You are on page 1of 301

European Metals & Mining: A Strange

Love How I Learned to Stop


Worrying and Love the Ore
JULY 2013
SEE DISCLOSURE APPENDIX OF THIS REPORT FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

Is $80/t iron ore a certainty? Perhaps not...the future may not be as dark as consensus believes

Recent weakness in mining equities is consistent with iron ore at $80/t Aus FOB, or ~40% below
both average five-year and 1H:13 prices; we show how the magnitude and speed of the implied
price decline express exaggerated fears around GDP, demand growth and supply response
China, the world's largest commodities consumer (56% of 2012 iron ore), must complete its
transformation from a U.S. 1930s' equivalent level of industrialization before it faces an
unprecedented demographic crunch; this supports iron ore demand for 7-12 years
Maintaining "super-cycle" pricing, thus, depends on the supply side exercising sufficient capex
restraint not to displace the bulk of high-cost producers; however, given our view on demand, we
see room for the currently approved pipeline and prices supported above $120/t for seven years
What if we are wrong? Even then, if iron ore fell to $80/t, three "automatic stabilizers" the
natural hedge between revenue and costs, value-in-use and iron ore demand elasticity would
offset some of the fall with a positive value impact of 5-20% for our coverage stocks
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013



For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
1





Portfolio Manager's Summary

Iron ore has been the outperforming commodity of the last decade (rising 1,340%
from its 2001 average to its 2011 peak). Since 2009, the iron ore price has averaged
close to $130/t FOB Australia; however, recent weakness in mining equities
suggests that the market believes that an imminent, severe and permanent
downward revision to the value of this commodity is due. An analysis of equity
values shows that the market is discounting a 40% correction in the price of iron
ore down to levels close to $80/t. We do not believe that such a decline is
necessarily justified and that it is, at the very least, inconsistent with the growth
forecasts for the Chinese economy held by the IMF and the OECD. We believe that
the price of iron ore is supported by the fundamental geological poverty of China
and that any reacceleration of the Chinese economy must imply a reacceleration in
metal demand and with it support for the price of raw materials.
That China is the world's largest consumer of commodities (56% of iron ore in
2012) is undeniable. Equally undeniable is the unprecedented rapidity with which
China has attained this position. However, we also believe that the demographic
crunch looming in 2020-25, as the birth-rate explosion of the 1950s and 1960s and
subsequent "one child" policy successively age their way through the population, is
a phenomenon that cannot be ignored. If China is to industrialize sufficiently to
support its aging population before exhausting its supply of "cheap" labor, then it
has a bare decade in which to complete a transformation from an agrarian society to
one dominated by the service sector. China's embedded capital stock (~4.5 tons of
steel per capita) and the composition of its labor force (with parity between primary
and tertiary forms of employment) resemble that of the U.S. of the 1930s.
Furthermore, while China's rate of capital stock formation is roughly 2x that of the
U.S., this merely speaks of the increases in mining productivity that we have seen
over the last 50 years. Productivity gains mean that China's capital stock is
embedded at one-fourth the labor used to build up that of the U.S.
Maintaining so-called "super-cycle" pricing, thus, depends upon the supply
side. Specifically, will the major Western miners exhibit sufficient capital
discipline to limit the quantity of low-cost iron ore brought to market? This
commodity can be mined by the likes of the "Big Three," for as low as $25-30/t
cash costs. Will they race to compete on low-cost volume, thereby displacing the
~9% of 2012 global supply provided by high-cost ($120-$180/t) Chinese miners?
Increasingly, the miners are becoming aware that prioritizing volume over value is
a fool's paradigm and that just because you can build something does not mean that
you should. In this Blackbook, we show how iron ore prices could well be
supported above $120/t through to 2020.
Furthermore, even if we are wrong and iron ore prices do decline as the market
is anticipating, three factors will offset their impact on company valuations: First,
the natural hedge between costs and revenue (including but not limited to exchange
rates); second, because not all iron ores are created equal, value-in-use adjustment
reduces the ability for low-quality supply to compete and provides price support for
the major miners with high-quality deposits; and third, the elasticity of Chinese iron
ore demand. We believe that a major part of the slowdown in Chinese steel growth
is the budgetary constraint of high iron ore prices; relax the constraint through
lower iron ore price and iron ore demand should increase.
Paul Gait paul.gait@bernstein.com +44-207-170-0599
Esther L. Healer, CFA esther.healer@bernstein.com +44-207-170-0546
Rusne Didziulyte rusne.didziulyte@bernstein.com +44-207-170-0541
July 15, 2013
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
2 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE








For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
3





Table of Contents

Significant Research Conclusions 5
If China Is to Grow Rich Before It Grows Old, It Must Finish Industrializing in the
Next Decade 15
Iron Ore "Super-Cycle" Pricing Generated by High-Cost Producers Responding to
the Rapidity of China's Industrialization 29
Two Times the Rate at One-Fourth the Labor: Chinese Steel Intensity Does Not
Indicate Overinvestment 41
Iron Ore Pricing Support Over the Next Decade Depends Upon Capital Discipline
(Rio 360 Case Study) 63
What GDP Growth Is Consistent With $80/t Iron Ore Baked Into Mining Equities? 81
China Growth Scenarios 105
Our Iron Ore Price Forecast 115
Local Currency Costs and USD Revenues: The Stabilizing Effect of the "Natural
Hedge" in Costs 135
Not All Iron Ores Were Created Equal: The Stabilizing Effect of Value in Use 143
If Prices Fall While Capital Stock Is Accumulating, Demand Accelerates: The
Demand Elasticity Stabilizer 153
Valuation and Risks 167
Company Impact 187
Appendix 1: From Grizzly to De Niro 205
Appendix 2: Growth Scenarios 253
Appendix 3: Financial Statements 259
Index of Exhibits 277


For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
4 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE






Exhibit 1 Financial Overview

Source: Bloomberg L.P., FactSet and Bernstein estimates and analysis.
7/12/2013 AngloAmerican BHPBilliton GlencoreXstrata RioTinto Vale MSCIEurope
AAL.LN BLT.LN GLEN.LN RIO.LN VALE3.BZ MSDLE15
Rating O O O O O
LocalCurrencyUnits BRL
CurrentSharePrice(LocalCurrency) 12.95 18.00 2.60 27.99 30.32 367.33
52WeekHigh(LocalCurrency) 21.63 22.36 3.98 37.57 44.10 379.59
CurrentLow(LocalCurrency) 12.07 16.71 2.69 25.82 28.39 303.28
YTDPerformance(%) (29.5%) 1.3% 7.5% (16.1%) (22.0%) 16.1%
YTDRelativePerformance(%) (45.6%) (14.8%) (8.6%) (32.2%) (38.1%)
12MonthPriceTarget(LocalCurrency) 20.25 22.50 5.25 41.25 46.50
Upside/(Downside)toTargetPrice 56% 25% 102% 47% 53%
MCAP(US$m) 25,217 145,992 27,483 78,780 77,034
NetDebt/(Cash)(US$m) 5,855 32,169 22,551 21,990 26,088
Minorities 17,642 1,349 5,032 490 (4,702)
EV(US$m) 51,687 170,890 93,427 98,682 98,420
EBITDAUS$m
2013E 10,052 25,614 15,902 24,183 22,523
2014E 11,833 38,119 20,203 31,348 26,230
2015E 15,590 45,903 26,252 38,698 32,415
EV/EBITDAUS$m
2013E 5.1 6.7 5.8 4.1 4.4
2014E 4.4 4.5 4.2 3.1 3.8
2015E 3.3 3.7 3.3 2.6 3.0
EPSUS$/share
2013E 1.90 2.70 0.43 5.33 2.28
2014E 2.57 3.73 0.63 7.34 2.55
2015E 3.75 4.73 0.97 9.52 3.58
DividendYield%
2013E 3.5% 4.2% 3.5% 3.9% 2.2%
2014E 2.3% 3.5% 4.9% 4.1% 3.4%
2015E 3.0% 3.6% 5.8% 5.1% 4.8%
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
5





Significant Research Conclusions

Iron ore has been the outperforming mining commodity for the last decade and is
the critical source of earnings generation (~60% of EBITDA) for our coverage
group. Recent weakness in mining company equities implies a very severe discount
to spot iron ore price ($80/t versus an 1H:13 average US$129/t Australian FOB) in
terms of future price level and the rapidity of decline. We do not believe this
decline is a foregone conclusion. Furthermore, if it were to happen, there are a
number of factors that would mitigate the severity of the valuation impact.

The industrial behemoth
1
that is the Chinese economy has been powered by
exploitation of China's most abundant resource: vast pools of surplus rural labor.
However, this labor supply is not infinite. Over the next generation, China will
experience a substantial increase in its old-age dependency ratio as the country ages
sharply in response to earlier policy initiatives (namely, the "one child" policy)
see Exhibit 2. On top of this are the behavioral changes in a workforce increasingly
composed of only children. The IMF sees cheap labor in China exhausted between
2020 and 2025 concurrent with our forecast for peak raw materials demand in
China (see Exhibit 3). We believe that the proximity of this labor exhaustion has
contributed to the urgency of the Chinese governmental push to install a productive
capital base and transition the economy away from subsistence agriculture to
tertiary forms of value-added activity. The unprecedented rapidity of Chinese
industrialization has rendered China the largest consumer of global commodities
(56% of total iron ore demanded globally in 2012). In our view, this reflects the
country's requirement to "grow rich before it grows old" and before the supply of
cheap labor that has powered this industrialization is exhausted.

Exhibit 2 In 2000, China Was a Clear Outlier the
World's Largest Country Set to Age Rapidly
and Yet Still at a Pre-Industrial Output Level

Exhibit 3 The Demographic Challenges Facing China
Stand Behind the Requirement to
Accelerate the Capital Stock Formation
Source: UN and Bernstein estimates and analysis. Note: 2015-40 numbers are UN estimates.
Source: UN and Bernstein analysis.

1
The original biblical Behemoth is described as having a tail like cedar, bones like iron, limbs as strong as copper, and sinews like stone, hence it
seems an apropos metaphor for the economy of the world's largest consumer of commodities.
-10
0
10
20
30
40
50
60
-50 -40 -30 -20 -10 0 10
G
D
P
/
C
a
p
i
t
a

U
S
$
'
0
0
0
Change in Old-Age Dependency Ratio 2000-2040 Negative Indicates Aging
Population
Aging of Population vs. Development of Economy Including China
Size of Bubble = Population
USA
Japan
China
South
Korea
-10%
-5%
0%
5%
10%
15%
20%
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
2
0
1
5
2
0
2
0
2
0
2
5
2
0
3
0
2
0
3
5
2
0
4
0
C
h
a
n
g
e

i
n

W
o
r
k
i
n
g
-
A
g
e

P
o
p
u
l
a
t
i
o
n
China Growth in Working-Age Population
(15-64 Years)
Critical
demographic
inflection point
~20202025
We Do Not Believe the
Sustained Iron Ore Price Fall
Implied by Mining Equity
Valuations Is a Foregone
Conclusion; Even If So, Several
Factors Would Mitigate the
Valuation Impact
If the World's Largest
Consumer of Commodities Is
to Grow Rich Before It Grows
Old, China Must Largely
Complete Its Unprecedentedly
Rapid Industrialization by
2020-25
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
6 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





It is the urgency of China's industrialization, in our view coupled with the
fundamental geological scarcity of certain key raw materials domestically that
has been the key driver behind the emergence of the commodity "super-cycle." On
the demand side, our secular commodity price view is supported by a fundamental
analysis of industrialization patterns in 120 countries since 1900. On the supply
side, we identify the emergence of a new class of marginal producers in 2003
(Chinese high-cost producers), their impact on the global cost curve, and the
duration of supply side support for "super-cycle" pricing based on new greenfield
and brownfield projects. We see the "super-cycle" pricing regime supported on the
demand side until China finishes industrializing (2020-25) and on the supply side
until sufficient new low-cost Western production is brought on line to displace the
marginal high-cost Chinese producers (the timing of which rests in the hands of the
Western majors and underlies our continued and continuous calls for capital
discipline) see Exhibit 4.

The high rate of recent Chinese steel consumption, in both absolute magnitude and
relative to the current consumption by other countries, is often interpreted to
suggest overinvestment and that the Chinese economy may be unduly steel
intensive in which case, an immediate and sustained iron ore price decline to
US$80/t might indeed be reasonable. However, many datasets look at only the last
~20 years and point out China's peak steel intensity of 60kg/000$GDP as being
substantially higher than the peak rate of consumption during the industrialization
of the U.S. They fail to consider the pronounced productivity increases in the
mining sector over the last half-century. China has access to iron ore production
that is 2.5-5x more efficient in man-hour terms than was available to the U.S. when
it industrialized (see Exhibit 5). Three factors stand behind Chinas access to this
higher productivity iron ore mining (largely located in Australia): 1) globalization
of the commodities industry (between 1965 and 2005, real freight costs fell 40%,
while global trade in iron ore rose by 330% and coal by 1070%), 2) geological
endowment (a miner in the U.S. needs to move ~2x ROM material as his Australian
counterpart to generate the same amount of useful material), and 3) population
densities (Western Australia ex-Perth has, on average, 0.23 people per square
kilometer versus 67 in Minnesota and 175 in Michigan). Due to this increased
productivity and China's access to it, the Middle Kingdom
2
is embedding steel into
its capital stock at a rate ~2x that of peak U.S. steel intensity but at one-fourth of
the labor that the U.S. required. This more rapid embedding of steel in China's
capital stock reflects not inefficiency per se, but rather that the productivity of the
world's best iron ore miners (Australians today) can be utilized to hasten the
process of capital stock formation. This rapidity has been further enabled by the
purchase, disassembly and reassembly of steel-making production from the West
into China (e.g., the Famous Industrials Group industry relocation projects).
Consequently, from a demand perspective, we consider the fear that the iron ore
price will decline to US$80/t and remain there to be overdone.


2
The literal translation of Zhong-guo the Chinese name for China, which can also be rendered as Middle State. American is Meiguo or
Beautiful Kingdom/State.
We Attribute "Super-Cycle"
Pricing in Iron Ore to the
Emergence of High-Cost
Chinese Marginal Producers;
We See the "Super-Cycle"
Continuing Until Those
Producers Are Displaced by
New Low-Cost Production
We Do Not Believe That the
Rate of Chinese Steel
Consumption Is Indicative of
Overinvestment; China Is
Embedding Steel Into Its
Capital Stock at a Rate
Approximately Double That of
Peak U.S. Steel Intensity But at
Around One-Fourth of the
Labor That the U.S. Required
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
7





Exhibit 4 China Accounted for ~16% of 2012 Global
Iron Ore Production (ROE Equivalent); Our
Analysis Shows That ~60% of the Chinese
Production Consisted Primarily of
"Missing" Chinese High-Cost Mines

Exhibit 5 Productivity Uplift of the Iron Ore Imports
Into China Has Enabled It to Overtake the
U.S. in Terms of Effective Productivity in
2003
Note: There are a few other high-cost producers in the "missing
Chinese mines" category but they are de minimis.
Source: AME and Bernstein estimates and analysis.
Source: WSA, NBS, BLS and Bernstein estimates and analysis.

On the supply side, we see the inability of the Chinese mining sector to transition
from labor-intensive to capital-intensive modes of production during this rapid
industrialization phase in China, supporting the current "super cycle" pricing. Costs
on the supply side provide the long-term pricing structure, meaning pricing support
will persist, in our view, so long as a significant proportion of high-cost marginal
producers in China (~9% of 2011 ROE equivalent global supply, with marginal
costs of production ~$120-180/t) are not displaced (see Exhibit 4). Accordingly,
capital discipline, the single greatest source of value creation in the mining space, is
particularly critical for iron ore (the fourth most crustally abundant element).
Here, we provide a case study on the possible 70Mtpa Pilbara iron ore
expansion proposed by Rio Tinto. The price elasticity backed out from Rio Tinto's
own cost curve implies a reduction of US$27/t from this project, resulting in an $18
billion value loss (not quite Alcan levels, but getting there). However, if
management's 3% steel demand growth target came to pass, this would limit price
declines from the project to US$14/t meaning that expenditure of US$5 billion
would generate a positive value of ~US$8 billion. Shareholders in Rio Tinto may
be comfortable risking an $18 billion loss for the chance of an $8 billion gain,
should China achieve 3% steel demand growth in a decelerating environment.
Alternatively, they might wish to follow the example of Emperor Augustus and
consider the whole expansion akin to fishing with a golden fish hook: the gain, if
all goes well, is too small to offset the risk of loss if it does not. We further expand
our analysis to demonstrate how globally superior value generation can result from
the pursuit of locally optimal growth targets but only in consolidated markets
where industry incumbents are explicitly aware of the price destructive effects of
excessive volume growth (see Exhibit 6 and Exhibit 7). It is this dynamic, which
underlies our continued calls for capital discipline from the Western majors to
avoid engaging in a massive value transfer from their own shareholders to the
Chinese Communist Party by subsidizing China's continued industrialization.

170
160
150
140
130
120
110
100
80
70
0
60
180
40
30
20
10
0
50
1,000,000 750,000 500,000 250,000
90
1,250,000
Cumulative global production kt Fe
Missing Chinese
Mines
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
T
o
n
s

p
e
r

M
a
n

Y
e
a
r
Effective Chinese Productivity, Including
Imports
USA Ef f ective Chinese Productivity
Pricing Support in the Next
Decade Thus Depends Upon
Capital Discipline from the
Western Miners as Our "Rio
360" Case Study Shows
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
8 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 6 The Value Destructive Effect of Excessive
Volume Growth Can Be Seen Once the
Impact of Supply Elasticity Is Considered

Exhibit 7 It Is the Elasticity of Supply That Inflects
Any Commodity Cost Curve; the Higher the
Elasticity, the Higher the Margin and the
Lower the Degree of Consolidation
Required to Generate Superior Returns
Source: Bernstein estimates and analysis. Source: Bernstein estimates and analysis.

The iron ore price (the most important source of EBITDA generation for our
coverage) has averaged US$135/t over the last five years and US$129/t 1H:13
Australian FOB and yet mining company stocks have been among the worst
performers of the year. We ran four fixed commodity price scenarios ( "Grizzly,"
"Bear," "Bull," and "De Niro" in order of increasing aggressiveness) and examined
how sensitive the value generated by our DCF (out to 2030) was to these different
scenarios. We then selected the scenario that most closely resembled current market
conditions and flexed the prices of the two most important commodities (from an
EBITDA generation perspective) copper and iron ore in order to determine
what the market was pricing in for those commodities. We found that mining
equity valuations were baking in $80/t iron ore, a ~40% discount to year-to-date
and five-year average prices. We then asked ourselves what the world needs to look
like for these prices to come about. Specifically, "what growth outlook for the
world's largest commodity consumer, China, would be consistent with $80/t iron
ore?" We calculated the Chinese GDP growth implied by consensus demand
expectations in China, then used this implied economic growth to back out the
supply side response that, in concert with this demand expectation, would result in
$80/t iron ore. We found that this was consistent with ~7% Chinese GDP growth
some 1.3% below the IMF forecast and 0.5% below the official government
guidance as well as significant new supply: ~550Mtpa of new iron ore capacity
out to 2020 (a ~50% increase on the 1,123mt produced in 2012 globally), of which
~300Mtpa would be surplus at this GDP growth rate and hence price destructive.

Using the model (discussed earlier) that we built to back out Chinese GDP and
supply side response consistent with consensus demand and price expectations, we
can also determine a consistent forecast for iron ore prices and steel demand growth
across any GDP scenario for China. Our "bull" scenario takes the IMF's forecast
from 2Q:12, which sees the Chinese economy accelerate back up to a trend rate of
8.5%. This would absorb the ~300Mtpa of price destructive oversupply implied in
the consensus scenario (mentioned earlier), resulting in a tight market in which the
miners do not compete on volume and in which a trend price of US$140/t could
0
20
40
60
80
100
120
140
0 25 50 75 100125150175200225250275300
V
a
l
u
e

(
U
S
$
b
n
)
Iron Ore Volume Growth for New Entrant (Mt)
Value of Volume Growth for Different
Price Elasticity
0.0 -0.5 -1.0 -1.5
-2.0 -2.5 -3.0
"Normal"straight
linerelationship
betweenvolume
andvalue...but
onlyifelasticityis
ignored
0
2
4
6
8
10
12
1 2 3 4 5 6 7 8 9 10
E
V
/
E
B
I
T
D
A

M
u
l
t
i
p
l
e

o
f

I
n
d
u
s
t
r
y
No. of Players in Industry (i.e., Degree of
Consolidation)
Multiple Uplift Available in Consolidated
Commodity Markets by Elasticity
e=-1 e=-2 e=-3
Mining Equities Have Recently
Been Baking in $80/t Iron Ore
(~40% Below Year-to-Date and
Five-Year Average Prices)
This Is Consistent With Both
~7% Chinese GDP Growth
(Below Both IMF Estimates and
Chinese Targets) and
~550Mtpa New Iron Ore
Capacity Out to 2020
We Construct Bull, Middle and
Bear Scenarios for Chinese
GDP and Supply Response to
Bound the Possibilities for Iron
Ore Prices Out to 2020 ($140/t
down to $65/t)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
9





eventuate out to 2020 (see Exhibit 8). A "middle" scenario takes the Chinese target
of 7.5% GDP growth as a floor (despite the fact that Chinese GDP has a tendency
to miss on the upside). This yields a price of ~US$120/t out to 2020. Our China
"bear" scenario sees GDP decline to 6% and no supply coming out of the market (a
true worst-case scenario). This results in an iron ore price testing the US$65/t mark
over a multi-year period.

Exhibit 8 Our Three Scenarios Set the Widest Plausible Band, in Our View, Around Implied
Consensus Expectations; They Range from More Bullish Than the IMF's Current
Forecast, Through Official Chinese GDP Targets, to a Bear Scenario in Which No
Supply Is Removed from the Market Despite Prices Collapsing
Source: IMF and Bernstein estimates and analysis.

The previous sections looked at analysis conducted during 2Q:13. Here, we provide
an overview of our updated iron ore price forecast. At the time of publication of
this Blackbook, we predict $130/t (2013E) rising to a peak of $144/t (2016E). This
is consistent with the IMF's current GDP forecast of 7.8% in 2013 rising to 8.5% in
2016 and average increase in supply of 88Mtpa 2013-16E. By 2020, we expect iron
ore prices of $115/t consistent with of IMF forecasts for an average 8.5% Chinese
GDP growth 2017-20E and a further 28Mtpa of incremental supply in the market.

Exhibit 9 Our Iron Ore Price Forecast Is Consistent With the IMF's Current GDP Forecast of
7.8% in 2013 Rising to 8.5% in 2016 and Average Increase in Supply of 88Mtpa 2013-
2016
Source: Bloomberg L.P. and Bernstein estimates and analysis.
2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Consensus 33 42 46 76 81 147 168 128 127 118 110 107 100 95 90 90
Scenario 1: IMF 8.5% 33 42 46 76 81 147 168 128 146 151 162 170 167 160 137 121
Scenario 2: Official Target 7.5% 33 42 46 76 81 147 168 128 137 134 127 125 122 117 106 104
Scenario 3: China Bear 6% 33 42 46 76 81 147 168 128 123 106 95 89 77 68 66 66
-
20
40
60
80
100
120
140
160
180
I
r
o
n

O
r
e

P
r
i
c
e

U
S
$
/
t
Iron Ore Price by GDP Scenario
Nominal Dollars Spot* 2013 YTD 2013E 2014E 2015E 2016E
Iron Ore US$/t 109 129 130 137 141 144
Iron Ore Consensus US$/t 123 114 106 100
SCB Upside/Downside 6% 20% 33% 44%
*as of June 30, 2013
Our Current Forecast Is for Iron
Ore That Peaks at $144/t in
2016 and Declines to $115/t by
2020
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
10 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





As JK Galbraith observed, "faced with the choice between changing one's mind and
proving that there is no need to do so, almost everyone gets busy on the proof." As
an exercise in listening to Galbraith, we asked ourselves "what are the valuation
impacts if we are wrong, and if $80/t iron ore becomes a near-term reality?" While
examining this hypothetical situation, we came across three "automatic stabilizers"
that would mitigate a part of the negative value impact of a sustained iron ore price
fall for the big Western miners and offer a realistic picture of how a sustained fall
in iron ore prices would impact valuations: (1) the natural FX hedge embedded in
the miners' cost structures; (2) value-in-use adjustments commanded by ores of
differing qualities and (3) elasticity of iron ore demand and spare capacity in
China's steel-making industry whose exploitation would become economical, if the
iron price were to fall sufficiently. Across all of these stabilizers, those companies
that are the most exposed to iron ore experience the greatest offsetting effect.

A natural hedge exists in the operating cost structure of the miners that softens the
earnings impact of any sustained fall in commodity prices (see Exhibit 10 and
Exhibit 11). In a world of falling commodity prices, we expect to see substantial
weakening in producer currencies (AUD and BRL). Given that the miners' costs are
denominated in local currency and their revenues in U.S. dollars, any producer-
currency weakening will lead to an improvement in operating margin. With nearly
50% of the cost increases in iron ore over the last 10 years coming from the impact
of currency movements, any currency weakening is a significant source of upside.
We estimate that Vale and Rio would experience the greatest benefits (equivalent to
12% and 8% of June 30, 2013 share prices, respectively), while more diversified
BHP and Anglo would experience 4% and neutral impacts, respectively.

Exhibit 10 Mining Costs and Revenue Exhibit a High
Degree of Correlation

Exhibit 11 Currency Appreciation Drives a Significant
Part of the Cost to Price Relationship,
Particularly for the Australian Producers

Source: Bloomberg L.P. and Bernstein analysis. Source: Bloomberg L.P. and Bernstein analysis.

3
Note that we omit Glencore Xstrata from this automatic stabilizer valuation analysis as the company lacks direct iron ore production bar its
1Q:13 acquisition of a stake in Ferrous Resources Ltd. Note that all valuation offsets are expressed in percentage of the June 30, 2013 price in
USD terms.
R = 0.9048
0
5,000
10,000
15,000
20,000
25,000
0 20,000 40,000 60,000
T
o
t
a
l

C
o
v
e
r
a
g
e

C
o
s
t
s

(
$
m
)
Total Coverage Revenue
Total Iron Ore Costs and Revenue
41%
17%
42%
Rio Tinto Iron Ore Cost Drivers
Producer Currency Appreciation Local Currency Inflation
Real Cost Increases
What If We Are Wrong and
There Is a Sustained Iron Ore
Price Fall (to $80/t)? If So,
Three Factors Would Mitigate
the Negative Value Impact for
the Big Western Miners
We Estimate That Cost
Savings, Combined With the
Natural FX Hedge Embedded in
Operating Costs, Could Offset
Valuation Declines by an
Equivalent of, on Average, 5%
of June 30, 2013 Share Prices
for Rio, BHP, Anglo and Vale
3

For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
11





Not all iron ores were created equal. Substantial quality and value-in-use (VIU)
heterogeneity exists in iron ore products. Removing homogeneity from a
commodity industry, of course, has a "de-commoditizing" effect iron ore grade
accounts for 93% of the iron ore price variation around the 62% Fe benchmark.
However, even after this effect is adjusted for, poorer-quality, low-grade iron ore
still incurs a pricing penalty (see Exhibit 12). Inclusion of a VIU adjustment in the
cost curve thus increases the marginal cost of production, reduces the ability for
low-quality supply to compete and provides price support for the major miners with
high-quality deposits. We estimate that Vale and Rio would experience the greatest
benefits (equivalent to 11% and 9% of June 30, 2013 share prices), while more
diversified BHP and Anglo would experience 4% and 6% offsets, respectively.

Exhibit 12 There Is a Significant Range of Variation
Around the Benchmark 62% CIF Price
Point, and Even After Adjusting for Fe
Grade, Poor-Quality Ore Suffers a
Significant Discount

Exhibit 13 We Believe That a Significant Part of the
Slowdown in Chinese Steel Growth
Resulted from the Budgetary Constraint
Imposed by High Commodity Prices
Source: BAIINFO and Bernstein analysis. Source: Bloomberg L.P., AME, CRU, IMF and Bernstein estimates
and analysis.

Chinese steel making has seen its EBITDA margins cut by ~70% over the last
decade on the back of rising raw material prices (iron ore CAGR of 26%, PCI and
coking coal CAGR of 14%) and essentially stagnant steel prices (local currency
CAGR of 1%, USD CAGR of 4%). We believe that this decline stands behind the
fall in Chinese steel production growth (down from ~20% p.a. 10 years ago to the
~6% p.a. seen today). Steel capital stock in China is still only at around one-third of
the level seen in the West, and the urbanization and industrialization of China
remains far from complete (see Exhibit 13). In a world where iron ore starts to fall
toward a non-Chinese cost floor of US$80/t, there would be a significant reduction
in the cost pressures facing the Chinese steel industry, which, we expect, would
yield an increase in the Chinese steel trend growth and push iron ore price back up
to US$95/t. Vale and Rio would experience the greatest benefits (equivalent to 31%
and 24% of June 30, 2013 share prices), while more diversified BHP and Anglo
would experience 10% and 16% offsets, respectively.

R = 0.7734
-40
-30
-20
-10
0
10
20
30
50% 55% 60% 65% 70%
I
r
o
n

O
r
e

P
r
e
m
i
u
m

v
s
.

