Вы находитесь на странице: 1из 185

01 December 2011 Americas/Canada&United States Equity Research Steel (Metals & Mining -Steel)

North American Iron Ore


Research Analysts Nathan Littlewood 416 352 4585 nathan.littlewood@credit-suisse.com

INITIATION

Initiating coverage
North Americas combination of under utilised infrastructure, skilled labour, low jurisdictional risk, and cheap power make it a region that global iron ore investors should not ignore. The steel industrys requirements for higher quality raw materials combined with trends of decreasing DSO grades from more traditional iron ore regions are likely to make high quality manufactured iron ore products, such as those produced in parts of North America, an important part of the seaborne market going forwards. Exhibit 9 summarises our global iron ore coverage, and illustrates that the North American stocks are currently trading on the lowest multiples globally.
Exhibit 1: Target Price and Rating summary (based on 29 Nov 2011 close)
Share Price Alderon Iron Ore Corporation ADV.TO C$ 2.36 Cliffs Natural Resources CLF US$ 67.81 Labrador Iron Ore Royalty LIF-U.TO C$ 37.22 Corporation Labrador Iron Mines LIM.TO C$ 6.74 New Millennium NML.TO C$ 1.51 Source: Company data, Credit Suisse estimates. Target Price 2.60 90.00 45.00 8.30 1.90 Rating N O O O O P/NAV 0.40 0.91 0.70 0.7 0.24 12m PER n.m. 5.2 9.3 4.8 n.m.

We use a range of valuation tools to look at these stocks both on a stand-alone basis and through the eyes of potential acquirers. From our global database of almost 300 assets and 80 companies, we have handpicked the most relevant comparables for each stock, taking into account life cycle status, diversification, ore body / product type, infrastructure access, and other key value determinants. Our investment views differ from the rest of the street on: ADV.TO TP puts us at bottom of the street. Although we like this asset and the team that is putting it together, we do not believe the stock deserves the takeover premium it currently attracts. CLF Our global coverage universe provides multiple valuation perspectives, most of which make CLF look cheap relative US metals peers. We see LIF-U.TO as a more logical acquisition target than the more commonly speculated ADV.TO. LIF-U.TO TP puts us as top of the street, and we believe that the market has under-appreciated the potential opportunity in this business as the Labrador Trough moves from a state of mine to infrastructure constraint. NML.TO / LIM.TO We see a compelling case for a corporate combination, with LIM.TO appearing the more logical acquirer. If LIM.TO is smart enough, we see an opportunity for it to be the consolidator of the sector.

DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. U.S. Disclosure: Credit Suisse 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.

01 December 2011

Table of contents
Introduction Global context North American snap shot Why produce iron ore in Canada? Capitalising North Americas natural advantages Alderon Iron Ore Corporation (ADV.TO) Bloom Lake II tougher the second time around? Investment Thesis Valuation Summary Net Present Value NAV sensitivities As an acquisition target Earnings multiples Comparable company analysis Company-Specific Risks Asset Review Summary Background Products & Pricing Mining and Processing Transport and Logistics Costs Reserves and Resources Corporate Balance Sheet & Cash Flow Management Ownership Cliffs Natural Resources (CLF) 2012 will be about addressing diversification concerns Investment Thesis Valuation Summary Net Asset Value NAV sensitivities Earning Multiples Comparable company analysis Company-Specific Risks Asset Review Summary United States Iron Ore Eastern Canadian Iron Ore Asia Pacific Iron Ore Minority Iron Ore Interests North American Coal Asia Pacific Coal (Australia) Ferroalloys Financials Balance Sheet Cash Flows Management & Board Ownership Labrador Iron Ore Royalty Corporation (LIF_u.TO) 5 7 8 10 11 14 14 15 19 19 19 20 22 24 25 27 28 28 28 28 31 32 34 37 39 39 40 42 44 44 45 49 49 50 51 52 54 58 59 59 62 64 66 68 68 69 69 74 74 75 76 79 80

North American Iron Ore

01 December 2011

Dont underestimate the value of infrastructure Investment Thesis Valuation Summary Net Present Value NAV sensitivities Price to Earnings Ratio Comparable Company Analysis As an acquisition target Company-Specific Risks Asset Review LIF-U.TO s interests in IOC Background Products and Pricing Mining and Processing Transport and Logistics Corporate Company Structure Balance Sheet Cash Flows Management Ownership Labrador Iron Mines (LIM.TO) Actions speak louder than words, for now Investment Thesis Valuation Summary Net Present Value NAV Sensitivities Earning multiples Comparable Company Analysis LIM.TO as the Labrador Trough consolidator Company-Specific Risks Asset Review Overview Products & Pricing Mining and Processing Transport and Logistics Operating Costs Capital Costs Resources Corporate Company Structure Balance Sheet Cash Flows Management Ownership New Millennium Iron Corporation (NML.TO) Cheap resource tonnes, but not without funding and development challenges Investment Thesis Valuation Summary Net Present Value NAV Sensitivities As an acquisition target NML.TO as a Tata Steel acquisition target

80 81 84 84 85 86 88 89 90 92 93 93 94 94 96 97 99 99 100 100 101 102 103 103 104 107 107 107 108 110 111 113 115 116 116 117 119 120 124 125 126 128 128 129 129 130 132 133 133 134 136 136 136 137 138 141

North American Iron Ore

01 December 2011

Earning multiples Comparable company analysis Company-Specific Risks Asset Review Summary Overview Hematite Project Taconite (Magnetite) Project Capital Costs Operating Costs Reserves and Resources Corporate Company Structure Balance Sheet Cash Flows Ownership Management Appendix 1: Canadian Iron Ore Production Background Production Infrastructure Appendix 2 Credit Suisse Global Supply/Demand model Appendix 3 Credit Suisse Commodity Price Forecasts Appendix 4 Iron Ore products summary Appendix 5 companies mentioned

143 143 145 146 146 146 148 153 158 161 161 163 163 163 166 167 169 171 171 173 175 177 178 179 180

North American Iron Ore

01 December 2011

Introduction
We initiate coverage of the North American Iron Ore Mining sector, launching with: 1 NYSE name (Cliffs Natural Resources) and 4 TSE/TSV names (Alderon Iron Ore, Labrador Iron Ore Royalty Corporation, Labrador Iron Mines and New Millennium Iron Corporation), or 3 producers (Cliffs Natural Resources, Labrador Iron Ore Royalty Corporation and Labrador Iron Mines) and 2 developers (Alderon Iron Ore and New Millennium Iron Corporation).

As illustrated in Exhibit 2, our valuations are somewhat more cautious than the rest of the street, but we are in fact top of the street for LIF-U.TO with our C$45/sh target price.
Exhibit 2: Credit Suisse Target Price upside/downside relative to the street
300%

North Americas combination of under utilised infrastructure, skilled labour, low jurisdictional risk, and cheap power make it a region that global iron ore investors should not ignore. We demonstrate that the steel industrys requirements for higher quality raw materials combined with trends of decreasing DSO grades from more traditional iron ore regions, are likely to make high quality manufactured iron ore products such as those produced in North America an increasingly important part of the seaborne iron ore market. Appendix 1 provides a geographical, geological, and infrastructure overview of the Canadian iron ore industry and forms an important part of this report, particularly for those who are relatively new to the sector. Appendix 2 contains a summary of our global supply demand model Appendix 3 sets out the commodity price assumptions that have been used in all our modelling, and Appendix 4 contains an overview of the various types of iron ore products and how they are inter-related.

North American Iron Ore

200%

100% 66% 0% 10% Alderon Iron Ore -100% Consensus range Credit Suisse Target Price NAV spot 18% Cliffs Natural Resources 21% Labrador Iron Ore Royalty Corp 23% Labrador Iron Mines New Millennium Iron

Consensus mean NAV mid-cycle

NAV CS base case NAV consensus

Source: IBES, Credit Suisse estimates (Note: NML.TO consensus upside continues > 500% off page)

01 December 2011

Alderon Iron Ore Corporation (ADV.TO) The Kami project is located on some of the best real estate in the Labrador Trough; surrounded by existing iron ore mines (Exhibit 10). Management are not shy of the Bloom Lake / Consolidated Thompson comparisons, and while there are numerous direct comparisons between these projects (scale, grade, location, management) there are also some important differences (Exhibit 11). In our opinion this project faces a number of headwinds that were not present for Bloom Lake, and which the market has overlooked. These under-appreciated differences are the basis of our below-consensus valuation call. Cliffs Natural Resources (CLF) CLF was beneficiating low grade iron ore in North America before iron ore was even discovered in the Pilbara, and there are few mining businesses globally that come close in terms of iron ore mining longevity. That said, the company is currently going through one of its cyclical diversification phases, and has so far struggled with leveraging its iron ore expertise into other commodities. 2012 looks set to be a show me year as continuation of recently acquired coal activities is assessed. Although we believe CLF is relatively cheap against its global comparables (Exhibit 62 - Exhibit 64), we struggle to get excited about the long term growth story. Labrador Iron Ore Royalty Corporation (LIF-U.TO) LIF-U.TO is unique as an infrastructure owner, and we believe that the market has overlooked the potential value that this business will likely capture as the Labrador Trough moves from its current mine constrained state, to a more natural infrastructure constrained state. If rail is what ends up constraining the Labrador Trough, then we anticipate a significant value transfer from rail provider (LIF-U.TO) to customer. Our LIF-U.TO valuation puts us at the top of the market, and this is before we include infrastructure as a potential profit centre, which adds perhaps $6/share to our current LIF-U.TO valuation. Labrador Iron Mines (LIM.TO) We admire this business for its actions speak louder than words approach, having reinjected life back into a once-discontinued IOC project in record time. LIM.TO is now one of four iron ore producers operating in Canada, but for this what you see is what you get story, the challenge now is building longevity into the business model. We see LIM.TO as a potential consolidator of the Labrador Trough. It could use fully priced, but short mine life producing paper (currently trading at ~ $10 per resource tonne) to buy up various non-producers which currently trade at around $1/t. We have seen this story before; Atlas Iron in Australias Pilbara region started out much like LIM.TO is today, but has grown into Australias 4th largest iron ore miner after Fortescue Metals Group. NML.TO is the obvious starting point for LIM.TOs consolidation story. New Millennium Iron Corporation (NML.TO) The development of the 4.2mtpa/2013 hematite project is giving Tata steel an opportunity to test drive a Canadian iron ore project. If Tata likes what it sees, and the numbers on the 20-25mtpa/2016+ magnetite project stack up, we expect to see NML ultimately acquired by Tata Steel. The problem is, we do not see this as an imminent event. We admire NML for its focus on cost minimisation, resource optimisation, innovation, technology, and customer needs. One is unlikely to find a more thorough engineering capability in a < $1bn mkt cap iron ore mining company anywhere in the world. Collectively the senior management team have over 300 years worth of industry experience. Unlike many of its peers which are essentially short term focused opportunists, New Millennium aims to build a business to last. The corporate vision of NML is to become a significant, low cost iron ore producer in North America by the end of this decade.

North American Iron Ore

01 December 2011

Global context
Exhibit 3 provides a graphic snapshot of 2010 global iron ore production. The bubble sizes represent 2010 production level, while green indicates open pit, red is underground, and yellow is mixed open pit/underground.
Exhibit 3: Global Iron Ore Production contributions (bubbles size represents mine production)

Source: Raw Materials Data Iron Ore, Stockholm 2011

Note that North American production is fairly geographically concentrated: Most of the US production comes from around the Great Lakes of Michigan and Minnesota, and is captive to the US steelmaking industry. Most of the Canadian production is from the Labrador Trough which runs through Quebec as well as Newfoundland & Labrador. Unlike the US, the Canadian material has a very accessible route to the seaborne market at the mount of the St Lawrence Seaway on the edge of the North Atlantic (see Exhibit 5).

North American Iron Ore

USGS estimates that in 2010 the United States produced 49mt of iron ore, and Canada 35mt, as summarised in Exhibit 4. These estimates mate Canada and the United States the 8th and 9th largest iron ore producers in the world, behind Australia, Brazil, India, China, Russia, Ukraine and South Africa.

01 December 2011

Exhibit 4: World Iron Ore Production and Reserves * Note: The mine production estimate for China is based on crude ore, rather than usable ore, which is reported for the other countries
2009 Australia Brazil India China * Russia Ukraine South Africa Canada United States Iran Kazakhstan Sweden Venezuela Mexico Mauritania Other countries World total Source: US Geological Survey 394 300 245 880 92 66 55 32 27 33 22 18 15 12 10 43 2,240 2010 420 370 260 900 100 72 55 35 49 33 22 25 16 12 11 50 2,400 Ore 24,000 29,000 7,000 23,000 25,000 30,000 1,000 6,300 6,900 2,500 8,300 3,500 4,000 700 1,100 11,000 180,000 Grade 63% 55% 64% 31% 56% 30% 65% 37% 30% 56% 40% 63% 60% 57% 64% 56% 48% Contained iron 15,000 16,000 4,500 7,200 14,000 9,000 650 2,300 2,100 1,400 3,300 2,200 2,400 400 700 6,200 87,000

North American snap shot


Canadian iron ore production has better access to world markets than United States production, due to it being close to the mouth of the St Lawrence Seaway.
Exhibit 5: North American iron ore map (US and Canada)

Source: Company data

North American Iron Ore

01 December 2011

ADV.TO, LIF-U.TO, LIM.TO and NML.TO all have the ability to sell 100% of their production internationally as do CLFs Wabush and Bloom Lake mines. Please refer Appendix 1 for more information about Canadian iron ore infrastructure. The CLF United States operations however, have a ~$40/t freight barrier (requiring 25kt vessels) between themselves and the seaborne market. At current prices this barrier can be cleared, and in 2011 CLF is indeed selling a small U.S. tonnage internationally, but our longer term price deck does not make this economic.
Supplier IOC 0 2.4 0 0 0 1.4 0 8.7

The best-located assets in Canadas Labrador Trough are those with access to infrastructure. With the exception of LIM.TOs recent start up operation at Schefferville, all of the Labrador Trough production comes from the area surrounding Labrador City which is serviced by both the QNS&L/IOC (common carrier ~ 40-50mtpa current capacity, potentially expandable to 80-100mtpa before double tracking) and the QCM/ArcelorMittal (private, sufficient for AMs needs) rail lines. As well as having established nearby towns, this area is connected to hydro-generated grid power. Moving further North (and away from the port) to Schefferville and the NML properties; rail infrastructure does exist but is in need of refurbishment. This area is not connected to the Churchill Falls hydro-generation. Power availability is not such a problem for high grade hematite operations, but becomes an issue for magnetite concentration (KeMag and LabMag) which consumes 10-15x more energy. Expansion projects are in the pipeline at Muskrat Falls and potentially Gull Lake for the end of the decade. Further north again towards Adriana Resources Lac Otelnuk one moves into a region untapped by rail or road. The only access to this site at present is by float plane or helicopter.

North American Iron Ore

Exhibit 6: 2011 forecast North American iron ore supply/demand balance (totals ~ 67.7mt)
Consumer AHMSA AK Steel Essar Arcelor Mittal Severstal RG Steel US Steel Available for export Demand 6.7 * 5.2 2.9 22.8 2.8 4 23.3 n/a Equity Supply 5.1 0 0 11.3 0 0 20.8 1.3 ** Cliffs 0.5 1.4 2.9 8.7 2.8 1.6 0.6 1.4 Arcelor Mittal 0 1.4 0 (3) ** 0 0 0 5.1 Sinter 1 0 0 2.8 0 1 1.9 n/a

Source: Raw Materials & Ironmaking (* Will receive 0.1 of MagCon in 2011, ** Included in ArcelorMittal equity supply)

Exhibit 6 summarises 2011E material movements in North America. Although not listed below, Labrador Iron Mines joined ranks with the producers in 2011 with a small initial contribution. The bulk commodities sector is as much, or even more, about logistics and infrastructure as it is about resources and mining. Bulk open pit mining is not rocket science, and there may be just cents or dollars a tonne difference between a business that does this well and a business that does this poorly. By contrast, a transport solution between the mine gate and the steel mills stock pile can cost as little as $7-8/t or as much as $70-80/t. There is a massive amount of value to be created, destroyed, and transferred through the access and control of infrastructure.

01 December 2011

Exhibit 7: Labrador Trough Iron Ore Deposits bubble size represents in situ resources Blue = covered by this report, Dark (blue/grey) = in production
60
IOC's QNS&L line, 50mtpa capacity expandable to 80100mtpa. AM has its own railway Tshiuetin line, 3mtpa capacity expandable to 10mtpa for $40mn

50

No railway beyond Schefferville

40 Production (mtpa)

Lac Otelnuk

30 Carol Lake 20 Mont Wright 10 Bloom Lake 8mtpa 0 300 400 500 600 700 Transport distance to port (km) 800 900 Kami Schefferville DSO Project (NML)
IOC's QNS&L line, 50mtpa capacity expandable to 80-100

KeMag

LabMag

Fermont

Source: Company data, Credit Suisse estimates (for each project we have based the distance on the most likely infrastructure route not as the crow flies. Production is based on current/potential as applicable)

Why produce iron ore in Canada?


The primary reason not to produce iron ore in Canada is its proximity to the global growth market, China. Freight is roughly 2.5-3.0 times more from Canada to China than it is from Australia to China (C5 route). This differential is quite transparent, and readily forecast. We use $10/t for C5 route freight long term, so the freight differential for Canada relative to Australia is roughly $15-20/t. The offsetting advantages to this, and the reasons why we believe North America is an attractive place to produce iron ore are: Electricity cost is as little as 4c/kwhr. This compares to around 16c/kwhr in Western Australia. For a typical iron ore concentrate project requiring perhaps 15W per tonne of concentrate (see Exhibit 27), a 12c/kwhr power differential is worth about $5/t of concentrate. Canada has extensive technical expertise in mining, and labour rates are far lower than other major iron ore regions such as Australia. Quebec (hosting a large portion of the Labrador Trough) was ranked the most favourable mining jurisdiction in the world by Fraser institute from 2008-2010, although we should note that its 2011 ranking is threatened by the proposed Bill 14. Excess infrastructure capacity. Not only do a number of the infrastructure assets in Canada have excess capacity, but at both of the ports we have visited the Port CEOs appeared committed to not only accommodating new projects, but also using government funding to assist in their construction.

North American Iron Ore

10

01 December 2011

Plan Nord a 25-year, $80bn infrastructure spend program announced by the Quebec government in May 2011 which aims to promote resources development above the 49th parallel. Royalties are lower in Canada than other iron ore producing regions such as Australia and Brazil. BHP recently agreed to a near 2% royalty increase with the Western Australian government on its fines, taking the royalty rate to 7.5%. And lastly for the global warming believers, increasing temperatures are reducing the arctic freeze to the north of Canada. If temperatures continue to follow their recent trend this sea route will become more and more accessible, shortening the current voyage via the tip of South Africa and reducing North Americas freight disadvantage to China.

North American Iron Ore

Capitalising North Americas natural advantages


From a production exposure perspective, the best way to play the product quality them we discuss above are through ADV.TO, LIF-U.TO, and NML.TO. All three have long mines lives, and offer full exposure to seaborne prices. CLF does offer an opportunity to play the same theme through its Canadian assets, but the story is diluted by the US exposure which due to its geographical/freight barriers to entry/exit, is somewhat insulated from world markets. The taconite based materials that CLF produces from around the Great Lakes are generally of inferior quality to that which comes out of the Labrador Trough in Canada. LIM.TO has a high quality product in its early years, but longer term is not expected to be materially above the index at 62% Fe. LIM.TO is also relatively short life, and its story may be over before we really see the quality theme we discuss above play out. Further LIM.TO is producing low energy intensity hematite dominate product so it does not capitalise on North Americas relative power advantage. Error! Reference source not found. provides a valuation summary of our Global Iron Ore coverage, and team of regional analysts. Credit Suisse now has research coverage of 25 global iron ore exposures. Our commodity/macro support comes from the Commodities Team within our Fixed Income Division. Analysts based in London and Singapore specialise in the Iron Ore space.

11

North American Iron Ore

Exhibit 8: Summary of Canadian iron ore deposits / projects


Company Adriana Resources Inc Advanced Exploration Alderon Iron Ore Arcelor Mittal Operation Lac Otelnuk Roche Bay Kami Interest Tonnes 40% 50% 100% 70% 100% 65% 83% 100% 100% 75% 100% 100% 100% 15% 36% 36% 20% 100% 59% 2,373 5,741 3,462 79 1,231 2,373 38.1% 29.5% 31.2% 58.6% 32.2% 38.1% 904 1,695 1,080 47 397 904 137 610 389 9 397 531 6,260 323 1,088 865 4,467 Resource Attrib Production % Fe Contained Contained Tonnes Cash Cost Start up 29.1% 26.7% 30.2% 65.0% 29.5% 1,824 86 328 562 1,320 729 43 328 394 1,320 50 5 8 18 14 31 45 14 producing 2018 2015 2015 Capital Expenditure US$ US$/t 12,909 1,113 989 3,973 258 223 124 221 Province Quebec Nunavut Newfoundland & Labrador / Quebec Nunavut Quebec Quebec Quebec Quebec Quebec Quebec Newfoundland & Labrador Newfoundland & Labrador Newfoundland & Labrador Newfoundland & Labrador Newfoundland & Labrador Quebec Quebec Quebec Newfoundland & Labrador

Mary River Project (Baffinland) Quebec Cartier Mining / Mont Wright Century Iron Mines Duncan Lake Champion Minerals Fire Lake North Cliffs Natural Resources Wabush Lamelee & Peppler Bloom Lake Labrador Iron Mines Schefferville - Silver Yards Schefferville Houston/Redmond Schefferville - Howse Labrador Iron Ore Royalty Corporation New Millennium Iron Carol Lake LabMag KeMag DSO Project (NML) Ungava Bay Carol Lake

852 24.5% 209 136 1,061 28.8% 306 252 CLF does not publish resources 1,017 29.6% 301 301 827 29.4% 243 182 17 57.3% 10 10 22 57.3% 13 13

9 5 8 2.5 2.5 2.5 26 15 22 4 0 26

51

2015 producing 2010 producing 2013 2018 producing

1,368

157

55-60 50-65

> 1000 97 97 97

> 125 39 39 39

35 28 31 24.58

2016 2016 2012 2016 producing

3,138 4,314 348 6,438

209 196 83 322

Oceanic Iron Ore RIO Tinto

Source: Company data, Credit Suisse estimates

01 December 2011

12

North American Iron Ore

Exhibit 9: Credit Suisse Global Iron Ore Coverage


Company Alderon Iron Ore Anglo American Aquila Resources Ltd Atlas Iron Ltd BHP Billiton Cliffs Natural Resources Companhia Siderrgica Nacional (CSN) Eurasian Natural Resources Corporation Ferrexpo Fortescue Metals Group Gindalbie Metals Ltd Jindal Steel & Power Ltd JSW Steel Kumba Labrador Iron Mines Labrador Iron Ore Royalty Corporation MMX Mount Gibson Iron Ltd New Millennium Iron OneSteel Rio Tinto Tata Steel US Steel Vale Xstrata Country Analyst Canada Nathan Littlewood London Australia Australia Australia USA Brazil London London Australia Australia India India South Africa Canada Canada Brazil Michael Shillaker Paul McTaggart Matthew Hope Paul McTaggart Nathan Littlewood Ivan Fadel Liam Fitzpatrick Liam Fitzpatrick Matthew Hope Matthew Hope Neelkanth Mishra Neelkanth Mishra Semyon Mironov Nathan Littlewood Nathan Littlewood Ivan Fadel Ticker ADV.V AAL.L AQA.AX AGO.AX BHP.AX CLF CSNA3.S A ENRC.L FXPO.L FMG.AX GBG.AX JNSP.BO JSTL.BO KIOJ.J LIM.TO LIF_u.TO MMXM3. SA MGX.AX NML.TO OST.AX RIO.AX TISC.BO X VALE XTA.L Rating N N N O O O O O N O O O U U O O O O O O O U N O O TP US$ 2.55 54.95 6.85 4.21 46.08 90.00 13.11 14.60 6.11 6.78 1.42 12.92 9.33 49.94 8.14 44.15 7.21 2.15 1.86 2.38 92.48 8.81 24.00 47.00 26.69 SP US$ 2.32 38.00 6.86 3.07 37.23 67.81 8.16 10.43 4.70 4.92 0.53 10.09 11.96 62.82 6.62 36.55 3.56 1.35 1.48 0.87 67.51 7.78 27.30 23.25 15.97 upside Mkt Cap % US$m 10% 45% 0% 37% 24% 18% 61% 40% 30% 38% 167% 28% -22% -20% 16% 21% 103% 59% 26% 192 50,283 2,569 2,748 184,183 9,698 11,468 13,436 2,768 15,306 605 9,427 2,669 20,123 358 2,339 2,204 1,458 261 EV/EBITDA 12m 24m -11.3 4.3 29.8 6.4 4.6 2.9 4.9 4.8 3.5 4.9 9.8 6.8 6.1 7.6 2.4 11.9 8.9 1.6 n.m. 3.9 3.8 5.3 4.8 4.0 4.4 6.4 8.1 5.7 5.9 4.2 -20.1 3.8 26.1 4.8 4.1 2.9 4.4 4.3 3.9 3.8 2.9 5.6 5.2 7.6 3.3 11.3 3.2 1.7 5.5 3.2 3.7 4.7 4.1 4.4 3.6 4.7 4.5 5.8 3.5 3.3 PE 12m -15.6 8.5 48.2 13.3 8.7 5.2 8.3 7.9 4.4 8.2 25.0 10.5 14.1 10.8 11.4 9.3 65.0 3.3 -42.8 4.0 8.0 3.8 12.6 5.6 7.7 13.6 7.1 8.6 4.2 16.4 24m -21.2 8.0 48.6 11.6 7.7 5.2 7.2 7.1 5.1 6.4 5.2 9.2 11.5 11.3 4.0 10.0 25.8 3.5 37.2 3.0 7.9 4.4 8.4 6.5 6.1 8.4 6.7 6.4 4.1 5.7 ROE 12m 24m -11.9 12.0 12.1 11.2 29.1 20.3 32.4 14.1 32.0 38.1 2.9 23.2 6.5 70.2 32.4 72.2 2.1 25.4 -4.7 5.6 20.6 16.4 8.4 20.2 12.0 22.5 17.8 41.6 18.8 7.4 -10.1 11.4 11.4 12.3 26.7 17.2 33.4 13.9 22.0 32.7 11.5 21.5 8.5 60.4 17.7 60.7 5.3 20.0 4.5 6.4 17.5 16.2 11.3 15.6 13.3 20.9 16.9 31.8 14.2 12.4 Div. Yield 12m 24m 0.0 2.1 0.0 2.0 3.2 1.2 7.9 2.3 140.4 1.3 0.0 0.4 1.9 7.2 0.0 0.0 0.4 6.1 0.0 12.5 2.0 2.6 0.7 8.9 2.7 13.5 1.3 0.4 76.4 1.3 0.0 2.3 0.0 2.0 3.4 1.3 9.2 2.5 140.4 1.7 0.0 0.5 2.5 7.2 0.0 0.0 1.1 6.1 0.0 17.5 2.1 2.7 0.7 7.1 2.9 14.0 1.4 0.4 78.9 1.5
01 December 2011

Australia Matthew Hope Canada Nathan Littlewood Australia Australia India USA Brazil London Michael Slifirski Paul McTaggart Neelkanth Mishra Richard Garchitorena Ivan Fadel Liam Fitzpatrick

175% 1,162 37% 105,117 13% 7,462 -12% 3,931 102% 121,615 67% 46,776

Global average Australia average North America average (excl ADV.TO and NML.TO) South America average Europe average Source: Company data, Credit Suisse estimates

13

01 December 2011

Americas / Canada

Alderon Iron Ore Corporation


(ADV.TO)
Rating Price (30 Nov 11, C$) Target price (C$) 52-week price range Market cap. (C$ m) Enterprise value (C$ m) NEUTRAL* [V] 2.36 2.60 4.05 - 2.22 195.21 178.60

Bloom Lake II tougher the second time around?


We initiate coverage on Alderon Resources with a NEUTRAL rating and C$2.60 target price. Our target price puts us well below the current $4.506.25/share consensus TP range, primarily because we do not believe that the stock deserves the acquisition premium it currently attracts. We like ADV.TO for its location, geology, and proven management track record, but are cautious about being blinded by the Consolidated Thompson euphoria. We do not believe that ADV.TO is a smart acquisition for CLF, and coming into production at a time when the Labrador Trough is likely to be infrastructure constrained will mean incremental costs to this project which have not been included in ADV.TOs current estimates or economic analysis. Until recently, ADV.TO had planned to release a Pre Feasibility Study (PFS) in Q2 2012, but this now seems to have been bypassed and the company is targeting a Detailed Feasibility Study (DFS) in Q3 2012. The DFS will include the recently defined North Rose resource for a significant increase in LOM tonnage and small improvement in strip ratio, for an overall boost to project economics. More importantly, ADV.TO will be a step closer to having a document with which it can seriously start marketing this project to strategic partners to assist in funding, potentially coinciding with a sale of Altius Minerals 40% stake in the company. Our C$2.60/share target price is struck off a C$2.57 NAV based valuation and 0.43x P/NAV multiple. ADV.TO is the least developed project in our universe, having only completed PEA, so relative to the peer group it has a large portion of its valuation derived from the DCF tail providing excellent leverage for the LT iron ore bulls.
12/10A -0.04 -55.4 -321.4 -4.6 -0.10 -31.9 -39.6 -24 -3.54 82.72 1.3 -16.6 -16.3 12/11E 12/12E -0.31 -0.14 -7.7 -17.1 -55.8 -142.4 -27.1 -14.0 -0.26 -0.12 -9.2 -18.9 -6.7 -13.0 -17 -20 -28.93 -11.40 IC (current, C$ m) EV/IC (x) Dividend (Next Qtr., C$) Dividend yield (%) 12/13E -0.11 -21.1 -195.6 -8.0 -0.10 -23.2 -22.8 -11 -6.54 88.82 2.0

Research Analysts Nathan Littlewood 416 352 4585 nathan.littlewood@credit-suisse.com

Share price performance


Daily Dec 01, 2010 - Nov 30, 2011, 12/01/10 = C $2.31

5 4 3 2 Dec-10 Price Apr-11 Aug-11 Indexed Price Relative

On 11/30/11 the S&P/TSX COMPS INDEX closed at 12204.11

Quarterly EPS 2010A 2011E 2012E

Q1 -0.02 -0.07 -0.04

Q2 -0.04 -0.06 -0.04

Q3 -0.05 -0.13 -0.03

Q4 0.06 -0.04 -0.03

North American Iron Ore

*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).

Financial and valuation metrics Year EPS (CS adj.) (C$) Prev. EPS (C$) P/E (x) P/E rel. (%) Revenue (C$ m) EBITDA (C$ m) OCFPS (C$) P/OCF (x) EV/EBITDA (current) Net debt (C$ m) ROIC (%) Number of shares (m) BV/share (Next Qtr., C$) Net debt (Next Qtr., C$ m) Net debt/tot cap (Next Qtr., %)
Source: Company data, Credit Suisse estimates.

14

01 December 2011

Investment Thesis
We like ADV.TOs numerous similarities with Bloom Lake, but there are also some important differences. ADV.TOs Kami will likely be entering the market when current excess infrastructure capacity in the Labrador Trough has been already utilised by others. The financial hurdles and construction risks for a business requiring new infrastructure build are higher than for those that can utilise existing facilities. We see a significant gap between a fundamentals based valuation for this story and the takeover premium based valuation that management has attracted by promoting the Bloom Lake based comparison, of which this team is rightly very proud. We believe that there are more logical acquisitions for highly speculated acquirers Cliffs Natural Resources than ADV.TO. Although our current house price deck (LT US$90/t CFR China) does make it difficult to get excited about ADV.TO from a valuation perspective, we note that this stock has more leverage to LT price assumptions than anything else we cover. Weve seen the spot iron ore price bounce off the Chinese cost curve at US$120/t CFR recently, and on a LT US$120/t scenario we would have a ~$12/share target price for ADV.TO. Consolidated Thompson / Bloom Lake comparison
Exhibit 10: Project Plan

Source: Company data

Located on some of the best real estate in the Labrador Trough, ADV.TOs Kami property is surrounded by established iron ore mines. Aside from LIM.TOs recent 1.5mtpa start up operation, all of Canadas existing iron ore production (4 mines) is generated within close proximity of Kami; CLFs Wabush (5

North American Iron Ore

15

01 December 2011

mtpa) and Bloom Lake (8mtpa), ArcelorMittals Mont Wright (14mtpa), and IOCs Carol Lake (17mtpa). At face value, the Consolidated Thompson transaction makes ADV.TO look extremely cheap. Our own capex estimate for Kami of $1.45bn combined with ADV.TOs current EV of around $200mn suggests a buy + control premium (25%) + build cost = $1.7bn. This is about one-third of what CLF paid for Consolidated Thompson.
Kami Location Province Resource tonnage (mt) Resource grade (% Fe) Magnetite grade (% Fe) Initial scale (mtpa) Expansion (mtpa) Mass recovery Waste:Ore Waste:Product 2km East of Fermont & 10km SW of Wabush Newfoundland & Labrador 1,088 30.2 19.8 8.0 16.0 37.8 1.92 5.08 Bloom Lake 13km NW of Fermont Quebec 910 29.4 7.9 8.0 16.0 41.0 0.97 2.37

Development and execution risk


Exhibit 12: Labrador Trough production guidance for potential users of QNS&L rail
120 100 80 60 40 20 0 2010 2011 ADV - Kami CLF - Bloom Lake NML - Hematite 2012 2013 2014 2015 2016 2017 2018 2019 2020

North American Iron Ore

Exhibit 11: Kami and Bloom Lake comparison

Source: Company data, Credit Suisse estimates

Kami has many similarities with Bloom Lake, and management is rightly not shy about promoting these. The projects are based on similar size deposits (Kami is in fact a little larger), similar grade, similar location, similar scale (8mtpa going to 16) and both are offspring of the same Forbes & Manhattan team (a Toronto-based Merchant Bank that specialises in incubating junior mining companies). Although there are many similarities with Bloom Lake, there are also some important differences. In Exhibit 22 we use Bloom Lake operating cost guidance as a starting point to derive an EV/EBITDA based valuation for ADV.TO of C$1.12/share.

CHM - Fermont IOC - Carol Lake Current rail capacity

CLF - Wabush LIM - Schefferville Potential rail capacity

Source: Company data

16

01 December 2011

Perhaps the most significant difference between Kami and Bloom Lake is that Kami will be entering the market at a point where the Labrador Trough as region is facing infrastructure constraints. The following projects are more advanced than ADV.TOs Kami and likely ahead of it in the infrastructure queue: CLFs Bloom Lake expansion to 16mtpa, and Wabushs relatively constant 4-5mtpa IOCs expansion to 23 or maybe 26mtpa, Labrador Iron Mines ramp up to 5mtpa, New Millennium / Tata Steels initial 4.2mtpa, and

For a total of 56mtpa. Currently, it is estimated that the rail has capacity for 40-50mtpa (though IOC has indicated it can be expanded well beyond this, at a cost) and the longer term Labrador Trough production will also be dependent on a yet to be funded port/berth solution. Infrastructure bottlenecks can be addressed/removed, and but doing so costs capital. The problem we see with ADV.TOs Kami numbers, just like those of its peers, is that these capital contributions have not been allowed for nor has there been an opex allowance to reflect either a) increased competition for accessing an unexpanded infrastructure platform or b) repayment to a third party which builds the infrastructure on ADV.TO's behalf. Utilising an idle infrastructure asset such as QNS&Ls railway line which has a book vlaue of near zero, is a very different financial proposition to needing new infrastructure built in a tight labour market with competition from other rail users. Superior leverage to long term iron ore price Our analysis suggests that ADV.TOs relatively long mine life and high operating costs provide more leverage to the long term iron ore price than anything else we cover. We believe that the risk to LT iron ore prices remains very much to the upside, and see significant disappointment as the industry watches for new projects coming on line through 2012-2016. Currently, the Credit Suisse LT iron ore price of US$90/t makes it difficult for us to be bullish ADV.TO from a valuation perspective, but this would quickly change with a US$10 20/t increase to LT price assumptions.
Exhibit 13: Leverage to LT iron ore price

Valuation impact

North American Iron Ore

4.00 ADV 3.00 2.00 1.00 -20% 0.00 -1.00 -2.00 ADV
Source: Company data, Credit Suisse estimates

LIF-U LIM NML -10% base case 10% 20%

LIF-U

LIM

NML

17

01 December 2011

Exhibit 14: Financial Summary


Alderon Iron Ore Corporation (ADV)
2009 2010 0.0 -4.6 0.0 -4.6 0.0 -0.1 -4.6 -3.0 -1.6 0.0 0.0 -1.6 0.0 0.0 -1.6 24.4 0.0 0.5 0.0 24.9 88.7 0.0 0.3 89.0 113.9 0.9 0.0 0.1 1.0 112.8 113.5 0.0 0.0 112.8 -24.4 -4.6 0.0 0.0 -3.0 -1.1 5.0 -3.6 0.0
0.0

Year ending 2011 2012


0.0 -27.1 0.1 -27.0 0.0 -0.3 -26.9 -1.4 -25.5 0.0 0.0 -25.5 0.0 0.0 -25.5 16.6 0.0 0.0 0.0 16.6 88.7 0.0 0.3 89.0 105.6 0.0 0.0 0.2 0.2 105.5 105.5 0.0 0.0 105.5 -16.6 -27.0 0.0 0.1 0.0 5.0 0.7 -21.2 0.0
0.0 0.0

31 Dec 2013 Share Price: C$2.36


0.0 -8.0 0.1 -8.1 0.0 5.9 -13.9 -3.9 -10.0 0.0 0.0 -10.0 0.0 0.0 -10.0 90.8 0.0 0.0 0.0 90.8 88.8 0.0 0.3 89.2 180.0 0.0 80.0 0.2 80.2 99.9 99.9 0.0 0.0 99.9 -10.8

2009

In CADmn, unless otherwise stated 2010 2011 2012 2013

Profit & Loss


Sales revenue EBITDA Depr. & Amort. EBIT Associates Net interest Reported PBT Income tax Profit after tax Minorities Preferred dividends Normalised NPAT Analyst adjustments Unusual item after tax Reported NPAT

12/09A 12/10A 12/11E 12/12E 12/13E


0.0 -0.1 0.0 -0.8 0.0 0.0 -0.5 0.1 -0.5 0.0 0.0 -0.9 0.0 0.0 -0.9 1.5 0.0 0.0 0.0 1.5 0.0 0.0 0.0 0.0 1.5 0.2 0.0 0.0 0.2 1.3 -0.2 0.0 0.0 1.3 -1.5 -0.8 0.0 0.0 0.1 0.3 0.3 -0.2 0.0
0.0

1/12/2011 11:23

0.0 -14.0 0.1 -14.1 0.0 2.3 -16.4 -4.6 -11.8 0.0 0.0 -11.8 0.0 0.0 -11.8 60.0 0.0 0.0 0.0 60.0 88.8 0.0 0.3 89.1 149.1 0.0 40.0 0.2 40.2 108.9 108.9 0.0 0.0 108.9 -20.0 -14.1 -1.4 0.1 4.9 0.0 -0.2 -10.7 0.0
0.0 0.0

NEUTRAL RATIRating 2.60 TARG Target Price C$ 10.17 vs % TP_U Share price VALU ADV.TO is an iron ore developer focused on the Kami project, located in the Labrador Trough region of Eastern Canada. A PEA released in October 2011 scoped the project as 8mtpa production at a capital cost of C$989mn. Other releases indicated that the company is aiming to commence production in 2014

Earnings
Equiv. FPO (period avg.) c_EP c_EP EPS (Normalised) EPS_ EPS Growth c_DP DPS c_PA Dividend Payout c_FC Free CFPS mn c % c % c x x x % % x %
% x x

12/09A 12/10A 12/11E 12/12E 12/13E


4.4 -19.6 0.0 0.0 -3.7 -12.0 -209.8 -1,390.8 0.0 -1.6 -49.7 413.4
0.0 -7.2

36.6 -4.3 78.3 0.0 0.0 -9.8 -55.4 -37.4 -37.2 0.0 -4.2 0.8 -1.4
0.0 1.0

82.8 -30.8 -623.9 0.0 0.0 -25.6 -7.7 -6.3 -6.3 0.0 -10.9 1.9 -24.2
0.0 1.0

85.3 -13.8 55.2 0.0 0.0 -12.5 -17.1 -12.1 -12.2 0.0 -5.3 1.8 -10.8
0.0 1.4

89.7 -11.2 19.0 0.0 0.0 -10.2 -21.1 -21.1 -21.4 0.0 -4.3 2.1 -10.1
0.0 1.8

Balance Sheet
Cash & equivalents Inventories Receivables Other current assets Current assets Property, plant & equip. Intangibles Other non-current assets Non-current assets Total assets Payables Interest bearing debt Other liabilities Total liabilities Net assets Ordinary equity Minority interests Preferred capital Total shareholder funds Net debt

12/09A 12/10A 12/11E 12/12E 12/13E

Valuation
c_PE P/E ALT(EV/EBIT ALT(EV/EBITDA c_DIDividend Yield c_FC FCF Yield c_PB Price to Book

Returns
c_RO Return on Equity c_I_N Profit Margin c_I_S Asset Turnover c_AS Equity Multiplier c_RO Return on Assets c_RO Return on Invested Cap.

% %

-57.4 423.2

-1.4 -1.8

-24.2 -28.9

-7.9 -11.4

-5.6 -6.5

Gearing
c_GE Debt to Net debt + Equity % Net x c_NE Net Debt to EBITDA c_I_E Cover (EBITDA/Net Int.) x Int x c_I_E Cover (EBIT/Net Int.) Int % (c_CCapex to Sales % (c_CCapex to Depreciation 698.3 Net Cash Net Cash Net Cash Net Cash 12.3 5.3 0.6 1.4 1.4 73.7 107.8 -6.1 -1.4 73.4 107.6 -6.1 -1.4

Cashflow
EBIT Net interest Depr & Amort Tax paid Working capital Other Operating cashflow Capex
Capex - expansionary Capex - maintenance

12/09A 12/10A 12/11E 12/12E 12/13E

Assumptions & Operations

12/09A 12/10A 12/11E 12/12E 12/13E


79.1 0.00 0.00 131.9 0.00 0.00 168.9 0.00 0.00 152.5 0.00 0.00 140.0 0.00 0.00

Acquisitions & Invest Asset sale proceeds Other Investing cashflow Dividends paid Equity raised Net borrowings Other Financing cashflow Total cashflow Adjustments Net Change in Cash

0.0 0.0 0.0 0.0 0.0 0.1 0.0 1.5 1.6 1.5 0.0 1.5

-0.1 0.0 -6.5 -6.7 0.0 33.5 0.0 0.0 33.5 23.2 0.0 23.2

0.0 0.0 0.0 0.0 0.0 9.2 0.0 0.0 9.2 -12.0 0.0 -12.0

0.0 0.0 0.0 0.0 0.0 14.0 40.0 0.0 54.0 43.4 0.0 43.4

-8.1 M_IRONORE_FINES_CFRC Iron Ore (62% IODEX) -4.9 0.1 c_RPP Equity Iron Ore Sales 3.9 c_RPP Equity Concentrate Sales 0.0 -0.2 -9.1 Projects & Mines 0.0 Kami - 8mtpa base case 0.0 Kami - 16mtpa expansion Sub-Total 0.0 0.0 Corporate 0.0 0.0 Net Cash / (debt) 0.0 Corporate Sub-Total 0.0 0.0 Total 40.0 0.0 40.0 - Shares on issue (mn) 30.9 - Target P / NAV 0.0 - WACC (nominal) 30.9

US$/t CFR mt mt

Net Asset Value C$mn C$/sh 273 3.27 326 3.90 599 7.17 C$mn 17 -58 -42 558 83.6 0.43 x 10.0% C$/sh 0.20 -0.70 -0.50 6.67

multiple 0.70 x 0.20 x

Valuation C$mn C$/sh 191 2.29 65 0.78 257 3.07 C$mn 17 -58 -42 215 C$/sh 0.20 -0.70 -0.50 2.57 2.36 0.40 x

multiple 1.00 x 1.00 x

- Current share price - Current P/NAV

Source: Company data, Credit Suisse estimates

North American Iron Ore

18

01 December 2011

Valuation
Summary
ADV is currently trading at 0.79x our 8mtpa NAV or 0.38x our 8 + 8 = 16mtpa NAV. We believe that for an unfunded early stage project that is still ~5 years off production 0.79x P/NAV is an ambitious multiple. Our target NAV multiple is closer to 0.43x which generates a NAV based valuation of C$2.57/share (see Exhibit 15). ADV.TO trades at US$0.49 per contained tonne in resource (see Exhibit 24). One of the biggest challenges with valuing a stock such as ADV.TO is the significant gap, or disconnect, between: Our stand alone equity valuation, based on our house price deck, and An M&A/takeover based valuation by an acquirer with a more bullish price outlook than our own. ADV.TOs marketing efforts are clearly aimed at attracting this takeover premium into the valuation.

We know this gap exists, and is very wide. As the markets view on M&A shifts, as is the ADV.TO valuation as it moves between these two valuation extremities. As an illustration of the variance between these two valuation perspectives, we note that our stand-alone DCF for Bloom Lake today, using our house price deck, is roughly US$1.7bn. We can arrive at a comparable number for ADV.TOs Kami using other valuation tools. CLF thought it was worth almost 3x more; C$4.9bn. Although we believe that ADV.TOs Kami is a viable project, at current levels it is near fair value on a stand-alone equity basis. This puts us at the bottom of the street from a valuation perspective. We do not believe, as discussed here-in, that ADV.TO deserves the massive takeover premium that directly or indirectly the rest of the street appears to have baked into its numbers.

Those with a different view on the appropriate risk weightings are encouraged to apply their own with a maximum valuation under a risk free scenario being $6.72/share, as below.

North American Iron Ore

Net Present Value


Our NAV uses a consistent discount rate of 10%, and we have a separate DCF for the 8mtpa base case and the 16mtpa expansion scenario. Our NAV based valuation captures: 70% of the 8mtpa base case DCF, and 20% of the expansion DCF to 16mtpa.

19

01 December 2011

Exhibit 15: DCF sum of parts valuation

Projects & Mines Kami - 8mtpa base case Kami - 16mtpa expansion Sub-Total Corporate Net Cash / (debt) Corporate Sub-Total Total Notes: - Shares on issue (mn) - Target P / NAV - WACC (nominal)

Net Asset Value C$mn C$/sh 273 3.27 326 3.90 599 7.17 C$mn 17 -58 -42 558 C$/sh 0.20 -0.70 -0.50 6.67

weighting 0.70 x 0.20 x

Valuation C$mn C$/sh 191 2.29 65 0.78 257 3.07 C$mn 17 -58 -42 215 C$/sh 0.20 -0.70 -0.50 2.57

weighting 1.00 x 1.00 x

83.6 0.43 x 10.0%

- Current share price - Current P/NAV - Valuation upside

2.36 0.40 x 9%

Source: Company data, Credit Suisse estimates

From a development perspective ADV.TO is the least advanced project within our universe, and the ramp up of production coincides with the retreat of our house price deck to our LT levels. It is not surprising therefore, that the bulk of our DCF sits in the post 2020 tail, and that our ADV.TO valuation is highly leverage to LT price assumptions.
Exhibit 16: 5 year rolling NAV
25 20 15 C$/share
C$/share 10 5 0 -5 -10 0% -3% -1% 11% 7% 20% 25%

Exhibit 17: Contributions to 2011 NAV


15 256% 300% 250% 200% 150% 100% 50% -30% 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 >2020 -50% -100% Kami - 8mtpa base case Corporate % of NAV Net Cash / (debt) Kami - 16mtpa expansion -150%

10 5 0 -52011Q1 -10 -15 Kami - 8mtpa base case Corporate Raw Total Net Cash / (debt) Kami - 16mtpa expansion 2011Q4 2012Q3 2013Q2 2014Q1 2014Q4 2015Q3

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

There are only modest capital expenditures over the next few years and no revenue, so the 5 year rolling NAV model is relatively flat.

NAV sensitivities
We maintain four different macro scenarios in our models; CS assumptions (official house forecasts), Spot (US$140/t CFR), Mid-Cycle (CS LT price run from today into perpetuity) and Consensus (based on the Consensus Economics quarterly broker survey. Our NAV under each of these scenarios is summarised below. Consensus and Spot commodity price scenarios both offer upside to our more conservative house price deck.

