 16,500 7.48 19,500 -15% -1% 14,903 11% 2,000 0.91 2,300 -13% -11% 1,855 8% 1,725 1,825 -5% 1% 1,379 25% 30.00 31.00 -3% 0% 22.33 34% 1,650 1,750 -6% 5% 1,457 13% 785 881 -11% 1% 741 6% 1,500 1,750 -14% 11% 1,115 35% 180 185 -3% 3% 140 29% Q3 14 2,000 0.91 2,375 -16% 5% 1,852 8% 7,700 3.49 8,850 -13% 3% 7,280 6% 17,000 7.71 19,600 -13% 3% 14,903 14% 2,150 0.98 2,350 -9% 8% 1,855 16% 1,750 1,850 -5% 1% 1,379 27% 31.00 31.00 0% 3% 22.33 39% 1,700 1,750 -3% 3% 1,457 17% 805 881 -9% 3% 741 9% 1,700 1,750 -3% 13% 1,115 52% 180 185 -3% 0% 140 29% Q4 14 2,200 1.00 2,400 -8% 10% 1,852 19% 7,900 3.58 9,100 -13% 3% 7,280 9% 16,800 7.62 20,450 -18% -1% 14,903 13% 2,300 1.04 2,400 -4% 7% 1,855 24% 1,700 1,800 -6% -3% 1,379 23% 30.00 30.00 0% -3% 22.33 34% 1,750 1,750 0% 3% 1,457 20% 835 881 -5% 4% 741 13% 1,450 1,750 -17% -15% 1,115 30% 180 180 0% 0% 140 29% 2013 1,963 0.89 2,076 -5% 1,852 6% 7,707 3.50 8,032 -4% 7,280 6% 15,628 7.09 17,453 -10% 14,903 5% 2,002 0.91 2,107 -5% 1,855 8% 1,595 1,745 -9% 1,379 16% 27.89 30.01 -7% 22.33 25% 1,533 1,611 -5% 1,457 5% 729 700 4% 741 -2% 1,200 1,100 9% 1,115 8% 168 173 -3% 140 20% 2014 2,050 0.93 2,331 -12% 4% 1,852 11% 7,675 3.48 8,750 -12% 0% 7,280 5% 16,750 7.60 19,675 -15% 7% 14,903 12% 2,175 0.99 2,325 -6% 9% 1,855 17% 1,719 1,819 -5% 8% 1,379 25% 30.25 30.50 -1% 8% 22.33 35% 1,669 1,750 -5% 9% 1,457 15% 800 881 -9% 10% 741 8% 1,500 1,750 -14% 25% 1,115 35% 179 183 -2% 7% 140 28% 2015 2,200 1.00 2,445 -10% 7% 1,852 19% 7,900 3.58 9,050 -13% 3% 7,280 9% 17,500 7.94 19,750 -11% 4% 14,903 17% 2,250 1.02 2,450 -8% 3% 1,855 21% 1,650 1,735 -5% -4% 1,379 20% 30.75 30.75 0% 2% 22.33 38% 1,850 1,945 -5% 11% 1,457 27% 900 1,080 -17% 13% 741 21% 1,300 3,781 -66% -13% 1,115 17% 190 190 0% 6% 140 36% LT Real 2,200 1.00 2,200 0% 1,852 7,500 3.40 7,500 0% 7,280 18,000 8.16 18,000 0% 14,903 2,000 0.91 2,000 0% 1,855 1,500 1,500 0% 1,379 24.00 24.00 0% 22.33 2,100 1,800 17% 1,457 1,100 1,000 10% 741 2,250 3,500 -36% 1,115 170 170 0% 140
Cu
Ni
Zn
Old New vs old New QoQ % / YoY % Spot New vs spot Gold New Old New vs old New QoQ % / YoY % Spot New vs spot Silver New Old New vs old New QoQ % / YoY % Spot New vs spot Pt New Old New vs old New QoQ % / YoY % Spot New vs spot Pd New Old New vs old New QoQ % / YoY % Spot New vs spot Rh New Old New vs old New QoQ % / YoY % Spot New vs spot Coking New coal Old New vs old New QoQ % / YoY % Spot New vs spot
Summary earnings & valuation changes

The relatively large cuts to near-term commodity price forecasts result in sizeable downgrades to our earnings forecasts across the diversified peer group. Key points: The lack of changes to our iron ore deck means the earnings and NPV impact of our adjustments is smallest for RIO, followed by BHPB. In fact, BHPBs NPV rises marginally, reflecting the impact of the roll forward of our NPV to H114 and the move beyond BHPBs peak capex. GLEN XTA's downgrades are driven by its heavy exposure to Copper, Zinc and Nickel, where we have downgraded forecasts by 4-15% across our forecast horizon and which account for 63% of our (pre-adjustments) 2015E EBITDA. Although AAL's relative exposure to Copper and Nickel is smaller than for GLEN XTA, downgrades to our PGM price profile, as set out in our South African colleagues note Platinum Foresight: Producers' foundations cracking, time to overhaul strategy, and higher assumed cost inflation offset by weaker ZAR assumptions, mean it sees slightly higher earnings downgrades. The NPV impact is slightly lower than for GLEN XTA. VED sees the most significant near-term earnings downgrades, driven by a high exposure to Copper, Aluminium and Zinc (combined 65% & 46% of FY14E revenue & EBITDA respectively), all of which see forecast cuts, coupled with slightly higher D&A assumptions following FY13 results.
Table 3: Summary earnings and NPV changes
NPV (GBP) 18.18 23.43 4.23 44.92 16.21 vs prev -5.7% 0.2% -6.4% -0.5% -1.4% EBITDA (US$m, calendarised) vs vs prev 2014E prev 2015E -7.9% 9,116 -11.4% 9,825 -0.8% 35,704 -3.8% 37,182 -5.6% 15,944 -13.3% 18,632 1.2% 19,390 0.7% 20,148 -8.7% 6,339 -12.7% 7,041 vs prev -17.3% -4.0% -14.0% -1.7% -9.9% vs prev -11.7% -0.6% -10.3% 1.7% -47.2% EPS (USc, calendarised) vs 2014E prev 2015E 181 -17.6% 200 303 -5.0% 313 44 -22.8% 53 497 -1.4% 543 298 -27.3% 317 vs prev -26.3% -5.4% -23.2% -4.3% -23.3%
AAL BHPB GLEN RIO VED
2013E 8,492 32,352 12,876 18,725 4,985
2013E 174 276 33 507 127
Table 4: Traded UK diversified miner valuations Marked to Market (as on 24th May)
Price () 19.16 29.01 3.35 15.67 12.94 Mkt Cap ($m) 168,037 84,884 67,191 32,985 5,215 2013E 188.6 373.2 18.7 123.5 59.0 EPS (GBp/sh) 2014E 202.9 407.0 21.3 119.3 118.8 2015E 211.0 450.4 23.7 117.8 132.9 2013E 10.2x 7.8x 17.9x 12.7x 21.9x PER 2014E 9.4x 7.1x 15.7x 13.1x 10.9x 2015E 9.1x 6.4x 14.2x 13.3x 9.7x 2013E 6.0x 3.0x 9.5x 4.5x 7.0x EV/EBITDA 2014E 2015E 5.4x 5.0x 2.8x 2.7x 8.5x 7.3x 4.7x 4.7x 5.6x 4.6x 2013E 4.3% 3.3% 4.0% -3.7% 0.8% FCF Yield 2014E 7.2% 4.5% 5.2% -1.6% 18.3% 2015E 8.8% 10.3% 8.4% 3.6% 22.6%
BHPB RIO GLENXTA AAL VED
Table 5: Traded UK diversified miner valuations JPM base case forecasts (as on 24th May)
Price () 19.16 29.01 3.35 15.67 12.94 Mkt Cap ($m) 168,037 84,884 67,191 32,985 5,215 2013E 182.7 335.4 21.5 117.1 109.1 EPS (GBp/sh) 2014E 198.5 328.8 29.0 119.0 190.0 2015E 202.8 359.5 34.2 129.6 195.6 2013E 10.5x 8.6x 15.6x 13.4x 11.9x PER 2014E 9.6x 8.8x 11.6x 13.2x 6.8x 2015E 9.4x 8.1x 9.8x 12.1x 6.6x 2013E 6.1x 5.6x 9.0x 5.1x 6.2x EV/EBITDA 2014E 2015E 5.4x 5.0x 5.5x 5.3x 7.2x 5.8x 5.2x 5.1x 4.7x 3.7x 2013E 4.0% 1.4% 1.2% -5.1% 4.5% FCF Yield 2014E 7.2% 1.9% 5.6% -3.5% 24.4% 2015E 8.5% 7.2% 12.1% 2.9% 28.9%
BHPB RIO GLENXTA AAL VED
As shown in the charts below, the typical inverse relationship between commodity prices and producer currency exchange rates appears to be holding, with commodity price-related downgrades offset to an extent by FX-related upgrades. Particularly relevant for the peer group are the ZAR, which has weakened in the face of Eskom issues and labour unrest, and the AUD, where the impact of China slowing, dilution of the interest rate carry trade and slowing FDI in large resource projects have combined to drive a seemingly definitive move down through parity against the USD.
Figure 1: AAL commodity price vs FX earnings impact
7,500 7,110 7,000 6,500 492 6,000 5,500 5,000 EBIT FY'14
Figure 2: BHPB commodity price vs FX earnings impact

29,000 28,500 28,000 28,516
6,005
27,500 27,000
1,016
27,242
1,597 Commodities FX EBIT FY'14
26,500 26,000 EBIT FY'14

Figure 3: GLEN XTA commodity price vs FX earnings impact

12,500 12,000 11,500 11,000 10,500 10,000 9,500 9,000 EBIT FY'14
Figure 4: RIO commodity price vs FX earnings impact

15,000 14,500 14,000 14,410 852 14,507
12,303
410
9,844
13,500 13,000
755
EBIT FY'14
Commodities
FX
EBIT FY'14
Pecking order remains intact

The market typically trades the sector based on marked to market earnings, so our earnings downgrades are arguably already reflected in share prices. Nonetheless, valuations continue to look unchallenging across the group, with the shares trading at 15-35% discounts to the historical trading average. RIO is trading on a P/NPV of 0.65x, BHPB 0.82x, GLEN 0.79x, AAL 0.86x and VED 0.79x. Our pecking order remains intact, with Glencore Xstrata our top pick and Anglo American our least preferred. Despite our downgrades we estimate GLEN XTA will generate 36% of its market cap in cumulative FCF from 2013-16E or 55% by 2017, the best amongst the peer group. Volume growth is also strong, as shown in Figure 6, with most projects (although notably not Central African copper) largely de-risked and coming towards the end of their investment phase.
5
Figure 5: Cumulative FCF yield, GLEN & VED 55% & 129% by 2017E
140% 120% 100% 80% 60% 40% 20% 0% -20% 2013E
Figure 6: Cumulative Copper Equivalent volume growth

150 140 130 120 110 100
2014E GLEN XTA
2015E BHP RIO
2016E AAL
2017E VED
90 2012A
2013E GLEN XTA
2014E BHP
2015E RIO
2016E AAL
2017E VED
Further detail on the rationale for our relative rankings can be found within the relevant company sections towards the rear of this report, however in summary: GLEN XTA [OW, 420p/sh Jun-14 PT]: best-in-sector 55% cumulative FY1317E FCF yield coupled with differentiated message on capital allocation and high level of employee ownership make it our top pick. Key risks include project execution, particularly Central African copper, and the copper price; VED [OW, 1,540p/sh Jun-14 PT]: strong, non-commodity price investment case, with approvals on corporate restructuring seemingly imminent and likely to drive a re-rating as debt is distributed more sensibly through the structure. Valuation and FCF generation also look supportive; key risks include Indian government bureaucracy, particularly the risk of further delays to corporate restructuring approvals. Significant debt refinancing/repayement is required over the remainder of the year. RIO [OW, 4,520p/sh Jun-14 PT]: most under-appreciated FCF improvement story in the sector, with annual FCF yields of >12% by 2016, plus strong growth in the interim. Key risks include the iron ore price, further project approvals (Oyu Tolgoi phase II) and uninspiring messaging on capital allocation; BHPB [N, 2,300p/sh Jun-14 PT]: recent strong performance likely to continue as investors continue to appreciate strong messaging on cost and capital discipline plus the benefits of the most diversified asset portfolio of the peer group. Key risks would include capex approvals and an improvement in messaging from the peers. AAL [N, 1,820p/sh Jun-14 PT]: we continue to believe hope around Mark Cutifanis arrival at AAL will be enough to support performance heading into mid-year results. Longer-term, however, significant structural issues need to be addressed, including South African labour and power issues, the problem Minas Rio and Barro Alto projects, an uninspiring future growth pipeline and the broader question of South African exposure. Premium valuation and lack of growth does not help, in our view.
Commodity views base & precious metals