B
e
n
c
h
m
a
r
k

(
U
S
$
/
t
)
Fe Grade of Iron Ore
Price Impact of Quality in Iron Ore
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
J
a
n
-
0
5
A
u
g
-
0
5
M
a
r
-
0
6
O
c
t
-
0
6
M
a
y
-
0
7
D
e
c
-
0
7
J
u
l
-
0
8
F
e
b
-
0
9
S
e
p
-
0
9
A
p
r
-
1
0
N
o
v
-
1
0
J
u
n
-
1
1
J
a
n
-
1
2
A
u
g
-
1
2
S
t
e
e
l

G
r
o
w
t
h
S
t
e
e
l

E
B
I
T
D
A

M
a
r
g
i
n
Chinese Steel Growth and Profitability Since
2005
Margin, %
Annualized Growth
Steel Growth Ex Monetary Growth
VIU or Heterogeneity in a
Commodity Offers a Degree of
Automatic Stabilization to the
Iron Ore Price, Offsetting
Valuation Declines in an
Oversupply World by an
Equivalent of, on Average, ~7%
of June 30, 2013 Share Prices
for Rio, BHP, Anglo and Vale
Chinese Steel Growth Rate
Declines Are a Consequence of
the Budgetary Constraint of
High Iron Ore Prices;
Consequently, Low Iron Ore
Prices Would See Demand
Rise, Offsetting Valuation
Declines by an Equivalent of,
on Average, 20% of June 30,
2013 Share Prices for Rio, BHP,
Anglo and Vale
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
12 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Mining companies are operationally and financially geared to their underlying
commodity exposure, so we provide two valuation metrics (see the "Valuation and
Risks" chapter of this Blackbook for more details):
~80% of weekly mining equity price moves can be explained by underlying
commodity price moves, so we use a regression-based trading model and our
commodity price forecasts to help determine our 12-month price targets. If the
regression remains stable or deviations appear temporary, the model determines
the target price. If we believe a deviation is signaling a fundamental change, we
will adjust our target price for this fundamental shift and disclose the manner and
magnitude of the adjustment made. At present, no adjustments have been made.
We additionally provide a supplementary DCF-based valuation constructed in
nominal local currency terms out to 2030 over which explicit commodity price
and exchange rate forecasts apply. The nominal local currency cash flows are de-
escalated into real U.S. dollar cash flows and discounted at the company-specific
WACC. A country risk premium reflecting the geographic origin of the cash
flows is added to the underlying WACC to reflect cash flow items (i.e.,
expropriation) that cannot be explicitly modeled in the cash flow. All reserves are
considered exploited by the model. In addition, 50% of the incremental resources
(i.e., 50% of the residual resources, excluding those that have already been
converted to reserves) of the company are modeled. Where residual life of mine
(LOM) may be inferred for operations beyond the 2030 time horizon, a terminal
value is applied for the remaining years of potentially exploitable material. We
forecast our models in reporting currency (USD), convert to listing currency
(GBP or Real), and round final DCF values in 25p/cent increments.

The four most significant risks facing the major mining houses are: 1) lack of
capital discipline (specifically displacement of high-cost Chinese marginal
producers by low-cost Western production), 2) operating cost inflation (U.S. dollar
denominated unit costs in all the major mining houses have seen double-digit
growth rates over the last 10 years, roughly half of which are macro related and the
other half are real local currency), 3) a sustained downturn in the Chinese economy
(the largest consumer of global resources), and 4) resource nationalism (ranging
from increased share of rent extraction to outright asset confiscation). For more
details on both sector risks and company-specific risks, see the risk section in the
"Valuation and Risks" chapter.

We believe that there are sound fundamental reasons why commodity prices over
the last five years have been at elevated levels relative to historical precedent.
Moreover, as we have discussed, for iron ore
4
these reasons are based on supply
and demand dynamics that center around China, the largest consumer of
commodities. On the demand side, the Chinese government is facing an imperative
to industrialize at an unprecedented rate ahead of an equally unprecedented
demographic shift. Meanwhile, the Chinese domestic mining industry, with its
high-cost and labor-intensive production, has become more important to global
supply. We believe that changing the cost structure and importance of this industry
may take longer than the market currently anticipates. As a result, we do not
believe that the sustained and near-term fall in commodity price implied by mining
valuations is a foregone conclusion. Furthermore, in the event that we are wrong,
the natural FX hedge embedded in operating costs, VIU adjustment and reduced
cost pressures on the steel-making industry that would eventuate would all mitigate
the valuation impact of such a fall. A key conclusion of our analysis is the
sensitivity of the iron ore price forecast to two variables: China's macro policy (will
the outcome be similar to that which the IMF predicts?) and the strategic choices of
the incumbent iron ore miners (will they discipline capital in pursuit of value or

4
European Metals & Mining: Iron, Cold Iron, Is Master of Them All...or at Least 60% of EBITDA.
Valuation Methodology
Risks
Investment Conclusion
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
13





will they simply pursue volume at the cost of suppressing prices?). Both bear
watching and while the former is beyond the control of our coverage companies,
the latter component of their destiny is firmly within their own control.
Rio Tinto (TP 41.25; unmodified from trading model prediction) 73%
of 2012 EBIT from iron ore, plus world-class copper exposure: We consider
Rio Tinto the most attractive stock in our coverage. Rio owns some of the highest
quality iron ore assets and (vitally) infrastructure globally. Rio also has exposure to
some of the world's best operational copper assets not to mention three of the
world's best undeveloped copper deposits (Resolution and La Granja). Tier 1 assets
in iron ore include Dampier and Cape Lambert (Australian Pilbara), while copper
includes Escondida, Grasberg, Bingham Canyon and Oyu Tolgoi. The prospects of
genuine capital discipline and cost cutting under new CEO Sam Walsh (who made
his bones in low-cost brownfield Pilbara production), coupled with a more
reasoned approach to volume growth, mean that we continue to see Rio Tinto as
our top pick. Our trading model, used to set 12-month target prices, has shown no
signs of the regression shifting (R-squared = 88%) nor is there anything in our
fundamental research to date that causes us to anticipate it will, hence we have
taken our target price from the unmodified regression model price.
Vale (TP BRL 46.50; unmodified from trading model prediction) 95%
of 2012 EBIT from iron ore, a commodity in which we see near-term upside:
Vale is the world's largest iron ore producer and, in Carajas, has one of the most
globally attractive iron ore assets. Vale is the most operationally geared miner to
the iron ore price and we see an asymmetric risk to the upside in iron ore prices in
the near term, hence from a pure value consideration, we are more favorably
inclined to Vale now than previously. We do note the significant influence of the
Brazilian government (5.5% directly through Golden Shares and ~34% indirectly
through the strategic consortium of Valepar). The company is, in our view, most at
risk should a reduced iron ore price eventuate, given its geographic longinquity
from the worlds largest consumer of iron ore, China. Vale's regression continues to
show instability in our trading model (despite R-squared of 86% in our most recent
update). However, for now we have taken the unmodified price target generated by
the trading model, but we will continue to monitor the regression.
BHP (TP 22.50; unmodified from trading model prediction) highest-
quality stock, Tier 1 assets and limited geographic risk: BHP Billiton not only
has the longest corporate history of our coverage group (its component parts trace
their origins back to 1851 and 1883, respectively), we view it as our highest quality
stock. In 2012, the company generated the highest revenue of the "Big Three"
miners in our coverage (US$72 billion versus US$56 billion for Rio and US$49
billion for Vale) and had the highest EBITDA margin (42% versus 39% for Vale
and 36% for Rio). BHP Billiton is the second most diversified (from a commodity
exposure perspective) company in our coverage, after Anglo American. However,
where platinum has been a drag on Anglo's portfolio, BHP's has received a boost
from "black gold" in its petroleum division (69% EBITDA margins in calendar
2012 versus 11% for Anglo's platinum division perspective). The strong
commodity risk diversification of BHP Billiton is complemented with geographic
diversification that, while skewed to Australia, is nonetheless low risk. We have not
seen signs of the regression shifting (R-squared =78%) in our trading model, nor is
there anything in our fundamental research to date that causes us to anticipate it
will. Accordingly, we set our target price from the unmodified regression model
price.
Anglo American (TP 20.25; unmodified from trading model prediction)
a soluble turnaround story: Anglo American has the most diversified portfolio
of our coverage group from a commodity perspective and is significantly smaller
than the "Big Three" of BHP, Rio and Vale due to its smaller iron ore exposure.
That Anglo is ahead of Glencore Xstrata on this metric is, in large measure, due to
the existence of Kumba in Anglo's portfolio. Kumba, however, like AmPlats and
thermal coal, increases the company's country risk exposure due to its South
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
14 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





African location. Anglo American has the highest country risk premium in our
coverage 2.6% versus an average of 1.2% for the "Big Three." Given recent
operational difficulties (including failure to deliver on Minas Rio and Los Bronces,
not to mention the issues plaguing platinum), Anglo remains in our minds a
turnaround story one that will challenge new CEO Mark Cutifani, but one which
we believe is solvable for a leader with his 36 years of operational expertise. Given
the shift in the regression and the fundamental factors that have been weighing on
the stock, as well as the upcoming 1H reporting (at which time Mr. Cutifani will
present the results of his portfolio review), and that we consider Anglo a
restructuring story, we consider there is a greater likelihood of regression instability
going forward than for Rio or BHP and are monitoring the situation. However, for
now, we have taken the unmodified price target generated by the trading model (R-
squared = 85%) at present.
Glencore Xstrata (TP 5.25; unmodified from trading model prediction)
traders, copper and coal: Glencore Xstrata offers exposure for copper and coal
bulls without a taste for iron.
5
It also offers exposure to the sales and trading house
that Mr. Ivan Glasenberg built. As such it has a profile that is distinct relative to the
pure miners in our coverage. The impact of the high-turnover, low-margin trading
business (2% EBITDA margin in 2012 versus 25% for Glencore Xstrata combined)
is clearer even when contextualized against the average 33% for our coverage
group. As an owner operator (Mr. Glasenberg holds 8% of the combined entity's
paper), Mr. Glasenberg's incentives are squarely aligned with investors. It remains
to be seen how he will staff the combined entity, following the departure of much
of the senior management talent from Xstrata. We do consider that Glencore has
some ways to go yet before it will be "institutional quality" on the metrics of
reporting and governance. Furthermore, the company's operations in frontier
jurisdictions like the DRC not only result in the second-highest country risk
premium in our coverage but also carry headline risk as does Glencore's trading
division.
6

For Glencore Xstrata, we have constructed a synthetic stock using Xstratas
actual history and its recent relationship with Glencore. This synthetic shows, in
our view, an acceptably high R-squared of 64%. For now, we have taken the
unmodified price target of 5.25 but will continue to monitor the trading model.



5
Given that the company's only direct iron ore exposure is its 1Q:13 acquisition of a stake in Ferrous Resources.
6
To wit the April 21, 2013 story Glencore traded with Iranian supplier to nuclear program
http://www.guardian.co.uk/business/2013/apr/21/glencore-trade-iran-supplier-nuclear
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
15





If China Is to Grow Rich Before It
Grows Old, It Must Finish
Industrializing in the Next Decade

The industrial behemoth,
7
that is the Chinese economy, has so far been powered by
exploitation of China's most abundant resource: vast pools of surplus rural labor.
However, this labor supply is not infinite. Over the next generation, China will
experience a substantial increase in its old-age dependency ratio as the country ages
sharply in response to earlier policy initiatives (namely, the "one child" policy). A
January 2013 IMF working paper
8
sees cheap labor in China becoming exhausted
sometime between 2020 and 2025 the same point at which we forecast that
China's absolute demand for raw materials will peak. We believe that it is the
proximity of this labor exhaustion that has contributed to the urgency of the
Chinese government's push to install a productive capital base and transition the
economy away from subsistence agriculture to tertiary forms of value-added
activity. The unprecedented rapidity of Chinese industrialization has rendered
China the largest consumer of global commodities (56% of total iron ore demand
globally in 2012); in our view, this reflects the county's requirement to "grow rich
before it grows old" and before the supply of cheap labor that has powered this
industrialization is exhausted.
It is the rapidity of this industrialization, coupled with the fundamental
geological scarcity of certain key raw materials domestically, that has been the key
driver behind the emergence of the commodity "super-cycle." In this chapter, we
show how our counter-consensus view on "stronger for longer" commodity prices
is consistent with the imperative faced by the Chinese to build an industrial society
in a little more than 20 years.
Global Demographics and the Impact of China
A clear relationship exists between the wealth of societies and their demographic
structure (see Exhibit 14). Rich industrialized economies tend to see falling birth
rates and rapidly increasing dependency ratios.
9
In these societies, old-age
provision is not critically dependent on having a large number of children. Rather,
the increase in productivity associated with industrialization enables the society to
easily generate the output required to support what would otherwise be a significant
burden. On the other hand, in societies relying on subsistence agriculture, the birth
rate tends to stay high and the society does not age significantly over time.
The transition from an agrarian economy to an industrial society, dominated by
tertiary forms of economic activity, requires significant consumption of steel and
other raw materials. In effect, it represents the build-up of capital stock that
increases the productivity of the workforce, thus liberating labor from the
requirement to be engaged in primary enterprises in the process. We see this pattern
clearly in the U.S., where the employment in agriculture peaked in 1910 at 11.6
million people before falling monotonically to just over 2 million people today (see
Exhibit 15). This is despite the fact that over the same period U.S. production of
wheat rose from 17mt in 1910 to over 60mt today (+253%). Likewise, the U.S.

7
The original biblical Behemoth is described as having a tail like cedar, bones like iron, limbs as strong as copper, and sinews like stone, hence it
seems an apropos metaphor for the economy of the world's largest consumer of commodities.
8
"Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point?" IMF WP/13/26.
9
Defined as the number of non-productive workers (according to the UN, those aged 0-14 and 65 plus) relative to the working-age population.
So, a dependency ratio of 50 implies 50 non-productive citizens supported by 100 people of working age.
Over the Next Generation,
China's Old-Age Dependency
Ratio Will Increase Sharply in
Response to Earlier Policy
Initiatives
In 2000, China's Demographic
Composition Resembled That
of a Rich Industrial Society,
With a Falling Birth Rate and a
Rapidly Aging Society, But Its
Economy Was Still Agrarian
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
16 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





experienced similar increases in the production of other agricultural commodities
(maize +315%; rice +1,970%; cattle +62%). As a result, the service sector
employment rose substantially from 5.9 million people in 1910 to roughly 48
million today (see Exhibit 16). In 1850, U.S. agriculture employed 5x as many
people as the service sector did (5 million versus 0.9 million), but it now employs
only 0.05x as many (2.2 million versus 48 million) a 100-fold decline over the
space of the U.S.'s industrialization.
As the U.S. transitioned from an agrarian to an industrialized society, its
capital stock rose. Rather than relying on the energy of human labor to drive
output, it is far more productive to harness the forces of mechanization and
industrialization (see Exhibit 17). Moreover, this transition is not isolated to the
U.S., but has been replicated in one form or another across all countries that have
industrialized.

Exhibit 14 There Is a Clear Relationship Between the Aging of a Population and Its
WealthUsually, Birth Rates Fall as Societies Get Rich, With Aging Population
Supported by the Increased Productivity Associated With Industrialization
Source: UN and Bernstein estimates and analysis.
R = 0.4677
-10
0
10
20
30
40
50
60
-50 -40 -30 -20 -10 0 10
G
D
P
/
C
a
p
i
t
a

U
S
$
'
0
0
0
Change in Old-Age Dependency Ratio 2000-2040 Negative Indicates Aging Population
Aging of Population vs. Development of Economy Excluding China
Size of Bubble = Population
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
17





Exhibit 15 In 1910, the U.S. Began Transitioning from
an Agricultural Economy

Exhibit 16 Toward One Driven by Services
Source: Mitchell and Bernstein analysis. Source: Mitchell and Bernstein analysis.

Exhibit 17 We Believe That the Increases in Labor Productivity, Occasioned by the Increased
Intensity of Capital Stock (Machinery, Railroads, etc.), Enabled This Transition
Source: World Steel Association (WSA), UN, Mitchell and Bernstein estimates and analysis.

The stark outlier from the rule of an aging population equating to high output
and increased prosperity, however, was China in 2000. In particular, its output in
real terms stood at a little over US$2,000 per capita, and yet the country was set to
experience a precipitous decline in the working-age population (see Exhibit 18).
Little wonder that as few as six years ago, a Chinese demographer reportedly stated
at Davos that "China might have to resort to mass suicide in the end, shoving
pensioners onto the ice."
10
Though stark hyperbole, this comment nevertheless
illustrates the realization by the Chinese policy makers that a graying population in
a society that has not yet industrialized is a recipe for social and economic disaster.
Since 2000, China has embarked upon a program of urbanization unprecedented in
human history. Agricultural employment in China peaked in 2000 and has been

10
As reported in the Daily Telegraph on February 6, 2013.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1
8
5
0
1
8
6
0
1
8
7
0
1
8
8
0
1
8
9
0
1
9
0
0
1
9
1
0
1
9
2
0
1
9
3
0
1
9
4
0
1
9
5
0
1
9
6
0
1
9
7
0
1
9
8
0
1
9
9
0
2
0
0
0
2
0
1
0
T
h
o
u
s
a
n
d

P
e
o
p
l
e
US Agriculture Employment
0
10,000
20,000
30,000
40,000
50,000
60,000
1
8
5
0
1
8
6
0
1
8
7
0
1
8
8
0
1
8
9
0
1
9
0
0
1
9
1
0
1
9
2
0
1
9
3
0
1
9
4
0
1
9
5
0
1
9
6
0
1
9
7
0
1
9
8
0
1
9
9
0
2
0
0
0
2
0
1
0
T
h
o
u
s
a
n
d

P
e
o
p
l
e
US Services Employment
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0
1
2
3
4
5
6
1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
C
a
p
i
t
a
l

S
t
o
c
k

o
f

S
t
e
e
l

k
g
/
C
a
p
i
t
a
R
a
t
i
o

P
r
i
m
a
r
y

t
o

T
e
r
t
i
a
r
y

J
o
b
s
Evolution of US Economy to Service Sector
Ratio Primary to Tertiary Employment - USA Steel Capital Stock - USA
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
18 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





declining ever since, with first manufacturing and now services increasing in
importance to the overall economy (see Exhibit 19 through Exhibit 22). Indeed,
there are now more people employed in the service sector in China than in
manufacturing and construction.
Meanwhile, the installation of the capital stock required to support an urban
service-based society has continued apace (see Exhibit 23) and has followed the
same trajectory as that of the U.S. and other industrialized countries. There are now
as many jobs in services in China as in farming, and the country's capital stock
comprises ~4 tons of steel per capita. The U.S. reached the point of equivalence
between employment in the service sector to agricultural labor in 1930
accompanied by a capital stock of ~5.5 tons of steel per capita. On this basis,
Chinese industrialization has been more productive than that seen in the U.S. Both
from the perspective of the labor pool composition and capital stock installation,
China today resembles the U.S. of the 1930s (see Exhibit 24). The important
difference between the two, however, is the speed of the transition toward an urban
society. It took the U.S. 80 years to reduce the importance of agriculture from 5x
that of services to parity. The Chinese accomplished this in 30 years.

Exhibit 18 In 2000, China Was a Clear Outlier from the Normal Pattern the World's Largest
Country Was Set to Age Rapidly and Yet Was Still at a Pre-industrial Level of Output
Source: UN and Bernstein estimates and analysis.
-10
0
10
20
30
40
50
60
-50 -40 -30 -20 -10 0 10
G
D
P
/
C
a
p
i
t
a

U
S
$
'
0
0
0
Change in Old-Age Dependency Ratio 2000-2040 Negative Indicates Aging Population
Aging of Population vs. Development of Economy Including China
Size of Bubble = Population
USA
Japan
China
South
Korea
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
19





Exhibit 19 It Was Only in the Year 2000 That China
Started Reducing Its Framing Dependence

Exhibit 20 1970s Saw the Rise in Construction and
Manufacturing Employment Start
Source: NBS and Bernstein analysis. Source: NBS and Bernstein analysis.

Exhibit 21 Followed in Short Order by the Service
Sector

Exhibit 22 Today, More People Are Employed in
Services Than Manufacturing
Source: NBS and Bernstein analysis. Source: NBS and Bernstein analysis.


0
50
100
150
200
250
300
350
400
M
i
l
l
i
o
n

W
o
r
k
e
r
s
Primary Employment China
0
50
100
150
200
250
M
i
l
l
i
o
n

W
o
r
k
e
r
s
Secondary Employment China
0
50
100
150
200
250
300
M
i
l
l
i
o
n

W
o
r
k
e
r
s
Tertiary Employment China
0
100
200
300
400
500
600
700
800
M
i
l
l
i
o
n

W
o
r
k
e
r
s
Chinese Employment Breakdown
Primary Secondary Tertiary
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
20 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 23 The Pattern in China Is Nearly Identical to That Seen in the U.S.; Capitalization Drives
Productivity Increases, Which Then Lead to the Emergence of Services
Source: NBS, WSA and Bernstein estimates and analysis.

Exhibit 24 Comparing China to the U.S. Suggests That the Structure of the Chinese Economy
Today Is Similar to the U.S. in the 1930s, Both in Labor and Capital Stock; However,
the Transition Has Been Far More Rapid in China
Source: NBS, WSA, Mitchell and Bernstein estimates and analysis.


0
1
2
3
4
5
6
7
8
9
10
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
R
a
t
i
o

P
r
i
m
a
r
y

t
o

T
e
r
t
i
a
r
y

J
o
b
s
C
a
p
i
t
a
l

S
t
o
c
k

o
f

S
t
e
e
l

k
g
/
C
a
p
i
t
a
Evolution of Chinese Economy to Service Sector
Steel Capital Stock - China Ratio Primary to Tertiary Employment - China
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0
1
2
3
4
5
6
7
8
9
10
1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
C
a
p
i
t
a
l

S
t
o
c
k

o
f

S
t
e
e
l

k
g
/
C
a
p
i
t
a
R
a
t
i
o

P
r
i
m
a
r
y

t
o

T
e
r
t
i
a
r
y

J
o
b
s
China and US Evolution Compared
Ratio Primary to Tertiary Employment - USA Ratio Primary to Tertiary Employment - China
Steel Capital Stock - USA Steel Capital Stock - China
TheChineseeconomy
iresembles thatofthe
USinthe1930s
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
21





Lewis Point and the End of Cheap Labor
The Lewis point is defined as the point at which surplus agricultural labor becomes
exhausted and industrial wages start to accelerate. This, in turn, lowers the
industrial sector productivity, placing a drag on the level of investment in an
economy. According to the argument, prior to this point, the pool of rural labor acts
as a brake on wages in the industrial sector. This, in turn, increases its profitability,
hence supporting a higher level of investment.
So far it would seem that (with the exception of raw materials) China has
maintained an exceptionally rapid growth rate with (relatively) low inflation
precisely because of this mechanism (or so the IMF would argue). However, the
pool of cheap labor in the country is soon to be exhausted. In a January 2013
whitepaper, the IMF marks the point of exhaustion somewhere between 2020 and
2025 (see Exhibit 25). This, therefore, marks the point at which capital stock
accumulation in China will come under the greatest pressure. Moreover, this point
also coincides with our forecast for the peak demand for raw materials in China,
and this coincidence is not accidental (see Exhibit 26). By 2020, the Chinese will
have installed a capital stock comparable to that seen in most other industrialized
nations. Consequently, China should be able to bear the acceleration in industrial
wages with some degree of equanimity principally because once the country's
capital stock is already built, the decline in investment profitability will not matter
as much as it would now.
To see this more clearly, let's consider Japan. It started to exhaust its working-
age population some 20 years prior to China, with Japanese population in the 15-64
age group growth turning negative in 2000 (see Exhibit 27). However, at this point,
Japan was already an industrialized nation with 14 tons of steel per capita in its
capital stock.

Exhibit 25 The Demographic Challenges Facing China and the Emergence of Lewis Point Stand
Behind the Requirement to Accelerate the Capital Stock Formation
Note: 2015-40 numbers are UN estimates.
Source: UN and Bernstein analysis.

-10%
-5%
0%
5%
10%
15%
20%
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
C
h
a
n
g
e

i
n

W
o
r
k
i
n
g
-
A
g
e

P
o
p
u
l
a
t
i
o
n
China Growth in Working-Age Population (15-64)
Criticaldemographic
inflection point~2020to
2025
As China's Supply of Cheap
Rural Labor Is Exhausted,
Maintaining the Level of Capital
Investment Will Become More
Difficult; China's Transition
Will Have to Be as Rapid as It
Has Been So Far and Continue
Until at Least 2020
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
22 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 26 The Urgency to Industrialize the Chinese Economy Is Evident in the Acceleration in
Steel Demand in Comparison to the Historical Precedent in the West
Note: 2015-30 numbers are Bernstein estimates.
Source: WSA and Bernstein estimates and analysis.

Exhibit 27 A Very Similar Demographic to China Was Seen in Japan Toward the End of the Last
Century; However, by the Time the Japanese Transition Occurred, Industrialization
Was Complete and Output Stayed High
Note: 2015-40 numbers are UN estimates.
Source: UN and Bernstein analysis.


0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
C
r
u
d
e

S
t
e
e
l

k
t
Global Crude Steel Production
EU (27) Other Europe C.I.S North America South America Africa Middle East
China India Japan South Korea Other Asia Oceania Other
Westernpost
warcapital
accumulation
Westerncapital
"maintenance"...comm
oditiesexgrowth
Asiancapital
accumulation
-10%
-5%
0%
5%
10%
15%
20%
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
C
h
a
n
g
e

i
n

W
o
r
k
i
n
g

A
g
e

P
o
p
u
l
a
t
i
o
n
China Japan
By 2025,Chinesesteel
percapitawillstandat
~10tonsvs.~4today
WhenJapanhitthe
demographicceiling,
therewasaninstalled
stockof14tonsper
capita
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
23





If our demand projections prove accurate, by the time China reaches this
demographic tipping point, the country too will have industrialized (critically, it
will not have done so if raw material demand goes ex-growth from this point).
Consequently, China has a very limited window in which to achieve the necessary
changes to the structure of its economy and society, and it is clearly seen in the
evolution of China's dependency ratio over time. In the 1950s, the infant mortality
rate in China stood at ~200 per 1000, but then fell dramatically over the next 20
years to a level well below 50. However, female fertility levels stayed at roughly
the same level (around six births per woman) for a considerable period, thus
resulting in an explosive population growth, an increase in life expectancy and a
rapid fall in the child dependency ratio following the "one child" policy (see
Exhibit 28).
The response of the "one child" policy to the problem subsequently sowed the
seeds for an inevitable rise in the old-age dependency ratio (see Exhibit 29). In toto,
these two effects generated a demographic "wave" of cheap labor moving through
the Chinese economy between 1970 and 2020, as the children of the previous pro-
growth policy initiatives matured and entered the workforce (see Exhibit 30).
Given that the first part of the boon of cheap labor was effectively squandered
during the Cultural Revolution and subsequent political restructuring, only the
period from 2000 to 2020 was left available to take advantage of reorientation of
mass cheap rural labor in the Chinese economy. So while a similar demographic
profile to China was seen 20 years earlier in Japan, the political situation in the
Middle Kingdom and the sheer size of the country led to a radically different
outcome (see Exhibit 31).
Further compounding this demographic trend is the accompanying behavioral
trend. On a 1Q:13 trip to China, our team interviewed management across
industries, including sewing machine and baby goods manufacturing, hospitality,
fine dining, education, and mining to gather anecdotes about managing a workforce
increasingly composed of only children. These "xiao huangdi" (little emperors) are
the sole focus of often six doting relatives (two parents and four grandparents). We
collected anecdotes that were similar across different industries: only children were
often resistant to shift work or overtime, many expected to be allowed to go home
for a lunch break, they would refuse to work if they came down with minor colds,
if a family member grew ill they would leave without offering any notice, and if
they changed jobs they would also often leave without giving notice. There was
also discussion of a seasonal pattern of, if not outright productivity disruption, at
least disruption from management's perspective: the month following Chinese New
Year (and the payment of bonuses) many workers would shop around for offers of
new employment at higher wages (particularly in Shanghai and Beijing). They
would take these offers back to their current employer in order to negotiate
increased compensation. The employers felt that they had no choice but to raise
wages for those workers that had proven themselves to be reliable, as many
workers were not reliable. Across all the conversations we had, one common thread
emerged: behaviorally, management considered their respective workforces less
reliable than they had been 5-10 years in the past. To the extent that our interviews
can be extrapolated to the nation at large, this suggests that behavioral shifts in the
workforce may further increase the time pressure upon the Chinese government to
industrialize beyond that suggested by demographics alone.


For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
24 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 28 A Rapid Fall in the Child Dependency Ratio
Following the "One Child" Policy

Exhibit 29 Will Eventually Be Offset by the
Extraordinary Increase in the Old-Age
Dependency Ratio
Note: 2020-60 are UN estimates.
Source: UN and Bernstein analysis.
Note: 2020-60 are UN estimates.
Source: UN and Bernstein analysis.

Exhibit 30 The End of the Last Century Marked an
Opportunity to Deploy Abundant Labor in
China to Develop Its Capital Stock

Exhibit 31 Mirroring Japan But Scaling Up More
Than 10 Fold (127 Million vs. 1,345 Million
People)
Note: 2020-60 are UN estimates.
Source: UN and Bernstein analysis.
Note: 2020-60 are UN estimates.
Source: UN and Bernstein analysis.