North American Iron Ore

20

01 December 2011

Exhibit 18: NAV sensitivities under various macro scenarios


20.00 18.00 16.00 14.00 $/share 12.00 10.00 8.00 6.00 4.00 2.00 0.00 CS base case Raw NAV Credit Suisse target price Spot Mid-Cycle Consensus $2.57 $1.83 $6.67 $8.55 $5.13 $4.28 $10.13 $18.75

Risk Weighted NAV Share price

Source: Company data, Credit Suisse estimates

We assume a (2012 real) capital cost for this project of C$1.25bn, or C$1.45bn by 2015 once it is built, the derivation of which is discussed in the Asset Review section of this report. Modelling capex at guidance of $989mn would increase our current $2.57/share risk weighted NAV (and likely target price) to $4.28/share. $100mn (or ~10%) additional capex erodes about $0.60/share off the valuation on our modelling. Kami will be a highly price leveraged project, which we would expect to see sitting in the fourth quartile of the global cash cost curve. This will mean that it offers immense leverage to LT price.. With a CAD$ cost base and US$ revenues, flexing the exchange rate assumption offers the same leverage.
Exhibit 19: NAV sensitivities

4.00 3.00 Valuation impact 2.00 1.00 -20% 0.00 -1.00 -2.00 iron ore
Source: Company data, Credit Suisse estimates

-10%

base case

10%

20%

8mtpa capital cost

USDCAD

North American Iron Ore

21

01 December 2011

As an acquisition target
Kamis sensitivity to price and exchange rate assumptions can not be removed, but its value as a project could be enhanced by sharing infrastructure with one of its neighbours. This has the potential to compress the schedule, and reduce initial capital costs.
Exhibit 20: Iron Ore sector deal value (US$mn) and count

$16,000

12

$12,000

$8,000

$4,000

$0

0 DecQ 03 DecQ 04 DecQ 05 DecQ 06 DecQ 07 DecQ 08 DecQ 09 DecQ 10 DecQ 11 Volume Deal Count Linear (Deal Count)

Source: Bloomberg

ADV and CLF the strategic argument is there, but is it really that compelling? M&A is clearly a growing theme in this industry, and one that is often raised in relation to ADV. CLF seems to be speculated as the most logical acquirer and while we consider this theme below, we see it as a low probability outcome. CLF needs to reduce or at least dilute its US steel industry dependency, and Kami offers an opportunity to realise this in a commodity and region it already knows well.

Reserve / Resource life (years)

North American Iron Ore

Exhibit 21: Estimate Reserve/Resource life of mines surrounding ADV.TOs Kami


140 120 100 80 60 40 20 0 MI&I Resources P&P Reserves P&P Reserves MI&I Resources P&P Reserves MI&I Resources P&P Reserves 47 23 30 15 16 13 71 64 37 54 36 38 25 121

Bloom Lake (8 to 16mtpa) CLF

Wabush (4.5 to Mont Wright + Fire Lake (14 to 5.5mtpa) 24mtpa) CLF ArcelorMittal

Carol Lake (17 to 26mtpa) IOC

Mine life - current production

Mine life - @ target production

Source: Company data, Credit Suisse estimates

22

01 December 2011

From a mine life perspective, Cliffs Natural Resources seems the most logical acquirer of Kami with its Wabush property having only ~ 13-16 year reserve life remaining. Of the other producers in the region; ArcelorMittal has the longest mine life and IOC does not appear to have a pressing need to address theirs. That said, 13 years is a very long time in this business, within which a lot can change. We wont really know what CLFs appetite for another Forbes & Manhattan offering will be like until it has fully digested Consolidated Thompson. Early indications are, however, that CLF may be experiencing some minor indigestion issues. Perhaps the more logical acquisition for CLF is not ADV.TO at all but rather LIFU. At this stage the Labrador Trough is mine/supply-constrained, so transactions are largely about ownership of resources. When the Labrador Trough becomes infrastructure constrained, wed expect the M&A focus to move to infrastructure. A minority interest in IOC is not only a valuable asset in its own right, but it may also help derisk CLFs Bloom Lake expansion aspirations by providing it greater control over infrastructure allocation. (For further discussion on this idea, please refer the LIF-U.TO section of this report.)

ADV.TO valuation through CLFs eyes? CLF knows Bloom Lake well, and is likely to understand the comparisons that ADV.TO makes between Kami and Bloom Lake as well as anyone. Post acquiring Forbes & Manhattans last iron ore creation (Bloom Lake), we suspect that new owner CLF has learnt some valuable lessons about due diligence. There were a number of capital items that Consolidated Thompson had deferred on Bloom Lake in order to make capital cost guidance. This has left an operation with numerous legacy issues that need to be resolved: Bloom Lake has a relatively punitive rail agreement with QNS&L, which costs it far more than a final offer arbitration (FOA) outcome would. Bloom Lake has to use trans-shipping in order to load vessels, because its berth is draft constrained. Bloom Lake has an underspecified tailings management system, which needs upgrading. Bloom Lake may need a magnetite concentrate circuit installed in order to recover the roughly 1/3 magnetite contained in resource.

Our DCF for Bloom Lake is around US$1.7bn, or about 1/3rd of what CLF paid for it. We suspect that CLF is currently feeling at least some degree of buyers remorse, and would be surprised to see it take another bite of Forbes & Manhattan pie until it has finished digesting, and reflecting upon the purchase of, the previous slice. As summarised in Exhibit 22, we believe that Kamis operational costs should be fairly similar to Bloom Lakes in an infrastructure status quo world, and almost unquestionably higher than ADV.TOs PEA guidance of C$44.87/t. As noted in our opening remarks, to assume that the infrastructure status quo remains (of surplus infrastructure capacity) is probably optimistic, and the Kami numbers ought to be adjusted to reflect this. Simplistically speaking, we believe that additional port and rail capital costs could easily add $50 per annual tonne to the cost of new Labrador Trough capacity (ADV.TOs current capital intensity estimate is $124/t), and a 10% ROIC on this would add $5/t to the all in cost base. If we include a notional US$5/t to reflect the need to fund, or competitively gain access to infrastructure, then Exhibit 22 illustrates that taking Bloom Lakes US$60/t as a starting point gets us to around $62/t opex for Kami. Against our LT price deck, Kami would therefore generate US$19/t EBITDA. On 6x EV/EBITDA and at 8mtpa, this implies an

North American Iron Ore

23

01 December 2011

ADV.TO valuation of around $912mn, or $1.824bn following a doubling of capacity to 16mtpa. As demonstrated in Exhibit 25, projects at scoping or PEA stage typically trade at ~ 10% the EV/t valuation of producing assets. 10% x US$912bn = US$91mn (or C$1.12/share), as a valuation for Kami today.
Exhibit 22: Kami opex forecast relative 2012 Bloom Lake guidance
$65

$60 4.0 US$/t 1.0 $55 60.0 $50 56.0 7.0 5.0 2.2

5.0

62.2 57.2

$45 2012 Bloom Lake opex Bloom Lake ramp up Potential LT Bloom Lake opex Transshipping Higher strip Altius royalty ratio Magnetite circuit Potential Infrastructure Potential Kami cash competition Kami cash cost - with cost infrastructure infrastructure competition status quo

Source: Company data, Credit Suisse estimates

Please note that the above is a scenario analysis only. Our actual modelling gives ADV.TO the benefit of the doubt, and uses much lower operating cost assumptions. Our actual operating cost assumptions are summarised in Exhibit 38.

Earnings multiples
Although we dont believe that this project would be entirely debt funded, from a modelling perspective there are far less uncertainties around modelling debt than there are equity, so this is the approach we adopt for our model. Our P/NAV multiple is sufficiently conservative that it takes into account the equity dilution that will occur if ADV.TO issues paper as < 1.0x NAV. The consequence of the debt finance modelling is that our balance sheet/interest numbers make PER analysis somewhat meaningless. We can however use EV (fixed)/EBITDA. At a reasonably conservative 5x, our analysis suggests that post commissioning ADV.TO could support a $8-12/share valuation, which is fairly consistent with our raw NAV.

North American Iron Ore

24

01 December 2011

Exhibit 23: EV/EBITDA

$20 $15 C$ per share $10 $5 $0 Dec -$5 10 Dec 11 3x Dec 12 4x Dec 13 5x Dec 14 Dec 15 6x Dec 16 7x Dec 17 Dec 18 8x Dec 19 Dec 20

share price

Source: Company data, Credit Suisse estimates

As illustrated in Exhibit 64, the pure-play iron ore producers currently trade at an average 3.6x EV/EBITDA, so a 5x target multiple does imply a significant recovery from current levels.

Comparable company analysis


Exhibit 24: EV/t (US$ per contained Fe tonne in resource) (Global iron ore comparables, filtered for a) pure play iron ore and b) magnetite in resource
EV/Fe tonne in Resource 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Northland Resources Grange Resources Australasian Resources Alderon Iron Ore Murchison Metals Ltd Gindalbie Metals Ltd Advanced Exploration New Millennium Iron Adriana Resources Inc Century Iron Mines Oceanic Iron Ore Bellzone Mining African Minerals Ferrexpo Northern Iron Black Iron

Source: Bloomberg, Company data, Credit Suisse estimates

We have handpicked a group of global pure play concentrate/beneficiation names as relevant valuation benchmarks for ADV. Our analysis suggests that on an EV/t (contained Fe in resource) ADV.TO represents average value. The most development advanced names within this basket and also the most expensive, and we believe that at roughly 50% of the EV/t of a (near) producing magnetite name such as Gindalbie Metals, Northern Iron,

North American Iron Ore

25

01 December 2011

or Grange Resources, that the ADV.TO valuation is probably a little ahead of itself. This point is further illustrated in Exhibit 25.
Exhibit 25: EV/t (US$ per contained Fe tonne in resource) with relative to life cycle status
18.0 16.0 Labrador Iron Mines EV per contained Fe tonne in resource 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1 Explorer Alderon Iron Ore 2 Scoping / PEA New Millennium Iron BFS3/ DFS 4 Developer 5 Producer Labrador Iron Ore Royalty Corporation

Source: Bloomberg, Company data, Credit Suisse estimates

North American Iron Ore

26

01 December 2011

Company-Specific Risks
Investment in any mining company brings with it operational risks, commercial risks, development risk and in the case of an unfunded project such as Kami there is also significant financial/funding risk. A few of the risks we regard as being more company-specific include: Examples of Operational and Development Risks Infrastructure access. We believe that over the next 3-5 years the Labrador Trough will transition from a mine/supply constrained region, to an infrastructure constrained region. Exhibit 105 illustrates the planned projects (according to company guidance) relative to current/expandable infrastructure capacity. We are not nave enough to think that all of these projects will succeed, nor are all of the projects shown wanting to use the QNS&L railway line, but it seems hard to deny that competition will increase and that access costs will follow. Development risk. ADV.TOs Kami project is the least developed project within our coverage universe, having only had its PEA completed in October 2011. The economics of this project are vulnerable to capital cost inflation between 2011-2014, and our analysis of the nearby Bloom Lake project demonstrated that its capital costs increased at a CAGR of 23%. Higher exposure to energy costs. Relative to its peers, Kami has a higher strip ratio and higher magnetite proportion, both of which make it a more energy intensive business than its direct peers. ADV.TOs capital estimates assume that a number of essential infrastructure services are provided to the project without capital charge to ADV.TO but recovered through ongoing operating costs. Should ADV.TOs assumptions prove incorrect, capital costs and funding requirements will likely increase.

Examples of Commercial and Financial Risks Being located in North America, further from growth markets, this operation is more sensitive to seaborne freight rates than most of its global peers. Credit Suisse forecasts a long term freight rate of roughly $10/t for capesize C5 (WA to China) from which we set our North American freight rate assumptions. Ownership risk. Management and Altius combined own approximately 52% of ADV.TOs issued shares, giving them decision making control over this business. In order to fund this project it is likely that Altius will sell its 40% interest to a strategic partner. This transaction could result in a transfer of project control, and the development interests of the strategic partner may not align with those of ADV.TOs other shareholders. This sort of risk exists even with the majors we sight Rio Tintos current challenges with Chinalco on Simandou. Funding. ADV.TO is currently debt free with a modest $13mn cash balance (SepQ11 estimate). CS forecasts capital costs for this project of nearly C$1.5bn (nominal), which we expect to be funded by a combination of debt and equity. If financial markets are not conducive to an appropriate level of support for iron ore projects at the time, it is likely that this project will either be delayed or existing shareholders will have to be heavily diluted.

North American Iron Ore

27

01 December 2011

Asset Review
Summary
Our Asset Review section covers: Products & Pricing looking at some of the more unusual characteristics of the Kami concentrate and their importance to project economics. Mining & Processing where we point out that Kami has a much higher magnetite concentration than neighbouring deposits requiring a slightly higher capex and opex plant Transport & Logistics reflecting a similar solution to that employed by Bloom Lake, although as noted already Kami may face greater infrastructure competition by the time it comes into production (see also Exhibit 105) Costs we explain how we arrived at our capex assumption of $1.45bn (2015 $s) starting with the companys guidance of C$989mn.

This section of the report should be read in conjunction with Appendix 1. Exhibit 204 shows the location of ADV.TOs Kami project.

North American Iron Ore

Background
Alderon Resources acquired the Kamistiatusset (Kami) property in December 2010 via exercising an optioned right which was established with Altius Resources in November 2009. In exchange for the 100% interest in the property, Altius was issued 32,285,006 shares, making it ADV.TOs largest shareholder (39.3%). Altius also retains a 3% gross sales royalty on iron ore concentrate from the Kami Project. The ~ 7,750ha Kami property straddles the Western Labrador / Eastern Quebec interprovincial boundary but the majority of it is in Labrador. It is approximately 10 km southwest from the town of Wabush in Newfoundland & Labrador and immediately adjacent (east) of the town of Fermont in Qubec.

Products & Pricing


The project is currently only at PEA stage and final product specifications are still being developed, but the PEA assumed production of a 65.5% Fe beneficiated magnetite/hematite concentrate. What differentiates the ADV.TO's product and that of its neighbours from most other concentrates is that it is very course grained; 80% of the material passes a 263 um seive (P80 = 263um). Most concentrates typically require grinding to P80 in the order of 50um in order to liberate the silica. See Exhibit 26 for a summary of two of the key operational parameters for concentrate projects, which illustrates this point: Grind size. P80 is used as convention in most parts of the world, and simply tells us how fine the particles need to be ground in order to get 80% of the material (=P80) passing through a given seive size. Mass recovery. This could also be called beneficiation yield, and basically tells us how many product tonnes we get out for each tonne or ROM ore put into the plant. Mass recovery is different to iron recovery, although mass recovery is required to calculate iron recovery. 1 tonne of 30% Fe ROM ore into the plant (1 x 0.30 = 0.3) and a mass recovery of 38% for a 65.5% product (0.38 x 0.655 = 0.249) implies a 65.5% iron recovery (=0.249/0.38).

28

01 December 2011

The most desirable projects are located at the top right hand corner. The least desirable are at the bottom left corner.
Exhibit 26: Grind size and mass recovery for global concentrate projects
50
Hawks Nest Magnetite

45
Cashmere Downs Roche Bay Karara magnetite

Askaf Guelb El Aouj Mayoko Iron Ore

40

Mass Recovery (%)

Middleback Range magnetite Kami Southdown Bungalow - magnetite Duncan Yerecoin Balmoral South Ridley Magnetite Tonkolili Gum Flat Lac Otelnuk

Lake Giles magnetite

35
Sino Iron ore

30
Lebtheinia Jack Hills magnetite Kalia

25

Evraz

20 10 50 90 130 170 210 250 290 P80 grind size (um)

Source: Company data

The benefit of a course grained product is that less energy is consumed in reducing the particle size (see Exhibit 27) in order to facilitate silica liberation potentially saving several dollars per tonne in opex.
Exhibit 27: Grind size and energy intensity
25
Ridley Magnetite

20
Balmoral South

MW per tonne of conc

Sino Iron ore

15
Karara magnetite Southdown

10
Kami

Balla Balla

5
Apurimac Kalia

0 20 60 100 140 P80 grind size (um) 180 220 260

Source: Company data

Unlike finer grained concentrates which absolutely must be pelletised prior to use in the steel making process, preliminary metallurgical test work indicates that the Kami concentrate will likely not need pelletising, as It is sufficiently course grained that it can be sold into the sinter market. This gives Kamis concentrate a higher value in use.

North American Iron Ore

29

01 December 2011

In the unlikely event that the Kami concentrate is not suitable as a sinter feed, and does need further grinding in order to make a suitable pellet feed, its relatively low grade would mean that it would only be suitable for making Blast Furnace (BF) pellets, not the more valuable Direct Reduction (DR) pellets. At this stage at least, this does not appear to be hugely relevant however because the product is unlikely to be sold as a pellet feed.
Exhibit 28: Resource and product Fe content for global concentrate projects
73% 71%
Yerecoin Kalia Tonkolili Nkout Kaunisvaara Southdown Minas Rio Phase 1 Cairn Hill

69% 67% 65% 63% 61%


Gum Flat

Lake Giles magnetite

Apurimac

Product Grade (%Fe)

Yalgoo

Irvine Island Iron Ore Marampa

Eurilla Iron Ore & Uranium Sydvaranger Kami Mt Forrest magnetite

Mt Oscar

59% 57% 55% 20%


Lake Giles hematite

25%

30%

35%

40% Resource grade (% Fe)

45%

50%

55%

60%

Source: Company data

Guidance suggests sales will commence late 2014. We model early 2016 which reflects a more achievable timeline; though this still implies a faster build than Bloom Lake. Either way, we are reverting towards our LT price assumption >2015 and being so far out our valuation is not hugely sensitive to ramp up timing assumptions.
Exhibit 29: Quarterly Iron Ore sales
Iron Ore Volumes 4.5 4.0 3.5 3.0 mt 2.5 2.0 1.5 1.0 0.5 0.0 2014Q1 2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 Guidance

8mtpa base case


Source: Company data, Credit Suisse estimates

16mtpa expansion

North American Iron Ore

30

01 December 2011

Mining and Processing


Mining In order to yield 8mtpa all of saleable production with a mass recovery of 37.8% and a strip ratio of 1.92:1, Kami will average material movements of around 61mtpa, however this is expected to peak in year two of the operation, and decrease thereafter as illustrated below . Management targets PFS release in Q2 2012, which unlike the 2011 Scoping Study will include the North Rose resource, driving a lower strip ratio (perhaps 1.5 1.6:1) than applied to the Scoping Study (1.92:1).
Exhibit 30: Forecast iron ore concentrate sales (8mtpa base case only)

Material Movement 150 120 90 mt 60 30 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Material movement
Source: Company data, Credit Suisse estimates

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Total Sales Volume

Strip ratio

Processing Relative to the more established projects in the region, Kami should benefit from the use of newer and more efficient technology. Kami will need a magnetic separation circuit from the outset due to its higher magnetite concentrations. Magnetic separation is already used at Carol Lake and planned for Bloom Lake in 2012. Other than the requirement for a magnetite circuit, a fairly conventional flow sheet is proposed: Ore is crushed using a single gyratory crusher. Crushed ore is stored in a conventional, uncovered stockpile, reclaimed by apron feeders onto the AG mill feed conveyor. Primary grinding is done with one dual-pinion AG mill with a variable speed, active front-end type electric drive. Mill discharge is screened using a two-stage screening circuit. Oversize from the primary screens and the secondary banana screens is recirculated to the AG mill. The flowsheet is based on a three-stage spiral gravity concentrating circuit followed by Low Intensity Magnetic Separation (LIMS) cobbing of the spiral circuit tailings. The LIMS concentrate is reground in a ball mill and further concentrated in a magnetic separation plant for magnetite recovery. The spiral circuit is expected to produce roughly 6.2 mtpa of concentrate, with the LIMS circuit producing the remaining 1.8 mtpa.

North American Iron Ore

31

01 December 2011

Exhibit 31: Kami flow sheet

Source: Company data

Concentrate from the spiral circuit, dewatered using pan filters, and concentrate from the magnetic circuit, dewatered using disc filters, are combined and directed to a train load-out silo. Dewatered tailings are directed to the tailings pumping system for final disposal to the tailings impoundment area. Concentrator operations are based on a 365 days per year operation with an overall plant utilization of 90%.

For more information on the above the infrastructure please refer the Appendix 1. Although arrangements are still preliminary, ADV.TO expects to lease or purchase locomotives and railcars which will be operated by QNS&L plus pay for any additional sidings required on the railway. Port ADV.TOs preferred port option is based on building an independent operation that it would control itself. This option involves the purchase and construction of the following: 1 stacker/reclaimer

North American Iron Ore

Transport and Logistics


Rail The Kami project will require the use of three separate sections of rail: A new 6 km rail spur (and loop) will be required between the concentrator and the QNS&L line. Between Labrador City and the Port of Sept Iles rail junction, ADV.TO plans to use the existing QNS&L rail alignment. At the port, ADV.TO plans to use the Chemin de Fer Arnaud (CFA) railway to arrive at Point Noirre. It is likely that a small port spur will also need to be funded by ADV.

32

01 December 2011

1 railcar dumper and train positioner 1 rail loop to handle 240 ore cars 6 conveyors Road relocation and 48 water line relocation Conveyor structures and maintenance facilities

Power The projected annual electrical consumption is in the order of 451 GWh and the power demand is estimated at 58.3 MW. This assumes that winter building heating and concentrate drying is done using oil-fired boilers and not electric boilers for steam production. If electric boilers were to be considered, an additional 35 MW would be required along with an emergency oil-fired boiler. The PEA assumes that NALCOR will, in the near future, build a 230 kV (or 315 kV) line running along the Bloom Lake railway, and the power line supplying the Kami site will connect to this line. If this is not the case, then either capital costs or operating costs will be higher as a result. Emergency power will be provided by four diesel-powered gensets. Two 1200 kW units will be required for the concentrator, one for the crusher and one for the mine garage and offices.

North American Iron Ore

33

01 December 2011

Costs
Bloom Lake comparison Given the geographical, geological, management, and scope similarities, Bloom Lake makes an obvious comparable.
Exhibit 32: Bloom Lake start up, opex and capex guidance
Dec-05 Project Start date Q1 2008 May-06 Q4 2008 Mar-07 Q4 2008 May-07 Q1 2009 Nov-08 Q3 2009 Jun-10 Q2 2010 LT estimates 8mtpa by 2012 > 1,000 8 > 125 57.50

Capex Scale Capex Opex Mining Processing Infrastructure Rail Port G&A/other

$mn mtpa $ per annual t $/t $/t $/t $/t $/t $/t $/t

179 5 36 22.36 5.16 9.21 7.09 6.25 0.84 0.90

290 5 58 19.89 6.26 3.85 8.65

334 7 48 18.74 5.78 3.45 8.45

348.4 7 50 18.74 5.78 3.45 8.45

464 8 58 24.17 6.58 4.18 11.87

< 800 8 < 100 32.00

1.13

1.06

1.06

1.54

Source: Company data, Credit Suisse estimates

Exhibit 32 summarises that between scoping stage and today, Bloom Lakes: Start-up guidance slipped over 2 years Capex guidance increased by nearly 250% (on a $ per annual tonne basis) Operating cost guidance increased by >150%

Although 150% opex inflation may sound an alarming number, our analysis indicates that it is actually only slightly ahead of broader industry trends (22.36*1.14^7 = 55.95). The capex increase however, is well in excess of broader industry trends. Capital Cost estimate ADV.TOs October 2011 capital cost estimate for Kami was C$989mn.
Exhibit 33: PEA capital cost estimate

North American Iron Ore

Source: Company data

The Bloom Lake example, and hundreds of other similar ones across the industry, does not give us a high degree of confidence in miners ability to accurately forecast capital costs. Forecasting high/realistic capital costs depressed equity prices, making financing a more dilutive process. This should not be a surprise.

34

01 December 2011

There are two types of capital cost inflation to consider in order to understand what is a reasonable capex assumption to use for valuing this business: Project/company-specific, being the result of poor management or engineering Non-company-specific; being generally unavoidable increase due industry wide trends
Exhibit 35: 2000 2010 cost inflation
500 450 $136 120 $119 100 Capex CAGR 2008 - 2014 = 14% 80 60 40 20 0 2008 2009 2010 2011 Year Capital Intensity 2012 2013 2014 Note: 2011 distorted by BHP's RGP5 Linear (Capital Intensity) $102 350 300 250 200 $63 $44 $61 150 100 50 0 $141 400 New production volume (mtpa)

Sector average capital intensity (US$/t)

Using our global database of around 300 assets and 80 companies, we have derived Exhibit 36, which suggests that across the industry, capital cost inflation runs at around 14%. This compares reasonably well by similar independent analysis by McKinsey & Co (Exhibit 35). Lets now consider how Bloom Lake performed relative to this context. The capital cost inflation on Bloom Lake from 2005 to 2011 was 23% p.a. (i.e. 9% higher than the rest of the industry). One might suggest that 60% (or 14/23) of the Bloom Lake cost inflation was industry related, and the remaining 40% project specific.

What does this mean for ADV.TO and Kami? Just like Bloom Lake wasnt, Kami will not be immune to industry wide trends. Over the next 3-4 years during ADV.TOs construction period, we expect this cost inflation trend to continue but Canadian cost inflation should run below global levels (which are heavily distorted by the Pilbara region in Australia). As a starting point, we assume 10% Canadian capital cost inflation will apply to ADV, and its Canadian peers. In Bloom Lakes case there appears to have been ~9% p.a. company-specific cost inflation, over and above the wider sector trend. Bloom Lake was the first iron ore project to be built in the Labrador Trough in decades, and we have no doubt that second time around there will be less surprises. That said, we still feel that the ADV.TOs estimates are more optimistic than most, so in addition to the 10% sector inflation estimated above, we feel that adding an additional 3-4% company-specific cost inflation is appropriate. 10% + 3.5% takes our total Kami capex inflation rate to around 13.5%.

North American Iron Ore

Exhibit 34: Iron Ore Capital Intensity Trend


160 140

Project volume incl in CS comps

Source: Company data, Credit Suisse estimates

Source: McKinsey & Co

Taking ADV.TOs $989bn PEA capex guidance as a starting point, our analysis indicates that: The 2H 2012 capex (when the Feasibility Study is due for completion) will be around $1.12bn.

35

01 December 2011

The 2014-2015 capex (during construction/deployment) will be around $1.45.

We model in nominal terms to 2015, and real there after. The above analysis forms the basis of the capex estimates included in our DCF.
Exhibit 36: Kami capital cost estimate, 2014 nominal terms (C$mn)
$1,500 $1,400 $1,300 $1,200 $1,100 $1,000 $900 $800 PEA capex guidance Industry wide cost inflation Company specific inflation 2014 capex estimate

North American Iron Ore

Source: Company data, Credit Suisse estimates

Operating cost estimates


Exhibit 37: PEA operating cost estimates

Source: Company data

ADV.TOs PEA opex estimates are provided in Exhibit 37, our own are in Exhibit 38.

36

01 December 2011

Exhibit 38: Operating costs and margin

Realised price and operating costs 100 90 80 70 60 50 40 30 20 10 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Mining cost Port cost Realised Price
Source: Company data, Credit Suisse estimates

C$/t

Processing cost G&A cost

Rail cost Royalty

Our LT cost forecasts come down in real terms with the declining strip ratio, and our LT prices are struck off a USDCAD exchange rate of 0.90, and iron ore price of $90/t (CFR, 62% IODEX) with appropriate adjustments made for freight and Value in Use.

Reserves and Resources


Relative to surrounding deposits, the Kami ore bodies are relatively magnetite rich with less of the specular hematite. This translates to slightly higher plant operating and capital costs, but offsetting this somewhat we would expect to see better recoveries.
Exhibit 39: Kami Resources (last updated 5 April 2011)
Ore mt Rose Central Indicated Inferred Total Indicated Inferred Total Indicated Inferred Total Indicated Inferred Total 376.1 46.0 422.1 114.1 71.9 186.0 480.0 480.0 490.2 597.9 1,088.1 Total Fe % 29.8 29.8 29.8 30.5 30.7 30.6 30.3 30.3 30.0 30.3 30.2 Total Fe mt 112.1 13.7 125.8 34.8 22.1 56.9 145.4 145.4 146.9 181.2 328.1 mag Fe mt 70.0 8.8 78.8 25.2 16.0 41.2 hm Fe mt 31.2 3.7 34.9 6.5 4.3 10.8 Mn % 1.56 1.61 1.57 1.02 1.05 1.03 SiO2 % 44.90 44.90 44.90 45.60 45.40 45.52 -

Mills Lakes

North Rose

Total

Source: Company data

North Rose is the most recent addition to ADV.TOs resource statement, but magnetite/hematite splits, as well as impurity levels, have not yet been disclosed as they have for Rose Central and Mills Lakes.

North American Iron Ore

37

01 December 2011

Around 80% of the total iron in Rose Central and Mills Lakes is magnetite, but we understand that with the inclusion of North Rose this may come down to around 50%. We also expect North Rose (Exhibit 40) strip ratio to be slightly lower than Rose Central and Mills Lakes, upon which the PEA is based.
Exhibit 40: Rose Central (incl in PEA) and North Rose (was not in the PEA)

Source: Company data

North American Iron Ore

38

01 December 2011

Corporate
Balance Sheet & Cash Flow
Current Balance Sheet: ADV is currently debt free, has a cash balance of $13mn and a burn rate of around $14mn p.a. On 10 November ADV.TO announced a non-brokered private placement of 6 million flow through shares, at an issue price of $3.00/share raising $6mn. There are a total of 4.877mn warrants with exercise prices that range from $2.20 2.80/sh, potentially raising $13.48mn
Number Outstanding 90,910 4,495,712 291,275 5,078,297 Proceeds (C$mn) $0.25 $12.59 $0.64 $13.48 Expiry Date March 23, 2012 December 16, 2012 December 16, 2012

Project Finance We expect that this project will ultimately be funded by a combination of debt and equity, with the ultimate mix being part of a combined offtake/funding deal if Kami is developed as

North American Iron Ore

Exhibit 41: Outstanding warrants, C$14.02mn total


C$ exercise price $2.75 $2.80 $2.20 Total Source: Company data

There are also 7.94mt options outstanding, with a weighted average exercised price of $2.49/share.
Exercisable @ 30 Exercise Price (C$) Proceeds (C$mn) Expiry Date Jun 11 1,190,000 1.50 1.79 March 3, 2015 75,000 1.88 0.14 April 27, 2015 62,500 2.00 0.25 May 1, 2015 125,000 1.20 0.36 July 22, 2015 37,500 1.53 0.08 October 20, 2015 471,300 1.60 3.03 November 8, 2015 293,750 3.00 3.53 December 29, 2015 475,000 3.70 7.03 February 9, 2016 25,000 3.80 0.38 March 1, 2016 3.40 1.02 April 4, 2016 2.62 2.10 June 13, 2016 3.20 3.20 July 06, 2016 3.30 0.66 July 18, 2016 3.27 0.33 August 5, 2016 2,755,050 23.88 total

Exhibit 42: Outstanding options,


Outstanding 1,190,000 75,000 125,000 300,000 50,000 1,896,300 1,175,000 1,900,000 100,000 300,000 800,000 1,000,000 200,000 100,000 9,211,300 Source: Company data

Our capital structure modelling assumes that all of the above are exercised at expiry date. At the current burn rate, the warrants extend the need for additional funding by around 5 months. Based on an assumed cash burn rate of $14mn p.a., the recent private placement, and the 2012 warrants, ADV.TO should finish 2012 with a cash balance of around $23.5mn.

39

01 December 2011

an independent project. We do not believe that ADV.TO needs external funding support until 2013, by which time it will have completed the Bankable Feasibility Study. Although we expect to see an equity component to Kamis financing, from a modelling perspective we assume that the project is 100% debt financed because: there are less uncertainties/assumptions required and finance theory suggests that value can not be created through a funding decision.

There would of course be some NAV dilution if ADV.TO issues paper when P/NAV is less than 1.0x, but we feel that we have adequately allowed for this equity dilution with the P/NAV multiple used and discussed in the Valuation section of this report.

North American Iron Ore

Management
ADV has a board of 9 Directors with both broad and deep experience across business development, Canadian iron ore operations, law, human resources, and accounting. A number of the Directors and Management team are direct employees of Forbes & Manhattan, and work for ADV.TO indirectly. Forbes & Manhattan is a Toronto-based private merchant back which incubates, finances, and develops both public and private companies. Its most visable success story is Consolidated Thompson, and ADV.TO is one of a number of junior mining names it is currently involved in, most of which are focused on gold or iron ore. ADV.TO has an audit committee comprised of three directors: Mr Boland, Mr Humphrey and Mr Porter, all of whom are independent and financially literate. The primary function of the audit committee (the "Committee") is to assist the board of directors in fulfilling its financial oversight responsibilities by reviewing the financial reports and other financial - information provided by the Company to regulatory authorities and shareholders, the Company's systems of internal controls regarding finance and accounting and the Company's auditing, accounting and financial reporting processes. The Committee's primary duties and responsibilities are to: Serve as an independent and objective party to monitor the Company's financial reporting and internal control system and review the Company's financial statements. Review and appraise the performance of the Company's external auditors. Provide an open avenue of communication among the Company's auditors, financial and senior management and the Board of Directors.

40

North American Iron Ore

Exhibit 43: Key Personnel


Name Mark J. Morabito Position Executive Chairman Profession B.A., J.D. Description Canadian Iron Ore experience

Stan Bharti

Tayfun Eldem

Bernard Potvin

Bruce Humphrey

Brian Dalton

Matt Simpson

John Baker David Porter

Brad Boland

Mark Morabito is an executive with a background in corporate finance and securities law. He has over 15 years experience in public markets with a strong focus on junior mining and small business venture capital with extensive experience in capital-raising and corporate development. Mr. Morabito has raised over $150 million in public markets over the last five years. Mr. Morabito also has seven years of direct exploration experience in Newfoundland and Labrador. Vice Chairman Engineer Stan Bharti brings over 25 years of business, management and financing experience to Alderon. Over the last ten Consolidated years Mr. Bharti has been involved in acquiring, restructuring, and financing public companies. Mr. Bharti has raised Thompson over $2 billion in public markets over the last five years. His experience in public markets includes acquisitions of companies in Europe, Australia and North America. Mr. Bharti also held several positions (including CEO) with Consolidated Thompson Iron Mines Ltd. from 2005 to 2009. President & Engineer Worked for the Iron Ore Company of Canada (IOC) for more than 20 years and held many senior roles including VP IOCC CEO Expansion Projects & Engineering and VP Operations & Engineering. Accountable at IOC for the development and delivery of a nearly $2B program of green and brown fields expansion projects. VP - Project Mechanical Mr. Potvin has over 37 years of experience in mining and processing operations and brings with him substantial QCM and IOCC Execution Engineer expertise in engineering, maintenance, project development and construction. Throughout his career Mr. Potvin has held senior roles at Quebec Cartier Mining, Reynolds Metals, Alcoa and the Iron Ore Company of Canada ("IOC"), a Rio Tinto subsidiary. During his tenure at IOC, Mr. Potvin held the role of General Manager of Expansion Projects, successfully managing green and brown field expansion projects in Labrador City and Sept Iles. Mr. Potvin has extensive project management experience in iron ore and aluminum, and has executed a number of successful projects in excess of $1 billion. Director Mining Engineer Over 30 years of experience with such major companies as Inco, Cominco and Noranda. Previous positions include: Chairman of Consolidated Thompson Iron Mines, President and CEO of Desert Sun Mining Corp. and Senior Vice President and CEO of Goldcorp Inc. Director Brian Dalton co-founded a number of successful private mineral exploration and exploration service companies prior to co-founding Altius in 1997. Since 1997 he has served as the President and CEO of Altius, during which time it has achieved strong growth and is now a member of the TSX SmallCap Index. He is a member of the Board of Regents of Memorial University and has been a volunteer for various charitable fundraising campaigns in Newfoundland and Labrador. Director Chemical Mr. Simpson spent the past 8 years working for the Iron Ore Company of Canada, most recently as Mine General IOCC, Rio Tinto engineer, MBA Manager at the Carol Lake Iron Ore Deposit in Labrador where he was accountable for a workforce of 620 people to safely move 70 Mt/yr of material. Prior to joining Rio Tinto, Mr. Simpson worked as a Process Engineer for Hatch designing and constructing Nickel laterite projects primarily in Australia/Asia. He has an MBA and Chemical Engineering Degree. Director Lawyer John Baker is the senior partner and chairman of a leading Newfoundland and Labrador law firm and carries on an extensive mining, securities, and corporate/commercial practice. Director MBA David Porter is a seasoned executive who has served as Vice President Human Resources & Organizational IOCC Effectiveness for the Iron Ore Company of Canada, a C$2Billion Canadian based Corporation. He has also been responsible for Operations, Safety, Health, Sustainable Development, Communications and Community Relations across the mining and steel sectors for over 33 years. Mr. Porter has lead the development and execution of business strategy, negotiated landmark agreements with international unions, governments and communities and lead business transformation initiatives. Director CMA Brad Boland is a Certified Management Accountant. He was the Chief Financial Officer of Consolidated Thompson Iron Mines Limited until July 2009. From May 2005 to September 2007, he was at Kinross Gold Corp., most recently serving in the position of Vice President, Corporate Controller. Prior to that, from August 1998 to February 2005, Mr. Boland was at Goldcorp Inc., as Corporate Controller and the Vice President, Finance.

01 December 2011

Source: Company data

41

01 December 2011

Ownership
We like the fact that ADV.TO is well owned by the board and management together they hold around 8% of the company with the Chairman of ADV.TO (Mark Morabito) and the Chairman of Forbes & Manhattan (Stan Bharti) being the second and third largest shareholders respectively.
Exhibit 44: Major shareholder groups

Board & Management 8%

Other 52%

Altius 40%

Source: Factset

Altius Minerals What makes the share register less appealing, and potentially compromises the hostile acquisition story, is Altius Resources (ALS.TO). Altius exchanged the Kami asset for its ADV.TO shareholding in 2010, and in addition to the significant parent equity interest also retains a 3% gross sales royalty over the project. ADV.TO has a right of first offer under the Altius Option Agreement. Altius is a project generation and royalty business that is based in Newfoundland & Labrador. It has in excess of $300mn in assets including $200mn cash, and no debt. Project Generation Business: aside from Kami, other success stories include Paladin Energys Aurora, and Rambler - a near term copper play. Royalty Business: 3% on Kami, 2% on Paladins CMB Uranium project, and 0.3% on Voiseys Bay.

Altius does not want to put its own balance sheet at risk and become an equity partner in the project. It does however want to retain the royalty. We believe Altius preferred strategy for its stake will be to sell it to a strategic partner with the ability to assist in funding the project into production thereby increasing the value/probability of realisation on the royalty. For this same reason Altius is unlikely to want to sell to institutional investors.

North American Iron Ore

42

01 December 2011

Exhibit 45: Top 20 shareholders (as at 30 September 2011)


Holder Name Altius Minerals Corp. MORABITO MARK J BHARTI STAN Mackenzie Financial Corp. RBC Global Asset Management, Inc. AGF Investments, Inc. Standard Life Investments, Inc. (Canada) Goodman & Co. Investment Counsel Ltd. HUMPHREY RAYMOND BRUCE GAMCO Investors BOLAND BRAD J Lawrence Decter Investment Counsel, Inc. BC Investment Management Corp. BluMont Capital Corp. Fonds des Professionnels, Inc. Etienne, Odier, Pythoud & Cie. SA BlackRock Asset Management Canada Ltd. Galileo Global Equity Advisors, Inc. Industrial Alliance Investment Management, Inc. Source: Factset % O/S 39.74 3.84 3.26 1.81 1.34 1.31 0.86 0.67 0.60 0.36 0.30 0.24 0.22 0.20 0.16 0.08 0.01 0.00 0.00

North American Iron Ore

43

01 December 2011

Americas / United States

Cliffs Natural Resources (CLF)


Rating OUTPERFORM* [V] Price (30 Nov 11, US$) 67.81 Target price (US$) 90.00 52-week price range 101.43 - 48.30 Market cap. (US$ m) 9,697.62 Enterprise value (US$ m) 12,993.25
*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).

2012 will be about addressing diversification concerns


We initiate coverage on Cliffs Natural Resources with a US$90/sh target price and an OUTPERFORM rating. CLF operates 7 iron ore mines which are expected to sell ~ 45mt of iron ore in 2012, as well as 3 coal mines for ~ 7.2mt of coal. The company has development interests in ferrochrome/chromite, and is exploring for various base and precious metals. We like CLF for its iron ore industry longevity and mining/beneficiating experience, but see the biggest risk in owning the stock as being value destructive acquisitions. Consensus seems to believe that ADV.TO (a Bloom Lake look-a-like) is CLFs next target, however in our view LIF-U.TO would be a smarter acquisition for CLF. CLFs heavy dependence on the US steel industry offers a leveraged play to a US recovery. 2012 production guidance assumes a 70-75% US blast furnace utilisation rate, and our earnings are based on an iron ore price assumption of US$152/t (62% IODEX, CFR China), which is above todays spot. 2012 is a show me year for CLF. It is a year in which we see our key concern, diversification risk, being addressed. A positive year would see: a) Q112: convincingly positive PFS results from the Canadian chromite project (acquired 2010), b) mid-year: demonstration of Bloom Lake production to nameplate 8mtpa (acquired 2011), and c) a commitment decision on (and not disposal of) the North American coal business (acquired 2007 and 2010). Q212 should also see Koolyanobbing iron ore in Western Australia ramp up to 11mtpa. We will likely be more positive on CLF if indeed it uses 2012 to show us how it adds value through diversification. Our $90/share target price is set at the approximate mid point of a) NAV10% of US$77/share, and b) 5x 12mth forward EV/EBITDA which generates US$100/share.
12/10A 10.21 6.6 44.9 4,682.2 1,359.0 9.70 8.0 9.6 146 23.60 143.01 50.3 3,295.6 43.6 12/11E 12/12E 12.03 13.14 5.6 5.2 44.3 44.6 7,015.3 8,381.1 2,853.7 3,468.6 16.03 19.54 4.2 3.5 4.6 3.8 3,296 1,749 27.24 18.84 IC (current, US$ m) EV/IC (x) Dividend (Next Qtr., US$) Dividend yield (%) 12/13E 13.07 5.2 50.2 8,485.6 3,348.8 17.49 3.9 3.9 406 17.93 10,000.67 1.2 0.13 0.19

Research Analysts Nathan Littlewood 416 352 4585 nathan.littlewood@credit-suisse.com

Share price performance


Daily Dec 01, 2010 - Nov 30, 2011, 12/01/10 = US$70.46

88 68 48 Dec-10 Mar-11 Price Jun-11 Sep-11 Indexed S&P 500 INDEX

On 11/30/11 the S&P 500 INDEX closed at 1246.96

Quarterly EPS 2010A 2011E 2012E

Q1 0.69 3.11 2.04

Q2 1.92 2.95 3.62

Q3 2.18 4.07 3.94

Q4 2.82 1.94 3.54

North American Iron Ore

Financial and valuation metrics Year EPS (CS adj.) (US$) Prev. EPS (US$) P/E (x) P/E rel. (%) Revenue (US$ m) EBITDA (US$ m) OCFPS (US$) P/OCF (x) EV/EBITDA (current) Net debt (US$ m) ROIC (%) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Net debt/tot cap (Next Qtr., %)
Source: Company data, Credit Suisse estimates.

44

01 December 2011

Investment Thesis
The corporate strategy of this business is to build scale by owning expandable and exportable steelmaking raw material assets serving international markets. Operational expertise and longevity Cliffs Natural Resources (and its corporate predecessors) have a longer history in iron ore mining and beneficiation than almost any other mining company in the world. This companys roots trace back to 1847, when the first DSO iron ore discoveries were made in the Lake Superior Iron Ore district in Michigan. As early as the 1890s Cliffs had established a laboratory to investigate the beneficiation of low grade ores, and in 1954 commercial scale beneficiation was achieved at the Humbolt mine. By contrast, iron ore was not even discovered in Australias Pilbara region (home of BHP and RIOs iron ore operations) until the 1960s. There are few iron ore companies that can boast over 50 years experience in beneficiating iron ore, and fewer still that have160 years experience in mining it (much of which, by the way, was underground). As the worlds high-grade and near-surface deposits are depleted, those with a long term view on this sector may see increasing value in these skill sets. Diversification will the current campaign be different to past attempts? CLF currently has a heavy exposure to the US Steel industry. CLFs 25 mtpa United States iron ore sales are almost land locked within North America, and the volume this business produces is directly linked to US steel production. Although US steel production does continue to recover, it is still some way off capacity levels.
Exhibit 46: Acquisition scorecard. $3.6bn spent, $1.6bn generated (so far)
1500 Total acquisition spend = $3.6bn Total EBITDA generated to 2010 = $1.6bn 1000

500

0 Portman Limited -500 2005 / 2008 United Taconite 2008 Wabush 2010 Sonoma INR Energy 30% Amapa Chrome Coal 2007 Coal 2007 Deposits Operations 2010 2010 Cummulative EBITDA to 2010 PinnOak 2007

Purchase Price
Source: Company data

Exhibit 63 and Exhibit 64 demonstrate what might be achievable through successful diversification. So far however, we feel that the 15-20% diversified premium observable in these charts has alluded CLF. We struggle to identify a successful example of diversification within the portfolio. The biggest risk we see in owning this stock, is value destruction through poor acquisitions. The 2005-2008 Portman acquisition provided much needed exposure to end markets in Asia, but the payback observed above has a significant element of iron ore price surprise, not just smart buying.

North American Iron Ore

45

01 December 2011

The 2011 Consolidated Thompson acquisition is differentiated from the companys existing US iron ore production by its ready access to the seaborne market via the St Lawrence Seaway. We currently have a C$1.7bn DCF for Bloom Lake, which CLF acquired for C$4.9bn. CLFs foray into renewable fuels resulted in a $30mn write off to SepQ11 earnings. 2012 is shaping up to be a show me year for CLFs relatively new coal business, as management aims to make a decision about their continuation/disposal. CLF has spent around US$1.8bn building this position in coal (see Exhibit 46), meanwhile Exhibit 54 shows our current NAV for this business is around $600mn.

Over the years CLF's has diversified into various industries such as timber, woodenware, wood chemicals, paper, copper, oil shale, oil drilling, uranium, hydro-power generation, rail roads, shipping, charcoal iron and coke iron. Looking forwards it is exploring for nickel, chromite, PGMs and even gold. When the inevitable cyclical slowdown comes, the company has historically always gone back to its roots (iron ore mining) and sold off noncore assets. Although CLFs growth strategy states a focus on steel making raw materials, we struggle to see this reflected in the priority list of its recently formed exploration business. The exploration business is looking for not only iron ore, ferroalloys and nickel, but also copper, PGMs and gold. Is the current resources cycle any different to previous ones? In our opinion, yes. Will the current diversification attempts be any more successful than previous ones? We certainly hope so, but, to be frank, we dont know. Are the stakes higher this time? In our opinion, yes. The iron ore and steel industry have structurally changed over the past decade and we believe that the future of this business is dependent upon reducing its reliance on the North American steelmaking industry.
Exhibit 48: CLF feeling the US Steel Industrys pain?
9,000 8,250 USA Steel Production (monthly, kt) 7,500 6,750 6,000 5,250 4,500 3,750 3,000 Jun-08 120 105 90 75 60 45 30 15 0 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 CLF Share Price (US$)

US Steel Production (kt)

North American Iron Ore

Exhibit 47: USA annual steel production 30 year growth pattern adds just 124kt p.a.
120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 y = 124.62x + 87259 2 R = 0.0118

USA Steel Production

CLF share price

Source: World Steel Association

Source: Company data, World Steel Association

Growth pipeline is not as substantial as its peers, but it is lower risk Relative to its peers, CLFs growth pipeline is: Less substantial. This business lacks the growth upside that most of its local and international peers do, with new tonnage being offset by depletion at Empire (5.5mtpa) and Cockatoo Island (1.5mtpa).

46

01 December 2011

Lower risk. Most of the visible growth is coming from brownfield expansions, and all of the visible growth is from relatively low risk mining jurisdictions.

