RBC Dominion Securities Inc. H. Fraser Phillips (Analyst) (416) 842-7859 fraser.phillips@rbccm.com Patrick Morton (Analyst) (416) 842- 9957 patrick.morton@rbccm.com June 16, 2014 Metal Prospects Aluminium Market Outlook – Third Quarter 2014 Demand  Global aluminium demand growth remains strong, up 7.2% in Q1/14. We forecast annual consumption growth of 7.0% in 2014, 6.8% in 2015, 6.6% in 2016, and trend growth of a little over 5.0% thereafter. Supply  Production curtailments outside of China have lowered utilization rates and, together with continued solid growth in demand, have moved the market into rough balance, with a continued surplus in China offset by a deficit in the rest of the world. With current capacity utilization rates estimated to be 78% versus full effective rates of roughly 90%, our analysis points to a market with significant excess capacity, and capacity continues to grow. We expect realized prices (LME plus physical premium) to remain below the ninetieth percentile of the cash cost curve to constrain capacity utilization rates and prevent the market from moving back into surplus. We forecast production growth of 4.0% in 2014, 6.8% in 2015, 6.6% in 2016, 5.1% in 2017, and 5.3% in 2018. Market Balance and Inventories  The global market was in a balanced to slight surplus position in the first five months of 2014, with total reported inventories up 233,000 tonnes. Total inventories remain at historically high levels, both in absolute terms and in weeks of consumption. We expect our forecast demand growth to be met by capacity additions and rising capacity utilization, leaving inventories well above critical levels throughout our forecast period. We expect China to remain self-sufficient over the next five years, leaving the rest of the world on its own to continue to try to absorb the excess capacity outside China. As a result, we see only limited scope for price increases. Price Forecasts  As noted, our forecast assumes that the realized price (LME plus physical premium) remains below the ninetieth percentile of the cash cost curve in order to constrain production growth and keep the market in balance. We do not believe that current record-high premia are sustainable and expect premia to decline gradually over the next two years, making way for an increase in the LME price. We forecast an average price of $0.81/lb in 2014, $0.90/lb in 2015, $1.00/lb in 2016, $1.10/lb in 2017, and $1.15/lb in 2018. Our long-term forecast is $1.10/lb in 2014 US dollars. Risks to Forecast  Economic growth – The key risk to our forecast is the strength of the global economy. A 1% decrease in forecasted 2014 global demand would decrease our forecast growth rate to 5.9% from 7.0% and increase our forecast surplus by 495,000 tonnes.  Investment demand – Investment demand remains a key driver of commodity prices, leaving prices vulnerable to increased volatility.  Supply – Further production curtailments could push the market into deficit and support higher prices, while stronger production growth than we assume could push the market back into surplus.  Indonesian bauxite export ban – If the ban has a larger negative effect on Chinese alumina and aluminium production than we are currently assuming, then both alumina and aluminium prices could be higher than we currently forecast. All values in U.S. dollars unless otherwise noted. Priced as of prior trading day’s market close, ET (unless otherwise stated). For Required Conflicts Disclosures, see page 22. Aluminium Price Forecast (US$/lb)NewOld% Chg.2014E$0.81$0.88-7%2015E$0.90$0.95-5%2016E$1.00n/cn/c2017E$1.10n/cn/c2018E$1.15n/cn/cLong-term(2014$)$1.10n/cn/c Note: Price changes were originally published in our June 5, 2014 research comment North American Metals & Mining Q3 2014 Commodity Price Revisions & Outlook: Still cautious. frank_wy_leung11@hkma.gov.hk First Last 06/17/14 02:37:58 PM Hong Kong Highpower Metal Prospects: Aluminium Market Outlook – Third Quarter 2014 June 16, 2014 2 Table of Contents Supply/Demand Production Changes Current Trends Inventory and Price Consumption Refined Capacity and Production Aluminium Costs Alumina Alumina Costs Appendix I: Projections for Alum. Consumption Exhibit 1: Refined Aluminium Supply/Demand Balance .............................................................................................. 3 Exhibit 2: Global Aluminium Supply/Demand .............................................................................................................. 3 Exhibit 3: Global Aluminium Supply/Demand and Prices............................................................................................. 3 Exhibit 4: Summary of Aluminium Production Changes (Compared to 2013A; ’000 t