0
10
20
30
40
50
60
70
80
P
o
p
u
l
a
t
i
o
n

6
5
+

t
o

1
5
-
6
4
Child Dependency Ratio China
0
10
20
30
40
50
60
P
o
p
u
l
a
t
i
o
n

0
-
1
4

t
o

1
5
-
6
4
Old-Age Dependency Ratio China
30
40
50
60
70
80
90
P
o
p
u
l
a
t
i
o
n

0
-
1
4

a
n
d

6
5
+

t
o

1
5
-
6
4
Total Dependency Ratio China
30
40
50
60
70
80
90
100
P
o
p
u
l
a
t
i
o
n

0
-
1
4

a
n
d

6
5
+

t
o

1
5
-
6
4
China and Japan Aging Compared
China Japan
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
25





Capital Accumulation and Real Commodity Prices
Over 1930-1970, there was a clear link between the trend growth in real
commodity prices and the growth in Western capital stock (see Exhibit 32). When
the West went ex-growth for raw materials following the oil shocks of the 1970s,
real commodity prices started their downward trend. This illustrates that falling real
commodity prices do not constitute the norm. In fact, quite the opposite should be
true, given that the miners start by accessing the most promising and easily
exploited geology and move onto the harder, higher-cost deposits only
subsequently. However, after the mid-1970s, productivity improvements flattened
the mining cost curve. Given the commoditized nature of the industry and absent
meaningful marketing power, the benefits of these cost improvements were
transferred to raw material consumers through lower prices. Mining companies
became their own worst enemies as they competed on volume and pursued simple
"beggar thy neighbour" strategies.
This trend halted abruptly in 2003, as the world driven by Chinese
industrialization re-entered the mode of capital accumulation. Part of our
conviction in continued commodity price strength lies in the real and inevitable
requirement we see to transform the Chinese economy. We believe that capital
accumulation in China must continue to run for some time to come, and therefore
demand for raw materials going ex-growth simply does not match the demographic
reality faced by the Chinese policy makers.
As an example of this, we show our forecast for real copper prices and the
continuation of capital stock accumulation in Exhibit 33. The market currently
prices in significant declines in the real copper price going forward. In our view,
this is at odds with the historical precedents of significant size economies trying to
industrialize and the effect of such industrialization on commodity prices.
A further complication relates to the fact that it has been Chinese mining wage
escalation that has driven the commodity "super-cycle" through its impact on the
structure of the global cost curve (see Exhibit 34). As China approaches the Lewis
point, Chinese wages should start to accelerate. If China has not been able to
"unlock" Africa by the time this happens, and absent massive value destructive
capital profligacy from the major miners, the chance of seeing further significant
commodity price rises cannot be discounted.

The Period of Capital
Accumulation in the West Saw
a Trend of Increasing Real
Commodity Prices; We See
Chinese Capital Accumulation
Continuing to at Least 2020
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
26 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 32 1930-1973 Saw Real Commodity Prices Grow as Capital Was Accumulated in
Western Economies; Once Demand Went Flat, Productivity Improvements in Mining
Drove Real Commodity Prices Down
Source: WSA, Bloomberg L.P., Mitchell and Bernstein estimates and analysis.

Exhibit 33 The Emergence of a New Phase of Capital Accumulation Driven by China Has Seen
Significant Real Commodity Price Appreciation; Our Counter-Consensus View on
Commodities Is Driven, in Part, by a Belief That This Will Continue Until the Chinese
Capital Stock Accumulation Comes to an End
Note: 2015-20 are Bernstein estimates
Source: WSA, Bloomberg L.P., Mitchell and Bernstein estimates and analysis.

0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2,000
3,500
5,000
6,500
8,000
9,500
11,000
12,500
1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
R
e
a
l

C
o
p
p
e
r

P
r
i
c
e

U
S
$
/
l
b
U
S

C
a
p
i
t
a
l

S
t
o
c
k

k
g

S
t
e
e
l
/
C
a
p
i
t
a
Real Commodity Prices and Capital Stock Accumulation to 2003
US Capital Stock Real Copper Price
Inanex. demand growth
world,productivity
improvements drive down
real commodity prices
0
1,500
3,000
4,500
6,000
7,500
9,000
10,500
12,000
13,500
1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
C
a
p
i
t
a
l

S
t
o
c
k

k
g

S
t
e
e
l
/
C
a
p
i
t
a
R
e
a
l

C
o
p
p
e
r

P
r
i
c
e

U
S
$
/
l
b
The Rise of China and the Impact of Real Commodity Prices
Real Cu Price Real Cu Price Forecast US Capital Stock China Capital Stock
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
27





Exhibit 34 Chinese Labor Costs Have Been Instrumental in Changing Global Commodity Cost
Curve Structures and, With Them, the Price of Mined Raw Materials; What Happens
Once China Moves Past the Lewis Point?
Source: IMF, NBS and Bernstein estimates and analysis.
0
50
100
150
200
250
300
350
400
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Chinese Costs and Global Growth vs. Price
IMF Metals Index Chinese Costs + GDP
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
28 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE






For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
29





Iron Ore "Super-Cycle" Pricing
Generated by High-Cost Producers
Responding to the Rapidity of China's
Industrialization

In our 2012 Blackbook, European Metals & Mining: Iron, Cold Iron, Is Master of
Them All...or at Least 60% of EBITDA, we reviewed why iron ore is important to
our coverage group, and discussed in length our supply and demand framework.
11

Iron ore is the key commodity for our coverage group, generating, on average, 41%
of revenue and 65% of EBITDA in 2012. This has risen from the average of 23%
of revenue and 28% of EBITDA back in 2003, supported not only by rising iron
ore prices
12
but also by iron ore production increases of 11.6% CAGR across our
coverage group.
13
In our view, it is the urgency of China's industrialization
(discussed in the previous chapter), coupled with the fundamental geological
scarcity of certain key raw materials domestically, that has been the key driver
behind the emergence of the commodity "super-cycle." On the demand side for iron
ore, our secular commodity price view is supported by a fundamental analysis of
industrialization patterns in 120 countries since 1900. On the supply side, we
identify the emergence of a new class of marginal iron ore producers in 2003
(Chinese high-cost producers), their impact on the global cost curve, and the
duration of supply side support for "super-cycle" pricing based on new greenfield
and brownfield projects. We see the "super-cycle" pricing regime supported on the
demand side until China finishes industrializing (2020-25) and on the supply side
until sufficient new low-cost Western production is brought on line to displace the
marginal high-cost Chinese producers (the timing of which rests in the hands of the
Western majors and underlies our continued and continuous calls for capital
discipline).
Iron Ore Key Commodity for Our Coverage
Iron ore is the key commodity for our coverage group, generating, on average, 41%
of revenue and 65% of EBITDA in 2012 (see Exhibit 35 and Exhibit 36). This has
risen from the average of 23% of revenue and 28% of EBITDA back in 2003,
supported not only by rising iron ore prices but also by iron ore production
increases of 11.6% CAGR across our coverage group. Of the "Big Three,"
14
BHP
showed the highest CAGR for the period (8.1%), while Vale which started from
a production base 2.5x that of BHP's in 2003 had the lowest CAGR at 6.9%
(meaning that by 2012, Vale's production base was only 1.9x that of BHP's). Anglo
American had the highest CAGR out of our coverage stocks exposed to direct iron
ore production of 23.7% (see Exhibit 37 through Exhibit 40).

11
Please see the "China Growth Scenarios" and "Our Iron Ore Price Forecast" chapters for more information on our price forecast in the context
of different scenarios discussed in this Blackbook.
12
2003-12 saw the IMF 62% FE monthly spot (CFR Tianjin port) rise at a CAGR of 128%, from an average $14/t to an average $129/t.
13
Excluding Glencore, which has no direct production exposure to iron ore, bar the company's 1Q:13 stake acquired in Ferrous Resources.




14
Rio Tinto, Vale and BHP Billiton.
We See Iron Ore "Super-Cycle"
Pricing Continuing Until High-
Cost Chinese Marginal
Producers Are Displaced by
New Low-Cost Production
Iron Ores Contribution to Our
Sectors EBITDA Has Increased
from 28% to 65% (2003-12),
Supported by a Price CAGR of
128% and Production Volume
CAGR of 12% Over the Period
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
30 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 35 Across Our Coverage Group, Iron Ore
Generated, on Average, 41% of Revenue

Exhibit 36 ...And 65% of EBITDA in 2012
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

Exhibit 37 Iron Ore Currently Accounts for 44% of Rio Tinto's Revenue and Has Been Driven by
a 7.6% Production CAGR
Source: Corporate reports and Bernstein estimates and analysis.

70%
44%
31%
18%
41%
2012 Revenue from Iron Ore
97%
76%
49%
37%
65%
2012 EBITDA from Iron Ore
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
R
e
v
e
n
u
e

$
m
P
r
o
d
u
c
t
i
o
n

k
t
Rio Tinto Iron Ore
Rio Tinto Volume Rio Tinto Revenue
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
31





Exhibit 38 Iron Ore Currently Accounts for 31% of BHP Billiton's Revenue and Has Been Driven
by an 8.1% Production CAGR
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 39 Iron Ore Currently Accounts for 70% of Vale's Revenue and Has Been Driven by a
6.9% Production CAGR
Source: Corporate reports and Bernstein estimates and analysis.

0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
R
e
v
e
n
u
e

$
m
P
r
o
d
u
c
t
i
o
n

k
t
BHP Iron Ore
BHP Volume BHP Revenue
0
5,000
10,000
15,000
20,000
25,000
30,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
R
e
v
e
n
u
e

-
$
m
P
r
o
d
u
c
t
i
o
n

-
k
t
Vale Iron Ore
Vale Volume Vale Revenue
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
32 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 40 Iron Ore Currently Accounts for 18% of Anglo American's Revenue and Has Been
Driven by a 23.7% Production CAGR
Source: Corporate reports and Bernstein estimates and analysis.
Iron Ore Demand
Iron ore demand can be understood only in the context of steel demand, as steel is
the means by which iron ore is actually consumed in an economy. Through months
of data analysis, we have assembled a database covering the consumption of metals
and economic output for 120 countries since 1900. Our analysis identified distinct
and repeatable patterns in every country that has successfully industrialized (as well
as the anomalous patterns in those that have not).
First and foremost, it is important to distinguish between the rate of steel
consumption (how much is being consumed/embedded today) and the level of steel
consumption (how much has been consumed/embedded historically). We liken the
situation to filling a bathtub: the speed of water coming out of the tap cannot tell
you when the bathtub will overflow you also need to know how full the bathtub
is already and how much water it can hold.
Industrializing and industrialized economies move through three distinct
phases in their rate of steel consumption. The same three phases are repeated across
industrialized and industrializing countries in our dataset.
i.
Development. The build-up of industrialization where steel use grows
faster than the underlying GDP. This corresponds to the phase of
capital-base installation, which will subsequently generate output.
ii.
Peak. A peak in intensity where GDP growth and steel growth are
matched. During this phase, we see the effect of diminishing returns
additional capital spending starts delivering incrementally less output.
iii.
Decline. The development of an economy based on tertiary forms of
value-add, i.e., forms of manufacturing that require little incremental
consumption of natural resources (e.g., airbags in cars no new steel
is used but significant value is created). Once this occurs, overall
economic growth will be faster than the growth in metal consumption.
As a country industrializes, it evolves through these three distinct phases,
which result in a unique and consistently repeated structural form that appears
across the development of Western Europe, North America and the developed
Asian economies. Following the same three-phase trajectory for the evolution of
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
0
5,000
10,000
15,000
20,000
25,000
30,000
R
e
v
e
n
u
e

$
m
P
r
o
d
u
c
t
i
o
n

k
t
Anglo Iron Ore
Anglo Volume Anglo Revenue
Our Dataset of 120 Countries
Since 1900 Shows All
Industrialized and
Industrializing Countries Pass
Through Distinct and Repeated
Patterns of Steel Demand
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
33





the steel consumption rate within all industrialized and industrializing countries,
China's steel intensity has passed from development through peak and is now in the
decline phase a period in which the rate of demand growth is decelerating. The
requirement to continue to build the capital stock and complete the industrialization
constrains how rapid the deceleration will be. The steady-state rate of consumption,
once the process is completed, will be determined by whether the economy, once
mature, adopts a more manufacturing or services-oriented focus (see Exhibit 41).
15

Countries that have not industrialized (and historical data for industrialized
countries prior to industrialization) show clustered and random (albeit typically
low) rates of steel intensity.
In addition, three paradigms emerge for the evolution of the level of steel
consumption across countries that have industrialized (or attempted to
industrialize). These patterns show how the level of steel stock has varied by the
stage of economic development in each country, which allows us to view how a
country, becoming ever more productive (i.e., increasing total factor productivity
with increasing economic development), looks through the lens of cumulative steel
use. We dub these paradigms "Services and Technology" (exemplified by the U.S.
and the U.K.), "Manufacturing" (exemplified by Germany and Japan) and
"Inefficient" (exemplified by the former USSR)
16
see Exhibit 42.
Our framework shows that Chinese steel demand (46% of 2012 finished steel
demand globally) is on a sustainable path (see Exhibit 43). We believe it is
erroneous to conflate decelerating metal intensity with negative or flat metal
demand growth. It is likewise erroneous to conclude that rapidity of development is
an appropriate proxy for efficiency (or lack thereof) in capital allocation. However,
these seem to be two of the more widely disseminated flaws in analyzing the
Chinese steel industry. Chinas current steel intensity (rate) is consistent with its
state of industrialization and shows that the country is transitioning from Phase 2
(Peak) to Phase 3 (Decline) at a rate commensurate with that seen elsewhere. This
is not a "structural shift" so much as a natural development to a state that is less
steel intensive. The current trajectory sees China ending up less steel intensive than
"Manufacturing" countries like South Korea but more so than "Services and
Technology" countries like the U.S. To highlight the sustainability of China's
demand, we would call attention to the fact that the economic activity of every
person in the U.S. (or any other developed country) is supported by an installed
capital base comprising 80kg of copper and 12,000kg of steel more than triple
the current capital base in China (26kg of copper and 4,500kg of steel per capita)
see Exhibit 44.


15
In order to render these comparable across differently populated countries, we adjust output and embedded stock on a per-capita basis.
16
As with the rate calculation, in order to render these comparable across differently populated countries, we adjust output and steel consumption
on a per-capita basis.
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
34 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 41 Like Other Countries That Have Industrialized, China's Steel Intensity Has Passed
from "Development" Through "Peak" and Is Now in "Decline"; the Steady-State Rate
of Consumption Will Be Determined by Whether the Economy, Once Mature, Adopts
a More Manufacturing or Services-Oriented Focus
Source: WSA, IMF, Mitchell and Bernstein estimates and analysis.

Exhibit 42 The "Services and Technology" Pattern (Embodied by the U.S.) Shows the Highest
Output/Capital Stock (on a Per-Capita Basis), the "Manufacturing" Pattern (Embodied
by Germany) Also Shows an Upward-Sloping Relationship Between Output and
Capital Stock; Only the Failed "Inefficient" Pattern (Embodied by the former USSR)
Shows a Flat and Negative Relationship Between Output and Embedded Capital
Stock
Source: WSA, IMF, Mitchell and Bernstein estimates and analysis.

0
10
20
30
40
50
60
70
80
0 5 10 15 20 25 30 35 40 45 50
S
t
e
e
l

I
n
t
e
n
s
i
t
y

(
k
g
/
$
'
0
0
0

G
D
P
)
Output GDP/Capita $'000 (Real 2005 PPP)
Trend Steel Intensity Evolution
France USA China Japan South Korea China Actual
0
5
10
15
20
25
30
35
40
45
50
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000 28,000 30,000 32,000
O
u
t
p
u
t

G
D
P

p
e
r

C
a
p
i
t
a

(
$
1
,
0
0
0
)
Capital Stock kg Steel per Capita
Paradigms for Embedding Steel Stock
USA USSR Germany
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
35





Exhibit 43 Our Analysis Derives a Consistent Relationship Between Steel Demand Growth and
Overall Level of Economic Activity for China; It Does Not See Signs That the Output
Generated by the Embedded Capital Stock Is "Inefficient"; Rather, It Is Increasing in
a Manner Consistent With Development Into an Economy Midway Between the
"Services and Technology" (Embodied by the U.S.) and the "Manufacturing"
(Embodied by Germany) Patterns
Source: WSA, IMF, Mitchell and Bernstein estimates and analysis.

0
5
10
15
20
25
30
35
40
45
50
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
G
D
P

p
e
r

C
a
p
i
t
a

U
S
$
'
0
0
0
Installed Steel Stock (including depreciation) kg per Capita
Steel Stock vs. Output Evolution
China Historical China Forecast - SCB USA Historical Linear (China Historical - Trend)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
36 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 44 A Central Plank of Our Thesis Rests on the Fact That Chinese Urbanization and
Industrialization Are Still Far from Complete; in Terms of Capital Stock
Accumulation, Labor Composition and Levels of Output, China Today Resembles the
U.S. in the 1930s
Source: WSA, IMF, Mitchell and Bernstein estimates and analysis.

R = 0.6587
0
10
20
30
40
50
60
70
80
0 5,000 10,000 15,000 20,000
O
u
t
p
u
t

G
D
P
/
C
a
p
i
t
a

$
'
0
0
0

(
R
e
a
l

2
0
0
5

P
P
P
$
)
Capital Stock kg Steel/Capita (including depreciation)
Capital Stock to Output by Country
China
UK
Kuwait
Germany
SKorea
Taiwan
USA
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
37





Iron Ore Supply
We do not believe that the microeconomics of supply and demand have
suddenly ceased to determine commodity prices. In other words, we reject
"financialization" or other non-economic explanations of the "super-cycle."
Rather, a shift in the source of the marginal unit of supply and lack of
transparency into that marginal unit have obfuscated the underlying supply and
demand dynamic. In 2003, Chinese producers emerged as the marginal
high-cost supplier for metals, including iron ore, met coal and copper. However,
a lack of visibility into the nature of these producers led to a breakdown in the
representativeness of the dataset historically used to construct the global cost
curve (see Exhibit 45 and Exhibit 46). We see a paradox in China: pre-industrial
modes of natural resource production coexisting with industrial modes of
production in other sectors. This has led to Chinese mining costs outstripping
productivity gains, which has driven up both Chinese commodity imports and
global commodity prices. Chinese labor productivity and costs and, specifically,
the inability to displace increasingly expensive labor with capital represent the
true cause of commodity "super-cycle" pricing. Our analysis has completed the
global cost curve, showing that ~10% of global iron ore production in 2011
came from the "missing" Chinese mines (see Exhibit 47). From the supply side,
the current "super-cycle" is supported so long as these high-cost marginal
producers in China are not displaced. China lacks the geological endowment,
experience in capital allocation processes and political will to drive a transition
to capital-intensive modes of mining. That leaves, in our view, two routes for
displacement Chinese mining abroad (e.g., in Africa) and new low-cost
supply brought on by Western majors. This means that the persistence of the
supply side support for the "super-cycle" will be determined by the degree of
capital discipline exercised by Western majors (see Exhibit 48). Currently, our
medium-term iron ore price forecast is based on a "zero-capital discipline"
assumption. That is, we assume that the miners will continue failing to prioritize
their total portfolio value ahead of the marginal value of incremental growth. To
the extent that Western majors bring on new, low-cost supply in copious
amounts (referring here to the mega projects that have the ability to displace
significant numbers of high-cost marginal suppliers in China), they effectively
subsidize Chinese industrialization at the expense of future sector profitability.
Thus, the fate of sector profitability rests squarely on the shoulders of the
incumbents, who control the best portion of the world's production and new
mega projects.

In 2003, Chinese Producers
Emerged as the Marginal, High-
Cost Suppliers of Iron Ore; But
Lack of Visibility Into the
Nature of These Producers Led
to a Breakdown in the
Representativeness of the
Dataset Historically Used to
Construct the Global Cost
Curve Our Reconstructed
Global Cost Curve Includes the
"Missing" Chinese Mines
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
38 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 45 At First Glance, the Old Heuristic of
Marginal Cash Costs Appears to Have
Broken Down

Exhibit 46 But the Fact That Our Visibility Into Costs
in China Is Incomplete Provides a Better
Answer
Source: AME, Bloomberg L.P. and Bernstein analysis. Source: AME and Bernstein analysis.

Exhibit 47 China Accounted for ~16% of 2012 Global
Iron Ore Production (ROE Equivalent); Our
Analysis, Which Completes the Global Cost
Curve, Shows That ~60% of the Chinese
Production Consisted Primarily of
"Missing" Chinese High-Cost Mines

Exhibit 48 Our Analysis of the Cash Costs of 149
Green and Brownfield Projects Shows That
the Majority Will Not Be Value Accretive at
Iron Ore Prices Below $150/t Against a Fully
Loaded Discount Rate
Note: There are a few other high-cost producers in the "missing
Chinese mines" category but they are de minimis.
Source: AME and Bernstein estimates and analysis.

Source: AME, CRU and Bernstein analysis.

0
20
40
60
80
100
120
140
160
180
200
2005 2006 2007 2008 2009 2010 2011 2012
U
S
$
/
t
Iron Ore Costs and Price
C(90) Price
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Australia China
Percentage of "Costed" Iron Ore
Supply
Known Unknown
170
160
150
140
130
120
110
100
80
70
0
60
180
40
30
20
10
0
50
1,000,000 750,000 500,000 250,000
90
1,250,000
Cumulative global production kt Fe
Missing Chinese
Mines
800,000 600,000 400,000 200,000 0
5,000
25,000
35,000
45,000
55,000
60,000
20,000
1,000,000
50,000
40,000
15,000
0
30,000
10,000
There are 16 projects
globally that need to be
understood/monitored to
track the future of the iron
ore price. Capital
discipline here is key to
ensure that the market
remains well supported.
Cumulative production from new
Greenfield projects kt Fe
P
r
o
d
u
c
t
i
o
n
-
k
t

F
e
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
39





Long-Term Price Forecast
We see the "super-cycle" pricing regime supported on the demand side until China
finishes industrializing (2020-25), and on the supply side, until sufficient new low-
cost Western production is brought on line to displace the marginal, high-cost
Chinese producers (the timing of which rests in the hands of the Western majors
and underlies our continued and continuous calls for capital discipline).
We believe that prices rise to the extent that marginal units of supply are called
by demand and that prices fall to the extent that marginal units of supply are
displaced. Because marginal supply determines price, the cost structure of an
industry determines both the revenue and the margin generation of that industry.
With this heuristic in place, we take inspiration from Fischer Black's work on
business cycles and monetary policy
17
and construct a modified framework,
replicating his approach to business cycles but extending the lead time between
demand signals and the supply side response. One consequence of the long lead
time is inherent cyclicality in the mining industry. Furthermore, this cyclicality
ensures that the incentive price (the price at which a miner is incentivized to bring
on new capacity) is seldom achieved, but is rather over- or under-shot. This means
that the value generated by investment (either by the mining companies themselves
or by investors into mining companies) is almost entirely a call on the ability to act
counter-cyclically.
Our supply and demand analysis gives rise to our counter-consensus positive
iron ore price forecast (2013: +3%, 2014: +18% and 2015: +29%) see Exhibit
49 and Exhibit 50. We expect iron ore to peak at $145/t in 2016 as supported by the
marginal costs of Chinese iron ore production. We believe that the tendency to
embed backwardation into commodity price forecasts and instantaneous reversion
to some notional long-term mean has been the most obvious error in commodity
price forecasting over the last 10 years. In our view, it is the supply side cost
structure that determines the structural shape of commodity prices over the longer
term; supply is sticky as projects have multi-year lead times, while demand gains
and losses can be relatively instantaneous. All of which is another way of bringing
us back to a principal tenet of this Blackbook: capital discipline is the key to price
preservation.

Exhibit 49 We Embed a Contango Rather Than Backwardation Into Our Short- to Medium-Term
Price Forecasts
Source: Bloomberg L.P., IHS Global Insight and Bernstein estimates and analysis.

Exhibit 50 Our Iron Ore Forecast Sees Considerable Upside in 2014-16E Relative to Consensus;
We Would Be Even More Bullish If We Were Convinced the Western Majors Were
Committed to a Higher Degree of Capital Discipline
* As of June 30, 2013
Source: Bloomberg L.P. and Bernstein estimates and analysis.

17
"Business Cycles and Equilibrium," published in 1987.
Iron Ore Fines FOB Aus 2013 H2 2014 H1 2014 H2 2015 H1 2015 H2 2016 H1 2016 H2 2017 H1 2017 H2 2018 H1 2018 H2
Nominal Forecast 131 136 139 140 142 143 145 141 146 137 134
Real (2013$) Forecast 130 134 136 135 136 136 136 129 126 123 120
Nominal Dollars Spot* 2013 YTD 2013E 2014E 2015E 2016E
Iron Ore US$/t 109 129 130 137 141 144
Iron Ore Consensus US$/t 123 114 106 100
SCB Upside/Downside 6% 20% 33% 44%
We Apply a Framework Taken
from Fischer Black's Work on
Business Cycles to Our Supply
and Demand Analysis, Adapted
to Long Lead Times in the
Mining Sector; This Generates
Our Counter-Consensus
Positive View on Iron Ore
Pricing
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
40 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE






For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
41





Two Times the Rate at One-Fourth
the Labor: Chinese Steel Intensity
Does Not Indicate Overinvestment

This chapter grew out of an analysis of productivity increases in mining, which we
looked at to address frequent client concerns about the high rate of Chinese steel
consumption in recent years. This rate, in both absolute magnitude and relative to
the current consumption by other countries, is often interpreted to suggest
overinvestment and that the Chinese economy may be unduly steel intensive in
which case, an immediate and sustained iron ore price decline to US$80/t might
indeed be reasonable.
18
Is China's steel intensity (annual rate of consumption)
higher than that of the U.S.? Yes, of course, but...once one adjusts for relative labor
productivity in iron ore mining, the answer becomes emphatically no. When the
U.S. industrialized, steel and bulk commodities traded in local markets. In contrast,
China's industrialization reflects a world of global bulk commodity markets, where
the productivity of the world's best iron ore miners (Australians) rather than just
the geographically proximate producers can be utilized to advance capital stock
formation. In effect, China has been able to outsource its mining industry to
Australia, and in doing so it has increased the effective productivity of its raw
material consumption radically. Every million tons of steel embedded into the U.S.
economy has consumed 475 man-years of labor in the form of iron ore. On the
other hand, every million tons of steel embedded into China (so far) has consumed,
on average, only 183 man-years of labor. So while China is embedding steel into its
capital stock at approximately double the average speed of the U.S., the steel
consumed reflects a use of resources (labor) only one-fourth as intense as that used
during the U.S. industrialization. The wholesale acquisition of Western steel plants
and an ability to replicate Western levels of steep productivity through the
purchase, disassembly and reassembly of steel-making production in China enabled
rapid Chinese steel growth (e.g., the Famous Industrials Group industry relocation
projects). In essence, China combined the efficiency of large blast furnaces with
cheap labor and raw materials to affect an incredibly high return to capital, which
has enabled the rapidity of capital stock accumulation in China so far.
Consequently, from a demand perspective, we consider the fear that the iron ore
price will decline to US$80/t and remain there is overdone.
Steel Intensity and Productivity
It is estimated that it took 30,000 people 30 years to build the Great Pyramid of
Cheops a total of 900,000 man-years of labor embedded into 6 million tons of
Egyptian limestone (of course, today many would point out that the limestone
intensity of Egypt was far higher than that seen in any previous period of temple
building. Consequently, they would criticize the endeavor as being illustrative of
massive capital misallocation and thereby predict the imminent collapse of
Egyptian civilization some 3,000 years too early). The vast increases in labor
productivity can be powerfully illustrated by pointing out that the same edifice
today could be pulled together by 150 Australian iron ore miners in a year. This

18
In the "What GDP Growth Is Consistent With $80/t Iron Ore Baked Into Mining Equities?" chapter, we demonstrate that the market is currently
factoring in a long-term iron ore price of US$80/t or a 40% discount to the June 12, 2013 spot price.
Every Million Tons of Steel
Embedded Into the U.S.
Economy Has Consumed 475
Man-Years of Labor in the
Form of Iron Ore Versus 183 in
China; Absent Western Capital
Ill-Discipline, We See Price
Support for Iron Ore Until 2023
Neither Farmers Nor
Hairdressers Consume a Huge
Amount of Metal; Rather, Metal
Is Required to Embed the
Capital Stock That Allows the
Transition from Primary to
Tertiary Forms of Value-Add to
Take Place
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
42 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





represents a 6,000-fold increase in the efficiency of human labor. We would
understand this increase as being driven by the ability of capital stock (machinery)
to convert high-intensity energy sources (oil) into useful work far more effectively
than the human body can convert food into output. It is against this backdrop that
we illustrate the change in the operating model of the Australian mining industry
over the last 50 years in Exhibit 51 and Exhibit 52. These exhibits not only
illustrate the transition in the mining industry, but also offer a qualitative
impression of the main theme of this chapter the impact that mining productivity
improvements have had on the rapidity of capitalization and urbanization in China
over the last decade. It is easy to forget how phenomenally effective Rio Tinto,
BHP Billiton and the like are at the task of mining (of course, whether their
economic analysis is of the same caliber is a different question). The engineering
competence on display at well-run mining operations and the increase in this over
time have significant implications on how we should understand the development
of industrial societies.
Exhibit 53 illustrates the evolution of U.S. industrialization from 1900 to date,
exemplified by the rate at which metal is embedded into the economy. The picture
is of an agrarian society moving to an industrial society as its economy transitions
from one dominated by farming to one that is services focused. At either end of this
transition, metal intensity (rate of consumption/embedding) is low: neither farmers
nor hairdressers consume a huge amount of metal. Rather, metal is required to
embed the capital stock that enables the transition from primary to tertiary forms of
value-add to take place.
In this transition, labor productivity plays two vital roles. First, improved
agricultural productivity is required to generate a surplus level of output that frees
labor from the task of feeding itself and enables it to branch out into other
economic activities. The greater the agricultural productivity, the more labor can be
freed from farming and moved into the production of raw materials. Next, the
greater the level of productivity in mining (for example), the greater the output of
raw materials that can be generated by this now-surplus, non-agricultural labor. The
greater the output of these raw materials, the greater the rapidity with which a
capital stock can be installed. And, of course, the faster the capital stock can be
installed in a country (i.e., bridge, buildings, rolling stock, machinery, etc.), the
faster the transition to a service-sector economy can be achieved. This is a
relatively simple narrative, but one which we have seen repeated over and over in
the database we built, which looks at the rates of metal consumption/embedding
across 120 countries since 1900.
19
Furthermore, we have the same narrative in the
back of our minds when considering the current and future role for metals in the
global economy.