The following section includes data from the J.P. Morgan Commodity Research teams latest price update, released on 23rd May Metals Weekly Slower growth, lower price expectations. Recent downward revisions to economic growth forecasts in the JPM view translate to lower implied growth in global metals use. At the same time, fresh data on production and inventories lead to upward adjustments in our refined supply numbers, even as we maintain that market expectations are still somewhat too high. The net effect is to lower our expectations for average cash prices over the next 18 months, but still to project the evolution of cash prices to be generally upward from here. Moreover, long-dated prices continue to be well supported by high costs and, thus, significant investment hurdle requirements.
Copper
Key changes: 2013: Global demand growth cut from +3.9% to +3.7%, reflecting weaker Chinese import demand and global semi-fabricated product output year-to-date. Refined supply growth increased from +3.9% to +4.1%, primarily driven by an increase to the mine side where African output has exceeded expectations, even allowing for disruptions to established mines elsewhere. Balance moves from 143kt surplus to 307kt. 2014: Global demand growth cut from +4.9% to +3.9%, with China again the main driver, moving from +6.6% to +5.5%. Refined supply growth increased from +3.7% to +3.8%.
Table 6: Copper supply/demand balance
Source: Company Reports, Government and Industry data, WBMS, USGS, Exchanges, Wood Mackenzie, J.P. Morgan Commodities Research.
Aluminium
Key changes: 2013: Global demand growth cut from +7.4% to +6.4%, reflecting similar drivers as those outlined for copper above. Supply growth increased from +6.9% to +7.1%, primarily driven by faster than expected Chinese expansions. Balance moves from surplus of 681kt to 1.54Mt. 2014: Global demand growth cut from +7.5% to +7.2%. Supply increased from +7.3% to +7.4%. Balance goes to 1.75Mt from 411kt. Our improving price path therefore implies substantial capacity shutdowns going forward.
Table 7: Aluminium supply/demand balance
Nickel
Key changes: 2013: Balance moves from a 35kt surplus to 30kt. The major change is a 30kt cut to our nickel pig iron (NPI) production forecast in China, offset by increases to RoW primary nickel production. 2014: Balance goes from 36kt surplus to 22kt surplus.
Table 8: Nickel supply/demand balance
10
Zinc
Table 9: Zinc supply/demand balance
11
Commodity views coal

The following section contains an extract from the note We Update Our Coal Price Deck Ahead of The Q3 Coking Coal Negotiation by our global coal analyst team, led by our US colleague, John Bridges. Overall we have made no changes to our existing thermal coal price deck, which sees prices gently improve from the current ~$87/t to $95/t by the end 2013 then remaining at that level (in real terms) going forward. We have modestly cut our near-term coking coal (benchmark contract) forecasts to reflect the weak spot pricing environment (<$140/t) and recent commentary (McCloskey's Coal Report) around a likely $165/t Q3 settlement.
Table 10: International Coal Price Deck
CY12A Hard Coking new Hard Coking old %change Semi-soft Coking new Semi-soft Coking old %change Ratio to HCC PCI (low vol) new PCI (low vol) old %change Ratio to HCC
Q1'13 165
Q2'13 172 172
Q3'13 165 175 -5.7%
Q4'13 170 180 -5.6% 109 115 -5.6% 64% 134 137 -1.8% 79%
CY13E 168 173 -2.9% 108 111 -2.9% 64% 132 131 1.0% 79%
Q1'14 175 180 -2.8% 112 115 -2.8% 64% 138 139 -0.3% 79%
Q2'14 180 185 -2.7% 115 118 -2.7% 64% 142 142 -0.2% 79%
Q3'14 180 185 -2.7% 115 118 -2.7% 64% 142 144 -1.5% 79%
Q4'14 180 180 0.0% 115 115 0.0% 64% 142 142 0.0% 79%
CY14E 179 183 -2.1% 114 117 -2.1% 64% 141 142 -0.5% 79%
CY15E 190 190 0.0% 122 122 na 64% 150 148 1.3% 79%
LT '13$ 170 170 0.0% 110 110 0.0% 64% 135 135 0.0% 79%
209
165
106 134 106
110 110
106 112 -5.7% 64%
124 145 124
141 131 7.9%
130 133 -2.0% 79%
We Update Our Coal Price Deck Ahead of The Q3 Coking Coal Negotiation
While Chinese steel production remains strong, it is the outlier. Elsewhere, activity in the steel business has been weak and is depressing demand for coking coal in general and the better grades of coal in particular. Bloombergs estimate of the spot hard coking coal price has fallen to $139.50/t and expectations for the Q3 price settlement are deteriorating. We now expect the benchmark grade coal to settle at $165/t in Q3 compared with our earlier estimate for $175/t. We feel the coking coal market is performing in line with our view that cost saving would make PCI coal more popular as steelmakers looked for ways to use less hard coking coal. Whats been disappointing is steel production growth has slowed and steel prices have fallen back, forcing steelmakers to lower raw material costs. PCI coal is now trading at 79% of the price of hard coking coal This fits with the view expressed in our Global Coking Coal note from Dec12 that steel makers would react to the peak coking coal prices by looking for alternatives and PCI coal is a relatively simple way to use less coking coal. A$ strength has kept US coking coal exporters in the market The extended strength in the A$ kept the price of Australian coking coal high and allowed US miners to export their coking coal at elevated levels. The break lower in the A$ is likely to make Australian HCC more competitive in the seaborne market
12
and together with (almost) forced sales of Mongolian coking coal from the TT Erdenes mine could be contributing to the very low spot price for excess coal. After several years of acute cost inflation, Australian miners are targeting aggressive cost reductions BHPB is showcasing its Queensland operations next week, with the key focus likely to be on cost reduction measures. Unit costs should begin to fall with capacity utilisation rising, new projects ramping up, and the A$ now falling. Assuming demand remains subdued, this could force other higher cost suppliers, such as US miners, to trim sales. The spot market is a useful directional leading indicator for coking coal prices However, the transaction price must make sense for both parties. Consequently, we feel that the Q3 settlement is likely to be around $165/t not the current spot level of $139.50. Yet the longer the spot price remains at this low level the greater the downward pressure. We suspect BHPBs mine visits next week will be watched closely by the worlds coking coal industry since greater volumes from these mines would likely force others to shut in capacity.
13
Anglo American
Neutral
Company Data Price (p) Date Of Price Price Target (p) Price Target End Date 52-week Range (p) Mkt Cap ( bn) Shares O/S (mn) Anglo American (AAL.L;AAL LN) FYE Dec 2011A 1,557 24 May 13 1,820 30 Jun 14 2,215 - 1,507 18.8 1,206 Adj. EPS FY ($) Revenue FY ($ mn) EBITDA FY ($ mn) EBITDA margin FY EBIT FY ($ mn) EBIT margin FY Bloomberg EPS FY ($) EV/EBITDA FY 4.99 36,548 13,275 36.3% 10,975 30.0% 4.73 2.6 2012A 2.26 32,786 8,685 26.5% 6,164 18.8% 1.92 4.0 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
1.97 37,021 9,222 24.9% 7,290 19.7% 4.7
1.77 35,749 8,596 24.0% 6,685 18.7% 2.31 4.8
2.20 38,822 10,290 26.5% 7,740 19.9% 4.6
1.82 37,049 9,116 24.6% 6,611 17.8% 2.80 4.9
Source: Company data, Bloomberg, J.P. Morgan estimates.
We upgraded our recommendation on Anglo American from Underweight to Neutral on April 14th. We based the upgrade on a view that, with Mark Cutifani having just got into the hot seat and 1-year performance having been so dire (>30% underperformance against the key peers), that the "hope trade" on better messaging would provide some support through H1. Year-to-date performance has been in line with RIO, however the shares have continued to notably underperform BHPB and GLEN XTA. Longer-term, the challenges appear to be piling up in Mr Cutifanis inbox: addressing chronic labour and power issues in South Africa; coming up with a credible plan to create value at Minas Rio and Barro Alto; re-invigorating the development pipeline, which is currently skewed towards PGM and Metallurgical Coal projects, in the context of a balance sheet that is adding rather than reducing leverage over coming years; and, ultimately, deciding on an appropriate strategy with respect to Amplats. As shown in Figure 7, the majority of our FY13 downgrade is driven by the iron ore division, specifically Kumba. Despite no changes to our underlying iron ore price forecasts, we have taken this opportunity to adjust our production forecasts to reflect the ongoing impact of strike action at Sishen during Q1, causing us to drop our production forecast by ~3Mt to 47Mt. We have also adjusted sales to reflect planned restocking and pushed our unit cost inflation forecast up from +5% to +10%. Copper price downgrades are offset by a reduction to assumed unit costs at Collahuasi, in line with the estimates we use for the JV partners. In FY14E, downgrades are dominated by copper due to our lower price forecast and by the unit cost impact in 2013 rolling forward.
14
Figure 7: Impact of price and FX changes on FY13E EBIT

7,900 7,700 7,500 7,300 7,100 6,900 6,700 6,500 6,300 6,100 7,290 6,685
Figure 8: Impact of price and FX changes on FY14E EBIT

7,900 7,700 7,500 7,300 7,100 6,900 6,700 6,500 6,300 6,100 7,740
6,611
AAL trades on spot PERs of 12.7x/13.1x for FY13/14E respectively, a 41/58% premium to the peer group. Our base case P/NPV of 0.86x is more attractive than has previously been the case, but the company continues to screen at a premium to all other peers and arguably still faces unresolved structural challenges. We retain our Neutral recommendation, although AAL is still our least preferred exposure in the diversified peer group.
Table 11: J.P. Morgan changes to AAL forecasts
Old 33,188 9,222 7,290 197.0 89.3 6,466 -7,772 -12,895 1,928 425 747 1,909 45 3,376 299 744 165 -211 -208 0 7,290 FY13E New 32,015 8,596 6,685 177.0 87.1 6,153 -7,772 -13,058 1,819 396 747 1,882 -27 2,869 331 740 165 -211 -208 0 6,685 Change -4% -7% -8% -10% -2% -5% 0% 1% -6% -7% 0% -1% -160% -15% 11% 0% 0% 0% 0% 0% -8% Old 34,895 10,290 7,740 220.2 93.7 6,605 -6,932 -16,057 616 807 2,542 143 2,741 430 813 78 -216 -213 0 7,740 FY14E New 33,187 9,116 6,611 181.5 89.3 5,846 -6,932 -16,685 458 807 2,042 4 2,383 495 774 78 -216 -213 0 6,611 Change -5% -11% -15% -18% -5% -11% 0% 4% n/a -26% 0% -20% -97% -13% 15% -5% 0% 0% 0% 0% -15% Old 37,652 11,880 9,181 271.0 98.4 7,425 -5,121 -16,944 1,676 870 3,043 134 2,304 605 853 136 -222 -219 0 9,181 FY15E New 35,121 9,825 7,170 200.0 91.5 6,145 -5,121 -18,346 693 870 2,456 23 1,977 702 755 136 -222 -219 0 7,170 Change -7% -17% -22% -26% -7% -17% 0% 8% n/a -59% 0% -19% -83% -14% 16% -12% 0% 0% 0% 0% -22%
Revenue EBITDA Operating profit EPS DPS CFO Capex Net cash/(debt) NPV Divisional operating profit Platinum Diamonds Copper Nickel Iron ore & manganese Met coal Thermal coal Other mining & industrial Exploration Corporate activities Other Total
US$m US$m US$m USc/sh USc/sh US$m US$m US$m GBp/sh US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m
Source: J.P. Morgan estimates. Note: new 2013 NPV refers to June-14 NPV.
15
Figure 9: AAL FY13E EBITDA breakdown

Diamonds / Minerals, 13% Copper, 27%
Figure 10: AAL FY13E earnings sensitivities

Rand/US$ A$/US$ Hard coking coal Iron ore Thermal Coal PGM Nickel Copper -15%
9% -4% 4% 7% 6% 5% 2% 9% -10% -5% 0% 5% 10% 15%
Iron ore, 35%
Coking coal, 8% Thermal coal, 11%
PGM, 6%
Investment Thesis, Valuation and Risks Anglo American (Neutral; Price Target: 1,820p)
Investment Thesis We maintain our Neutral recommendation on Anglo American as we believe that after a period of protracted underperformance the combination of an emerging selfhelp story and the arrival of new CEO Mark Cutifani will be enough to reverse the weakness as market anticipation of improvement in the business is heightened. We do recognise however that sustained outperformance is likely to be limited by AALs expensive relative valuation to diversified peers. Valuation Our 18.20/sh Jun-14 PT for AAL is based on 1x our mid-14E NPV forecast for the company, in line with historical multiples. The cut to our price target is driven by a reduction in our NPV caused by cuts to our commodity price forecasts. We believe P/NPV multiples more accurately reflect the drivers of long-term share price performance. Risks to Rating and Price Target Specific upside risk essentially comes from any improvement in perceived South African risks, or indeed any increase in price in commodities where Anglo has unique exposure, such as diamonds or PGMs. A fundamental reassessment of the company strategy or a thorough restructuring of the Platinum business could lead shares of AAL to outperform. Besides that, the risks are essentially the same as for the rest of the sector (commodity prices, currencies, fiscal regimes). On the downside, outside of the inevitable industry-related risks of lower than expected commodity prices or demand, we anticipate that AALs gearing will rise to >25% by 2015 while RIO and BHPB are de-gearing and so the company will need to be cautious to avoid facing an overburdened balance sheet. Furthermore, if the operating environment in South Africa were to suddenly deteriorate the stock would see major underperformance as the country accounts for c.50% of earnings. Finally, a lack of progress in H113 in delivering a convincing strategy or finding a partner for Minas Rio is likely to be seen a disappointment by the market, significantly weighing upon the share price
16
Anglo American: Summary of Financials