Examples of peers that have superior EPS growth but higher risk projects include: ENRC Africa and Kazakhstan Anglo American South Africa and the technically ambitious $5bn Minas Rio project in Brazil Rio Tinto Simandou in Guinea Xstrata Zanaga (Republic of Congo), and Guelb el Aouj (Mauritania)

North American Iron Ore

47

01 December 2011

Exhibit 49: Financial Summary


Cliffs Natural Resources (CLF)
2009 2010 4,682.2 1,359.0 322.3 1,036.7 0.0 78.2 1,841.5 469.8 1,371.7 0.0 0.0 1,390.3 18.6 0.0 1,371.7

Year ending 2011 2012


7,015.3 2,853.7 433.6 2,420.1 0.0 211.8 2,306.9 421.0 1,885.9 0.0 0.0 1,699.5 -186.4 0.0 1,885.9 8,381.1 3,468.6 610.0 2,858.6 0.0 174.8 2,683.7 766.2 1,917.5 0.0 0.0 1,875.7 -41.8 0.0 1,917.5

31 Dec 2013 Share Price: US$67.81


8,485.6 3,348.8 614.6 2,734.2 0.0 128.0 2,606.2 677.6 1,928.6 0.0 0.0 1,865.6 -63.0 0.0 1,928.6

2009

In USDmn, unless otherwise stated 2010 2011 2012 2013

Profit & Loss


Sales revenue EBITDA Depr. & Amort. EBIT Associates Net interest Reported PBT Income tax Profit after tax Minorities Preferred dividends Normalised NPAT Analyst adjustments Unusual item after tax Reported NPAT

12/09A 12/10A 12/11E 12/12E 12/13E


2,342.0 428.1 236.6 191.5 0.0 41.7 346.4 4.3 342.1 0.0 0.0 243.2 -98.9 0.0 342.1 502.7 375.2 103.5 179.8 1,161.2 2,592.6 189.4 696.1 3,478.1 4,639.3 178.9 525.0 1,398.4 2,102.3 2,537.0 2,685.3 0.0 0.0 2,537.0 22.3 191.5 -39.5 236.6 -60.8 -152.9 10.8 185.7 -116.3
-116.3

1/12/2011 11:25

OUTPERFORM RATIRating 90.00 TARG Target Price US$ 32.72 vs % TP_U Share price VALU CLF is a mining and natural resources company, producing iron ore pellets, lump and fines iron ore as well as thermal and metallurgical coal. The company operates mines in the United States, Canada and Australia. It also has a longer term exposure to chromite and renewable fuels.

Earnings
Equiv. FPO (period avg.) c_EP c_EP EPS (Normalised) EPS_ EPS Growth c_DP DPS c_PA Dividend Payout c_FC Free CFPS mn c % c % c

12/09A 12/10A 12/11E 12/12E 12/13E


125.7 193.5 34.8 18.0 55.2 35.0 51.4 23.0 0.5 0.8 3.2 9.1
10.4 0.5 1.7

136.1 1,021.1 427.6 65.0 6.4 773.5 6.6 9.5 7.2 1.0 11.4 2.4 36.2
29.7 0.6 2.0

141.2 1,203.3 17.8 68.7 5.7 1,183.6 5.6 4.1 3.4 1.0 17.5 1.3 23.5
24.2 0.5 2.0

142.8 1,313.6 9.2 85.9 6.5 1,683.3 5.2 3.4 2.8 1.3 24.8 1.0 20.0
22.4 0.5 1.8

142.8 1,306.5 -0.5 85.4 6.5 1,460.5 5.2 3.6 2.9 1.3 21.5 0.9 16.9
22.0 0.5 1.6

Balance Sheet
Cash & equivalents Inventories Receivables Other current assets Current assets Property, plant & equip. Intangibles Other non-current assets Non-current assets Total assets Payables Interest bearing debt Other liabilities Total liabilities Net assets Ordinary equity Minority interests Preferred capital Total shareholder funds Net debt

12/09A 12/10A 12/11E 12/12E 12/13E

Valuation

1,566.7 665.7 2,212.3 3,284.9 c_PE P/E x 417.3 904.1 1,070.6 1,061.7 ALT(EV/EBIT x 359.1 452.0 535.3 530.9 ALT(EV/EBITDA x 240.6 221.8 221.8 221.8 c_DIDividend Yield % 2,583.7 2,243.6 4,040.0 5,099.3 c_FC FCF Yield % 3,979.2 10,059.9 10,479.3 10,776.0 c_PB Price to Book x 372.3 1,237.7 1,237.7 1,237.7 Returns % 843.0 818.2 818.2 818.2 c_RO Return on Equity 5,194.5 12,115.8 12,535.2 12,831.9 c_I_N Profit Margin % x 7,778.2 14,359.4 16,575.2 17,931.2 c_I_S Asset Turnover x 266.5 376.7 446.1 442.4 c_AS Equity Multiplier % 1,713.1 3,961.3 3,961.3 3,691.3 c_RO Return on Assets % 1,959.9 2,777.6 2,777.6 2,777.6 c_RO Return on Invested Cap. 3,939.5 7,115.6 7,185.0 6,911.3 Gearing 3,838.7 7,243.8 9,390.2 11,019.9 c_GE Debt to Net debt + Equity % Net x 3,837.7 7,243.8 9,390.2 11,019.9 c_NE Net Debt to EBITDA 0.0 0.0 0.0 0.0 c_I_E Cover (EBITDA/Net Int.) x Int x 0.0 0.0 0.0 0.0 c_I_E Cover (EBIT/Net Int.) Int % 3,838.7 7,243.8 9,390.2 11,019.9 (c_CCapex to Sales % 146.4 3,295.6 1,749.0 406.4 (c_CCapex to Depreciation

5.2 7.4 0.9 0.1 10.3 4.6 5.0

17.9 19.4 3.7 0.1 17.4 13.3 5.7

11.8 18.8 31.3 1.2 13.5 11.4 11.9

11.3 18.3 15.7 0.5 19.8 16.3 12.3

10.4 17.7 3.6 0.1 26.2 21.4 10.7

Cashflow
EBIT Net interest Depr & Amort Tax paid Working capital Other Operating cashflow Capex
Capex - expansionary Capex - maintenance

12/09A 12/10A 12/11E 12/12E 12/13E


1,036.7 -47.2 322.3 -15.2 -43.6 67.0 1,320.0 -266.9
-266.9

Assumptions & Operations


M_IRO Iron

12/09A 12/10A 12/11E 12/12E 12/13E


79 170 25.06 0.00 0.00 132 190 90 35.42 0.54 0.03 169 289 122 42.34 4.11 1.33 153 250 128 46.25 7.00 1.10 140 250 138 49.56 7.30 1.00

2,420.1 -215.7 433.6 -3.7 164.6 -534.6 2,264.3 -834.2


-241.5 -592.7

2,858.6 -186.4 610.0 -672.1 180.4 0.0 2,790.5 -1,029.5


-642.5 -387.0

2,734.2 -140.3 614.6 -702.2 -9.6 0.0 2,496.7 -911.3


-500.0 -411.3

Ore (62% IODEX) Coking Coal c_RPP Thermal Coal c_RPP Equity Iron Ore Sales c_RPP Equity Coking Coal Sales c_RPP Equity Thermal Coal Sales

US$/t CFR US$/t FO US$/t FOB mt mt mt

Acquisitions & Invest Asset sale proceeds Other Investing cashflow Dividends paid Equity raised Net borrowings Other Financing cashflow Total cashflow Adjustments Net Change in Cash

0.0 28.3 -91.3 -179.3 -31.9 270.0 -276.4 342.6 304.3 310.7 13.0 323.7

-994.5 59.1 -165.4 -1,367.7 -68.9 433.3 738.1 -14.9 1,087.6 1,039.9 24.1 1,064.0

-4,453.5 0.0 -16.2 -5,303.9 -159.6 868.0 895.5 549.9 2,153.8 -885.7 -15.3 -901.0

0.0 0.0 0.0 -1,029.5 -214.4 0.0 0.0 0.0 -214.4 1,546.6 0.0 1,546.6

0.0 0.0 0.0 -911.3 -242.8 0.0 -270.0 0.0 -512.8 1,072.6 0.0 1,072.6

Mines U.S. Iron Ore Eastern Canadian Iron Ore Asia Pacific Iron Ore Amapa Iron Ore North America Coal Sonoma Coal Mines Sub-Total Projects Corporate Total

Net Asset Value US$mn US$/sh 7,280 50.87 2,409 16.83 2,858 19.97 357 2.50 753 5.27 574 4.01 14,232 99.46 339 -3,296 11,275 2.37 -23.03 78.79

multiple 1.00 x 0.90 x 1.00 x 1.00 x 1.00 x 1.00 x 0.00 x 1.00 x 1.00 x

Valuation US$mn US$/sh 7,280 50.87 2,168 15.15 2,858 19.97 357 2.50 753 5.27 574 4.01 13,991 97.77 339 -3,296 11,034 2.37 -23.03 77.11

Source: Company data, Credit Suisse estimates

North American Iron Ore

48

01 December 2011

Valuation
Summary
Our $90/share target price is set at the approximate mid point of a NAV10% of US$77/share (Exhibit 54), and 5x 12mth forward EV/EBITDA which generates US$100/share. Most analysts seem to rely on earnings multiples for CLF, but given the lack of profitability in the DCF tail implied by our LT commodity prices, and concerns about CLFs ability to create value through diversification, we feel it would be remiss to disregard the longer term earnings. Hence the DCF/NAV consideration.

Relative to the other iron ore businesses now under coverage, CLF is a challenging business to value: The US SEC does not require the same level of forecast disclosure as the TSX does with its NI 43-101. Whilst we can make some fairly well educated estimates around longer term production, the absence of formal guidance does make DCF modelling a little more challenging. We can not observe a consistent EPS or EBITDA multiple in the companys trading history. Our 5x EV/EBITDA target recognises that the US bulks currently trade at 3-4x EV/EBITDA but our 5x target implies a recovery to mid-cycle levels. CLFs LT average is in fact 4.7x EV/EBITDA. CLF does appear relatively and historically cheap, as illustrated in Exhibit 50 to Exhibit 53. All metrics are at levels not seen since 2H 2008.
Exhibit 51: EV/EBITDA averages 4.7x
9 8 7 6 5 4 3 2 1 0 Jan 04

North American Iron Ore


25 20 15 10 5

Exhibit 50: PER averages 8.9x

0 Jan 04

Jan 06

Jan 08

Jan 10

Jan 06

Jan 08

Jan 10

Source: IBES, Credit Suisse estimates

Source: IBES, Credit Suisse estimates

Exhibit 52: P/CF


14 12 10 8 6 4 2 0 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11

Exhibit 53: P/Book


5 4 3 2 1 0 Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Source: IBES, Credit Suisse estimates

Source: IBES, Credit Suisse estimates

49

01 December 2011

Net Asset Value


Our NAV uses a consistent discount rate of 10%, and aside from the Bloom Lake expansion from 16 to 24mtpa models production generally as per company guidance.
Exhibit 54: Net Asset Value and NAV based target price

Mines U.S. Iron Ore Eastern Canadian Iron Ore Asia Pacific Iron Ore Amapa Iron Ore North America Coal Sonoma Coal Sub-Total Projects Ferroalloys Sub-Total Corporate Cash Debt Sub-Total Total Notes: - Shares on issue (mn) - Target P / NAV - WACC (nominal)

Net Asset Value US$mn US$/sh 7,280 50.87 2,409 16.83 2,858 19.97 357 2.50 753 5.27 574 4.01 14,232 99.46 US$mn 339 339 US$mn 666 -3,961 -3,296 11,275 US$/sh 2.37 2.37 US$/sh 4.65 -27.68 -23.03 78.79

multiple 1.00 x 0.90 x 1.00 x 1.00 x 1.00 x 1.00 x

Valuation US$mn US$/sh 7,280 50.87 2,168 15.15 2,858 19.97 357 2.50 753 5.27 574 4.01 13,991 97.77 US$mn 339 339 US$mn 666 -3,961 -3,296 11,034 US$/sh 2.37 2.37 US$/sh 4.65 -27.68 -23.03 77.11

Weighting 1.00 x

Weighting 1.00 x 1.00 x

143.1 0.98 x 10.0%

- Current share price - Current P/NAV - Valuation upside

67.81 0.91 x 14%

Source: Company data, Credit Suisse estimates

We apply a 1.0x P/NAV multiple to all asset DCFs with the exception of Eastern Canadian Iron Ore for which we use 0.9x. The 1.0x P/NAV multiples reflect the fact that these are generally mature businesses. Where growth exists, it is brownfield in nature and considered fairly low risk. The reason for the 0.9x multiple on Eastern Canadian Iron Ore is the Bloom Lake expansion to 16mtpa. We will likely remove this 10% discount as the company provides further clarity on costs and infrastructure access. This would add roughly US$3/share to our NAV based valuation.

North American Iron Ore

50

01 December 2011

Exhibit 55: 5 year rolling NAV


120 100 80

Exhibit 56: Contributions to 2011 NAV


40 30 20 16% 15% 10% US$/share 10 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 >2020 -10 -10% -9% -20 -20% U.S. Iron Ore Asia Pacific Iron Ore North America Coal Ferroalloys % of NAV Eastern Canadian Iron Ore -30% Amapa Iron Ore Sonoma Coal Balance sheet 7% 6% 6% 5% 5% 4% 35% 40% 30% 20% 10% 0%

US$/share

60 40 20 0 -20 -40 U.S. Iron Ore Asia Pacific Iron Ore North America Coal Ferroalloys Raw Total Eastern Canadian Iron Ore Amapa Iron Ore Sonoma Coal Balance sheet
-30

2011Q1

2011Q4

2012Q3

2013Q2

2014Q1

2014Q4

2015Q3

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

As should be expected for a relatively modest growth, and low capex business, the 5 year rolling NAV is fairly steady at around $80-90/share (before risk weightings). A relatively low 35% of our 2011 NAV is generated > 2020, reflecting the fact that this business is already a mature and producing business, with a fairly modest growth outlook.

NAV sensitivities
We maintain four different macro scenarios in our models; CS assumptions (official house forecasts), Spot (US$140/t CFR), Mid-Cycle (CS LT price run from today into perpetuity) and Consensus (based on the Consensus Economics quarterly broker survey. Our NAV under each of these scenarios is summarised below.
Exhibit 57: NAV sensitivities under various macro scenarios
160.00 140.00 120.00 100.00 $/share $79.47 80.00 60.00 40.00 20.00 0.00 CS base case Raw NAV Credit Suisse target price
Source: Company data, Credit Suisse estimates

$133.55 $130.88 $94.31 $91.86 $77.79

$20.36 $19.91 Spot Mid-Cycle Consensus

Risk Weighted NAV Share price

Our valuation scenarios as summarised in Exhibit 57. We have flexed a few of the key drivers behind our CLF NAV and summarise them in Exhibit 58 below. Iron Ore unsurprisingly gives the greatest leverage, with a 50% NAV increase per 10% increase to our US$ price deck.

North American Iron Ore

51

01 December 2011

Coal we have basketed all of CLFs coal products together to test sensitivity to this assumption, and a 10% NAV increase per 10% increase to our US$ price deck We model the APAC and Eastern Canadian iron ore businesses with A$ and C$ cost bases respectively, and our USD sensitivity tests USDAUD and USDCAD assumptions concurrently (i.e. assuming a constant AUDCAD rate). A stronger USD means these offshore costs are less significant, and we calculate a 6% NAV decrease per 10% increase to our USD FX assumption.

Valuation impact

C$ per share

North American Iron Ore

Exhibit 58: NAV sensitivities

4.00 3.00 2.00 1.00 -20% 0.00 -1.00 -2.00 iron ore
Source: Company data, Credit Suisse estimates

-10%

base case

10%

20%

coal

USDCAD

Earning Multiples
Most analysts seem to use 8-10x PER as a valuation tool for CLF, and while we feel that this is an appropriate range, we struggle to demonstrate support for this assumption on a historic basis.
Exhibit 59: PER bands

$140 $120 $100 $80 $60 $40 $20 $0 Dec 03 4x Dec 06 6x Dec 09 8x 10 x Dec 12 12 x Dec 15 14 x Dec 18 share price

Source: Company data, Credit Suisse estimates

52

01 December 2011

Using this 8-10x PER assumption however, our current price deck supports a $105130/share valuation for roughly the next two years. Beyond 2013 we start retreating towards LT price assumptions and this valuation support rapidly falls to ~ $30-40/share. Those with a more specific view on PER multiples and forward time horizon can read an implied valuation off Exhibit 60.
Exhibit 60: PER valuation matrix
EPS (US$/sh) 12 mth forward 24 mth forward 36 mth forward 13.140 13.212 7.665 6. x $78.84 $79.27 $45.99 7. x $91.98 $92.49 $53.66 8. x $105.12 $105.70 $61.32 PER multiple implied target price 9. x 10. x 11. x $118.26 $118.91 $68.99 $131.40 $132.12 $76.65 $144.54 $145.34 $84.32 12. x $157.68 $158.55 $91.98 13. x $170.82 $171.76 $99.65 14. x $183.97 $184.97 $107.31

Source: Company data, Credit Suisse estimates

On an EBITDA multiple of 5x, CLF could support a valuation of US$95-100/share through 2012-13, or >2015 would get to US$27/share. 6x EV/EBITDA implies a company valuation of around $120/share through 2012-2013, and >2015 perhaps US$37/share.
Exhibit 61: EV (fixed) / EBITDA bands

$140 $120 C$ per share $100 $80 $60 $40 $20 $0 Dec 10 3x Dec 11 Dec 12 4x Dec 13 5x Dec 14 Dec 15 6x Dec 16 7x Dec 17 Dec 18 8x Dec 19 Dec 20

share price

Source: Company data, Credit Suisse estimates

North American Iron Ore

53

01 December 2011

Comparable company analysis


A relative earnings multiple analysis for CLF suggests that on a 12mth forward consensus basis, CLF tends to underperform the peer group through the troughs, and outperform through the peaks.
Exhibit 62: 12 month forward IBES PER

40 x 35 x 30 x 1 yr consensus PER 25 x 20 x 15 x 10 x 05 x 00 x Jan 08 CLF RIO.AX

Jul 08 BHP.AX

Jan 09 FMG.AX

Jul 09 MGX.AX

Jan 10 TCKb.TO

Jul 10 KIOJ.J

Jan 11 VALE.N

Jul 11 LIF_u.TO XTA.L

Source: IBES, Credit Suisse estimates

We suspect that this observation is a consequence of the earnings insulation provided by its operational geography/isolation: CLFs dependence on the US steel industry for both volume and pricing, means that its earnings are less exposure to spot seaborne prices than those of its peers. Perhaps what we are observing below is a relatively stable earnings base (the denominator) but a numerator (price) that gets dragged up/down with the rest of the sector in response to the broader macro story.

This observation is supported by Exhibit 63 and Exhibit 64 as well, while providing some broader sector context. CLF appears to be a name to go long relative the peer group when valuations get compressed (as they are now), and sell relative to the peer group when valuations expand again. That said, we should note that this historical observation may be less applicable in the future, as CLF produces an increasing volume of iron ore linked to global seaborne prices i.e. the price insulation layer is getting thinner.

North American Iron Ore

54

01 December 2011

CLF relative international iron ore producing peers Exhibit 63 and Exhibit 64 use IBES consensus data.
Exhibit 63: Global PER comparables for CLF (Global iron ore comparables, filtered for producer status)
25.0 20.0 15.0 Diversified avg = 7.0 x 10.0 5.0 0.0 MMX Companhia Siderrgica Nacional JSW Steel Tata Steel OneSteel US Steel African Rainbow Minerals Labrador Iron Ore Royalty Jindal Steel & Power Ltd Cliffs Natural Resources Rio Tinto Anglo American Sesa Goa Kumba Vale Mount Gibson Iron Ltd
Northern Iron

Pure play avg = 6.1 x

BHP Billiton

Xstrata

Eurasian Natural Resources

Fortescue Metals Group

Usinas Siderurgicas De Minas

12m fwd PER

24m fwd PER

12m Diversified Avg

Labrador Iron Mines

12m Pure Play avg

Source: IBES estimates

On an EV/EBITDA and PER basis, CLF appears relatively cheap against its international Producer peers, although we do see some fairly high quality names trading at similar levels, which somewhat compromise the relative valuation call, including Vale and Rio Tinto.
Exhibit 64: Global EV/EBITDA comparables for CLF (Global iron ore comparables, filtered for producer status)
12.0 10.0 8.0 6.0 4.0 2.0 0.0 MMX JSW Steel Tata Steel US Steel NMDC Companhia Siderrgica Nacional OneSteel Usinas Siderurgicas De Minas Cliffs Natural Resources Labrador Iron Ore Royalty Labrador Iron Mines Sesa Goa Vale Rio Tinto Kumba Xstrata Anglo American Ferrexpo Fortescue Metals Group African Rainbow Minerals Jindal Steel & Power Ltd Eurasian Natural Resources Mount Gibson Iron Ltd Grange Resources BHP Billiton Pure play avg = 3.6 x Diversified avg = 4.3 x

12m fwd EV/EBITDA

24m fwd EV/EBITDA

12m Diversified Avg

12m Pure Play Avg

Source: IBES estimates

Grange Resources

Northern Iron

Ferrexpo

NMDC

North American Iron Ore

55

0.0 10.0 12.0 14.0 0.0 2.0 4.0 6.0 8.0 CONSOL Energy Inc. Alpha Natural Resources LLC CONSOL Energy Inc. United States Steel Group Nucor Globe Specialty Metals Olympic Steel Cloud Peak Energy Reliance Steel & Auminum Worthington Industries Teck Resources Ltd Peabody Energy Corp SunCoke Energy Inc. Alcoa Inc. Freeport-McMoRan Copper & Gold Century Aluminum Company Arch Coal, Inc. Cliffs Natural Resources SunCoke Energy Inc. Nucor Worthington Industries

1.0

2.0

3.0

4.0

5.0

6.0

7.0

North American Iron Ore

Reliance Steel & Auminum Globe Specialty Metals Olympic Steel 12m fwd PER

Source: Company data, Credit Suisse estimates


Cloud Peak Energy Peabody Energy Corp Teck Resources Ltd Alcoa Inc. 24m fwd PER Arch Coal, Inc. Cliffs Natural Resources

Source: Company data, Credit Suisse estimates

Exhibit 65: North American Metals & Mining PER comparables

Exhibit 66: North American Metals & Mining EV/EBITDA comparables

Exhibit 65 and Exhibit 66 use Credit Suisses own earnings forecasts.

CLF relative North American Metals & Mining peers (various commodities)

Based on Credit Suisses own earnings forecasts, CLF is the cheapest US listed Metals & Mining stock under coverage.

12m fwd EV/EBITDA

United States Steel Group

24m fwd EV/EBITDA

Alpha Natural Resources LLC

Freeport-McMoRan Copper & Gold

Century Aluminum Company

01 December 2011

56

01 December 2011

Exhibit 67 illustrates that our views on CLF earnings are actually not significantly different to the rest of the street. We are marginally more bullish on 12 mth forward earnings than the street, but on a 24mth (basically CY13) view we are actually a little more cautious. The point being that whether we use consensus or Credit Suisse earnings forecasts, CLF still looks cheap.
Exhibit 67: Credit Suisse 12/24 mth forward EPS relative IBES consensus

20% 15% CS rel consensus EPS (24mth forward) RS.N ANR.N 10% 5% 0% -20% -15% -10% -5% -5% 0%

TCKb.TO SXC.N CNX.N ACI.N CLD.N BTU.N FCX.N

GSM.OQ WOR.N 5% 10% 15% 20% NUE.N

-10% ZEUS.OQ X.N -15% -20% CS rel consensus EPS (12mth forward) Cliffs Natural Resources

Source: Company data, Credit Suisse estimates, IBES

North American Iron Ore

57

01 December 2011

Company-Specific Risks
Investment in any mining company brings with it operational risks, commercial risks, and development risk. A few of the risks we regard as being more company-specific include: Examples of Operational and Development Risks Pinnacle carbon monoxide issues the carbon monoxide issues at Pinnacle appear to have been addressed for the time being, but we can not be certain that this issue has now completely disappeared and will not impact production again in the future. Infrastructure access. CLF targets 24mtpa production from Bloom Lake longer term. Infrastructure owners IOC are obliged to allow CLF to access the railway line so long as it has surplus capacity, but IOCs recent indications that it was considering expansion plans to 50mtpa are a signal that third party access to this rail way line is likely to become more difficult in the future.

Examples of Commercial and Financial Risks Diversification/Acquisition Risk. Cliffs needs to diversify away from its dependence on the US steel making industry, and seems to want to diversify away from iron ore. Portman and Consolidated Thompsons acquisitions both help realise the first objective, but we are yet to see a successful attempt at realising the second objective. We see value destruction through poor acquisitions as one of the biggest risks associated with owning this stock. Mineral Resources Rent Tax (MRRT). We do not include the Australian Labor Governments proposed MRRT in our base case modelling. There remain many uncertainties around the MRRT, not the least being whether it actually will be introduced and maintained (although this is looking increasingly likely, with the recent lower house endorsement). Opinion polls indicate the current Federal Government has weak support, and the opposition party has committed to scrap the tax, so it may not last long if in fact it is introduced. MRRT impact depends on the level of allowable capital deductions and operating margins, but will reduce the NAV of most iron ore businesses by around 5-12%, the higher end being the less capital intensive businesses. This translates to $0.80-2.00/share off our group level valuation Relative Iron Ore prices. The iron ore industry has undergone a tremendous amount of change over the past 2 years, and the way iron ore is priced today is very different to the way it was priced pre-2009. Value in Use adjustments for non-standardised products such as pellets are continuing to evolve, and while we believe we understand this topic far better than most, we are quite certain that pricing mechanics will not be the same in 5-10 years time as they are today.

North American Iron Ore

58

01 December 2011

Asset Review
Summary
Relative to its global peers, the CLF portfolio is heavily dependent on depressed steel markets such as the US, with a relatively small exposure to growth markets in Asia. The following Asset Review provides a summary of: United States Iron Ore CLFs largest iron ore production platform which is heavily dependent upon the US steel industry. CLF has 5 operating mines in the US. Eastern Canadian Iron Ore the source of most of CLFs iron ore growth is Bloom Lake, the asset recently acquired as part of the C$4.9bn Consolidated Thompson takeover. CLF has 2 operating mines in Eastern Canada. Asia Pacific Iron Ore acquired through the 2005 2008 Portman acquisition. In 2012 Koolyanobbing expansion to 11mtpa should be completed, and Cockatoo Island will be disposed of. North American Coal this troubled group of 3 coal operations will be subject to a rigorous corporate review in 2012, with disposal being one of the potential outcomes. Ferroalloys The Ring of Fire chromite project provides exposure to the structurally attractive chromite industry, but this high grade ferrochrome deposit is located in a region untapped by infrastructure. We see CLF more as mine operators than mine builders, for whom this undeveloped resource represents an ambitious but potentially very rewarding challenge.

North American Iron Ore

Exhibit 71 provides a production, capacity, reserve and ownership summary of CLFs portfolio. Although CLF does have some geographical and product diversification, at its core this is very much an iron ore business. Roughly 90% of our NAV is from the iron ore businesses (Exhibit 54), and the vast majority of our earnings.
Exhibit 68: Asset locations and product flows

13.5mt

24.4mt
9.4mt

1.5mt

9.2mt
1.8mt

Source: Company data, Credit Suisse estimates

59

01 December 2011

Exhibit 69: EBIT contributions by business unit

Operational Revenue 2,500 2,000 US$mn 1,500 1,000 500 0 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 United States Iron Ore Asia Pacific Iron Ore
Source: Company data, Credit Suisse estimates

Eastern Canadian Iron Ore North American Coal

CLF publishes little in the way of operational data, so our ability to have a view on the underlying quality of the assets or their changing profitability is fairly limited. Meaningful analysis of grades, recoveries, strip ratios, unit operating costs or reserve/resource quality is not possible.
Exhibit 70: Revenue contributions by business unit

Operational EBIT 1,400 1,200 1,000 US$mn 800 600 400 200 0 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 United States Iron Ore Asia Pacific Iron Ore
Source: Company data, Credit Suisse estimates

Eastern Canadian Iron Ore North American Coal

North American Iron Ore

60

North American Iron Ore

Exhibit 71: Asset summary


Capacity (mtpa) 2011 guidance (mt) Sales (mt) Cash Cost (US$/t) 32 24 67.5 - 72.5 60 - 65 Saleable Product from Reserve 2010 Book Proven Probable Total (mt) Ownership life Value (mt) (mt) (years) (US$mn) 977 737 10 206 97 300 124 240 64 176 0.9 0.9 0.0 119 68 0 30 10 16 12 51 7 44 100.5 98.5 2.0 1096 805 10 236 107 316 136 291 71 220 101.4 99.4 2 24 24 2 30 13 53 25 22 13 28 9 10 1 639 493 49 190 44 138 72

Iron Ore

Product

Location

North America United States of America Empire Tilden Hibbing Northshore United Taconite Canada Wabush Bloom Lake Asia Pacific Koolyanobbing Cockatoo Island Lump + fines Lump + fines Western Australia Western Australia Pellets Pellets Pellets Pellets Pellets Pellets

46.4 32.9 5.5 8 8 6 5.4 13.5 5.5 8 11.8 10.4 1.4

Michigan Michigan Minnesota Minnesota Minnesota

79% CLF / 21% ArcelorMittal 85% CLF / 15% US Steel 100% 100% 100%

90 - 95

Pellets Pellets

Quebec Quebec

146

100% 75% CLF / 25% WISCO

60 - 65

243 243 0 100% 50% CLF / 50% Asia Pacific Iron Ore

Latin America Amapa Fines Brazil

5.1 5.1

4.5 4.5

184 184 30% CLF / 70% Anglo American

Coal

Product

Location

Capacity (mtpa) 9.4

2011 guidance (mt) Production Cash Cost (mt) (US$/t) 4.5 110 - 115

In place (mt) 423 140 80 203

Book Reserves Reserve Moist Recoverable Ownership Value life (mt) (years) (US$mn) 225 62 42 121 24 16 17 42 324 133 77 115 100% 100% 100%

North America Pinnacle Complex Oak Grove CLCC LV metallurgical LV metallurgical HV metallurgical and thermal West Virginia Alabama West Virginia

4 2.5 2.9

Asia Pacific Sonoma Metallurgical and thermal Queensland

3.6 3.6

3.1 3.1

90 - 95 90 - 95

35.5 35.5

20 20.2

6 6

98 98 45% CLF
01 December 2011

Source: Company data, Credit Suisse estimates

61

01 December 2011

United States Iron Ore


Prior to the recent Consolidated Thompson acquisition, CLF grouped its US and Canadian Iron Ore mines into one North American Iron Ore business unit. This has since been restructured as: United States Iron Ore this is the former North American business, excluding Wabush. Eastern Canadian Iron Ore Wabush, along with the recently acquired Bloom Lake.

North American Iron Ore

Exhibit 72: North American iron ore mines (US and Canada)

Source: Company data

Production summary In the United States, CLF operates five iron ore mines in Michigan and Minnesota (the CLF operations are marked with black dots in Exhibit 72). Together these operations have a rated production capacity of around 26mtpa of iron ore pellets. The head grade of the US deposits is in the 30 - 35% Fe range, containing both magnetite and hematite. CLFs ores are upgraded to 65 - 68% Fe concentrates before being fired into 13 different grades of pellets. All pellets become hematite (Fe2O3) during this firing and oxidation process. The United States Iron Ore business is ex-growth, and faces mine depletion at Empire in the near future.

62

01 December 2011

Pricing and margins The average realised price for CLFs North American iron ore business is currently significantly lower than the FOB reference price (or World Price in CLFs language) we calculate by taking a Chinese pellet price and netting off freight.
Exhibit 73: North American/U.S. Iron Ore operating margins

North American / U.S. Iron Ore - operating margins 250 US$ per metric tonne 200 150 100 50 0 2005Q1 2006Q2 2007H1 2008Q3 2009Q4 2010H2 2011 2013Q1 2014Q2 2015H1 Cash Cost FOB Reference Price
Source: Company data, Credit Suisse estimates Note: we have used North American numbers pre 2011, and U.S. (i.e. ex Wabush) thereafter.

DD&A Realised Price (Forecast or Actual)

Our modelling assumes that longer term the formula based component of sales (which looks at steel utilisation levels and prices) rolls off in favour of World Pricing mechanisms and that CLF will realise a price roughly equal to our FOB estimate of World Price. In a falling iron ore price environment, it is possible that the US iron ore business could even realise a price above our World Price estimate.
Exhibit 74: North American Iron Ore transition to world price

22 million tons

24 million tons

25 million tons

Formula
1

World Price

Tons available to be priced at World Price

Assumes sales volume of approximately 25 million tons for 2014.

Source: Company data

North American Iron Ore

63

01 December 2011

New technology threats For most of its life, the US iron ore industry has had a captive customer base, and has not had to contest with international imports. This isolated industry has had little incentive to pursue productivity enhancements or to implement new technology. Relatively new import competition is changing the way the US iron ore industry, and its steel making customers, think about technology. An example of this is Magnetation, a group that AK Steel has recently become involved in. Not that we are advocating Magnetation as the way of the future, but readers should be aware that if the technology is proven to be successful it does have the potential to change the dynamics of the US iron ore industry: Throughout the Great Lakes area exist vast tailings ponds of low grade hematite waste. These old hematite tailings ponds have been created by plants that used fairly basics LIMS technology to recover magnetite, but without WHIMS or any other means of hematite recovery the hematite content reported to waste. Magnetation is developing a proprietary flow sheet (patents pending) that it claims will be capable of recovering the hematite from these tailings ponds. The US iron ore industry is an industry that is struggling with over capacity, so the marginal supply tonne will likely need to be exported, incurring rail costs of perhaps $30-50/t which directly hit the margin. The potential resources available within these old tailings ponds would amount to hundreds of millions of tonnes and the material is already mined, already crushed, and much of it will already have infrastructure available to it.

US$ per metric tonne

North American Iron Ore

Eastern Canadian Iron Ore


Exhibit 75: Eastern Canadian projects Exhibit 76: Eastern Canadian Iron Ore operating margins
Eastern Canadian Iron Ore - operating margins 250 200 150 100 50 0 2010Q1 2010Q4 2011Q2 2011H2 2012H1 2012 2013Q3 2014Q1 2014Q4 2015Q2 2015H2 Cash Cost FOB Reference Price DD&A Realised Price (Forecast or Actual)

Source: Company data

Source: Company data, Credit Suisse estimates

The 5.0-5.5mtpa rated Wabush mine, and the 8mtpa rated Bloom Lake mine, are both located near Labrador City in the Labrador Trough. Please refer Appendix 1 for more information on the Labrador Trough. Bloom Lake is unique amongst CLFs North American iron ore portfolio in that it sells product as concentrate. Recent growth in this business has all been acquired, and future growth is from recently acquired assets:

64

01 December 2011

February 2010: Bought out former partners in the Wabush asset taking CLFs interest to 100% (from 24%). This increased CLFs production capacity by around 4mtpa and added more than 50mt to reserves.
Exhibit 78: Quarterly EBIT forecasts
Iron Ore EBIT 1,200 1,000 800 US$mn 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 USA Canada Asia Pacific Amapa (Iron Ore) 600 400 200 0 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 USA Canada Asia Pacific Amapa (Iron Ore)

mt

Volume (mt)

2.0 1.5 1.0 0.5 0.0 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 China Taiwan Other Germany Trinidad and Tobago 12 mth avg Netherlands United States

Volume (mt)

North American Iron Ore

Exhibit 77: Quarterly Production forecasts


Iron Ore Volumes 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

January 2011: Announced planned acquisition of peers Consolidated Thompson for roughly C$4.9bn. Consolidated Thompsons flagship asset, Bloom Lake, has a nameplate capacity of around 8mtpa though it will be 2012 before 8mtpa is achieved with the addition of a magnetite recovery circuit. 2014 and onwards: Bloom Lakes 16mtpa 2014/15 target appears achievable but longer term 24mtpa is more of a challenge. CLF lacks an infrastructure agreement beyond 16mtpa, and IOCs recent indication that it was reviewing concepts to 50mtpa (from current 22mtpa) was a fairly clear signal to the rest of the sector that incremental infrastructure access is not going to be more challenging. At this stage we only model Bloom Lake to 16mtpa. Bloom Lakes impact on Canadian export volumes is fairly evident in Exhibit 80, where we see a large increase in non-agglomerated (i.e. unpelletised = concentrate) volumes.
Exhibit 80: Canadian concentrate exports
Non-Agglomerated (Fines / Concentrate) Iron Ore exports 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 China Germany Netherlands Taiwan Trinidad and Tobago United States Other

Exhibit 79: Canadian total exports


Total Iron Ore exports 3.5 3.0 2.5

Source: Trade data, Credit Suisse estimates

Source: Trade data, Credit Suisse estimates

This growth volume is almost exclusively China bound, and tells us a couple of things about marketing new concentrate projects in North America:

65

01 December 2011

The North American steel industry is dominated by pellet consumers. It does not have its own pelletising capacity. The marginal supply tonne needs to be exported. In todays market exporting will mean exposure to World Prices i.e. something close to a spot price calculated with reference to the Platts 62% IODEX. The need to export also speaks for the strength of existing offtake contracts. Bloom Lake could use idle pelletising capacity at Wabush and be able to fill offtake contracts with Bloom Lake pellets. This strategy may help Bloom Lake penetrate the North American market.

Our modelling is based on Wabush cash costs of around C$101/t in 2012, and Bloom Lake at C$63/t. Our blended average cash cost forecasts are summarised in Exhibit 76

US$ per metric tonne

North American Iron Ore

Asia Pacific Iron Ore


Exhibit 81: Asia Pacific Iron Ore operations Exhibit 82: Eastern Canadian Iron Ore operating margins
Asia Pacific Iron Ore - operating margins 200 180 160 140 120 100 80 60 40 20 0 2010Q1

2011Q1

2012Q1

2013Q1

2014Q1

2015Q1

Cash Cost FOB Reference Price


Source: Company data Source: Company data, Credit Suisse estimates

DD&A Realised Price (Forecast or Actual)

CLF operates two DSO iron ore operations in the Pilbara: Cockatoo Island located in the Kimberly region of Western Australia, this 1.5 mtpa asset produces DSO hematite lump and fines. Cockatoo Island sits in between Irvine Island (PLV.AX) and Koolan Island (MGX.AX) which are all part of the same iron enriched sandstone feature. In September 2011 CLF agreed to a term sheet covering the sale of this asset to PLV.AX at end 2012. PLV.AX will likely be planning to relocate some the Cockatoo Island facilities for its Irvine Island project. MGXs Koolan Island and CLFs Cockatoo Island are the only two sources of production from Yampi Sound monthly port export data for which is presented below demonstrating a modest pricing discount relative to our benchmark/spot expectations.

66

01 December 2011

Exhibit 83: Yampi Sound export volumes


Yampi Sound - Volumes 0.80 0.70 Monthly Iron Ore Exports 0.60 0.50 0.40 0.30 0.20 0.10 0.00 Sep10 Oct10 Nov- Dec10 10 Jan11 0.35 0.07 0.07 0.07 0.15 0.07 0.32 0.31 0.41 0.23 0.00 0.04 0.00 0.07 0.18 0.00 0.08 0.07 0.16 0.07 0.16 0.30 0.07 0.22 0.47

Exhibit 84: Yampi Sound export prices


Yampi Sound - Prices 180 160 140 Price (US$/t) 0.22 120 100 80 60 40 20 0 Sep10 Oct10 Nov- Dec10 10 Jan11 Feb11 Mar11 Apr- May- Jun- Jul-11 Aug- Sep11 11 11 11 11 'Benchmark' Fines 'Spot' Fines 155 133 123 129 119 102 101 101 113 101 175 116 99 0 0 174 158 162 148 149 164 158 131 160 143

Feb- Mar11 11

Apr- May- Jun- Jul-11 Aug- Sep11 11 11 11 11 Lump Yampi Sound

Fines Yampi Sound

Fines Yampi Sound

Lump Yampi Sound

Source: Trade data, Credit Suisse estimates

Source: Trade data, Credit Suisse estimates

Koolyanobbing this asset is a collective name for the operating deposits at Koolyanobbing, Mount Jackson and Windarling. Each of the three deposits has its own unique mineralogy, which requires blending at Koolyanobbing in order to produce a consistent quality product. From Koolyanobbing the crushed and blended ore is transported 360 miles south to the Port of Esperance for shipment to Asian customers. CLF is the only iron ore exporter using the Port of Esperance, and the below data gives us fairly good clarity on CLFs monthly activities.
Exhibit 86: Esperance export prices
Esperence - Prices 200 180 160 140 120 100 188 192 195 184 175 183 169 173 165 165 165 168 168 80 148 146 142 136 145 156 160 162 147 158 60 123 127 130 40 20 0 Sep10 Oct10 Nov- Dec10 10 Jan11 Feb11 Mar11 Apr- May- Jun- Jul-11 Aug- Sep11 11 11 11 11 'Benchmark' Fines 'Spot' Fines

Monthly Iron Ore Exports

0.35

0.32

0.42 0.30

0.34

0.30 0.35 0.40 0.22 0.20

0.53

0.36

0.36

0.36

0.43

0.31

0.39

0.34

0.45 0.30

0.30 0.38 0.11

0.41

0.30

Sep10

Oct10

Nov- Dec10 10

Jan11

Feb- Mar11 11

Apr- May- Jun- Jul-11 Aug- Sep11 11 11 11 11 Lump Esperance

Fines Esperance

Price (US$/t)

MMRT and Carbon Tax not in our numbers yet, but do present a real risk We do not include the Australian Labor Governments proposed Mineral Resources Rent Tax (MRRT) in our base case modelling. There remain many uncertainties around the MRRT, not the least being whether it actually will be introduced and maintained. Opinion polls indicate the current Federal Government has weak support, and the opposition party has committed to scrap the tax, so it may not last long if in fact it is introduced. Commonwealth Treasury produced an exposure draft on the operation of the MRRT in June 2011, but some detail remains outstanding. The Government intended to bring the MRRT legislation to Parliamentary vote later this year, and the tax begin in July 2012, but this timing looks tight given carbon tax legislation is also to be brought to Parliament in this period. MRRT impact depends on the level of allowable capital deductions and operating margins, but will reduce the NAV of most iron ore businesses by around 5-12%, the higher end

North American Iron Ore

Exhibit 85: Esperance export volumes


Esperence - Volumes 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00

0.45

Fines Esperance

Lump Esperance

Source: Trade data, Credit Suisse estimates

Source: Trade data, Credit Suisse estimates

In 2012 a $339mn infrastructure, mine, and plant upgrade is expected to be complete at Koolyanobbing which will increase asset production from current 8.4 to 11mtpa. The above upgrade is partly offset however by the loss of Cockatoo Island

67

01 December 2011

being the less capital intensive businesses. This translates to $0.80-2.00/share off our group level valuation. Separately, the carbon tax represents around $1/t in additional costs for the typical iron ore business, and as this is far less than the accuracy of our modelling anyway, no specific allowance for it has not been included.

Minority Iron Ore Interests


CLF has a 30% minority interest in Amapa, with the controlling interest being held by Anglo American. Production commenced in December 2007, however commercial production was not declared until 2010, when the asset produced 4mt (2.7mt in 2009, and 1.2mt in 2008). Anglo expects Amapa to produce 4.5mt of iron ore fines in 2011 and 5.1mt once fully ramped up.

North American Coal


Exhibit 87: Quarterly Production forecasts
Coal Volumes 2.50 2.00 1.50 1.00 0.50 0.00 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 North America Sonoma (Coal) US$mn mt 20 0 -20 -40 -60 North America Sonoma (Coal) 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 80 60 40

Exhibit 88: Quarterly EBIT forecasts


Coal EBIT

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

CLF operates five metallurgical coal mines located in West Virginia and Alabama and one thermal coal mine in West Virginia. On an aggregate basis these operations have a rated capacity of 9.4mtpa. See Exhibit 71 for further detail.
Exhibit 89: North American Coal asset map

Source: Company data

North American Iron Ore

68

01 December 2011

With the exception of Cliffs Logan County Coal Surface, all of the other mines are underground extracted using longwall and continuous miner equipment. These assets have been troubled by operational issues in recent times: Oak Grove (2.5mtpa) in April 2011 a tornado destroyed 2.5 miles of a 5 mile overland conveyor system connecting the mine to the Concord Preparation Plant. The same tornado rendered the Preparation Plant itself inoperable with the top four floors sustaining structural damage. The conveyor has since been replaced, and the Preparation Plant repairs should be completed during November. It had originally been intended to restart this operation in December 2011, but this has been delayed into January 2012. With a 600kt raw material stockpile, 1Q12 sales should be strong. Pinnacle (4mtpa) is currently subject to a forced closure by regulatory agencies as a result of excess carbon monoxide issues. CLF has demonstrated to the relevant authorities that the carbon monoxide is not a result of a fire, but rather naturally occurring, allowing a restart in October 2011.

There are no capacity expansions in the pipeline for the North American Coal business, and although back in July it had been expected that 2012 would increase towards 9mtpa, these expectations were downgraded to around 7.2mtpa with the recent SepQ11 update. A number of small deposits are coming on line in the near term, all of which are incorporated in the above asset summaries and volumes forecasts: Green Ridge (LV metallurgical) is part of Pinnacle complex, and will produce around 120ktpa in 2011. Lower War Eagle (HV metallurgical) as well as the two deposits below are all part of the CLCC project. This contributes around 540kt as it ramps up to full production in 2012. Toney Fork (thermal) is a small surface mine contributing around 1mtpa in 2011. Chilton Elk Lick (HV metallurgical) is an underground deposit which will have a small contribution from 2012 and ramps up into 2013.

North American Iron Ore

Asia Pacific Coal (Australia)


In Australia CLF holds a 45% economic interest in the Sonoma coking and thermal coal mine located in the state of Queensland. This project has a capacity of 4mtpa, made its first shipment in February 2008, and has a 170mt resource. Sonoma Ming Management is a joint venture partnership also involving: QCoal Sonoma Pty Ltd, a privately owned Queensland resource company. QCoal initiated development of the Sonoma deposit JFE Shoji Trade Corporation, part of the JFE Steel Group, one of the largest steel producers in Japan China Steel, the largest steel producer in Taiwan Watami Trading, a Hong Kong based trading company

Ferroalloys
CLF acquired Freewest Resources and Spider Resources during 2010, giving it 100% control of the Black Thor and Black Label properties and 73.5% of Big Daddy. Collectively these projects are known as the Ring of Fire Chromite Project (see Exhibit 90). All three properties are located in Northern Ontario, Canada.

69

01 December 2011

Exhibit 90: Chromite project location

Source: Company data

CLF is targeting a 2015 commencement for 1 to 2 mtpa of high grade chromite to produce 600ktpa of ferrochrome with a > 30 year life. Ore extracted from the mine with a grade of 40% Cr2O3 or greater is suitable for refining directly in the off-site Ferrochrome Production Facility without any further treatment at the Mine Site. Ore with a lower grade must be processed to increase its chromite content. We intend to build a DCF model for this project as soon as we know a little more about the geology/orebody and the final product specifications, but at this stage we do not have enough detail to do so, and value these assets at acquisition cost.
Exhibit 91: Ferroalloys acquisition timeline

Source: Company data

CLFs 2Q11 analyst conference call confirmed that: The project description was submitted to, and approved by, the Ontario government which facilities further critical path permitting requirements.

North American Iron Ore

70

01 December 2011

The PFS is due for completion in 2H 2011

Chromite/Ferrochrome industry background We like the fundamentals of the chromite/ferrochrome industry, with the supply side experiencing many of the same issues that we see in PGMs. Although we do not yet have our own S/D model or a view on pricing, the following provides some background. Chromite and Ferrochrome Chromite (FeCr2O4) is an iron chromium oxide mineral and the only ore of chromium metal. A wide variety of ferroalloys are produced using chrome ore. Depending upon the metallurgical application, the composition of the ore varies in terms of its Cr203 content and its Cr:Fe ratio. Ferrochrome (FeCr) is an alloy of chromium and iron containing between 50% and 70% chromium. Ferrochrome is produced by electric arc melting of chromite. The stainless steel industry is the largest consumer of ferrochrome.

Demand Of the total world chromite output roughly 94% is used to produce ferrochrome for the metallurgical industry (stainless steel), 2% is used in chemical industry and the remainder in the refractory and foundry industry. 80% of global ferrochrome production is used for making stainless steel. China is the leading consumer of chromium metal in the world, accounting for over 70% of the worlds production. The United States is import dependant on chromium metal and is currently the 7th leading consumer of this commodity

North American Iron Ore

Exhibit 92: Chromium First Use 2010E

Source: ENRC company presentation / Heinz H Pariser 2010

Supply Currently there are no substitutes for chromite in the production of ferrochrome that makes stainless steel stainless.

71

01 December 2011

Resources and production are mostly in the Eastern Hemisphere in countries that are politically and economically challenged by high energy and production costs. The leading chromite ore-producing countries are South Africa, Kazakhstan, and India. Exhibit 93shows the production of chromite by various countries over the period 20012011.