19
Iron - Cold Iron - Is Master of Them All...(Or At Least 60% of EBITDA) - The Forms of Steel Use & Iron Ore Demand (2/5).
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
43





Exhibit 51 Mining in Western Australia in 1961...
Source: 1961 Report of the Department of Mines, Western Australia, Presented to Both Houses of Parliament in 1962.

Exhibit 52 ...And Today
Source: BHP Billiton.

For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
44 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 53 At Either End of the Industrialization Process, Metal Intensity (Rate of
Consumption/Embedding) Is Low; Rather, Metal Is Required to Embed the Capital
Stock That Enables the Transition from Primary to Tertiary Forms of Value-Add (or
Farmers to Hairdressers)
Source: WSA, Mitchell, IMF and Bernstein estimates and analysis.

Exhibit 54 shows China's path of steel intensity and summarizes why there is
significant anxiety about the steel-intensive nature of Chinese economic
development. The peak steel intensity in China was ~65kg/$'000 of GDP some
60% higher than that in the U.S. It should be recalled, however, that in the U.S.
steel intensity peaked ~100% higher than the peak steel in France. Consequently,
the dangers of drawing uncritical parallels between China and the U.S. are obvious,
and yet the fact that Chinese metal intensity is high has led many to fear that it is
"unsustainably" high and that a rapid retrenchment from current levels is imminent.
China's overall economic growth is decelerating. Moreover, the country's metal
intensity (rate of consumption/embedding) will track below rather than above
Chinese GDP growth. However, part of the reason for the decline in metal growth
(and thereby indirectly GDP growth) in China is the impact of high commodity
prices. To the extent that the world was willing to supply the Chinese economy
with nearly "free" raw materials (i.e., iron ore at US$12/t), it showed itself quite
able to absorb these raw materials at an unprecedentedly rapid rate. Clearly, there
could be hysteresis in this relationship, but there is at least a prima facia case that
lowering commodity prices will see Chinese growth re-accelerate.
That China's apparent steel intensity exceeds that seen in the U.S. belies the
fact that far more real resources were embedded in the U.S. capital stock than are
being embedded in China today. This comes down to the creation of a globalized
commodity market and access to 2.5-5x more efficient (in man-hour terms) iron ore
mining. This is made possible not only by geological and population differences,
but also due to the capitalization of the mining industry. The West underwrote its
own industrialization (and that of post-World War II Japan) through the removal of
labor from the mining sector in favor of capital. We question how much more
Western capital will be embedded into the sector. In the case of the iron-ore mega
projects, capital spend represents a value transfer from Western shareholders to
0
5
10
15
20
25
30
35
40
45
50
0 5 10 15 20 25 30 35 40 45 50 55
S
t
e
e
l

I
n
t
e
n
s
i
t
y

(
k
g
/
$
'
0
0
0

G
D
P
)
GDP/Capita (US$'000)
U.S. Finished Steel Demand Intensity Since 1900
SI Actual SI Trend
2012
1900
1917
1975
1948
The Peak Steel Intensity in
China's Ongoing
Industrialization Was Some
60% Higher Than That Seen in
the U.S.; But the Peak Only
Indicates the Rapidity of the
Industrialization Process the
U.S Peaked 100% Higher Than
France When the Latter
Industrialized
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
45





China through suppressing iron ore prices and thereby underwriting the continued
industrialization of the Middle Kingdom.
20


Exhibit 54 The Chinese Economy Has Seen Steel Intensity Peak at ~65kg/$'000 of Output (vs.
40kg/$000 U.S. Peak); Because China's Peak Was More Than 60% Higher Than the
U.S., and Because Many Datasets Look at Only the Last ~20 Years of Data, This Has
Spawned Fears That the High Rate of Steel Consumption in Recent Years Is
Indicative of Overinvestment and That the Chinese Economy Is Unduly (and
Inefficiently) Steel Intensive
Source: WSA, Mitchell, IMF and Bernstein estimates and analysis.


20
The literal translation of Zhong-guo the Chinese name for China, which can also be rendered as Middle State. America is Meiguo, or
Beautiful Kingdom/State.
0
10
20
30
40
50
60
70
80
0 5 10 15 20 25 30 35 40 45 50
S
t
e
e
l

I
n
t
e
n
s
i
t
y

(
k
g
/
$
'
0
0
0

G
D
P
)
Output GDP/Capita $'000 (Real 2005 PPP)
Trend Steel Intensity Evolution
France USA China Japan South Korea China Actual
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
46 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Globalization, Freight and China's Industrialization
During its industrialization, China has had access to Australian iron ore production
(20,000 tons/man-year at peak versus the U.S. peak of ~9,000 tons/man-year). It is
not capitalization that made the difference between the U.S. and Australian
industries, as both countries have well-capitalized mining industries. Rather, three
factors stand behind this higher Australian productivity and Chinas access to it:
globalization of the commodities industry, different geological endowment and
different population densities.
Exhibit 55 and Exhibit 56 display the history of global freight rates, going back
to 1750. This is a vitally important place to start when considering the history of
bulk commodities economics as freight rates are the driving force behind the
decline in regional commodity markets and the rise of a truly global trade in iron
ore and coal. Between 1965 and 2005, real freight costs fell 40%, while global
trade in iron ore rose 330% and coal 1,070%. Global markets arise when the value
of freight is lower than the value of the commodity being traded. These markets
fragment again, of course, when freight rates rise relative to the cost of the
commodity.
21
Prior to the advent of global trade in the bulk industrial commodities
(and it is these commodities that form the bedrock of industrial development), the
level of national raw material productivity was the critical determinant of the pace
of industrial development. In Exhibit 57 through Exhibit 59, we summarize the
economic history of the U.S. iron ore industry since 1900. Productivity in U.S. iron
ore production peaked at nearly 9,000 tons/man-year, and the path to that level was
by no means steady. For large parts of its history, the U.S. was producing iron ore
at productivities of less than 4,000 tons/man-year.

Exhibit 55 Global Freight Rates Have Declined in Real Terms by an Average of 0.9% p.a. Over
the Last 260 Years...
Source: Stopford and Bernstein estimates and analysis.


21
Consequently, it is ironic that, of the "Big Three" global miners, Vale seems determined to undermine the pricing support of its key
commodity and increase the risk of fragmenting global iron ore markets. As the most geographically distant from the bulk of iron ore demand
(Asia), we estimate that China alone represented 56% of 2012 iron ore demand and produced just 13%, importing the balance of 42%.
Consequently, Vale's profits and shareholders are the most vulnerable if the company's own cheap supply removes the need for high-cost
inefficient artisanal mining in China. Vale's determination to bring huge low-cost supply onstream seems to indicate that its strategic direction is
determined by incentives different than those of other publicly listed companies, perhaps due to the significant ownership by the Brazilian
government (5.5% direct through Golden Shares and 34% indirect through the strategic consortium of Valepar).

0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1
7
5
0
1
7
6
0
1
7
7
0
1
7
8
0
1
7
9
0
1
8
0
0
1
8
1
0
1
8
2
0
1
8
3
0
1
8
4
0
1
8
5
0
1
8
6
0
1
8
7
0
1
8
8
0
1
8
9
0
1
9
0
0
1
9
1
0
1
9
2
0
1
9
3
0
1
9
4
0
1
9
5
0
1
9
6
0
1
9
7
0
1
9
8
0
1
9
9
0
2
0
0
0
2
0
1
0
R
e
a
l

2
0
0
0
$
Global Freight Index 1750-2012
Access to Iron Ore Production
That Is 2.5-5x More Efficient
Than During the U.S.
Industrialization Has Helped
Enable the Rapidity of Chinas
Ongoing Development
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
47





Exhibit 56 Leading to the Emergence of a Truly Global Market for Bulk Commodities,
Including Iron Ore and Coal; Consequently, Relative Global Competitiveness in the
Production of These Commodities Began to Matter
Source: Stopford and Bernstein estimates and analysis.

Exhibit 57 Before the Advent of Scrap-Based EAF Production, U.S. Iron Ore Production Peaked
in the 30 Years Between 1950 and 1980
Source: USGS and Bernstein estimates and analysis.


0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
R
e
a
l

2
0
0
0
$
Global Freight Index 1900-2012
0
20
40
60
80
100
120
140
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
I
r
o
n

O
r
e

M
t
US Iron Ore Production
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
48 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 58 The Transition to EAF-Based Production Saw Declines in Both Iron Ore Production
and Employment
Source: BLS and Bernstein estimates and analysis.

Exhibit 59 Consequently, the U.S. Iron Ore Productivity Peaked at Nearly 9,000 Tons/Man-Year
(Although for Much of the U.S. Industrialization, Its Intensity Was Far Lower)
Source: Govt. of Western Australia and Bernstein estimates and analysis.

In contrast, we show the development of iron ore mining in Western Australia
(see Exhibit 60 through Exhibit 62). Unlike the iron ore industry in the U.S., in
Australia, it has never been intended for domestic consumption and has always had
a strong international market orientation (Western Australian Government lifted its
embargo on iron ore exports in 1960), focusing originally on post-WWII
reconstruction and the subsequent industrialization of Japan and now on China.
This development operated hand-in-hand with the declines in the international
0
5
10
15
20
25
30
35
40
45
50
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
T
h
o
u
s
a
n
d

P
e
o
p
l
e

E
m
p
l
o
y
e
d
US Iron Ore Mining Employment
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
T
o
n
s

p
e
r

M
a
n
-
Y
e
a
r
US Iron Ore Mining Productivity
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
49





freight costs, which enabled the economic movement of low-value material over
significant distances. Consequently, the industrial development of the U.S. was
predicated largely upon the productivity of its domestic mining industry. The U.S.
did not and could not take advantage of the highest level of global raw materials
production when it was industrializing and had to be content with the level of
productivity that prevailed at the local or national level. So, while the U.S. iron ore
intensity peaked at ~9,000 tons/man-year, Australia peaked at 20,000 tons/man-
year. It is this level of productivity that the Chinese are also able to access (albeit
indirectly) today, and the Japan and the Asian Tigers were able to enjoy during the
later part of the 20
th
century.
Having said this, it is important to understand the difference between the
relative productivities of Australia and the U.S. First of all, both American and
Australian iron ore industries are very well capitalized, and it is capital rather than
labor that stands behind raw material production (in contrast to China where
mining is still labor driven). However, the two key differences are geology and
population density.
Different geological endowments: A miner in the U.S. needs to move about
twice as much run of mine (ROM) material as his Australian counterpart to
generate the same amount of useful material. This is due to the difference
between accessing direct shipping ore hematite (62% Fe grade) available
throughout the Pilbara and magnetite (~35% Fe ROM) found in the U.S., which
requires beneficiation and processing before it can be converted to pellets used by
the U.S. steel makers.
Population density: Western Australia (ex-Perth) has, on average, 0.23 people
per square kilometer versus 67 in Minnesota and 175 in Michigan. Virtually no
one lives in Western Australia outside of Perth (see Exhibit 63). As a resource-
intensive industry, mining requires significant land, water and power (not to
mention there are those who have questioned the aesthetics of open-cut mining, as
odd a suggestion as that may sound). A high population density always means
that there will be competing calls on the resources that a miner needs as well as
the potential for objections from local residents on aesthetic and environmental
grounds. Consequently, it is much easier to mine in a sparsely populated area. On
this note, China is 1,300 times more densely populated than the Pilbara!
22

Before moving on to the labor productivity required to generate each ton of
steel hitherto embedded in the Chinese capital stock, it is worth addressing why the
declines in Pilbara mining productivity post 2006 are linked to the use of labor
rather than declining asset productivity (which might initially appear to be the
primary cause) see Exhibit 62. It is easier to see what is going on if we look at
the breakdown of production, employment and productivity by producer in the
Pilbara (see Exhibit 64 through Exhibit 67). The large producers, Rio and BHP,
have not suffered productivity declines anywhere near as severe as the average
would suggest, though even these producers have suffered deterioration. However,
for FMG, using the alternative surface mining technology, the productivity is about
half that of the traditional mining methods. This indicates that the decline in
productivity is largely attributable to the employment of labor on project and
exploration sites for assets that are yet to produce rather than necessarily indicating
a reduction in productivity from the mines already producing material.
Consequently, Exhibit 68 shows the range of productivities that we use in the
subsequent analysis.



22
Chinese statistic, excluding the provinces of Inner Mongolia, Xinjiang, Tibet, Qinghai and Gansu, as there is limited population and negligible
mining.
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
50 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 60 In Contrast to the U.S., Western Australian Iron Ore Industry Was Always Driven by
Exports First to Japan and Today to China; the Declines in Shipping Costs
Facilitated This Greatly
Source: Govt. of Western Australia and Bernstein estimates and analysis.

Exhibit 61 Superior Geology and Continuing Improvement in Mining and Logistics Technology
Have Led to Substantial Increases in Mining Productivity
Source: Govt. of Western Australia and Bernstein estimates and analysis.

0
50
100
150
200
250
300
350
400
450
1
9
6
0
1
9
6
2
1
9
6
4
1
9
6
6
1
9
6
8
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
I
r
o
n

O
r
e

M
t
Western Australia (Pilbara) Iron Ore Production
0
5
10
15
20
25
30
35
40
1
9
6
0
1
9
6
2
1
9
6
4
1
9
6
6
1
9
6
8
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
T
h
o
u
s
a
n
d

P
e
o
p
l
e

E
m
p
l
o
y
e
d
Western Australia (Pilbara) Iron Ore Mining Employment
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
51





Exhibit 62 In Addition, Low Population Density Renders Iron Ore Mining in Pilbara Hugely
Productive...
Source: Govt. of Western Australia and Bernstein estimates and analysis.

Exhibit 63 And Provides a Significant Advantage Over the U.S. or China as Mining
Jurisdictions
Note: China excludes the "five provinces" of Inner Mongolia, Xinjiang, Tibet, Qinghai and Gansu.
Source: Wikipedia and Bernstein analysis.


0
5,000
10,000
15,000
20,000
25,000
1
9
6
0
1
9
6
2
1
9
6
4
1
9
6
6
1
9
6
8
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
T
o
n
s

p
e
r

M
a
n
-
Y
e
a
r
Western Australia (Pilbara) Iron Ore Mining Productivity
295
175
67
0.89 0.23
China Michigan Minnesota Western Aus WA (ex Perth)
D
e
n
s
i
t
y

P
e
r
s
o
n
s

p
e
r

S
q
u
a
r
e

k
m
Population Density by Iron Ore Mining Region
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
52 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 64 The Consolidation of the Industry Can Be Seen in Both the Concentration of
Employment...
Source: Govt. of Western Australia and Bernstein estimates and analysis.

Exhibit 65 ...And Production in Western Australia
Source: Govt. of Western Australia and Bernstein estimates and analysis.


14,278
9,712
5,974
1,240 1,177
611
374 325 254 171 135 115 68 8
P
e
o
p
l
e

E
m
p
l
o
y
e
d
Western Australia Iron Ore Mining Employment (2011)
0
50
100
150
200
250
I
r
o
n

O
r
e

M
t
Western Australia Iron Ore Mining Production (2011)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
53





Exhibit 66 Among the Majors, Rio and BHP Have Almost Identical Productivities and Are
Almost Twice as Productive as Either FMG or Cliffs
Source: Govt. of Western Australia and Bernstein estimates and analysis.

Exhibit 67 It Is Also Interesting to Note the Significant Declines in Productivity Seen at the
Company Level as Well as in the Industry Overall in Recent Years
Source: Govt. of Western Australia and Bernstein estimates and analysis.

26,901
16,397
16,011
8,704
7,579
6,870 6,709
6,497
3,653
3,077
2,035
T
o
n
s

p
e
r

M
a
n
-
Y
e
a
r
Western Australia Iron Ore Mining Productivity (2011)
-
20
40
60
80
100
120
140
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
1
0
0

=

2
0
0
2
Indexed Iron Ore Mining Labor Productivity
BHP Clif f s Resources Rio Tinto
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
54 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 68 However, the Decline in Productivity in Western Australia Is Due to the Inclusion of
Labor That Is Allocated to Building Projects (With a Significant Production Lead
Time) vs. Labor Allocated to Operations That Generate Current Volume
Source: Govt. of Western Australia and Bernstein estimates and analysis.

When turning to China and its recent rates of steel production and iron ore demand
(see Exhibit 69 and Exhibit 70), it is important to stress how radically different its
domestic iron ore production is from either the U.S. or Australia (see Exhibit 71
through Exhibit 75). Vast amounts of (hitherto) cheap labor historically stood
behind the raw material production in China rather than the use of capital and
machinery. However, post the late 1970s' reforms and the beginning of Chinese
integration into the global economy (GATT and finally WTO membership),
Chinese raw material consumption underwent a radical change. Imported raw
materials rather than domestic production became the mainstay of industrial
activity. The exports into China allowed the PRC to access the ever-increasing
productivity of Australian iron ore miners (see Exhibit 76).
Since 1990, self-sufficiency in Chinese iron ore production has only been
declining (see Exhibit 71). Given that the marginal producer of iron ore globally is
in China (as discussed in the "If China Is to Grow Rich Before It Grows Old, It
Must Finish Industrializing in the Next Decade" chapter), it is the high costs of
domestic Chinese production that are currently setting raw material prices.
Removing these producers will catalyze the end of the current secular period of
pricing support (short-term supply demand fluctuations notwithstanding). In this
regard, the trend decline is remarkably stable; if history is projected forward
(admittedly, always a dangerous move), it would see China falling to 10% self-
sufficiency (and thus becoming irrelevant to price formation) only by 2023.
23

Clearly, extrapolating trend ignores the fact that conditions change and that supply
and demand may accelerate, but due to the stabilizing effect of demand elasticity it
may well be that the path to oversupply takes longer to come into play than many
realize (see Exhibit 72).
However that may be, while the U.S. was reliant on its own geology and
mining productivity to stand behind its industrialization, the decline in global

23
This assumes straight-line trend of declining Chinese self-sufficiency due to continued importation of iron ore into China by the majors at the
same historical absolute amount of increased tonnage (rather than historical average growth rate of importation). It does not take into
consideration the actual new project pipeline.
0
5,000
10,000
15,000
20,000
25,000
1
9
6
0
1
9
6
2
1
9
6
4
1
9
6
6
1
9
6
8
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
T
o
n
s

p
e
r

M
a
n
-
Y
e
a
r
Western Australia (Pilbara) Iron Ore Mining Productivity
Productivity From Operations Productivity Including Projects
China Is Embedding
Approximately One-Fourth the
Labor Into Its Capital Stock
Than the U.S. Did, But at a
Steel Intensity That Is
Approximately Double That of
Peak U.S. Steel Consumption
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
55





freight costs enabled China to outsource this to Australia and take advantage of the
superior geology and mining environment in the Pilbara. If we calculate the
average productivity of the iron ore that China has actually consumed in its
industrialization, we can see that it actually outstrips that of the U.S. (see Exhibit
77). The weighted average productivity
24
of iron ore produced over the industrial
history of the U.S. stands at 3,350 tons per man-year. The average productivity that
stands behind the Chinese economic development is 8,750 tons per man-year. To
return to Cheops, today we would be able to build 6,000 Great Pyramids, where the
ancient Egyptians built one, employing exactly the same amount of manpower.
This testifies to the increase in labor productivity over the intervening 5,000 years.
Pyramid building in toto may be unproductive insofar as it satisfies no real human
need, but that cannot be deduced from the relative intensity with which one society
constructs pyramids versus another at a very different point in time.
Turning to Exhibit 78 and Exhibit 79, we see an incredibly strong relationship
between relative productivity in raw material production and relative intensity of
steel use between the U.S. and China. Chinese steel intensity is not much greater
than that seen in the U.S. (or indeed anywhere else). Peak U.S. iron ore production
occurred in 1951, at which time a U.S. miner could produce at a rate of 3,150 tons
per year and steel intensity was 33kg/$'000. Today, steel intensity in China is
63kg/$'000 but the effective productivity of iron ore production is 13,600 tons/man-
year. China is therefore embedding approximately one-fourth the labor into its
capital stock that the U.S. did, despite having higher steel intensity in absolute
terms. The more rapid embedding of steel in China's capital stock reflects not
inefficiency per se, but rather that the productivity of the world's best iron ore
miners (Australians) as opposed to just the geographically proximate producers can
be utilized to advance the process of capital stock formation.

Exhibit 69 China Has Seen Both Its Steel

Exhibit 70 And Iron Ore Production Increase
Source: WSA, NBS and Bernstein estimates and analysis. Source: WSA, NBS and Bernstein estimates and analysis.



24
Weighted by tons of iron ore.
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
C
r
u
d
e

S
t
e
e
l

(
k
t
)
Chinese Crude Steel Production
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
I
r
o
n

O
r
e

(
k
t
)
Chinese Iron Ore Demand
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
56 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 71 The Iron Ore Majors (Vale, Rio and BHP) Have Aggressively Grown Their Volume
Share of the Chinese Iron Ore Market Over the Last Decade, While Chinese Self-
Sufficiency Has Declined Significantly
Source: WSA, NBS and Bernstein estimates and analysis.

Exhibit 72 Extrapolating the Trend Decline in Self-Sufficiency Forward Suggests the End of the
Chinese Iron Ore Industry (and With It the High-Cost Price Support for Iron Ore) in
the Region from 2020 to 2025; Clearly, Acceleration in Supply from the Seaborne
Market and Declining Steel Growth Rates Would Advance This
Note: 2014-20 are Bernstein estimates.
Source: WSA, NBS and Bernstein estimates and analysis.


0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
C
h
i
n
e
s
e

S
e
l
f
-
S
u
f
f
i
c
i
e
n
c
y

(
%
)
I
r
o
n

O
r
e

(
k
t
)
Chinese Iron Ore Supply
Imports Domestic Production Self -Suf f iciency
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
2
0
1
4
2
0
1
6
2
0
1
8
2
0
2
0
S
e
l
f
-
S
u
f
f
i
c
i
e
n
c
y


(
%
)
Chinese Iron Ore Self-Sufficiency Trend Decline
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
57





Exhibit 73 Chinese Growth in Iron Ore (on a Rich-Ore-Equivalent Basis) Peaked in 2007; Since
Then, Declining Grades and Rising Costs Have Seen Useable Ore Production Decline
Source: NBS, WSA and Bernstein estimates and analysis.

Exhibit 74 An Ever-Increasing Amount of Labor Has to Be Allocated to China's Iron Ore
Production
Source: NBS, WSA and Bernstein estimates and analysis.


0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
I
r
o
n

O
r
e

(
R
O
E

B
a
s
i
s
)

k
t
Chinese Domestic Iron Ore Production
0
100
200
300
400
500
600
700
800
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
T
h
o
u
s
a
n
d

P
e
o
p
l
e

E
m
p
l
o
y
e
d
Chinese Domestic Iron Ore Employment
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
58 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 75 Leading to a Prolonged Decline in the Productivity of the Chinese Domestic
Industry Since 2007
Source: NBS, WSA and Bernstein estimates and analysis.

Exhibit 76 An Australian Miner Is 35x as Productive as His Chinese Counterpart; However,
Given That Globalization of the Iron Ore Industry Has Enabled China to Outsource Its
Iron Ore Mining to Australia, Does That Differential Matter?
Source: WSA, NBS, BLS and Bernstein estimates and analysis.

0
100
200
300
400
500
600
700
800
900
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
T
o
n
s

p
e
r

M
a
n
-
Y
e
a
r
Chinese Domestic Iron Ore Productivity
0
5,000
10,000
15,000
20,000
25,000
1
9
6
0
1
9
6
2
1
9
6
4
1
9
6
6
1
9
6
8
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
T
o
n
s

p
e
r

M
a
n
-
Y
e
a
r
Western Australia (Pilbara) Iron Ore Mining Productivity
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
59





Exhibit 77 Productivity Uplift of the Iron Ore Imports Into China Has Enabled It to Overtake the
U.S. in Terms of Effective Productivity in 2003
Source: WSA, NBS, BLS and Bernstein estimates and analysis.

Exhibit 78 We Compare the Rate at Which Steel Is Being Embedded in China Relative to Peak
U.S. Steel Intensity (Y Axis) and the Peak Iron Ore Production (in Man-Hour Terms) to
Which China Has Access Relative to That Accessible to the U.S. During Its
Industrialization (X Axis); However, Due to Productivity Improvements, the Real
Resources Consumed to Embed Steel in the Chinese Economy Are Markedly Lower
Than Was the Case During the Industrialization of the U.S.
Source: WSA, NBS, BLS and Bernstein estimates and analysis.

0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
T
o
n
s

p
e
r

M
a
n
-
Y
e
a
r
Effective Chinese Productivity, Including Imports
USA Ef f ective Chinese Productivity
R = 0.8458
80%
90%
100%
110%
120%
130%
140%
150%
160%
20% 40% 60% 80% 100% 120% 140% 160% 180%
C
h
i
n
e
s
e

S
t
e
e
l

I
n
t
e
n
s
i
t
y

t
o

P
e
a
k

U
S

S
t
e
e
l

I
n
t
e
n
s
i
t
y
Ratio of Chinese Iron Ore Productivity to Peak US Iron Ore Productivity
Relative Iron Ore Productivity to Relative Steel Intensity
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
60 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 79 U.S. Iron Ore Production Peaked in 1951, With an American Miner Producing 3,150
Tons/Year and Steel Intensity of 33kg/$1,000; Today, China's Steel Intensity Is
63kg/$'000, While the Effective Productivity of Iron Ore Production Is 13,600
Tons/Man-Year
Source: WSA, NBS, BLS and Bernstein estimates and analysis.

Imitation is often touted as the sincerest form of flattery, but we would argue that
the outright purchase and adoption of another's technological developments go at
least one step further. We mentioned earlier in this chapter that post the Open Door
Policy and the beginnings of Chinese integration into the global economy (GATT
and finally WTO membership), Chinese raw material consumption underwent a
radical change, with imported raw materials rather than domestic production
becoming the mainstay of industrial activity. This was not the only radical change
that enabled greater steel embedding into the Chinese economy. The Chinese also
purchased steel-making technology from the West; one of the more "famous"
examples of this is the Famous Industrials Group, which began importing precision
measuring tools and lock cylinders into China in the 1990s. Famous expanded into
industry relocation projects; over the last 10 years, the company has relocated
departments and production, including six complete industrial plants and
production lines from the West into China.
25
Some examples include:
1995 saw the purchase of the Bergkamen Coal Washing plant from the Monopol
mine (Northern Rhur Valley), its subsequent disassembly and transport to China.
Today, it is run by SDIC Xinji Energy Co., Ltd., a Chinese coal producer with
mines in the Anhui province (see Exhibit 80).
Three years later, in 1998, Famous purchased the Sophia Jacoba coal washing
plant from the Hckelhoven coal mine in the Rhine Valley. Around 100 Chinese
experts spent eight months disassembling the plant before relocating it to Eastern
China, where it is also operated today by SDIX Xinji Energy Co (see Exhibit 81).
2002 saw the purchase of the Kaiserstuhl Coking Plant from the Dortmunder
Westfalenhuette. The following year saw its disassembly by 300 Chinese
specialists followed by its 2004 reassembly in Jinin, Shandong province. The

25
http://famous-germany.com/a_news.asp?classid=15.