Profit and Loss Statement $ in millions, year end Dec Revenues % Change Y/Y Gross Margin (%) EBITDA % Change Y/Y EBITDA Margin (%) EBIT % Change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net Income (Reported) % change Y/Y Shares Outstanding EPS (Reported) % Change Y/Y EPS (ZARc) Balance sheet $ in millions, year end Dec Cash and cash equivalents Accounts Receivable Inventories Others Current assets Net fixed assets Total assets ST loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Shareholders' equity BVPS FY12 32,786 -10.3% 8,685 -34.6% 26.5% 6,164 -43.8% 18.8% (377) -239 -102.2% (375) (156.8%) (1,493) -124.5% 1,254.0 -1.19 (123.6%) 1,858 FY12 9,094 3,275 5,005 571 18,047 79,369 2,604 4,536 4,267 8,803 15,150 10,710 35,582 43,787 35 FY13E 35,749 9.0% 8,596 -1.0% 24.0% 6,685 8.4% 18.7% (397) 5,307 -2318.7% (1,854) 31.0% 1,808 -221.1% 1,284.0 1.41 (218.2%) 1,595 FY13E 4,696 3,763 4,937 571 14,069 82,081 2,604 5,903 4,267 10,170 15,150 10,710 36,949 44,986 35 FY14E 37,049 3.6% 9,116 6.0% 24.6% 6,611 -1.1% 17.8% (658) 5,347 0.8% (1,709) 31.0% 2,216 22.6% 1,284.0 1.73 22.6% 1,673 FY14E 1,069 3,900 5,079 571 10,721 83,608 2,604 6,072 4,267 10,339 15,150 10,710 37,118 46,414 36 Cash flow statement FY15E $ in millions, year end Dec 39,106 EBIT 5.6% Depreciation & amortization - Change in working capital 9,825 Taxes 7.8% Cash flow from operations 25.1% 7,170 Capex 8.5% Disposals/(purchase) 18.3% Net Interest (863) Free cash flow 5,672 6.1% Equity raised/repaid (1,810) Debt Raised/repaid 31.0% Other 2,453 Dividends paid 10.7% Beginning cash 1,284.0 Ending cash 1.91 DPS 10.7% DPS (ZARc) 1,935 Ratio Analysis FY15E $ in millions, year end Dec (592) EBITDA margin 4,116 Operating margin 5,324 Net Profit margin 571 SG&A/Sales 9,521 Sales per share growth - Sales growth 85,357 Net profit growth EPS growth 2,604 6,366 Interest coverage (x) 4,267 Net debt to Total Capital 10,633 Net debt to equity 15,150 Sales/assets (x) 10,710 Assets/Equity 37,412 ROE 47,941 ROCE 37 FY12 6,164 2,521 (527) (1,799) 7,021 (5,607) (4,716) (496) (666) 24 4,886 (970) 11,732 9,312 85.00
698
FY13E 6,685 1,912 947 (1,854) 8,185 (7,772) (452) (397) (1,690) 0 0 (1,067) 9,312 4,696 87.13
785
FY14E 6,611 2,506 (109) (1,709) 7,953 (6,932) 0 (658) (1,156) 0 0 (1,129) 4,696 1,069 89.30
823
FY15E 7,170 2,654 (169) (1,810) 8,537 (5,121) 0 (863) 953 0 0 (1,157) 1,069 -592 91.54
886
FY12 26.5% 18.8% NM -13.4% -10.3% -124.5% (123.6%) 16.4 15.2% 16.9% 0.4 1.8 7.4% 12.1%
FY13E 24.0% 18.7% 5.1% 6.5% 9.0% -221.1% (218.2%) 16.8 23.8% 24.7% 0.4 1.8 6.1% 11.5%
FY14E 24.6% 17.8% 6.0% 3.6% 3.6% 22.6% 22.6% 10.1 30.4% 30.0% 0.4 1.8 6.3% 10.4%
FY15E 25.1% 18.3% 6.3% 5.6% 5.6% 10.7% 10.7% 8.3 33.3% 31.3% 0.5 1.8 6.9% 10.6%
Source: Company reports and J.P. Morgan estimates.
17
Anglo American (AGLJ.J)

Underweight
Company Data Price (c) Date Of Price Price Target (c) Price Target End Date 52-week Range (c) Mkt Cap (R bn) Shares O/S (mn) Anglo American (AGLJ.J) (AGLJ.J;AGL SJ) FYE Dec 2011A 2012E 22,635 24 May 13 26,615 30 Jun 14 29,145 21,329 273.0 1,206
(Prev)
2012E
(Curr)
2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
Adj. EPS FY ($) Revenue FY ($ mn) EBITDA FY ($ mn) EBITDA margin FY EBIT FY ($ mn) EBIT margin FY EV/EBITDA FY EPS (ZARc) FY DPS (ZARc) FY
5.04 36,548 13,275 36.3% 10,975 30.0% 3,650 -
1.93 32,015 8,296 25.9% 5,887 18.4% 5.2 1,590 -
(1.19) 32,786 8,685 26.5% 6,164 18.8% (977) -
1.74 35,489 8,829 24.9% 6,238 17.6% 5.5 1,501 -
1.41 35,749 8,596 24.0% 6,685 18.7% 1,269 -
2.38 38,752 10,397 26.8% 7,661 19.8% 4.9 2,044 -
1.73 37,049 9,116 24.6% 6,611 17.8% 1,590 -
See investment comments above on Anglo American Plc
Investment Thesis, Valuation and Risks Anglo American (AGLJ.J) (Underweight; Price Target: 26,615c)
Investment Thesis We assign an Underweight rating to shares of AGL due primarily to 1) full valuation (c.10% premium to BIL on spot PERs, 25% on P/NPV) and 2) potential negative catalysts including further labour unrest in S Africa and disappointment on the Platinum review in 113, plus a greater risk to its dividend that BIL. Valuation Our R266/sh Jun-14 PT for AGL is based on 1x our revised year end NPV forecast for the company, in line with historical multiples. We believe P/NPV multiples more accurately reflect the drivers of long-term share price performance. Risks to Rating and Price Target Specific upside risk essentially comes from any improvement in perceived South African risks, or indeed any increase in prices in commodities where Anglo has unique exposure, such as diamonds or PGMs. Moreover, a thorough restructuring of the Platinum business could potentially lead to outperformance. Besides that, the risks are essentially the same as for the rest of the sector (commodity prices, currencies, fiscal regimes).
18
Anglo American (AGLJ.J): Summary of Financials

Profit and Loss Statement $ in millions, year end Dec Revenues % Change Y/Y EBITDA % Change Y/Y EBITDA Margin (%) EBIT % Change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net Income (Reported) % change Y/Y Shares Outstanding Minorities EPS (Reported) % Change Y/Y EPS (ZARc) Balance sheet $ in millions, year end Dec Cash and cash equivalents Accounts Receivable Inventories Current assets Fixed Assets Total assets
a
Cash flow statement FY11 FY12E FY13E FY14E $ in millions, year end Dec 36,548 32,786 35,749 37,049 EBIT 11.0% -10.3% 9.0% 3.6% Depreciation & amortization 13,275 8,685 8,596 9,116 Change in working capital 11.3% -34.6% -1.0% 6.0% Taxes 36.3% 26.5% 24.0% 24.6% Cash flow from operations 10,975 6,164 6,685 6,611 12.1% -43.8% 8.4% -1.1% Capex 30.0% 18.8% 18.7% 17.8% Disposals/(purchase) (695) (798) (925) (925) Net Interest 978 493 378 449 Free cash flow 15.7% -49.6% -23.3% 18.8% - Equity raised/repaid (286000.0%) (37500.0%) (185409.3%) (170932.8%) Debt Raised/repaid (1,753) (879) (1,645) (1,422) Dividends paid 11.3% -49.9% 87.2% -13.5% Beginning cash -47.0 -5,760.0 -673.7 -166.5 Ending cash 7,846 (614) 3,453 3,638 DPS 5.04 -1.19 1.41 1.73 DPS (ZARc) (7.8%) (123.6%) (218.2%) 22.6% 3,650 (977) 1,269 1,590 Ratio Analysis FY11 FY12E FY13E FY14E $ in millions, year end Dec - P/E 3,674 3,275 3,763 3,900 Net Profit margin 3,517 5,005 4,937 5,079 379 571 571 571 Sales per share growth Sales growth 2,896 2,278 2,730 2,730 Net profit growth 72,442 79,369 82,081 83,608 EPS growth
8,178 8,803 10,170 10,339 Interest coverage (x)
FY11 10,975 (1,694) 11,422 24,856 8,829 (6,203) 8,883 -
FY12E 6,164 (1,137) 7,021 16,233 5,012 (5,607) 5,222 -
FY13E FY14E 6,685 6,611 (1,359) (1,054) 8,185 7,953 15,834 17,179 6,153 5,846 (7,772) (6,932) 6,331 6,244 (8,295) (7,003) 0 0 (452) 0 -13,058 -16,685 9,312 4,696 0.00 0.00
-
(5,203) (10,100) -347 24 533 (4,716) -1,374 -8,442 6,460 11,732 0.00 0.00
-
FY11 4.7 NM
FY12E NM NM
FY13E FY14E 16.8 13.7 NM NM
-4147.6% -99.3% 832.2% 319.4% 11.0% -10.3% 9.0% 3.6% 11.3% -49.9% 87.2% -13.5% (7.8%) (123.6%) (218.2%) 22.6% 15.8
-
ST loans Payables Total current liabilities Long term debt Total liabilities Shareholders' equity BVPS
7.7
-
7.2
-
7.1
-
5,098 8,178 1,018 29,253 43,189 (1)
4,536 8,803 2,604 35,582 43,787 (0)
5,903 10,170 2,604 36,949 44,986 (0)
6,072 10,339 2,604 37,118 46,414 (0)
Dividend Yields Net debt to equity Assets/Equity EV/EBITDA P/BV ROE ROCE
2.9% 1.7
16.9% 1.8
24.7% 1.8
-579.0
30.0% 1.8
-142.0
-45.6 -11,122.8
19
BHP Billiton
Neutral
Company Data Price (p) Date Of Price Price Target (p) Price Target End Date 52-week Range (p) Mkt Cap ( bn) Shares O/S (mn) BHP Billiton (BLT.L;BLT LN) FYE Jun 2011A 1,923 24 May 13 2,300 30 Jun 14 2,252 - 1,651 40.6 2,112 Adj. EPS FY ($) Revenue FY ($ mn) EBITDA FY ($ mn) EBITDA margin FY EBIT FY ($ mn) EBIT margin FY Adj P/E FY DPS (Gross) FY (p) 4.07 71,739 37,093 51.7% 31,980 44.6% 7.1 101.0 2012A 3.21 72,226 33,746 46.7% 27,238 37.7% 9.1 112.0 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
2.40 67,118 28,883 43.0% 21,814 32.5% 12.1 116.0
2.41 66,912 28,918 43.2% 21,883 32.7% 12.1 116.0
2.92 75,349 34,481 45.8% 26,292 34.9% 10.0 124.0
2.83 73,188 33,543 45.8% 25,519 34.9% 10.3 124.0
BHP Billiton has outperformed the peer group (excl-VED) over the past month, demonstrating typical defensive qualities in difficult market conditions, but also reflecting the companys strong messaging on cost and capital discipline relative to the peer group. We expect this to continue in the medium term, with asset disposal potential better than at the majority of the competitors and major additional capex approvals, for example on Jansen, likely to be pushed further down the road, leaving the FCF profile to improve as capex requirements taper off. Longer-term, however, FCF yield reaches a plateau at 8-9% pa, lower than several of the peers, constraining management with respect to capital allocation to a greater degree than the peer group. Downgrades are dominated by the Base Metals (copper) division, driven by our cuts to copper price forecasts in both years. Nickel and Aluminium also suffer downgrades for FY14, although slightly lower cost assumptions in FY13 see a small upgrade to Aluminium EBIT. The remainder of the divisions, including the key Iron Ore division, see modest upgrades, driven by our lower AUD forecasts that benefit the cost side of the profit equation.
Figure 11: Impact of price and FX changes on FY13E EBIT ($m)
21,950 21,900 21,850 21,800 21,750 21,700 21,650 21,600 21,550 21,500
Figure 12: Impact of price and FX changes on FY14E EBIT ($m)

26,500 26,000 25,500 25,000 24,500 24,000 23,500
BHPB trades on spot PERs of 10.2x/9.4x for FY13/14E, a30% premium to RIO. Our base case P/NPV of 0.82x is more attractive than has previously been the case, but also continues to trade at a premium to the peer group. While we recognise the attraction of the companys stronger messaging on cost and capital discipline, we
20
retain the view that better longer-term cashflow generation is available elsewhere in the sector and therefore keep our Neutral recommendation.
Table 12: J.P. Morgan changes to BHPB forecasts
Old 69,503 28,883 21,814 240 116 18,003 -21,802 -28,144 2,339 6,338 -230 4,107 -104 -137 10,935 481 13 -461 21,814 FY13E New 69,297 28,918 21,883 241 116 18,038 -21,767 -28,074 2,343 6,320 -194 3,980 -104 -197 11,019 503 78 -457 21,883 Change 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% -16% -3% 0% 43% 1% 5% 518% -1% 0% Old 75,899 34,481 26,292 292 124 24,444 -16,907 -25,991 9,184 93 5,638 0 39 9,350 392 925 -796 26,292 FY14E New 73,738 33,543 25,519 283 124 23,587 -16,711 -26,582 9,093 -34 4,792 0 -431 9,720 479 983 -781 25,519 Change -3% -3% -3% -3% 0% -4% -1% 2% -1% -136% -15% n/a -1194% 4% 22% 6% -2% -3% Old 82,600 38,887 29,904 335 132 27,499 -13,723 -18,025 10,570 582 6,751 0 194 9,419 384 1,236 -809 29,904 FY15E New 80,008 37,371 28,530 318 132 26,434 -13,573 -19,532 10,486 305 5,358 0 -273 9,752 465 1,426 -796 28,530 Change -3% -4% -5% -5% 0% -4% -1% 8% -1% -47% -21% n/a -241% 4% 21% 15% -2% -5%
Revenue EBITDA Operating profit EPS DPS CFO Capex Net cash/(debt) NPV Divisional EBIT Petroleum Aluminium Base metals Diamonds & specialty Stainless steel materials Iron ore Manganese Metallurgical coal Energy coal Total EBIT
US$m US$m US$m USc/sh USc/sh US$m US$m US$m GBp/sh US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m
Figure 13: BHPB FY13E EBITDA breakdown