North American Iron Ore

Exhibit 93: World Chromite supply (mt)


25

20

15

10

0 2001 2002 2003 2004 South Africa 2005 India 2006 2007 2008 2009 2010 2011E

Kazakhstan

Other Countries

Source: USGS, Industrial Mineral Corporation

Manufacturing ferrochrome is a power intensive process, consuming between 2.2 and 2.4 megawatts of electricity to produce 1 tonne of ferrochrome. South Africa, the largest producer of chrome ore and ferrochrome, is facing power availability issues. Public provider ESKOM has announced that it plans to increase power costs by 20 30% on yearly basis. Currently power rates are about US6/kwh, which will reach US13.5/kwh by 2015 if ESKOMs planned increases are realised. This compares to Canadian power costs of around US4/kwh. South Africa is also facing labor issues. Work stoppage in the country is reaching record levels in 2011 as unions demand inflation-busting pay increases. South African workers have been striking in the chemicals, engineering, metals, diamond and coal industries, curbing output from factories and mines. According to the United States Geological Survey (USGS), if chrome ore production from South Africa were disrupted, the remaining producers would have to increase their production by a factor of 1.75 to compensate for the loss.

72

01 December 2011

Exhibit 94: World Chromite demand / Ferrochrome supply (mt)


9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2001 2002 2003 2004 2005 China 2006 Kazakhstan 2007 India 2008 Others 2009 2010

South Africa

Source: USGS, Outokumpu

Pricing Ferrochrome and Chrome ore are not exchange traded commodities. Prices are negotiated between buyers and sellers, either on the spot market or under contract Chromite is priced on a c/dmtu basis, similar to the pre 2010 iron ore price units. Like iron ore though, our analysis of available pricing data suggests that the conversion from c/dmtu to $/t is a little more complicated than a simple grade adjustments. We suspect that Value In Use adjustments also apply here, such that the Chromite content of a low grade ore is worth less than the Chromite content in a high grade ore.

North American Iron Ore

73

01 December 2011

Financials
Balance Sheet
CLFs last reported balance sheet has $545mn in cash and cash equivalents, and $3,883mn long term debt, as summarised below
Exhibit 95: Debt summary (as at 30 June 2011)
Debt Instrument Type Interest Rate Maturity Face Amount $500 $800 $400 $270 $55 $1,750 LongComments Term Debt O/S $499 $790 $398 $270 $55 $250 Note that nothing was drawn on this at 6/30/10. Also note that this facility has increased from $600 million to $1.25 billion

Senior Notes Senior Notes ($300 million for the CT Acquisition) Senior Notes Private Placement Senior NotesTranche A Private Placement Senior NotesTranche B $1.75 Billion Revolving Credit Facility

Fixed Fixed Fixed Fixed Fixed

4.80% 6.25% 5.90% 6.31% 6.59%

2020 2040 2020 2013 2015 2012

Variable Varies

Senior Notes- Tranche A (All for the Fixed 4.88% 2021 CT Acquisition) Term Loan (All for the CT Acquisition) Variable Varies (LIBOR + 60- 2016 90 basis points) Source: Company data, Credit Suisse estimates

$700 $984 $5,459

$699 $922 $3,883

CLFs own balance sheet / debt targets are: 30-40% debt to total capital (ND / (ND + E)) 2.0-2.5x debt to EBITDA
Exhibit 97: Interest coverage
Debt to EBITDA 3.5 3.0 2.5 ND / (ND+E) 2008H1 2009H1 2010H1 2011H1 2012H1 2013H1 2014H1 2015H1 2.0 1.5 1.0 0.5 0.0 2008H1 2009H1 2010H1 2011H1 2012H1 2013H1 2014H1 2015H1

ND / (ND+E)

North American Iron Ore

Exhibit 96: Gearing Ratio


Net debt to net debt + equity 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Our modelling suggests that CLFs balance sheet targets are comfortable short term, but in 2014-2015 our current price deck will make Debt to EBITDA tight.

74

01 December 2011

Cash Flows
1H11 net debt increased as a result of the Consolidated Thompson acquisition, but, looking forward, even our fairly modest house iron ore price forecasts see the companys balance sheet position continue to improve. Relative to company guidance, our capital cost assumptions are: Capital expenditure: 10-20% higher than guidance. This business is largely ex-growth and capital requirements are modest in comparison to operating cash flow generation. Valuation is not sensitive to capex assumptions. Maintenance expenditure. We model flat-to-increasing maintenance expenses consistent with the aging nature of these assets. Like most miners, CLFs seems to suggest that maintenance costs will decrease over time.

US$mn

Coal $45 million related to bringing Lower War Eagle, a high-volatile metallurgical coal mine in West Virginia, into production $16 million related to the mine shaft construction at Cliffs Oak Grove Mine in Alabama

North American Iron Ore

Exhibit 98: Cash Flow and Net Cash Summary

Cash Flow and Net Cash Summary 4,000 3,000 2,000 1,000 0 -1,000 2010H1 -2,000 -3,000 -4,000 -5,000 -6,000 Net cash flow from operations Investing cash flow
Source: Company data, Credit Suisse estimates

2011H1

2012H1

2013H1

2014H1

2015H1

Financing cash flow Net cash

2011 Capital Expenditure Guidance CLF anticipates spending a total $900mn across sustaining and expansion capital for 2011, which would be distributed as follows: Iron Ore $125 million for extension of Cliffs Empire Mine in Michigan to 2014 $20 million related to increasing production at Wabush to 5.5 million tons by 2013 $146 million related to infrastructure upgrades at Cliffs Koolyanobbing Mine in Western Australia $200 - 300 million related to expanding Bloom Lake to 16 million tons by 2013

75

01 December 2011

$14 million related to the longwall installation at Cliffs Pinnacle Mine in West Virginia

North American Iron Ore

The remaining $200-300mn will be spent on sustaining capital

Management & Board


CLF has a board of 12 directors, with 10 of the 11 2011 nominees being independent. All directors are elected annually, and shareholders have cumulative voting rights. Independent directors have designated a lead director and meet at regularly scheduled executive sessions without management. Audit, compensation and organization, and board affairs committees are composed entirely of independent directors. Independent directors must take a portion of their annual retainer in Company stock in accordance with stock ownership guidelines. All directors attended at least 75 percent of the meetings of the Board and Board committees of which they were a member in 2010. There is no retirement plan for independent directors elected to the Board subsequent to 1998. A formal code of ethics provides guidance to Cliffs' directors and employees.

76

North American Iron Ore

Exhibit 99: Key Personnel (Management)


Name Joseph Carrabba Position Chairman, President & Chief Executive Officer Profession MBA, Geologist Description Mr. Carrabba joined Cliffs from Rio Tinto, a global mining company, where he served for 22 years in a variety of leadership capacities at locations worldwide including the United States, Asia, Australia, Canada, and Europe. Before relocating to Rio Tintos Diavik Diamond Mines, Inc., in Canadas Northwest Territory, where he served most recently as president and chief operating officer, he spearheaded the development and successful implementation of Rio Tintos Six Sigma initiative at its bauxite mining operation in Australia. Accounting Ms. Brlas joined the Company in December 2006 as senior vice president, chief financial officer and treasurer. In her current role, her responsibilities include finance, financial reporting, accounting, financial planning, investor relations, human resources and treasury functions. Ms. Brlas joined Cliffs with an extensive accounting and financial career spanning more than 20 years. Lawyer (JD) Mr. Tompkins has responsibility for all traditional corporate general counsel matters, Cliffs' ongoing relationships with all U.S. and international government and regulatory bodies, and the execution and reporting of the Company's increasingly critical sustainable development practices. Mr. Tompkins joined Cliffs in May 2010, having previously been executive vice president and chief financial officer for RPM International Inc. Before joining RPM in 1996, he held various legal and executive positions with Reliance Electric Company and Exxon Corporation. MBA Mr. Gallagher joined Cliffs in 1981 as an ore sales representative in the commercial department. He has held various management positions within the Company, and was named vice presidentsales in August 1998. Mr. Gallagher was then named Senior Vice President -- CFO in 2003 and president of North American Iron Ore in 2006. Chemical Engineer In his current position, Mr. Price has operating responsibility for all operations at the Companys global portfolio of controlled iron ore and coal interests in North America, Asia Pacific and Brazil, as well as leading operations for emerging assets, including ferrochrome, iron technologies and renewaFUEL. He was named senior vice president & managing director of Asia Pacific Iron Ore by Cliffs in April 2009, with responsibility for all commercial and operating activities within the business unit. He joined Cliffs in 2007 as chief executive officer of Portman Limited, the third largest iron ore mining company in Australia. Mining Engineer Mr. Smith has global responsibility for business development at Cliffs, including the identification and evaluation of potential strategic transactions, due diligence and valuation, integration, and resource evaluation/quantification. He also has oversight for the exploration and development activities of the companys Global Exploration Group. Prior to Cliffs, Mr. Smith held mine management positions with Asarco and South Peru Copper Corporation.

Laurie Brlas

Executive Vice President Finance and Administration & Chief Financial Officer

P. Kelly Tompkins

Executive Vice President Legal, Government Affairs and Sustainability & Chief Legal Officer

Donald Gallagher

Executive Vice President, President Global Commercial

Duncan Price

Executive Vice President, President Global Operations

Clifford Smith

Senior Vice President Global Business Development

Source: Company data

01 December 2011

77

North American Iron Ore

Exhibit 100: Key Personnel (Board)


Name Susan M. Cunningham Position Director Profession Description Senior Vice President of Exploration of Noble Energy Inc., an international oil and gas exploration and production company, since May 2007. Ms. Cunningham served as Senior Vice President of Exploration and Corporate Reserves from October 2005 to May 2007, and Senior Vice President of Exploration of Noble Energy Inc. from 2001 to 2005. Former Managing Director and Chief Executive Officer of Portman Limited, an international iron ore mining company in Australia, from October 2002 through April 2005. Executive Vice President and Chief Operating Officer of The AES Corporation, one of the world's largest independent power producers with 2009 revenues of $14 billion. Mr. Gluski has been employed by AES for nine years and was appointed to his current position in 2007. Prior to that, he served as executive vice president and president, Latin America, and senior vice president of the Caribbean and Central America business. Earlier in his professional career, he held positions at Johnson & Johnson and Procter & Gamble. Deputy General Counsel, U.S. Congressional Office of Compliance, since November 2007. Ms. Green served as Aide to Councilmember Nancy Floreen, Montgomery County, Maryland, from December 2002 to August 2005. Ms. Green was originally proposed as a nominee for the Board of Directors by the United Steelworkers, or USW, pursuant to the terms of the 2004 labor agreement. Former Senior Vice President (1998-2006), Chief Financial Officer (1994-2005) and Treasurer (2002-06) of Martin Marietta Materials, Inc. Ms. Henry previously served on the board of Inco Limited, now known as Vale Inco, a wholly owned subsidiary of the second largest mining company in the world, Vale of Brazil. Chairman, President and Chief Executive Officer of Ferro Corporation, a supplier of technologybased performance materials for manufacturers. Kirsch joined Ferro in 2004 as president and chief operating officer. He became president and chief executive officer in 2005 and added responsibilities as chairman in 2006. Previously, he served as president of Premix Inc. and Quantum Composites, president and a director for Ballard Generation Systems and vice president for Ballard Power Systems. He began his career with The Dow Chemical Company. Chairman and Chief Executive Officer of Stillwater Mining Company, a palladium and platinum producer, since February 2001. Former President and Chief Executive Officer of IPSCO Inc., a North American steel-producing company, from 1982 through 2002. Chief Executive Officer of RKR Asset Management, a consulting organization, since June 2006. Mr. Riederer served as Chief Executive Officer from January 1996, and President from January 1995 through February 2001, of Weirton Steel Corporation, a steel-producing company. He currently serves on the Board of Trustees of Franciscan University of Steubenville. Retired Chairman and Chief Executive Officer of Inmet Mining Corporation. During his 20-year tenure with the company, Mr. Ross also served as president and chief executive officer, vice president and chief financial officer, vice president and treasurer and corporate controller. Prior to joining Inmet Mining, Mr. Ross was employed by Placer Dome, Inc. (1985-1989) and PricewaterhouseCoopers (1980-1985). Professor of Law at the Yale Law School and professor at the Yale School of Management since 1987.
01 December 2011

Barry J. Eldridge Andres R. Gluski

Director Director

Susan M. Green

Director

Janice K. Henry

Director

James F. Kirsch

Director

Francis R. McAllister Roger Phillips Richard K. Riederer

Director Director Director

Richard A. Ross

Director

Alan Schwartz Source: Company data

Director

78

01 December 2011

Ownership
Management and insiders collectively own 0.57% of the company, and the top 20 shareholders are summarised below.
Exhibit 101: Ownership by organisation (30 September 2011)
Holder Name Capital World Investors The Vanguard Group, Inc. BlackRock Fund Advisors State Street Global Advisors Winslow Capital Management, Inc. American Century Investment Management, Inc. Columbia Management Investment Advisers LLC Wellington Management Co. LLP Jennison Associates LLC Mellon Capital Management Corp. TIAA-CREF Asset Management LLC Calamos Advisors LLC Northern Trust Investments Banc of America Securities LLC New Jersey Division of Investment First Trust Advisors LP Skagen AS Goldman Sachs Asset Management LP Pyramis Global Advisors LLC Lord Abbett & Co. LLC Source: Factset % O/S 9.18 5.31 4.10 3.96 2.33 1.59 1.57 1.46 1.34 1.25 1.21 1.16 1.12 1.04 1.04 0.96 0.94 0.94 0.94 0.90

North American Iron Ore

79

01 December 2011

Americas / Canada

Labrador Iron Ore Royalty Corporation (LIF_u.TO)



Rating Price (30 Nov 11, C$) Target price (C$) 52-week price range Market cap. (C$ m) Enterprise value (C$ m) OUTPERFORM* 37.22 45.00 40.43 - 29.69 2,382.08 2,506.55

Dont underestimate the value of infrastructure


We initiate coverage on Labrador Iron Ore Royalty Corporation (LIFU.TO) with a $50/share target price and OUTPERFORM rating. Our target price puts us at the top of the street. LIF-U.TO is a stapled security, with each unitholder owning a subordinated note, as well as minority interest (15.1%) in, and sales royalty (7% + 10c/tonne) on, the Rio Tinto operated Iron Ore Company of Canada (IOC) and its Carol Lake project. We like LIF-U.TO/IOC for its valuation performance relative to Rio Tinto (Credit Suisses top large cap pick in the sector), and also as the only owner of a railway line between Labrador City (where most of the regions current production comes from) and the Port of Sept Iles, on the St Lawrence Seaway. We believe that the market has under appreciated the strategic opportunity that infrastructure ownership in the Labrador Trough presents as this region transitions from one of current mine constraint, to one of infrastructure constraint over the next 3-4 years. In early 2012 IOC is expected to commission the recent expansion to 22mtpa, and in early 2013 this should further increase to 23.3mtpa. IOC is currently awaiting Rio Tinto board approval for a further expansion to 26mtpa, and longer term 50mtpa is being considered. Our $45/share target price is set using at the mid point of our DCF sum of parts (C$49.27), and 10x 12mth forward EPS (C$40.39). The DCF uses a 0.8x P/NAV multiple applied to the 15.1% equity interest but everything else added at par.
12/10A 6.15 6.1 35.1 164.2 161.2 4.87 6.9 15.7 174 19.39 64.00 4.5 124.5 38.7 12/11E 12/12E 4.48 4.00 8.3 9.3 60.6 77.5 170.6 220.8 168.4 218.8 4.41 3.86 8.4 9.6 15.0 11.5 124 70 18.70 24.65 IC (current, C$ m) EV/IC (x) Dividend (Next Qtr., C$) Dividend yield (%) 12/13E 3.82 9.8 90.5 229.3 227.3 3.83 9.7 11.1 23 24.80 460.61 5.4

*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months.

Research Analysts Nathan Littlewood 416 352 4585 nathan.littlewood@credit-suisse.com

Share price performance


Daily Dec 01, 2010 - Nov 30, 2011, 12/01/10 = C$33.77

44 39 34 29 Dec-10 Price Apr-11 Aug-11 Indexed Price Relative

On 11/30/11 the S&P/TSX COMPS INDEX closed at 12204.11

Quarterly EPS 2010A 2011E 2012E

Q1 0.49 0.98 0.90

Q2 2.17 1.27 0.96

Q3 1.78 1.43 1.02

Q4 1.71 0.88 1.12

Financial and valuation metrics Year EPS (CS adj.) (C$) Prev. EPS (C$) P/E (x) P/E rel. (%) Revenue (C$ m) EBITDA (C$ m) OCFPS (C$) P/OCF (x) EV/EBITDA (current) Net debt (C$ m) ROIC (%) Number of shares (m) BV/share (Next Qtr., C$) Net debt (Next Qtr., C$ m) Net debt/tot cap (Next Qtr., %)
Source: Company data, Credit Suisse estimates.

North American Iron Ore

80

01 December 2011

Investment Thesis
Backed by one of the best in the business LIF-U.TO offers pure iron ore exposure backed by the financial and technical capabilities of the second largest miner of iron ore in the world, Rio Tinto. LIF-U, via its wholly owned subsidiary called Labrador Iron Ore Royalty Corporation (LIORC) holds: A minority equity 15.1% interest in the Iron Ore Company of Canada (IOC or IOCC). This represents roughly 41% of our operational valuation. Rio Tinto has a controlling equity interest at 58.7%, and Mitsubishi Corporation owns the other 36.2%. A 7% gross overriding royalty covering 100% of production from IOC. The royalty represents roughly 59% of our operational valuation. A 10 cent per tonne commission on all iron ore products produced, sold and shipped by IOC. This represents roughly 1% of our operational valuation.

In addition to the above, as a stapled unit each LIF-U.TO unitholder also owns a 12.08%/$3.875 parcel of subordinated notes, which pays a quarterly coupon of $0.117/stapled unit. Outperforming one of the best in the business
Exhibit 102: Side by side comparison (as at 28 Nov 2011)
LIF-U.TO 10 year price performance 1 year price performance Dividend Yield (10 yr avg) Iron Ore Production Growth (100% basis) Source: Company data, Credit Suisse estimates 376% RIO.AX 131% Iron Ore 371% -21% 0

LIF-U.TO has a better dividend yield, better share price performance, and better iron ore production upside than Rio Tinto. On both a 1 and 10 year view it has also outperformed the iron ore price. Many investors buy Rio Tinto for its large scale, high quality iron ore business and well regarded management. LIF-U.TO offers many of the same qualities as Rio Tinto, plus it has the benefit of offering superior returns.
Exhibit 103: LIF-U.TO and RIO.AX dividend yields Exhibit 104: LIF-U.TO and RIO.AX share price performance
Indexed Share Price (Jan 2001 = 100)

Dividend Yield

500 400

15% 10% 5% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 LIF-U.TO RIO.AX

40% 30%

300 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 LIF-U.TO share price divided by RIO.AX LIF_u.TO 20% 10% 0%

RIO.AX

Source: Company data

Source: Company data

A large part of LIF-U.TOs earnings are generated from a revenue based royalty, which means that in theory its earnings should be less sensitive to iron ore price movement than

North American Iron Ore

LIF-U divided by RIO

-3% -251% 7.24% 2.23% Potential to increase from Currently working on 233 to current 22 to 50mtpa (+127%) 333mtpa (+46%)

25% 20%

700 600

60% 50%

81

01 December 2011

a pure mining business. This may make LIF-U.TO a defensive iron ore exposure in a falling commodity price environment. Infrastructure owner, from mine to port There are three parts to a bulk commodity export business; 1) a mine, 2) a transport/logistics solution, and 3) a port/vessel loading solution. IOC is one of an elite few which own all three parts. Ownership of the infrastructure assets will become increasingly valuable as the Labrador Trough moves from its current mine constrained state, to an infrastructure constrained state expected to occur in 2013-2014. As competition for rail access intensifies, IOC should be able to increase the value transfer from customer projects (such as ADV, CLF, LIM and NML) to their own. IOCs infrastructure earnings can not be isolated in LIF-U.TO s reporting, but in the Valuation section of the report we estimate that there could be an incremental C$6/share valuation upside potential not currently embedded in our valuation.

North American Iron Ore

Exhibit 105: Proposed Labrador Trough production through the port of Sept Iles
250 200 150 100 50 0 2010 2011 ADV - Kami CLF - Bloom Lake LIM - Schefferville ADI - Lac Otelnuk 2012 2013 2014 2015 2016 2017 2018 2019 2020

CHM - Fermont FER NML - KeMag & LabMag Current rail capacity

CLF - Wabush IOC - Carol Lake NML - Hematite Potential rail capacity

Source: Based on respective company guidance

IOCs high grade products are likely to become increasingly important to Rio Tintos marketing strategy RIOs Australian iron ore business has the lowest grade iron ore products of the big three (incl BHP and Vale). The IOC pellets and concentrate are an important component of Rios global marketing strategy, offsetting the declining grade trend from RIOs Pilbara hematite operations. As RIO increases production of Pilbara material from 233 to 333mtpa, it is likely to have a need for additional high grade, such as that produced by IOC, to supplement the declining DSO grade trend. That said, IOC is not RIOs only source of high grade material. RIO is also developing Simandou in Guinea, which has a resource grade of 66% Fe and RIO expects it to produce 95mtpa from 2016.

82

01 December 2011

Exhibit 106: Financial Summary


Labrador Iron Ore Royalty Corporation (LIF.UN)
2009 2010 164.2 161.2 5.6 155.6 0.0 15.2 140.4 70.3 70.0 -126.7 0.0 196.7 0.0 0.0 196.7 73.6 0.0 51.4 0.0 125.0 539.8 0.0 0.0 539.8 664.8 10.5 248.0 187.2 445.7 219.2 223.4 0.0 0.0 219.2 174.4 155.6 0.0 5.6 5.9 0.3 -11.5 155.9 0.0
0.0

Year ending 2011 2012


170.6 168.4 4.8 163.6 0.0 29.5 134.1 68.2 65.9 -131.2 0.0 197.1 0.0 0.0 197.1 123.5 0.0 56.6 0.0 180.1 560.1 0.0 0.0 560.1 740.2 9.4 248.0 140.6 398.1 342.1 290.6 0.0 0.0 342.1 124.5 163.6 0.4 4.8 26.2 17.9 -19.1 193.8 0.0
0.0 0.0

31 Dec 2013 Share Price: C$37.22


229.3 227.3 10.5 216.8 0.0 27.4 189.3 81.4 107.9 -136.3 0.0 244.2 0.0 0.0 244.2 224.6 0.0 75.7 0.0 300.2 581.1 0.0 0.0 581.1 881.3 12.6 248.0 140.6 401.3 480.1 409.4 0.0 0.0 480.1 23.4 216.8 3.1 10.5 35.9 0.0 -21.0 245.4 0.0
0.0 0.0

2009

In CADmn, unless otherwise stated 2010 2011 2012 2013

Profit & Loss


Sales revenue EBITDA Depr. & Amort. EBIT Associates Net interest Reported PBT Income tax Profit after tax Minorities Preferred dividends Normalised NPAT Analyst adjustments Unusual item after tax Reported NPAT

12/09A 12/10A 12/11E 12/12E 12/13E


76.9 75.1 4.7 70.4 0.0 0.3 70.0 26.7 43.4 -31.7 0.0 75.1 0.0 0.0 75.1 6.2 0.0 25.0 0.0 31.2 508.4 0.0 0.3 508.8 539.9 5.2 0.0 121.6 126.8 413.1 413.1 0.0 0.0 413.1 -6.2 70.4 0.0 4.7 1.9 -15.9 -18.7 42.4 0.0
0.0

1/12/2011 11:27

220.8 218.8 10.5 208.3 0.0 28.1 180.2 77.9 102.3 -153.7 0.0 256.1 0.0 0.0 256.1 178.1 0.0 75.6 0.0 253.7 570.6 0.0 0.0 570.6 824.3 12.6 248.0 140.6 401.2 423.1 352.5 0.0 0.0 423.1 69.9 208.3 2.5 10.5 31.2 15.8 -21.0 247.3 0.0
0.0 0.0

OUTPERFORM RATIRating 45.00 TARG Target Price C$ 20.90 vs % TP_U Share price VALU LIF-U.TO owns a 15.1% minority, 7% revenue royalty, and a 10c per tonne commission in Iron Ore Company or Canada (IOCC). IOCC operates the Carol Lake iron ore mine and pellet plant located in the Labrador Trough region of Eastern Canada, and is majority owned (58.7%) and controlled by Rio Tinto.

Earnings
Equiv. FPO (period avg.) c_EP c_EP EPS (Normalised) EPS_ EPS Growth c_DP DPS c_PA Dividend Payout c_FC Free CFPS mn c % c % c x x x % % x %
% x x

12/09A 12/10A 12/11E 12/12E 12/13E


32.0 234.6 0.0 0.0 132.5 15.9 36.3 34.1 0.0 3.6 2.9 18.2
97.6 0.1 1.3

32.0 614.7 162.0 0.0 0.0 487.3 6.1 16.4 15.9 0.0 13.1 5.3 88.0
119.8 0.2 3.0

44.0 448.1 -27.1 0.0 0.0 440.5 8.3 15.6 15.2 0.0 11.8 5.6 67.8
115.6 0.2 2.5

64.0 400.1 -10.7 0.0 0.0 386.4 9.3 12.3 11.7 0.0 10.4 6.8 72.6
116.0 0.3 2.3

64.0 381.6 -4.6 0.0 0.0 383.4 9.8 11.8 11.2 0.0 10.3 5.8 59.7
106.5 0.3 2.2

Balance Sheet
Cash & equivalents Inventories Receivables Other current assets Current assets Property, plant & equip. Intangibles Other non-current assets Non-current assets Total assets Payables Interest bearing debt Other liabilities Total liabilities Net assets Ordinary equity Minority interests Preferred capital Total shareholder funds Net debt

12/09A 12/10A 12/11E 12/12E 12/13E

Valuation
c_PE P/E ALT(EV/EBIT ALT(EV/EBITDA c_DIDividend Yield c_FC FCF Yield c_PB Price to Book

Returns
c_RO Return on Equity c_I_N Profit Margin c_I_S Asset Turnover c_AS Equity Multiplier c_RO Return on Assets c_RO Return on Invested Cap.

% %

13.9 10.7 Net Cash Net Cash 235.5 220.7 0.0

29.6 19.7 44.3 1.1 10.6 10.2 0.0

26.6 17.2 26.7 0.7 5.7 5.5 0.0

31.1 24.0 14.2 0.3 7.8 7.4 0.0

27.7 24.5 4.7 0.1 8.3 7.9 0.0

Gearing
c_GE Debt to Net debt + Equity % Net x c_NE Net Debt to EBITDA c_I_E Cover (EBITDA/Net Int.) x Int x c_I_E Cover (EBIT/Net Int.) Int % (c_CCapex to Sales % (c_CCapex to Depreciation

Cashflow
EBIT Net interest Depr & Amort Tax paid Working capital Other Operating cashflow Capex
Capex - expansionary Capex - maintenance

12/09A 12/10A 12/11E 12/12E 12/13E

Assumptions & Operations


M_IRONORE_FINES_CFRC

12/09A 12/10A 12/11E 12/12E 12/13E


79.1 2.15 0.79 1.36 131.9 2.28 0.46 1.82 168.9 2.10 0.67 1.43 152.5 2.93 1.16 1.76 140.0 3.26 1.33 1.93

Iron c_RPP

Ore (62% IODEX) Ore Sales c_RPP Equity Pellet Sales Equity Concentrate Sales
c_RPP Equity Iron

US$/t CFR mt mt mt

Acquisitions & Invest Asset sale proceeds Other Investing cashflow Dividends paid Equity raised Net borrowings Other Financing cashflow Total cashflow Adjustments Net Change in Cash

0.0 0.0 0.0 0.0 -64.0 0.0 0.0 0.0 -64.0 -21.6 0.0 -21.6

0.0 0.0 0.0 0.0 -88.5 0.0 0.0 0.0 -88.5 67.4 0.0 67.4

0.0 0.0 0.0 0.0 -143.9 0.0 0.0 0.0 -143.9 49.9 0.0 49.9

0.0 0.0 0.0 0.0 -192.7 0.0 0.0 0.0 -192.7 54.6 0.0 54.6

0.0 0.0 0.0 0.0 -198.9 0.0 0.0 0.0 -198.9 46.4 0.0 46.4

Projects & Mines 15.1% Equity Interest 7% Sales Royalty 10c/t commission Sub-Total Corporate Net Cash / (debt) Corporate Sub-Total Total

Net Asset Value C$mn C$/sh 1,630 25.47 1,962 30.65 25 0.38 3,616 56.50 C$mn -125 -12 -137 3,479 C$/sh -1.95 -0.19 -2.14 54.36

multiple 0.80 x 1.00 x 1.00 x

Valuation C$mn C$/sh 1,304 20.37 1,962 30.65 25 0.38 3,290 51.41 C$mn -125 -12 -137 3,153 C$/sh -1.95 -0.19 -2.14 49.27

multiple 1.00 x 1.00 x

Source: Company data, Credit Suisse estimates

North American Iron Ore

83

01 December 2011

Valuation
Summary
Our $45/share target price is the approximate average of: A DCF based sum of parts, using a 10% discount rate and 0.8x P/NAV multiple applied to LIF-I.TOs 15.1% equity interest generating C$49/share (Exhibit 110), and 10x PER applied to 12mth forward EPS of $4.04/share to imply C$40.39/share (Exhibit 116).

LIF-U.TO is currently trading at 0.7 x P/NAV and 9.3 / 9.8 our 2012 / 2013 earnings respectively.
Exhibit 107: PER averages 10.3x
18 16 14 12 10 8 6 4 2 0 Jan 04

These two opportunities are somewhat mutually exclusive, but to have included neither in our valuation suggests that we have been fairly conservative in our valuation approach. If IOCs infrastructure profit centre were to earn $5/t on say 75mtpa of third party tonnage, LIF-U.TO would be generating almost $400mn extra NPAT, on a PER of 10x this is worth roughly $6/share which is not included in our current modelling. Despite its high yield, it appears to us that investors fundamentally buy this stock as an iron ore price exposure, not as an excess/relative yield story (see Exhibit 109). Although, given the nature of its business, iron ore price and absolute yield do very much go hand in hand.

North American Iron Ore

Exhibit 108: Relative PER averages 0.71


1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Jan 04 Jan 06 Jan 08 Jan 10

Jan 06

Jan 08

Jan 10

Source: IBES, Credit Suisse estimates

Source: IBES, Credit Suisse estimates

Our modelling does not include LT infrastructure upside potential Our modelling is based on the IOC assets producing at an ultimate 26mtpa. Our base case valuations do not include the following: Expansion to 50mtpa. RIO has announced that it is reviewing expansion options to 50mtpa. We view this as much as a warning shot across the bow of IOCs peers (and potential rail users) as it is a genuine indication of the miners own aspirations. Infrastructure earnings. As noted earlier one of the reasons we like IOC/LIF-U.TO is that it is a railway owner and operator. Beyond 2013-2014 as the Labrador Trough becomes infrastructure constrained, we expect the value transfer from rail customer to rail provider to increase.

84

01 December 2011

Exhibit 109: LIF-U.TO excess return relative 10 yr bonds, and the iron ore price
40 C$ share price, and % return 35 30 25 20 15 10 5 0 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Iron Ore price 200 175 150 125 100 75 50 25 0 Spot Iron Ore price (US$/t)

LIF-U.TO excess yield to 10 yr bond (%)


Source: Bloomberg, Factset

LIF-U.TO share price (C$/sh)

Net Present Value


Exhibit 110: DCF sum of parts valuation

Projects & Mines 15.1% Equity Interest 7% Sales Royalty 10c/t commission Sub-Total Corporate Net Cash / (debt) Corporate Sub-Total Total Notes: - Shares on issue (mn) - P / NAV target - WACC (nominal)

Net Asset Value C$mn C$/sh 1,630 25.47 1,962 30.65 25 0.38 3,616 56.50 C$mn -125 -12 -137 3,479 C$/sh -1.95 -0.19 -2.14 54.36

multiple 0.80 x 1.00 x 1.00 x

Valuation C$mn C$/sh 1,304 20.37 1,962 30.65 25 0.38 3,290 51.41 C$mn -125 -12 -137 3,153 C$/sh -1.95 -0.19 -2.14 49.27

multiple 1.00 x 1.00 x

64.0 0.91 x 10.0%

- Current share price - Current P/NAV - Valuation upside

37.22 0.70 x 32%

Source: Company data, Credit Suisse estimates

Our P/NAV target uses a 0.8x multiple against the 15.1% equity interest on the basis that proceeds from IOC are in the form of discretionary dividends. If RIO is to go ahead with the expansion of IOC to potentially 50mtpa, it is likely that this dividend stream with be at risk as cash will need to be reinvested rather than paid out. Some might argue, and we would find it hard to disagree, that this 20% discount is very conservative, and that any dividend risk is offset by the fact that the asset is managed by RIO; one of the best operators in this business.

North American Iron Ore

85

01 December 2011

The rest of our DCFs we use at par value (1x P/NAV), as their payment is not at IOCs discretion.
Exhibit 111: 5 year rolling NAV model
140 120 100 C$/share
C$/share

Exhibit 112: Contributions to todays NAV


15.0 12.5 21% 10.0 7.5 10% 5.0 3% 2.5 0.0 3% 3% 3% 3% 3% 3% 5% 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 >2020 15.1% Equity Interest 10c/t commission Balance sheet 7% Sales Royalty Corporate % of NAV -5% 14% 15% 23% 21% 25% 20%

80 60 40 20 0 -202011Q1 2011Q4 2012Q3 2013Q2 2014Q1 2014Q4 2015Q3 15.1% Equity Interest 10c/t commission Corporate 7% Sales Royalty Balance sheet Raw Total

-2.5

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Our 5-year rolling NAV model, and annual NAV contribution charts show that: The valuation is very much here and now. A large portion of this businesses valuation is generated in the short term whilst our price deck remains strong. Unlike the other companies covered in this report where we model an accumulation of cash on the balance sheet, LIF-U.TO does not accumulate rather it pays it out. Including accumulated dividend payments in Exhibit 111 would make it look much more like our other rolling NAV models. The value of the 15.1% equity interest rolls off with the retreat of our price deck. The roll off is a function of being a relatively high cost business against a rapidly retreating commodity price deck. The 7% sales royalty provides a valuation floor so long as this operation is still in production. Even if we roll our NAV forward by 3-4 years, we still see valuation support well above todays share price.

North American Iron Ore

NAV sensitivities
We maintain four different macro scenarios in our models; CS assumptions (official house forecasts), Spot (US$140/t CFR), Mid-Cycle (CS LT price run from today into perpetuity) and Consensus (based on the Consensus Economics quarterly broker survey. Our NAV under each of these scenarios is summarised below.

86

01 December 2011

Exhibit 113: NAV sensitivities under various macro scenarios


90.00 80.00 70.00 60.00 $/share 50.00 40.00 30.00 20.00 10.00 0.00 CS base case Raw NAV Credit Suisse target price
Source: Company data, Credit Suisse estimates

$84.69

$79.41

$74.17 $54.36 $49.27 $24.46 $24.79

$69.93

Spot

Mid-Cycle

Consensus

Risk Weighted NAV Share price

Even on a mid-cycle scenario ($90/t CFR 62% IODEX, and CADUSD = 0.90) we do not see huge downside relative to the current share price. On this price deck, however, the 15.1% equity interest has a negative DCF, which explains why the risk weighted NAV is in fact higher than the raw NAV in Exhibit 113 In terms of the macro drivers behind our NAV, the iron ore price assumption clearly provides the greatest leverage. Every +10% increase to our iron ore price deck drives a ~ 70% increase to our NAV. Due to the US$ revenues and C$ cost base, flexing the USDCAD assumption does essentially the same thing (in reverse) as flexing the iron ore price assumption.
Exhibit 114: NAV sensitivities

4.00 3.00 Valuation impact 2.00 1.00 -20% 0.00 -1.00 -2.00 iron ore
Source: Company data, Credit Suisse estimates

-10%

base case

10%

20%

operating cost

USDCAD

North American Iron Ore

87

01 December 2011

Price to Earnings Ratio


Historical analysis indicates a good fit between LIF-U.TO share price and rolling 12 month forward earnings as illustrated in Exhibit 115. The average PER is 10.3x, which we are comfortable with as a target PER going forwards. Using our house price deck we see long term valuation support at around $20/share, and around $40/share for the next year or two. Note that this PER analysis makes no allowance for a) expansion beyond 26mtpa, or b) earnings generated from infrastructure charge out, and as we noted earlier we feel this makes our valuation fairly conservative.
Exhibit 115: PER bands using CS commodity prices

$60 $50 C$ per share $40 $30 $20 $10 $0 2003 4x 2005 6x 2007 8x 2009 2011 10 x 2013 12 x 2015 2017 2019 share price

14 x

Source: Company data, Credit Suisse estimates

Readers with a more definitive view on forward time horizon, and the appropriate PER multiple for this stock, can read an implied valuation from Exhibit 116. 10x 12mth forward earnings suggests a PER based valuation of US$65.97/share.
Exhibit 116: PER derived valuation matrix (CS macro assumptions)
EPS ($/sh) 6. x 12 mth forward 24 mth forward 36 mth forward 4.039 3.832 2.353 $24.23 $22.99 $14.12 7. x $28.27 $26.82 $16.47 8. x $32.31 $30.66 $18.82 PER multiple implied target price 9. x 10. x 11. x $36.35 $34.49 $21.17 $40.39 $38.32 $23.53 $44.43 $42.15 $25.88 12. x $48.47 $45.98 $28.23 13. x $52.51 $49.81 $30.58 14. x $56.55 $53.65 $32.94

Source: Company data, Credit Suisse estimates

North American Iron Ore

88

10.0

12.0

10.0

15.0

20.0

25.0

0.0 0.0 5.0 MMX Usinas Siderurgicas De Minas MMX US Steel Jindal Steel & Power Ltd NMDC BHP Billiton Companhia Siderrgica Nacional African Rainbow Minerals Rio Tinto JSW Steel Xstrata Anglo American Tata Steel Eurasian Natural Resources Vale Cliffs Natural Resources Sesa Goa OneSteel Labrador Iron Mines Labrador Iron Ore Royalty Kumba Fortescue Metals Group Ferrexpo Grange Resources Mount Gibson Iron Ltd Northern Iron

2.0

4.0

6.0

8.0

Source: IBES
Jindal Steel & Power Ltd JSW Steel

Source: IBES

North American Iron Ore

Usinas Siderurgicas De Minas

Companhia Siderrgica Nacional Tata Steel US Steel BHP Billiton NMDC OneSteel African Rainbow Minerals Sesa Goa Xstrata Vale Rio Tinto Eurasian Natural Resources Anglo American Cliffs Natural Resources Labrador Iron Ore Royalty Fortescue Metals Group Labrador Iron Mines Kumba Ferrexpo Grange Resources Northern Iron Mount Gibson Iron Ltd Pure play avg = 3.6 x 12m Diversified Avg 24m fwd PER Diversified avg = 4.3 x Diversified avg = 7.0 x 12m fwd PER

Exhibit 118: EV/EBITDA (Consensus)

Exhibit 117: PER multiples (Consensus)

Comparable Company Analysis

On a PER and EV/EBITDA basis LIF-U.TO is relatively expensive against the global comparables, as illustrated in Exhibit 117 and Exhibit 118. We believe that a premium valuation relative to the peers is justifiable not only on the basis of management quality but also dividend yield which is the highest in the sector (Exhibit 119).

12m fwd EV/EBITDA Pure play avg = 6.1 x 12m Pure Play avg

24m fwd EV/EBITDA

12m Diversified Avg

12m Pure Play Avg

01 December 2011

89

01 December 2011

Exhibit 119: Dividend yield for global iron ore exposures


20.0% 2012 div yield 16.0% 12.0% 8.0% 4.0% 0.0% Eurasian Natural Resources Corporation Labrador Iron Ore Royalty Corporation Companhia Siderrgica Nacional (CSN) Usinas Siderurgicas De Minas Gerais Sa African Rainbow Minerals Cliffs Natural Resources Grange Resources Anglo American Atlas Iron Ltd BC Iron Ferrexpo Fortescue Metals Group Mount Gibson Iron Ltd Xstrata Jindal Steel & Power Ltd Mineral Resources Ltd BHP Billiton Sesa Goa Tata Steel Rio Tinto Kumba NMDC OneSteel JSW Steel US Steel MMX Vale 2013 div yield

Source: IBES

As an acquisition target
Most people consider RIO as the most logical acquirer of LIF-U, but we think CLF makes more sense. LIF-U.TO through CLFs eyes CLFs Wabush and Bloom Lake assets are in close proximity to IOCs Carol Lake and the associated rail infrastructure both are in fact customers of IOCs QNS&L railway subsidiary. For CLF, the value in IOC is not only in the current assets, but also the valuation uplift that could be realised in their own existing assets by de-risking the long term infrastructure solution. CLF has an agreement with IOC for 16mtpa of rail capacity on the QNS&L line, but beyond this level (aspirations are for 24mtpa) CLF will need more rail allocation. A seat on the IOC board (LIF-U.TO holds 2 of a total 11 IOC seats) might improve CLFs chances of securing this much needed rail allocation, particularly as competition for this constrained asset intensifies through 2013-2014. CLF paid $4.9bn (or just over $5bn on an EV basis) for Consolidated Thompson, which is equivalent to $625 per annual tonne. LIF-U.TO current trades at around $925 per annual tonne, but roughly 60% of this valuation is the royalty stream valuation, so on a like for like basis LIF-U.TO is worth 925 x 40% = ~$370/t, i.e. less than what CLF paid for Consolidated Thompson. LIF-U.TO through RIOs eyes In March 2001, RIO launched an ultimately unsuccessful takeover bid on LIF-U.TO . At the time LIF-U.TOs exposure in IOC was basically the same as it is today, except that the equity interest was 18.93%, not the current 15.1%. After adjusting for $211mn notes on issue at the time, the IOC enterprise value at the time of the attempted acquisition was roughly $670mn. Dividing this by then 15mtpa production capacity suggests that as a long life asset the valuation was $46 per annual production tonne.

North American Iron Ore

90

01 December 2011

RIO disposed of its acquired LIF-U.TO stake in 2005, and a lot has changed in the iron ore industry (and RIOs project portfolio) since. Lets now consider how RIO might view LIFU.TO today. Freight - from FOB to CFR RIOs 2000 acquisition of North Limited gave RIO its majority stake in IOC, as well as the Robe River assets in Australia. RIOs extensive growth options in Australia are located closer to growth markets, and do not have the same freight disadvantage that projects in Australia, Brazil, or West Africa do. In 2010 this industry saw a shift in price terms from FOB (Exhibit 120) to CFR (Exhibit 121). Rather than freight being the customers liability, it became a net back against the miners revenue. Like many of the other transitions that we observed in iron ore pricing during 2010, it should not be a surprise that this was driven by BHP which, along with RIO, is a relative winner of the change.
Exhibit 120: Freight burden pre-2010 (FOB basis) Exhibit 121: Freight burden post-2010 (CFR basis)

$100/t
$82/t

$100/t

$128/t $110/t $124/t


$110/t $110/t $110/t

$100/t

$85/t

$100/t

Source: Credit Suisse estimates

Source: Credit Suisse estimates

We believe that the Pilbara and expansion of IOC are more attractive expansion options for RIO than acquiring LIF-U.TO LIF-U.TO is currently trading at around $925 per annual capacity tonne, or $370/t after normalising for its royalty valuation as above. RIO is currently building new capacity in the Pilbara for $160-180 per annual tonne. Further, we estimate that the capital intensity of an IOC / Carol Lake expansion would probably only be in the order of $100-150/t. So, if RIO really did want to increase its production exposure in the Labrador Trough it appears more economical to build (as a brownfield IOC expansion) than buy.

North American Iron Ore

91

01 December 2011

Company-Specific Risks
Investment in any mining company brings with it operational risks and commercial risks. A few of the risks we regard as being more company-specific include: Examples of Operational and Development Risks LIF-U.TO holds a non-controlling minority interest in IOC. LIF-U.TO is not responsible for production or expansion decisions related to the Carol Lake iron ore mine. Some may argue that this lack of control should attract a valuation discount, particularly when and if the interests of LIF-U.TO shareholders are in conflict with the interests of RIO, the mine operator. Age of the asset base. This project was commissioned in the 1960s and still has some legacy 1960s technology. Newer assets would be more efficient, more reliable, and likely more economical to operate. Being located in North America, further from growth markets, this operation is more sensitive to seaborne freight rates than most of its global peers. Credit Suisse forecasts a long term freight rate which is lower than todays spot, but if our freight forecasts are too low either in the short or medium term, freight rates may adversely impact IOC realised price forecasts and undermine the global competitiveness of this business.

Examples of Commercial and Financial Risks LIF-U.TO is entirely dependent on the income generated by Labrador Iron Ore Royalty Corporation (LIORC) which in turn is entirely dependent on IOC and its Carol Lake operation for income. The dividend received from IOC is discretionary, and should IOC decide that it wishes to retain the dividend in order to fund a capital expansion program to 50mtpa (for example) the dividend would very likely be at risk. A large portion of IOCs production is pellet, the price of which we forecast based on a pellet premium relative to the 62% Index Fines price. This pellet premium is higher than the cost of producing pellet in most parts of the world, so as pellet production capacity catches up with demand there is a possibility that this pellet premium could come under pressure. Against a trend of declining DSO hematite grades from the Pilbara, and with RIO already having the lowest quality products (on average) of the big 3 global producers, we would suggest that IOCs high quality products will be of increasing marketing importance to RIO hence supporting the case for RIO to expand the IOC operations. Iron ore marketing is an incredibly complicated topic, and not one that we will pretend to be experts on, but we would note that RIO is developing other sources of high grade production (Simandou) which are located closer to growth markets than IOC is. On 20 July 2011, the Ministry of Finance announced proposed amendments to the Income Tax Act concerning stapled securities. Under the proposal, when debt and equity are stapled together and trade as a unit (e.g. LIF-U.TO), the interest on the debt portion of the stapled security would not be deductible in computing income for tax purposes. If LIF-U.TO is unsuccessful in its current appeal to delay the implementation of these changes, it is likely that they will come into effect from July 2012.

North American Iron Ore

92

01 December 2011

Asset Review
Our Asset Review section covers: LIF-U.TO s interests in IOC which are through a 7% sales royalty, 15.1% minority equity interest, and 10c/t sales commission. Mining & Processing in which we note that IOCs Carol Lake is currently the only operator in the Labrador Trough using a magnetite recovery circuit. Transport & Logistics briefly touches on the infrastructure solution, but by far the most important to thing to understand about infrastructure is the potential infrastructure profit centre opportunity we valued earlier at perhaps $6/share as the Labrador Trough becomes infrastructure constrained.

This section of the report should be read in conjunction with Appendix 1: Canadian Iron Ore Industry. Exhibit 204 shows the location of IOCs Carol Lake project.

IOC Equity In addition to the royalty interest, LIF-U, directly and through its wholly owned subsidiary, Hollinger-Hanna, owns a 15.10% equity interest in IOC. The other shareholders of IOC are Rio Tinto Limited with 58.72% and Mitsubishi Corporation with 26.18%. Dividends of U.S. $60.4 million or approximately C$62.7 million were received in 2010.

IOC Commissions Through its directly owned subsidiary Hollinger-Hanna, LIF-U.TO has the right to receive a payment of 10 cents per tonne on the products sold by IOC. The 10c/t payment is the result of a marketing commission that Hollinger-Hanna once charged IOC for selling its ore. Pursuant to the agreement, IOC is obligated to make the payment to Hollinger-Hanna so long as Hollinger-Hanna is in existence and solvent. In 2010, Hollinger-Hanna received a total of $1.5 million in commissions from IOC.

IOC leases the Carol Lake mine from LIF-U.TO (hence the royalty), but IOC directly owns the hematite/magnetite concentrator, pellet plant (all located in Newfoundland & Labrador), a 418km railway line between the mine and the Port of Sept Iles (in Quebec, on the St. Lawrence seaway), and at Sept Iles has a 6mt stockyard, stacker, reclaimer and shiploader.

North American Iron Ore

LIF-U.TO s interests in IOC


LIF-U.TO has exposure to IOC through a revenue based royalty, an equity interest, and a sales commission. IOC Royalty LIORC holds certain mining leases and mining licenses covering approximately 18,200 hectares of land near Labrador City. IOC has leased certain portions of these lands from which it currently mines iron ore. In return, IOC pays LIORC a 7% gross overriding royalty on all sales of iron ore products produced from these lands. A 20% tax on the royalty is payable to the Government of Newfoundland and Labrador. For the five years prior to 2010, the average royalty (net of the 20% tax) had been approximately $74.0 million per year and in 2010 was $130.1 million. Because the royalty is revenue based, it is not dependent on the profitability of IOC. It is however obviously affected by changes in sales volumes, iron ore prices and, because iron ore prices are denominated in US dollars, the United States Canadian dollar exchange rate.