0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
50%
70%
90%
110%
130%
150%
170%
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
R
e
l
a
t
i
v
e

I
r
o
n

O
r
e

P
r
o
d
u
c
t
i
v
i
t
y
R
e
l
a
t
i
v
e

S
t
e
e
l

I
n
t
e
n
s
i
t
y
Chinese Steel Intensity to Iron Ore Productivity
Chinese to Peak US Steel Intensity Chinese To Peak US Iron Ore Productivity
The Rate at Which China Has
Been Embedding Steel Has
Furthermore Been Accelerated
by the Purchase of Western
Steel-Making Technology
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
61





plant, which had only been operational for eight years prior to its purchase,
recommenced operations in 2006 (see Exhibit 82).
It is worth noting that the purchase of entire plants and production lines is not
limited to the mining and steel-making sector; Famous has also relocated spring
factories (for the manufacture of trucks and railway vehicles), underground
refrigeration plants, foot processing and packaging factories, and automation and
communications systems, to name a few of its non-mining projects (see Exhibit
83). This process of disassembly and reassembly means that in a bare manner of
months, not only did China benefit from the specifically relocated department or
production itself, but the "specialists" involved in the dis- and re-assembly are now
able to replicate and reproduce that technology on a wider scale across China. This
further enables the rapidity of the Chinese industrialization process.

Exhibit 80 Bergkamen Coal Washing Plant

Exhibit 81 Hckelhoven Coal Washing Plant
Source: Famous Industrial Group GmbH. Source: Famous Industrial Group GmbH.

Exhibit 82 Kaiserstuhl Coking Plant

Exhibit 83 Werdohl Leaf Spring Factory
Source: Famous Industrial Group GmbH. Source: Famous Industrial Group GmbH.
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
62 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE






For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
63





Iron Ore Pricing Support Over the
Next Decade Depends Upon Capital
Discipline (Rio 360 Case Study)

On the supply side, as noted in the "Iron Ore 'Super-Cycle' Pricing Generated by
High-Cost Producers Responding to the Rapidity of China's Industrialization"
chapter, we see the inability of the Chinese mining sector to transition from labor-
intensive to capital-intensive modes of production as a consequence of poor
geological endowment supporting the current "super-cycle" pricing (this is, of
course, bearing in mind that this failure is occurring against the backdrop of the
rapid industrialization of China). As we see the costs on the supply side providing
the long-term pricing structure, pricing support will persist, in our view, so long as
a significant proportion of high-cost marginal producers in China (~35% of 2011
rich ore equivalent [ROE] Chinese supply, with marginal costs of production
~$120-180/t) are not displaced. Should the Western miners actively cease to
underwrite continued Chinese industrialization (as the West underwrote its own
and that of Japan), we see pricing support for iron ore continuing for the duration of
China's industrialization (discussed in the "If China Is to Grow Rich Before It
Grows Old, It Must Finish Industrializing in the Next Decade" chapter). If not, then
it is 2015 that we see as the earliest time at which there will be sufficient new
production coming onstream to displace high-cost producers.
We are aware that we are beginning to sound like a later day and mining-
focused version of Cato the Elder (if such a thing can be imagined) and finish every
piece with a cry that "capital is to be disciplined." Yet capital discipline is the
single greatest source of value creation in the mining space and this is
particularly critical for iron ore, the fourth most crustally abundant element. For
any large mining company, an "unrelenting focus" on value is synonymous with
ensuring that capital is allocated to new volume only if it does not lead to price
destruction. An unrelenting focus on shareholder value is diametrically opposed
to any strategy designed (explicitly or not) to lower commodity prices.
This chapter continues with the "value maximizing growth strategies for large
mining companies" theme. In particular, we focus on the possible 70Mtpa iron ore
expansion by Rio Tinto as a case study and show how the decision to proceed (or
not) with the project depends on how comfortable Rio Tinto owners are with the
3% steel demand growth target that the company's management clearly believes in.
Shareholders in Rio Tinto may be comfortable risking an $18 billion loss on the
chance of an $8 billion gain should China achieve 3% steel demand growth in a
decelerating environment. Alternatively, they might wish to follow the example of
the Emperor Augustus in considering the whole enterprise akin to fishing with a
golden fish hook and that the gain, if all goes well, is too small to offset the risk of
loss if it does not.
We further expand our analysis to demonstrate how globally superior value
generation can result from the pursuit of locally optimal growth targets in
consolidated markets, where industry incumbents are explicitly aware of the price
destructive effects that excessive volume growth has. In itself, market consolidation
and a "good" industry structure are not sufficient to drive superior returns. Instead,
the miners require an approach to value that explicitly captures the price destructive
effect of new volume. For us, the critical feature of the debate on Rio Tinto 360 is
the emerging language from the company recognizing (for the first time) that the
value of the investment proposition turns on the market impact that the extra tons
Capital Discipline Is the Single
Greatest Source of Value
Creation in the Mining Space;
an "Unrelenting Focus" on
Value Is Synonymous With
Ensuring That Capital Is
Allocated to New Volume Only
If It Does Not Lead to Price
Destruction
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
64 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





will have. In our view, it is a great leap forward and could precipitate a re-rating of
the iron ore industry.
Capital Discipline Is Not the Same as Returns of Capital
We have written previously and extensively on the need for capital discipline. In
our call, Euro Metals & Mining: Not Enough Aristotle? The Fallacy of Growth &
How Mining Companies Can Avoid Destroying Value, we showed how natural
limits to growth emerge in consolidated commodity industries. Moreover, we
believe that a natural evolution from "growth" to "value" exists in any mining
company as it grows bigger. This transition corresponds to the development of a
mining company from the entrepreneurial activity of new asset creation for a junior
to the custodial function of value and asset preservation for a major. That is, the
most important skill set for a mining junior is necessarily focused on the
engineering and project-management aspects of mining. In contrast, once
established as a major producer, it is the commercial, strategic and economic
abilities that the miner's management will have tested.
Much has been made of capital discipline in the last few months, with CEO
after CEO lining up to claim this virtue and to extol his "unrelenting focus" on
shareholder value creation. However, what does capital discipline mean in practice,
and why should it actually matter? After all, doesn't capital provide the lifeblood
for continuing activity?
In theory, and ignoring taxation implications, shareholders should be
ambivalent between receiving a dividend, which can be reinvested at their cost of
capital, and having that dividend retained in the company to finance growth. If
anything, it is always possible to generate a synthetic dividend stream,
26
which
transaction costs aside should render dividend policy a value-neutral
proposition. Given this, capital discipline becomes a virtue only if capital allocation
has gone wrong. Consequently, we view capital discipline in mining as a tool for
preventing excessive organic growth. High commodity price preservation through
maintaining a grip on supply is the single greatest value driver that mining
companies have at their disposal. The greater the capital distribution returned to
shareholders, the less likely a catastrophic oversupply is to result. In our view,
mining will always be a cyclical business. However, it is up to the incumbent
players to determine whether to feed or dampen that cyclicality. An "unrelenting
focus" on value as far as any large-scale miner is concerned is synonymous
with ensuring that capital is allocated to new volume only if it does not lead to
price destruction.
For us, capital discipline is not about returns of capital per se. Instead, we see
it as a mechanism to ensure that new volume growth is more accurately aligned
with the forward-looking demand environment. We prefer our companies to run the
risk of undersupplying the market and seeing higher prices, with the threat of
possible demand destruction, to them oversupplying the market and guaranteeing
prices will collapse. In other words, given the inherently asymmetric risk profile
facing the miners, we would like them to play the odds in a manner that favors
value creation for their own bottom lines and their shareholders. Consequently, we
are not indifferent to the ways the capital is to be returned. Specifically, for us,
capital discipline is not the same as asset disposal; we certainly would not like to
see the miners execute wholesale asset disposals at (possibly) "fire sale" prices.
Offloading assets to competitors is a risky strategic enterprise, which could result in
de-consolidation of the market, while giving a potential competitor access to
geology that it would not otherwise have (as we discuss later in this chapter,
industry consolidation is one of the few means by which superior returns can be
created in commodity markets). Moreover, in absence of synergies, shifting assets
from one hand to another would create value only if the markets were inefficient

26
By either selling stock outright or writing out of the money call options on it to achieve the required income. From a risk-return perspective all
of these alternatives are equivalent.
Capital Discipline Becomes a
Virtue Only When Capital
Allocation Has Gone Wrong;
the Greater the Capital
Distribution Out of the Mining
Space, the Less Likely a
Catastrophic Oversupply Is to
Result
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
65





over a sustained period. In our view, such belief cannot become the strategy for the
industry as a whole. Finally, asset disposals masquerading as capital discipline may
enable the miners to sidestep the real objective, i.e., rationing of supply.
Consequently, it is not returns of capital per se that we look for, but returns of
capital that would otherwise be expended to accelerate supply into a declining
demand environment. Clearly, we are not suggesting that an asset should be kept
even if a truly attractive price is offered rather, lucrative asset disposal
opportunities should be explored all the time. Nevertheless, in our view, such
exploration is more likely to yield attractive results at the top of the cycle rather
than the bottom of it.
The mining industry is facing a dilemma at the moment. Although equity
prices are reflecting a very significant and irreversible decline in commodity prices
(most notably, for iron ore it sees the long-term price of US$80/t), the price
environment, while volatile, is not yet utterly unsupportive of earnings. The last
time equity valuations were as low as currently, the iron ore price had hit just
US$85/t and it looked as if it were game over for that particular commodity. So
why, when the 1H:13 iron ore price averaged US$129/t Aus FOB, is this not being
reflected in equity valuations?
We believe that this comes back, again, to capital discipline. For retained
earnings to be valued, they must have the prospect of being returned to
shareholders at some future even if far removed date (hopefully, magnified
many times over). Currently, however, the market fears that greater mining
operating cash flows will translate to proportionally higher organic growth plans.
The greater the capital spend today, the greater the volume tomorrow and in a
slowing demand environment the greater the likelihood of a sustained and
severe supply demand imbalance and price destruction. Consequently, higher
earnings today imply lower earnings tomorrow. Furthermore, however counter-
intuitive it may seem, the longer commodity price environment stays strong, and
the more mining companies will de-rate unless they alter their behavior and
convince the market that they are truly earnest about capital discipline. The
problem is not the price environment, rather it is the strategy of the miners and their
reaction to that price environment. Simply converting ever-expanding operating
cash flows into new sources of production must come to an end. In our view, it will
happen either in a value-accretive manner, with the miners willingly forgoing
organic growth opportunities, or violently, when commodity prices are driven
down to such a level that new organic growth is impossible, while the promise of a
return on historical investment is proven illusory.
We strongly believe that increasing the dividend by 15% or 50% is simply
insufficient. For the miners to see a structural re-rating, there must be a clear
change in strategy that sees returns to capital rather than expenditure of capex as
the priority. In 2012, Rio Tinto spent ~US$18 billion on capex, ~US$6 billion on
corporate tax and ~US$3 billion on dividends. Why not simply reverse the priority
of capex and dividends (see Exhibit 84 and Exhibit 85)?
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
66 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 84 Assuming Disciplined Capex, We Expect
Rio Tinto to Have Room to De-Gear Its
Balance Sheet Significantly Over the Next
Few Years

Exhibit 85 Curtailment of Capex and De-Gearing of the
Balance Sheet Would Enable Rio to Raise
Its Dividend from US$3.0 Billion in 2012; We
See No Reason Why It Should Not Double
Over Time
Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.
Rio Tinto Pilbara 360 Project Does It Make Sense?
In a meeting this past May that was closed to the media (and yet whose contents
were known to the media almost immediately), Rio Tinto's management put
forward a 70Mtpa Pilbara expansion to 360Mtpa to the company's board for
approval in 4Q:13. We interpret this "leak" as an attempt by the company to gauge
shareholder sentiment toward continued capital spend ahead of actually having to
make the decision. While some pushback has resulted, rhetoric around value aside,
we would expect management to execute this expansion if investor opposition
grows muted. For us, the question is whether this expansion creates or destroys
value for Rio Tinto and the mining sector.
In a recent interview, Rio's CEO Sam Walsh claimed that "the additional
tonnage of 70 million tons was unlikely to result in a US$20/ton price decline."
27

Critically, this statement represents the first time that the company explicitly
recognized that the value of the investment may turn on the impact that it will have
on the market. In our view, this recognition is a significant step forward for the
industry, which moves the debate much closer to where it needs to be if returns
from mining have any hope of being sustained into the medium term. While
industry consolidation is a necessary requirement to see superior returns and
genuine pricing power in a commodity industry, it is far from sufficient on its own.
The necessary and sufficient condition is that there is industry consolidation as well
as explicit awareness of the impact that new volume growth has on price. Pursuing
industry consolidation absent an understanding of how volume growth can act to
undermine price and value is merely a verisimilitudinous distraction. However,
once this factor is understood, the prospect that superior returns can accrue
naturally follows.
To make this point concrete, we look at the case study that Rio Tinto has
provided in the form of its 360Mtpa Pilbara expansion. First of all, Rio Tinto, like

27
"Rio Said to Pursue $5 Billion Iron-Ore Project as Glut Looms," Bloomberg L.P., May 7, 2013.
2,775
45,182
38,577
18,861
4,071
8,807
19,412
17,829
6,220
(3,729)
2006
A
2007
A
2008
A
2009
A
2010
A
2011
A
2012
A
2013
E
2014
E
2015
E
U
S
$
m
Rio Tinto Net Debt
-
2%
4%
6%
8%
10%
12%
-
5,000
10,000
15,000
20,000
25,000
30,000
2012 A 2015 E
D
i
v
i
d
e
n
d

Y
i
e
l
d

(
%
)
U
S
$
m
Rio Tinto Dividend Potential
Capex Tax Dividend Dividend Yield
Rio Tinto Owners Need to Get
Comfortable With the
Prospects for 3% Steel
Demand Growth from China; It
Is on This That the Value of the
Expansion Turns; Will It
Suppress Price Sufficiently to
Render It Unattractive?
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
67





us, recognizes a significant inflection in the global cost curve (see Exhibit 86 and
Exhibit 87). It should be noted that it is this inflection in a commodity cost curve
that is responsible for both the margin that an industry generates as well as the
volatility in that commodity's price. A steep cost curve implies significant industry
profitability as well as significant risk; a flat cost curve has low profitability but a
correspondingly low risk. As a result, the more valuable a commodity industry, the
greater the requirement to ensure that volume growth is well managed and non-
disruptive. Uninteresting and low-value businesses, on the other hand, can more or
less look after themselves. Taking Rio Tinto's cost curve, we convert it from a
discrete to a continuous mining output function for the industry as a whole, and
from this curve, we calculate the elasticity of supply that is implicit in Rio Tinto's
analysis. From this, we can see that Rio Tinto estimates the elasticity of supply to
currently be somewhere between 3 and 4 (see Exhibit 88 and Exhibit 89).
Most importantly, an explicit awareness of price elasticity naturally generates
the limits to organic growth. If one imagines an infinite reservoir of value-accretive
projects, conventional wisdom would suggest that a company should execute as
many of them as it can. Moreover, the same wisdom would suggest that there is a
straight-line relationship between the number of projects that are executed (i.e.,
volume of output) and the value of that company (see Exhibit 90). However, this
ignores that demand for a commodity is always finite and there is a negative
relationship between commodity volumes and prices. The greater the volume in the
market, the lower the price will be. Factoring that into the analysis of value
maximization increasingly bends the straight line down into a parabola that shows a
discrete point of maximum volume growth.

Exhibit 86 Rio Tinto's Cost Curve...

Exhibit 87 ...Not Dissimilar to Our Own
Source: Rio Tinto. Source: AME, CRU, NBS and Bernstein estimates and analysis.


170
160
150
140
130
120
110
100
80
70
0
60
180
40
30
20
10
0
50
1,000,000 750,000 500,000 250,000
90
1,250,000
Cumulative global productionkt Fe
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
68 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 88 Schematically, We Can Represent the Rio Tinto Cost Curve...
Source: Rio Tinto and Bernstein estimates and analysis.

Exhibit 89 ...And So We Can Calculate the Elasticity of Supply That Rio Tinto Must Believe In
Source: Rio Tinto and Bernstein estimates and analysis.


0
20
40
60
80
100
120
140
160
180
200
0 200 400 600 800 1,000 1,200 1,400 1,600
O
p
e
x

(
U
S
$
/
t
)
Cumulative Iron Ore Production (mt)
Rio Tinto Iron Ore Supply
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
E
l
a
s
t
i
c
i
t
y
Cumulative Iron Ore Production (mt)
Rio Tinto Iron Ore Elasticity
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
69





Exhibit 90 The Value Destructive Effect of Excessive Volume Growth Can Be Seen Once the
Impact of Supply Elasticity Is Considered
Source: Bernstein analysis and estimates.

Exhibit 91 summarizes this relationship. Given the elasticity that Rio Tinto
believes exists in the iron ore market, it ought to come to the conclusion that its
expansion by 70Mtpa will lower the price of iron ore by ~US$27/t. Under such a
scenario, it is simply expending US$5 billion of capital to reduce its total EBITDA
by ~US$2.3 billion a year for a total value destruction of almost US$18 billion
not quite at Alcan levels, but getting there. This simple analysis can also be made
more complex by building the full DCF model for the investment (or indeed by
generating a closed-form algebraic solution to the problem as we did in Euro
Metals & Mining: Not Enough Aristotle? The Fallacy of Growth & How Mining
Companies Can Avoid Destroying Value) but the essence stays the same. One
could object that the analysis uses a price of US$140/t and that this is far too high
given that we "know" that price will fall to US$80/t. However, this begs rather than
answers the question of whether or not to proceed with the investment and is
actually irrelevant to the analysis in hand, which turns on price differences, not
price levels.

0
20
40
60
80
100
120
140
0 25 50 75 100 125 150 175 200 225 250 275 300
V
a
l
u
e

(
U
S
$
b
n
)
Iron Ore Volume Growth for New Entrant (Mt)
Value of Volume Growth for Different Price Elasticity
0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0
"Normal"straightline
relationshipbetween
volumeandvalue...but
onlyifelasticityisignored
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
70 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 91 Rio Tinto's Claim That It Does Not See a Price Fall of US$20/t on the Back of Its
70Mtpa Increase in Production Becomes the Key Variable in Deciding Whether or Not
the Project Makes Sense; If the Project Induces a Greater Decline, It Will Be Net
Value Destructive for the Company
Source: Rio Tinto and Bernstein estimates and analysis.

In any event, we also know that Rio Tinto believes in 3% iron ore demand
growth from China. If we factor this in, the conclusion changes as shown in Exhibit
92. The extra demand growth is sufficient to limit the price declines to only
~US$14/t and so there is an incrementally positive contribution to EBITDA. That
is, an expenditure of US$5 billion generates a positive value of ~US$8 billion.
Clearly, everything here turns on whether the 3% demand growth in China is
something that shareholders are happy with. Shareholders in Rio Tinto may be
comfortable facing the loss of US$18 billion versus the gain of US$8 billion on the
chance that China will achieve 3% steel demand growth in a decelerating
environment. Alternatively, they might wish to follow the example of Emperor
Augustus in considering the whole enterprise akin to fishing with a golden fish
hook and that the gain, if all goes well, is too small to offset the risk of loss if it
does not. Just as Augustus saw that there were limits to his own empire building
and that, after all, Germany was just too small a prize to warrant the loss of Roman
lives, so too we would caution that tons, once put in the market, are virtually
impossible to remove. Much better to build only once there is clarity on the demand
side from China. Festina lente, as Augustus would have it.

Original Volume Mt 290
Expanded Volume Mt 360
Change in Volume Mt 70
Current Chinese Iron Ore Demand Mt 1100
% Additional Supply from Rio % 6.4%
Price Elasticity - -3
Price Ex Expansion US$/t 140
Price Inc Expansion US$/t 113
Rio Tinto Unit Costs US$/t 35
Total Costs Ex Expansion US$bn 10.2
Total Costs Inc Expansion US$bn 12.6
Incremental EBITDA US$bn (2.3)
Multiple on EBITDA - 5.5
Less Capex Expended US$bn 5.0
Total Incremental Value US$bn (17.5)
Rio Tinto 360Mt Expansion Ex-Demand Growth
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
71





Exhibit 92 Rio Tinto Also Believes in a 3% Demand Growth World; This Would Be Sufficient to
Limit the Price Impact of the Expansion to ~US$14/t and So Make It Appear Value
Accretive (Though Clearly Not by the Degree That It Would Be If the Price Impact of
the New Supply Were Neglected in Entirety)
Source: Rio Tinto and Bernstein estimates and analysis.

If we were asked to provide a guide as to our preferred course of action with
this project, we would suggest taking the time from now until 4Q to really
understand the true value of expansion to 360Mtpa under a range of demand
scenarios and price responses. When it comes to the 4Q decision point, we would
prefer Rio Tinto to push this back to 2Q:14, under the pretext of undertaking
further market studies. This keeps the threat of new supply in the market, but
increases the likelihood of continuing market tightness for a longer period without
unduly upsetting its largest customer China. Post this point, Rio Tinto can
always come back with a revised path to growth, which shows a markedly slower
ascent to the 360mt target, if demand is really there for it. Moreover, we believe
that Sam Walsh has given himself an "out" on the project by declaring it contingent
upon there being no "significant change in the demand-supply situation" (ironic in
some sense, given that this project is in itself a significant change in the demand-
supply situation). We would like to see this "out" utilized and, by doing so, see Rio
Tinto's management demonstrate how superior industry structure can drive superior
returns. Positive industry structure is not in itself a standalone positive outcome; it
enables a positive outcome only in so far as it supports superior value creation.
There is no point in trying to preserve market share if this leads to substantial value
destruction.

Original Volume Mt 290
Expanded Volume Mt 360
Change in Volume Mt 70
Current Chinese Iron Ore Demand Mt 1100
% Additional Supply from Rio % 6.4%
% Chinese Demand Growth % 3.0%
Price Elasticity - -3
Price Ex Expansion US$/t 140
Price Inc Expansion US$/t 126
Rio Tinto Unit Costs US$/t 35
Total Costs Ex Expansion US$bn 10.2
Total Costs Inc Expansion US$bn 12.6
Incremental EBITDA US$bn 2.3
Multiple on EBITDA - 5.5
Less Capex Expended US$bn 5.0
Total Incremental Value US$bn 7.5
Rio Tinto 360Mt Expansion Including Demand Growth
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
72 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





The Virtue of Consolidation Why Does It Matter?
This simple example provided by Rio Tinto can be usefully extended to consider
the case of commodity industries in general. In Exhibit 93 and Exhibit 94, we set
out two industry models (deliberately chosen to be caricatures of the iron ore
industry) that both show the potential for significant oversupply with possible new
project growth in excess of demand growth. Both industries are currently
generating significant margins, as is shown by the price elasticity. The only
difference between these two industries is the degree of consolidation one is
highly consolidated (four industry players or the Herfindahl-Herschman Index
[HHI] of 0.25, the threshold of "high concentration") and the other fragmented.
Under each market situation, we simply ask what the locally optimal value
maximizing strategy is for each incumbent player and then calculate the global
response as the sum of the local responses. We then consider four possible
scenarios: industry fragmentation versus consolidation and an explicit
understanding or not of the value impact of the elasticity of supply.
In the first scenario (see Exhibit 95), the industry is fragmented where each
participant acts on the belief that the only change that building a project has is to
increase volume for the participant, rather than to lower price as well. Under this
scenario, each player thinks that its volume will be value enhancing and so
executes the maximum possible growth. Each believes that it will be able to add an
incremental US$18 billion of value locally (or 27% versus the starting value of
US$66 billion) but the global effect of this local value maximization is massive
oversupply and the destruction of US$32 billion of value for each player. It is the
realization of this outcome that should see a de-rating of the industry from say 6x
EBITDA to closer to 3x EBITDA as the market prices in today what it believes will
come to pass tomorrow.

Exhibit 93 In Understanding the Value Impact of
Consolidation, We Construct Two Simple
Industries One Fragmented...

Exhibit 94 ...The Other Consolidated, But in All Other
Respects Identical
Source: Bernstein analysis and estimates. Source: Bernstein analysis and estimates.


Industry Structure
Number of Players # 10
Size of Market Mt 1000
Market Share Mt 100
New Projects Available Mt 400
Max Growth per Player Mt 40
Demand Growth Mt 200
Price US$/t 150
Elasticity of Supply # -2
Caital Intensity for Growth US$/t 200
Opex US$/t 40
Industry Structure
Number of Players # 4
Size of Market Mt 1000
Market Share Mt 250
New Projects Available Mt 400
Max Growth per Player Mt 100
Demand Growth Mt 200
Price US$/t 150
Elasticity of Supply # -2
Caital Intensity for Growth US$/t 200
Opex US$/t 40
Industry Consolidation Is a
Necessary But Not a Sufficient
Condition for a Commodity
Industry to Generate Superior
Returns; the Virtue of
Commercial Awareness Must
Be Added
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
73





Exhibit 95 For Each Industry, We Simply Look at the Consequences of Each Player Looking to
Maximize Apparent Local Value; in This Case, "Apparent" Means Simply Looking at
the Economics of Their Own Decision Making; It Is Easy to Show That in a Situation
of Potential Oversupply, Local Value Maximization Leads to Global Value Destruction
for a Fragmented Industry With No Market Impact Awareness...
Source: Bernstein analysis and estimates.

Under the second scenario (see Exhibit 96), the industry is still fragmented, but
each participant has a more sophisticated understanding of value and recognizes
that his individual project will impact price as well as volume. However, each
project is simply too small to have much of an impact on price (in this case US$6/t)
and so each player chooses to maximize volume growth just the same as before.
While the prize that each player believes that it is aiming at is slightly lower than
before (US$13 billion versus US$18 billion), it is still large enough to justify
unconstrained volume growth. However, the net result is exactly the same as in the
first example massive oversupply, huge price cuts and value destruction, with
the anticipation of such an outcome being presaged by an industry-wide de-rating.

Incumbent Player Total Industry
Player Ex Growth Total Industry Ex Growth
Volume Mt 100 Volume Mt 1000
Price US$/t 150 Price US$/t 150
Revenue US$bn 15 Revenue US$bn 150
Unit Costs US$/t 40 Unit Costs US$/t 40
Total Costs US$bn 4 Total Costs US$bn 40
EBITDA US$bn 11 EBITDA US$bn 110
EV/EBITDA Multiple - 6 EV/EBITDA Multiple - 6
EV US$bn 66 EV US$bn 660
Player Inc Growth Total Industry Inc Growth
Original Volume Mt 100 Original Volume Mt 1000
Growth Volume Mt 40 Growth Volume Mt 400
Price US$/t 150 Price US$/t 90
Revenue US$bn 21 Revenue US$bn 126
Unit Costs US$/t 40 Unit Costs US$/t 40
Total Costs US$bn 6 Total Costs US$bn 56
EBITDA US$bn 15 EBITDA US$bn 70
EV/EBITDA Multiple - 6 EV/EBITDA Multiple - 6
EV US$bn 92 EV US$bn 420
Less Capex US$bn 8 Less Capex US$bn 80
Total EV US$bn 84 Total EV US$bn 340
EV per Participant 34
Apparent Value Creation per Incumbent US$bn 18 Actual Value Creation per Incumbent US$bn -32
Fragmented Industry Excluding Awareness of Price Elasticity
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
74 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 96 ...And This Global Value Destruction Will Occur Whether or Not Each Individual
Player Is Aware of the Impact That Its Decisions Have on the Market Price; the
Apparent Gain from Organic Growth in Each Scenario Is an Overwhelmingly
Compelling Prize
Source: Bernstein analysis and estimates.

In the next scenario (see Exhibit 97), there is a consolidated market but each
player is blithely unaware of the impact of its decisions on the market. Under this
scenario, local value maximization is again realized through each player building in
an unconstrained manner. It is clear that there is no difference in outcome between
a fragmented and a consolidated industry, if the effect of price elasticity is
neglected from the investment decision-making process (as seems to be the
standard practice in mining). Industry consolidation is not an automatic good for
shareholders it is a positive only in so far as it yields a value outcome superior to
that which would be achieved without consolidation. There is no point in trying to
preserve an oligopoly if its preservation destroys rather than enhances value. In
short, there is no such thing as a "good" industry structure if that structure does not
return price power and superior value creation. And in mining, such an outcome
cannot exist for as long as local value maximization is thought to be synonymous
with ignoring the market impact of new volume. As so often in corporate life, the
unanalyzed pursuit of "strategic" imperatives can easily lead to massive value
destruction.

Incumbent Player Total Industry
Player Ex Growth Total Industry Ex Growth
Volume Mt 100 Volume Mt 1000
Price US$/t 150 Price US$/t 150
Revenue US$bn 15 Revenue US$bn 150
Unit Costs US$/t 40 Unit Costs US$/t 40
Total Costs US$bn 4 Total Costs US$bn 40
EBITDA US$bn 11 EBITDA US$bn 110
EV/EBITDA Multiple - 6 EV/EBITDA Multiple - 6
EV US$bn 66 EV US$bn 660
Player Inc Growth Total Industry Inc Growth
Original Volume Mt 100 Original Volume Mt 1000
Growth Volume Mt 40 Growth Volume Mt 400
Price US$/t 144 Price US$/t 90
Revenue US$bn 20 Revenue US$bn 126
Unit Costs US$/t 40 Unit Costs US$/t 40
Total Costs US$bn 6 Total Costs US$bn 56
EBITDA US$bn 15 EBITDA US$bn 70
EV/EBITDA Multiple - 6 EV/EBITDA Multiple - 6
EV US$bn 87 EV US$bn 420
Less Capex US$bn 8 Less Capex US$bn 80
Total EV US$bn 79 Total EV US$bn 340
EV per Participant 34
Apparent Value Creation per Incumbent US$bn 13 Actual Value Creation per Incumbent US$bn -32
Fragmented Industry Including Awareness of Price Elasticity
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
75





Exhibit 97 In a Consolidated Industry, Where Each Player Acts as If It Was Unaware of the
Impact That Its Decisions Have on the Market, There Is Absolutely No Difference in
Outcome Versus a Fragmented Industry; Exactly the Same Volume Is Brought to the
Market and Exactly the Same Value Destruction Results; Consolidation in
Commodity Markets Is Necessary But Not Sufficient to Generate Superior Returns
Source: Bernstein analysis and estimates.

