Australian Mining Australian Mining：3Q15 commodity review

Deutsche Bank Markets Research Australasia Australia M&M - Diversified Resources Industry Australian Mining Sector Date 30 June 2015 Recommendation Change 3Q15 commodity review Fundamentals still weak, but the sell-off appears overdone for some ________________________________________________________________________________________________________________ Deutsche Bank AG/Sydney Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Paul Young Research Analyst (+61) 2 8258-2587 paul-d.young@db.com Brett McKay Research Analyst (+61) 2 8258-2607 brett.mckay@db.com Kaan Peker Research Analyst (+61) 2 8258-1424 kaan.peker@db.com Mathew Hocking Research Analyst (+61) 2 8258-2611 mathew.hocking@db.com Key Changes Company Target Price Rating AQG.AX 3.00 to 3.10(AUD) - AWC.AX 2.50 to 2.10(AUD) - BHP.AX 33.40 to 29.00(AUD) - EVN.AX 1.00 to 1.10(AUD) - FMG.AX 2.35 to 1.50(AUD) Hold to Sell IGO.AX 5.30 to 5.20(AUD) Hold to Buy MGX.AX 0.30 to 0.20(AUD) - OGC.AX 2.90 to 3.00(AUD) Buy to Hold OZL.AX 4.20 to 3.90(AUD) - RIO.AX 77.90 to 68.00(AUD) - RRL.AX 1.30 to 1.20(AUD) - S32.AX 2.60 to 2.50(AUD) Hold to Buy SFR.AX 7.30 to 6.90(AUD) - SIR.AX - Hold to Buy SYR.AX 6.60 to 6.30(AUD) - WHC.AX 2.25 to 1.50(AUD) Buy to Hold WSA.AX 5.10 to 4.50(AUD) - Source: Deutsche Bank Top picks Rio Tinto (RIO.AX),AUD53.29 Buy Alumina (AWC.AX),AUD1.50 Buy South32 (S32.AX),AUD1.74 Buy Independence Group (IGO.AX),AUD4.27 Buy Sandfire Resources NL (SFR.AX),AUD5.67 Buy Source: Deutsche Bank Commodity prices continue to soften due to continued demand weakness and/or increased supply. Fundamentals for the base metals still look more attractive than the bulks but we think a recovery in metal prices might not get underway until 2016. We have cut prices hard again and have lowered some long run prices also. Nonetheless, the mining sector has been aggressively sold off and we see value emerging with some quality stocks looking attractive on valuation and FCF yield (even at spot). We still prefer base metals over bulks & precious metals. Our top picks are RIO, AWC, S32 (now a BUY), IGO (now a BUY), SFR and SYR. We have downgraded WHC, OGC and FMG. Commodity price changes: changes to long run Fe, Al, thermal and alumina The big changes to our commodity price forecasts are to iron ore (-10-20% and a drop in our long run real price from US$80/t to US$66/t which is now set at long run marginal cost), copper (-20% in 2017 to US254c/lb, -14% in 2018 to US287c/lb, due to weaker demand), aluminium (10-15% downgrades to US80c in 2015 and then a gradual increase to our new long run price of US96c/lb real in 2021), alumina (a drop in our real long run price from US$390/t to US$360/t), nickel (5-15% downgrades from 2015-2017 on weak demand and larger stockpiles supplementing the market for longer). Despite the downgrades, we remain positive on most of the base metals, with deficits forecast for nickel, aluminium and alumina, with copper fundamentals improving in the medium term (2017-18) as supply slows and demand recovers, albeit slower than previously expected. We remain bearish on gold, retaining our forecast for prices to fall to US$1,100/oz in 2016 due to a rising USD driven by increasing real interest rates and a lack of inflationary pressures. Top Picks: BUY attractive valuations and strong balance sheets The recent sector de-rate has created opportunities in our view. Our Top Picks are companies with higher quality assets, trading at a deep discount to valuation, with strong balance sheets and with significant cost out, production growth or both; These include; 1. Rio Tinto (FCF yield of 8% in 2016, 0.8x NPV, continues to deliver on cost out and capital management and is now in a position to approve more high returning growth). 2. AWC (FCF yield of 9% in 2016, 0.75x NPV, alumina fundamentals remain robust and costs are declining). 3. S32 (FCF yield of over 10% on our forecasts and over 5% at spot, 0.7xNPV, strong balance sheet). 4. IGO (0.8xNPV, completion of SIR acquisition, strong FCF yield, increasing dividends) and, 5. SFR (0.8x P/NPV, strong FCF yield, dividend upside potential, exploration upside). In this review, we have upgraded S32 and SIR to a BUY, and have downgraded WHC and OGC to HOLD and FMG to SELL all on valuation. Valuation and sector risks Company risks include adverse commodity and currency movements (p21). This report changes pr