Copper, 17% Aluminium, 1% Coking coal, 2% Thermal coal, 5%
Figure 14: BHPB FY13E earnings sensitivities

Rand/US$ A$/US$ Hard coking coal Iron ore WTI / Brent Thermal Coal Nickel Copper Alumina/Aluminium 1% 3% 2% -10% -5% 0% 5% 10% 15% 3% 1% -5% 2% 6% 1%
Petroleum, 33%
Nickel, 1% Iron ore, 43%

-15%
Investment Thesis, Valuation and Risks BHP Billiton (Neutral; Price Target: 2,300p)
Investment Thesis While the BHPB shares trade at a discount to our NPV, we maintain our Neutral recommendation and preference for RIO in the diversified mining space given what we see as the latters compelling long-term valuation support, organic growth profile and continued strong cash generation. We recognise that the volume growth outlook for BHP Billiton over the next 3-5 years is strong; however, a large component of that growth is coming from the recently acquired US shale gas assets, where long-term value remains to be proved,
21
so the relative growth argument is not enough in isolation for us to change our preference Valuation Our Jun-14 price target for BHP Billiton Plc of 23.00/sh is based on our year-end NPV, to which we apply a 1x multiple, in line with the methodology on the other diversifieds. The cut to our price target is driven by a reduction in our NPV caused by cuts to our commodity price forecasts. We believe P/NPV multiples more accurately reflect the drivers of long term share price performance than near term earnings multiples. Risks to Rating and Price Target There is little, in our view, that could affect BHP Billiton outside the normal risks attached to the mining sector in general. Upside risks could come from higher-thanexpected commodity prices where the company has unique exposure (coking coal and oil). Similarly, downside risk could come from lower-than-expected oil and coking coal prices. While we believe the companys balance sheet is solid, we think it offers less flexibility than that of RIO.
22
BHP Billiton: Summary of Financials

Profit and Loss Statement $ in millions, year end Jun Revenues % Change Y/Y Gross Margin (%) EBITDA % Change Y/Y EBITDA Margin (%) EBIT % Change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net Income (Reported) % change Y/Y Shares Outstanding EPS (Reported) % Change Y/Y EPS (ZARc) Balance sheet $ in millions, year end Jun Cash and cash equivalents Accounts Receivable Inventories Others Current assets Net fixed assets Total assets ST loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Shareholders' equity BVPS FY12 72,226 0.7% 33,746 -9.0% 46.7% 27,238 -14.8% 37.7% (730) 26,508 -15.6% 35.0% 5,336.6 2.89 (35.0%) 2,492 FY12 4,781 7,704 6,233 1,451 12,024 3,668 24,799 67,085 FY13E 66,912 -7.4% 28,918 -14.3% 43.2% 21,883 -19.7% 32.7% (1,369) 20,514 -22.6% 36.6% 5,336.6 2.40 (17.1%) 2,107 FY13E 7,411 8,319 7,082 1,799 9,842 3,335 31,835 76,445 FY14E 73,188 9.4% 33,543 16.0% 45.8% 25,519 16.6% 34.9% (1,535) 23,984 16.9% 36.4% 5,336.6 2.83 18.0% 2,559 FY14E 8,903 8,845 7,529 1,799 10,354 3,335 31,835 85,682 Cash flow statement FY15E $ in millions, year end Jun 79,458 EBIT 8.6% Depreciation & amortization - Change in working capital 37,371 Taxes 11.4% Cash flow from operations 47.0% 28,530 Capex 11.8% Disposals/(purchase) 35.9% Net Interest (1,395) Free cash flow 27,134 13.1% Equity raised/repaid - Debt Raised/repaid 36.8% Other - Dividends paid - Beginning cash 5,336.6 Ending cash 3.18 DPS 12.6% DPS (ZARc) 3,002 Ratio Analysis FY15E $ in millions, year end Jun 15,953 EBITDA margin 9,525 Operating margin 8,108 Net Profit margin 1,799 SG&A/Sales Sales per share growth - Sales growth - Net profit growth EPS growth 10,950 Interest coverage (x) 3,335 Net debt to Total Capital - Net debt to equity 31,835 Sales/assets (x) - Assets/Equity - ROE 96,759 ROCE FY12 27,238 6,508 (8,337) 33,746 (20,837) (11,199) (588) 5,999 (385) 8,827 (5,933) 870
FY13E 21,883 7,035 (7,812) 28,918 (21,767) 5,822 (944) (2,208) (309) 6,836 (6,107) 1,015
FY14E 25,519 8,024 (8,359) 33,543 (16,711) 1,020 (1,598) 8,392 0 0 (6,404) 1,123
FY15E 28,530 8,841 (9,451) 37,371 (13,573) 1,020 (1,486) 14,376 0 0 (6,831) 1,246
FY12 46.7% 0.4% 0.7% (35.0%) 37.3 34.5% -
FY13E 43.2% -7.4% -7.4% (17.1%) 16.0 36.1% -
FY14E 45.8% 9.4% 9.4% 18.0% 16.6 30.6% -
FY15E 47.0% 8.6% 8.6% 12.6% 20.4 19.9% -
23
BHP Billiton (BILJ.J)

Neutral
Company Data Price (c) Date Of Price Price Target (c) Price Target End Date 52-week Range (c) Mkt Cap (R bn) Shares O/S (mn) BHP Billiton (BILJ.J) (BILJ.J;BIL SJ) FYE Jun 2010A 2011A 27,845 24 May 13 33,300 30 Jun 14 31,156 21,921 1,512.9 5,433 Adj. EPS FY (c) Revenue FY (R mn) EBITDA FY (R mn) EBITDA margin FY EBIT FY (R mn) EBIT margin FY EPS (ZARc) FY DPS (ZARc) FY 2012A 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
1,699 2,839 2,492 2,085 2,107 2,527 2,559 400,481 500,103 561,228 583,625 585,506 651,772 662,778 185,670 258,581 262,222 251,150 253,045 298,258 303,759 46.4% 51.7% 46.7% 43.0% 43.2% 45.8% 45.8% 149,572 222,937 211,651 189,681 191,485 227,426 231,092 37.3% 44.6% 37.7% 32.5% 32.7% 34.9% 34.9% 1,699 2,839 2,492 2,085 2,107 2,527 2,559 660 704 870 1,009 1,015 1,073 1,123
See investment comments above on BHP Billiton Plc
Investment Thesis, Valuation and Risks BHP Billiton (BILJ.J) (Neutral; Price Target: 32,540c)
Investment Thesis While shares of BHPB trade at a discount to our NPV, we maintain our Neutral recommendation given continued uncertainty in the macroeconomic outlook, despite signs of improvement. BIL management will need to deliver on operational improvements and cost reductions before a meaningful rerating takes place. We recognise that the volume growth outlook for BHP Billiton over the next 3-5 years is strong; however, a large component of that growth is coming from the recently acquired US shale gas assets where long-term value remains to be proved, so the relative growth argument is not enough in isolation for us to change our preference. Valuation Our Jun-14 price target for BHP Billiton Plc of R325.4/sh is based on our year-end NPV, to which we apply a 1x multiple, in line with the methodology used on the other diversifieds. The cut to our price target is driven by a reduction in our NPV caused by cuts to our commodity price forecasts. We believe P/NPV multiples more accurately reflect the drivers of long-term share price performance than near-term earnings multiples. Risks to Rating and Price Target There is little, in our view, that could affect BHP Billiton outside the normal risks attached to the mining sector in general. Upside risks could come from higher-thanexpected commodity prices where the company has unique exposure (coking coal and oil). Similarly, downside risk could come from lower-than-expected oil and coking coal prices. While we believe the companys balance sheet is solid, we think it offers less flexibility than that of RIO.
24
BHP Billiton (BILJ.J): Summary of Financials

Profit and Loss Statement R in millions, year end Jun Revenues % Change Y/Y EBITDA % Change Y/Y EBITDA Margin (%) EBIT % Change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net Income (Reported) % change Y/Y Shares Outstanding Minorities EPS (Reported) % Change Y/Y EPS (ZARc) Balance sheet R in millions, year end Jun Cash and cash equivalents Accounts Receivable Inventories Current assets Fixed Assets Total assets
a
FY12 561,228 12.2% 262,222 1.4% 46.7% 211,651 -5.1% 37.7% (5,672) 205,979 -6.0% 35.0% 5,336.6
(894)
FY13E 585,506 4.3% 253,045 -3.5% 43.2% 191,485 -9.5% 32.7% (11,976) 179,509 -12.9% 36.6% 5,336.6
(1,392)
FY14E 662,778 13.2% 303,759 20.0% 45.8% 231,092 20.7% 34.9% (13,899) 217,193 21.0% 36.4% 5,336.6
(1,447)
2,492 FY12 37,151 59,864 48,433 740,112 -
2,107 FY13E 64,849 72,796 61,969 886,339 -
2,559 FY14E 80,624 80,098 68,186 982,209 -
Equity raised/repaid Debt Raised/repaid Dividends paid Beginning cash Ending cash (1,554) DPS - DPS (ZARc) 3,002 Ratio Analysis FY15E R in millions, year end Jun 150,533 P/E 89,876 Net Profit margin 76,509 - Sales per share growth Sales growth 1,053,797 Net profit growth - EPS growth
- Interest coverage (x)
FY15E 749,767 13.1% 352,631 16.1% 47.0% 269,206 16.5% 35.9% (13,165) 256,041 17.9% 36.8% 5,336.6
Cash flow statement R in millions, year end Jun EBIT Depreciation & amortization Change in working capital Taxes Cash flow from operations Capex Disposals/(purchase) Net Interest Free cash flow
FY12 211,651 50,570 (64,782) 262,222 (161,913) (87,021) (4,569) 46,615 (2,992) 68,590 (46,102) 870
FY13E 191,485 61,560 (68,359) 253,045 (190,470) 50,942 (8,260) (19,320) (2,704) 59,818 (53,438) 1,015
FY14E 231,092 72,667 (75,694) 303,759 (151,333) 9,241 (14,468) 75,992 0 0 (57,992) 1,123
FY15E 269,206 83,425 (89,178) 352,631 (128,080) 9,629 (14,021) 135,657 0 0 (64,456) 1,246
FY12 11.9% 12.2% 37.3

-
FY13E 4.3% 4.3% 16.0

-
FY14E 13.2% 13.2% 16.6

-
FY15E 13.1% 13.1% 20.4

-
ST loans Payables Total current liabilities Long term debt Total liabilities Shareholders' equity BVPS
93,432 192,699 521,280 0
86,123 278,571 668,928 0
93,760 288,292 775,923 0
103,321 300,396 913,019 0
Dividend Yields Net debt to equity Assets/Equity EV/EBITDA P/BV ROE ROCE
34.5% 191,232.6
36.1% 169,815.6
30.6% 164,089.5
19.9% 157,477.4
25
Glencore Xstrata plc

Overweight
Company Data Price (p) Date Of Price Price Target (p) Price Target End Date 52-week Range (p) Mkt Cap ( bn) Shares O/S (mn) Glencore Xstrata plc (GLEN.L;GLEN LN) FYE Dec 2012A 2013E 332 24 May 13 420 30 Jun 14 392 - 284 44.0 13,264
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
2015E
(Prev)
2015E
(Curr)
Adj. EPS FY ($) Revenue FY ($ mn) Adj EBITDA FY ($ mn) Adj EBITDA Margin FY EBIT FY ($ mn) Net Att. Income FY ($ mn) EPS Reported FY ($) DPS (Net) FY (p)
0.00 36.42 32.44 57.37 44.16 68.83 52.70 236,091 265,112 260,886 296,348 286,785 311,307 301,229 12,952 13,634 12,834 18,400 15,944 21,661 18,632 5.5% 5.1% 4.9% 6.2% 5.6% 7.0% 6.2% 7,531 7,958 7,243 12,303 9,844 15,033 11,998 5,599 4,814 4,288 7,610 5,857 9,130 6,990 0.00 39.11 35.21 61.79 48.55 74.55 58.29 13.40 13.40 13.83 13.83 14.18 14.18
Despite copper and nickel driven FY13/14 EPS downgrades of 11/23%, GLEN remains our most preferred UK diversified. In our view, GLEN offers sector-leading capital returns potential due to best in sector FCF, combined with explicit and conservative capital allocation messaging. We forecast $24bn 2013-16 cumulative FCF ($27bn previously or $20bn on spot), equivalent to 34% its current market cap (28% on spot) versus BHPB in second place at 29% its market cap. GLEN is owned 37% by staff (25.9% by the top 13 senior managers) and management has stated that new projects must justify a 20-25% RoE otherwise excess cash will be returned to shareholders. GLEN trades at a75/60% premium to peers on 16.3/12.0x PER FY13E/14E on JPMe or on mark to market multiples of 18.5/16.3x PER FY13E/14E. We believe our base case 0.80x P/NPV more accurately captures GLENs best in sector earnings growth (85% growth 2013-16 on JPMe, or 39% on spot). We also consider an upfront PER premium is justified by Marketing, which JPMe will deliver 70-75% cash conversion on steady EBIT of ~$3bn pa, plus underappreciated synergies that we estimate could exceed $1.0bn pa in total (JPMe $610m across 2014-16). We estimate preferential price risk for copper, zinc and coal versus iron ore and PGMs. The key risks to GLENs equity rating are: i) copper price as copper is ~35% EBITDA JPMe; and ii) execution of its Industrial pipeline, with Central African Coppers expansion from 279kt FY12 to >600kt by FY15 most susceptible to delays or disappointments, in our view.
26
Figure 15: Impact of price and FX changes on FY'13 EBIT ($m)