It is only when we come to the fourth and last scenario (see Exhibit 98) that a
new feature emerges. Here again, local value maximization is sought; each agent
individually builds as fast as it can commensurate with maximizing the value of its
individual portfolio. However, because each player is independently aware of the
fact that its decisions impact the market and because each has a large installed
capital base, each comes to the conclusion that excessive growth will have a
deleterious impact on value. Consequently, we see for the first time delivery
of volume in a restrained manner. The effect of this at an industry-wide level is to
generate value superior to that which each individual agent was targeting
individually. Instead of massive oversupply, the "perfect" balance between new
volume and price appreciation is met and industry-wide value is enhanced. Under
this circumstance, the market should begin to re-rate rather than de-rate the sector,
as awareness is formed about the emergent rationality of the industry and gets
priced in.
We would like to stress no call is made here for concert or collusive action
from the miners. Rather, a simple analysis of each agent's own local value
maximization would be sufficient. In none of the foregoing analysis has anything
other than local value maximization been the driving force behind decision making.
There is no call to "look after" the market or to act to support price for other
Incumbent Player Total Industry
Player Ex Growth Total Industry Ex Growth
Volume Mt 250 Volume Mt 1000
Price US$/t 150 Price US$/t 150
Revenue US$bn 37.5 Revenue US$bn 150
Unit Costs US$/t 40 Unit Costs US$/t 40
Total Costs US$bn 10 Total Costs US$bn 40
EBITDA US$bn 27.5 EBITDA US$bn 110
EV/EBITDA Multiple - 6 EV/EBITDA Multiple - 6
EV US$bn 165 EV US$bn 660
Player Inc Growth Total Industry Inc Growth
Original Volume Mt 250 Original Volume Mt 1000
Growth Volume Mt 100 Growth Volume Mt 400
Price US$/t 150 Price US$/t 90
Revenue US$bn 53 Revenue US$bn 126
Unit Costs US$/t 40 Unit Costs US$/t 40
Total Costs US$bn 14 Total Costs US$bn 56
EBITDA US$bn 39 EBITDA US$bn 70
EV/EBITDA Multiple - 6 EV/EBITDA Multiple - 6
EV US$bn 231 EV US$bn 420
Less Capex US$bn 20 Less Capex US$bn 80
Total EV US$bn 211 Total EV US$bn 340
EV per Participant 85
Apparent Value Creation per Incumbent US$bn 46 Actual Value Creation per Incumbent US$bn -80
Consolidated Industry Excluding Awareness of Price Elasticity
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
76 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





participants. However, one has to look only at a number of media articles on the
topic of Rio Tinto's 360Mt expansion target to realize how pervasive the
misunderstanding of this topic is. The common error is the mistaken belief that
looking to preserve price is somehow putting global rather than local value
objectives at the heart of a company's strategy. This is not the case. Rather, putting
price preservation at the heart of strategy is something that every company ought to
do, but it is something that becomes of critical importance when the company
approaches the scale of the large diversified miners.

Exhibit 98 The Sufficient Condition for Superior Returns in Consolidated Markets Is an
Awareness of the Impact That Volume Decisions Have on Price and the Fact That
This Changes the Value of the Entire Portfolio, Not Just the Marginal Ton; Under
Such Conditions, the Pursuit of Local Optimality Returns a Global Value Solution in
Excess of What Is Optimal
Source: Bernstein analysis and estimates.

To summarize, industry consolidation is a necessary but not sufficient
condition to enjoy superior returns in a commodity market (see Exhibit 99).
Industry consolidation and an awareness of what local value maximization actually
means are the necessary and sufficient conditions to enjoy pricing power and a
superior return. The re-rating or de-rating that a sector should enjoy on the back of
this is shown in Exhibit 100 through Exhibit 102. This shows how the rating varies
by degree of market awareness and by degree of consolidation as well as certain
Incumbent Player Total Industry
Player Ex Growth Total Industry Ex Growth
Volume Mt 250 Volume Mt 1000
Price US$/t 150 Price US$/t 150
Revenue US$bn 37.5 Revenue US$bn 150
Unit Costs US$/t 40 Unit Costs US$/t 40
Total Costs US$bn 10 Total Costs US$bn 40
EBITDA US$bn 27.5 EBITDA US$bn 110
EV/EBITDA Multiple - 6 EV/EBITDA Multiple - 6
EV US$bn 165 EV US$bn 660
Player Inc Growth Total Industry Inc Growth
Original Volume Mt 250 Original Volume Mt 1000
Growth Volume Mt 28 Growth Volume Mt 112
Price US$/t 157 Price US$/t 176
Revenue US$bn 44 Revenue US$bn 196
Unit Costs US$/t 40 Unit Costs US$/t 40
Total Costs US$bn 11 Total Costs US$bn 44
EBITDA US$bn 32 EBITDA US$bn 152
EV/EBITDA Multiple - 6 EV/EBITDA Multiple - 6
EV US$bn 194 EV US$bn 910
Less Capex US$bn 6 Less Capex US$bn 22
Total EV US$bn 189 Total EV US$bn 888
EV per Participant 222
Apparent Value Creation per Incumbent US$bn 24 Actual Value Creation per Incumbent US$bn 57
Consolidated Industry Including Awareness of Price Elasticity
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
77





other variables.
28
It is clear that iron ore is an industry where there ought to be
pricing power and superior return potential.
29
However, it is clear (see Exhibit 103)
that currently the miners are not getting the benefit of an expectation of superior
performance quite the reverse. Given that the industry is sufficiently
consolidated to enjoy a premium rating (and will remain so under most scenarios),
the reason for its absence must relate to expectations of how the market incumbents
understand their role as agents in charge of value maximization. As we look at the
sector, the critical flaw we see is that of incorrect or too simplistic valuation
methodologies as we lay out in Euro Metals & Mining: Not Enough Aristotle? The
Fallacy of Growth & How Mining Companies Can Avoid Destroying Value. The
valuation policy error in mining companies results in poor capital discipline and an
inability for globally superior outcomes to emerge from local value optimization.
However, this is clearly beginning to change. Irrespective of the decision that is
finally reached on Pilbara 360, the announcement from Rio Tinto's CEO Sam
Walsh that is of key importance is that "the additional tonnage of 70 million tons
was unlikely to result in a $20/t price decline."
30
This is clearly an indication that
the error in approach to value in at least one company is in the process of being
rectified. It is for this reason that we continue to be optimistic about the future of
the mining industry and continue to believe that emphasizing capital discipline is
the key. It took, after all, 118 years to finally reduce Carthage; so perhaps a few
years to see the emergence of real capital discipline is not too bad a result. We
believe that a re-rating in this space is possibly precipitated by an appreciation that
the defence of the iron ore price is a genuinely possible outcome. Exhibit 104
shows the impact of a re-rating around iron ore.

Exhibit 99 A Necessary Condition for Superior Price Performance Is That an Industry Be
Consolidated, But It Is Not Sufficient; a Necessary and Sufficient Condition Is That
There Is a Consolidated Industry Comprising Agents Who Understand the Price
Impact of Their Own Decisions

Source: Bernstein analysis and estimates.


28
The consolidation could have been illustrated using the Herfindahl-Herschman Index, but the effect is much the same as if we just use the
number of market participants to illustrate the point.
29
While iron ore may be a scarce commodity, cape size export ports and world-class bulk transport infrastructure are not, and these are the key
elements in the iron ore business.
30
"Rio Said to Pursue $5 Billion Iron-Ore Project as Glut Looms," Bloomberg L.P., May 7, 2013.
Conditions for
Superior Returns in
Commodity
Industries
Consolidated Fragmented
Aware of Price
Impact of Own
Decisions
Unaware of Price
Impact of Own
Decisions
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
78 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 100 There Are Really Only Three Players That Matter in Iron Ore (Four at a Push)...This Is
a Sufficient Enough Degree of Consolidation That the Pursuit of Local Value
Maximization Ought to Embed Capital Discipline in the Industry and Generate
Superior Returns
Source: Bernstein analysis and estimates.

Exhibit 101 While the Degree of Possible Oversupply Is Clearly an Important Variable...
Source: Bernstein analysis and estimates.

0
1
2
3
4
5
6
7
8
9
10
1 2 3 4 5 6 7 8 9 10
E
V
/
E
B
I
T
D
A

M
u
l
t
i
p
l
e

o
f

I
n
d
u
s
t
r
y
Number of Players in Industry (i.e., Degree of Consolidation)
Multiple Uplift Available in Consolidated Commodity Markets Facing
Oversupply
Including Market Awareness Excluding Market Awareness
0
1
2
3
4
5
6
7
8
9
10
1 2 3 4 5 6 7 8 9 10
E
V
/
E
B
I
T
D
A

M
u
l
t
i
p
l
e

o
f

I
n
d
u
s
t
r
y
Number of Players in Industry (i.e., Degree of Consolidation)
Multiple Uplift Available in Consolidated Commodity Markets Facing
Oversupply
100% Possible Oversupply 75% Possible Oversupply 50% Possible Oversupply
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
79





Exhibit 102 ...Even More Important Is the Elasticity of Supply, and Here Rio Tinto Itself Estimates
This to Be About Three; Moreover, It Is the Elasticity of Supply That Inflects Any
Commodity Cost Curve and So Generates the Margins That an Industry Enjoys; the
Higher the Elasticity, the Higher the Margin and Also the Lower the Degree of
Consolidation Required to Generate Superior Returns
Source: Bernstein analysis and estimates.

Exhibit 103 However, This Is Clearly Not What Is Being Discounted in the Stocks
Source: FactSet and Bernstein analysis.

0
2
4
6
8
10
12
1 2 3 4 5 6 7 8 9 10
E
V
/
E
B
I
T
D
A

M
u
l
t
i
p
l
e

o
f

I
n
d
u
s
t
r
y
Number of Players in Industry (i.e., Degree of Consolidation)
Multiple Uplift Available in Consolidated Commodity Markets by Elasticity
e=-1 e=-2 e=-3
4.6
5.0
5.0
5.8
Vale Rio Anglo BHP
E
V
/
E
B
I
T
D
A
Current Trading Multiples for Iron Ore Producers
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
80 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 104 We Are Beginning to See Greater Clarity from the Miners in Their Thinking on Capital
Discipline and Price Preservation...All of Which Ought to Create a Greater Chance of
Seeing Growth Restrained and the Industry Re-Rate, Generating Significant Upside
for the Miners, Especially Rio Tinto and Vale
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Rio BHP Vale Anglo
Current EV (US$m) 106,719 186,765 106,936 57,856
Proportion of Price Target Attributable to Iron Ore (%) 42.8% 25.4% 40.3% 24.6%
Current EV/EBITDA (x) 4.97 5.79 4.58 5.04
Bernstein Iron Ore Multiple (x) 6.18 6.81 7.41 4.87
Multiple Possible on Iron Ore (x) 7.68 8.31 8.91 6.37
Value Impact (US$m) 11,075 10,447 8,725 4,378
Share Price Impact ($) 6.0 2.0 1.7 3.4
Current* Share Price ($) 42.28 27.19 13.37 19.56
Per Share Impact (%) 14% 7% 13% 18%
* July 12, 2013
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
81





What GDP Growth Is Consistent
With $80/t Iron Ore Baked Into
Mining Equities?

The iron ore price (the most important source of mining EBITDA generation) has
averaged US$135/t over the last five years and US$129/t average 1H:13 Aus FOB
price and yet mining company stocks have been among the worst performers of
the year. This spring, we ran four fixed commodity price scenarios ("Grizzly,"
"Bear," "Bull" and "De Niro" in order of increasing aggressiveness) and examined
how sensitive the value generated by our DCF (out to 2030) was to these different
scenarios. The scenarios were bounded by the range of prices seen over the last five
years (varying from the 25
th
percentile to the 80
th
percentile of the distribution),
given the changes in the cost structure of the mining industry. We then selected the
scenario that most closely resembled current market conditions and flexed the
prices of the two most important commodities (from an EBITDA generation
perspective for our coverage group) copper and iron ore in order to determine
what the market was pricing in for these commodities. While the market still
appeared comfortable about the longer-term copper prospects (baking into equity
prices a 19% premium to the June 30, 2013 spot), the market was and remains
deeply concerned about iron ore (baking in a 26% discount to the June 30, 2013
spot). Our analysis found that the market was pricing in iron ore at US$80/t and
copper at US$8,000/t (see Exhibit 117 through Exhibit 121). We found and
continue to find it difficult to believe that the pessimistic view on iron ore was
tenable then or at the time of this Blackbook's publication.
We then asked ourselves "what Chinese growth outlook would be consistent
with $80/t iron ore?" We calculated the Chinese GDP growth implied by consensus
demand expectations in China, and then used this implied economic growth to back
out the supply side response that, in concert with this demand expectation, would
result in $80/t iron ore. We found that this was consistent with ~7% GDP growth
some 1.3% below the IMF trend forecast and 0.5% below the official
government guidance as well as significant new supply: ~550Mtpa of new iron
ore capacity out to 2020 (a ~50% increase on the 1,123mt produced in 2012
globally), of which ~300Mtpa is surplus and hence price destructive.
Stress Testing DCF Valuations in Different Commodity Price Worlds
At the time of this analysis in May, with the exception of the precious metals (most
notably palladium), commodities were trading toward the bottom end of their
historical five-year trading ranges (see Exhibit 105 through Exhibit 107), with the
base metals and coal looking particularly depressed. We held all other variables
constant (e.g., FX, capex and operating cost escalation) and focused on how our
target price would vary with a changing long-term commodity price. Our "base
case" factored in the most reasonable (in our view) temporal structure of the price
line as a result of changing industry structures. Moreover, it is considered that,
from a value perspective, the path taken to reach a long-term price is just as
important as the overall price level.

Mining Equities Have Recently
Been Baking in $80/t Iron Ore
(~40% Below 1H:13 and Five-
Year Average Prices) This Is
Consistent With Both ~7%
Chinese GDP Growth (Below
Both IMF Estimates and
Chinese Targets) and
~550Mtpa New Iron Ore
Capacity Out to 2020
Commodities Were Trading at
Multi-Year Lows, So We Ran
Four Commodity Price
Scenarios to Examine the
Sensitivity of Our DCF
Valuation
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
82 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 105 Summary of Historical Commodity Prices
Source: Bloomberg L.P. and Bernstein estimates and analysis.

Exhibit 106 Except for Some Precious Metals, Current Spot Prices of the Key Commodities for
the Miners in Our Coverage Were Substantially Below Their Most Recent Five-Year
Mean
Source: Bloomberg L.P. and Bernstein analysis.



Nominal Commodity Prices
Percentile of 5-Yr
Distribution
Nominal Commodity Prices 5Yr Avg YTD Spot YTD Spot
Platinum US$/oz 1,536 1,607 1,439 58% 28%
Palladium US$/oz 519 730 679 82% 73%
Gold US$/oz 1,282 1,609 1,414 76% 60%
Copper US$/t 7,312 7,814 6,975 58% 29%
Nickel US$/t 19,458 17,025 15,099 30% 13%
Zinc US$/t 1,971 1,995 1,813 48% 23%
Thermal Coal Ex Newcastle US$/t 102 91 86 34% 26%
Iron Ore Fines FOB Aus US$/t 135 146 138 58% 45%
Silver US$/oz 24 29 24 67% 52%
Uranium US$/lb 52 43 41 16% 3%
Molybdenum US$/lb 17 11 11 22% 21%
Aluminum US$/t 2,155 1,975 1,872 32% 20%
73%
60%
53%
46%
29% 29%
28%
26%
21%
20%
13%
4%
Current Spot Price Percentile of Five-Year Price Distribution
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
83





Exhibit 107 Higher Average Year-to-Date Prices Reflect Higher Commodity Prices in the
Beginning of the First Quarter of the Year
Source: Bloomberg L.P. and Bernstein estimates and analysis.

In order to stress test this case and our stock recommendations, we took four price
scenarios with fixed commodity prices (we label them "Grizzly," "Bear," "Bull" and
"De Niro" in order of increasing aggressiveness) and examined how the price target
generated by our DCF
31
would vary with each of them.
A brief overview of our scenarios for a selection of the most important
commodities is given in Exhibit 108 and Exhibit 109 and explained in detail in
"Appendix 1: From Grizzly to DeNiro." In order to understand what these price
scenarios represent, one should contrast them against the range of prices that we
have seen over the last five years. Exhibit 110 and Exhibit 111 show the
distributions of historical copper and iron ore prices (for the other major
commodities, these are shown in Appendix 1). All the price scenarios we have
chosen are bounded by the range of prices seen over the last five years (varying
from the 25
th
percentile of the distribution, on average, for the "Grizzly" scenario to
the 80
th
percentile for the "De Niro" scenario). Given the change in the cost
structure of the mining industry over the last decade, if a price distribution further
back than the last five years is taken, we believe it would lead to an overly negative
assessment of what the future could hold. A copper price of US$6,500/t is
markedly different in terms of impact now than it would have been in 2003.

31
Please note that we provide two valuation metrics: a one-year target price based upon our regression model and an intrinsic value generated by
a DCF out to 2030. It is the latter that was used throughout this analysis. For more details on our valuation methodology, please see the
"Valuation and Risks"' chapter.
82%
76%
67%
58% 58% 58%
48%
34%
32%
30%
22%
16%
Average YTD Price Percentile of Five-Year Price Distribution
Our Four Scenarios Ranged
from 25
th
to 80
th
Percentile of
Historical Price Ranges
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
84 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 108 Summary of Commodity Price Scenarios vs. Historical Distribution Real Terms
Source: Bloomberg L.P. and Bernstein estimates and analysis.

Exhibit 109 Summary of Commodity Price Scenarios vs. Current Model Real Terms
Source: Bloomberg L.P. and Bernstein estimates and analysis.


Real LT Commodity prices Percentile of 5Yr Distribution
2011 US$
Current
Model
Grizzly Bear Bull De Niro
Current
Model
Grizzly Bear Bull De Niro
Platinum US$/oz 1,486 1,500 1,700 1,900 2,100 33% 34% 72% 91% 98%
Palladium US$/oz 606 500 600 700 800 58% 46% 56% 77% 96%
Gold US$/oz 1,619 1,200 1,500 1,800 2,100 77% 45% 63% 98% 100%
Copper US$/t 7,652 6,500 7,500 8,500 9,500 51% 20% 44% 80% 94%
Nickel US$/t 15,991 16,000 18,000 20,000 22,000 17% 17% 40% 60% 71%
Zinc US$/t 1,841 1,800 2,000 2,200 2,400 26% 21% 48% 71% 90%
Thermal Coal ex Newcastle US$/t 88 80 90 100 110 29% 18% 33% 56% 64%
Iron Ore Fines FOB Aus US$/t 74 70 90 110 130 11% 7% 19% 26% 36%
Silver US$/oz 30 20 25 30 35 69% 50% 53% 69% 90%
Uranium US$/lb 44 45 50 55 60 24% 27% 45% 73% 81%
Molybdenum US$/lb 11 10 12 14 16 15% 7% 28% 42% 64%
Aluminum US$/t 2,405 1,700 1,900 2,100 2,300 74% 11% 22% 49% 67%
Real LT Commodity Prices Scenario as % of Current LT Price
Current
Model
Grizzly Bear Bull De Niro Grizzly Bear Bull De Niro
Platinum US$/oz 1,486 1,500 1,700 1,900 2,100 101% 114% 128% 141%
Palladium US$/oz 606 500 600 700 800 83% 99% 116% 132%
Gold US$/oz 1,619 1,200 1,500 1,800 2,100 74% 93% 111% 130%
Copper US$/t 7,652 6,500 7,500 8,500 9,500 85% 98% 111% 124%
Nickel US$/t 15,991 16,000 18,000 20,000 22,000 100% 113% 125% 138%
Zinc US$/t 1,841 1,800 2,000 2,200 2,400 98% 109% 119% 130%
Thermal Coal ex Newcastle US$/t 88 80 90 100 110 91% 103% 114% 126%
Iron Ore Fines FOB Aus US$/t 74 70 90 110 130 94% 121% 148% 175%
Silver US$/oz 30 20 25 30 35 67% 83% 100% 117%
Uranium US$/lb 44 45 50 55 60 101% 113% 124% 135%
Molybdenum US$/lb 11 10 12 14 16 91% 109% 127% 145%
Aluminum US$/t 2,405 1,700 1,900 2,100 2,300 71% 79% 87% 96%
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
85





Exhibit 110 The "Fat Tail" in the Copper Price Distribution Relates to the Period Immediately
After the Financial Crisis; We Would Interpret the Shape of the Price Distribution as
Telling Us Something About the True Costs of Marginal Production
Source: Bloomberg L.P. and Bernstein analysis.

Exhibit 111 The Shift in Pricing Regime from the Benchmark to the Spot Market as Well as the
Deterioration in Chinese Domestic Mined Iron Ore Grades Result in a Markedly
Different Price Distribution for Iron Ore Than for Copper
Source: Bloomberg L.P. and Bernstein analysis.

Please refer to Appendix 1 of this Blackbook for other commodity price
distributions.
0%
2%
4%
6%
8%
10%
12%
2
,
0
0
0
2
,
2
5
0
2
,
5
0
0
2
,
7
5
0
3
,
0
0
0
3
,
2
5
0
3
,
5
0
0
3
,
7
5
0
4
,
0
0
0
4
,
2
5
0
4
,
5
0
0
4
,
7
5
0
5
,
0
0
0
5
,
2
5
0
5
,
5
0
0
5
,
7
5
0
6
,
0
0
0
6
,
2
5
0
6
,
5
0
0
6
,
7
5
0
7
,
0
0
0
7
,
2
5
0
7
,
5
0
0
7
,
7
5
0
8
,
0
0
0
8
,
2
5
0
8
,
5
0
0
8
,
7
5
0
9
,
0
0
0
9
,
2
5
0
9
,
5
0
0
9
,
7
5
0
1
0
,
0
0
0
P
e
r
c
e
n
t
i
l
e
Cu Spot Price US$/t
Five-Year Nominal Copper Price Distribution
Spotasof
22/04/2013
$6,975/t
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200
P
e
r
c
e
n
t
i
l
e
Fe Spot Price US$/t
Five-Year Nominal Iron Ore Price Distribution
Spotasof
22/04/2013
$138/t
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
86 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 112 gives the high-level summary of how each of our stocks would respond
to the valuation scenarios used. Vale is tied with Rio Tinto for the lowest downside
in our Grizzly scenario and shows the highest upside in Bull and De Niro scenarios;
the company with the greatest downside across all scenarios is Glencore. This was
largely a consequence of our then-negative view on the long-term iron ore price
32

(albeit with an interesting trajectory down to this level) versus copper and the high
level of operational gearing in Vale on the back of its significant capex program
(see Exhibit 113 through Exhibit 116).
For each of our coverage companies, we detail the pro forma financials for
each of the scenarios, giving a summary income statement, balance sheet and cash
flow. The full details of these scenarios are given in Appendix 1, but for the sake of
brevity only the headline details have been included here. We also show how the
SOTP DCF value varies by scenario for our coverage, as we base our target prices
on EV of the aggregate assets held by each company.

Exhibit 112 Vale Shows the Greatest Potential Upside and Widest Price Distribution Under Our
Scenarios (on the Back of Operational Gearing), While Glencore Shows the Greatest
Downside and Least Upside Relative to Our DCF Value (as a Result of Our Bullish
View on Copper in the Medium Term)
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 113 Rio Tinto Shows the Least Downside to Our
Scenarios and Glencore the Greatest

Exhibit 114 As Soon as a More Positive Iron Ore Price
Is Introduced, the Impact of Operational
Gearing in Vale Is Immediately Apparent
Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.

32
Please see the "Our Iron Ore Price Forecast" chapter for our updated iron ore price forecast.
TP / NPV per Share vs. Current Model
Current
Model
Grizzly Bear Bull De Niro Grizzly Bear Bull De Niro
Anglo American 23.00 6.51 17.03 26.84 36.22 -72% -26% 17% 57%
BHP Billiton 25.00 6.54 16.71 27.02 37.49 -74% -33% 8% 50%
Glen Xta Pro Forma 5.16 1.21 3.05 4.90 6.75 -77% -41% -5% 31%
Rio Tinto 45.75 15.23 37.73 59.99 81.69 -67% -18% 31% 79%
Vale BRL 29.25 9.73 34.38 58.97 83.54 -67% 18% 102% 186%
-67% -67%
-72%
-74%
-77%
Rio Tinto Vale Anglo
American
BHP
Billiton
Glen Xta
Pro Forma
TP vs. Current Model Grizzly
18%
-18%
-26%
-33%
-41%
Vale Rio Tinto Anglo
American
BHP
Billiton
Glen Xta
Pro Forma
TP vs. Current Model Bear
Vale Showed the Greatest
Upside Across All Scenarios;
Glencore the Lowest
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
87





Exhibit 115 Our Target Prices Are the Equivalent of the
"Bull" Scenario Even Though We Reach
These Targets With Higher Short-Term
Prices and Lower Long-Term Prices

Exhibit 116 It Is Difficult for Us to See Further Upside in
Our Target Price for Glencore as It Already
Factors in a Very Strong Copper Price

Source: Corporate reports and Bernstein estimates and analysis.

Source: Corporate reports and Bernstein estimates and analysis.
What Iron Ore Price Is Being Baked In?
In addition to stress testing our equity valuations, we also aimed to find out what
iron ore and copper prices the market was pricing into the miner's equity prices.
From the four scenarios run earlier, we selected the scenario that most closely
resembled current market conditions ("Bear") and flexed the prices of the two most
important commodities (from an EBITDA generation perspective for our coverage
group) copper and iron ore in order to determine what the market was pricing
in for those commodities. We found that mining equity valuations were baking in
$80/t iron ore, a ~40% discount to year-to-date and five-year average prices (see
Exhibit 117 through Exhibit 121).

Exhibit 117 As This Scenario Analysis Run in Late May Shows, Rio Tinto Offers the Most
Attractive Balance Between Risk and Potential Upside
Note: Price current as of May 21, 2013, when this analysis was run.
Source: Corporate reports and Bernstein estimates and analysis.

102%
31%
17%
8%
-5%
Vale Rio Tinto Anglo
American
BHP
Billiton
Glen Xta
Pro Forma
TP vs. Current Model Bull
186%
79%
57%
50%
31%
Vale Rio Tinto Anglo
American
BHP
Billiton
Glen Xta
Pro Forma
TP vs. Current Model De Niro
Rio Tinto (GBP), Current Price = 28.78 Iron Ore (US$/t)
TP 70 90 110 130
6,500 20.76 35.94 50.73 65.28
7,500 22.57 37.73 52.50 67.03
8,500 24.38 39.52 54.28 68.79
9,500 26.21 41.33 56.06 70.55
C
o
p
p
e
r

(
U
S
$
/
t
)
Flexing Our Price Assumptions
Revealed That Iron Ore Was
Priced in at a ~40% Discount
Year-to-Date and Versus the
Five-Year Average
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
88 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 118 The Presence of Oil in the BHP Portfolio Adds a Third Critical Variable That Renders
It Harder to Unpack the Implied Iron Ore and Copper Price from the Market Price; Oil
Remains a Key Diversifier for the Highest Quality Stock in Our Coverage
Note: Price current as of May 21, 2013, when this analysis was run.
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 119 While the Market Price of Vale Might Seem to Imply a Higher Iron Ore Price, We
Believe That This Is a Function of Us Modeling a Higher Tax Rate for Vale Than the
Market
Note: Price current as of May 21, 2013, when this analysis was run.
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 120 For Anglo, the Issues of Both Platinum and South African Political Risks Add a Layer
of Complexity to the Investment Proposition
Note: Price current as of May 21, 2013, when this analysis was run.
Source: Corporate reports and Bernstein estimates and analysis.