93

01 December 2011

Background
Incorporated in 1949, IOC was founded when mining companies Hollinger, MA Hanna and others combined their exploration interests. Construction of an iron ore mine commenced in 1950, and by 1954 the company was loading its first shipment of material from Schefferville. In 1961 IOC commenced pelletizing iron ore concentrate for the first time, and in 1962 the current Carol Lake mine was commissioned. IOC has changed hands many times in its 60 year history. Japans Mitsubishi Corporation acquired a 20% interest in 1992 and remains the companys second largest shareholder (after Rio Tinto) though has since increased its interest to 26.2%. Bethlehem Steel and National Steel sold a majority interest in IOC to North Limited in 1997, and in 1999 LIF-U.TO acquired Dofascos equity taking its equity interest in IOC from 10.1% to 18.9%. This marked the end of steel company participation in IOC. In 2000 Rio Tinto acquired Australias North Limited, and although this transaction was predominantly about the Robe River assets in Western Australias Pilbara region, it also gave RIO a 56.07% interest in IOC. Today RIOs interest has increased to 58.7%, while LIF-U.TO has been diluted down to 15.1%. RIO attempted to acquire LIF-U.TO in 2001, but an overly optimistic offer price did not result in a successful attempt, and RIOs holding in LIF-U.TO was disposed of in 2005.

Products and Pricing


IOC currently sells most of its product as pellets, although announced expansion tonnage will see a growing proportion of sales in the form of concentrate. IOC's 2010 sales totalled 15.1 million tonnes comprised of 3.0 million tonnes of iron ore concentrate and 12.1 million tonnes of iron ore pellets. IOC sales traditionally are approximately 35% in North America, 35% in Europe, 25% in the Asia-Pacific with an increasing volume heading to China. We understand that current capacity and permitting of these assets allows production of around 17mtpa. In May, 2010 IOC announced that it was resuming phase one of its three phase expansion program which was originally approved in May 2008 but halted later in the year because of the market downturn. This phase will increase production of concentrates by 4 million tonnes to an annual rate of 22 million tonnes. It will cost $435 million (RIO estimated) and is expected to be completed by the end of 2011. On February 8, 2011, IOC also announced that it was restarting phase two of its expansion program which was also halted in 2008. This project involves improving the magnetite recovery circuit, and is expected to further increase production to 23.3 million tonnes of concentrate. Target completion is end 2012 at a cost of $289 million (RIO estimated). The third phase to increase production to 26 million tonnes is still in the planning stage, but we have included it in our modelling along with a capital estimate of $500mn. RIO/IOC has announced that it is evaluating options to 50mtpa, but we do not currently model sales beyond 26mtpa.

North American Iron Ore

94

01 December 2011

Exhibit 122: Realised Price forecasts


Realised price forecasts 250 200 150

Exhibit 123: Volumes forecasts (100% basis)


Iron Ore Volumes 7.0 6.0 5.0

US$/t

4.0 mt 3.0 2.0 1.0

100 50 0 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 Realised Price CS ref Pellet Price CS ref Concentrate Price CS ref price - wt'd avg

0.0 2008Q1

2009Q1

2010Q1

2011Q1

2012Q1

2013Q1

2014Q1

2015Q1

Concentrate Sales Volume

Pellet Sales Volume

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Our price modelling starts with CFR China Index prices for fines and pellet, which we then adjust for freight, quality, and grade in order to derive our own estimates for IOCs realised concentrate (CS ref Concentrate Price above) and pellet (CS ref Pellet Price). Although there is not a perfect historical correlation, we assume that LT our weighted average reference price is the same as IOCs average realised price. Our modelling also assumes that RIO/IOC soon abandon the QALAM (quarter averaged lagged a month) reference period mechanism in favour of a shorter term price referencing method similar to other majors such as BHP and FMG. Accounting for QALAM pricing (which we have not done) would also address the timing mismatch shown in 2010-2011. Going forwards we assume that only 20% of full year volumes are shipped in MarQ with the balance evenly spread this is a function of the northern hemisphere winter.
Exhibit 124: Carol Lake operating margin forecast

Carol Lake - operating margins 250 US$ per metric tonne 200 150 100 50 0 2008Q1

2009Q1

2010Q1

2011Q1

2012Q1

2013Q1

2014Q1

2015Q1

Cash cost (incl depreciation) Realised Price


Source: Company data, Credit Suisse estimates

FOB Reference Price

As summarised in Exhibit 124, we see a fairly tight historic correlation between our own FOB reference price estimates and the realised price inferred from (but not explicitly reported by) the LIF-U.TO accounts. The rapidly eroding operating margin (a function of our price deck on iron ore) is consistent with the here and now valuation we discussed in the valuation section and saw demonstrated in Exhibit 111 and Exhibit 112.

North American Iron Ore

95

01 December 2011

Mining and Processing


Mine IOCs Carol Lake mine has produced over 1.3bt of crude ore since it started up in 1962. Today it is mined at a rate of approximately 55mtpa, roughly 43mtpa of which is ore (implied strip ratio = 0.3 : 1). ROM ore has a head grade of around 39% Fe, consisting of both hematite and magnetite. The crude ore is transported 13km to the primary crushers. Process Plant & Concentrator All of the existing mines in the Labrador City area use spirals to recovery iron from their specular hematite dominant material. The IOC flow sheet is currently unique in the Labrador Trough, in that it is the only facility with a low intensity magnetic separation (LIMS) circuit for recovering magnetite in addition to hematite. Nearby Bloom Lake (CLF/ex-CLM) is planning to add LIMS to its flow sheet in 2012. The Concentrator upgrades Run-Of-Mine (ROM) ore to a 65-67% iron concentrate. After crushing, the ore is ground to break the iron bearing minerals (primarily hematite and magnetite) from the gangue or waste material (silica). The iron bearing minerals are separated from the waste and recovered in three processing areas the Primary Spiral Plant, which accounts for approximately 88% of the total production, and utilizes gravity separation methods to separate the (heavier) iron bearing minerals from the (lighter) silica based waste particles. Material not recovered by the Primary Spiral Plant grades only about 15-20% iron, and is separated into a magnetic and non-magnetic stream using LIMS. The magnetite bearing stream is further processed in the Magnetite Plant. This process uses one 3000kW and three 800kW ball mills, hydro-cyclones, two additional stages of LIMS, and 75 micron screens to recover approximately 165 tonnes per hour of magnetite based concentrate (7% of total production). The non-magnetic stream from the first stage of LIMS is further processed in the Hematite Plant. Additional screens and close to 1,000 spiral separators are used to recover approximately 100 tonnes per hour of a hematite based concentrate (5% of total production).

Pellet Plant Magnetite Plant concentrate is pumped to the Pellet Plant which has a current capacity of 14.1mtpa. Concentrate from the Primary Spiral and Hematite Plants is de-watered using horizontal vacuum filters to moisture levels of approximately 5.5% solids, and then conveyed to either concentrate stockpiles, train silos, or to the Pellet Plant. The Pellet Plant performs further processing of the concentrate to produce a pellet product for blast furnace and DRI furnace operations. The concentrate, fluxes and coke additives are reground and mixed in the regrind section to produce a filter feed. The filter feed is dewatered and agglomerated in the filtering and balling plant section. The product from the filter and balling section is dried and fired in the induration section to achieve the pellet physical properties. The pellets are screened and stored in the Loadout, ready for shipment to Sept-les. When there is a requirement to reduce the concentrate to a lower silica level to produce low silica pellets, the reground concentrate is directed through a flotation circuit to achieve the required silica level before mixing to produce a filter feed. The Pelletizing Plant produces five grades of pellets: standard acid, high silica flux, low silica acid, low silica flux, and direct reduction (DR).

North American Iron Ore

96

01 December 2011

The concentrate must be reground to a finer size structure for optimal agglomeration and induration pellet quality. The Pellet Plant operates 14 ball mills to achieve the grinding requirements for the pelletizing process. The grinding mills regrind the spiral concentrate in 12 ball mills of which seven operate at 2,250kW and five that operate at 3,00kW. The two remaining ball mills are used separately to grind the coke breeze and flux materials used in the pelletizing process. The ground coke breeze and flux materials are transported to the coke and flux slurry storage tanks.

The iron ore concentrate and pellets are transported via a 418km railway line to the port of Sept Iles, on the St. Lawrence Seaway. This railway line is owned by an IOC subsidiary called QNS&L. The fact that this railway line crosses the provincial Newfoundland & Labrador and Quebec provincial boundary means that it is deemed common carrier status. Unlike RIOs infrastructure assets in the Pilbara, IOC is obliged to carry third party tonnage on this railway line so long as the railway has capacity to do so. It is understood that the railway line has a current capacity of 50mtpa, however it could be upgraded to 80100mtpa by adding additional sidings and bridges. CLFs Wabush, Bloom Lake, and LIM.TOs 1.5mtpa hematite project are all current customers of QNS&L/IOC. At the Port of Sept Iles a railway damper unloads the wagons and a stacker places this material into a stockpile of 6mt capacity. One of two reclaimers collect stockpiled material and loads it into capesize vessels. The IOC berth is the only one at Sept Iles that is capable of loading directly into capesize vessels. The CLF facilities require more expensive transhipping at this stage.

IOCs resource and reserve statement do not provide a huge amount of detail, and it should be noted that RIO.AX reports in-situ resources, but saleable product for reserves. The above 638mt/65% reserve gives a reserve life of 29 years at 22mtpa, and would be equivalent to an in-situ reserve of roughly 1,635mt at 39% Fe based on an assumed 39% mass recovery. Looking back to 2002 we can get a little more detail on the IOC reserves/resources. If we say IOC was producing around 17mtpa for 2002 - 2010, then it would have been depleting the reserve at 40-45mtpa. Adjusting 2002 reserves for 8 years of depletion gets to a 2010 number of 1,054mt. This suggests that IOC has added about 580mt to reserves over this period. This seems reasonable.

North American Iron Ore

Transport and Logistics

Reserves and Resources


The following figures are all quoted on a 100% basis. LIF-U.TO s equity interest is 15.10% of these figures.
Exhibit 125: 2010 Reserves and Resources
Resources Measured Indicated Inferred Total Saleable Product from Reserves Proved Probable Total 366 272 638 65 65 65 238 177 415 Ore mt 202 754 1417 2373 Total Fe % 39.3 38.2 37.8 38.1 Total Fe mt 79 288 536 903

Source: Company data, Credit Suisse estimates

97

01 December 2011

The resource figures however are a little peculiar. Making the same depletion adjustment to 2002 resources gets to a 2010 number of 2,902mt yet RIO only reports 2,373mt of resources in 2010. We understand that the reason for the inconsistency is the slightly stricter resource reporting requirements under the Australian JORC compared to Canadas NI 43-101.
Reserves (P&P) Resources (Mines) 3251 39.1 22.5 1.88 1.25 0.3 0.22 0.024 0.18 Resources (Prospects) 825 36.1 Total Reserves & Resources 5479 38.5

North American Iron Ore

Exhibit 126: Historical (2002) IOC Reserve/Resource Statement

Tonnes Fe Mag CaO MgO Mn Al2O3 TiO2 H2O++ Source: Company data

1403 38.6 20.3 2.2 1.53 0.33 0.19 0.022 0.19

98

01 December 2011

Corporate
Company Structure
Restructured from a Fund to a Corporation in 2010 On 1 July 2010, a reorganisation of LIF-U.TO was implemented which gave each unitholder one common share in LIORC, and a 12.08%/$7.75 parcel of subordinated notes of LIORC. Following the recent 2 for 1 share split this has become $3.875.

These securities are trading as stapled units on the Toronto Stock Exchange. The securities that were previously held by Labrador Iron Ore Royalty Income Fund are now held directly by the Unitholders. The change from a fund to a corporation was driven by changes to Canadian trust laws from 2011. As a corporation, LIF-U.TO is now able to expense administrative and interest costs. Headline earnings decreased as a result of the interest expense on the notes. Under the previous income trust arrangement the reported income of the trust was also the net income to the unitholders. Under the stapled security arrangement, the income of the unitholders is the total of the net income of LIORC plus the interest from the $248mn LIORC subordinated notes they own.
Exhibit 127: LIF-U.TO , LIORC and IOC structure

North American Iron Ore

Source: Company data, Credit Suisse estimates

99

01 December 2011

Income tax changes are already priced, and worth an estimated $1.40/share to valuation On 20 July 2011, the Ministry of Finance announced proposed amendments to the Income Tax Act concerning stapled securities. Under the proposal, when debt and equity are stapled together and trade as a unit (e.g. LIF-U.TO), the interest on the debt portion of the stapled security would not be deductible in computing income for tax purposes. The announcement has an effective date of July 20, 2012 with a deferral to July 20, 2016 under some circumstances. The directors are studying the effect of this announcement on LIORC, while they await the details of the proposed legislation. On the basis that the annual interest payments on LIF-U.TO s debt are $30mn, the NPAT impact of this tax change is $9mn. On a PER of 10x, this is worth $90mn or $1.40/share which based on share price movement at the time of announcement has already been priced into the stock.

Recent 2-for-1 share split Effective 1 July 2011, LIF-U.TO subdivided its stapled units on a two-for-one basis. Following completion of the subdivision, the number of outstanding common shares and subordinated note receipts represented by stapled units increased from 32 million to 64 million

The $248mn notes are equivalent to $3.875 per unit (based on 64mn units, post the split), and pay an average 12.08%/$30mn in annual interest ($0.468/share). It is these notes, along with one share in the Labrador Iron Ore Royalty Corporation (LIORC) that make up the LIF-U.TO stapled units.

North American Iron Ore

Balance Sheet
LIF-U.TO has net debt of $178.8mn, comprised of: C$211.3mn subordinated notes expiring 2025, with a weighted average coupon of 12.45% (part of the stapled security), C$36.7mn subordinated notes expiring 2029, with a weighted average coupon of 9.95% (also part of the stapled security), and C$69.2mn (SepQ11) cash and cash equivalents.

Cash Flows
LIORC is a taxable corporation under the Income Tax Act (Canada) and is subject to income tax on its net income. The primary income of LIORC is royalties from IOC. Expenses of LIORC include $30.0 million a year of interest payments on the $248 million notes held by unitholders, interest on any bank loans and administrative expenses. Dividends paid by IOC to LIF-U.TO are post-tax. No additional tax needs to be paid by LIF-U. The 7% sales royalty is subject to a 20% royalty tax payable to the Newfoundland Provincial government by LIF-U.TO, as well as a corporate tax of roughly 30%, so LIFU.TO effectively keeps 56 cents in the dollar. The 10c/t sales commission is also received tax free via Hollinger-Hanna, and is subject to the ~30% corporate tax but not the 20% Newfoundland royalty tax, so LIFU.TO effectively keeps 70 cents in the dollar.

100

01 December 2011

Exhibit 128: EPS/DPS and payout ratio

EPS and DPS 3.5 3.0 2.5 EPS / DPS 2.0 1.5 1.0 0.5 0.0 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 Basic Reported EPS Payout ratio
Source: Company data, Credit Suisse estimates

180% 160% 140% 100% 80% 60% 40% 20% 0% Payout ratio 120%

Dividend per share - final

Generally, LIORC makes cash distributions from its net income to the maximum extent possible, subject to the maintenance of appropriate levels of working capital. The stapled unitholders will continue to receive quarterly distributions of interest on the notes and dividends on the common shares on the 25th day of the month following the end of each quarter.

Management
Seven Directors are responsible for the governance of the Corporation and also serve as directors of Hollinger-Hanna. The Directors, in addition to managing the affairs of the corporation and Hollinger-Hanna, oversee the Corporations interests in IOC. Two of the seven Directors sit on the board of IOC and the four independent Directors serve as members of the Audit, Nominating and Compensation Committees. Scotia Managed Companies Administration Inc. pursuant to an administration agreement acts as the administrator of the Corporation and Hollinger-Hanna. IOC has a board of 11 seats, 2 of which are held by LIF-U.TO , 3 by Mitsubishi, and 6 by Rio Tinto. The Directors of LIF-U.TO are responsible for managing the investments and affairs of the Corporation, which consists mainly of the receipt of revenues from IOC and the payment of distributions to the shareholders, in a manner that retains sufficient liquidity to provide funds to protect its investment in IOC.

North American Iron Ore

101

01 December 2011

Exhibit 129: Key Personnel


Name Bruce C. Bone Position President and Chief Executive Officer Description Mr Bone is a Chartered Accountant, President and Chief Executive Officer of Labrador Iron Ore Royalty Corporation and formerly Vice-President & Treasurer, Noranda Inc. Non Executive Chairman of the Board Mr Corcoran is the Vice-Chairman of Jarislowsky Fraser Limited., and has and Chairman of Nominating Committee over 40 years of experience in the financial services industry. Director Mr Jackman is the Chairman, President and Chief Executive Officer of E-L Financial Corporation Limited. Mr Jackman has 21 years of experience in the financial services industry. Executive Vice President, Secretary and Mr McCartney is a Company Director, Counsel and former Managing Director Partner, McCarthy Ttrault LLP, Barristers and Solicitors Director and Chairman of Audit Mr Palmer is a Charted Accountant, Company director and former Chief Committee Financial Officer, Norcen Energy Resources Limited CFO and Director Mr Thomas is a Charted Accountant, Company director and formerly Vice President, Finance and CFO of Shawcor Ltd. Director and Chairman of Compensation Mr Worth is a Company director, former Vice President Mining Group, Committee Canadian Imperial Bank of Commerce and former President, Canadian Institute of Mining and Metallurgy.

William J. Corcoran Duncan N. R. Jackman

James C. McCartney Paul H. Palmer Alan R. Thomas Donald J. Worth

Source: Company data

Ownership
LIF-U.TO has a strong institutional shareholding, with CIBC being the largest holder at 14.49%. There do not appear to be any substantial management shareholdings, nor are there any large strategic/steel mills, as is the case with many other iron ore names.
Exhibit 130: Ownership by organisation (30 September 2011)
Holder Name CIBC Global Asset Management, Inc. The Empire Life Insurance Co. (Investment Management) Guardian Capital LP Haber Trilix Advisors LP AGF Investments, Inc. Manulife Asset Management Ltd. Mackenzie Financial Corp. Morgan, Meighen & Associates Ltd. Picton Mahoney Asset Management CI Investments, Inc. Middlefield Capital Corp. Connor, Clark & Lunn Investment Management Ltd. Goodman & Co. Investment Counsel Ltd. Stanton Asset Management Fiera Sceptre, Inc. Investment Management Barometer Capital Management Scotia Asset Management Pyramis Global Advisors LLC RBC Global Asset Management, Inc. I. G. Investment Management Ltd. Source: Company data, Credit Suisse estimates % O/S 14.49 3.27 1.98 1.80 1.65 1.58 1.42 1.38 1.31 1.24 1.06 0.74 0.64 0.52 0.48 0.48 0.47 0.47 0.42 0.40

North American Iron Ore

102

01 December 2011

Americas / Canada

Labrador Iron Mines (LIM.TO)



Rating Price (30 Nov 11, C$) Target price (C$) 52-week price range Market cap. (C$ m) Enterprise value (C$ m) OUTPERFORM* [V] 6.74 8.30 14.82 - 5.05 364.27 361.88

Actions speak louder than words, for now


We initiate coverage on Labrador Iron Mines with a $8.30/share target price and an OUTPERFORM rating. Following the recent start-up of its Schefferville iron ore project, LIM.TO joined the elite ranks of the Canadian iron ore producers, and over the next few years aim to increase current production to 5mtpa. We admire the action oriented culture and cash generation capabilities in the short-medium term, but LIM.TO is very much a case of what you see is what you get and what you get is a relatively high cost business with a short mine life and business model that lacks long term sustainability, in our opinion. We believe that a corporate combination with peers NML.TO would generate significant short-medium term synergies, reduces LIM.TOs current cost of doing business, and provide LIM.TO the long term blue sky valuation potential that it currently lacks. Our NML.TO initiation report provides further discussion on this topic, as well as pro-forma valuations. LIM.TO has relied on third party infrastructure and marketing arrangements with IOC in order to get its start up production to market, but we believe that these are very costly arrangements and the company appears eager to operate independently of IOC. 2012 should see LIM.TO clarify its shortmedium term port and marketing intentions, which have the potential to reduce the current cost base. During JunQ12 we expect to see LIM.TO declare commercial production. Our $8.30/share target price is derived using a DCF with a 0.8x P/NAV multiple applied to the operational assets on the basis that the company is still very much in a stage of learning and growth. Short term, 10x PER suggests $17/share potential, though this is unlikely to be realised with longer term support at around $6/share based on the target 5mtpa production rate.
03/11A -0.09 -74.1 -430.2 -4.9 -0.08 -173.5 -66.3 -6 -2.86 54.05 2.8 -27.8 -2.4 03/12E 03/13E -1.11 1.40 -6.1 4.8 -44.2 40.0 101.4 251.2 -71.3 119.5 -0.85 1.94 -7.9 3.5 -4.6 2.7 -2 -41 -40.92 47.47 IC (current, C$ m) EV/IC (x) Dividend (Next Qtr., C$) Dividend yield (%) 03/14E 1.88 3.6 33.3 391.0 163.0 2.59 2.6 2.0 -135 50.26 143.17 2.5

*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts Nathan Littlewood 416 352 4585 nathan.littlewood@credit-suisse.com

Share price performance


Daily Dec 01, 2010 - Nov 30, 2011, 12/01/10 = C$9.7

15 10 5 Dec-10 Price

Apr-11

Aug-11 Indexed Price Relative

On 11/30/11 the S&P/TSX COMPS INDEX closed at 12204.11

Quarterly EPS 2011A 2012E 2013E

Q1 -0.02 -0.09 0.44

Q2 -0.02 -0.14 0.41

Q3 -0.02 -0.53 0.35

Q4 -0.03 -0.36 0.21

Financial and valuation metrics Year EPS (CS adj.) (C$) Prev. EPS (C$) P/E (x) P/E rel. (%) Revenue (C$ m) EBITDA (C$ m) OCFPS (C$) P/OCF (x) EV/EBITDA (current) Net debt (C$ m) ROIC (%) Number of shares (m) BV/share (Next Qtr., C$) Net debt (Next Qtr., C$ m) Net debt/tot cap (Next Qtr., %)
Source: Company data, Credit Suisse estimates.

North American Iron Ore

103

01 December 2011

Investment Thesis
The Actions Speak Louder than Words philosophy The LIM philosophy, in our opinion, seems to be that actions speak louder than words. LIM does not have a reserve statement, it does not have 3 revisions on its feasibility study, and LIM.TO is still getting its heading around the economics of its own project. What LIM does have however is an operating mine, and during JunQ2012 we expect it to be cash flow positive and declaring commercial production. As far as the Canadian iron ore industry goes, operating cash flow will put LIM.TO into a fairly exclusive group; alongside CLF, IOC and ArcelorMittal. What makes LIM not just part of an exclusive group, but unique, is that: LIM.TO is the only TSX listed and controlled iron ore miner in Canada (LIF-U.TO also being a producer, but controlled by Rio Tinto). LIM.TOs progress to date has been achieved without taking on any debt, or diluting LIM.TOs project interest to a strategic partner.

A long term consolidator of the Labrador Trough? The position of Labrador Trough iron ore consolidator remains vacant, at this stage. We believe that LIM.TO has an opportunity to fill the role. LIM.TOs strategic benefits are its production, its first mover advantage, and its near term operating cash flow. LIM.TOs currency is its paper. We believe that LIM.TO has an opportunity to use its $16 per resource tonne paper to consolidate a number of other $1 per resource tonne plays (see Exhibit 25), in doing so it would: Re-value the targets by providing them with operating cash flow to reduce dilution risk, and applying the lessons LIM.TO has learnt to date about fast track production. Provide existing LIM.TO shareholders with some blue sky valuation potential that the story currently lacks.

The most obvious starting point for this strategy is NML.TO, and retaining NML.TOs people would address one of LIM.TOs other weaknesses: engineering smarts. Seizing an opportunity The reason LIM has managed to develop its projects so much more quickly than its peers, however, is not due to experience, but to the availability of infrastructure which was built for the very deposits LIM.TO is now mining. As an organisation, LIM.TO does not have a tremendous amount of collective experience in the construction, operation, or marketing of iron ore projects- although we note that this is in the process of changing with recent appointments of ex-Wabush and Baffinland management. The project was initially under-engineered, which has led to a lot of engineering on the run. As LIM.TO learns more about the performance of the orebody through the plant, and customer requirements, the plant has been redesigned. Retrospective upgrades to the plant will continue through 2012, which are largely aimed at achieving nameplate capacity rather than exceeding it. As LIM.TO has learnt more about beneficiation yields and infrastructure solutions, cash costs have been revised upwards. There is a learning process taking place within LIM.TO. We do not know how much longer this process will continue, but until is does we have low confidence in the production, capex, and opex guidance that the company provides.

North American Iron Ore

104

01 December 2011

Not yet a sustainable bulk commodity story The challenge for this business is longevity, and how to achieve it. In an LT world where CS predicts the iron ore price heading towards US$90/t (CFR China), LIM.TOs is not likely to be a business model which will prosper: The bulk commodities business is about economies of scale, and efficient infrastructure solutions. Currently, LIM.TO has neither. Current operating costs of C$65/t do not tell the whole story. There is also C$100mn associated with the 11mt of resources at James and Redmond, which is > C$10/t on a saleable product basis. None of LIM.TOs future growth beyond 2.5mtpa shares this initial C$100mn investment the next 2.5mtpa requires at least anotherC$100mn capex. C$130mn worth of mineral property interests on the balance sheet = $4/t on current NI 43-101 resources, royalties are C$3-4/t, perhaps C$10-15/t is paid to IOC for a marketing fee, and start up costs associated with infrastructure take or pay arrangements are currently being capitalised. We estimate that the all in cost of production is $30-40/t higher than reported cash costs. Our 2012 FOB Canada fines price is ~US$124/t, but longer term it is US$73/t.

Inclusion of historic resources into the mine plan is critical to the valuation story We like that LIM.TO are doers, not talkers. We like that LIM.TO has an infrastructure agreement with QNS&L for handling of its ore. But, we do not like the fact that LIM.TO has no reserves and less than 40 mt of NI 43-101 compliant resources (6 years worth of production at target 5mtpa). On the NI 43-101 resources alone, the stock is worth a fraction of todays share price. Inclusion of an additional 124mt of historic resources into the mine plane is critical to the valuation story, as we highlight in Exhibit 131. To date the reconciliation of historic resources has been positive, so conversion to NI43-101 compliance may be viewed as little more than a formality, however without addressing this formality we fear that LIM.TO is compromising its own investability for some readers of this report.
Exhibit 131: Valuation sensitivity to mine life extension

C$/share

North American Iron Ore

$14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Current NI 43-101 resources + 64mt from NFL + 60mt from QBC Non-compliant resource valuation Credit Suisse target price

Source: Company data, Credit Suisse estimates

105

01 December 2011

Exhibit 132: Financial Summary

Labrador Iron Mines (LIM)


2010 2011 0.0 -4.9 0.0 -4.9 0.0 -0.1 -4.8 -0.8 -4.0 0.0 0.0 -4.0 0.0 0.0 -4.0 7.6 0.2 1.3 0.9 10.0 36.7 0.0 137.6 174.3 184.3 14.9 1.7 3.1 19.7 164.6 164.6 0.0 0.0 164.6 -5.9 -4.9 0.0 0.0 0.0 0.1 1.4 -3.4 0.0
0.0 0.0

Year ending 31 Mar 2012 2013 2014 Share Price: C$6.74


101.4 -71.3 7.6 -78.9 0.0 -0.1 -78.8 -18.7 -60.1 0.0 0.0 -60.1 0.0 0.0 -60.1 2.4 38.0 11.4 1.7 53.5 83.6 0.0 24.4 108.1 161.6 19.0 0.0 4.6 23.6 137.9 126.5 0.0 0.0 137.9 -2.4 -78.9 -0.1 7.6 11.1 14.6 -0.5 -46.1 -14.1
-10.0 -4.1

2010

In CADmn, unless otherwise stated 2011 2012 2013 2014

Profit & Loss


Sales revenue EBITDA Depr. & Amort. EBIT Associates Net interest Reported PBT Income tax Profit after tax Minorities Preferred dividends Normalised NPAT Analyst adjustments Unusual item after tax Reported NPAT

03/10A 03/11A 03/12E 03/13E 03/14E


0.0 -2.7 0.1 -2.8 0.0 -0.1 -2.7 -3.9 1.2 0.0 0.0 1.2 0.0 0.0 1.2 48.3 0.0 0.7 0.0 49.0 7.9 0.0 153.1 161.1 210.0 2.1 0.0 32.3 34.4 175.6 161.5 0.0 0.0 175.6 -48.3 -2.8 0.0 0.1 0.0 -0.6 0.2 -3.1 0.0
0.0 0.0

1/12/2011 11:33

251.2 119.5 15.6 103.9 0.0 -1.5 105.3 29.5 75.8 0.0 0.0 75.8 0.0 0.0 75.8 41.4 22.3 11.1 1.7 76.5 134.0 0.0 24.4 158.4 234.9 9.3 0.0 4.6 13.9 221.0 209.8 0.0 0.0 221.0 -41.4 103.9 1.4 15.6 -6.5 -6.3 -3.2 104.9 -65.9
-57.0 -8.9

391.0 163.0 25.8 137.2 0.0 -3.6 140.8 39.4 101.4 0.0 0.0 101.4 0.0 0.0 101.4 135.4 35.3 17.6 1.7 189.9 153.9 0.0 24.4 178.3 368.2 14.7 0.0 4.6 19.3 348.9 331.3 0.0 0.0 348.9 -135.4

OUTPERFORM RATIRating 8.30 TARG Target Price C$ 23.15 vs % TP_U Share price VALU LIM.TO commenced production of a small hematite iron operation in 2H2011, and aims to ramp up production to 5mtpa through 2012 and 2013. 'The project' includes around 20 satellite deposits that were once mined by IOCC, but were abandoned in the early 1980's. As of October 2011, LIM is the only iron ore producer listed on the TSX.

Earnings
Equiv. FPO (period avg.) c_EP c_EP EPS (Normalised) EPS_ EPS Growth c_DP DPS c_PA Dividend Payout c_FC Free CFPS mn c % c % c x x x % % x %
% x x

03/10A 03/11A 03/12E 03/13E 03/14E


37.4 3.1 0.0 0.0 -8.4 216.4 -126.3 -131.5 0.0 -1.2 1.6 0.7
0.0 1.3

43.7 -9.1 -391.9 0.0 0.0 -7.9 -74.1 -72.5 -72.5 0.0 -1.2 1.8 -2.4
0.0 1.1

54.0 -111.3 -1,124.1 0.0 0.0 -92.9 -6.1 -4.5 -5.0 0.0 -13.8 2.9 -47.5
-59.3 0.6 1.3

54.0 140.4 226.2 0.0 0.0 177.7 4.8 3.4 3.0 0.0 26.4 1.7 36.1
30.2 1.1 1.1

54.0 187.7 33.7 0.0 0.0 229.5 3.6 2.6 2.2 0.0 34.0 1.1 30.6
25.9 1.1 1.1

Balance Sheet
Cash & equivalents Inventories Receivables Other current assets Current assets Property, plant & equip. Intangibles Other non-current assets Non-current assets Total assets Payables Interest bearing debt Other liabilities Total liabilities Net assets Ordinary equity Minority interests Preferred capital Total shareholder funds Net debt

03/10A 03/11A 03/12E 03/13E 03/14E

Valuation
c_PE P/E ALT(EV/EBIT ALT(EV/EBITDA c_DIDividend Yield c_FC FCF Yield c_PB Price to Book

Returns
c_RO Return on Equity c_I_N Profit Margin c_I_S Asset Turnover c_AS Equity Multiplier c_RO Return on Assets c_RO Return on Invested Cap.

% %

0.6 0.9

-2.2 -2.6

-37.2 -44.4

32.3 41.6

27.5 46.3

Gearing
c_GE Debt to Net debt + Equity % Net x c_NE Net Debt to EBITDA c_I_E Cover (EBITDA/Net Int.) x Int x c_I_E Cover (EBIT/Net Int.) Int % (c_CCapex to Sales % (c_CCapex to Depreciation Net Cash Net Cash Net Cash Net Cash Net Cash 17.7 1.2 0.0 Net Cash Net Cash 30.2 35.4 841.8 -81.4 -45.4 31.4 35.4 931.4 -70.8 -38.2 13.9 26.2 11.7

Cashflow
EBIT Net interest Depr & Amort Tax paid Working capital Other Operating cashflow Capex
Capex - expansionary Capex - maintenance

03/10A 03/11A 03/12E 03/13E 03/14E

Assumptions & Operations

03/10A 03/11A 03/12E 03/13E 03/14E


79.1 0.00 131.9 0.00 168.9 0.26 152.5 1.95 Valuation C$mn 471 471 C$mn 2 -25 -22 449 140.0 3.23

137.2 M_IRONORE_FINES_CFRC Iron Ore (62% IODEX) 2.9 25.8 c_RPP Equity Iron Ore Sales -37.1 c_RPP_IRON_CONC 14.1 -3.2 Projects & Mines 139.7 Schefferville -45.7 Sub-Total
-30.0 -15.7

US$/t CFR mt

Net Asset Value C$mn C$/sh 554 10.26 554 10.26 C$mn 2 -25 -22 532 54.0 0.85 x 10.0% C$/sh 0.04 -0.46 -0.42 9.84

multiple 0.85 x 0% multiple 1.00 x 1.00 x 0% 0

C$/sh 8.72 8.72 C$/sh 0.04 -0.46 -0.42 8.30 6.74 0.70 x

Acquisitions & Invest Asset sale proceeds Other Investing cashflow Dividends paid Equity raised Net borrowings Other Financing cashflow Total cashflow Adjustments Net Change in Cash

-14.4 0.0 -2.1 -16.5 0.0 32.8 0.0 0.0 32.8 13.1 0.0 13.1

-27.1 0.0 -12.3 -39.3 0.0 2.6 0.0 -0.5 2.1 -40.7 0.0 -40.7

-51.0 0.0 -9.5 -74.6 0.0 115.8 0.0 -0.3 115.5 -5.2 0.0 -5.2

0.0 0.0 0.0 -65.9 0.0 0.0 0.0 0.0 0.0 39.0 0.0 39.0

0.0 0.0 0.0 -45.7 0.0 0.0 0.0 0.0 0.0 94.0 0.0 94.0

Corporate Net Cash / (debt) Corporate Sub-Total Total - Shares on issue (mn) - Target P / NAV - WACC (nominal)

- Current share price - Current P/NAV

Source: Company data, Credit Suisse estimates

North American Iron Ore

106

01 December 2011

Valuation
Summary
The LIM valuation process is a reasonably straightforward one; LIM.TO is very much a case of what you see is what you get. The company essentially has one project; Schefferville comprising of 20 satellite deposits, which it targets to be producing at 2.5mtpa by end 2012 followed by a number of cookie cutter expansion steps which expand to, or maintain, production at 5mtpa. Our modelling assumes a modest delay to the 5mtpa target, as summarised in Exhibit 148, but more importantly we assume a mine life of ~ 100mt, which is well in excess of the current NI 43-101 compliant resources of just 39mt. The sensitivity to this mine life assumption is summarised in Exhibit 136.

Net Present Value


Exhibit 133: NAV and risk weighted valuation

Projects & Mines Schefferville Sub-Total Corporate Net Cash / (debt) Corporate Sub-Total Total Notes: - Shares on issue (mn) - Target P / NAV - WACC (nominal)

Net Asset Value C$mn C$/sh 554 10.26 554 10.26 C$mn 2 -25 -22 532 C$/sh 0.04 -0.46 -0.42 9.84

multiple 0.85 x

Valuation C$mn C$/sh 471 8.72 471 8.72 C$mn 2 -25 -22 449 C$/sh 0.04 -0.46 -0.42 8.30

multiple 1.00 x 1.00 x

54.0 0.85 x 10.0%

- Current share price - Current P/NAV - Valuation upside

6.74 0.70 x 23%

Source: Company data, Credit Suisse estimates

Our 1 year forward NAV based valuation for LIM uses a 0.85x P/NAV, on the basis that in 12 months time we expect to see 1 x 2.5mtpa module fully commissioned and construction should be imminent on the other. Notionally (2.5 x 100% + 2.5 x 70%)/5 = 85%. Our 5 year rolling NAV model shows a steady increase in net asset value due mainly to the cash accumulation against a relatively low capital intensity business model.

North American Iron Ore

107

01 December 2011

Exhibit 134: 5 year rolling NAV


16 14 12 10 C$/share 8 6 4 2 0 -2 2011Q2 2012Q1 2012Q4 2013Q3 2014Q2 2015Q1 2015Q4

Exhibit 135: Contributions to 2011 raw NAV


5 4 3 C$/share 2 1 0 -1 -2 Schefferville Net Cash / (debt) Corporate 5% 14% 8% 5% 5% 5% 5% 4% 4% 61% 50% 40% 30% 20% 10%

0% 2011 -14% 2012 2013 2014 2015 2016 2017 2018 2019 2020 >2020 -10% -20% % of NAV

Schefferville

Net Cash / (debt)

Corporate

Raw Total

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

From a valuation perspective, LIM.TO is a here and now story. Roughly 28% of our current NAV is derived from 2011 mainly from the balance sheet. Relative to its peers, LIM.TOs current deposits have shorter mine lives and are therefore less sensitive to long term price assumptions. Only 28% of our current NAV sits > 2020 this is in contrast to their Schefferville neighbours, New Millennium, for which we have 119% of the NAV being generated > 2020.

NAV Sensitivities
Proving up historical resources into the mine plan is critical to the valuation story
Exhibit 136: Valuation sensitivity to mine life extension

$14.00 $12.00 $10.00 C$/share $8.00 $6.00 $4.00 $2.00 $0.00 Current NI 43-101 resources + 64mt from NFL + 60mt from QBC Non-compliant resource valuation Credit Suisse target price

Source: Company data, Credit Suisse estimates

One of the most important drivers and sensitivities to our LIM.TO valuation is the mine life assumption. The companys current NI 43-101 resources of around 40mt suggest a resource life of less than 6 years after allowing for beneficiation yield and ramp up to 5mtpa. There are currently no reserves. However, over and above the above NI 43-101 compliant resources, LIM.TOs property has historically held: Newfoundland & Labrador: 64.4mt at 58% Fe and 7.1% silica, and Quebec: 60.5mt at 55.4% Fe and 6.1% silica

Based on positive resource reconciliation to date, we have a high level of confidence that LIM.TO will prove these resources into NI 43-101 tonnes with time. We do not get the

North American Iron Ore

108

01 December 2011

impression from management that this resource conversion process is a particularly high priority however. Our published NAV assumes a LOM of 100mt, and the NAV sensitivity to inclusion of these additional resources into the mine plan is illustrated in Exhibit 136. Sensitivity analysis under alternative price decks We maintain four different macro scenarios in our models; CS assumptions (official house forecasts), Spot (US$140/t CFR), Mid-Cycle (CS LT price run from today into perpetuity) and Consensus (based on the Consensus Economics quarterly broker survey). Our NAV under each of these scenarios is summarised below. Consensus and Spot commodity price scenarios both offer upside to our more conservative house price deck.
Exhibit 137: NAV sensitivities under various macro scenarios
18.00 16.00 14.00 12.00 $/share 10.00 8.00 6.00 4.00 2.00 0.00 CS base case Raw NAV Credit Suisse target price
Source: Company data, Credit Suisse estimates

$15.87 $13.82 $13.41 $9.84 $11.69 $5.52 $4.60

$8.30

Spot

Mid-Cycle

Consensus

Risk Weighted NAV Share price

Sensitivity to key macro drivers is summarised in Exhibit 138. LIM.TOs relatively short mine life do not offer a lot of leverage to the iron ore price assumption We noted out low confidence in managements (and our own) operating cost forecasts due to the under-engineered nature of this business, and learning on the job approach. A 20% increase in operating costs almost entirely erodes our NAV and makes the business worthless on our current price deck.

North American Iron Ore

109

01 December 2011

Exhibit 138: NAV sensitivities

4.00 3.00 Valuation impact 2.00 1.00 -20% 0.00 -1.00 -2.00 iron ore
Source: Company data, Credit Suisse estimates

-10%

base case

10%

20%

operating cost

USDCAD

Earning multiples
Our PER model (Exhibit 139) suggests that beyond the FY13 iron ore price induced spike, this company will generate around $0.60/share in earnings supporting an $4.80-6.00/share valuation on a 8-10x multiple, which we feel is appropriate.
Exhibit 139: PER bands

$20 $16 C$ per share $12 $8 $4 $0 Dec -$4 10 4x Dec 11 Dec 12 6x Dec 13 8x Dec 14 Dec 15 Dec 16 12 x Dec 17 Dec 18 14 x Dec 19 Dec 20

10 x

share price

Source: Company data, Credit Suisse estimates

LIM.TO does not have, and will not have, a particularly complicated balance sheet based on its current business model. We can use the EBITDA multiples in Exhibit 140 to arrive at a similar valuation range.

North American Iron Ore

110

Contained Fe tonnes in Resource (i.e. grade adjusted) - mill

C$ per share $12 $16 $20 $0 $4 $8 Dec -$4 10

1,000

1,500

2,000

2,500

3,000

500

North American Iron Ore

Exhibit 140: EBITDA bands

3x Dec 11 Dec 12 Dec 13 4x 5x

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Dec 14 6x Dec 15

Comparable Company Analysis

Exhibit 141: Mineral Inventory back of global iron ore comparables

Exhibit 141 puts LIM.TOs resource inventory into context. Whilst we entirely appreciate that LIM.TO may not need a NI 43-101 compliant reserve statement, or a larger resource statement, to profitably mine the deposits, we are concerned that without addressing these things the company may be limiting its investor audience.

Hematite

Dec 16 7x Dec 17

Mineral Resources

8x

Dec 18 Dec 19

Other

Dec 20

share price

BHP Billiton Rio Tinto Fortescue Metals Group Ferrexpo Adriana Resources Inc Anglo American Atlas Iron Ltd Sundance Resources MMX NMDC Kumba Zanaga Iron Ore Co Brockman Resources London Mining New Millennium Iron Murchison Metals Ltd Flinders Mines Ltd Australasian Resources Champion Minerals IMX Resources Gindalbie Metals Ltd OneSteel Macarthur Minerals Aquila Resources Ltd Iron Ore Holdings Limited Oceanic Iron Ore Alderon Iron Ore Grange Resources Mindax Limited Black Iron African Rainbow Minerals Iron Road Limited Northland Resources Cliffs Natural Resources Jupiter Mines Ferrowest Northern Iron Labrador Iron Ore Royalty Red Hill Iron Limited Western Desert Emergent Resources Pluton Resources Century Iron Mines Strike Resources Limited Cazaly Resources Limited Golden West Resources Admiralty Resources NL Mount Gibson Iron Ltd Cape Lambert Ironclad Mining Moly Mines Sherwin Iron African Iron Advanced Exploration Lincoln Minerals BC Iron Mineral Resources Ltd Fox Resources Crusader Resources Labrador Iron Mines Centrex Metals Limited Cullen Dannemora Mineral AB

01 December 2011

111

01 December 2011

Exhibit 142: EV/EBITDA comparables Global comps: Filtered for a) pure play iron ore and b) Developer or Producer status
12.0 10.0 8.0 6.0 4.0 2.0 0.0 Fortescue Metals Group Labrador Iron Ore Royalty Corporation Labrador Iron Mines Grange Resources African Minerals Atlas Iron Ltd Mount Gibson Iron Ltd Gindalbie Metals Ltd Ferrexpo Northern Iron Kumba

12m fwd EV/EBITDA

24m fwd EV/EBITDA

Source: IBES

Exhibit 142 and Exhibit 143 provide a comparable company analysis from our global database of iron ore names, which have been filtered for a) pure play iron ore and b) at either developer or producer status. Relative to this peer group, we believe LIM.TO is fairly priced, or arguably a little cheap on a consensus EV/EBITDA basis.
Exhibit 143: PER comparables Global comps: Filtered for a) pure play iron ore and b) Developer or Producer status
12.0 10.0 8.0 6.0 4.0 2.0 0.0 Labrador Iron Mines Grange Resources African Minerals Mount Gibson Iron Ltd Ferrexpo Fortescue Metals Group Gindalbie Metals Ltd Labrador Iron Ore Royalty Corporation Northern Iron Atlas Iron Ltd Kumba BC Iron

12m fwd PER

24m fwd PER

Source: IBES

North American Iron Ore

112

01 December 2011

LIM.TO as the Labrador Trough consolidator


The opportunity In our opinion, LIM.TOs greatest assets are its production, its first mover advantage, its experience in dealing with infrastructure providers, and the lessons it has learnt in the process. However these rare assets are being devalued by the day, as: LIM.TOs peers go through the learning process that it has already experienced, making LIM.TOs experiences less unique. Global iron ore supply catches up with demand, potentially taking prices down to a level at which LIM.TOs business model becomes uneconomic.

With the right corporate smarts, we believe that LIM.TO has an opportunity to leverage the premium its paper currently attracts in order to play consolidator of the Labrador Trough, essentially buying $1 per contained Fe tonne paper with $16 per contained Fe tonne paper.
Exhibit 144: Can LIM.TO use $16/t paper to buy $1/t paper?
18.0 16.0 Labrador Iron Mines EV per contained Fe tonne in resource 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1 Explorer Alderon Iron Ore 2 Scoping / PEA New Millennium Iron BFS3/ DFS 4 Developer 5 Producer
scoping study hype? bankable reality?

North American Iron Ore

Labrador Iron Ore Royalty Corporation

Source: Company data, Credit Suisse estimates

The LIM.TO we see today reminds us of an Atlas Iron (AGO.AX) we watched in 2008. At the time AGO.AX had 39mt of DSO resources, and just 15mt of reserves. Pardoo, AGO.AXs first operation, had just over 7mt of reserves which gave it 3-4 years worth of production at a 2mtpa scale. AGO.AX was, and remains, a third party infrastructure model. It currently uses trucks to transport ore to a third party port. AGO.AX used its producer premium to start doing deals. It bought Warwick Resources, Aurox Resources, Giralia Resources and FerrAus Limited. Today, AGO.AX has 1,034 mt of DSO hematite resources, 242mt of reserves, it is targeting > 46mtpa of production as it transforms from a low capex start up model to a higher capex, and rail dependent, mid-tier player.

113

01 December 2011

Today, AGO.AX is the second largest pure play iron ore miner listed on the ASX, after Fortescue Metals Group.

The challenge Although we can see this as a very real opportunity, we are less convinced that LIM.TO feels the same about it. We certainly cant observe the same long term corporate ambition in LIM.TO that we could see in AGO.AX. There are no doubt others, namely Chinese steel mills, who may have had similar ideas about the Labrador Trough. Whilst it would certainly be difficult to realise a vision like this without an appetite for the iron ore and deep pockets to pay for it, Tata Steels (or Corus) geographic advantage in the short term should not be over looked. A Chinese customer of the Labrador Trough will forever be burdened with a significant freight disadvantage. Tata Steel on the other hand plans to use its Labrador Trough production exposure to feed its Corus operations in Europe. The freight penalty to Europe is far less severe.

North American Iron Ore

Please refer to our New Millennium report, and specifically the valuation section, where we have discussed a corporate combination of LIM.TO and NML.TO in more detail.

114

01 December 2011

Company-Specific Risks
Investment in any mining company brings with it operational risks, commercial risks, and development risk. A few of the risks we regard as being more company-specific include: Examples of Operational and Development Risks LIM.TO does not currently have a reserve statement. Whilst we appreciate that there has been good reconciliation to historic reserves and that from an operations perspective one may not be required, the companys financial projections and cost estimates have not been subject to the same level of review and assessment as those of its peers. LIM.TO currently relies on provision of third party services for rail/transport, port/loading and sales/marketing. We have low visibility on the current commercial arrangements, and even less on how these arrangements might work in the future. LIM.TOs current rail and marketing arrangements with IOC expire at end 2011, and to date replacement or renewed agreements have not been announced. LIM.TOs operation is relatively more exposed to weather (or temperature) than that of its peers. LIM.TOs processing plant is not enclosed in a building. Being located in North America, further from growth markets, this operation is more sensitive to seaborne freight rates than most of its global peers. Credit Suisse forecasts a long term freight rate which is lower than todays spot, but if our freight forecasts are too low either in the short or medium term, this will adversely impact IOC realised price forecasts and undermine the global competitiveness of this operation.

Examples of Commercial and Financial Risks Although LIM.TO has a LOM rail agreement with IOC/QNS&L for the transport of its ore, this is a commitment for tonnage only, not price. The pricing will be renegotiated every few years, and we expect that as competition for rail access increases so will LIM.TOs access price. LIM.TOs long term logistics solution is still evolving. We do not know what LIM.TOs long term material handling, port, and marketing arrangements will look like and neither does LIM.TO. LIM.TO has no debt and no debt facilities in place. It plans to fully fund its expansion aspirations with operating cash flows. A collapse in the iron ore price will quickly erode this OCF, potentially leaving the business balance sheet constrained.

