22 November 2010 Weekly Commodity Compendium Nick Moore Head of Commodity Strategy +44 20 7678 0555 nick.metals.moore@rbs.com Daniel Major Commodity Analyst +44 20 7678 4146 daniel.major@rbs.com RBS – Weekly Commodity Compendium No.105 Metals - whoops they did it again.... This material should be regarded as a marketing communication and may have been produced in conjunction with the RBS trading desks that trade as principal in the instruments mentioned herein. Never a dull moment for commodities which have just had their second major price wobble of the year again driven by an external event. The first was the mid-April to mid-June crisis of confidence when commodity prices tumbled 25-30% upon the unfolding Greek Tragedy. The second has been this past couple of weeks driven by the de-fanging of the once proud Celtic Tiger, Ireland. Thus far the price declines have not been as great as the Q211 slump. Starting around 11th of November and troughing on 17th, the metals with the weakest near term outlook zinc and nickel were hardest hit down 22% and 17% respectively with copper and aluminium both seeing declines of a more defensive 12%. But note too that hitherto resilient precious metals were also swept lower in the sell-off. Commodities are cyclicals and ideal for top-and-tail trading and as we say don’t marry them, be a serial dater. Source: RBS RBS Investor Poll – What would you spend $100 on between Nov 2010 and June 2011? Some interesting findings from the latest RBS poll (follow link to view), of nearly 500 investors. Responses to the question ‘If I gave you $100 to invest what would you spend it on from now through June 30th‘ revealed that 45% of investors would be long equities. This supports the view of RBS Equity strategists that equities appear to be the stand out asset class in 2011 (Everything counts in large amounts 15Nov). In terms of sector allocation, RBS recommends an overweight allocation to basic resources, the sector displaying some key characteristics that should attract fresh inflows in 2011 namely; inflation hedging, EM exposure, earnings momentum and potential for capital management notably through share buybacks. The second most popular category was commodities at 17%. Note that 40% of respondents chose commodities in the same survey conducted in November 2009, since then the CRB commodity index has gained ~25%. Investor interest has been a key driver of the impressive price gains seen across the commodity complex, but it has taken prices of some commodities ahead of where their current fundaments would justify. Yes, better prices lie ahead, but as the past week has shown, until fundamentals catch up with recent price gains commodity markets remain vulnerable to sharp corrections. The RBS survey suggests investor enthusiasm for commodities may have waned but significant interest remains. This should prevent excessive and sustained price corrections and provides excellent trading opportunities. Topping and tailing is the name of the game for 2011. An elevated but volatile commodity price outlook should allow most mining companies achieve healthy margins and earnings progression in 2011, providing a positive backdrop for the sector. We remain constructive on the medium term outlook for the commodities but believe there is more bang for your buck in mining equities than direct commodity investment. 45%17%13%7%7%6%5%0%10%20%30%40%50%EquitiesCommodsCorp CreditGovt BondsCashEM BondsOther The Royal Bank of Scotland Weekly Commodity Compendium |22 November 2010 Consensus mining equity valuations, the week ahead and more2 Bloomberg consensus valuation multiples for some of the major US and European miners EV/EBITDA P/E P/B 2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012 Anglo American 11.3x 6.4x 4.9x 4.2x 21.2x 11.4x 8.7x 7.9x 2.38x 1.87x 1.59x NA Antofagasta 12.7x 7.4x 4.3x 4.1x 32.4x 18.0x 11.2x 11.1x 4.06x 3.55x 3.00x NA BHP Billiton 10.7x 9.3x 6.2x 5.3x 17.7x 12.5x 9.5x 9.0x 4.63x 3.68x 2.85x 2.26x ENRC 9.8x 6.0x 4.8x