8,000 7,958 7,800 7,600 7,400 7,200 7,000 384 78 295 36 31 33 7,243 81

12,500 12,303 12,000 11,500 11,000 10,500 10,000 9,500 9,000 1,359 549 476 71 138 52 9,845 193
Table 13: J.P. Morgan changes to GLEN XTA forecasts

$ in millions 2012A Pro-forma 236,091 2,228 11,063 12,952 2,130 6,368 7,531 6,348 5,599 Prev 265,112 2,893 11,008 13,634 2,748 5,496 7,958 6,349 4,814 36 13 10,467 -9,854 48,954 39% 93,295 4.52 7,958 2,752 3,423 876 981 -206 445 -58 14 0 -270 2013E New 260,886 2,811 10,289 12,834 2,667 4,863 7,243 5,635 4,288 32 13 10,687 -9,854 48,733 39% 87,243 4.23 7,243 2,671 3,039 955 686 -242 445 -25 -17 0 -270 vs prev -1.6% -2.8% -6.5% -5.9% -3.0% -11.5% -9.0% -11.2% -10.9% -10.9% 0.0% 2.1% 0.0% -0.4% -6.5% -6.5% -9.0% -3.0% -11.2% 8.9% -30.0% 17.4% 0.0% -57.2% -220.2% 0.0% 0.1% 12,303 3,155 5,313 1,191 1,878 633 352 -9 61 0 -272 9,844 2,963 3,954 1,329 1,328 157 352 44 -10 0 -273 -20.0% -6.1% -25.6% 11.6% -29.3% -75.2% 0.0% -594.3% -116.2% 0.0% 0.3% 15,033 3,350 6,603 1,740 2,471 770 289 19 69 1 -278 11,998 3,154 4,900 1,870 1,767 354 289 -67 9 1 -279 -20.2% -5.8% -25.8% 7.5% -28.5% -54.0% 0.0% -451.5% -87.5% 0.0% 0.3% Prev 296,348 3,299 15,373 18,400 3,151 9,446 12,303 10,572 7,610 57 14 10,058 -7,027 47,725 36% 2014E New 286,785 3,107 13,110 15,944 2,959 7,179 9,844 8,118 5,857 44 14 10,813 -7,027 46,750 37% vs prev -3.2% -5.8% -14.7% -13.3% -6.1% -24.0% -20.0% -23.2% -23.0% -23.0% 0.0% 7.5% 0.0% -2.0% Prev 311,307 3,497 18,443 21,661 3,345 11,988 15,033 13,363 9,130 69 14 15,298 -5,121 35,110 26% 2015E New 301,229 3,301 15,610 18,632 3,150 9,149 11,998 10,338 6,990 53 14 13,247 -5,121 36,426 28% vs prev -3.2% -5.6% -15.4% -14.0% -5.9% -23.7% -20.2% -22.6% -23.4% -23.4% 0.0% -13.4% 0.0% 3.7%
Revenue EBITDA Marketing EBITDA Industrial EBITDA EBIT Marketing EBIT Industrial EBIT PBT Net income underlying EPS underlying DPS CFO Capex Net debt Net gearing SOTP NPV SOTP NPV (/shr) EBIT Marketing Copper Coal Zinc Nickel Oil Alloys Aluminium Agriculture Corporate & other
8,452 47,962 42%
27
Figure 17: GLEN FY15 EBITDA by segment (JPMe)

Nickel 7% Zinc 15% Oil Alloys 2% 1% Marketing 18%
Figure 18: GLEN FY13E earnings sensitivities

Rand/US$ /US$ A$/US$ Ferrochrome Hard coking coal WTI / Brent Thermal Coal Zinc Nickel Copper Alumina/Aluminium -15% 1% -7% -4% 2% 1% 2% 5% 6% 3% 12% 1% -10% -5% 0% 5% 10% 15%
Coal 21%
Copper 36%
Investment Thesis, Valuation and Risks Glencore Xstrata plc (Overweight; Price Target: 420p)
Investment Thesis We believe GLEN offers a compelling combination of sector-leading volume and free cash flow growth, along with a differentiated business model that benefits from the smoothing effects and reduced cost of capital of the worlds pre-eminent commodity marketing/trading business. In our view, the company can justifiably lay claim to offering investors the most obvious path to enhanced shareholder returns over the next three-five years. Valuation Our Jun-14 price target of 4.20/sh (previously 4.50/sh) is based on a 1.0x multiple of our base case NPV. The cut to our price target is driven by a reduction in our NPV caused by cuts to our commodity price forecasts. Our NPV assumes a WACC of 10.6% on the companys Industrial assets and 8.0% for the Marketing business, reflecting the relatively lower risk profile of marketing activities, where the majority of capital employed is asset-backed and self-liquidating on a rolling ~1-month basis. Our price target implies near-term earnings multiples at a 10% premium to the peer group but this is justified by GLENs best in sector 85% underlying earnings growth from 2013-16 on JPM base case estimates plus its lack of iron ore exposure. Risks to Rating and Price Target GLEN faces the same commodity price and exchange rate risks as the broader sector, although arguably to a lesser degree given the smoothing effect of pass-through marketing contracts. In addition, we identify the following company-specific key downside risks to our Overweight recommendation and price target: 1. Geopolitical risk: GLEN has a higher exposure to non-OECD economies than either RIO or BHPB and a similar proportion as AAL. GLEN also has a number of key assets (Katanga, Mutanda/Kansuki, Oil & Gas, Kazzinc, Peruvian copper etc.) in countries considered to carry a high level of political risk. Any unrest or moves towards so called resource nationalism could have a detrimental impact on near-term earnings and/or disrupt longer-term growth opportunities; Execution risk: we forecast GLENs Industrial assets will deliver sector leading copper equivalent volume growth of 35% from 2013-2016. This is
2.
28
driven by the start-up and expansion of over 10 projects, including Koniambo (nickel), Katanga, Mutanda, Mopani, Antapaccay (all copper), Ravenswood North, Optimum (coal), Alen Block and Chad (both oil), Las Bambas. The geographically and commodity diverse portfolio presents a risk to managements stewardship. We identify African copper as the key risk, where output is forecast to grow from 279kt copper to>600kt by 2016. This requires timely and on budget developments at the three mines, but GLEN must also solve in-country power constraints. GLEN is funding the US$284m refurbishment of two turbines at the Inga dam to provide 450MW of shared power to Katanga, Mutanda and Kansuki. 3. Integration risk: the merger of GLEN and XTA brings together two welldiversified portfolios, both commodity and geography, and differentiated management styles. Although we view diversification as positive on balance, applying a relatively devolved management style across >90 operations could create operational inefficiencies; Retention risk: GLENs success owes much to the contribution of key employees from both of the heritage companies and is particularly relevant in the marketing business. The departure of a selection of key Xstrata executives (CEO, CFO, Head of Strategy, most Divisional CEOs) creates a risk around implementation of the combined group strategy. The loss of key personnel in the Marketing division would be detrimental to the outlook for a key division and the groups key differentiating earnings stream. Credit risk: GLEN carries a high level of debt and consequently relatively high levels of current gearing, particularly associated with the Marketing business. A significant seizure in global credit market that impacted GLENs ability to fund its marketing activities through short-term debt markets could have a negative impact on group earnings. We note, however, that marketing debt is almost entirely backed (~90%) by readily-marketable inventories (RMI), creating a low-risk and therefore attractive credit profile for potential lenders - GLEN has a syndicate of ~85 relationship banks and was able to refinance a $13bn revolving facility in April 2013 with a syndicate of 33 banks; Trading risk: GLEXs physical commodity trading Marketing activities operates with relatively small equity capital employed. The notional value of trades dwarfs the groups balance sheet meaning the management of Value At Risk (VAR) is critical. ~US$100m of cotton trading losses in 2011 highlight non-performance risk that GLEN is subject to, namely if suppliers or customers elect not to supply or accept contracted commodities. We regard this risk to most acute in illiquid markets. GLEN hedges the vast majority of positions, mitigating price, settlement and counterparty risk, therefore VAR risk is most relevant for those trades where GLEN takes a directional or speculative position, which are a minority of transactions. Any failure of VAR controls could have significant negative implications for earnings and valuation. M&A risk: we anticipate that GLEN will remain an active participant in sector M&A going forward, at least in assessing potential opportunities. While historic M&A performance has been good, not least in the merger transaction, any future activity creates the risk of value destruction which would impact our group NPV.
29
4.
5.
6.
7.
Key upside risks to our current price target, beyond commodity prices, include: 1. Synergy upside: the official synergy target of $500m pa (pre-tax) could well be exceeded, with XTAs abandoned Management Incentive Arrangements mooting an $800m target. These additional savings could come from a variety of sources including enhanced cost of funding, higher sustainable margins in marketing due to the identification of enhanced blending opportunities and further streamlining of centralised cost pools; Disposals: GLEN has one of the most extensive pre-development asset portfolios across the peer group. Most obviously, the required disposal of Las Bambas could create upside to our price target, with our existing group valuation assuming a 50% discount to the assets NPV. A thorough review and reprioritisation of the broader pipeline may also identify a number of non-core assets for disposal. Our NPV currently applies a 25% riskweighting (i.e. 75%) to the estimated value of these projects; sales at a higher value would imply upside to our group valuation; Volume growth: our base case NPV already factors in significant volume growth, particularly in the Copper and Coal divisions. Nonetheless, with sector-leading FCF generation there is the scope for additional volume growth to emerge.
2.
3.
30
Glencore Xstrata plc: Summary of Financials

Profit and Loss Statement $ in millions, year end Dec Revenues % Change Y/Y Gross Margin (%) EBITDA % Change Y/Y EBITDA Margin (%) EBIT % Change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax Tax as a % of BT Net Income (Reported) % change Y/Y Shares Outstanding (m) EPS (Reported) - $ % Change Y/Y Balance sheet $ in millions, year end Dec Cash and cash equivalents Accounts Receivable Inventories Others Current assets LT investments Net fixed assets Total assets Liabilities ST loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Shareholders' equity BVPS - $ Cash flow statement FY11 FY12 FY13E FY14E FY15E $ in millions, year end Dec 208,893 236,091 260,886 286,785 301,229 EBIT 19.3% 13.0% 10.5% 9.9% 5.0% Depreciation & amortization - Change in working capital & Other 16,223 12,952 12,834 15,944 18,632 Taxes 9.1% -20.2% -0.9% 24.2% 16.9% Cash flow from operations 7.8% 5.5% 4.9% 5.6% 6.2% 11,395 7,531 7,243 9,844 11,998 Capex 1.6% -33.9% -3.8% 35.9% 21.9% Disposals/(purchase) 5.5% 3.2% 2.8% 3.4% 4.0% Net Interest (1,162) (1,191) (1,694) (1,801) (1,801) Free cash flow 10,233 2,917 5,635 8,118 10,338 11.1% -71.5% 93.2% 44.1% 27.3% Equity raised/repaid (1,876) (260) (978) (1,678) (2,606) Debt Raised/repaid 18.3% 8.9% 17.4% 20.7% 25.2% Dividends paid 7,917 5,599 4,288 5,857 6,990 Other 20.5% -29.3% -23.4% 36.6% 19.3% - 13,219.8 13,263.7 13,263.7 Beginning cash 0.00 0.00 35.21 48.55 58.29 Ending cash 37.9% 20.1% DPS Ratio Analysis FY11 FY12 FY13E FY14E FY15E $ in millions, year end Dec 4,511 3,740 5,723 16,047 EBITDA margin (%) - 28,136 30,275 31,466 32,160 Operating margin (%) 0 26,404 28,489 32,017 33,008 Net margin (%) - SG&A/Sales - 61,777 65,229 71,931 83,942 Sales per share growth - Sales growth (%) - Attributable net profit growth (%) - 169,043 176,328 183,957 198,500 EPS growth (%) - 17,142 17,142 17,142 17,142 Interest coverage (x) - 27,638 32,300 35,292 35,860 Net debt to Total Capital - Net debt to equity - 52,346 57,008 60,000 60,568 Sales/assets (x) - 35,331 35,331 35,331 35,331 Total Assets/Equity - ROE - 104,084 106,733 109,725 110,293 ROCE - 64,959 76,505 81,143 95,118 FY11 11,395 4,283 16,223 FY12 FY13E FY14E FY15E 7,531 7,243 9,844 11,998 4,804 5,592 6,099 6,634 276 (2,139) (1,191) (694) (1,076) (978) (1,678) (2,606) 13,228 10,696 14,753 17,938
- (12,769) (9,854) (7,027) (5,121) - (6,611) (430) 0 4,045 - (1,053) (1,608) (1,726) (1,660) - (4,317) 833 3,786 8,127 FY11 7.8% 3.8% 19.3% 20.5% 9.8 141 0 0 0 15,478 0 0 0 (1,937) (1,175) (1,803) (1,848) 4,511 4,511 3,740 13.40 3,740 5,723 5,723 16,047 13.83 14.18
FY12 FY13E FY14E FY15E 5.5% 4.9% 5.6% 6.2% 2.4% 1.6% 2.0% 2.3% - 9.6% 5.0% 13.0% 10.5% 9.9% 5.0% -29.3% -23.4% 36.6% 19.3% - 37.9% 20.1% 6.3 4.3 5.5 6.7 73.8% 63.7% 57.6% 38.3% 2.6 2.3 2.3 2.1 -
31
Rio Tinto plc