North American Iron Ore

115

01 December 2011

Asset Review
Overview
LIM will be developing 20 satellite deposits most of which are brownfield ex-IOC sites that were abandoned in the early 1980s. IOC walked away from these operations due to decreasing silica levels and reducing iron grades, but in todays market with new iron ore appetites evolving and various processing options now economically viable these assets are seeing a new lease of life. LIM plans to develop and mine the deposits in four stages, starting with those located closest to existing infrastructure (James is the source of current production).
Exhibit 145: LIM Project Plan

Source: Company data

LIM currently has just 41mt of N 43-101 compliant resources at 56.7% Fe and 12.09% silica. In addition to this 41mt, historical IOC resources on the other properties were: Newfoundland & Labrador: 64.4mt at 58% Fe and 7.1% silica Quebec: 60.5mt at 55.4% Fe and 6.1% silica Total: 124.9mt at 56.7% Fe and 6.6% silica

It should only be a matter of process for LIM to do the necessary work to convert these historical resources into NI 43-101 compliant resources. At the individual deposit level we can see that a combination of a) step out drilling (more tonnage) and b) higher silica cut off levels have resulted in substantial increases (Exhibit 146). We understand that iron cut off levels have not changed however.

North American Iron Ore

116

01 December 2011

LIM.TOs current resources on the below deposits are 114% higher than the historic IOC resources. Extrapolating this same level of success to the other 124.9mt of IOC resource suggests there could be potential for 268mt of NI 43-101 resources, although we would consider 114% increase in all historic resources a fairly bullish target.
Exhibit 146: Growth of historic resources

Source: Company data

Products & Pricing


Exhibit 147: Quarterly Sales forecasts
Iron Ore Volumes 1.4 1.2 1.0 0.8 mt
mt 3.0 2.00 2.0 1.0 0.0 0.75 0.09 2011 2012 2013 2014 Annualised Guidance 2015 3.22 1.95 4.00 4.50 6.0 5.00 5.0 4.0 3.50 4.50

Exhibit 148: Annual Sales forecasts


Iron Ore Volumes

0.6 0.4 0.2 0.0 2011Q1 2012Q1 2013Q1 Total Sales Volume 2014Q1 2015Q1

Annualised Guidance

Total Sales Volume

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Our ramp-up assumptions imply a modest delay relative to guidance Our sales volume modelling assumes: A modest shortfall relative to ramp up guidance, with a 12-18mth delay in achieving the LT target run rate. We assume that LT production gets to 5mtpa (from 2016). We model 20% of full year sales in MarQ (LIM.TOs Q4) and the balance evenly spread over the rest of the year. This is weather related.

Like most aspects of this project, the product mix and product specifications are still evolving as LIM continues to learn about its ore bodies, how best to process them, and what their customers actually want. During our August 2011 visit to the site we saw a small ~ 170kt stockpile of genuine DSO material (which LIM calls DRO, an invented term), and two larger stockpiles of

North American Iron Ore

117

01 December 2011

beneficiated lump and sinter fines (which LIM calls DSO, even though it is beneficiated material). The lump is a relatively fine grained +8 25mm. Iron content is an attractive 65%, and all impurities are at levels low enough that price penalties are not a concern. All else being equal, we would expect LIM.TOs lump to attract a modest price premium. The fines are apparently grading around 64% Fe with all impurities being higher than the lump most notably silica (5%) as a result of the smaller size fractions included. Although being higher impurities than the lump, it is probably only the silica level that would be of (modest) concern to customers when assessing VIU.

The deposit is currently being mined at above resource grade, with ROM feed averaging 60-61%. Longer term the head grade will fall below current resource grades to 55-57%, and as a result finished product grades are also expected to reduce to perhaps 62-63%. From a Value in Use (VIU) perspective, the grade premium will erode as a result, and pricing could come under pressure due to the relatively fine particle sizing of LIM.TOs product. There will be a limit to the amount of LIM.TOs fines a steel mill can put into its sinter bed without impacting sinter productivity. SepQ11 downgraded CY12 sales guidance from 2.5 to 1.8 - 2.0mt LIM.TOs recent SepQ11 results downgraded CY12 guidance from 2.5 to 1.8-2.0mt. The shortfall seems to be primarily a result of lower than expected train wagon availability. LIM is using used rail wagons that come fitted for a rotary dumper, but the internal braces need to be removed and replaced with external ones so that LIM.TO can unload the wagons using an excavator. The union does not permit skilled workers to be flown in, and the refurbishment process has been much slower than anticipated. LIM.TO physically owns around 400 rail cars, around two-thirds of which are now in service, and LIM.TOs agreement with QNS&L allows for 124 wagon consists. The recent delivery of a second train has addressed the rail constraint somewhat, but the operation is now constrained by ambient temperatures (see Exhibit 152).
Exhibit 149: Silver Yards processing plant upgrades

North American Iron Ore

Source: Company data

The plant has a nameplate capacity of around 0.55mtpa until mid 2012, when the Phase 3 upgrade takes place (Exhibit 149).

118

01 December 2011

RIO marketing arrangement estimated cost is at least 10% of FOB price in 2011 LIM does not have any in house iron ore marketing experience, and for 2011 LIM has engaged IOC as not only infrastructure provider but also marketing agent. Effectively LIM.TO sells its ore to IOC unloaded at the port, and IOC then pays to load the LIM.TO ore material onto ships and sells LIM.TOs material as its own, on the spot market. The commercial charges associated with this arrangement are confidential, but we estimate that LIM is paying at least 10% of FOB revenue on the basis that: During our August 2011 site visit management indicated that using IOC as a marketing agent and having access to its capesize facilities was roughly economically equivalent to doing the marketing themselves but having to use smaller vessels with higher freight. The difference between a panamax and capesize vessel Canada to China is roughly $10-12/t. The panamax option uses a different berth, and requires transhipping, adding perhaps $3/t. 11 + 3 = 14. The spot price of iron ore in August, when this deal was announced, was roughly $175/t CFR China, or perhaps $145/t FOB. 14 divided by 145 = 10%.

Although our estimates may not be precise, we believe that LIM.TO is very keen to bypass the IOC marketing arrangement and sell direct to Tier 2/3 steel mills or with the help of a trader/broker. Although it has not said as much, we believe that LIM.TO is likely to be targeting a new offtake deal in early 2012 that by-passes IOC. The market has not been told what the old arrangements were (though we have estimated them above) and is unlikely to be told the details of the new arrangements are, so when and if this announcement comes it may not be fully appreciated. If our estimates are correct however, bypassing IOC could probably result in an 8-10% realised price improvement. Our modelling assumes that the marketing fee drops from 10% in CY11 to 2% thereafter. Unfortunately the alternative marketing arrangement does not really reduce all in costs, because the marketing fee is replaced by a higher port/loading charge, as discussed further below.

North American Iron Ore

Mining and Processing


Mining By end 2011, total mined ore production should be around 1.6 mtpa, having been scaled back due to the rail constraints further downstream. Mining and process plant operation is outsourced to a contractor running a fleet of 45 80 tonne excavators and 40 100 tonne articulated and rigid dump trucks. The stage 1 strip ratio (James and Redmond deposits) is around 1.2:1, so initial material movements required to meet the 2.5mtpa sales target will be in the order of 7.3mtpa after adjusting for a 75% beneficiation yield, increasing to perhaps 14-15mtpa on a consistent strip ratio. We have low visibility on the longer term strip ratio, but we anticipate an increase to 1.5:1 longer term in our modelling which implies a 16.7mtpa earthmoving operation longer term. One of the nice things about this operation is that as a result of its weathered nature and leached out silica, the material is currently all free dig i.e. drill and blast is not required. This represents a saving of perhaps $0.50 1/t mined. During IOCs operation of these assets, the yellow limonitic ores, lower grade TRX ores and high silica ores (HISI) were separated and stockpiled. LIM is planning to upgrade the Silver Yards beneficiation plant in 2012 to process the high silica, lower grade, and yellow ores to produce saleable products.

119

01 December 2011

Overburden, waste stripping and iron ore stockpiling will continue to some extent on a 12 month basis. The fragmented and poddy nature of the LIM resources implies a relatively high development intensity, and also that as the operational foot print spreads, haulage and site maintenance costs are likely to increase more quickly than they would for a more concentrated deposit. Processing LIM.TO is currently producing two types of product: Direct Rail Ore. Material which has not been beneficiated, and one tonne out of the ground means one tonne on the ship. Direct Rail Ore (DRO) is LIM.TOs own terminology that distinguishes DRO from beneficiated ore. CY12 guidance = 0.5mt of this material. Direct Shipped Ore. Material which has been beneficiated as described below. One tonne out of the ground means 0.55 0.75t on the ship. Although LIM.TO calls this DSO material their use of this terminology is inaccurate in our opinion because the material is not direct shipped; it is beneficiated first. CY12 guidance = 1.3 1.5mt of this material.

After reviewing and verifying historical IOC data, LIM has relied on a combination of IOC RC drilling, trenching and bulk sampling for resource definition and metallurgical design. The absence of significant diamond drilling has meant that understanding of ore granularity, or particle sizing, was poor. Since commencing mining LIM has learnt that the ore is much finer than anticipated. Recoveries were consequently much lower (around 50-55%). This is being remedied in two phases: Phase 2: additional of a hydro sizer, or floatex density separator, and an FLSmidth Pan Filter to dry the product to a moisture < 8%. This intermediate step has a relatively low capex and opex impact, but we understand that following installation in October 2011, November recoveries have improved to around nameplate 75%. Phase 3: will add the first example of WHIMS (wet high intensity separation) in the Labrador Trough. WHIMS exploits the mildly magnetic properties of hematite with high intensity (and high energy) magnetic separation.

Together the Phase 2 and Phase 3 expansions are expected to increase the total capital cost of the plant to $80mn (from current $50mn) and the total cost of the project to $150mn including $70mn worth of infrastructure. (150/2.5 = $60 per annual tonne). The existing Silver Yard beneficiation plant adjacent the James deposit is the first of two facilities that are likely to be required to meet the 5mtpa target. Ore beneficiation is planned to run from April to November each year, although this is weather dependent. Of course to produce 2.5mtpa in 7 months requires a plant with instantaneous capacity of closer to 4.3mtpa.

North American Iron Ore

Transport and Logistics


Existing infrastructure in this region gave LIM a huge advantage from both a capital cost and schedule perspective. Access roads, water supply and sewage facilities were already available, as was access to an airport (Schefferville), railway and shipping port. Much of this existing infrastructure was put in place by IOC for these very deposits during the 1950s.

120

01 December 2011

Exhibit 150: James deposit, Silver Yard OPF, ore stockpile and rail loading facilities

Source: Company

Rail near term requires an 8.5mth rail window per year Some upgrades have been required. The first major construction activity was reestablishing a 4.5 kilometre spur line to connect the processing site to the ScheffervilleSept-les main line. Installation of the new track along the existing rail bed was completed in 2010 and then used to bring in the main components of the processing plant and accommodation camp. Although the infrastructure has facilitated an expedient start-up, it has not facilitated what we would consider an optimised (or cheap to operate) logistics solution. Beneficiated and direct shippable ores are stockpiled parallel to the rail spur adjacent to the ore processing facility. A FEL (Front End Loader) is used to load each of the wagons on what is currently an 85-95 car consist. Each wagon takes roughly 4 minutes to load. Typically iron ore would be loaded with a purpose built hopper/train loader which is capable of loading each wagon in roughly 75 seconds. Once current wagon availability has been addressed, the consists are meant to be increasing to 124 cars and longer term LIM.TO hopes 240 will be permitted. The wagons have a net pay load of 100 tonnes, and 119 tonnes gross, which is equivalent to an axle loading of just under 30 tonnes. As far as we know the worlds heaviest rail network is owned by Fortescue Metals Group in Australias Pilbara region which has a 40 tonne axle load capacity.

North American Iron Ore

121

01 December 2011

After leaving the site, the trains pass LIM.TOs own spur, the Tshiuetin and QNS&L railways to Sept Iles (see Appendix 1 for further detail about these railways). The current agreements with TSH and QNS&L for accessing their respective lines are Life Of Mine volume arrangements, but pricing is re-negotiated every few years. From the mine to the end of the Tshiuetin Railway a contractor supplies the locomotive services, but QNS&L requires that QNS&L operate the locos on their own line, so for the time being at least the locos have to be decoupled and switched. Although QNS&L is the operator of this rail service, LIM will be making advanced payments totaling $25mn to cover the purchase by QNS&L of the new locos. This advance payment will be repaid by QNS&L to LIM commencing July 2012 in the form of a $3.50 per tonne haulage discount. i.e. LIM gets a $3.50 haulage discount on the first 7.14 mt. A summary of LIM.TOs train movements and capacities is provided in Exhibit 151. In order to achieve 2.5mtpa and ensure that the rail capacity is matched with the mine/plant capacity. Improvements are required in terms of pay load per train (which shouldnt be a challenge) and cycle time per train (requires co-operation from IOC/QNS&L).
SepQ11 DecQ11 2 10,000 4 3.50 182 1.82 8.5 1.29 MarQ12 2 10,000 4 3.50 182 1.82 8.5 1.29 JunQ12 3 11,500 3.5 6.00 312 3.588 8.5 2.54 SepQ12 3 11,500 3.5 6.00 312 3.588 8.5 2.54 DecQ12 3 11,500 3.5 6.00 312 3.588 8.5 2.54

North American Iron Ore

Exhibit 151: Summary of LIM.TOs train capacity


Available train sets capacity per train cycle time per train train cycles train cycles quarterly rail capacity (ignoring weather) available months p.a. full year capacity (weather dependent) no tonnes days per week per year mtpa no 1 10,000 4 1.75 91 0.91 8.5 0.64

Source: Company data, Credit Suisse estimates

The other critical assumption behind the above math is the available rail months per year. Unlike NML.TO, LIM.TO is not drying its ore prior to loading, so in order to avoid having the ore freeze in the wagons, LIM.TO can only rail during warmer periods. Our calculations suggest that with 3 trains, as are expected from 1 April 2012, LIM.TO needs an 8.5mth rail window per year. Exhibit 152 puts this into context, and demonstrates that the average temperatures in Schefferville at the edges of this period are around -15 deg C. Temperature is obviously critical to LIM.TOs rail capacity, and with only 3 trains it would appear that 2.5mtpa is ambitious.

122

01 December 2011

Exhibit 152: Schefferville max, average and minimum monthly temperatures

20 10 Deg Celcius 0 Jan Feb Mar Apr May Jun -10 -20 -30
Source: www.climate.weatheroffice.gc.ca

Jul Aug Sep Oct Nov Dec

8.5 months

Port LIM.TOs 2011 port arrangement is as follows: LIM does not have a car dumper at the port, as is normal bulks practice, but rather uses an excavator to dig the material out of the wagon (hence the need for modifications we mentioned earlier). This is both unusual and opex inefficient.

LIM.TOs 2012 port arrangements are likely to be: Rather than the unloaded ore becoming IOC property, it is likely that this material will be loaded into a truck from the IOC stockyard area, and then stockpiled at the PointeAux-Basques terminal.

North American Iron Ore

Exhibit 153: Excavator unloading a train at IOCs stockyard at Sept Iles

Source: Company

The unloaded material is formed into stockpiles in IOCs stockyard at Sept Iles, at which point it becomes IOC property (at least for 2011), and reported cash costs end at this point (i.e. loading not included). For the remainder of 2011 under the existing IOC sales agreement, LIM will access IOCs capesize capable berth at Sept Iles.

123

01 December 2011

A contractor with shiploading capabilities will be used to recover ore from the stockpiles, and load it onto a barge. The Pointe-Aux-Basques terminal only has a draft of 9m, and on LIM.TOs limited 2012 tonnage it does not make sense to hire out (on a full time basis) transhipping facilities, so LIM.TO is likely to be barging the ore to Quebec City, where it will be unloaded onto shore, and then reloaded onto a large capesize vessel. We consider LIM.TOs proposed 2012 port/loading arrangements to be very logistically complicated, involving 2 more unloading/loading steps than would normally be involved in a more optimised bulk commodity business. Recall our remarks at the front of this report about the value to be created and destroyed through logistics. The fact that LIM.TO is willing to go to this much effort to avoid selling its ore via IOC, tells us that the 10% marketing fee we estimated in the Products & Pricing is if anything conservative estimate. Although the above does not sound like an efficient way to get ore onto a boat, we understand from a bargaining and negotiations (with IOC) perspective why LIM.TO needs to at least look like it has an alternative route to market.

LIM.TOs longer term port arrangements are still evolving: The port handling arrangements for 2012 and future years remain subject to ongoing evaluation and finalization. A car dumper is being considered longer term, which might cost LIM.TO $30-50mn. If LIM.TO ends up doing their own marketing in 2012 and onwards, it will incur additional cost to load the vessels but save the IOC marketing fee. Longer term, LIM anticipates that it will be able to utilise the new multi-user wharf planned by the Port Authority and, when built, this should enable the loading of cape size vessels. This is a >2014 story.

US$/t

Our indicative operating cost assumptions are illustrated above (Exhibit 154) relative to the companys guidance (Exhibit 155). Of particular note:

North American Iron Ore

Operating Costs
Exhibit 154: Realised price and operating costs
Realised price and operating costs 160 140 120 100 80 60 40 20 0 2011Q1 2012Q1 Mining cost Port cost Marketing fee
Source: Company data, Credit Suisse estimates

2013Q1

2014Q1

2015Q1 Rail cost Royalty FOB Reference Price

Processing cost G&A cost Realised Price

124

01 December 2011

Opex guidance does not include the IOC marketing fee or royalties. Exhibit 155 shows a big increase in port costs from 2012. The increase is because LIM.TO is currently selling the ore on an unloaded (but not loaded onto ship) basis to IOC. IOC carries the vessel loading cost. From 2012 we assume LIM.TO does its own marketing, so it therefore pays the loading cost. The increase in port costs is offset by a reduction in marketing fees. We model a LOM strip ratio of 1.5:1 from MarQ13 (LIM.TOs 2012Q4) but a lower figure near term this drives an increase in mining costs as shown. The realised price is lower than our qtrly average FOB reference in the current DecQ11 due to LIM.TOs shipping having unfortunately coincided with the recent trough in iron ore prices.
2012-2017 guidance C$/t 2011 guidance (+10%) C$/t 13.2 8.8 27.5 5.5 55

The above provides access to 11mt of resources (>$10/t on a saleable product basis). The Houston/Redmond and Howse production frontiers will each cost an incremental $100mn (real terms) to establish, but have slightly more accessible tonnage. The capital

North American Iron Ore

Exhibit 155: Operating Cost guidance

Mining & Hauling Processing Transportation & Port General and administration Marketing fees Total Source: Company data, Credit Suisse estimates

12 8 25 5 50

Royalties Under the terms of an Option and Joint Venture Agreement dated September 15, 2005 between Fonteneau Resources Limited (Fonteneau) and Energold as subsequently amended on properties in Labrador, and which agreement which was subsequently assigned to LIM, a royalty in the amount 3% of the selling price FOB port per tonne of iron ore produced and shipped from any of the properties in Labrador is payable to Fonteneau. This royalty shall be capped at: US$1.50 per tonne on the Central Zone properties, (James, Knob Lake 1, Redmond, Gill and Houston) US$1.00 per tonne on the South Zone properties (Sawyer and Astray) US$0.50 per tonne on the North Central Zone (Howse property) and the North Zone (Kivivic property)

Capital Costs
By the time the Phase 3 expansion is complete at Silver Yards, this project will have cost around $100mn, consisting of: $6mn buildings, camp, and office equipment $23mn transportation, infrastructure and equipment (rail and rolling stock) $50mn beneficiation plant and equipment $20mn capitalised stripping and dewatering

125

01 December 2011

intensity per resource tonne appears to be $5 10/t. Although this is a low capital cost business, it is by no means a low capital intensity business. Longer term LIM.TOs historic resources such as Eclipse, Sawyer and Astray become increasingly difficult to access with their access being complicated by either topography or the surrounding lakes (see Exhibit 204). LIM.TO and the Tata Steel/NML.TO JV are making capital contribution payments to railway owners TSH, such that this railway can be refurbished in order to accommodate LIM.TOs 5mtpa and NML/Tatas 4.2mtpa.

Resources
LIM.TO has the smallest NI 43-101 resource base of any of the stocks under coverage. Note the below detailed resource statement shows slightly more total tonnage (21mt) than the companys latest depletion adjusted update (39.5mt) however the latter does not include Fe and impurity grades hence we have used the earlier resource statement below.
Exhibit 156: Resources
Ore mt James Indicated Inferred Total 8.098 0.111 8.209 0.849 0.03 0.879 2.084 0.087 2.171 22.17 0.69 22.86 6.384 0.369 6.753 39.585 1.287 40.872 Total Fe % 57.7 53.6 57.6 59.9 57.3 59.8 55.0 52.3 54.9 57.0 54.9 56.9 54.8 53.9 54.8 56.7 54.4 56.7 Total Fe mt 4.67 0.06 4.73 0.51 0.02 0.53 1.15 0.05 1.19 12.64 0.38 13.02 3.50 0.20 3.70 22.46 0.70 23.16 Mn % 0.65 0.14 0.6 0.37 0.64 0.4 1.17 1.95 1.2 1 1 1.0 2.3 2.7 2.3 1.2 1.47 1.14 SiO2 % 14.08 19.88 14.2 5.05 5.87 5.1 10.97 10.84 11.0 12.8 16.55 12.9 8 9.4 8.1 12.3 14.15 12.09 P % 0.027 0.036 0.027 0.120 0.133 0.120 0.048 0.068 0.049 0.064 0.055 0.064 0.076 0.069 0.076 0.060 0.060 0.060 Al2O3 % 0.500 0.500 0.500 2.090 4.090 2.158 0.810 0.960 0.816 0.700 0.500 0.694 1.000 0.900 0.995 0.750 0.680 0.748

Redmond 2B Indicated Inferred Total Redmond 5 Indicated Inferred Total Measured & Indicated Inferred Total Measured & Indicated Inferred Total Measured & Indicated Inferred Total

Houston

Denault

Total

Source: Company data

In addition to the above NI 43-101 compliant resources, historical IOC resources on the other properties were: Newfoundland & Labrador: 64.4mt at 58% Fe and 7.1% silica Quebec: 60.5mt at 55.4% Fe and 6.1% silica Total: 124.9mt at 56.7% Fe and 6.6% silica NI 43-101 compliant plus historic resources would give LIM.TO a large resource base than NML.TO.

North American Iron Ore

126

01 December 2011

As we noted in Exhibit 136, inclusion of these resources into the mine plan is a critical part of the LIM.TO valuation story. Without including these resources in the mine plan our valuation would be a fraction of the current share price.

North American Iron Ore

127

01 December 2011

Corporate
Company Structure
The corporate structure is fairly simple, as summarised below.
Exhibit 157: LIM.TO corporate structure

Source: Company data

At 30 September 2011, LIM.TOs share capital consisted of: 54,052,057 commons shares on issue 1.825mn options with a weighted average exercise price of $4.41/share, as summarised in Exhibit 158 and Exhibit 159 478,335 warrants, with a weighted average exercise price of $12.50/share and expiring 26 October 2012, as summarised in Exhibit 160
Number Outstanding, beginning of period Grant Exercised Forfeited Outstanding, end of period Source: Company data 1,739,200 277,500 -185,262 -6,250 1,825,188 Weighted Avg Exercise Price 3.45 8.96 2.23 2.00 4.41 Value ($mn) 6.00 2.49 -0.41 -0.01 8.05

North American Iron Ore

Exhibit 158: Options activity for 6 months ended 30 September 2011

128

01 December 2011

Exhibit 159: Options exercisable as at 30 September 2011


Expiry Date Options Outstanding Number Weighted Avg Value ($mn) Exercise Price 1,138,938 2.00 2.28 263,750 6.27 1.65 12,500 7.30 0.09 132,500 11.65 1.54 177,500 10.18 1.81 100,000 6.80 0.68 1,825,188 4.41 8.05 Options Exercisable Weighted Avg Value ($mn) Exercise Price 1,138,938 2.00 2.28 118,750 6.27 0.74 ,4688 7.30 0.03 33,125 11.65 0.39 22,187 10.18 0.23 6.80 0.00 1,317,688 2.80 3.69 Number

31/08/2012 14/09/2015 9/11/2015 9/02/2016 23/06/2016 22/09/2016

Source: Company data

Exhibit 160: Warrants activity for 6 months ended 30 September 2011


Number Outstanding, beginning of period Grant Exercised Forfeited Outstanding, end of period Source: Company data 145,320 478,335 -104,704 -40,616 478,335 Weighted Avg Exercise Price 6.36 12.50 6.36 6.36 12.5 Value ($mn) 0.92 5.98 -0.67 -0.26 5.98

Balance Sheet
At 30 September 2011, LIM.TOs balance sheet had: No debt, and no debt facilities in place A cash balance of $38mn, down from $88mn three months prior

We believe that LIM.TOs balance sheet resilience will be severely tested over the next few months. LIM.TO will sell $50-60mn worth of iron ore during DecQ11, and will probably be relying on a very swift payment from IOC. Were it not for these receipts a continuation of the SepQ cash burn rate of $50mn per quarter would see it net cash negative before the end of CY11. Although there seems to be available space on site to mine and process more ore, stockpiling ore would represent an investment in working capital which LIM.TO does not seem to be willing to make. Mine production volumes and waste removal expectations for the full year have both been reduced.

Even if its balance sheet is currently keeping management awake at night, there are a number of preferred avenues over equity or debt. These include potential advanced payments with marketing agents, or offtake agreements.

North American Iron Ore

Cash Flows
LIM.TOs balance sheet will be stretched during the current DecQ11, but we believe it can be bridged without the need for external financial assistance. September 20 cash balance was $38mn, and the SepQ burn rate was about $50mn with no revenues received. LIM.TOs outgoings will reduce during the DecQ11, as operations are scaled back for the winter, and wed expect to see an expenditure of around $35-40mn. Iron ore sales via IOC are paid roughly 2 weeks after shipping, and during the DecQ11 we expect LIM.TO to receive payment for 3 out of its 4 cargoes, for receipts of around $60mn.

129

01 December 2011

Exhibit 161: Cash Flow summary

Cash Flow and Net Cash Summary 250 200 150 US$mn 100 50 0 -50 -100 -150 Net cash flow from operations Investing cash flow
Source: Company data, Credit Suisse estimates

2011

2012

2013

2014

2015

Financing cash flow Net cash

Management
LIM.TOs board and senior management have a broad and diverse range of experiences, and although there appears to be a reasonable level of mining experience amongst them. In recent times LIM.TO has strengthen the senior operating experience within the group, with the appointment of Mr Rodney Cooper, who prior to a brief stint as a mining research analyst was the VP Operations and COO of Baffinland Iron Mines. Chairman & CEO Mr John Kearney, and Mr Bill Hooley who is now a Director but until recently also COO, are both employees of Anglesey Mining LIM.TOs largest shareholder. We expect, and hope, that as LIM.TO continues to grow its board it will look to recruit new Directors with operational iron ore experience in Canada. LIM.TO has 3 members each on the following committees: An Audit Committee A Compensation Committee A Health and Safety Committee

North American Iron Ore

130

North American Iron Ore

Exhibit 162: Key Personnel


Name John F. Kearney Position Profession Description Canadian Iron Ore experience

Chairman & CEO MBA, CS

Rod Cooper

President and Chief Operating Officer

Terence N. McKillen Bill Hooley

Director & Executive Vice President Director

Geologist

Mr. Kearney has 37 years experience in the mining industry. He is also Chairman or Director of a number of public companies including Canadian Zinc Corporation and Anglesey Mining plc. He is also currently President of the Northwest Territories and Nunavut Chamber of Mines, a Director of the Mining Association of Canada, and a member of the Prospectors and Developers Association of Canada, Canadian Institute of Mining and Metallurgy and the Law Society of Ireland. Mr Rod Cooper is currently Vice President and Senior Analyst - Mining with Dundee Securities, a position that he Baffinland has occupied for two years. Prior to that he served for four years as Vice President Operations and Chief Operating Officer with Baffinland Iron Mines Corporation during its major development activities on the Mary River iron ore project on Baffin Island. Previously Mr Cooper has had a distinguished career in the mining sector with such other companies as Kinross, Homestake and Echo Bay in increasingly senior technical, operational and corporate management roles, including Vice President Technical Services with Kinross and Mine Superintendent, Eskay Creek Mine, with Homestake. Mr. McKillen is a professional geologist and has 40 years of experience in the mining industry. He is currently Director, President and CEO of Xtierra Inc., Conquest Resources Limited and Chief Executive of Minco plc. Mr. Hooley is currently Chief Executive of Anglesey Mining plc. He is a professionally qualified mining engineer and has 40 years of experience in the global mineral industry. Previously, he was Managing Director of Micon International Ltd. from 2000 to 2005. In addition, he held various management and executive posts with mining and service companies in the UK and Australia from 1975 to 1999. Mr. Lister has over 40 years of experience in the mining, metallurgical and chemical industries. He has served as President and CEO of Zemex Corporation, Vice Chairman of Dundee Bancorp Inc., Chairman and President of Campbell Resources Inc. He holds degrees of Bachelor of Science, a Master of Science and a Doctor of Philosophy from the University of Toronto. He was also a Director of Coal Corporation and Anatolia Minerals Development Limited. Mr. Gauthier is a mining engineer and since September 2008 has been Chief Operating Officer of Xtierra Inc. From August 2005 to June 2008, he was Chief Operating Officer of Nevsun Resources Ltd. From June 2004 until August 2005 he was a mining consultant and from December 2002 until April 2004, he was Vice-President, Mining of Glencairn Gold Corp. Mr. Gauthier has served as President and CEO of United Keno Hill Mines Limited prior to 2001, President, COO Santa Cruz Gold Inc. prior to 1999, and formerly Senior Vice-President Operations Lac Minerals Limited. Mr. Matthew Coon Come is Grand Chief of the Crees of Northern Quebec and a Board Member of the Grand Council of the Crees (Eeyou Istchee) and the Cree Regional Authority. He was National Chief of the Assembly of First Nations from 2000 to 2003 and previously was Grand Chief of the Grand Council of the Crees in Qubec for 12 years from 1987 to 1999. Earlier he served two terms as Chief of the Mistassini First Nation. Mr. Coon Come is a Founding Member of the Board of Compensation of the Cree Nation and has been a director of Creeco; AirCreebec, Cree Regional Intercompany Enterprise Company and Cree Construction Company and Chairman of Cree Housing Corporation and James Bay Native Development Corporation. He was a founding director of the First Nations Bank of Canada. In 1998 he was awarded the Goldman Prize (Environmental Award) in recognition of his leadership marshalling local, national and international environmental, human rights and tribal communities to create a strong coalition to stop the Great Whale hy Mr. Cunningham has been engaged as an independent mining consultant since 1996. He has been a director of Aurora Energy Resources Inc. since April 2006 and was formerly a director of Viceroy Exploration Ltd. Mr. Cunningham was the joint owner of the Golden Kopje Mine in Zimbabwe from 1997 to 2001 and general manager and director of Trillion Resources Inc. He also was Manager of Wright Engineers, and held various positions with Sherritt Gordon Mines. Mr. Cunningham holds a B.Sc in Geology from Rhodes University in South Africa.

Mining Engineer

Richard Lister

Director

Gerald J. Gauthier Director

Mining Engineer

Matthew Coon Come

Director

Eric W. Cunningham

Director

Geologist

01 December 2011

Source: Company data, Credit Suisse estimates

131

01 December 2011

Ownership
LIM.TO is reasonably well owned by board and management, together holding around 4.55% of the common shares, with CEO John Kearney the most significant at just over 3%. LIM.TOs largest single shareholder is Anglesey Mining Plc, which owns 32.914% of the company, followed by passport Capital with 19.33%.
Exhibit 163: Top 20 shareholders (as at 30 September 2011)
Holder Name Anglesey Mining Plc Passport Capital LLC KEARNEY JOHN FRANCIS I. G. Investment Management Ltd. Front Street Capital, Inc. Sentry Select Capital Management MCKILLEN TERENCE N Hesperian Capital Management Ltd. Fiera Sceptre, Inc. Investment Management Morgan, Meighen & Associates Ltd. Pyramis Global Advisors LLC Connor, Clark & Lunn Investment Management Ltd. RBC Global Asset Management, Inc. UBS Global Asset Management (Canada) Co. Dimensional Fund Advisors, Inc. Canada Pension Plan Investment Board BMO Asset Management, Inc. Carmignac Gestion SA The Vanguard Group, Inc. Middlefield Capital Corp. Source: FactSet % O/S 32.91 19.33 3.02 2.35 1.90 1.59 1.48 1.45 1.21 0.81 0.57 0.51 0.47 0.43 0.42 0.39 0.39 0.34 0.18 0.18

Anglesey Mining Anglesey Mining is a LSE listed mining company owning not only 33% of LIM.TO but also 100% of the Parys Mountain project in Wales, UK. LIM.TO was formed as a spin off of Anglesey Mining in order to focus on the iron ore interests. Parys Mountain is a Cu-Pb-Zn deposit with resources of 7.76mt grading 2% Cu, 2.9% Pb and 4.9% Zn. A detailed review of the resources and development options for Parys Mountain has been undertaken during 2011. At this stage we do not know the outcome of this review.

North American Iron Ore

132

01 December 2011

Americas / Canada

New Millenium Iron Corporation


(NML.TO)
Rating Price (30 Nov 11, C$) Target price (C$) 52-week price range Market cap. (C$ m) Enterprise value (C$ m) OUTPERFORM* [V] 1.51 1.90 4.48 - 1.02 266.16 305.35

Cheap resource tonnes, but not without funding and development challenges
We initiate coverage on New Millennium Iron Corporation with a $1.90/share target price and OUTPERFORM rating. Along with its project partners and major shareholders Tata Steel, NML.TO is developing a 4.2mtpa DSO/hematite project for first production likely in 2013, and in 2016 it targets a large scale (currently 22mtpa) magnetite project from its KeMag and LabMag deposits in the same region. We like NML.TO for its thorough and diligent engineering approach, and focus on building an iron ore business that is capable of lasting through the cycle. Our primary concerns for the business are around suitability of Tata Steel as a development partner, the Quebec/Newfoundland interprovincial issues, and the technical risk associated with the magnetite project which would involve around 700km of slurry pipeline in a region where temperatures average below zero for more than half the year. Over the next 12 months we expect NML to announce a maiden resource for the Lac Ritchie property and completion of the Bankable Feasibilty Study for the Magnetite project (end 2012). Our C$1.90/share target price is generated using a DCF sum of parts with a P/NAV multiple of 0.70x on the DSO/hematite project and 0.25x on the magnetite project. Short term, we see NML.TO as a LIM.TO acquisition target. Longer term, assuming the magnetite project is a viable one, we may see Tata Steel wanting to own 100% of these projects by acquiring NML.TO.
12/10A -0.06 -24.1 -140.1 -9.1 -0.04 -48.2 -27.2 -12 -17.47 176.27 0.81 39.2 34.7 12/11E 12/12E -0.02 -0.04 -65.5 -41.0 -477.8 -341.4 4.2 -7.8 0.5 -0.06 -0.05 -24.8 -28.4 -31.7 473.4 39 91 -10.52 IC (current, C$ m) EV/IC (x) Dividend (Next Qtr., C$) Dividend yield (%) 12/13E 0.05 31.0 288.0 88.6 50.0 0.21 7.3 5.0 69 15.56 135.80 2.1

Research Analysts Nathan Littlewood 416 352 4585 nathan.littlewood@credit-suisse.com

Share price performance


Daily Dec 01, 2010 - Nov 30, 2011, 12/01/10 = C $1.64

5 4 3 2 1 Dec-10 Price

Apr-11

Aug-11 Indexed Price Relative

On 11/30/11 the S&P/TSX COMPS INDEX closed at 12204.11

Quarterly EPS 2010A 2011E 2012E

Q1 -0.00 -0.02 -0.02

Q2 -0.01 -0.01 -0.02

Q3 -0.04 -0.01 -0.03

Q4 -0.01 -0.01 -0.02

North American Iron Ore

*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).

Financial and valuation metrics Year EPS (CS adj.) (C$) Prev. EPS (C$) P/E (x) P/E rel. (%) Revenue (C$ m) EBITDA (C$ m) OCFPS (C$) P/OCF (x) EV/EBITDA (current) Net debt (C$ m) ROIC (%) Number of shares (m) BV/share (Next Qtr., C$) Net debt (Next Qtr., C$ m) Net debt/tot cap (Next Qtr., %)
Source: Company data, Credit Suisse estimates.

133

01 December 2011

Investment Thesis
Building a business to last Unlike many of its global iron ore peers which are short term focused opportunists, New Millennium aims to build its business to last. Many of NML.TOs pure play iron ore peers will struggle to survive if Credit Suisses current LT price forecast of US$90/t CFR China (62% IODEX) turns out to be correct. By contrast, the corporate vision of NML is to become a significant, low cost iron ore producer in North America by the end of this decade. We see evidence of this strategy in the companys business practices. NML.TOs focus is on cost minimisation, resource optimisation, innovation & technology, and meeting customer needs. You are unlikely to find a more diligent group of Engineers in a < $1bn mkt cap iron ore mining company. Collectively the senior management team have over 300 years worth of industry experience. Financial backing of Tata Steel but is this an optimal partnership? NML has a deep corporate relationship with Tata Steel of India. Tata Steel currently produces 18 -19mtpa of steel in Europe and is aiming to 50% backwardly integrated this steel making capacity into iron ore (note: 9.5mtpa of steel production requires ~ 14.5mtpa of iron ore). As far as we are aware, NML represents Tatas only conduit for realising this objective. We question whether or not Tata Steel is really the best choice of partner for NML however, noting that: Tata Steel is already one of the most heavily geared steel producers in the Credit Suisse global coverage universe, and on a current pro-forma basis their involvement in the NML projects would make them the most heavily geared steel business globally. Tata Steel brings to the projects a thorough, and diligent Engineering approach both of which we feel NML.TO already possesses. Generally partnerships work best when there are complementary skills sets, but in this instance we see significant overlap. NML is a Tata Steel option on the LT iron ore price. Although this may translate into NML ultimately becoming a corporate target, it does appear to translate into there being any sort of urgency around project execution and delivery. Exhibit 202 demonstrates that we are no closer today to the target start date for the Magnetite project than we were three years ago.

The 2012/2013 Hematite project is about testing the water but Magnetite from 2016 is the main game We see the 2012/2013 hematite project as an opportunity for Tata Steel to test the water in Canada, and assess it as a place of business. Assuming Tata Steel is happy with the hematite project, and it wishes to pursue the magnetite project, we ultimately expect to see NML acquired by Tata Steel. The take out story is probably not an imminent one however; for the time being Tata Steel needs NML to manage approvals, governments, and indigenous relations. Although we do sense some frustrations with the compromises to project schedules that Tata Steel has already caused, 2012 will be about proving the strength of the corporate relationship through the execution and delivery phase. Successful delivery and commissioning of the hematite project to capex/opex guidance would demonstrate the benefits of the thorough engineering approach and partnership with Tata Steel. Not only would this re-rate the hematite project as it moves into production, but it should also drive a re-rating of the magnetite project which is where the real valuation leverage resides.

North American Iron Ore

134

01 December 2011

Exhibit 164: Financial summary


New Millennium Iron Corporation (NML)
2009 2010 0.0 -9.1 0.0 -9.2 0.0 0.0 -9.2 -0.3 -8.9 0.0 0.0 -8.9 0.0 0.0 -8.9 12.0 0.0 0.0 29.0 41.0 30.3 0.0 0.7 31.0 71.9 5.2 0.0 0.0 5.2 66.7 95.2 0.0 0.0 66.7 -12.0 -9.2 0.0 0.0 -0.3 3.1 0.5 -5.9 0.0
0.0 0.0

Year ending 2011 2012


0.0 -7.8 0.0 -7.8 0.0 2.0 -3.0 1.0 -4.0 0.0 0.0 -4.0 0.0 0.0 -4.0 60.8 0.0 0.0 94.4 155.2 44.1 0.0 4.6 48.7 203.9 0.0 100.0 0.0 100.0 103.9 143.3 0.0 0.0 103.9 39.2 -7.8 -0.6 0.0 -1.8 -0.3 -0.1 -10.7 -10.0
-10.0 0.0

31 Dec 2013 Share Price: C$1.51


88.6 50.0 11.5 38.5 0.0 11.6 11.1 2.6 8.6 0.0 0.0 8.6 0.0 0.0 8.6 231.0 12.0 6.0 94.4 343.4 84.7 0.0 4.6 89.3 432.7 5.0 300.0 0.0 305.0 127.7 161.1 0.0 0.0 127.7 69.0

2009

In CADmn, unless otherwise stated 2010 2011 2012 2013

Profit & Loss


Sales revenue EBITDA Depr. & Amort. EBIT Associates Net interest Reported PBT Income tax Profit after tax Minorities Preferred dividends Normalised NPAT Analyst adjustments Unusual item after tax Reported NPAT

12/09A 12/10A 12/11E 12/12E 12/13E


0.0 -3.0 0.0 -3.0 0.0 0.0 -3.0 -0.7 -2.3 0.0 0.0 -2.3 0.0 0.0 -2.3 9.7 0.0 0.0 1.7 11.4 43.4 0.0 3.0 46.4 57.8 1.1 0.0 0.3 1.4 56.4 70.3 0.0 0.0 56.4 -9.7 -3.0 0.2 0.0 -0.7 -2.5 1.1 -4.9 0.0
0.0 0.0

1/12/2011 11:33

4.2 0.5 0.5 0.0 0.0 11.8 -9.8 -3.3 -6.5 0.0 0.0 -6.5 0.0 0.0 -6.5 209.3 2.0 1.0 94.4 306.8 83.6 0.0 4.6 88.2 395.0 0.8 300.0 0.0 300.8 94.1 132.6 0.0 0.0 94.1 90.7 0.0 -15.8 0.5 3.7 2.2 0.0 -9.4 -40.1
-40.0 -0.1

OUTPERFORM RATIRating 1.90 TARG Target Price C$ 25.83 vs % TP_U Share price VALU NML.TO is currently developing a 4.2mtpa hematite project, and a 20-22mtpa magnetite project in the mid-Labrador Trough region of Eastern Canada, along with its strategic partner and major shareholder, Tata Steel.

Earnings
Equiv. FPO (period avg.) c_EP c_EP EPS (Normalised) EPS_ EPS Growth c_DP DPS c_PA Dividend Payout c_FC Free CFPS mn c % c % c x x x % % x %
% x x

12/09A 12/10A 12/11E 12/12E 12/13E


132.0 -1.7 0.0 0.0 -3.7 -86.4 -85.3 -86.1 0.0 -2.4 2.8 -3.3
0.0 0.8

141.7 -6.3 -257.8 0.0 0.0 -4.2 -24.1 -27.7 -27.8 0.0 -2.7 2.2 -9.3
0.0 0.8

175.2 -2.3 63.1 0.0 0.0 -6.1

176.2 -3.7 -59.9 0.0 0.0 -5.4

176.2 4.9 232.0 0.0 0.0 19.1 31.0 6.6 5.1 0.0 12.6 1.7 5.3
9.7 0.2 2.7

Balance Sheet
Cash & equivalents Inventories Receivables Other current assets Current assets Property, plant & equip. Intangibles Other non-current assets Non-current assets Total assets Payables Interest bearing debt Other liabilities Total liabilities Net assets Ordinary equity Minority interests Preferred capital Total shareholder funds Net debt

12/09A 12/10A 12/11E 12/12E 12/13E

Valuation
c_PE P/E ALT(EV/EBIT ALT(EV/EBITDA c_DIDividend Yield c_FC FCF Yield c_PB Price to Book -65.5 -41.0 -32.4 -13,626.8 -32.4 483.8 0.0 0.0 -4.0 -3.6 1.8 2.0 -2.8
0.0 1.4

Returns
c_RO Return on Equity c_I_N Profit Margin c_I_S Asset Turnover c_AS Equity Multiplier c_RO Return on Assets c_RO Return on Invested Cap. -4.9
-153.5 0.0 3.0

% %

-4.0 -4.9

-12.3 -16.2

-2.0 -7.3

-1.6 0.0 49.1 172.6 0.0 0.0 948.1

2.0 15.1 35.1 1.4 4.3 3.3 14.2

Gearing
c_GE Debt to Net debt + Equity % Net x c_NE Net Debt to EBITDA c_I_E Cover (EBITDA/Net Int.) x Int x c_I_E Cover (EBIT/Net Int.) Int % (c_CCapex to Sales % (c_CCapex to Depreciation Net Cash Net Cash 27.4 3.3 1.3 Net Cash -3.8 -3.8

Cashflow
EBIT Net interest Depr & Amort Tax paid Working capital Other Operating cashflow Capex
Capex - expansionary Capex - maintenance

12/09A 12/10A 12/11E 12/12E 12/13E

Assumptions & Operations

12/09A 12/10A 12/11E 12/12E 12/13E


140.0 0.72

38.5 M_IRONORE_FINES_CFRC US$/t CFR Iron Ore (62% IODEX) -23.5 79.1 131.9 168.9 152.5 11.5 c_RPP Equity Iron Ore Sales mt 0.00 0.00 0.00 0.03 -1.1 c_RPP_IRON_CONC 10.8 Net Asset Value Valuation 0.0 Projects & Mines C$mn C$/sh multiple C$mn 36.2 Hematite / DSO (4.2mtpa) 172 0.98 0.70 x 121 -12.6 Magnetite / KeMag & LabMag 1,112 6.31 0.25 x 278 Sub-Total 1,284 7.29 398 -10.0
-2.6

C$/sh 0.68 1.58 2.26 C$/sh -0.22 -0.14 -0.36 1.90

Acquisitions & Invest Asset sale proceeds Other Investing cashflow Dividends paid Equity raised Net borrowings Other Financing cashflow Total cashflow Adjustments Net Change in Cash

-9.1 0.0 14.0 4.9 0.0 0.4 0.0 0.0 0.4 0.5 0.0 0.5

-10.6 2.8 -4.0 -11.8 0.0 20.0 0.0 0.0 20.0 2.4 0.0 2.4

-8.9 0.0 -132.5 -151.4 0.0 166.2 50.0 0.0 216.2 54.1 0.0 54.1

0.0 0.0 0.0 -40.1 0.0 0.0 200.0 0.0 200.0 150.5 0.0 150.5

0.0 0.0 0.0 -12.6 0.0 0.0 0.0 0.0 0.0 23.7 0.0 23.7

Corporate Net Cash / (debt) Corporate Sub-Total Total Notes: - Shares on issue (mn) - Target P / NAV - WACC (nominal)

C$mn -39 -25 -64 1,220

C$/sh -0.22 -0.14 -0.36 6.92

multiple 1.00 x 1.00 x

C$mn -39 -25 -64 334

176.2 0.31 x 10.0%

- Current share price - Current P/NAV - Valuation upside

1.38 0.24 x 38%

Source: Company data, Credit Suisse estimates

North American Iron Ore

135

01 December 2011

Valuation
Summary
We set our NML.TO target price using a risk-weighted NAV, as summarised in Exhibit 165. Our modelling assumes a modest delay to both projects, as summarised in Exhibit 179 and Exhibit 185, and we use a consistent 10% discount rate. Our analysis of global iron ore M&A data differentiates the following section, and offers some insight into multiples paid by strategic acquirers of large scale iron ore deposits such as NML.TOs.