BHP Billiton (GBP), Current Price = 19.12 Iron Ore (US$/t)
TP 70 90 110 130
6,500 11.22 15.36 19.50 23.66
7,500 12.57 16.71 20.87 25.03
8,500 13.93 18.07 22.23 26.40
9,500 15.29 19.44 23.60 27.77
C
o
p
p
e
r

(
U
S
$
/
t
)
Vale (BRL), Current Price = BRL32.1 Iron Ore (US$/t)
TP 70 90 110 130
6,500 13.14 33.15 53.15 73.14
7,500 14.37 34.38 54.38 74.37
8,500 15.40 35.41 55.41 75.41
9,500 16.39 36.41 56.41 76.40
C
o
p
p
e
r

(
U
S
$
/
t
)
Anglo (GBP), Current Price = 15.49 Iron Ore (US$/t)
TP 70 90 110 130
6,500 12.32 15.05 17.75 20.43
7,500 14.33 17.03 19.69 22.34
8,500 16.33 18.99 21.62 24.24
9,500 18.31 20.93 23.54 26.13
C
o
p
p
e
r

(
U
S
$
/
t
)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
89





Exhibit 121 Note That for Glencore Xstrata, We Run the Analysis on Our Combined Pro Forma
Glencore Xstrata; Copper Is the Single Greatest Sensitivity for Glencore Xstrata; to
See Outperformance in This "Not Yet Institutional Quality" (from a Governance and
Reporting Perspective) Stock, It Is Necessary to Believe in a Strong Copper Price
Note: Price current as of May 21, 2013, when this analysis was run.
Source: Corporate reports and Bernstein estimates and analysis.
What GDP Outlook Is Consistent With $80/t Iron Ore?
Given that the equity market appeared to be discounting a US$80/t iron ore world,
we then asked ourselves what the world needs to look like for these prices to come
about. Specifically, "what growth outlook for the world's largest commodity
consumer, China, would be consistent with $80/t iron ore?"
We calculated the Chinese GDP growth implied by consensus demand
expectations in China, and then used this implied economic growth to back out the
supply side response that, in concert with this demand expectation, would result in
$80/t iron ore.
We found that US$80/t iron ore is consistent with a ~7% GDP growth some
1.3% below the IMF trend forecast and 0.5% below the official government
guidance. Our framework demonstrates that consensus expectations therefore imply
~550Mtpa of new iron ore capacity out to 2020, of which ~300Mtpa comes in
excess of the requirement and is price destructive. Yet more evidence of the
pressing need for a more restrained approach to organic growth by the majors!

Because China is the largest consumer of iron ore globally, and is only one-third of
the way through the most rapid industrialization ever seen globally, the most
important demand-side question for mining stocks is "How does one estimate
future steel intensity in China?" Exhibit 122 shows the history of Chinese steel
intensity as well as a plausible forward-looking trend line. The problem, however,
is that a lot of such lines might look equally convincing and yet each would
represent a substantially different future for the Chinese steel. There must be more
to determining the future of this key variable than the aesthetics of different curves,
and yet so often this still is the basis of demand projections.
Simply examining steel intensity curves does not provide enough information
to decide if China is "on track" relative to other industrialized countries. Instead,
we require a means to link steel intensity today with steel intensity tomorrow. We
find such a link in the constant relationship between an economy's steel capital
stock and its overall economic activity (R-squared = 65%) see Exhibit 122 and
Exhibit 123. Although steel intensity has varied from industrialization to
industrialization (the U.S. was twice as intensive as France, and China is again
some 50% more intensive than the U.S.), it has always been the embedding of steel
in physical infrastructure that enabled a transition from an agricultural economy to
one dominated by services. We therefore use this relationship to forecast how
China's capital stock is likely to evolve.
In order to ground our analysis, we take the trajectory of U.S. steel capital
stock formation relative to output as a benchmark development path for any
Glen Xta (GBP), Current Glencore Price = 3.37 Iron Ore (US$/t)
Implied Glen-Xta NPV 70 90 110 130
6,500 2.49 2.49 2.49 2.49
7,500 3.05 3.05 3.05 3.05
8,500 3.61 3.61 3.61 3.61
9,500 4.17 4.17 4.17 4.17
C
o
p
p
e
r

(
U
S
$
/
t
)
What Is the Implicit Chinese
GDP Assumption Consistent
With US$80/t Iron Ore? ~7%
Some 1.3% Below the IMF
Forecast and 0.5% Below the
Official Government Guidance
U.S. Industrialization Provides
a Canonical Pattern from
Which to Derive the Multiplier
Between Economic Growth and
Metal Demand Growth for
China
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
90 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





economy (see Exhibit 124 and Exhibit 125). These exhibits show the increasing
levels of productivity in the U.S. that is, incrementally higher levels of output
being generated from each additional unit of input. In fact, the relationship between
steel and output measures the evolution of productivity within an economy.
However, increases in productivity have only become evident after the U.S.
reached a steel stock of 10,000kg/capita versus ~4,500kg/capita in China today.
Although China remains more steel intensive than the U.S., efforts by the Chinese
government to diversify its economy away from reliance upon cheap outsourced
manufacturing result in a trajectory that is directionally converging with that of the
U.S. (see Exhibit 126).
In our annual forecasts, we extend the pattern of convergence seen historically
with ever-increasing productivity in the Chinese economy. While a case could be
made that China should be more metal intensive than the U.S. (due to its population
density and intensity of housing and the associated infrastructure), we believe that
the U.S. represents a sensible base case. Moreover, a more metal-intensive China
would only defer rather than obviate the need for the transition that was
experienced by the U.S. In any event, this adds only upside risk to our steel
forecast.

Exhibit 122 A Central Question for an Iron Ore Price Forecast Is How to Project China's Steel
Intensity Into the Future? Looking at Historical Steel Intensity Alone Is Insufficient
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.

0
10
20
30
40
50
60
70
80
0 5 10 15 20 25 30 35 40 45 50
S
t
e
e
l

I
n
t
e
n
s
i
t
y

(
k
g
/
$
'
0
0
0

G
D
P
)
Output GDP/Capita $'000 (Real 2005 PPP)
Trend Steel Intensity Evolution
France USA China Japan South Korea China Actual
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
91





Exhibit 123 The Relationship Between Economies' Capital Stock and Level of Output (R-squared
= 65%) Provides the Missing Data Point for Forecasting How the Capital Stock to
Output Ratio Will Evolve in China
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.


R = 0.6532
0
10
20
30
40
50
60
70
80
0 5,000 10,000 15,000 20,000
O
u
t
p
u
t

G
D
P
/
C
a
p
i
t
a

$
'
0
0
0

(
R
e
a
l

2
0
0
5

P
P
P
$
)
Capital Stock kg Steel/Capita (including depreciation)
Capital Stock to Output by Country
China
2012
UK
Kuwait
Germany
Taiwan
USA
China
2020
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
92 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 124 We Use the U.S. Development Path as a Basis for China's Industrialization Forecast
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.

Exhibit 125 The Benefit of Increasing Productivity Over Time Is Easier to See If the Axes in the
Earlier Graph Are Inverted; in the U.S., the Real Advances Took Place Only Once the
Capital Stock Had Been Built and Urbanization With the Accompanying Labor Force
Transformation Had Been Completed
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.


0
5
10
15
20
25
30
35
40
45
50
- 2,000 4,000 6,000 8,000 10,000 12,000 14,000
U
S

G
D
P
/
C
a
p
i
t
a

$
'
0
0
0

(
R
e
a
l

2
0
0
5

P
P
P
)
Kg of Steel in Economy per Capita
US Steel Capital Stock
R = 0.9595
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0 5 10 15 20 25 30 35 40 45 50
K
g

o
f

S
t
e
e
l

i
n

E
c
o
n
o
m
y

p
e
r

C
a
p
i
t
a
US GDP/Capita $'000 (Real 2005 PPP)
US Steel Capital Stock (Inverted Axes)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
93





Exhibit 126 China Is More Steel Intensive Than the U.S., But Shows Convergence
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.

We use this convergence with the U.S. levels of steel productivity to calculate
a consistent steel intensity for any level of overall economic activity. For
illustration only, we show a steel-intensity path that would enable China to reach
roughly current levels of the U.S. output by 2020. It would require China to post
GDP growth rates of ~20% for the next seven years, and, unsurprisingly, such a
growth pattern would show a very rapid convergence to the U.S. (see Exhibit 127).
In order to support this level of economic activity and to transition its large rural
population into urban centers, China needs to embed steel. The total amount of new
steel that would be required is supplied by the relationship between output and
capital stock. Assuming this amount of new steel would have to be generated over
the next seven years, we can then calculate the run rate of steel production (and
hence steel intensity) for the economy as a whole. This, thus, links current and
future steel intensities. Clearly, under the implausible/illustrative scenario of 20%
GDP growth, there must be a correspondingly large increase in steel intensity (see
Exhibit 128).
A further sensitivity should be flagged. The database of industrial data we have
assembled for all countries currently reporting to the WSA, dating back to 1900,
enables us to choose any historical paradigm of steel productivity as the basis for
Chinese development. Consequently, we could show China converging to Japanese
or German levels of steel productivity.
However, given the importance of the U.S. economy to global demand and
global trade, we believe that the development patterns of countries other than the
U.S. are less representative for China the soon-to-be largest economy in the
world.


-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0 5 10 15 20 25 30 35 40 45 50
K
g

o
f

S
t
e
e
l

p
e
r

C
a
p
i
t
a
GDP/Capita (Real 2005 PPP)
Steel Capital Stock China vs. USA
USA China
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
94 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 127 For Illustration Only, We Show a Development Path That Would Enable China to
Converge to the Current U.S. GDP Levels by 2020; It Would Require a 20% Growth
Rate Each Year
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.

Exhibit 128 Using Convergence as the "Missing" Data Enables Us to Calculate the Transition
Path Between Steel Intensities at Two Different Points in Time and Derive the
Relationship Between Overall Economic and Metal Growth Rates
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.


-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0 5 10 15 20 25 30 35 40 45 50
K
g

o
f

S
t
e
e
l

p
e
r

C
a
p
i
t
a
GDP/Capita (Real 2005 PPP)
Steel Capital Stock China Forecast vs. USA
USA China Actual China Forecast
0
10
20
30
40
50
60
70
80
- 5 10 15 20 25 30 35 40 45 50 55
S
t
e
e
l

I
n
t
e
n
s
i
t
y

K
g
/
$
'
0
0
0
Output GDP per Capita $'000 (Real 2005 PPP)
Steel Intensity Forecast
China Actual China Forecast Original SCB Trend
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
95





At our September 2012 launch, we used the April 2012 IMF global GDP forecasts
as the basis for our demand calculations. Since our launch, the Chinese economy
has unquestionably slowed down. In April 2012, the IMF was forecasting an
average annual growth of 8.7% over 2014-2016. This estimate was revised down to
an average 8.5% over 2014-2016 as of 2Q:13 (see Exhibit 129 and Exhibit 130).
Furthermore, at the time of our launch, we were happy to calibrate China's future
steel intensity forecast looking at the transition that would be required out to 2020
and beyond (as shown in Exhibit 123). However, in the face of frequent growth
revisions, looking at only longer-term trends is insufficient. Instead, an explicit
year-by-year analysis and greater rigor is required to explicitly link economic
activity to steel use.
Taking the April 2013 IMF GDP deck as a starting point, the path to
convergence for the U.S. is shown in Exhibit 131. The resultant steel intensity is
then shown in Exhibit 132. Evidently, steel intensity shows a marked departure
from the too simple trend line we had drawn previously (yet again, this highlights
the dangers, if any further highlighting was needed, of too simple curve plotting in
commodity markets analysis). However, if the acceleration of the Chinese economy
back up to a trend rate of 8.5% is believed and this is the IMF's current base case
for 2016-2019 steel production will accelerate accordingly (see Exhibit 132).
Given the relative immaturity of the Chinese economy, it is still at a very metal-
intensive phase of its development. Consequently, accelerating growth requires
acceleration in raw material consumption. The rising productivity of the U.S.
economy, which enabled it to grow output with no corresponding increase in metal
intensity, occurred only after its capital stock had been built. China is still some
way from this level (~4,500kg of steel per capital in China versus 12,000kg in the
U.S.). Consequently, in order to accelerate growth without accelerating metal
intensity, China's economy would have to experience an unprecedented increase in
metal productivity. In any event, redrawing the trend steel intensity line that
incorporates these more rigorously derived data points results in the structure
shown in Exhibit 133. Having derived the steel intensity for the Chinese economy,
it is possible to calculate the total steel production and volume growth (see Exhibit
134). More importantly, the ratio between metal growth and economic growth can
be calculated from the first principles (see Exhibit 135). Instead of asserting the
relationship between metal growth and economic growth, which simply masks
rather than solves the problem, this approach enables it to be derived consistently.


The IMF's GDP Deck Implies
That China's Steel Intensity
Would Need to Accelerate
Again
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
96 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 129 Since the Time of Our Original Analysis,
China's Economy Has Slowed Down
Markedly

Exhibit 130 In the Space of a Year, the IMF Revised Its
Growth Projections Down by 0.5% on
Average Over 2014-16)
Source: IMF and Bernstein analysis. Source: IMF and Bernstein analysis.

Exhibit 131 Taking the IMF's April 2013 Growth Forecast, We Estimate the Following
Convergence to the U.S. Steel Stock Levels for China
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.


6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
IMF China GDP Forecast
Apr-12 Apr-13
-0.8%
-0.7%
-0.6%
-0.5%
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
0.1%
IMF China GDP Changes
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
- 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0
K
g

o
f

S
t
e
e
l

p
e
r

C
a
p
i
t
a
GDP/Capita (Real 2005 PPP)
Capital Stock of Steel China Forecast vs. USA
USA China Actual China Forecast
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
97





Exhibit 132 Which Would Imply the Following Trajectory for Steel Intensity; the Previous Steel
Intensity Trend Line Was Extrapolated in Order to Keep the Long-Term Evolution of
China Consistent With the U.S.; Now, We Calculate It Year-by-Year
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.

Exhibit 133 We Refine Our Previous Steel Intensity Trend Line
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.


0
10
20
30
40
50
60
70
80
- 5 10 15 20 25 30 35 40 45 50 55
S
t
e
e
l

I
n
t
e
n
s
i
t
y

K
g
/
$
'
0
0
0
Output GDP per Capita $'000 (Real 2005 PPP)
Steel Intensity Forecast
China Actual China Forecast Original SCB Trend
0
10
20
30
40
50
60
70
80
- 5 10 15 20 25 30 35 40 45 50 55
S
t
e
e
l

I
n
t
e
n
s
i
t
y

K
g
/
$
'
0
0
0
Output GDP per Capita $'000 (Real 2005 PPP)
Steel Intensity Forecast
China Actual China Forecast (IMF GDP) Original SCB Trend Rev ised IMF/SCB Trend
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
98 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 134 And Generate the Following Steel Production Forecast; It Shows Declines in Crude
Steel Growth Seen Post 2020; in Our View, It Is Unavoidable Under All Chinese
Growth Scenarios
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.

Exhibit 135 Instead of Having to Guess the Relationship Between Metal Growth and Overall
Economic Growth, We Can Derive It from the First Principles
Source: WSA, IMF, Mitchell, Maddison and Bernstein estimates and analysis.


-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
0
200
400
600
800
1000
1200
2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
C
r
u
d
e

S
t
e
e
l

P
r
o
d
u
c
t
i
o
n

G
r
o
w
t
h
C
r
u
d
e

S
t
e
e
l

M
t
Implied IMF Steel Production and Growth
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Chinese Steel Growth to GDP Growth Multiplier IMF Scenario
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
99





Inverting the earlier calculation, we can unpack the assumptions consistent with a
particular view on China's expected GDP and, by extension, steel demand growth.
We start with consensus expectations for steel production and price. We take the
steel forecast of CRU a widely used high-quality data provider to the mining
industry (see Exhibit 136). It is one of the most frequently used forecasts in the
industry.
We derive the GDP deck consistent with the steel demand evolution assumed
by CRU (see Exhibit 137). The Chinese GDP growth rate that is consistent with
consensus expectations for steel demand is therefore ~7% some 1.3% below the
IMF trend figure and 0.5% less than the official government target. Historically, the
target has represented a floor to the achieved growth rather than an average
expectation and is a figure that is not subject to frequent revisions, which might
cause loss of face within the government. Moreover, the target aims to balance the
competing objectives of avoiding inflation, while ensuring employment (clearly,
something easier in theory than practice). Consequently, we believe that consensus
expectations embed a bear case, rather than an equally weighted upside to
downside scenario.
Nevertheless, the consequences that such steel demand path would have are
evident in Exhibit 138 and Exhibit 139. The consensus expectation sees the decline
in steel intensity seen over the last four years continuing into the future. We would
like to stress that Chinese steel intensity peaked in 2009 and has been declining
every year since what we are witnessing in China and mining more broadly
today is hardly a recent phenomenon.
33
In any event, the implied consensus view
on Chinese growth sees a metal growth multiplier tracking below one (see Exhibit
139).
We compare the IMF and consensus views on Chinese economic development
and their implications for steel growth in Exhibit 140. The exhibit summarizes the
sensitivity of the mining sector's value, which represents geared exposure to the
iron ore price. It, in turn, represents geared exposure to Chinese steel demand,
which then depends upon the overall growth of China's economy! Consequently,
looking through these permutations and taking a view on how this will play out
over the longer term is not an easy task, and we would interpret this as yet another
reason for the miners to take a restrained approach to organic growth. The only ton
that cannot be sold tomorrow is the one you sold today. Any doubt about the
"natural" home for a ton suggests that it is better to leave it in the ground and wait
till certainty is forthcoming. In 2010, Sam Walsh borrowed from Pliny the Elder
and noted that "the only certainty is that nothing is certain."
34
If 2010 was
uncertain, then China is even more so today. We would therefore like to borrow a
phrase from Pliny the Younger and note that one should "never do a thing
concerning the rectitude of which you are in doubt." There is considerable doubt
about the virtue of further iron ore growth.



33
And it is important to stress: peak steel intensity is only the year during which steel is embedded in the capital stock at the fastest rate. It does
not mean that in absolute terms, the amount of steel embedded will decline.
34
MMC, December 2, 2010.
The Chinese GDP Growth Rate
Consistent With Consensus (e)
Steel Demand Is ~7%, or 1.3%
Below the IMF and 0.5% Less
Than the Official Government
Target
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
100 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 136 Consensus Expectations for Chinese Steel Production Are Significantly Different
from Those Implied by the IMF's GDP Deck
Source: CRU and Bernstein estimates and analysis.

Exhibit 137 We Back Out the Scenario for China's GDP Evolution That Is Implied in the Steel
Growth Consensus; It Sees the Annual GDP Trend Growth of 7.1 vs. 8.5% Implied in
the IMF Deck
Source: IMF, CRU and Bernstein estimates and analysis.




0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
0
200
400
600
800
1000
1200
2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
C
r
u
d
e

S
t
e
e
l

P
r
o
d
u
c
t
i
o
n

G
r
o
w
t
h
C
r
u
d
e

S
t
e
e
l

(
M
t
)
Consensus Steel Production and Growth
2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E
IMF - April 2012 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.2% 8.2% 8.8% 8.7% 8.7% 8.6% 8.5%
IMF - April 2013 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 8.0% 8.2% 8.5% 8.5% 8.5%
Consensus 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 7.8% 7.6% 7.5% 7.2% 7.1%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
Chinese GDP Growth IMF vs. Implied Consensus
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
101





Exhibit 138 The Steel Intensity That Such a Trajectory Would Imply Is Markedly Lower Than the
Scenario Consistent With the IMF GDP Deck
Source: WSA, IMF, CRU, Mitchell, Maddison and Bernstein estimates and analysis.

Exhibit 139 Instead of a Recovery in the Metal to GDP Multiplier, We Would Continue to See
Declines
Source: WSA, IMF, CRU, Mitchell, Maddison and Bernstein estimates and analysis.

0
10
20
30
40
50
60
70
80
- 5 10 15 20 25 30 35 40 45 50 55
S
t
e
e
l

I
n
t
e
n
s
i
t
y

-
K
g
/
'
$
0
0
0
Output - GDP per Capita '$000 (Real 2005 PPP)
Implied ConsensusSteel Intensity Forecast
China Actual China Forecast Original SCB Trend
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Chinese Steel Growth to GDP Growth Multiplier
IMF Consensus
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
102 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 140 Unsurprisingly, Given the Relative Immaturity of the Chinese Economy, Its Steel
Growth Is Highly Leveraged (~4 to 1) to the Overall Economic Growth Rate
Source: WSA, IMF, CRU, Mitchell, Maddison and Bernstein estimates and analysis.

In addition to having visibility into the consensus view on steel production in
China, we have some understanding of the Chinese cost structure (see Exhibit 141
and Exhibit 142). Moreover, we know the consensus price expectation (see Exhibit
143) this price line shows the decline to ~US$80/t (real) that is currently
discounted in equity valuations, albeit US$80/t appears to be factored into equity
prices with no "fade" down. Rather, the market is indicating that any excess profits
generated by the miners above this long-run equilibrium will simply be squandered
on mistaken organic growth projects. Given this, we derive a consistent supply side
response that is implicitly factored into the commodity price expectations (see
Exhibit 144 through Exhibit 146). Over the next seven years, the market "expects"
an increase in supply of ~550Mtpa delivered into the Chinese steel market, of
which ~300Mtpa will be superfluous to the Chinese demand growth needs. The
300Mtpa of production will have to compete for space in the market through the
displacement of high-cost incumbent tons. Consequently, we expect this to yield a
decline in price along the trajectory assumed by consensus.


-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
D
e
l
t
a

C
o
n
s
e
n
s
u
s

t
o

I
M
F
China GDP and Steel Growth IMF vs. Implied Consensus
GDP Steel
$80/t Iron Ore at ~7% Chinese
GDP Is Only Maintained If
~550Mtpa of New Supply
(330Mtpa Surplus) Also Come
Onstream
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
103





Exhibit 141 Using Our Knowledge of the Structure of the Chinese Domestic Mining Industry, We
Can Generate an Exemplar Cost Curve for the Industry as a Whole
Source: WSA, IMF, CRU, AME and Bernstein estimates and analysis.

Exhibit 142 This Enables Us to Understand the Elasticity of Supply
Source: WSA, IMF, CRU, AME and Bernstein estimates and analysis.


0
20
40
60
80
100
120
140
160
180
200
0 200 400 600 800 1000 1200 1400 1600
O
p
e
x

(
U
S
$
/
t
)
Cumulative Iron Ore Production (mt)
Idealized Iron Ore Supply
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
E
l
a
s
t
i
c
i
t
y
Cumulative Iron Ore Production (mt)
Idealized Iron Ore Elasticity
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
104 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 143 Combining It With Consensus Steel
Demand Expectations Yields Consensus
Price Expectations

Exhibit 144 And Enables Us to Derive Consensus
Supply Expectations
Source: Bloomberg L.P. Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.

Exhibit 145 Assuming the Consensus GDP Deck, Two-
Thirds of the Supply Expected to Come
Onstream Is Not Needed

Exhibit 146 With Price Destructive Oversupply of
~300Mt by 2020
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.

-
20
40
60
80
100
120
140
160
180
N
o
m
i
n
a
l

(
U
S
$
/
t
)
Consensus Iron Ore Price Forecast
0
20
40
60
80
100
120
140
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
S
u
p
p
l
y

G
r
o
w
t
h

o
f

I
r
o
n

O
r
e

(
M
t
)
Implied Consensus Supply Expectations
Supply Required by Chinese Demand
Price Destructiv e Suppy in Excess of Demand
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
% of Excess Price Destructive Supply
Required Surplus
235
299
Total Iron Ore Supply by 2020 Mt
Required Surplus
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
105





China Growth Scenarios

Using the model we built to back out Chinese GDP and supply side response that is
consistent with consensus demand and price expectations, we can determine a
consistent forecast for iron ore prices and steel demand growth across any GDP
scenario for China. Our "bull" scenario takes the IMF's forecast from just over a
year ago (April 2012), which sees the Chinese economy accelerate back up to a
trend rate of 8.5%. This would absorb the ~300Mtpa of price destructive
oversupply implied in the consensus scenario (mentioned earlier), resulting in a
tight market in which the miners do not compete on volume and in which a trend
price of US$140/t could eventuate out to 2020. A "middle" scenario takes the
Chinese target of 7.5% GDP growth as a floor (despite the fact that Chinese GDP
has a tendency to miss on the upside). This yields a price of US$120/t out to 2020.
Our China "bear" scenario sees GDP decline to 6% and no supply coming out of
the market (a true worst-case scenario). This results in an iron ore price testing the
US$65/t mark over a multi-year period.
35


The model we discussed in the previous chapter can be used to derive a self-
consistent GDP, steel demand, supply reaction and iron ore price forecast for any
particular GDP or price assumption. For example, using the consensus supply we
derived in that, we assume that the market has a good grip on the supply side but
sees demand (i.e., Chinese GDP) as uncertain, hence we can flex GDP growth
assumptions and derive a new price forecast. Exhibit 147 summarizes forecast
prices under the IMF GDP deck.
36
The higher steel intensity of this GDP view
against a fixed supply side response leads to higher prices. Consequently, under
this scenario, prices are expected to average ~US$140/t out to 2020 a far cry
from the US$80/t that equities are currently discounting.
If it became clear that this price path were indeed to be realized, one could
reasonably expect a supply side response, whereby more new growth projects
would be approved. As we have stressed before, there is an inverse relationship
between apparent and actual attractiveness of commodity markets. The more
negative consensus expectations are, the less capital flows into the sector and thus
the lower future volumes will be. Unsurprisingly, the lower future volumes in a
commodity industry result in a higher future price. Conversely, the stronger
consensus expectations are, the higher the capital inflows and the higher the
volume growth, leading to a weaker counterfactual price environment. Once again,
it is only by understanding the implications of counter-consensual and counter-
cyclical behavior that sustainable value creation can be delivered in this industry.
For the purposes of this analysis, we assume that the long lead time in new project
development and approval will lead to the supply side changing more slowly than
the demand side. Consequently, at least to a first order approximation, the resulting
price line will be robust.



35
Our iron ore price forecast is discussed in greater detail in the "Our Iron Ore Price Forecast" chapter.
36
Ibid.
We Construct Bull, Middle, and
Bear Scenarios for Chinese
GDP and Supply Side
Response to Bound the
Possibilities for Iron Ore Prices
Out to 2020 ($140/t Down to
$65/t)
We Can Determine a
Consistent Forecast for Iron
Ore Prices and Steel Demand
Growth Across Any GDP
Scenario for China
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
106 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 147 We Can Use the Implied Consensus Supply Expectations to Derive Consensus Steel
Demand Scenario and Iron Ore Price Line for Any Chinese GDP Deck Assumptions;
Steel Intensity Is Geared to China's GDP and the Iron Ore Price Is Geared to Steel
Intensity; Risk and Uncertainty Pervades This Sector
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and Bernstein estimates and analysis.

We construct three scenarios to stress test the iron ore price against different future
development paths for China and against the supply view discussed earlier and in
the "What GDP Growth Is Consistent With $80/t Iron Ore Baked Into Mining
Equities?" chapter (see Exhibit 148 and Exhibit 149).
Scenario 1 Back to the future: The IMF April 2012 view of GDP results
in prices supported at an average ~US$140/t out to 2020. If the acceleration of
the Chinese economy back up to a trend rate of 8.5% is to be believed, and this is
the IMF base case, then that would require a corresponding acceleration in steel
production. Given the relative immaturity of the Chinese economy, it is still at a
very metal-intensive phase of its development. Consequently, accelerating growth
requires acceleration in raw material consumption. The increasing productivity of
the U.S. economy, which enabled it to grow output with no corresponding increase
in metal intensity, occurred only post the conclusion of the capital stock build.
China is still some way from this level (~4,500kg/capita versus 12,000kg/capita).
For the Chinese economy to accelerate its growth without accelerating metal
intensity, at this stage in its economic life, there would have to be an unprecedented
increase in metal productivity. If we regard the implied supply expectations as
being representative of what is most likely to eventuate in reality, such acceleration
in steel intensity would mean that all new tons would be able to find a home.
Instead of there being ~300Mtpa of price destructive oversupply, all of the
~550Mtpa of new supply would be able to satisfy true demand. So instead of
having the emergence of the miners competing on volume, the market would stay
tight and a trend price of US$140/t could eventuate out to 2020.
Scenario 2 Ending with a whimper: Taking the Chinese base case of
7.5% GDP growth as a floor yields an average price of US$120/t out to 2020.
There are, we believe, three factors that the Chinese government has at the heart of
its industrial policy, all of which are focused on ensuring the maintenance of
political stability. They are inflation (particularly for food), unemployment and
corruption. The official GDP target for China is 7.5%. Historically, the official
GDP target has been a floor rather than an average expectation, and is not subject to
2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Current SCB 33 42 46 76 81 147 168 128 131 138 142 145 139 135 123 113
Consensus 33 42 46 76 81 147 168 128 127 118 110 107 100 95 90 90
Consensus @ IMF GDP 33 42 46 76 81 147 168 128 138 142 152 160 157 150 129 114
0
20
40
60
80
100
120
140
160
180
I
r
o
n

O
r
e

F
O
B

A
u
s
Iron Ore Price Scenarios
Chinese GDP Growth
Scenarios: 8.5%, 7.5% and 6%
(and No Supply Reduction)
Generate 2020 Iron Ore Prices
of $140/t, $120/t and $65/t,
Respectively
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
107





frequent revisions that might cause loss of face within the government (remember
that during the period of an official 8% growth target, China averaged 10.6%).
Moreover, this growth target is set to try and balance the competing objectives of
avoiding inflation, while ensuring employment (clearly something easier in theory
than in practice). The previous notwithstanding, this scenario shows the impact of a
gradual fade to the official target levels of growth would actually be on China. The
implication of this would be US$120/t iron ore out to 2020.
Scenario 3 It's all over now baby blue: GDP revisions continue their
descent down to 6%, and there is no curtailment of supply (a true bear case),
resulting in prices testing US$65/t. This is for the true China bears. It shows the
impact of continued downward revisions to Chinese growth and no curtailment of
supply. It is worth noting that in a world of 6% growth, we believe that not only
would many of the high-cost producers ($120-180/t) close, but a number of projects
in the 550Mtpa of new supply would be canceled. However, a thorough bear
scenario should leave all this supply intact and that is what we do. Under this
world, the iron ore price could test the US$65/t level, just as it did in 2008;
however, unlike 2008, we do not believe that the miners would be saved by the
Chinese government stimulus. Consequently, a protracted period of low-price
levels would persist. Troublingly, the iron ore majors would still be cash positive at
these price levels, and so cutting existing tonnage as a form of self-help might still
not occur. Again, the warning for us is clear...far better not to install capacity today
than have to deal with trying to remove it if the world turns against you. (Not that it
is a particularly good parallel, but Platinum used to be Anglo American's most
profitable division; however, the good times have passed and trying to fix the
industry through removing ounces and labor is proving virtually impossible.)
For each scenario, we provide the following data points:
Overall Chinese GDP deck and how it differs from economic growth
expectations implied in consensus (see Exhibit 150, Exhibit 151, Exhibit 158,
Exhibit 159, Exhibit 166 and Exhibit 167);
Steel intensity and production that would result in for a given GDP deck
expectation and assuming that China will converge to U.S. productivity levels (see
Exhibit 152, Exhibit 153, Exhibit 160, Exhibit 161, Exhibit 168 and Exhibit 169);
Steel growth as well as steel-growth-to-economic growth multiple (see Exhibit
154, Exhibit 155, Exhibit 162, Exhibit 163, Exhibit 170 and Exhibit 171);
Proportion of new supply that will be required to satisfy growing demand as
well as the proportion that comes in excess of it, and would hence act to destroy the
price (see Exhibit 156, Exhibit 164 and Exhibit 172); and
Resultant iron ore price forecast (see Exhibit 157, Exhibit 165 and Exhibit
173).
Please see "Appendix 2: Growth Scenarios" for more detail on the scenarios in
this chapter and also the "What GDP Growth Is Consistent With $80/t Iron Ore
Baked Into Mining Equities?" chapter.