Overweight
Company Data Price (p) Date Of Price Price Target (p) Price Target End Date 52-week Range (p) Mkt Cap ( bn) Shares O/S (mn) Rio Tinto plc (RIO.L;RIO LN) FYE Dec 2011A 2,867 24 May 13 4,520 30 Jun 14 3,838 - 2,650 53.3 1,860 Adj. EPS FY ($) Revenue FY ($ mn) Adj EBITDA FY ($ mn) EBITDA margin FY EBIT FY ($ mn) EBIT margin FY Adj P/E FY Bloomberg EPS FY ($) 8.31 60,537 28,357 42.7% 23,620 39.0% 5.2 8.11 2012E 5.04 50,967 19,125 32.9% 13,491 26.5% 8.6 4.96 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
4.98 48,516 18,508 43.9% 14,349 29.6% 8.7 -
5.07 48,015 19,784 38.8% 15,206 31.7% 8.6 5.98
5.04 52,143 19,261 43.1% 14,410 27.6% 8.6 -
4.97 51,727 19,941 37.3% 15,140 29.3% 8.7 6.80
On a 12-month time horizon, RIO is our second most favoured UK diversified miner, principally due to its compelling valuation and long-term capital returns potential. On 0.63x P/NPV on JPMe, RIO is trading at a 23% discount to BHPB on 0.82x P/NPV. On JPMe RIO is trading at a 23/9% discount to BHPB on 8.6/8.8x FY13/14 PER, or a 25% discount on market to market FY13/14 PERs of 7.7/7.1x. RIOs shares are down17.6% YTD reflecting concerns over its high exposure to iron ore, yet prices remain well supported and RIO continues to show mark to market EPS upgrades. On $111/t for Q114 delivery we forecast 1/16% upgrades to our FY14E/15E EPS, or 21/34% on $123/t spot. Despite downside risk for its core commodity, we believe RIO is the key beneficiary among the peer group of currency weakness. We calculate a weaker A$ boosts RIOs FY14 EBIT by $852m offsetting a $755m decline due our lower commodity price deck; the A$ has weakened 8.7% since January. On a longer term horizon, we rank RIO alongside GLEN as generating sector-leading FCF. On our base case, which assumes conservative $80/t CFR long-term iron ore, we forecast RIOs current FCF yield at 12.7/13.2% for 2016/17. We forecast, post 2014 RIO will rank near the forefront of the sector in terms of growing its 4.0% FY13E dividend yield to levels more commensurate with its FCF generation. In our view, RIO is cheap, the investment case is compelling, but long dated.
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15,000 213 14,500 14,349 146 348 391 14,600

15,000 14,500 14,000 13,500 13,000 614 507 14,410 921 422 14,507
14,000
13,500
555
12,500
1,139
Table 14: J.P. Morgan changes to RIO forecasts

$ in millions 2012A Revenue EBITDA EBIT PBT Net income underlying EPS underlying DPS CFO Capex Net debt Net gearing SOTP NPV SOTP NPV (/shr) EBIT Iron ore Aluminium Copper Energy Diamonds Other
50,967 16,337 12,457 12,915 9,303 504 167 9,368 -17,458 19,737 25%
Prev 48,516 18,508 14,349 14,020 9,206 498 176 13,980 -13,172 21,956 25% 119,212 45.17 14,349 14,024 -28 1,929 -287 1,451 -2,739
2013E New 48,015 18,725 14,600 14,145 9,363 507 176 14,152 -12,936 21,547 25% 119,212 45.17 14,600 14,415 -174 1,374 60 1,451 -2,526
vs prev -1.0% 1.2% 1.8% 0.9% 1.7% 1.7% 0.0% 1.2% -1.8% -1.9% -1.5% 0.0% 0.0% 1.8% 2.8% nm -28.8% nm 0.0% -7.8%
Prev 52,143 19,261 14,410 14,232 9,309 504 181 14,726 -13,023 23,573 25%
2014E New 51,727 19,390 14,507 13,976 9,179 497 181 14,603 -13,004 23,268 24%
vs prev -0.8% 0.7% 0.7% -1.8% -1.4% -1.4% 0.0% -0.8% -0.2% -1.3% -0.9%
Prev 55,928 20,488 15,146 15,359 10,490 568 183 16,223 -9,789 20,526 20%
2015E New 55,027 20,148 14,791 14,673 10,038 543 183 15,709 -9,560 20,507 21%
vs prev -1.6% -1.7% -2.3% -4.5% -4.3% -4.3% 0.0% -3.2% -2.3% -0.1% 0.6%
12,457 13,842 -8 1,169 424 559 -3,529
14,410 11,345 558 4,344 -145 1,228 -2,920
14,507 12,265 -56 3,205 362 1,228 -2,498
0.7% 8.1% nm -26.2% nm 0.0% -14.5%
15,146 11,499 570 4,496 11 2,011 -3,441
14,791 11,957 122 3,262 394 2,011 -2,955
-2.3% 4.0% -78.7% -27.4% nm 0.0% -14.1%
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Figure 21: RIO FY13 EBITDA by segment (JPMe)

Diamonds / Minerals, 9% Copper, 9% Aluminium, 6% Thermal coal, 3%
Figure 22: RIO FY13E earnings sensitivities

C$/US$ A$/US$ Iron ore Thermal Coal Copper Alumina/Aluminium 1% 2% 6% -10% -5% 0% 5% 10% 15% -9% 12% 2%
Iron ore, 74%

-15%
Investment Thesis, Valuation and Risks Rio Tinto plc (Overweight; Price Target: 4,520p)
Investment Thesis We are OW on RIO, as we see: 1) an attractive long-term valuation (~15-20% discount to BHPB on P/NPV) , 2) a value-enhancing growth proposition (attributable iron ore production to increase 58% in 2011-16E) and 3) balance sheet flexibility, which we believe provides room for increasing shareholder returns and opportunistic M&A. Valuation Our 45.20 Jun-14 PT for RIO (Plc) is based on 1x our year end NPV forecast for the company, in line with historical performance, reflecting our iron ore price assumptions as described above. The cut to our price target is driven by a reduction in our NPV caused by cuts to our commodity price forecasts. Risks to Rating and Target Price The key risks to our Overweight recommendation include: Adverse outcomes in commodities, currencies, production and capital expenditure relative to our forecasts; Potential changes to taxation, legislation, regimes or other operating conditions in key jurisdictions; Dependence on iron ore (over 80% of 2012E EBIT is derived from the company's iron ore business). Consequently, the company is more levered to the health of the Chinese steel industry than the other diversified miners; Disproportionate exposure to cost inflation in Western Australia
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Rio Tinto plc: Summary of Financials

Profit and Loss Statement $ in millions, year end Dec Revenues % Change Y/Y Gross Margin (%) EBITDA % Change Y/Y EBITDA Margin (%) EBIT % Change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net Income (Reported) % change Y/Y Shares Outstanding EPS (Reported) % Change Y/Y Balance sheet $ in millions, year end Dec Cash and cash equivalents Accounts Receivable Inventories Others Current assets FY11 60,537 0.4% 25,844 7.3% 42.7% 23,620 17.3% 39.0% (735) (6,627) 29.0% FY11 9,670 6,058 5,307 951 21,986 FY12E 50,967 -15.8% 16,771 -35.1% 32.9% 13,491 -42.9% 26.5% (576) (3,528) 27.3% FY12E 7,082 5,319 6,136 1,656 20,193 FY13E 48,015 -5.8% 18,623 11.0% 38.8% 15,206 12.7% 31.7% (1,060) (4,008) 28.3% FY13E 12,272 4,607 6,030 1,656 24,565 Cash flow statement FY14E $ in millions, year end Dec 51,727 EBIT 7.7% Depreciation & amortization - Change in working capital 19,271 Taxes 3.5% Cash flow from operations 37.3% 15,140 Capex -0.4% Disposals/(purchase) 29.3% Net Interest (1,164) Free cash flow - Equity raised/repaid (3,790) Debt Raised/repaid 27.1% Other - Dividends paid - Beginning cash - Ending cash - DPS (GDR) Ratio Analysis FY14E $ in millions, year end Dec 12,551 EBITDA margin 6,754 Operating margin 6,754 Net Profit margin 47 SG&A/Sales 26,106 Sales per share growth Sales growth - Net profit growth 32,734 EPS growth 2,228 Interest coverage (x) 8,942 Net debt to Total Capital 4,577 Net debt to equity 13,519 Sales/assets (x) 33,591 Assets/Equity 21,122 ROE 68,232 ROCE 72,143 FY11 23,620 2,224 (6,197) 25,844 (12,335) 33 (613) 1,720 48 4,208 (2,236) FY12E 13,491 3,280 (5,823) 16,771 (17,458) (837) (2,482) 1,474 7,888 (3,038) FY13E 15,206 3,417 (3,929) 18,623 (12,936) (475) 5,190 0 7,000 (3,288) FY14E 15,140 4,131 (3,551) 19,271 (13,004) (862) 279 0 2,000 (3,320) -
FY11 42.7% 0.4% 32.1 18.4% 2.0 -
FY12E 32.9% -15.8% 23.4 28.5% 2.0 -
FY13E 38.8% -5.8% 14.3 28.2% 2.0 -
FY14E 37.3% 7.7% 13.0 27.9% 0.5 -
Net fixed assets Total assets ST loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Shareholders' equity BVPS
119,545 1,447 9,381 5,585 14,966 20,357 25,014 60,337 59,208 -
117,573 2,228 9,244 4,577 13,821 24,591 21,140 59,552 58,021 -
130,401 2,228 8,007 4,577 12,584 31,591 21,068 65,243 65,157 -
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Vedanta Resources
Overweight
Company Data Price (p) Date Of Price Price Target (p) Price Target End Date 52-week Range (p) Mkt Cap ( bn) Shares O/S (mn) Vedanta Resources (VED.L;VED LN) FYE Mar 2012A 1,281 24 May 13 1,540 30 Jun 14 1,352 - 821 3.5 273 Adj. EPS FY ($) Revenue FY ($ mn) EBITDA FY ($ mn) EBITDA margin FY EBIT FY ($ mn) EBIT margin FY Bloomberg EPS FY ($) Net Debt FY ($ mn) 1.42 14,005 4,026 28.7% 2,618 18.7% 1.34 10,070 2013A 1.33 14,990 4,888 32.6% 2,554 17.0% 1.45 8,611 2014E
(Prev)
2014E
(Curr)
2015E
(Prev)
2015E
(Curr)
3.00 13,741 5,908 43.0% 3,424 24.9% 7,430
1.77 12,950 5,297 40.9% 2,726 21.0% 2.40 7,545
4.46 19,794 7,659 38.7% 4,530 22.9% 3,212
3.28 18,320 6,673 36.4% 3,646 19.9% 2.98 3,989
We maintain our OW rating on VED, with a new June 14 PT of 1,540p/sh (previously 1,500p/sh, Mar 14E). Our near-term earnings estimates are heavily impacted by the downgrades to our commodity price assumptions, accentuated at the bottom-line by VEDs relatively high levels of D&A and net interest charges. However, our NPV sees only a marginal downgrade as we incorporate lower than expected end FY13 net debt (reported May 16th) as well as newly approved growth at HZL. We continue to admire VEDs blend of growth (6.7% Cu eq CAGR over next 5 years) and FCF yield (MtM cumulative 61% over the same period) which should drive significant de-levering, alleviating a key market concern. Furthermore the impending group restructuring will, in our view, significantly improve VEDs ability to service its debts and, once complete, delivers an enticing 0.78x P/NPV. Group restructuring remains most important catalyst Completion of the groups long-awaited restructuring remains the most significant potential near-term catalyst for VED, in our view. We describe in detail the mechanics of the restructuring transactions in our 9th April note: New Year, New Vedanta - Reinstating OW rating with 15 price target. We estimate the restructuring is ~40% NPV-accretive for VED, with an end March 14E NPV of 1,167p/sh ex- versus 1,639p/sh cum- restructuring. The last significant regulatory hurdle remains the issuance of an approval order by the High Court of Madras; we continue to believe the order is a matter of weeks rather than months away. However, we cannot dismiss the risk of a further few months delay if an appeal against the High Court approvals is lodged in the Supreme Court. As such, for modelling purposes we now assume the restructuring transactions are finalised during Q3 FY14 (Dec qtr), one quarter later than our previous assumption. De-leveraging on track VED has made encouraging progress in de-gearing its balance sheet, with reported net debt as of end March coming in lower than expected at $8.6bn (JPMe $9.2bn). Near-term debt maturities due in the FY13-14E financial year of $4.5bn have now virtually all been rolled into new facilities, repaid or refinanced with bonds on reasonably favourable terms.
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Figure 23: Changes to FY14E EBITDA by division (note iron ore forecasts are unchanged)
$ million
Figure 24: Changes to FY15E EBITDA by division (note iron ore forecasts are unchanged)
$ million
6,000 5,800 5,600 5,400 5,200 5,000 4,800 4,600 4,400
7,800 7,600 7,400 7,200 7,000 6,800 6,600 6,400 6,200
Earnings & NPV changes Our FY14/15E EBITDA estimates for VED fall by 10%/13% to $5.3bn/$6.7bn respectively on the back of lower JPMe assumptions for zinc, copper and aluminium (which together contribute ~41/44% of our forecast FY14/15E EBITDA). We have also increased our D&A estimate for FY14E by 3% to ~$2.6bn after the FY13E figure came in slightly higher than expected, while the 41/27% reductions in our bottom-line EPS estimates for FY14/15E are also accentuated by VEDs relatively higher financial gearing (EBITDA/Interest cover was 8.4x in FY13) and minority interests. Our end March 14E NPV falls by a modest ~5 pence to 1,639p/sh as the downgrades to near term earnings are offset by lower than expected net debt at the end of FY13 as well as the inclusion of the newly approved expansion at HZL to 1.2Mtpa mined zinc-lead over the next 6 years.
Table 15: Changes to our forecasts for VED (FY14-16E)
Previous 13,741 5,908 3,424 300 56 4,330 -2,379 7,430 7,897 1,644 1,498 262 48 432 70 481 371 2,746 5,908 FY14E New 12,950 5,297 2,726 177 58 3,745 -2,520 7,545 7,874 1,639 1,353 239 48 345 15 244 351 2,702 5,297 % change -6% -10% -20% -41% 4% -13% 6% 2% 0% 0% -10% -9% 0% -20% -78% -49% -5% -2% -10% Previous 19,794 7,659 4,530 446 56 6,027 -1,657 3,212 6,063 1,758 310 295 701 237 880 555 2,925 7,659 FY15E New 18,320 6,673 3,646 328 58 5,578 -1,864 3,989 6,341 1,588 258 295 470 213 441 523 2,886 6,673 % change -7% -13% -20% -27% 4% -7% 13% 24% 5% -10% -17% 0% -33% -10% -50% -6% -1% -13% Previous 20,006 7,740 4,338 390 57 5,941 -1,722 -854 4,316 1,758 310 295 701 237 880 555 2,925 7,659 FY16E New 18,908 6,974 3,654 293 59 5,269 -1,981 859 5,085 1,588 258 295 470 213 441 523 2,886 6,673 % change -5% -10% -16% -25% 4% -11% 15% nm 18% -10% -17% 0% -33% -10% -50% -6% -1% -13%
Revenues EBITDA EBIT Underlying EPS DPS CFO (post minority divi) Total capex Consolidated net debt Attributable net debt Attributable NPV Divisional EBITDA Zinc - India Zinc - International Iron ore Copper - Zambia Copper - India/Australia Aluminium Power Oil & Gas Total EBITDA
$m $m $m USc/sh USc/sh $m $m $m $m GBp $m $m $m $m $m $m $m $m $m
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Figure 25: VED FY14 EBITDA by segment (JPMe)