Net Present Value


Exhibit 165: Net Asset Value

Projects & Mines Hematite / DSO (4.2mtpa) Magnetite / KeMag & LabMag Sub-Total Corporate Net Cash / (debt) Corporate Sub-Total Total Notes: - Shares on issue (mn) - Target P / NAV - WACC (nominal)

Net Asset Value C$mn C$/sh 172 0.98 1,112 6.31 1,284 7.29 C$mn -39 -25 -64 1,220 C$/sh -0.22 -0.14 -0.36 6.92

multiple 0.70 x 0.25 x

Valuation C$mn C$/sh 121 0.68 278 1.58 398 2.26 C$mn -39 -25 -64 334 C$/sh -0.22 -0.14 -0.36 1.90

multiple 1.00 x 1.00 x

176.2 0.31 x 10.0%

- Current share price - Current P/NAV - Valuation upside

1.51 0.26 x 26%

Source: Company data, Credit Suisse estimates

Our 1 year forward NAV based valuation for NML.TO uses a 0.70x P/NAV for the hematite project and a 0.25x P/NAV multiple on the magnetite project. There is huge valuation upside in this story given our low aggregate 0.31x P/NAV multiple, particularly on the magnetite project. We believe that successful delivery of the hematite project through 2012 should increase market confidence in the NML/Tata relationship, which in turn will drive a re-rating of the magnetite multiple.
Exhibit 166: 5 year rolling NAV
14 12 10 8 C$/share 6 4 2 0 -2 2011Q1 -4 Hematite / DSO (4.2mtpa) Corporate Raw total Net Cash / (debt) Magnetite / KeMag & LabMag 2011Q4 2012Q3 2013Q2 2014Q1 2014Q4 2015Q3 C$/share

Exhibit 167: Contributions to 2011 raw NAV


14 12 10 8 6 4 2 0 -2 -4 Hematite / DSO (4.2mtpa) Net Cash / (debt) % of NAV Magnetite / KeMag & LabMag Corporate -5% -3% 2% -8% -17% -15% -4% 11% 11% 10% 119% 140% 120% 100% 80% 60% 40% 20%

0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 >2020 -20% -40%

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

North American Iron Ore

136

01 December 2011

Our 5 year rolling NAV model shows a steady increase in net asset value as we roll forward the magnetite DCF. In contrast to neighbours LIM.TO, which we described as a here and now valuation story, well over 100% of NML.TOs DCF resides > 2020. The next five years are periods of significant investment and cash outflow, and are DCF negative on our modelling.

NAV Sensitivities
We maintain four different macro scenarios in our models; CS assumptions (official house forecasts), Spot (US$140/t CFR), Mid-Cycle (CS LT price run from today into perpetuity) and Consensus (based on the Consensus Economics quarterly broker survey. Our NAV under each of these scenarios is summarised below. We believe that the current share price is supported by any of these four assumptions, and the raw NAV numbers (i.e. without the P/NAV multiples applied to reflect risk) demonstrate the significant upside potential here.
Exhibit 168: NAV sensitivities under various macro scenarios
9.00 8.00 7.00 6.00 $/share 5.00 4.00 3.00 2.00 1.00 0.00 CS base case Raw NAV Credit Suisse target price
Source: Company data, Credit Suisse estimates

$8.16 $6.92 $6.91

$8.28

$1.90

$2.41 $1.80

$2.35

Spot

Mid-Cycle

Consensus

Risk Weighted NAV Share price

North American Iron Ore

137

01 December 2011

Exhibit 169: NAV sensitivities

4.00 3.00 Valuation impact 2.00 1.00 -20% 0.00 -1.00 -2.00 iron ore
Source: Company data, Credit Suisse estimates

-10%

base case

10%

20%

capital cost

USDCAD

As an acquisition target
We see NML.TO as potentially being acquired by: Neighbors and peers Labrador Iron Mines (LIM.TO) Major shareholder, customer, JV partner, and financier, Tata Steel.

As time goes by: The potential synergies between LIM.TO and NML.TO erode, and the case becomes less compelling, as LIM.TO and NML.TO move closer to having independent infrastructure and processing arrangement for the DSO/hematite projects. The value proposition for Tata Steel increases. Short term Tata needs NML.TO as a local presence to address permitting, approvals, government and indigenous relations but as the projects are derisked Tata Steel has less and less need for this local presence (i.e. NML.TO).

NML.TO as an LIM.TO acquisition target We see the benefits to LIM.TO shareholders of a combination with NML.TO as: Changes the current what you see is what you get story to one with blue sky potential. Provides exposure to a business model which can survive through the cycle. Complimentary skill sets: LIM.TO are doers, and NML.TO are engineers and thinkers. Reduces the capital costs associated with the long term mine plan, by consolidating the DSO/hematite resources into the one portfolio; just like they were back in the 1980s when IOC owned the deposits. Provides end market / consumer intelligence (via Tata Steel), which LIM.TO currently lacks.

North American Iron Ore

138

01 December 2011

Allows LIM.TO to share in NML.TOs significant technical and engineering expertise in order to reduce the operating cost, and increase the efficiency of, LIM.TOs current operation. Provides more customer leverage with rail providers (QNS&L) for negotiating access rates. Allows a more efficient port solution. On its own, LIM.TO does not have enough tonnage to justify the lease of a trans-shipping vessel, so instead LIM.TO is planning to barge ore to Quebec City for reloading. Generates scale, which as a bulk commodities business LIM.TO lacks. Provides exposure to European marketing opportunities (via Tatas Corus). Perhaps not a great asset near term, but longer term this could help address LIM.TOs current significant freight disadvantage to Asia.

The benefits to NML.TO shareholders of a combination with LIM.TO are: Share the lessons learned through LIM.TOs recent pioneering approach, and may derisk the commissioning of NML.TOs DSO/hematite project. Provides access to near term operating cash flow, which would not only open up a wider investor audience, but also reduce dilution risk on the longer term magnetite project. NML.TO has a minimum 20% free carry interest in the magnetite project, but there is no way it will be able to self fund the next 16% in order to take its total interest to 36%. Combined with the cash flow from LIM.TO, it may have a chance. NML.TO has questions various questions about how to get its DSO/hematite project into production. LIM.TO has answers. Leveraging NML.TOs technical expertise into LIM.TOs projects increases the value of LIM.TOs projects and therefore increases the value of the consideration (assuming it is LIM.TO shares). Dilutes NML.TOs technical risk.

LIM.TO could offer a 20% takeover premium to NML.TO shareholders on a 0.28:1 (LIM:NML) scrip consideration. 0.28x the LIM.TO share price is charted on Exhibit 170, as is the NML.TO share price and the implied deal premium based on this assumed ratio.

North American Iron Ore

139

01 December 2011

Exhibit 170: LIM.TO theoretical takeover premium


$5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Jan 08 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% Jan 09 Premium on scrip offer Jan 10 LIM.TO offer Jan 11 NML.TO

Source: Company data, Credit Suisse estimates

Our pro-forma NAV model for NML.TO and LIM.TO would look something like Exhibit 171. Raw NAV per share for LIM.TO goes from $9.84/share to $16.95/share, i.e. +80%. Risk weighted valuation (after applying pro-form P/NAV multiples) does come down only slightly, from $8.30 to $7.58/share for LIM.TO, but we would argue that the combination of these two businesses de-risks the projects and therefore the P/NAV multiples should increase driving a net valuation increase. We have not included any synergies in the above analysis, which would result from not needing to build as many processing plants in the Schefferville area and being able to share site facilities. Synergies could easily sum to $50-100mn in our opinion, and add another $0.48-0.97/share to the mergco valuation.
Valuation C$mn C$/sh 471 4.56 121 1.17 278 2.69 870 8.41 C$mn -22 -64 -87 783 C$/sh -0.22 -0.62 -0.84 7.58

Exhibit 171: Pro-forma merged NAV calculation Net Asset Value Projects & Mines C$mn C$/sh Schefferville 554 5.36 Hematite / DSO (4.2mtpa) 172 1.67 Magnetite / KeMag & LabMag 1,112 10.75 Sub-Total 1,838 17.78
Corporate LIM.TO b/s and corporate NML.TO b/s and corporate Sub-Total Total Notes: - Shares on issue (mn) - Target P / NAV - WACC (nominal) C$mn -22 -64 -87 1,752 C$/sh -0.22 -0.62 -0.84 16.95

Share price

North American Iron Ore

multiple 0.85 x 0.70 x 0.25 x

multiple 1.00 x 1.00 x

103.4 0.47 x 10.0%

- Current share price - Current P/NAV - Valuation upside

6.74 0.43 x 12%

Source: Company data, Credit Suisse estimates

The transaction would be earnings dilutive, at least in the short term, because NML.TO only owns 20% x 4.2mtpa = 0.84mtpa of production exposure to LIM.TOs 5mtpa.

140

01 December 2011

NML.TO as a Tata Steel acquisition target


We believe that Tata Steel sees the DSO/hematite project as an opportunity to test the water in Canada, and assess it as a long term place of business. Although it has its challenges, which should not be underestimated, it is certainly not the main game. As global steel major like Tata Steel thinks in decades, not months or years, and assuming Tata can get comfortable with the engineering side of the magnetite project, we think that long term it is a logical acquirer of 100% of NML.TO. Just like the rest of the Canadian iron ore sector (ex LIM.TO), this would make the project foreign-owned.
Exhibit 172: Global magnetite projects capital intensity, production potential, and resource size
30

25 KeMag Production potential (mtpa) 20

15

LabMag

10

0 0 50 100 150 200 Capital Intensity (US$ per annual tonne) 250 300 350

Source: Company data

By global standards, NML.TOs magnetite projects are fairly attractive, being: large scale lower risk than Africa lower capital intensity than Australia relatively cheap to build and buy. The capex intensity shown above for KeMag and LabMag includes ~ $40/t for a pellet plant, which is not included in most of the other numbers.

NML.TO currently trades at US$0.33 per contained Fe tonne in resource, which against global M&A comps and current equity trading comps appears relatively cheap.

North American Iron Ore

141

(EV/t) US$ per contained Fe tonne

US$ per contained Fe resource tonne 10.0 12.0 4.0 6.0 8.0

10

15

20

25

0.0

2.0

60

North American Iron Ore


Centrex / BaoSteel Karara / Anshan Iron & Steel Gindalbie / Anshan Iron & Steel FMG / Hunan Valin Extension Hill magnetite / Chongqing Chonggang Minerals Development Investment Ltd Mt Gibson / Metalloinvest Rio Tinto / Chinalco

70 80 90

Source: Company data, Credit Suisse estimates


Mt Gibson / APAC Resources

Source: Company data, Credit Suisse estimates

100 110

Exhibit 174: Global iron ore M&A comps transaction value and spot iron ore price

Exhibit 173: Global iron ore M&A comps transaction value and spot iron ore price

Golden West Resources / Hunan Valin Steel Tube & Wire Co FerrAus / Western Mining Co (China) United Minerals Corporation NL / BHP Rio Tinto / Chinalco / Simandou Billiton Aurox / RockCheck Steel IronClad Mining / MCCM Capital FerrAus / Wah Nam FerrAus / China Railway Materials Brockman / Wah Nam Management Commercial Corp Baffinland / ArcelorMittal Aurox Resources / Atlas Iron Warwick Resources / Atlas Iron Grange Resources / Sojitz Cape Lambert / China Metallurgical

EV/Resource (M,I&I)

Aquila Resources Ltd. / BaoSteel

MMX / Wuhan Iron and Steel Murchison / Mitsubishi

120 130 140 150

Spot Hematite price (US$/t, CFR China)

Spot Iron Ore Price (US$/t CFR China)

Chinese average = $5.3/t Non-Chinese average = $2.2/t

Consolidated Thompson Iron Mines Ltd / Cliffs Natural Resources

160 170 180


Sphere Minerals / Xstrata

Giralia / Atlas Iron

BC Iron / Regent Pacific

Karara / Anshan Iron & Steel Centrex / BaoSteel Mt Gibson / Metalloinvest Red Hill Iron / Aquila Resources Murchison / Mitsubishi Aurox / RockCheck Steel Cullen Resources / Aquila Resources IMX / Jilin Tonghua IronX / Amglo American Cape Lambert / China Metallurgical Warwick Resources / Atlas Iron FerrAus / Western Mining Co (China) Midwest / SinoSteel Australian Bulk Minerals / Grange Resources Strike Resources / Gallagher Holdings Orion Equities / Strike Resources Golden West Resources / Hunan Valin Steel Tube & London Mining South America / ArcelorMittal African Minerals / Cape Lambert Grange Resources / Sojitz Western Desert Resources / ITOCHU Minerals & Gindalbie / Anshan Iron & Steel Mt Gibson / Shougang Mt Gibson / APAC Resources Centrex Metals / Wuhan Iron and Steel Rio Tinto / Chinalco FMG / Hunan Valin Consolidated Thompson / Wuhan MMX / Wuhan Iron and Steel Aquila Resources Ltd. / BaoSteel Warwick Resources / Atlas Iron FerrAus / China Railway Materials Commercial Corp Mt Gibson / Fushan United Minerals Corporation NL / BHP Billiton Extension Hill magnetite / Chongqing Chonggang Marampa iron ore project / Cape Lambert Resources Roy Hill / Posco Aurox Resources / Atlas Iron DMC Mining / Cape Lambert Jupiter Iron Ore / East China Mineral Exploration and Lincoln Minerals Ltd / Jiangyin Huaxi Steel Co., Ltd IronClad Mining / MCCM Capital Management Core Mining Ltd / Severstal Chilean iron ore / Shunde Rixin Development Co Rio Tinto / Chinalco / Simandou Sphere Minerals / Xstrata FerrAus / Wah Nam Brockman / Wah Nam Baffinland / ArcelorMittal Giralia / Atlas Iron Consolidated Thompson Iron Mines Ltd / Cliffs Natural BC Iron / Regent Pacific

190

Midwest / SinoSteel

Strike Resources / Gallagher Holdings

Spot Iron Ore price (US$/t CFR China)

50

100

150

200

250

200

01 December 2011

142

01 December 2011

Earning multiples
Our EBITDA multiple analysis (Exhibit 139) points to a fairly uninspiring valuation story near term during the companys DSO/hematite (only) phase, but longer term the magnetite project is where the blue sky potential resides.
Exhibit 175: EBITDA bands

$4.0 $3.5 $3.0 C$ per share $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 Dec 10 3x Dec 11 Dec 12 4x Dec 13 5x Dec 14 Dec 15 6x Dec 16 7x Dec 17 Dec 18 8x Dec 19 Dec 20

share price

Source: Company data, Credit Suisse estimates

Comparable company analysis


Exhibit 176: EV/t (US$ per contained Fe tonne in resource) (Global iron ore comparables, filtered for a) pure play iron ore and b) magnetite in resource
EV/Fe tonne in Resource 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Grange Resources Northland Resources Fortescue Metals Group Australasian Resources Champion Minerals Alderon Iron Ore Murchison Metals Ltd Adriana Resources Inc Advanced Exploration Gindalbie Metals Ltd New Millennium Iron Century Iron Mines Oceanic Iron Ore Bellzone Mining African Minerals Atlas Iron Ltd Northern Iron Ferrowest Ferrexpo Black Iron

Source: Company data, Credit Suisse estimates

We have handpicked a group of global pure play concentrate/beneficiation names as relevant valuation benchmarks for NML.TO. Our analysis suggests that on an EV/t (contained Fe in resource) NML.TO is relatively cheap. Perhaps the most relevant global comparable to NML.TO, is Gindalbie Metals (GBG.AX). GBG.AX is a Western Australian

North American Iron Ore

143

01 December 2011

magnetite exposure, and currently trades at around 6x the EV/t of NML.TO with further to go as it commences magnetite production in 2012/13. GBG.AX has a similar arrangement with AnSteel as what NML.TO has with Tata Steel; in each case the steel mill is the JV partner, main (or only) customer, major shareholder and financier. Both companies also have a small hematite start up, followed by a longer term magnetite story and benefit from some existing infrastructure in the region. NML.TO is about 4 years behind GBG.AX from a magnetite development perspective, but if NML.TO follows a similar valuation route to GBG.AX then this is potentially a 5 - 6 bag story. This is consistent with 0.20x P/NAV multiple (~ =1/6) on which NML.TO currently trades. At 1x P/NAV NML.TO would be worth about the same as GBG.AX on an EV/t basis.

North American Iron Ore

144

01 December 2011

Company-Specific Risks
Investment in any mining company brings with it operational risks, commercial risks, development risk and in the case of an unfunded project such as NML.TOs; there is also significant financial/funding risk. A few of the risks we regard as being more company-specific include: Examples of Operational and Development Risks Cross border issues Certain of the Companys properties are located in the Province of Newfoundland and Labrador and therefore subject to its mining legislation, which may require that primary processing be done within the province in order to obtain mining rights. Furthermore, provincial and federal legislators may enact laws or budgets that have a negative impact on this project or on the mining industry as a whole. Technical risk around pipeline. NML are a fairly ambitious group of engineers, and the proposed 700-800km slurry pipeline is considered a higher risk transport solution than would normally be employed for an iron ore project.

Examples of Commercial and Financial Risks Tata Steels development objectives may be inconsistent with those of NML equity investors. NML is a non controlling minority in its projects with the project being set by Tata Steel, not NML or its shareholders. Tata Steels actions and influence on the hematite project to date suggest to us that it has a reasonably conservative long term view on the iron ore market. It does not however aim to move quickly to exploit current commodity price strength. Uncertainty regarding project finance. Tata Steel is the finance arranger, but not the finance provider for the NML projects. If Tata decides to contribute equity to fund project capex NML gets a free carry. Although there is a non-formal understanding that the project will be 30% equity / 70% debt, if Tata decides to finance the project with more debt then NML shares the expense of servicing this additional debt. Dilution risk. NML will not be able to afford to make its incremental 16% equity contribution to the magnetite project without external assistance. It is possible that NML.TOs project interests will be compromised, or shareholders diluted, in order to ensure participation in the magnetite project.

North American Iron Ore

145

01 December 2011

Asset Review
Summary
The following section provides an overview of NML.TOs two projects, with a comprehensive review of the mines, plants and infrastructure solutions. The most differentiated parts of our NML.TO asset review are: Clarification of the hematite funding arrangements, as discussed in the Corporate section The magnetite and pipeline comps which put some global context around NML.TOs 22mtpa taconite/magnetite project. Our analysis of LT capital cost trends across the sector, which frame our capital cost estimate of $6.1 - 6.7bn (verse comparable company guidance of $4.85bn).

From these three resource bodies, NML hopes to build two projects: The 4.2mtpa hematite (also referred to by NML.TO as DSO) project, in which NML.TO has a 20% equity interest. The 4.2mtpa hematite project is considered fairly low risk, and is similar in scope and location to LIM.TOs 5mtpa Schefferville project. We clarify the funding arrangements for this project in the Corporate section of this report, which we feel are generally not well understood. This project area is shaded blue in Exhibit 177. The 22mtpa taconite/magnetite project, in which NML.TO has a minimum 20% equity interest currently, with potential to increase to 40%. The leverage this project offers to the LT iron ore price is discussed in the Valuation section of this report, while the Asset Review section provides some magnetite project and slurry pipeline comparables. We have utilised our global database of nearly 300 iron ore projects to examine capital cost inflation trends across the industry, and use this analysis to arrive at a nominal capital cost estimate for the project of $6.1 - 6.6bn. This project area is shaded red in Exhibit 177.

North American Iron Ore

Overview
NML currently has three resources; A hematite resource, parts of which have been historically mined by IOC as DSO material. And two taconite/magnetite resources - one deposit is located in Quebec (KeMag) and the other in Newfoundland & Labrador (LabMag).

146

01 December 2011

Exhibit 177: NML Project Plan

Source: Company

North American Iron Ore

147

01 December 2011

Hematite Project
Overview Aside from its close proximity to the magnetite resources, the hematite project is essentially completely independent of the larger magnetite projects. This project has a target production rate of ~4.2mtpa of beneficiated material. NML refers to this project as the DSO Project (DSO = Direct Shipped Ore). Although the project has the potential to be a DSO project today, and it was historically mined by IOC as a DSO product, this is not what NML is proposing. The material is being beneficiated with an anticipated mass recovery of 84%. We will not use the term DSO to describe this project, as in our view it is incorrect and misleading.

North American Iron Ore

Exhibit 178: Hematite project schedule

Source: Company data

The project is fairly similar in terms of scale (4.2mtpa v 5mtpa), location (near Schefferville) and ore body type (scattered ex-IOC deposits) to LIM.TOs Schefferville project. In terms of the engineering approach however, these projects couldnt be more different. LIM.TO plans to spend around C$100mn capex on its first 2.5mtpa stage, and a further $100mn for $200mn total to achieve 5mtpa of production. This averages $40 per annual tonne. LIM.TO does not have a reserve of detailed feasibility study for its project. This project can not wet process through winter while exposed to the elements, so it has to close down for part of the year. NML.TO/Tatas project is expected to cost closer to $360mn (as of April 2010) for 4.2mtpa, i.e. $85 per annual tonne. It has a NI43-101 reserve, and a larger resource base than LIM.TOs Schefferville, and it will operate year round having employed some clever engineering that will reduce energy costs, address ore freezing issues on the trains, and reduce the necessary plant scale. One might suggest that one is an opportunist that has accelerated its schedule in order to capitalise on a strong iron ore environment. The other thinks in decades, and is less concerned with capitalising on todays iron ore price environment and more concerned with ensure that it has a long term sustainable business.

148

01 December 2011

Products and Pricing The in-situ resource grade of these historic IOC resources is 58.6% and 7.8% silica. This material could be sold as DSO material, and in fact material of lower quality is currently quite common in the seaborne market, but NML have elected to build a beneficiation plant which will use gravity and magnetic separations to upgrade the ROM ore to a ~ 64.5% Fe product with SiO2 + Al2O3 levels below 4.5%. If this material were sold as a DSO (58.6% Fe) material it would attract a price penalty relative to the 62% IODEX headline price. As an upgraded product it should attract a premium. This material is too friable to produce lump product (as LIM.TO has already discovered), but it is expected that it will yield ~ 24% Super Fines (<0.1mm) and remainder Sinter Fines (6mm, 0.1mm). The Super Fines will likely require pelletisation (a process more common for magnetite concentrates) rather than being directly suitable for sintering. The pelletising requirement makes the super fines a slightly less valuable product to most steel mills.
Exhibit 180: Annual Sales volumes
Iron Ore Volumes 4.50 4.00 3.50 3.00 mt 2.50 2.00 1.50 1.00 0.50 0.00 2012Q1 2013Q1 2014Q1 Total Sales Volume 2015Q1 Guidance 2016Q1 0.17 2012 2013 2014 Total Sales Volume 2015 Guidance 2016 4.20 3.60 4.20 4.20

mt

North American Iron Ore

Exhibit 179: Quarterly Sales volumes


Iron Ore Volumes 1.20 1.00 0.80 0.60 0.40 0.20 0.00

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Mining A total of ~ 25 deposits are expected to be mined and blended in order to produce a consistent product over the course of the mine life. The deposits formed part of IOCs operations up until 1982, and are grouped into two clusters. Areas 2 & 3 are where the plant and facilities will be located. Area 4 is roughly 35km north and holds about 80% of the resources. Material will be hauled via 180 tonne road train to the processing location as marked below in Exhibit 181. As a full year operation, we do see some operational risk in the haul between the DSO 4 area and the plant. 35km is a long way to haul 180 tonne road trains on an unsealed road especially during a white out or blizzard. An average of 76 truck movements per day would be required based on 4.2mtpa product, 84% yield, and 365 days a year. This haul costs ~ $0.07/t/km. The poddy and scattered nature of the resources will mean a higher than normal unit mining cost. Rather than using an excavator, NML/Tata plan to use front end loaders (FEL). Front end loaders are not as efficient at excavation and truck loading as excavators are they are however more efficient at moving between different locations. The other potential implications of using FELs and road trains are that the drill and blast bench height will be different to what can be lifted with one bucket pass. We believe that the use of FELs and road trains will translate into a lot of additional work for a grader maintaining pit floors and running surfaces for the trucks.

149

01 December 2011

This operation will have higher than average maintenance costs. We typically think of maintenance costs as representing 5-10% of the operating cost. For this project this figure is likely to be more like 15-20%. The initial capital cost estimate does not include an allowance for construction of the haul road between the plant and the northern resources. Nor does it include an allowance for opening up (pre-strip, site facilities etc) of these northern resources. We have made appropriate allowances for capex required to tap the northern resources in our modelling.

North American Iron Ore

Exhibit 181: Hematite project plan

Source: Company data

The weathered nature of these ex-IOC resources make a lot of the material to free dig (i.e. no drill and blast) however we understand that drill and blast is required in some areas to break down the permafrost layer (frozen ore). The road trains used to haul this ore have heated wagons to prevent the ore freezing between the pit and the plant.

150

01 December 2011

Processing
Exhibit 182: Hematite flow sheet

Source: Company data

Unlike the nearby LIM hematite projects (which are also exploiting old IOC pits), the NML project aims to operate year road. Clearly the scale of the plant required to produce 4.2mt in 12 months is less that the plant require to produce the same amount in 7 months. Target mass recovery is 84%, so 4.2mtpa product requires 5mtpa ROM. This year round operation has necessitated a special climate control solution. A supported and insulated dome structure is proposed, that will contain the entire processing facility (except the primary crusher) as well as supporting administrative and maintenance facilities. This use of a dome structure is believed to be one of the first of its kind in the world. In order to address ore moisture (and freezing) issues on the rail, NML plans to use what would otherwise be wasted heat energy (~65%) from the diesel gensets to warm and dry the processed ore. Utilising this heat energy closes the price gap between hydro power and diesel gen set power. The hematite flow sheet will not be dissimilar to that of peers LIM unsurprising considering the two are mining from the same area of ex-IOC resources. Both use mineral sizers and crushers, gravity separators and wet high intensity magnetic separation (WHIMS). The difference between the LIM and NML plants however is that NML.TOs should be built properly from the start while LIM is executing a number of retrospective upgrades in order to get to a similar point.

Logistics Please refer Appendix 2 for an overview of the Labrador Trough infrastructure. The project will require the construction of an 18 km rail spur between the site and the TSH railway line (the connection shown just south of Schefferville in Exhibit 177).

North American Iron Ore

151

01 December 2011

From here, NML hopes to use the TSH, then QNS&L and CLF railway lines to get the material to Point Noire. Negotiations regarding access to the rail and port infrastructure are ongoing, so the company is unable to provide guidance on what these costs will be. In order to build our financial model we have had to make some educated estimates on these figures, which are summarised in Exhibit 194. NML believes it will be able to use a single ore carrier over both the TSH and QNS&L railway lines. We dont believe that QNS&L is going to allow another operator on its railway line so it is most likely that NML/Tata will be trying to get permission from TSH to allow QNS&L to haul on its line. If successful this would be a better outcome than what has been achieved by peers LIM which on insistence by QNS&L/IOC has to swap locomotives at Labrador City. In 2010 it took IOC to arbitration over rates for a 1 year rail access agreement. The win was a token one however being motivated not by a need to actually use the railway but rather a need by Tata Steel to have a realistic cost included in its economic assessment. It would not be difficult to imagine that having invested a lot of time in the arbitration process, and subsequently having the courts decision fall against, that IOC might feel somewhat aggravated. This is the background upon which NML/Tata is now attempting to negotiate a rail access agreement. Year round shipping is expected to translate to lower rail access costs transporting 4.2mtpa during an 8 month (say) window represents a 6.75mtpa opportunity cost for the rail owner on a full year basis. CLFs terminal at Point Noire is the preferred port option for this project, however the CLM transaction has delayed these negotiations and additional options are being evaluated.

North American Iron Ore

152

01 December 2011

Taconite (Magnetite) Project


Overview The Magnetite project is currently the subject to a Bankable Feasibility study, due for completion in late 2012 with an estimated cost (for the study) of $50mn. This BFS is being jointly managed and funded (64% Tata / 36% NML). Feasibility studies for the LabMag and KeMag projects (on a separate/stand-alone basis) were completed in 2006 and 2009 respectively. Following completion of the BFS, Tata Steel will have 4 months to make an investment decision i.e. 1H 2013. NML.TOs magnetite projects are fairly significant scale by global standards, as we illustrate in Exhibit 172. The capital intensities we have plotted are as per NML.TOs feasibility study estimates, as we the production potentials. NML.TOs feasibility estimates include a ~US$40/t pellet plant, however most of the comps to which we compare it do not i.e. KeMag and LabMag look more expensive below than they really are. Scope complicated by Provincial relationships When it comes to the sharing of mineral wealth, the Provincial governments of Newfoundland & Labrador (NF) and Quebec (QC) do not see eye to eye. The current tensions relate to the sharing of hydro-electricity profits which are transferred state side, and the inter-provincial relations represents a serious challenge for NML. Although the QC government is a little more co-operative, the NF government does not want to see QB profit on minerals extracted from NF. NF wants any value add processes such as iron ore beneficiation and pelletisation of NF ore to be done in NF.

The location of key pieces of equipment therefore becomes critical: Magnetite concentrator this upgrades ~ 30% Fe ROM ore into a 66-68% concentrate. A centralised KeMag/LabMag concentrator servicing both deposits may need to be located on the NF side of the border in order to appease the NF government. This is not a huge problem, and is in fact the more logical location it would also offer NF the opportunity to benefit through employment and taxes on QC/KeMag product. Pellet plant. The pellet plant converts a pumpable concentrate slurry into a dry pelletised product which is more suitable for sea freight and is an essential step ahead of steel making. The logical location for the pellet plant is at the end of the pipeline at Sept Iles, but Sept Iles is in QC. If pelletising was to be done in NF before the QC border, the product would need to be transferred from a pipeline and onto a railway line. Accessing 22mtpa of rail capacity makes this a vastly more complicated project.

North American Iron Ore

153

01 December 2011

Exhibit 183: KeMag and LabMag development options

Source: Company data

There are 3 project options being evaluated by the current Magnetite feasibility study: Combined KeMag/LabMag project. This is the optimal solution and offers a resource life of ~117 years (assuming 22mtpa). A common concentrator would be located in NF, and perhaps on the basis that NF is profiting from concentration of KeMag ore it would be willing to allow NML to pelletise LabMag ore in QC at Sept Iles. LabMag only. LabMag is the better of the two deposits it is closer to the port, it holds over 60% of the combined resource tonnage (73 years), and it has less overburden. This arrangement would require either a) combined pipeline/rail transport (which would detract from project economics) or b) a compromise from the NF government on the pellet plant location (into QC) which at this stage it appears unwilling to make. KeMag only. This option is being evaluated as a political lever, not as a preferable engineering solution. It is possible to route the pipeline around the NF border such that the project is completely independent of NF (see Exhibit 183) which would leave NF with no project, no employment benefits, and no taxes. KeMag has a 44 year resource life at 22mtpa.

From a valuation perspective, the combined KeMag/LabMag scenario is probably the only one that would justify a material expansion beyond the current 22mtpa concept which obviously presents upside, but under a constant production rate scenario with the variable being mine life, there is not a huge difference between these options: Capital costs are driven by production rate, not mine life. KeMag probably would have slightly higher opex (haulage distances are further and strip ratios likely higher), but this may be just a few dollars per tonne so not hugely material.

North American Iron Ore

154

01 December 2011

On a 10% discount rate the difference between the DCF on a 44 year earnings stream and a 117 year earnings stream is less than 2%.

mt

3.00 2.00 1.00 0.00 2016Q1 2017Q1 2018Q1 Total Sales Volume 2019Q1 Guidance 2020Q1

mt

North American Iron Ore

Exhibit 184: Magnetite project schedule

Source: Company data

Products and Pricing The scale of the Magnetite project, and its product split, are currently being reviewed as part of the BFS, however the previous KeMag and LabMag feasibility studies were based on three different products: Roughly a third of total volumes were high grade (69.7% Fe) concentrate. The remainder will be either BF grade or DR pellets grading 66.4% and 67.5% Fe respectively. The ultimate product mix will likely be somewhat dependent upon Tata Steels requirements, and off take rights will be proportional to the ownership interest (likely 36 or 20% NML.TO).
Exhibit 186: Annual Sales volumes
Iron Ore Volumes - Magnetite project 25.00 20.00 15.00 10.00 5.00 0.00 2016 Total Sales Volume Guidance 2020

Exhibit 185: Quarterly Sales volumes


Iron Ore Volumes - Magnetite project 6.00 5.00 4.00

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Mining The KeMag and LabMag magnetite geology is the same as that found in the Lake Superior district further south in Minnesota. Lake Superior type iron formation consists of banded sedimentary rocks composed principally of bands of iron oxides, magnetite and hematite within quartz-rich rock and variable amounts of silicate, carbonate and

155

01 December 2011

sulphide lithofacies. These deposits have a very gentle dip with LabMag outcropping in areas and KeMag covered by several metres of overburden.
Exhibit 187: Magnetite project cross section

Source: Company data, Credit Suisse estimates

The KeMag feasibility study envisaged a very large open pit, measuring a total 9.5km long typically 1km wide but up to 1.5km, and a total depth of 182mn with the lowest bench at 364.5m RL. Dimensions of the proposed LabMag pit have not been provided; it would be of similar magnitude. The footwall will be a shallow 4-6 degree slope to match the contact of the deposit, and the hanging wall closer to 48-50 degrees, subject to geotechnical testing. From a mine/geological perspective, LabMag is the superior deposit; it is large, closer to surface, and has a lower strip ratio (0.15:1 compared to 0.51:1). In order to yield 22mtpa of product, a mining rate of around 76mtpa will be required, with annual waste movements averaging 11/30 mtpa on top of this for LabMag/KeMag respectively.

Processing The concentrator flow sheet will recover only the magnetite, as hematite is considered too fine to be economically removed. Unlike the specular hematite found further south near Labrador City, the hematite at KeMag and LabMag is too fine to be economically recovered. Overall iron recovery is therefore around 60.5% and tailings grade will be roughly 16.7% Fe. As far as magnetite circuits go, there is nothing particularly unique or special about the proposed flow sheet, although we have summarised the steps below: Ore from the mine will be crushed using primary gyratory crushers and secondary cone crushers, stockpiled, then fed to nine parallel processing lines. The ore will first be ground finer using roller presses operated in closed circuit with wet vibrating screens. The liberated magnetic mineral will be recovered from the screen undersize product using three stages of magnetic separators with the second stage of separators operated in closed circuit with screens and regrind ball mills. Concentrate from the final separator stage will be screened and dewatered in thickeners. The underflow from the concentrate thickeners will be pumped to storage tanks at the head of the pipeline. The non-magnetic product from each of the separator stages will be fed to tailings thickeners or in the case of coarse material from the first separator stage directly to the tailings pump box. The underflow from the tailings thickeners will be pumped to the tailings pump box and the combined tailings stream pumped to the disposal area. The overflow from the concentrate and tailings thickeners will be collected in the process water reservoir and recirculated in the process.

North American Iron Ore

156

01 December 2011

Exhibit 188: Magnetite flow sheet

Source: Company data

Availability of power None of the historic (IOC) or existing (LIM) iron ore mines in this region involves fine grinding and magnetite separation, which is typically 10-15x more energy intensive than DSO hematite production. There is not currently sufficient power availability in the Schefferville area to accommodate large scale magnetite production such as that proposed by NML and Tata Steel. It is envisaged that power will be provided by a 270km long 315kV overhead power line from Hydro-Quebecs Brisay generating station, with emergency power from diesel gensets. There is also a requirement to service pumping stations along the proposed slurry pipeline with power.

Logistics NML proposes to build a ~ 700km buried slurry pipeline to transport magnetite concentrate between the site and the Port of Sept Iles. Based on a conceptual 22mtpa scale, this is a ~ 22 inch steel pipeline, which would be buried 1 2m below the surface in order to resist concentrate freeze. Where the pipeline cannot be buried (e.g. crossing a deep valley) the pipeline would have to be insulated and heated. NML suggests that the thermal protection of the pipeline will allow it to shut down for several days during winter without the contents of the pipeline freezing. Freezing of the concentrate in the pipeline would not only bring pumping to an obvious halt, but freezing would also risk damaging the pipeline as a result of the additional pressure. Due to the elevation of the project (800 metres above sea level) NML believes that only one pumping station would be required located close to a source of power. There are a number of other examples of concentrate pumping globally (Exhibit 189) however what all of the other case studies have in common is that they are all in significantly warmer climates.

North American Iron Ore

157

01 December 2011

Information about the operational challenges these pipelines have faced is not incredibly easy to find, but we have read that the Smoky Canyon pipeline has failed only twice; once during start up and another time due to a power failure. The pipeline has also had some issues with microbial induced corrosion as a result of dissolved oxygen. An oxygen scavenger system was considered, but monitoring and replacement of sections as required was deemed more economical. The Inskaya Coal Mine project pipeline operated over 3 winters from 1989 to 1991 without freezing problems before being shut down due to slurry fluid flow problems.
No. of Length Pumping Station km 3 2 2 pumping stations, 1 valve choking station and 2 terminals 2 2 1 main and 1 booster 83 396 267 Capacity Operatin g Cost mtpa 2.5 15 9 $1.77/t Operating Cost Capital Cost Capital cost $mn/km 0.060 Diameter Transportat ion Time inches hrs 14 66

North American Iron Ore

Exhibit 189: Comparable pipeline projects


Project Name

$/t c per t per km

$mn $5mn (1967)

Savage River, Tasmania Samarco, Brazil Essar, India

0.663 $77.7mn (2002)

9" 20"(396 km) and 18"(50 km) 0.291 16"

Minas Rio, Brazil Smoky Canyon Inskaya Coal Mine New Millennium

525 139.5 262 750

26.5 1.6 21.2

$2/t

0.381 $30mn (1991) $1,023 (2009) 0.313 1.364

26" 8" 20" 24-26"

23

Source: Company data, Credit Suisse estimates

It is envisaged that this project will utilise one of the three proposed 50mtpa terminals being built by the Port of Sept Iles at Point Noire the new multi-user facility.

Capital Costs
The following analysis concentrates on the capex for NML.TOs magnetite project. Although we do expect the cost of the DSO/hematite operation to be higher than Feasibility estimates of $335-358mn, this is not a meaningful valuation driver. Our analysis of NML.TOs capital costs has used the companys 2006 and 2009 PFS estimates, as well as our own database of global iron ore projects which now contains almost 300 mines/projects and nearly 1.5bt of proposed new supply over the next 10 years. We make the following observations regarding this data: The 2006 LabMag PFS and 2009 KeMag PFS were different in scope, so a direct comparison of the capital costs is of limited relevance. We have however identified a number of items (marked with * in Exhibit 192) that we believe are of comparable scope. The capital cost of the comparable scope items increased by 38% over the 2.6 years between the release of the studies. This is a CAGR of 13.1%. Our sector capex comps (Exhibit 190) suggest a similar rate of growth: 14% to be precise. Our compco derived 14% p.a. is not entirely an apples with apples comparison, because between 2008 and 2014 we see i) an increase in the number of magnetite projects, which by their nature are higher capex therefore weighting up the average and ii) we also see an increasing proportion of greenfield projects relative to lower cost brownfield. Still, this is a useful piece of analysis and does provide some context to NML.TOs 13.1%.

158

01 December 2011

Exhibit 190: Iron Ore Capital Intensity Trend


160 140 Sector average capital intensity (US$/t) $136 120 $119 100 Capex CAGR 2008 - 2014 = 14% 80 60 40 20 0 2008 2009 2010 2011 Year Capital Intensity 2012 2013 2014 Note: 2011 distorted by BHP's RGP5 Linear (Capital Intensity) $102 350 300 250 200 $63 $44 $61 150 100 50 0 500 450 $141 400 New production volume (mtpa)

Exhibit 191: 2000 2010 cost inflation

Project volume incl in CS comps

Source: Company data, Credit Suisse estimates

Source: McKinsey & Co

Our mine life assumptions for the Magnetite project are based on both the KeMag and LabMag resources, where as the published feasibility studies cover each project in isolation. Given that the stand alone feasibility studies were completed in 2009 and 2006 respectively, the cost estimates are considered somewhat stale, and in light of the observable inflation we feel that some adjustments are required.

Rather than apply an arbitrary capex increase, our methodology for deriving a capital cost estimate for this project is as follows (see also Exhibit 192): Step 1: We have taken the 2009 KeMag estimates and made some adjustments to them to reflect the increased scope (i.e. that of a combined project). Step 2: We have applied a relatively conservative 8% p.a. capex inflation rate to Step 1 numbers in order to derive a December 2011 estimate. This is further extrapolated in Step 3 to December 2012 estimates, which is when the Feasibilty Study for the combined project is planned for release. Our inflation adjusted capital cost estimate for the combined KeMag and LabMag project is C$6.1-6.6bn.

North American Iron Ore

159

01 December 2011

Exhibit 192: Capital Cost analysis


Project Source Mine and Access Roads * Crusher * Concentrator * Pipeline Pellet Plant * Port installation * Tailings * Heating Plant * Camp Railroad & Material Handling Helicopter Pad Water systems - Mine Water systems - Pellet Plant Water systems - Port Electrical power supply Mine Electrical power supply Pellet Plant Electrical power supply Port Total Directs EPCM Owners costs Contingencies Total Indirects Total LabMag NML.TOs PFS Aug 2006 $'s 156 252 308 308 622 213 88 9 47 230 1 12 9 5 187 72 18 2,538 205 174 323 701 3,239 3,443 285 326 398 1,008 4,451 36% 39% 87% 23% 44% KeMag NML.TOs PFS March 2009 $'s 146 336 603 1,023 851 253 67 12 19 6 1 14 3 1 108 Step 1 Step 2 Step 3 LabMag + KeMag LabMag + KeMag LabMag + KeMag CS Assumed CS Assumed CS Assumed March 2009 $'s Dec 2011 $'s Dec 2012 $'s 200 336 603 1150 851 253 130 20 60 6 1 14 3 1 108 72 18 3,826 316 362 443 1121 4,947 247 415 745 1,421 1,052 313 161 25 74 7 1 17 4 1 133 89 22 4,728 391 447 547 1,385 6,113 267 448 805 1,535 1,136 338 173 27 80 8 1 19 4 1 144 96 24 5,106 422 483 591 1,496 6,602

delta -7% 33% 96% 233% 37% 19% -24% 33% -60% -97% 0% 23% -62% -79% -42%

Source: Company data, Credit Suisse estimates

Exhibit 193 provides to some global context to the above capital intensity estimates. All entries in this chart are based on company guidance. The KeMag and LabMag feasibility studies suggested a capital intensity of around $200 per annual tonne, which puts them in the third quartile from a capital intensity perspective. Our modelled and assumed capital intensity of $6.6bn makes this a $300 per annual tonne project similar to GBG.AXs Karara magnetite project. Karara is actually a lot more expensive than Exhibit 193 suggests however, because a) the Karara numbers are based on third party provision of port and rail infrastructure, and b) Karara does not include a pellet plant, where as KeMag/LabMag do. Based on NML.TOs own guidance, and ignoring the pellet plant, KeMag and LabMag are actually roughly at the midpoint of the global magnetite capital intensity curve.

If our capital costs estimates are correct, then we would expect to see: The project downscaled, to potentially start at an initial 15mtpa concentrate project, partially feeding a 10mtpa pellet facility.

North American Iron Ore

160

01 December 2011

Tata may also exercise its right to bring in another partner. If this were to happen, NML.TO has a right of first refusal on an additional 4% funded equity interest.

300 250 200 150 100 50 0

Minerao Minas Bahia (MIBA)

Pedra de Ferro (BMSA formerly BML)

Sudeste - Serra Azul

Cashmere Downs

Kami

Stage 2 - Wilcherry Hill concentrate

Marampa, Sierra Leone

Jack Hills magnetite

Shymanivske

Lac Otelnuk

Gum Flat

Fermont

Askaf

LabMag

KeMag

Kalia

Askaf expansion

Sudeste - Bom Sucesso

Hawks Nest Magnetite

Ridley Magnetite

Balmoral South

Balla Balla

Marampa

Yerecoin

Putu

Karara magnetite

Port

Transport

Mine

Other

Pellet Plant

Total

Source: Company data, Credit Suisse estimates

Operating Costs
Exhibit 194: Hematite pricing and opex
Realised price and operating costs 160 140 120 100 80 120 100

Exhibit 195: Magnetite/Taconite pricing and opex


Realised price and operating costs

C$/t

C$/t

80 60 40 20 0 2012Q1 2013Q1 Mining cost Port cost Realised Price 2014Q1 2015Q1 2016Q1 Rail cost Royalty Processing cost G&A cost FOB reference price

60 40 20 0 2016Q1 2017Q1 Mining cost Port cost Royalty 2018Q1 2019Q1 2020Q1 Pipeline cost G&A cost FOB reference price Processing cost Pelletising cost Realised Price

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Our operating cost estimates for both projects are summarised in Exhibit 194 and Exhibit 195 relative to our realised price forecasts for each product. We have assumed that 100% of the Magnetite production is pelletised prior to export, which implies a more profitable business than the sale of concentrate would. NML.TOs pelletising cost forecast is less than $10/t, while we have a long term pellet premium of around $33/t.

Reserves and Resources


NML.TOs reserve and resource statements are a little misleading in that they state total Fe, not recoverable Fe. Only about 60% of the contained iron of KeMag and LabMag

Samarco JV - 30.5mtpa expansion

Irvine Island Iron Ore

Minas Rio Phase 1

Guelb El Aouj

Apurimac

Sino Iron ore

Southdown

Capital Intensity (US$ per annual tonne)

North American Iron Ore

Exhibit 193: Magnetite capital intensity curve


400 350

161

01 December 2011

would be recovered (being the magnetite), because the hematite content is too fine to be economically recovered and will report to tails. The resource figures below are exclusive of reserves.
Exhibit 196: Reserves and Resources
Ore mt Hematite/'DSO' Proven Probable Proven & Probable Measured Indicated Measured & Indicated Inferred Total KeMag Proven & Probable Measured & Indicated Inferred Proven & Probable Measured & Indicated Inferred 21.099 43.011 64.11 22.4 44.7 67.1 7.2 74.3 2141 307 1,014.0 3,545.0 1,045.0 1,151.0 Total Fe % 59.87 58.38 58.87 59.79 58.43 58.88 56.76 58.68 31.2 31.3 31.2 29.6 29.5 29.3 Total Fe mt 12.6 25.1 37.7 13.4 26.1 39.5 4.1 43.6 668.0 96.1 316.4 1049.3 308.3 337.2 Mn % 0.13 0.56 0.42 0.13 0.56 0.42 0.78 0.45 SiO2 % 5.89 9.26 8.15 6.03 9.27 8.19 10.14 8.38

LabMag

Source: Company data

North American Iron Ore

162

01 December 2011

Corporate
Company Structure
At 30 September 2011, NML.TOs share capital consisted of: 176,232,964 commons shares on issue 12.875mn options with a weighted average exercise price of $1.51/share, as summarised in Exhibit 197. Most of these options are part of the companys incentive stock option plan, and were issued with a maximum vesting period of 5 years. Some of these options only vest if certain performance criteria are met. 1.084285mn warrants priced at $3.50 per warrant and expiring on 28 August 2012.
Number Outstanding 375,000 795,000 250,000 1,290,000 250,000 100,000 70,000 1,957,500 33,000 24,500 33,000 3,790,000 36,000 42,000 3,315,000 175,000 52,000 48,000 72,000 32,000 135,000 12,875,000 Exercise Price 0.50 0.75 0.65 0.83 1.44 1.65 1.75 0.37 0.65 0.59 0.88 0.9 0.87 3.52 3.36 3.16 2.48 2.48 2.65 1.61 1.65 1.51 Value ($mn) 0.188 0.596 0.163 1.071 0.360 0.165 0.123 0.724 0.021 0.014 0.029 3.411 0.031 0.148 11.138 0.553 0.129 0.119 0.191 0.052 0.223 19

4.2 mtpa Hematite Project clarifying the definition of free carry On 13 September 2010, Tata Steel exercised its option to acquire 80% of the DSO/hematite project. The JV agreement would see Tata Steel reimburse NML for

North American Iron Ore

Exhibit 197: Options outstanding as at 30 September 2011


Expiry 1-Feb-12 2-Aug-12 13-Nov-12 30-Jan-13 25-Mar-13 30-Apr-13 1-Jun-13 20-Jan-14 8-Oct-14 4-Dec-14 2-Feb-15 30-Jun-15 31-Aug-15 8-Feb-16 1-Apr-16 29-Apr-16 16-May-16 18-Jul-16 26-Jul-16 18-Oct-16 1-Nov-16 Total Source: Company data

Balance Sheet
Current balance sheet status At 30 September 2011, NML.TOs balance sheet had: A cash balance of $17.5mn Guaranteed investment certificates worth $0.173mn paying 0.75% interest Treasury Bills worth $15.976mn maturing in Q4 2011 paying 0.94 1.22% Government of Canada Bonds worth $35.747mn maturing between March and September 2012 paying 1.04 1.32%

163

01 December 2011

80% of NML.TOs costs to date on the DSO Project, and in the future arrange funding for up to C$300mn of capital costs for the project in order to earn its 80% share of the JV and commit to take 100% of the off take. Beyond C$300mn capex spend; Tata/NML will share the remainder of the funding on an 80/20% basis. If we assume for now that the capex is only $300mn, then a targeted $210mn would be debt funded, and $42mn of this debt is serviced by NML. The difference between Tatas interest rate and NML.TOs interest rate might be say 5% p.a., so having Tata broker this debt on NML.TOs behalf is a saving of perhaps $2.1mn in interest payments p.a. On a PER of 10x this is worth $21mn. Assuming Tata does decide to provide 30% equity (and not a lower figure, substituting the balance with more debt) then the genuine free carry component of this deal is roughly $300mn x 30% x 20% = $18mn. NML carried Tata until the JVC was formed, and the reimbursement of (80%) historical costs is roughly C$20mn.