Copper, 7% Aluminium, 6% Zinc, 28% Iron ore, 1%
Figure 26: VED FY14E earnings sensitivities

INR/US$ Iron ore WTI / Brent Zinc 7% 6% 9% -10% -5% 0% 5% 10% 15% 1% 14% 12%
Energy, 6% Petroleum, 52%

Copper Alumina/Aluminium -15%

Investment Thesis, Valuation and Risks Vedanta Resources (Overweight; Price Target: 1,540p)
Investment Thesis Aside from the near-term catalyst of the Group restructuring which should significantly improve the companys ability to service its debt, we believe VED offers a compelling blend of volume growth, improving free cash flows and attractive valuation. We have an Overweight rating on Vedanta with a 15.40 Jun-14E price target. Valuation Our 1,540p per share end June 14E PT is derived using a target P/NPV multiple of ~0.9x applied to the average of our end March 14E and end September 14E attributable NPV estimates of 1,639p/sh and 1,788p/sh respectively. This is a discount to the multiple applied to larger cap diversified peers due to the companys general lack of earnings visibility and greater exposure to regulatory risks, although arguably this is already accounted for in our assumed WACC of 15%, which is higher than the WACCs we apply to the other UK diversifieds. Given the complexity of the Groups holding structure we use attributable rather than consolidated NPV as our primary valuation methodology for VED as we believe it more accurately accounts for the impact of minority interests. Our previous March 14E PT of 1,500p/sh was based on 0.9x our previous attributable end March 14E NPV estimate of 1,644p/sh, with the slight increase in our PT simply reflective of rolling the target out by 3 months to June 14. Risks to Rating and Price Target Aside from downside risks to commodity prices, we see three key stock specific risks to our OW call on VED: Uncertainty around the Indian regulatory environment remains a key challenge in our view a prolonged delay in completion of the group restructuring or the current ban on iron ore mining in Goa could lead to further earnings & NPV downgrades.
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VEDs balance sheet is still somewhat vulnerable. While the alignment of cash flows and debt repayments should be much improved post the group restructuting, and net debt/EBITDA is expected to improve rapidly as capex falls over the coming years, the scale of debt maturing over the FY14-15E period still leaves the group balance sheet vulnerable to external credit market shocks in our view. Conversely, elevated net debt levels (in theory) should imply reduced M&A & FCF reinvestment risk for the next few years. Dividend sustainability/leakage to minorities. Based on the guided 20% payout ratio from Sesa-Sterlite, our estimates suggest net debt at the PLC level, even after the restructuring, will remain stubbornly high at over $2.5bn for the next 10 years; as such, net interest payments at the PLC level also remain elevated on our forecasts, leaving little cash to spare for dividends to Vedanta shareholders. We therefore see a risk that VED chooses either to lower its dividend to a more sustainable level from the 58 cents per share paid out in FY2013, or to increase the payout ratio from Sesa-Sterlite, which in turn (given the Sesa-Sterlite parent cos indebtedness post-restructuring) would likely require increased payouts from HZL and Cairn India, implying significant cash leakage from the group in the form of dividends to minorities and withholding taxes.
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Vedanta Resources: Summary of Financials

Profit and Loss Statement $ in millions, year end Mar Revenues % Change Y/Y Gross Margin (%) EBITDA % Change Y/Y EBITDA Margin (%) EBIT % Change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax Tax as a % of BT Net Income (Reported) % change Y/Y Shares Outstanding (m) EPS (Reported) - $ % Change Y/Y Balance sheet $ in millions, year end Mar Cash and cash equivalents Accounts Receivable Inventories Others Current assets LT investments Net fixed assets Total assets Liabilities ST loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Shareholders' equity BVPS - $ FY12 FY13 FY14E 14,005 14,990 12,950 22.6% 7.0% -13.6% 25.4% 21.9% 21.0% 4,026 4,888 5,297 17.0% 21.4% 8.4% 28.7% 32.6% 40.9% 2,618 2,554 2,726 1.8% -2.4% 6.7% 18.7% 17.0% 21.0% (420) (521) (530) (517) (40) (250) 22.6% 2.0% 11.4% 60 157 482 -92.2% 163.2% 206.4% 272.7 272.9 273.1 0.22 0.58 1.77 (92.3%) 163.2% 205.9% FY12 6,885 1,796 1,704 10,562 210 45,935 FY13 7,982 1,706 1,966 11,850 2 45,950 FY14E 8,297 1,711 1,733 11,938 2 46,095 FY15E 18,320 41.5% 19.9% 6,673 26.0% 36.4% 3,646 33.7% 19.9% (499) (411) 13.0% 895 85.5% 273.1 3.28 85.5% FY15E 7,803 2,195 2,295 12,489 2 45,545 Cash flow statement FY16E $ in millions, year end Mar 18,908 EBIT 3.2% Depreciation & amortization 19.3% Change in working capital & Other 6,974 Taxes 4.5% Cash flow from operations 36.9% 3,654 Capex 0.2% Disposals/(purchase) 19.3% Net Interest (384) Free cash flow - Equity raised/repaid (977) Debt Raised/repaid 29.9% Dividends paid 801 Other -10.5% 273.1 Beginning cash 2.93 Ending cash (10.5%) DPS Ratio Analysis FY16E $ in millions, year end Mar 9,908 EBITDA margin (%) 2,113 Operating margin (%) 2,209 Net margin (%) - SG&A/Sales 14,426 Sales per share growth 2 Sales growth (%) - Attributable net profit growth (%) 46,147 EPS growth (%) FY12 FY13 FY14E FY15E FY16E 2,618 2,554 2,726 3,646 3,654 (1,408) (2,334) (2,571) (3,028) (3,319) (267) 10 (314) 259 (31) (916) (897) (358) (473) (974) 3,759 4,898 4,983 6,933 6,942 (2,773) (2,170) (2,520) (1,864) (1,981) (8,017) 0 0 0 0 735 806 530 499 384 (793) 1,034 1,417 3,938 3,445 0 7,245 (144) 0.36 FY12 28.7% 17.0% 0.4% 0 115 (154) 0.38 0 0 -751 -4,050 (158) (158) 0.38 0.38 0 -1,024 (158) 0.39
FY13 FY14E FY15E FY16E 32.6% 40.9% 36.4% 36.9% 16.8% 21.0% 19.9% 19.3% 1.1% 3.7% 4.9% 4.2% 41.5% 3.2% 41.5% 3.2% 85.5% -10.5% 85.5% (10.5%) 7.3 12.9% 10.1% 0.4 2.0 17.6% 11.8% 9.5 2.9% 2.0% 0.4 1.9 -
22.3% 7.0% -13.7% 22.6% 7.0% -13.6% -92.2% 163.2% 206.4% (92.3%) 163.2% 205.9% 6.2 29.3% 31.3% 0.3 2.5 7.5% 6.9% 4.9 26.8% 25.8% 0.3 2.4 8.0% 7.8% 5.1 23.3% 21.0% 0.3 2.3 10.6% 8.4%
4,152 4,400 4,050 1,024 1,450 Interest coverage (x) 3,843 4,564 4,022 5,327 5,127 Net debt to Total Capital - Net debt to equity 8,147 9,210 8,319 6,598 6,824 Sales/assets (x) (12,804) (12,193) (11,792) (10,767) (9,317) Total Assets/Equity - ROE 27,515 27,089 25,796 23,051 21,833 ROCE 18,420 18,861 20,299 22,494 24,314 17 16 17 20 22
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Important Disclosures
Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in Anglo American, Anglo American (AGLJ.J), BHP Billiton, BHP Billiton (BILJ.J), Glencore Xstrata plc, Rio Tinto plc, Vedanta Resources. Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Anglo American, Anglo American (AGLJ.J), BHP Billiton, BHP Billiton (BILJ.J), Glencore Xstrata plc, Rio Tinto plc, Vedanta Resources within the past 12 months. Director: A senior employee, executive officer or director of JPMorgan Chase & Co. and/or J.P. Morgan is a director and/or officer of BHP Billiton, BHP Billiton (BILJ.J). Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Anglo American, Anglo American (AGLJ.J), BHP Billiton, BHP Billiton (BILJ.J), Glencore Xstrata plc, Rio Tinto plc, Vedanta Resources. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Anglo American, Anglo American (AGLJ.J), BHP Billiton, BHP Billiton (BILJ.J), Glencore Xstrata plc, Rio Tinto plc, Vedanta Resources. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Anglo American, Anglo American (AGLJ.J), BHP Billiton, BHP Billiton (BILJ.J), Glencore Xstrata plc, Rio Tinto plc, Vedanta Resources. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Anglo American, Anglo American (AGLJ.J), BHP Billiton, BHP Billiton (BILJ.J), Glencore Xstrata plc, Rio Tinto plc, Vedanta Resources. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Anglo American, Anglo American (AGLJ.J), BHP Billiton, BHP Billiton (BILJ.J), Glencore Xstrata plc, Rio Tinto plc, Vedanta Resources. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Anglo American, Anglo American (AGLJ.J), BHP Billiton, BHP Billiton (BILJ.J), Glencore Xstrata plc, Rio Tinto plc, Vedanta Resources. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Anglo American, Anglo American (AGLJ.J), BHP Billiton, BHP Billiton (BILJ.J), Glencore Xstrata plc, Rio Tinto plc, Vedanta Resources. Broker: J.P. Morgan Securities plc acts as Corporate Broker to Rio Tinto plc, Vedanta Resources. J.P. Morgan Limited is acting as corporate broker and financial advisor to Vedanta Resources on its corporate reorganisation as announced on 25 February 2012. "J.P. Morgan Cazenove is acting as sponsor and financial adviser to Vedanta Resources Plc and has provided a fairness opinion in relation to the potential purchase of the Government of India's stake in Hindustan Zinc Limited and Bharat Aluminium Company Ltd. This research report is not intended to provide voting advice, to serve as an endorsement of the proposed transaction, or result in procurement, withholding or revocation of a proxy or any other action by a security holder."
J.P. Morgan Securities plc and/or its affiliates (J.P. Morgan) is acting as a Joint Global Coordinator, Joint Lead Manager and Joint Bookrunner to Vedanta Resources plc (Vedanta) on its proposed benchmark 144A/Reg S offering of long 5-year (Jan 2019) and 10-year US-dollar fixed rate senior notes as announced on 16 May 2013. J.P. Morgan will be receiving fees for so acting. J.P. Morgan may perform, or may seek to perform, other financial or advisory services for Vedanta and/or its affiliates and may have other interests in or relationships with Vedanta and/or its affiliates, and receive fees, commissions or other compensation in such capacities. This research report and the information herein is not intended to serve as an endorsement of the proposed transaction or result in procurement, withholding or revocation of a proxy or any other action by a security holder. This report is based solely on publicly available information. No representation is made that it is accurate or complete.
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Date 24-Apr-07
Anglo American (AAL.L, AAL LN) Price Chart
Rating Share Price (p) N N N N N N UW UW N OW OW OW OW N UW UW UW UW UW UW N 2815 2685 3163 2991 3477 2919 1781 1026 1307 2450 2684 2682 3284 2188 2694 1914 2002 1936 1833 1886 1872 1983 1642
Price Target (p) 2880 3070 3284 3351 3570 3040 2540 850 1010 --3600 4500 3500 3000 1900 1750 1680 1670 1630 1680 1640 1930 Price Target (c) 36300 33700 35500 40600 46100 44900 45509 46300 46300 53522 54000 57000 44000 37000 12400 13600 13600 45000 39300 25164 23200 24832 24610
06-Aug-07 26-Oct-07 27-Mar-08 28-Aug-08 06-Oct-08 26-Feb-09 09-Apr-09 01-Mar-10 23-Mar-10 16-Jun-10 11-Jan-11 23-Nov-11 24-Feb-12 21-Aug-12 11-Sep-12 01-Nov-12 21-Jan-13 28-Jan-13 18-Feb-13 15-Apr-13 Date 09-Oct-06
5,550 4,625 3,700 Price(p) 2,775 1,850 925 0 Feb 07 Nov 07 Aug 08 May 09 N 3,283.965p N 3,570p N 2,540p UW 1,010p N 2,880p N 3,070p N 3,351.059p N 3,040p UW 850p
OW 3,600p OW N OW 4,500p
UW UW 1,680p 1,680p N 3,000p UW 1,750p UW 1,630p N 1,930p OW 3,500p UW 1,900p UW UW 1,670p 1,640p
05-May-08 N
Feb 10
Nov 10
Aug 11
May 12
Feb 13
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Mar 01, 2010 - Mar 23, 2010.
12-Dec-12 UW
Rating Share Price (c) N N N N N N N N UW UW UW UW UW UW UW OW OW N UW UW UW 34295 35613 37024 38981 46600 38700 42780 42750 44915 47200 49497 54800 41499 23548 14241 17390 29990 34950 31861 25086 24730 26771 26450
Anglo American (AGLJ.J) (AGLJ.J, AGL SJ) Price Chart
15-Jan-07 16-Feb-07 25-Apr-07 13-Jul-07 05-Aug-07 26-Oct-07 04-Feb-08 08-Feb-08 27-Mar-08
N 35,500c N 44,900c UW 53,522.009c UW 44,000c 83,520 N 33,700c N 46,100c UW 46,299.793c UW 57,000c UW 13,600c 69,600 55,680 Price(c) 41,760 27,840 13,920 0 Sep 06 Jun 07 Mar 08 Dec 08 Sep 09 Jun 10 Mar 11 Dec 11 N 36,300c N 40,600c N 45,509.184c N 46,299.793c UW 54,000c UW 37,000c UW 12,400c OW 13,600cOW 45,000c
UW 24,832c UW 23,200c N 39,300c UW 25,164c UW 24,610c
05-May-08 UW 01-Jul-08 28-Aug-08 06-Oct-08 26-Feb-09 09-Apr-09

Sep 12 Jun 13 11-Jan-11
23-Mar-10 27-Feb-12 24-Aug-12 27-Sep-12 01-Nov-12
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Oct 09, 2006.
13-Dec-12 UW
42
BHP Billiton (BLT.L, BLT LN) Price Chart

4,494 OW 1,296p 3,852 OW 1,304p 3,210 OW 1,296p OW 1,419p OW 1,695p 2,568 Price(p) 1,926 1,284 642 0 Sep 06 Jun 07 Mar 08 Dec 08 Sep 09 Jun 10 Mar 11 Dec 11 Sep 12 UW N 2,000p N 2,700p N 2,400p N 2,225p N 2,300p OW 2,071p N 2,300p N 2,200p N 2,380p N 2,245p N 2,330p
Date 09-Oct-06 24-Oct-06 23-Apr-07 07-Aug-07 26-Oct-07 01-Mar-10 16-Jun-10 11-Jan-11 23-Nov-11 24-Feb-12 11-Sep-12 17-Oct-12
Jun 13 16-Jan-13
Rating Share Price (p) OW OW OW OW OW N UW N N N N N N N N 937 1014 946 1153 1366 1843 2007 1930 2474 1766 2073 1906 1949 2068 2076 1892 1842
Price Target (p) 1296 1304 1296 1419 1695 2071 -2000 2700 2400 2300 2225 2200 2245 2300 2380 2330
12-Dec-06 OW
12-Dec-12 N 15-Apr-13 17-Apr-13
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Mar 01, 2010 - Jun 16, 2010.
BHP Billiton (BILJ.J) (BILJ.J, BIL SJ) Price Chart
Date
N 33,300c N 29,000cN 29,000c N 27,000c
Rating Share Price (c) OW OW OW OW OW OW OW OW OW OW N N N N N N N 13739 16170 21770 24050 16051 18099 17499 19660 19902 21400 26662 25030 24634 25715 28925 29211 24652
Price Target (c) 18100 21100 23900 28458 18000 16800 18400 17400 21900 23700 27000 30000 29000 28000 29000 33300 32540
50,687 43,446
OW 18,400c OW 23,700c OW 23,900c OW 16,800c OW 21,900c OW 18,000c OW 17,400c
09-Oct-06 25-Apr-07 13-Jul-07 26-Oct-07
36,205 OW 18,100c OW 21,100c OW 28,458.09c Price(c) 28,964 21,723 14,482 7,241 0 Sep 06 Jun 07 Mar 08
N 30,000c N 28,000c N 32,540c 26-Feb-09
09-Apr-09 23-Apr-09 24-Jul-09 29-Jul-09 13-Aug-09 11-Jan-11 24-Feb-12 19-Apr-12

Dec 08 Sep 09 Jun 10 Mar 11 Dec 11 Sep 12 Jun 13 13-Dec-12
27-Sep-12 16-Jan-13 17-Apr-13
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Oct 09, 2006.
43
Glencore Xstrata plc (GLEN.L, GLEN LN) Price Chart
832 728 624 N 550p 520 Price(p) 416 312 208 104 0 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 N 440p OW 450p NR
Date 24-Jun-11 23-Nov-11 02-Feb-12
Rating Share Price (p) N N NR 471 371 432 314
Price Target (p) 550 440 -450
02-May-13 OW
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Feb 02, 2012 - May 02, 2013.
Rio Tinto plc (RIO.L, RIO LN) Price Chart
Date 09-Oct-06
Rating Share Price (p) N N N N N N OW OW OW OW OW OW OW OW OW OW OW 2125 2309 2270 2107 2573 3081 3597 3364 3339 4389 3055 3670 3000 3021 3072 3061 3311 3458 3080
Price Target (p) 3414 3685 3660 3327 3525 3650 3696 -4900 6300 4350 4800 4700 4500 4400 4320 4200 4400 4560
9,504
N 3,660p
OW OW 4,400p 4,400p
19-Oct-06 17-Jan-07 23-Apr-07 18-Sep-07 17-Oct-07 01-Mar-10 16-Jun-10 11-Jan-11 23-Nov-11 24-Feb-12 21-Aug-12 11-Sep-12 11-Oct-12
12-Dec-06 N
7,920 N 3,685p N 3,525p N 3,695.713p 6,336 N 3,414p N 3,327p N 3,650.073p Price(p)
OW 4,800p OWOW 4,500p 4,200p OW OW 4,900p OW 6,300p OW 4,350pOW OW 4,700p 4,320p OW 4,560p
4,752
3,168
1,584
0 Sep 06 Jun 07 Mar 08 Dec 08 Sep 09 Jun 10 Mar 11 Dec 11 Sep 12
Jun 13 16-Oct-12
12-Dec-12 OW 16-Jan-13 15-Apr-13
44
Vedanta Resources (VED.L, VED LN) Price Chart
4,836
OW 2,034.617p
Date 05-Mar-07
OW OW 4,000p OW 3,400p OW 1,400p NR OW 1,500p 06-Jul-07
Rating Share Price (p) OW OW OW 1215 1420 1649 2230 2242 2577 2548 2310 2351 929 986 1116
Price Target (p) 1866 1859 2035 2462 2737 3170 -4000 3400 1400 -1500
4,030
OW 1,859p
OW 3,170.177p
09-May-07 OW
3,224 OW 1,865.73p OW 2,462.031p OW 2,736.557p Price(p) 2,418
29-Oct-07
01-May-08 OW 23-May-08 OW 01-Mar-10 16-Jun-10 25-Jan-11 23-Nov-11 09-Aug-12

Feb 07 Nov 07 Aug 08 May 09 Feb 10 Nov 10 Aug 11 May 12 Feb 13
1,612
OW OW OW OW NR OW
806
09-Apr-13
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research website, www.jpmorganmarkets.com. Coverage Universe: Jamieson, Fraser R: Anglo American (AAL.L), Anglo American (AGLJ.J) (AGLJ.J), Antofagasta (ANTO.L), BHP Billiton (BLT.L), BHP Billiton (BILJ.J) (BILJ.J), Bumi Plc (BUMIP.L), ENRC Plc (ENRC.L) O'Kane, Dominic J: African Barrick Gold (ABGL.L), Glencore Xstrata plc (GLEN.L), Petropavlovsk (POG.L), Rio Tinto plc (RIO.L), Talvivaara Mining Company (TALV.L) Bell, Roger M: Avocet Mining (AVM.L), First Quantum Minerals (FQM.L), Fresnillo Plc (FRES.L), Gem Diamonds Ltd (GEMD.L), Hochschild (HOCM.L), Kazakhmys Plc (KAZ.L), Kenmare Resources (JEV.L), London Mining (LOND.L), New World Resources (NWRS.L), Vedanta Resources (VED.L) J.P. Morgan Equity Research Ratings Distribution, as of March 30, 2013
J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* Overweight (buy) 43% 54% 42% 74% Neutral (hold) 44% 47% 50% 64% Underweight (sell) 13% 38% 9% 57%
*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.
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(44- 20) 7742-5930 fraser.jamieson@jpmorgan.com J.P. Morgan Securities plc

(44-20) 7742-6729 dominic.j.okane@jpmorgan.com J.P. Morgan Securities plc

(44-20) 7134-5932 roger.m.bell@jpmorgan.com J.P. Morgan Securities plc

For Specialist Sales advice, please contact James H McGeoch

Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com

Europe Equity Research 28 May 2013

Source: J.P. Morgan estimates.

Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com

Europe Equity Research 28 May 2013

Table 2: Commodity price forecast changes

Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com

Europe Equity Research 28 May 2013

Summary earnings & valuation changes

AAL BHPB GLEN RIO VED

2013E 8,492 32,352 12,876 18,725 4,985

2013E 174 276 33 507 127

Source: J.P. Morgan estimates.

BHPB RIO GLENXTA AAL VED

Source: J.P. Morgan estimates.

BHPB RIO GLENXTA AAL VED

Source: J.P. Morgan estimates.

Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com

Europe Equity Research 28 May 2013

Figure 2: BHPB commodity price vs FX earnings impact

1,597 Commodities FX EBIT FY'14

26,500 26,000 EBIT FY'14

2,291 Commodities FX EBIT FY'14

Figure 3: GLEN XTA commodity price vs FX earnings impact

Figure 4: RIO commodity price vs FX earnings impact

2,868 Commodities FX EBIT FY'14

Pecking order remains intact

Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com

Europe Equity Research 28 May 2013

Figure 6: Cumulative Copper Equivalent volume growth

2014E GLEN XTA

2015E BHP RIO

2013E GLEN XTA

Source: J.P. Morgan estimates.

Source: J.P. Morgan estimates.

Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com

Europe Equity Research 28 May 2013

Commodity views base & precious metals

Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com

Europe Equity Research 28 May 2013

Table 6: Copper supply/demand balance

Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com

Europe Equity Research 28 May 2013

Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com

Europe Equity Research 28 May 2013

Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com

Europe Equity Research 28 May 2013

Fraser Jamieson (44- 20) 7742-5930 fraser.jamieson@jpmorgan.com

Europe Equity Research 28 May 2013

Commodity views coal

Q2'13 172 172

Q3'13 165 175 -5.7%

106 134 106

106 112 -5.7% 64%

124 145 124

141 131 7.9%

130 133 -2.0% 79%