We estimate that the total consideration offered by Tata for an 80% interest in this project was effectively $53mn, derived as follows: $21mn from the debt brokering, based on a 5% interested rate saving and 10x PER $20mn from historic cost reimbursement $18mn free carry on equity Less $6.059mn in legal fees associated with the transaction fees (as per 2010 Annual Report)

The above consideration makes 100% of the project worth C$66mn, or roughly $16 per annual production tonne and about C$0.82 per contained Fe in M,I&I Resource. Exhibit 173 and Exhibit 176 provide some context to the C$0.82, and as a reference LIM.TO currently trades at $58/t (5mtpa basis). The valuation certainly could have been better, but given that this deal was done in late 2008, they are certainly not unpalatable multiples. For the unfamiliar, these are considered fairly cheap multiples. The JV agreement does not provide for capital costs in excess on C$300mn. The April 2010 capital cost estimate for the project was C$359mn, although without the Phase 2 Goodwood component this reduces to $335mn. 22mtpa magnetite project a better deal, concluded in a better market The financing arrangements proposed by the binding heads of agreement (HOA) for the Magnetite project are far more favourable (to NML.TO) than the hematite funding arrangements; not too surprising considering that the hematite HOA was signed on October 1, 2008 during the Lehman Brothers crisis, and the magnetite agreement was signed during the height of the iron ore boom. Assuming that Tata decides to exercise its option on project development, the two parties would form a JV agreement. After formation of the joint venture, NML will hold a minimum 20% free carry equity interest in the project. Unlike the DSO/hematite project on which there is no gearing ratio stipulated (only an informal agreement) the HOA for the magnetite project specifies 70% debt / 30% equity gearing. Tata Steel will arrange the required equity portion of the financing (excluding NML.TOs optional equity interest) based on a maximum capital expenditure of up to $4.85 billion if both deposits are developed and up to $4.68/$3.76 billion respectively,

North American Iron Ore

164

01 December 2011

if only the KMag/LabMag deposits are developed. Arranging debt financing for the project shall be the responsibility of Tata Steel. NML.TOs interest could be increased by 16% through paid equity ($3.76 to 4.85bn x 30% equity x 16% = $180 to 233mn, on published capex estimates) and a further 4% through a right of first refusal if Tata Steel decides to sell part of its share to a third party.
NML ROFR 4%

North American Iron Ore

Exhibit 198: Magnetite funding split


NML Paid Equity 16%

NML Equity Free-Carry 20%

Tata Steel 60%

Source: Company data

Assuming Tata Steel decides to go ahead with the project, the 20% free carry is worth $226-291mn to NML based on the published capex guidance of $3.76-4.85bn. NML is also reimbursing NML for 64% of the estimated C$30mn in incurred project expenses to date.

165

01 December 2011

Does Tata Steel have the capacity to pay its share?


Exhibit 199: Steel Industry Gearing Ratios (ND/ND+E)

70% 60% 50% 40% 30% 20% 10% 0%


Ternium Sims Metal Management Bradespar Steel Authority of India Ltd Ferrexpo Plc Kumba Iron Ore Jindal Saw Ltd POSCO Usiminas Olympic Steel Vale Aperam Gindalbie Metals Ltd Baosteel BlueScope Steel Welspun Gujarat Stahl China Steel ArcelorMittal Reliance Steel & Auminum Magnitogorsk Steel Maanshan Iron & Steel Co Ltd Novolipetsk Steel Aichi steel OneSteel Thyssen Krupp AG Nucor Worthington Industries Angang Steel ERDEMIR Nippon Steel Hitachi Metals Severstal Acerinox Tung Ho Steel Enterprise SSAB Gerdau AK Steel Holding Corp. Voestalpine Outokumpu JFE Holdings Inc United States Steel Group Fortescue Metals Group Ltd JSW Steel Ltd Hyundai Steel Co. Jindal Steel & Power Ltd Evraz Group Kobe Steel Tata Steel Ltd Sumitomo Metal Industries Companhia Siderurgica Mechel Metals USA Holdings Corp. Tata Steel Ltd + $5.4bn debt

Source: Company data, Credit Suisse estimates

Conservative capex assumptions of $300mn and $3.76bn for the hematite/magnetite projects respectively imply that Tata Steel has an additional $3.2bn in debt, but the debt requirement increases to $5.4bn if we use our own capex forecasts. As summarised in Exhibit 199, an additional $5.4bn in debt take Tata Steel from being one of the most heavily geared steel businesses under our global coverage to the most heavily geared steel businesses under our global coverage. Tata Steel does not actually require all of the magnetite offtake, and the HOA does provide it an opportunity to bring in another partner to assist with funding. As we noted in our introductory comments, we do not believe that NML and Tata Steel are an optimal strategic fit in terms of the core competencies that each brings to the partnership and Tata Steels potentially limited funding capacity only heightens our concerns.

Cash Flows
NML is really not a cash flow story until after the Magnetite project ramps up in 2017, meaning that one faith in the LT iron ore market is a pre-requisite for LT owners of this stock.

North American Iron Ore

166

01 December 2011

Exhibit 200: Cash Flow summary

Cash Flow and Net Cash Summary 600 400 200 0 US$mn -200 -400 -600 -800 -1,000 -1,200 Net cash flow from operations Investing cash flow
Source: Company data, Credit Suisse estimates

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Financing cash flow Net cash

Ownership
Tata Steel became NML.TOs largest shareholder in October 2008, when it took a 19.9% interest in the company. In exchange for the desperately needed cash injection, Tata also took an 80% interest in the hematite project repaying NML 80% of sunk costs and also agreeing to arrange financing for the first $300mn of capital expenditure on the project. Since 2008, Tata has increased its parent level interest in NML to the current 27%, making it the largest shareholder ahead of former President and CEO Robert Martin. Board and management (ex-Tata) currently hold just under 4% of the company.
Exhibit 201: Top 20 shareholders (30 September 2011)
Holder Name Tata Steel Ltd. MARTIN ROBERT A Manulife Asset Management Ltd. Picton Mahoney Asset Management JOURNEAUX DEAN AGF Investments, Inc. NICHOLS LEE C G Canada Pension Plan Investment Board BMO Asset Management, Inc. Strategic Investment Advisors (Suisse) SA Fiera Sceptre, Inc. Investment Management Cypress Capital Management Ltd. (Canada) Sentry Select Capital Management HUDSON ROY HARRY AllianceBernstein LP SCHINDLER JOHN N Excel Investment Counsel, Inc. Global X Management Co. LLC Guardian Capital LP BlackRock Asset Management Canada Ltd. Mavrix Fund Management, Inc. Source: FactSet % O/S 26.77 1.27 1.25 1.23 1.23 1.13 0.93 0.74 0.70 0.53 0.33 0.17 0.14 0.14 0.08 0.04 0.04 0.02 0.02 0.01 0.00

North American Iron Ore

167

01 December 2011

For NML, Tata represents: Its largest shareholder Committed JV partner, operator, and finance broker for its 4.2mtpa hematite project Potential JV partner, operator, and finance broker for the larger taconite/magnetite project A valuable source of steel and iron ore industry intelligence with over 100 years experience in the industry

Tatas involvement with NML does provide additional credibility to the business aspirations, but it also has its draw backs in our opinion: Corporate appeal. Tata Steels presence makes acquisition by alternative parties, such as LIM.TO, more complicated. Removes project control. Tata is majority (80%) owner and controller of the hematite project. Depending on the options exercised it will also control 60-80% of the magnetite project. NML is a non-controlling minority which will receive a dividend from the project(s).

Target Completion Date

North American Iron Ore

Exhibit 202: Tracking the key milestones

Dec 16 Production (Taconite) Dec 15

Dec 14

Dec 13

Dec 12

Production (DSO)

Dec 11

Dec 10 Feasibility study completion (DSO)

Dec 09

Dec 08 Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Dec 12

Dec 13

Dec 14

Announcement Date
Source: Company data

Quality of the engineering solution is more important than the timeline. These projects will be built to Tata Steels requirements and Tata Steels timeline. Tatas timeline may or may not suit NML shareholders. Tata Steel is more focused on quality

168

01 December 2011

of the engineering solution and sustainability of the business than it is about execution with hast. Are core competencies appropriately complementary? The best partnerships tend to be ones where the skill sets of the respective partners are complimentary. In the case of Tata Steel and NML we feel there may be a doubling up on engineering expertise, but at the same time project execution and delivery expertise could be stronger. That said, recent experience in project execution within the Canadian Iron Ore sector is not as common as it is in other parts of the world. There is after all only one project of significant scale to have been delivered in the past 30 years CLMs Bloom Lake.

North American Iron Ore

Management
NML.TOs board consists of 8 directors, 3 of which are Tata Steel representatives. Tata has 37.5% board representation and 27% shareholder representation. We regard the senior management team as technically very strong and as noted in our introductory comments you are unlikely to find a more diligent group of Engineers in a company below $1 billion market cap NML.TO has an Audit Committee and a Corporate Governance and Compensation Committee. The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its financial oversight responsibilities by reviewing the financial reports and other financial information provided by the Corporation to regulatory authorities and shareholders, the Corporations systems of internal controls regarding finance and accounting, and the Corporations auditing, accounting and financial reporting processes. The responsibilities of the Corporate Governance and Compensation Committee in respect of compensation matters includes determining the compensation for the Named Executive Officers based on their performance and other factors. The Corporate Governance and Compensation Committee is currently comprised of Roy Hudson (Chair), John Schindler, Pierre Seccareccia and Partha Sengupta. John Schindler and Pierre Seccareccia are both considered independent directors. The Corporate Governance and Compensation Committee met once in the financial year ended December 31, 2010.

169

North American Iron Ore

Exhibit 203: Key Personnel


Name Dean Journeaux Roy Hudson Robert Martin Position President and CEO Secretary and Director Director Profession Canadian Iron Ore experience Mining Engineer Mr. Journeaux has held various engineering, operations and management positions with Quebec Cartier QCMC and MET-CHEM Mining Company, and MET-CHEM Canada Inc. At the time, both were US Steel subsidiaries. Lawyer Mr. Hudson earned a Bachelor of Commerce degree from the University of Alberta in 1979. He later received an LL.B. from the same institution in 1983. Mr. Hudson was called to the Alberta Bar in 1984. Geologist Mr. Martin received a Bachelor of Arts (Geology) from Acadia University, Wolfville, Nova Scotia, in 1962 IOCC and obtained a Certificate of Completion from MIT Sloan School for Senior Executives, Boston, Massachusetts in 1983. He has 40 years experience in business and the mining industry. The iron ore mining and development has been a major part of Mr. Martin's working life many years. Mr. Martin identified the LabMag Iron Ore deposit in 1960 and for 28 years he worked for the Iron Ore Company of Canada, which originally owned the LabMag deposit. Geology and Civil Mr. Nichols received a Bachelor of Science in Engineering (Engineering Geology Option) from Queen's IOCC Engineering University of Kingston, Ontario, in 1963, and a Master of Science in Geology and Civil Engineering from Syracuse University of Syracuse, New York in 1966. He has over 42 years of experience in the mining industry. CA Mr. Misra, Group Head (Mergers and Acquisitions) is responsible for the planning and execution of Tata Steel Groups merger and acquisitions, joint ventures, new businesses and divestments. Prior to his current position, Mr. Misra served as Chief, Strategy and was responsible for providing strategic direction to the company. Metallurgy Mr. H. M. Nerurkar is the Director of New Millennium Capital Corp. Mr. Nerurkar, Managing Director of Engineer Tata Steel since October 1, 2009, has a Bachelors degree in Metallurgy and has held various senior executive positions since joining Tata Steel in 1982. Prior to assuming his current position as the Managing Director of Tata Steel, Mr. Nerurkar was Executive Director of India and South East Asia of Tata Steel. With more than 35 years' experience in the steel industry, Mr. Nerurkar is an executive with multifaceted experience ranging from project execution, manufacturing, quality control, supply chain and marketing. Geologist Mr. Schindler holds geology degrees from McGill University (1960), University of London, England (1963, Mining Geology) and McMaster University (1975). He has over 40 years of domestic and international experience in the exploration and development of metallic and industrial minerals including, project design and management, and royalty and resource evaluations. Financial consulting Mr. Seccareccia, Fellow of the Ordre des comptables agrs du Qubec has over 35 years experience and management in various areas of financial consulting and management. Until 2002, he was the Managing partner of the Montreal office of PricewaterhouseCoopers. Metallurgy Mr. Sengupta was recently appointed Vice-President, Raw Materials at Tata Steel Ltd, after 28 years of Engineer service. As VP Raw Materials, Mr. Sengupta is in charge of Global Minerals, Natural Resources Division, Raw Materials Strategy Group and S&T Mining Project. He is a metallurgist from Banaras Hindu University, one of India's premier Institutes of Technology, who also attended the executive training program at INSEAD in France. Description

Lee C. G. Nichols

Director

N K Mishra

Director (Tata Steel)

H M Nerurkar

Director (Tata Steel)

John N. Schindler

Director

Pierre Seccareccia Director

P. Sengupta

Director (Tata Steel)

Source: Company data

01 December 2011

170

01 December 2011

Appendix 1: Canadian Iron Ore Production


Background
We estimate that in 2012 Canada will produce around 50 million tonnes of iron ore annually, most of which will be exported, making it the 8th largest iron ore producing country in the world. Canadian produced iron ore is generally recognized as being of a high quality; with high iron content and low impurities, giving it a higher Value in Use than most Australian and Indian material. It is almost entirely manufactured product; in that unlike the Direct Shipped Ore (DSO) from places like Australia, Canadian iron ore is beneficiated, concentrated, and pelletised into a saleable product. Since 1999, nearly all of Canada's iron ore production has come from the Labrador Trough region in Labrador and Quebec. History The Labrador Trough is a 1600km long, by 160km wide geographic belt that runs through Quebec and Newfoundland & Labrador in Canada. It is believed that there have been at least two large magmatic events in the Labrador Trough the first occurring around 2,170 million years ago and the second 1,880 million years ago. The banded iron formation hosts a type of magnetite referred to locally as Magnetite, as well as some smaller pockets of hematite some of which can be direct shipped (DSO) without the need for further upgrading. The Iron Ore Company of Canada (IOC) moved into the area in 1950, undertook one of the biggest civil construction projects in Canadian history, and in 1954 became the first iron ore miner in the region. IOC developed a mine site and the company town of Schefferville, constructed the Sept-Illes shipping terminal on the Gulf of St Lawrence, and built a 565km railway connecting the two sites. Back then, IOC was owned by the major US steel companies, and their main objective was to make sure they had enough iron ore supply. IOC was considered a cost centre, not a profit centre. Following the development of Carol Lake which is further south, IOC no longer had a need for the Schefferville area properties, and in 1982 walked away from Schefferville leaving all of the old infrastructure and 250mt of mineable reserves. Although the mine is long since shut, part of the railway continues to be operated by IOC subsidiary Quebec North Shore & Labrador Railway (QNSL). Geology From a geological and infrastructure perspective it is useful to think about the Labrador Trough in three separate zones; Northern, Central and Southern. Northern Trough The Northern section of the Labrador Trough contains sedimentary banded iron formations with low or no alteration. The orientation of the iron/silica layers are generally horizontal or close to. This material is a magnetite dominant form of mineralisation known in North America as taconite. The Northern zone is not serviced by infrastructure. Access is generally by float plane or helicopter only. The Northern Trough is home to Adriana Resources 6.3bt Lac Otelnuk. There is no historical production from this area.

North American Iron Ore

171

01 December 2011

Exhibit 204: Central and Southern Labrador Trough

Production

Exploration & Development

Eclipse KeMag

Rio Tinto/IOC
Murdoch Kivivic Howse Attikamagen LabMag Astray James Redmont Sawyer Houston

Arcelormittal Canada Cliffs Resources CLM (Cliffs) Labrador Iron Mines Alderon Resource Corp. Champion Minerals New Millennium

Quebec
Carol Lake Bloom Lake Mont Wright Lamelee Peppler Lake Wabush Mine Kami Fermont Fire Lake Mont Reed

Newfoundland & Labrador

Source: Labrador Iron Mines

North American Iron Ore

172

01 December 2011

Central Trough The Central Section of the Labrador Trough near Schefferville was mined by IOC until 1982, and currently hosts deposits owned by LIM.TO and NML.TO and Century Mines The intersecting Greenville fault has caused some metamorphism to what would have once been sedimentary taconite. The result of this tectonic collision is that small pockets of magnetite have been converted to specular hematite, which has recrystallised upon cooling into a coarser grained material. The taconite material in this area is mostly still flat lying, but the hematite mineralisation is folded and faulted with the higher grade material being mostly cyclical. The coarseness of the hematite particles which makes the material amendable to spiral recovery. Finer grained hematite is far more difficult to recover with gravity, and unlike magnetite it is not magnetic. Although historically IOC has recovered Direct Shippable Ore (DSO) from this area, most of the hematite/geothite material such as that being mined by LIM.TO and NML.TO will be beneficiated prior to shipping. IOCs historic presence in this area means that it is serviced by road and rail, although the rail extension to this area is only light gauge and in need of upgrade for longer term use by the iron ore industry. Although there are some small pockets of higher grade (50 58% Fe) hematite material, the vast majority of the mineralisation in the Central Section is taconite magnetite.

Southern Trough In the Southern Section of the Labrador Trough is where we find all of the current producers; Cliffs Natural Resources Wabush and Bloom Lake (ex-Cons Thompson asset, Arcelor Mittals Mont Wright and Iron Ore Company of Canadas Carol Lake, which is owned by Rio Tinto (58.72%), Mitsubishi Corporation (26.18%) and Labrador Iron Ore Royalty Corporation (15.1% equity interest, plus royalties). Development projects in this area include Alderons Kami and Champions Fermont. Trough rocks in this Grenville Province are highly metamorphosed and complexly folded. Iron deposits in the Gagnon Terrane, Grenville part of the Trough, include those on the Property and Lac Jeannine, Fire Lake, Mont-Wright, Mont-Reed, and Bloom Lake in the Manicouagan-Fermont area and the Luce, Humphrey and Scully deposits in the Wabush-Labrador City area. The high-grade metamorphism of the Grenville Province is responsible for recrystallization of both iron oxides and silica in primary iron formation, producing coarse-grained sugary quartz, magnetite, and specular hematite schist or gneiss (meta-taconites) that are of improved quality for concentration and processing.

North American Iron Ore

Production
The Labrador Trough contains four main types of iron deposits: Soft iron ores formed by supergene leaching and enrichment of the weakly metamorphosed cherty iron formation; they are composed mainly of friable fine grained secondary iron oxides (hematite, goethite, limonite). Taconites, the fine-grained, weakly metamorphosed iron formations with above average magnetite content and which are also commonly called magnetite iron formations.

173

01 December 2011

More intensely metamorphosed, coarser grained iron formations, termed metataconites which contain specular hematite and subordinate amounts of magnetite as the dominant iron minerals. Minor occurrences of hard high grade hematite ore occur southeast of Schefferville at Sawyer Lake, Astray Lake and in some of the Houston deposits.
Exhibit 206: Canadian pellet exports
Agglomerated (Pellets) Iron Ore exports 2.0 1.5 1.0 0.5 0.0 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 China Germany Netherlands Taiwan Trinidad and Tobago United States Other

Volume (mt)

2.0 1.5 1.0 0.5 0.0 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 China Taiwan Other Germany Trinidad and Tobago 12 mth avg Netherlands United States

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

The Labrador Trough currently produces around 50 mtpa of iron ore, consisting of a number of different products: Concentrate a magnetite dominant product that has been upgraded or beneficiated using magnetic and gravity based separation methods. Products with a P80 (80% passing) size of less than around 220 um (which is most) require aggregation into pellets before they can be used for steel making. Concentrate can be transported over land by truck, train, or pipeline (Savage River, Samarco and Minas Rio all being examples, and we hope in the future NML.TOs KeMag/LabMag as well). Concentrate grades are typically 62 68%, and the high iron content combined with generally low impurities can sometimes attract a price premium relative to more globally common hematite fines.
Exhibit 208: Canadian Concentrate exports
Concentrate / Fines exports 200 180 160 140 120 100 80 60 40 20 0 Sep06 Mar07 Sep07 Mar08 Sep08 Price Mar09 Sep09 Mar10 Sep10 Mar11 Sep11 2.500 2.000 Price (US$/t) Volume (mt) 1.500 1.000 0.500 0.000 Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep06 07 07 08 08 09 09 10 10 11 11 Volume Price 62% IODEX CFR China 200 180 160 140 120 100 80 60 40 20 0

Exhibit 207: Canadian Pellet exports


Pellet / Lump exports 3.5 3.0 2.5 Volume (mt) 2.0 1.5 1.0 0.5 0.0

Volume (mt)

Volume

62% IODEX CFR China

Source: Trade data, TSI, Credit Suisse estimates

Source: Trade data, TSI, Credit Suisse estimates

Pellets these are formed by adding a small amount of clay to a concentrate, then rolling the material into small marble sized balls. These soft concentrate + clay balls are fired at around 800 deg C which oxidises the magnetite, converting Fe3O4 into Fe2O3 (or hematite). This is an exothermic reaction (i.e. it releases energy) you will also notice that the product gains weight (around 1-3%) as a result. Pellets have the

North American Iron Ore

Price (US$/t)

Exhibit 205: Canadian total exports


Total Iron Ore exports 3.5 3.0 2.5

174

01 December 2011

highest Value In Use (VIU) of all iron ore products, and for this reason attract a price premium. Hematite Fines the big iron ore regions such as Australia and Brazil, and even Canada historically, generally sell hematite fines as a direct shipped ore (DSO) meaning that it does not need to be beneficiated or upgraded in between being dug out of the ground and sold to a steel mill. As head grades continue to decline globally, beneficiation of hematite fines is becoming more and more common. If it is of direct shippable grade, hematite ores are generally considered superior to magnetite because the capital and operating costs are lower. However, once we start talking about lower grade ores (< 50%) magnetite is often more desirable because as the name suggests magnetite is magnetic, making its separation from other minerals a lot easier. Hematite can be fairly easily upgraded using gravity if it is very course grains (as is done in the Southern Labrador Trough) but finer grained hematite requires Wet High Intensity Magnetic Separation (WHIMS) which are often not economically viable.

Five railway companies operate in the Labrador Trough; TSH - runs passengers and freight from Schefferville to Emeril Junction QNS&L - hauling iron concentrates and pellets from Labrador City/Wabush area via Ross Bay Junction to Sept les Bloom Lake Railway - hauling ore from the CML mine to Wabush

North American Iron Ore

Infrastructure
Rail All there are various small spur lines that connect individual projects, there are essentially four sections of rail to be aware of in relation to the Canadian iron ore industry. Northern section (Tshiuetin Railway) - Schefferville to Ross Bay Junction (217km). After IOC shut down its Schefferville mining operations this was gifted to what is now the Tshiuetin Rail Transportation (TSH), a consortium of First Nation communities, who rely on it to carry only passengers and light freight. Suffering from many years of neglect, this section of the railway is in dire need of maintenance in order to accommodate proposed iron ore tonnages. This rail way is shown in orange in Exhibit 204. Central section (QNS&L Railway) Ross Bay Junction to Emeril Junction (360km). This rail is owned and in use by IOC. This railway crosses a provincial border, between Newfoundland & Labrador and Quebec, which means that it is federally regulated and must adhere to the Canadian Transportation Act, under which common carrier obligation apply. Common carrier status essentially means that the owner, IOC subsidiary QNS&L, is obliged to transport others ore and QNS&L indeed does this for Wabush, Bloom Lake, and LIM.TOs Schefferville already. This rail way is also shown in orange in Exhibit 204. Southern section (Chemin de fer Arnaud, or CFA Railway) is the short section of railway which runs around the edge of Sept Iles port to Point Noire and is owned by Wabush Mining Company (CLF). This railway is currently used by Wabush and Bloom Lake. This rail way is shown in purple in Exhibit 204. Independent of the above three connected sections is the Quebec Cartier railway line which runs South West from the Labrador Trough and is shown in green in Exhibit 204. The QCM railway is owned and operated by ArcelorMittal and because it does not cross a provincial border it is not federally regulated and ArcelorMittal has no obligation to let others use it. Were it accessible, this railway would be of interest to CLF and ADV.

175

01 December 2011

Arnaud Railways - hauling iron ore for Wabush Mines (Wabush) and Consolidated Thompson Limited (CLM) between Arnaud Junction and Pointe Noire CRC hauls iron concentrates from Fermont area to Port Cartier for Quebec Cartier Mining Company (ArcelorMittal)

Port There is only really one port to consider in the context of our coverage, being Sept Iles, but for completeness readers should also be aware of Port Cartier which is used exclusively by Quebec Cartier Mining / ArcelorMittal. Sept-Iles (Seven Islands) Sept Iles exported 25mt of material in 2010, 22mt of which was iron ore, with other major commodities including alumina, aluminium, coke breeze and oil/gasoline. Sept Iles is a 40km2 deepwater port with a depth of 80m at its entrance. The draft varies considerably across the various berths within the port some allowing capesize loading and others constrained at around 8-9 metres (suitable for small ships or barges only). By late 2014 - 2015, the Port of Sept Iles hopes to have completed the first of three 50mtpa expansion increments in anticipation of increased iron ore production from the region. This is the port capacity growth upon which much of the proposed Labrador Trough production growth depends.

North American Iron Ore

176

North American Iron Ore

Appendix 2 Credit Suisse Global Supply/Demand model


Exhibit 209: Supply/Demand summary as at October 2011
CS Seaborne + China Iron Ore Supply-Demand Total IO Demand, mt China (% change) ex-China (% change) Total YoY Volume Variance (% change) Total IO Supplies, mt Indian Tonnes (% change) Australian Tonnes (% change) Brazilian Tonnes (% change) Other South American Tonnes (% change) South African Tonnes (% change) Other African Tonnes (% change) North American Tonnes (% change) Northern European Tonnes (% change) Other Tonnes (Asia/ME) (% change) China Landborne (% change) China Domestic Concentrate Tonnes (% change) Totals, mt YoY Variance (% change) Ex-China domestic tonnes YoY Volume Variance (% change) Total S-D Notional Surplus (Deficit), mt 10% slippage on growth tonnes Total S-D Notional Surplus (Deficit), mt 2008 788 386.0 1,174 2009 908 15.3% 298.6 -22.6% 1,207 33.0 2.8% 2010 984 8.3% 368.7 23.5% 1,352 145.4 12.1% 2011E 1,068 8.6% 388.0 5.2% 1,457 104.1 7.7% 2012E 1,144 7.1% 396.9 2.3% 1,541 84.8 5.8% 2013E 1,220 6.6% 410.8 3.5% 1,631 89.4 5.8% 2014E 1,296 6.2% 423.6 3.1% 1,719 88.4 5.4% 2015E 1,372 5.9% 433.3 2.3% 1,805 86.2 5.0% Chg 11-15 Chg 11-15 303 45 349 28% 12% 24% CAGR 6.4% 2.8% 5.5%

105.7 327.3 276.5 13.5 31.5 12.0 19.7 63.1 14.1 4.2 326.7 1,194

868

20.4 20.4

119.2 13% 375.3 15% 267.8 -3% 16.4 21% 44.1 40% 12.0 0% 19.7 0% 69.7 10% 16.7 18% 7.3 75% 255.0 -22% 1,203 8.8 1% 948 80.5 9.3% -3.8 -3.8

106.5 -11% 421.3 12% 308.2 15% 24.2 47% 47.0 7% 13.0 8% 19.7 0% 60.7 -13% 22.8 37% 10.4 42% 350.9 38% 1,385 181.5 15% 1,034 85.5 9.0% 32.3 32.3

89.7 -16% 463.1 10% 318.8 3% 26.5 10% 48.8 4% 15.1 16% 25.5 30% 49.6 -18% 34.8 52% 14.0 34% 370.7 6% 1,457 71.9 5% 1,086 52.1 5.0% 0.0 0.0

100.5 12% 517.1 12% 344.1 8% 24.5 -8% 49.0 0% 27.0 79% 31.4 23% 52.8 6% 36.0 4% 14.0 0% 356.1 -4% 1,552 95.7 7% 1,196 110.4 10.2% 11.0 11.0 0.0

100.5 0% 609.5 18% 367.7 7% 24.5 0% 55.0 12% 37.3 38% 37.5 19% 57.4 9% 36.0 0% 14.0 0% 316.7 -11% 1,656 103.7 7% 1,339 143.1 12.0% 25.3 25.3 0.0

100.5 0% 725.7 19% 439.8 20% 32.6 33% 55.0 0% 44.6 20% 48.4 29% 59.4 3% 36.0 0% 14.0 0% 210.2 -34% 1,766 110.1 7% 1,556 216.6 16.2% 47.0 47.0 0.0

100.5 0% 795.7 10% 514.1 17% 55.5 70% 55.0 0% 70.7 58% 56.4 17% 66.3 12% 36.0 0% 14.0 0% 108.9 -48% 1,873 106.9 6% 1,764 208.2 13.4% 67.8 67.8 0.0

11 333 195 29 6 56 31 17

12% 72% 61% 109% 13% 368% 121% 34%

2.9% 14.5% 12.7% 20.3% 3.0% 47.1% 22.0% 7.5%

-262 416 35 678

-71% 29%

-26.4% 6.5%

62%

12.9%

01 December 2011

Source: Company data, Credit Suisse estimates

177

North American Iron Ore

Appendix 3 Credit Suisse Commodity Price Forecasts


Exhibit 210: Credit Suisse commodity price forecasts
2011 Q1 Iron ore fines - (Pilbara FOB) US/dmtu Iron ore fines - 62% (Pilbara FOB) US$/t Iron ore lump - (Pilbara FOB) US/dmtu Iron ore lump - 64% (Pilbara FOB) US$/t Iron ore pellets - (Tubarao FOB) US/dmtu Iron ore pellets - 66% (Tubarao FOB) US$/t Iron ore fines - (China CFR) US/dmtu Iron ore fines - 62% (China CFR) US$/t Hard coking coal (US$/t) Semi hard coal (US$/t) Semi soft coal (US$/t) PCI coal (US$/t) Thermal Coal (JFY contract) US$/t Thermal Coal (Newcastle FOB) US$/t Source: Credit Suisse estimates 276 171 317 203 335 221 287 178 225 214 180 180 97 129 Q2 272 169 302 193 330 218 284 176 330 314 264 275 122 123 Q3 (f) 273 169 303 194 321 212 285 177 315 299 212 230 121 120 Q4 (f) Yr Avg Q1 (f) (f) 270 260 252 167 161 156 303 288 279 194 184 179 324 311 301 214 205 198 283 274 266 175 170 165 289 285 260 275 271 247 212 191 174 223 205 187 117 128 130 123 120 125 Q2 (f) 245 152 272 174 293 193 258 160 260 247 174 187 130 125 2012 Q3 (f) 245 152 272 174 293 193 258 160 260 247 174 187 135 130 Q4 (f) Yr Avg Q1 (f) (f) 244 235 227 152 146 141 271 261 252 174 167 162 292 281 272 193 186 179 258 250 242 160 155 150 260 260 250 247 247 238 174 174 168 187 187 180 133 135 138 128 130 138 Q2 (f) 213 132 236 151 254 168 226 140 250 238 168 180 138 138 2013 Q3 (f) 213 132 236 151 254 168 226 140 250 238 168 180 138 138 Long term Q4 (f) Yr Avg Yr Avg (real) (f) (f) 216 179 132 210 134 111 82 130 239 199 157 233 153 127 100 149 258 214 164 250 170 141 108 165 230 194 145 226 143 120 90 140 250 235 170 250 238 223 160 238 168 157 132 168 180 169 134 180 138 140 120 138 138 140 120 138 2014

01 December 2011

178

Iron Ore Miner

Steel Mill

North American Iron Ore

Appendix 4 Iron Ore products summary


Exhibit 211: Iron Ore products and how they are related

Hematite
Fe2O3

25 66% in situ Fe

Hematite concentrates are produced using gravity or WHIMS

Magnetite Fe3O 4 20 40% in situ Fe


Magnetite concentration uses LIMS

Lump 62 66% Fe

Fines (also known as Sinter feed) 57 63% Fe

Concentrate 60 70% Fe

Pellet Plant $10 20/t Miner, or steel maker Sinter Plant $10 12/t Pellets (Hematite Fe2O3)

Blast Furnace

Source: Company data, Credit Suisse estimates

01 December 2011

179

North American Iron Ore

Appendix 5 companies mentioned


Exhibit 212: Companies mentioned
Mkt Cap Company Admiralty Resources NL Adriana Resources Inc Advanced Exploration Afferro Mining African Iron African Minerals African Rainbow Minerals Alcoa Inc. Alderon Iron Ore Alpha Natural Resources LLC Anglo American Aquila Resources Ltd Arch Coal, Inc. Atlas Iron Ltd Australasian Resources BC Iron Bellzone Mining BHP Billiton Black Iron Brockman Resources CAP Mining Cape Lambert Cazaly Resources Limited Centrex Metals Limited Century Aluminum Company Century Iron Mines Champion Minerals Cliffs Natural Resources Cliffs Natural Resources Cloud Peak Energy Companhia Siderrgica Nacional (CSN) CONSOL Energy Inc. Cotton & Western Mining Crusader Resources Cullen Dannemora Mineral AB Emergent Resources Equatorial Resources Eurasian Natural Resources Corporation Ferrexpo Ferrowest Flinders Mines Ltd Fortescue Metals Group Fox Resources Freeport-McMoRan Copper & Gold Gindalbie Metals Ltd Globe Specialty Metals Golden West Resources Limited Grange Resources Ticker ADY.AX ADI.V AXI.V AFFA.L AKI.AX AMIq.L ARIJ.J AA.N ADV.V ANR.N AAL.L AQA.AX ACI.N AGO.AX ARH.AX BCI.AX BZM.L BHP.AX BKI.TO BRM.AX CAP CFE.AX CAZ.AX CXM.AX CENX.OQ FER.TO CHM.TO CLF CLF.N CLD.N CSNA3.SA CNX.N CWRN.PK CAS.AX CUL.AX DMABb.ST EMG.AX EQX.AX ENRC.L FXPO.L FWL.AX FMS.AX FMG.AX FXR.AX FCX.N GBG.AX GSM.OQ GWR.AX GRR.AX US$m 29 142 47 71 129 2,314 4,745 10,664 192 5,275 50,283 2,569 3,468 2,748 96 229 241 184,183 91 289 296 324 30 93 863 191 112 9,698 9,698 1,302 11,468 9,445 11 135 21 71 8 231 13,436 2,768 6 494 15,306 37 37,537 605 1,120 81 573 SP US$ 0.05 0.95 0.31 0.68 0.34 7.03 22.26 10.02 2.32 24.00 38.00 6.86 16.39 3.07 0.21 2.41 0.39 37.23 0.66 2.00 15.34 0.50 0.24 0.30 9.63 2.01 1.28 67.81 67.81 21.37 8.16 41.64 0.00 1.23 0.03 5.63 0.05 2.02 10.43 4.70 0.05 0.27 4.92 0.10 39.60 0.53 14.93 0.42 0.50 55.00 1.42 22.00 OUTPERFORM OUTPERFORM OUTPERFORM 6.78 OUTPERFORM 14.60 6.11 OUTPERFORM NEUTRAL 80.00 80.00 30.00 13.11 58.00 OUTPERFORM OUTPERFORM OUTPERFORM OUTPERFORM OUTPERFORM 12.00 OUTPERFORM 46.08 OUTPERFORM RESTRICTED 2.55 30.00 54.95 6.85 24.00 4.21 RESTRICTED NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL OUTPERFORM TP US$ IMX Resources Iron Ore Holdings Limited Iron Road Limited Ironclad Mining Jindal Steel & Power Ltd JSW Steel Jupiter Mines Kumba Labrador Iron Mines Labrador Iron Ore Royalty Corporation Lincoln Minerals London Mining Macarthur Minerals Mindax Limited Mineral Resources Ltd MMX Moly Mines Mount Gibson Iron Ltd Murchison Metals Ltd New Millennium Iron NMDC Northern Iron Northland Resources Nucor Oceanic Iron Ore Olympic Steel OneSteel Palladon Ventures Ltd Peabody Energy Corp Pluton Resources Red Hill Iron Limited Red River Reliance Steel & Auminum Rio Tinto Sesa Goa Sherwin Iron Strike Resources Limited SunCoke Energy Inc. Sundance Resources Tata Steel Teck Resources Ltd United States Steel Group US Steel Usinas Siderurgicas De Minas Gerais Sa Vale Western Desert Resources Worthington Industries Xstrata Zanaga Iron Ore Co Rating Company Ticker IXR.AX IOH.AX IRD.AX IFE.AX JNSP.BO JSTL.BO JMS.AX KIOJ.J LIM.TO LIF_u.TO LML.AX LOND.L MMS.TO MDX.AX MIN.AX MMXM3.SA MOL.AX MGX.AX MMX.AX NML.TO NMDC.BO NFE.AX NAUR.OL NUE.N FEO.V ZEUS.OQ OST.AX PLL.V BTU.N PLV.AX RHI.AX RVR.AX RS.N RIO.AX SESA.BO SHD.AX SRK.AX SXC.N SDL.AX TISC.BO TCKb.TO X.N X USIM5.SA VALE WDR.AX WOR.N XTA.L ZIOC.L Mkt Cap US$m 81 209 101 45 9,427 2,669 662 20,123 358 2,339 10 538 48 35 2,222 2,204 150 1,458 174 261 14,360 229 271 12,488 42 259 1,162 38 10,626 54 110 4 3,682 105,117 3,181 26 29 808 1,135 7,462 21,326 3,931 3,931 7,889 121,615 89 1,242 46,776 427 SP US$ 0.31 1.26 0.72 0.59 10.09 11.96 0.36 62.82 6.62 36.55 0.08 4.73 1.07 0.20 12.05 3.56 0.39 1.35 0.39 1.48 3.62 0.68 1.20 39.43 0.27 23.74 0.87 1.40 39.23 0.24 2.51 0.05 49.11 67.51 3.66 0.07 0.20 11.54 0.39 7.78 37.35 27.30 27.30 5.73 23.25 0.43 17.59 15.97 1.52 18.00 26.69 NEUTRAL OUTPERFORM 8.81 62.00 24.00 24.00 RESTRICTED 47.00 UNDERPERFORM OUTPERFORM NEUTRAL NEUTRAL RESTRICTED OUTPERFORM RESTRICTED RESTRICTED 56.00 92.48 OUTPERFORM OUTPERFORM 55.00 OUTPERFORM 25.00 2.38 NEUTRAL OUTPERFORM 43.00 OUTPERFORM 1.86 OUTPERFORM 2.15 OUTPERFORM 7.21 OUTPERFORM 49.94 7.65 44.15 UNDERPERFORM OUTPERFORM OUTPERFORM 12.92 9.33 OUTPERFORM UNDERPERFORM TP US$ Rating

01 December 2011

Source: Company Data, Credit Suisse

180

01 December 2011

Companies Mentioned (Price as of 30 Nov 11) Alderon Iron Ore Corporation (ADV.TO, C$2.36, NEUTRAL, TP C$2.60) Cliffs Natural Resources (CLF, $67.81, OUTPERFORM, TP $90) Labrador Iron Mines (LIM.TO, C$6.74, OUTPERFORM, TP C$8.30) Labrador Iron Ore Royalty Corporation (LIF_u.TO, C$37.22, OUTPERFORM, TP C$45.00) New Millennium Iron Corporation (NML.TO, C$1.51, OUTPERFORM, TP C$1.90)

Disclosure Appendix
Important Global Disclosures I, Nathan Littlewood, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names.
3-Year Price, Target Price and Rating Change History Chart for ADV.TO
ADV.TO Date Closing Price (C$) Target Price Initiation/ (C$) Rating Assumption
4 3.5 3 2.5 2 1.5 1 0.5 0 C$
12 /1 / 08 2/1 /09 4/1 /09 6/1 /09 8 /1 / 09 10 /1 / 09 12 /1/ 09 2 /1 / 10 4 /1 / 10 6 /1 / 10 8 /1 / 10 10 /1/ 10 12 /1/ 10 2 /1 /11 4 /1 / 11 6 /1 /11 8/ 1 /11 10 /1 /11

Closing Price

Target Price

Initiation/Assumption

Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for CLF
CLF Date Closing Price (US$) Target Price Initiation/ (US$) Rating Assumption
100 80 60 40 20 0 US$
12 /1 / 08 2/1 /09 4/1 /09 6/1 /09 8 /1 / 09 10 /1 / 09 12 /1/ 09 2 /1 / 10 4 /1 / 10 6 /1 / 10 8 /1 / 10 10 /1/ 10 12 /1/ 10 2 /1 /11 4 /1 / 11 6 /1 /11 8/ 1 /11 10 /1 /11

Closing Price

Target Price

Initiation/Assumption

Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

North American Iron Ore

181

01 December 2011

3-Year Price, Target Price and Rating Change History Chart for LIM.TO
LIM.TO Date Closing Price (C$) Target Price Initiation/ (C$) Rating Assumption
16 14 12 10 8 6 4 2 0 C$
12 /1 / 08 2/1 /09 4/1 /09 6/1 /09 8 /1 / 09 10 /1 / 09 12 /1/ 09 2 /1 / 10 4 /1 / 10 6 /1 / 10 8 /1 / 10 10 /1/ 10 12 /1/ 10 2 /1 /11 4 /1 / 11 6 /1 /11 8/ 1 /11 10 /1 /11

Closing Price

Target Price

Initiation/Assumption

Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for LIF_u.TO
LIF_u.TO Date Closing Price (C$) Target Price Initiation/ (C$) Rating Assumption
40 35 30 25 20 15 10 5 0 C$
12 /1 / 08 2/1 /09 4/1 /09 6/1 /09 8 /1 / 09 10 /1 / 09 12 /1/ 09 2 /1 / 10 4 /1 / 10 6 /1 / 10 8 /1 / 10 10 /1/ 10 12 /1/ 10 2 /1 /11 4 /1 / 11 6 /1 /11 8/ 1 /11 10 /1 /11

Closing Price

Target Price

Initiation/Assumption

Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for NML.TO
NML.TO Date Closing Price (C$) Target Price Initiation/ (C$) Rating Assumption
4 3.5 3 2.5 2 1.5 1 0.5 0 C$
12 /1 / 08 2/1 /09 4/1 /09 6/1 /09 8 /1 / 09 10 /1 / 09 12 /1/ 09 2 /1 / 10 4 /1 / 10 6 /1 / 10 8 /1 / 10 10 /1/ 10 12 /1/ 10 2 /1 /11 4 /1 / 11 6 /1 /11 8/ 1 /11 10 /1 /11

Closing Price

Target Price

Initiation/Assumption

Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows: Outperform (O): The stocks total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stocks total return is expected to be in line with the relevant benchmark* (range of 10-15%) over the next 12 months. Underperform (U): The stocks total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stocks absolute total return potential to its current share price and (2) the relative attractiveness of a stocks total return potential within an analysts coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry

North American Iron Ore

182

01 December 2011

factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stocks total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stocks total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analysts coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analysts coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisses distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 48% (61% banking clients) Neutral/Hold* 40% (57% banking clients) Underperform/Sell* 10% (54% banking clients) Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisses policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (ADV.TO) Method: Our C$2.60/sh target price on ADV.TO is set using a sum of parts DCF model, with a P/NAV multiple applied to the operational assets. A 10% discount rate, and Credit Suisse commodity price / FX forecasts have been used Risks: The risks associated with our C$2.60 target price on ADV.TO include, but may not be limted to: infrastructure access risk, development risk, ownership risk and funding risk. Price Target: (12 months) for (CLF) Method: Our US$90/sh target priceon CLF is set at the approximate mid-point of a US$77/sh NAV and 5x EV/EBITDA implying $100/sh. A 10% discount rate, and Credit Suisse commodity price / FX forecasts have been used Risks: The risks associated with our $90 target price on CLF realisation include, but may not be limted to: diversification / acquisition risk, taxation risk, and operational risk. Price Target: (12 months) for (LIM.TO) Method: Our C$8.30 target price on LIM.TO is set using a DCF sum of parts with a 0.85x P/NAV multiple applied to the operational assets and balance sheet items added at par. A 10% discount rate, and Credit Suisse commodity price / FX forecasts have been used. Risks: The risks associated with our C$8.30 target price on LIM.TO realisation include, but may not be limted to: project execution and ramp up risk, infrastructure risk, and resource growth / conversion risk Price Target: (12 months) for (LIF_u.TO) Method: Our C$45/share target price on LIF is set at the approximate mid-point of our C$49/sh NAV and 10x PER implying $40/share. A10% discount rate is used for the DCF and 0.8xP/NAC multiple applied to the 15.1% equity interest. All other items, including the balance sheet, have been added at par. A 10% discount rate, and Credit Suisse commodity price / FX forecasts have been used. Risks: The risks associated with our $45 target price on LIF include, but may not be limted to: minority ownership risk, dividend risk, and valuation/earnings risks associated with proposed amendments to the Income Tax Act whcih are expected to come into affect from mid-2012. Price Target: (12 months) for (NML.TO)

North American Iron Ore

183

01 December 2011

Method: Our C$1.90 target price on NML.TO is derived using a DCF sum of parts model with a P/NAV multiple of 0.7x applied to the DSO/hematite assets and 0.25x on the magnetite assets, balance sheet items added at par. A 10% discount rate, and Credit Suisse commodity price / FX forecasts have been used Risks: The risks associated with our C1.90 target price on NML.TO include, but may not be limted to: funding risk, technical risk, operational risk, and project partner risk. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names. The subject company (CLF) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (CLF) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (CLF) within the next 3 months. As of the date of this report, Credit Suisse Securities (USA) LLC makes a market in the securities of the subject company (CLF). Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ADV.TO, CLF, LIM.TO, LIF_u.TO, NML.TO) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. Credit Suisse has sent extracts of this research report to the subject company (LIF_u.TO) prior to publication for the purpose of verifying factual accuracy. Based on information provided by the subject company, factual changes have been made as a result. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. CS may have issued a Trade Alert regarding this security. Trade Alerts are short term trading opportunities identified by an analyst on the basis of market events and catalysts, while stock ratings reflect an analyst's investment recommendations based on expected total return over a 12-month period relative to the relevant coverage universe. Because Trade Alerts and stock ratings reflect different assumptions and analytical methods, Trade Alerts may differ directionally from the analyst's stock rating. The author(s) of this report maintains a CS Model Portfolio that he/she regularly adjusts. The security or securities discussed in this report may be a component of the CS Model Portfolio and subject to such adjustments (which, given the composition of the CS Model Portfolio as a whole, may differ from the recommendation in this report, as well as opportunities or strategies identified in Trading Alerts concerning the same security). The CS Model Portfolio and important disclosures about it are available at www.credit-suisse.com/ti. Taiwanese Disclosures: Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Nathan Littlewood, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Canada), Inc.. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.creditsuisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

North American Iron Ore

184

01 December 2011 Americas / Canada Equity Research

This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG, the Swiss bank, or its subsidiaries or its affiliates (CS) to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients as its customers by virtue of their receiving the report. The investments or services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to your individual circumstances or otherwise constitutes a personal recommendation to you. CS does not offer advice on the tax consequences of investment and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. CS believes the information and opinions in the Disclosure Appendix of this report are accurate and complete. Information and opinions presented in the other sections of the report were obtained or derived from sources CS believes are reliable, but CS makes no representations as to their accuracy or completeness. Additional information is available upon request. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, a trading call regarding this security. Trading calls are short term trading opportunities based on market events and catalysts, while stock ratings reflect investment recommendations based on expected total return over a 12-month period as defined in the disclosure section. Because trading calls and stock ratings reflect different assumptions and analytical methods, trading calls may differ directionally from the stock rating. In addition, CS may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. CS is involved in many businesses that relate to companies mentioned in this report. These businesses include specialized trading, risk arbitrage, market making, and other proprietary trading. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADRs, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment, in such circumstances you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed the linked site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CSs own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such website or following such link through this report or CSs website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority (FSA). This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States by Credit Suisse Securities (USA) LLC ; in Switzerland by Credit Suisse AG; in Canada by Credit Suisse Securities (Canada), Inc.; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A. or its affiliates; in Mexico by Banco Credit Suisse (Mxico), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instrument Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited , Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House,Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn. Bhd., to whom they should direct any queries on +603 2723 2020. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this report was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. Any Nielsen Media Research material contained in this report represents Nielsen Media Research's estimates and does not represent facts. NMR has neither reviewed nor approved this report and/or any of the statements made herein. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Copyright 2011 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

CREDIT SUISSE SECURITIES (USA) LLC United States of America: +1 (212) 325-2000

Sector initiation 111201 (rev 0).doc