For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
108 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 148 In Order to "Stress Test" the Demand and Price Environment, We Construct Three
Scenarios: (1) Slightly More Bullish Than the IMF (i.e., Back to the IMF April 2012
Figures); (2) One That Respects China's Official 7.5% GDP Growth Target; and (3)
Significantly Below the Target and the Implied Consensus Growth Rates
Source: IMF and Bernstein estimates and analysis.

Exhibit 149 The Resulting Price Paths Illustrate That the Risks for Long-Term Iron Ore Prices Are
to the Upside, Barring a Significant "Miss" on the Chinese Growth
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and Bernstein estimates and analysis.


2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
IMF 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 8.0% 8.2% 8.5% 8.5% 8.5% 8.5% 8.1% 7.8%
Scenario 1: IMF 8.5% 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 8.2% 8.4% 8.7% 8.7% 8.7% 8.7% 8.3% 8.0%
Scenario 2: Official Target 7.5% 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 8.0% 8.0% 7.9% 7.7% 7.7% 7.7% 7.5% 7.5%
Scenario 3: China Bear 6% 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 7.6% 7.3% 7.0% 6.7% 6.3% 6.0% 6.0% 6.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
Chinese GDP Scenarios
2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Consensus 33 42 46 76 81 147 168 128 127 118 110 107 100 95 90 90
Scenario 1: IMF 8.5% 33 42 46 76 81 147 168 128 146 151 162 170 167 160 137 121
Scenario 2: Official Target 7.5% 33 42 46 76 81 147 168 128 137 134 127 125 122 117 106 104
Scenario 3: China Bear 6% 33 42 46 76 81 147 168 128 123 106 95 89 77 68 66 66
-
20
40
60
80
100
120
140
160
180
I
r
o
n

O
r
e

P
r
i
c
e

U
S
$
/
t
Iron Ore Price by GDP Scenario
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
109





Scenario 1 "Back to the Future"
A return to the world anticipated by the IMF in April 2012 would see a re-
acceleration in the Chinese steel demand, with only 18% (rather than ~60%) of new
supply being price destructive. Prices could stay at US$160/t for a sustained period
of time.

Exhibit 150 Scenario 1 Uses a Slightly Stronger GDP
Deck Than the Current IMF Figures

Exhibit 151 And Nearly 2% Higher Than Consensus
Source: IMF and Bernstein estimates and analysis. Source: IMF and Bernstein estimates and analysis.

Exhibit 152 To Support This Level of Growth, Steel
Intensity Would Need to Rise

Exhibit 153 It Would Enable an Accelerated Capital
Stock Growth Rate in China
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.


5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
R
e
a
l

G
D
P

G
r
o
w
t
h
China GDP Deck
Scenario 1 Consensus
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Scenario 1 GDP vs. Implied Consensus
40
45
50
55
60
65
70
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
K
g

p
e
r

$
'
0
0
0

o
f

G
D
P
Chinese Steel Intensity
Scenario 1 Consensus
-
200
400
600
800
1,000
1,200
C
r
u
d
e

S
t
e
e
l

(
M
t
)
Chinese Crude Steel Production
Scenario 1 Consensus
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
110 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 154 This Would See Steel Growth Approach
10%...

Exhibit 155 ...And a Steel-to-GDP Ratio Well Above 1
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.

Exhibit 156 Under This Scenario, Only 18% of New
Volume Is Price Destructive

Exhibit 157 Leading to a Continuation of High Prices
Into the Medium Term
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.


-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Chinese Crude Steel Production Growth
Scenario 1 Consensus
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Steel to GDP Growth
Scenario 1 Consensus
441
94
New Supply Scenario 1 (Mtpa)
Required Additional Supply Price Destructiv e Supply
0
20
40
60
80
100
120
140
160
180
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
I
r
o
n

O
r
e

P
r
i
c
e

N
o
m
i
n
a
l

U
S
$
/
t

F
O
B

A
u
s
Iron Ore Price
Scenario 1 Consensus
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
111





Scenario 2 Ending With a Whimper
If we respect a trend decline down to the government's target annual GDP growth
of 7.5%, we would still see iron ore prices track some US$15/t above consensus.

Exhibit 158 Scenario 2 Assumes the Official Annual
GDP Growth Figure of 7.5%...

Exhibit 159 Which Is Still Significantly Ahead of
Consensus Expectations
Source: IMF and Bernstein estimates and analysis. Source: IMF and Bernstein estimates and analysis.

Exhibit 160 Although It Can Be Achieved Without an
Upward Correction to Steel Intensity

Exhibit 161 It Still Anticipates an Above-Consensus
Demand Growth
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.


5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
R
e
a
l

G
D
P

G
r
o
w
t
h
China GDP Deck
Scenario 2 Consensus
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Scenario 2 GDP vs. Implied Consensus
40
45
50
55
60
65
70
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
k
g

p
e
r

$
'
0
0
0

o
f

G
D
P
Chinese Steel Intensity
Scenario 2 Consensus
-
200
400
600
800
1,000
1,200
C
r
u
d
e

S
t
e
e
l

(
M
t
)
Chinese Crude Steel Production
Scenario 2 Consensus
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
112 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 162 With Well-Supported Steel Growth...

Exhibit 163 ...And a Declining Steel-to-GDP Ratio
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.

Exhibit 164 Nevertheless, 200Mtpa of Supply Is Still
Unwarranted from a Value Perspective...

Exhibit 165 Leading to Suppressed Yet Above-
Consensus Iron Ore Prices
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.


0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Chinese Crude Steel Production Growth
Scenario 2 Consensus
0.0
0.5
1.0
1.5
2.0
2.5
Steel to GDP Growth
Scenario 2 Consensus
334
200
New Supply Scenario 2 (Mtpa)
Required Additional Supply Price Destructiv e Supply
0
20
40
60
80
100
120
140
160
180
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
I
r
o
n

O
r
e

P
r
i
c
e

N
o
m
i
n
a
l

U
S
$
/
t

F
O
B

A
u
s
Iron Ore Price
Scenario 2 Consensus
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
113





Scenario 3 "It's All Over Now Baby Blue"
The third scenario sees all of the new supply growth as price destructive. It is
consistent with China growing at 6% p.a. and would see iron ore prices test the
US$65/t level.

Exhibit 166 Our Bear Case Assumes 6% GDP Growth
for China in the Long Term

Exhibit 167 Which Is ~1% Below the Current Implied
Consensus Expectation
Source: IMF and Bernstein estimates and analysis. Source: IMF and Bernstein estimates and analysis.

Exhibit 168 This Would Lead to a Significant Reduction
in Steel Intensity...

Exhibit 169 ...And Would See Stagnant Production Into
the Medium Term
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.


5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
R
e
a
l

G
D
P

G
r
o
w
t
h
China GDP Deck
Scenario 3 Consensus
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Scenario 3 GDP vs. Implied Consensus
40
45
50
55
60
65
70
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
k
g

p
e
r

$
'
0
0
0

o
f

G
D
P
Chinese Steel Intensity
Scenario 3 Consensus
-
200
400
600
800
1,000
1,200
C
r
u
d
e

S
t
e
e
l

(
M
t
)
Chinese Crude Steel Production
Scenario 3 Consensus
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
114 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 170 Consequently, the Industry Would
Effectively Go Ex Growth...

Exhibit 171 ...And Steel-to-GDP Ratio Would Fall Well
Below 1
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.

Exhibit 172 In This Scenario, Virtually All Volume
Growth Is Price and Value Destructive

Exhibit 173 Iron Ore Tests a US$65/t Floor
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and
Bernstein estimates and analysis.
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Chinese Crude Steel Production Growth
Scenario 3 Consensus
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Steel to GDP Growth
Scenario 3 Consensus
6
528
New Supply Scenario 3 (Mtpa)
Required Additional Supply Price Destructiv e Supply
0
20
40
60
80
100
120
140
160
180
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
I
r
o
n

O
r
e

P
r
i
c
e

-
N
o
m
i
n
a
l

-
U
S
$
/
t

F
O
B

A
u
s
Iron Ore Price
Scenario 3 Consensus
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
115





Our Iron Ore Price Forecast

We believe that prices rise to the extent that marginal units of supply are called by
demand and that prices fall to the extent that marginal units of supply are displaced.
Because marginal supply determines price, the cost structure of an industry
determines both the revenue and the margin generation of that industry. With this
heuristic in place, we take inspiration from Fischer Black's "Business Cycles and
Equilibrium," a book on business cycles and monetary policy,
37
and construct a
modified framework, replicating his approach to business cycles but extending the
lead time between demand signals and the supply side response. One consequence
of the long lead time is inherent cyclicality in the mining industry. Furthermore,
this cyclicality ensures that the incentive price (the price at which a miner is
incentivized to bring on new capacity) is seldom achieved, but is rather over- or
under-shot. This means that the value generated by investment (either by the
mining companies themselves or by investors into mining companies) is almost
entirely a call on the ability to act counter-cyclically.
In previous chapters, we looked at scenario analysis conducted in mid-2Q:13.
This chapter discusses our updated iron ore price forecast, distilled from the
analytical frameworks of the previous chapters and their conclusions.
At the time of publication of this Blackbook, we predict $130/t (2013E) rising
to a peak of $144/t (2016E). This is consistent with the IMF's current GDP forecast
of 7.8% in 2013 rising to 8.5% in 2016 and average increase in supply of 88Mtpa
2013-16. By 2020, we expect iron ore prices of $115/t consistent with IMF
forecasts for Chinese GDP growth 2017-20 and a further 28Mtpa of incremental
supply in the market.

Our basic premise is that price signals refer to something in the real economy
namely, the marginal units of supply called to clear demand. Because marginal
supply determines price, the cost structure of an industry determines both the
revenue and the margin generation of the industry. We also note that the simple
connection between a notional "oversupply" and falling prices or "undersupply"
and rising prices embeds two implicit assumptions. The first is that price elasticity
at the margin is high. The second is that cost escalation is low. In a world where
these conditions do not hold, it is perfectly possible to have an oversupplied market
with rising prices. We have to understand the structure of supply and demand at
each point, and use that understanding to deduce the market clearing price.
Prices rise to the extent that marginal units of supply are called by demand.
That call can originate from a number of sources, the most obvious of which is
the increase in underlying economic growth. Other reasons include the depletion
of existing non-marginal units of supply, as existing mines become exhausted.
Prices fall to the extent that marginal units of supply are displaced. The
displacement can include both temporary falls in demand (e.g., through
destocking and inventory management programs) and secular declines in demand
(as a result of substitution or falling overall growth rates). The displacement can
also occur as a consequence of the growth in non-marginal units of supply (which
is typically described as an "oversupplied" industry).
While our interpretation of what supply and demand imply is perhaps a little
different, the building blocks are traditional enough. The first element in our model
is demand. We show how raw material consumption fits into the overall structure
of economic output for a country. We do not believe that raw material consumption

37
Published in 1987.
We Apply a Fischer Black
Framework Taken from Fischer
Black's Work to Our Supply
and Demand Analysis, Adapted
to Long Lead Times in the
Mining Sector; This Generates
Our Counter-Consensus
Positive View on Iron Ore
Pricing
Our Basic Premise Is That
Price Signals Refer to
Something in the Real
Economy
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
116 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





is an effect of economic growth rather it is the cause of it. We understand the
economy as primarily a mechanism for the conversion or processing of raw
materials. Economic growth is then a measure of its relative intensity. This activity
requires a scale of capital stock (machinery and infrastructure) capable of
displacing human labor with the far more concentrated forms of energy contained
in (primarily) fossil fuels. It is this displacement of labor by capital and high-
intensity energy that generates high levels of productivity in the primary and
secondary industry that we associate with developed economies. The displaced
labor then moves into tertiary forms of value-add, leading to a society and an
economy characterized by its service sector. However, the essential point is that the
transition to a service sector cannot be occasioned without the development of a
capital stock of sufficient scale.

With the previous discussion in mind, it is clear that China is currently at a point in
its economic life where it is still installing this capital stock. Investment now
accounts for 45% of Chinese GDP compared to 35% just 10 years ago (see Exhibit
174 and Exhibit 175). This, in turn, corresponds to the fact that over the last 10
years, secondary forms of economic activity in China have been the fastest-
growing sector, outstripping growth in the tertiary forms of value-add by 1.4% per
annum (see Exhibit 176). This implies a very significant capital stock formation in
China. Moreover, it is the rapidity of this stock formation that stands behind the
rapid acceleration in China's output over the last 10 years. We use this fundamental
relationship between stock and output as the basis for our demand-side analysis
(see Exhibit 177 through Exhibit 179). At this stage in China's development, the
economy remains very metal intensive. Consequently, any re-acceleration in GDP
back to the trend levels forecast by the IMF (8.5%) or OECD (8.4%) must translate
into a corresponding acceleration in metal demand. In developed economies,
accelerating GDP means accelerating consumption. However, the composition of
the Chinese economy is such that consumption alone cannot account for economic
growth. Rather, it must be supplemented with investment, which, in turn, means
metal.

Exhibit 174 There Has Been a Significant Change in the
Structure of the Chinese Economy Over the
Last 10 Years...

Exhibit 175 ...With Consumption Losing Out to
Investment; Now Investment Accounts for
Around Half of All Activity
Source: Bloomberg L.P. and Bernstein estimates and analysis. Source: Bloomberg L.P. and Bernstein estimates and analysis.

45%
16%
35%
2%2%
Composition of Chinese GDP (2002)
Household Consumption Govt Consumption
Fixed Capital Formation Inventory Formation
Net Exports
35%
14%
46%
2%
3%
Composition of Chinese GDP (2012)
Household Consumption Govt Consumption
Fixed Capital Formation Inventory Formation
Net Exports
At This Stage in China's
Development, Its Economy
Remains Metal Intensive; Any
Re-Acceleration in China's
GDP Back to Trend Levels
Forecast by the IMF (8.5%) or
OECD (8.4%) Must Translate
Into a Corresponding
Acceleration in Metal Demand
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
117





Exhibit 176 Secondary Forms of Economic Activity Have Grown on Average 1.4% Faster Than
the Tertiary Forms Over the Course of China's Industrialization (10.7% vs. 9.3%)
Source: Bloomberg L.P. and Bernstein estimates and analysis.

Exhibit 177 However, the Net Result of All of This Activity Is That China Is on Trend to Catch Up
With the U.S. in Terms of the Overall Steel Productivity
Source: WSA, Mitchell, Maddison, Bloomberg L.P., IMF and Bernstein estimates and analysis.


0
2
4
6
8
10
12
14
16
18
J
u
n
-
9
9
N
o
v
-
9
9
A
p
r
-
0
0
S
e
p
-
0
0
F
e
b
-
0
1
J
u
l
-
0
1
D
e
c
-
0
1
M
a
y
-
0
2
O
c
t
-
0
2
M
a
r
-
0
3
A
u
g
-
0
3
J
a
n
-
0
4
J
u
n
-
0
4
N
o
v
-
0
4
A
p
r
-
0
5
S
e
p
-
0
5
F
e
b
-
0
6
J
u
l
-
0
6
D
e
c
-
0
6
M
a
y
-
0
7
O
c
t
-
0
7
M
a
r
-
0
8
A
u
g
-
0
8
J
a
n
-
0
9
J
u
n
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
u
l
-
1
1
D
e
c
-
1
1
M
a
y
-
1
2
O
c
t
-
1
2
M
a
r
-
1
3
Y
o
Y

G
D
P

C
h
a
n
g
e

(
%
)
Chinese GDP Growth Composition
Primary Secondary Tertiary
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
- 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0
K
g

o
f

S
t
e
e
l

p
e
r

C
a
p
i
t
a
GDP/Capita (Real 2005 PPP)
Capital Stock of Steel China Forecast vs. USA
USA China Actual China Forecast
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
118 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 178 China Currently Has ~35% of the Steel Stock of the U.S.; We Expect It to Rise to
~69% by 2020
Source: WSA, Mitchell, Maddison, Bloomberg L.P., IMF and Bernstein estimates and analysis.

Exhibit 179 We Use This Relationship Between Steel Stock and Output to Link the Steel Intensity
(i.e., Rate of Steel Consumption) Between Different Periods in a Country's Economic
Development
Source: WSA, Mitchell, Maddison, Bloomberg L.P., IMF and Bernstein estimates and analysis.

However, there is more than just the steel demand figure that needs to be
considered. Specifically, it has to be put in the context of an overarching view on
the development of the Chinese economy. Would the figure that we generate for
steel demand imply, for example, an increase or a decrease in the fixed-asset
investment (FAI) ratio for China? Exhibit 180 shows that the increase in steel
demand that we forecast is commensurate with a decline in the FAI ratio in China
back down to ~38% of GDP. As such, it corresponds to the sought-after
"rebalancing" of the Chinese economy. In order to explicate the commensurability
of increasing steel use with falling FAI, it is worth bearing in mind that the high
0
100
200
300
400
500
600
700
800
900
1000
0%
10%
20%
30%
40%
50%
60%
70%
80%
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
F
i
n
i
s
h
e
d

S
t
e
e
l

D
e
m
a
n
d

(
M
t
)
C
h
i
n
e
s
e

C
a
p
i
t
a
l

S
t
o
c
k

a
s

%

o
f

U
S
A
Chinese Finished Steel Demand and Capital Stock
Finished Steel Demand Capital Stock as % of USA
0
10
20
30
40
50
60
70
80
- 5 10 15 20 25 30 35 40 45 50 55
S
t
e
e
l

I
n
t
e
n
s
i
t
y

K
g
/
$
'
0
0
0
Output GDP per Capita $'000 (Real 2005 PPP)
Steel Intensity Forecast
China Actual China Forecast (IMF GDP) SCB Trend
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
119





FAI ratio in China has very little to do with raw material consumption per se. An
analysis of the most important raw materials in China establishes that only about
12% of the FAI is tied to raw material consumption (see Exhibit 181), even given
the most aggressive assumption that 100% of metal demand in China occurs as
investment rather than consumption. Our forecast for steel use sees this 12%
number declining over time (see Exhibit 182). Furthermore, it is clear that only
three metals really matter to the Chinese economy considered as a whole: steel,
copper and aluminum. Between them, they account for ~80% of the FAI
attributable to metal consumption (see Exhibit 183 and Exhibit 184).

Exhibit 180 Such a Trajectory of Steel Use Implies FAI Falling from 48% to 38% of GDP, in Effect
Achieving the Policy Aim of Rebalancing the Chinese Economy
Source: WSA, Mitchell, Maddison, Bloomberg L.P., IMF and Bernstein estimates and analysis.

Exhibit 181 However, the Vast Majority of the Investment in China Relates Not to Raw Material
Consumption Per Se, But Rather the Capitalization of Labor Associated With That
Investment
Source: Bloomberg L.P., AME, CRU, Wood Mackenzie and Bernstein estimates and analysis.
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
0
5,000
10,000
15,000
20,000
25,000
30,000
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Composition of Chinese GDP FAI and Consumption
FAI in GDP Non FAI in GDP FAI as Proportion of Total
12%
88%
Composition of FAI in 2012
Raw Materials in FAI Non-Raw Materials in FAI
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
120 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 182 Under Our Scenario for Raw Material Consumption (With Constant Prices), the Raw
Material Component of FAI Falls from 12.4% (Historical Average) to 8.9% Over the
Forecast Period
Source: Bloomberg L.P., AME, CRU, Wood Mackenzie and Bernstein estimates and analysis.

Exhibit 183 Steel Is by Far the Most Important Raw Material Component of FAI; Copper and
Aluminum Are Also Significant
Source: Bloomberg L.P., AME, CRU, Wood Mackenzie and Bernstein estimates and analysis.


4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Raw Material Consumption Contribution to FAI
61%
6%
10%
2%
2%
1%
18%
Raw Material Breakdown in Chinese FAI
% Steel of FAI % Aluminum of FAI % Copper of FAI % Zinc of FAI % Nickel of FAI % Lead of FAI % Cement of FAI
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
121





Exhibit 184 The Proportion of Raw Materials in FAI Has Stayed Very Stable Over Time
Source: Bloomberg L.P., AME, CRU, Wood Mackenzie and Bernstein estimates and analysis.

The real issue with the FAI ratio is not raw material consumption but the
capitalization of labor. Exhibit 185 shows how the labor pool in China has moved
over time as well as our forecast evolution of it going forward. Exhibit 186 shows a
continuation of the trend rates of loss of labor from agriculture, as the de-
agrarianization of China continues. We also extend the trend rate adding labor to
the service sector. This leaves the secondary sector employment as the balancing
item in the labor pool in the context of an overall contraction in the workforce in
China from 2014. Consequently, this sees the secondary sector experiencing
significant labor losses by ~2016 and is again in line with economic "rebalancing."
Exhibit 187 shows, for interest, the process of capital stock formation and de-
agrarianization in China. The capital stock in China is on track to be some 15%
larger than that in the U.S. before the transition to a U.S.-style service sector
economy is complete. The main takeaway from this analysis, however, is shown in
Exhibit 188. It illustrates how rising steel demand with falling FAI in China can be
squared through increasing labor productivity in the secondary sector. The
increases in steel demand are more than offset by the declines in the labor
employed in the secondary sector. It is this productivity increase that also
corresponds to the increase in the overall monetary value of the Chinese economy,
with more goods circulating ever more efficiently through society.

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Composition of Raw Materials in FAI Over Time
% Steel of FAI % Aluminum of FAI % Copper of FAI % Zinc of FAI % Nickel of FAI % Lead of FAI % Cement of FAI
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
122 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 185 Against This Picture of Raw Material Use, the Increase in the Importance of
Investment in China Is Due to the Movement of Labor Into Tertiary Forms of Activity
Source: Bloomberg L.P., World Bank, NBS and Bernstein estimates and analysis.

Exhibit 186 Against a Backdrop of Continued De-Agrarianization, a Declining Labor Pool and a
Continued Move Into Tertiary Forms of Employment, the Component of the Labor
Force in Secondary Forms Must Decline Over Time
Source: Bloomberg L.P., World Bank, NBS and Bernstein estimates and analysis.

0
100
200
300
400
500
600
700
800
900
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
E
c
o
n
o
m
i
c
a
l
l
y

A
c
t
i
v
e

P
e
o
p
l
e

(
m
n
)
Primary Labor Secondary Labor Tertiary Labor
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
Change in Chinese Labor Force Structure
Change in Primary Labor Change in Secondary Labor Change inTertiary Labor
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
123





Exhibit 187 The Trajectory of De-Agrarianization Has China Requiring 15% More Steel Capital
Stock Than the U.S. to Effect the Transition to an Economy Dominated by the
Service Sector
Source: Bloomberg L.P., World Bank, NBS and Bernstein estimates and analysis.

Exhibit 188 This Deceleration in Steel Demand and Change in Composition of the Workforce
Imply a Significant Increase in Steel Use Productivity; If Steel Productivity Were Held
Flat, There Would Be Significant Upside to Steel Demand
Source: Bloomberg L.P., AME, CRU, Wood Mackenzie, IMF, World Bank, NBS and Bernstein estimates and analysis.

R = 0.9987
0
5
10
15
20
25
30
35
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110%
I
m
p
o
r
t
a
n
c
e

o
f

A
g
r
i
c
u
l
t
u
r
e

i
n

C
h
i
n
a

R
e
l
a
t
i
v
e

t
o

U
S
A
Capital Stock of China Relative to USA
De-Agrarianization of China Implied in Capital Stock Accumulation
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
0
50
100
150
200
250
300
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
P
r
o
d
u
c
t
i
v
i
t
y

o
f

S
e
c
o
n
d
a
r
y

L
a
b
o
r

k
g

S
t
e
e
l
/
C
a
p
i
t
a
L
a
b
o
r

i
n

t
h
e

S
e
c
o
n
d
a
r
y

S
e
c
t
o
r
Steel Use Productivity
Secondary Labor Steel Productiv ity
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
124 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





On the supply side, we use our analysis of the main mining companies (Vale, Rio
Tinto, BHP Billiton and Anglo) as well as third-party data for Fortescue Metals
Group (ticker FMG; not covered) to derive the supply side response from the
incumbent producers. We supplement this with an estimate of iron ore supply from
new entrants and other non-major sources of supply (see Exhibit 190 through
Exhibit 192). Then, we estimate what we believe is a representative proxy for the
cost structure of the iron ore industry landed China. Clearly, this involves the
conversion of a discrete set of individual mines into a continuous output function
for the iron ore industry as a whole. However, given the inherent uncertainty in any
price forecast, we believe that this step is warranted. We then estimate how the cost
structure would evolve if price equilibrium were to be maintained, i.e., if supply
changes were to exactly equal demand changes. We supplement this with an
estimate of how the structure would change as a consequence of the cost escalation
that we continue to see in the Chinese domestic industry. In this regard, it is useful
to quickly summarize the two types of movements within the cost structure of a
commodity market.
Rotations of the cost curve change margin but may or may not change price.
This change implies differential in cost escalation within the industry and hence a
change in competitive position, privileging some players and disadvantaging
others. This creation of relative advantage generates margin.
Translations change price but leave margin unchanged. Translations of the
cost curve imply that all players have been impacted equally by any new industry
development. Consequently, relative competitive position is unchanged and the
change has no impact on the margin.
Margin in mining is created by geological and mining method differentiation.
This differentiation then translates into cost-curve rotations, which lead to margin
increases and (assuming that the change has not taken place through an
unwarranted expenditure of capital) value. For example, in iron ore this has arisen
as a consequence of the difference between truck and shovel operations in Australia
(mining high-grade hematite) versus wheelbarrow and muscle operations in China
(mining low-grade magnetite). We show the impact of the cost-curve changes in
Exhibit 189.

Exhibit 189 Against This Demand Environment, We Look at Cost Curves of Iron Ore Landed
China; the New Low-Cost Supply Additions Rotate the Cost Curve Downwards; Cost
Inflation Translates the Cost Curve Upwards; It Is the Interplay Between Cost Curve
Translation and Rotation That Generates Margin and Ultimately Price
Note: 2016 and 2020 numbers are Bernstein estimates.
Source: CRU, AME and Bernstein estimates and analysis.
20
40
60
80
100
120
140
160
180
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1000 1050 1100 1150
U
S
$
/
t

F
O
B

A
u
s

N
o
m
i
n
a
l
Cumulative Volume (Mt)
Smoothed Chinese Cost Curves Evolution
2012 2016 2020
We Look at the Supply
Response from the "Big 4+1"
to Understand How the Cost
Curve (Landed China) Will
Change Over Time; This Cost
Curve Dynamic Drives the
Expected Price Performance
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
125






Exhibit 190 Our Analysis of the Major Miners Informs Our Supply Side Projections
Source: CRU, corporate reports and Bernstein estimates and analysis.

Exhibit 191 We Allow for Significant Growth from the
Juniors

Exhibit 192 FMG Appears to Have the Most Aggressive
Growth Plans
Source: CRU, corporate reports and Bernstein estimates and analysis. Source: CRU, corporate reports and Bernstein estimates and analysis.

-
200
400
600
800
1,000
1,200
1,400
1,600
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
2
0
1
9
E
2
0
2
0
E
M
t

I
r
o
n

O
r
e
"Big Five" Iron Ore Supply
Rio BHP FMG Vale Anglo
- 50 100 150 200 250
Other
BHP
Vale
Rio
FMG
Anglo
Iron Ore (Mt)
Nw Iron Ore Supply to 2020E
0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
FMG
BHP
Rio
Anglo
Vale
Volume Growth CAGR to 2020E
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
126 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Having calculated a supply and a demand response, we look at how the balance in
the iron ore market will change over time. It should be stressed that this balance is
purely notional. Iron ore is not copper we do not expect to see 200mt (say) of
"spare" iron ore on board a queue of capesize ships outside Qingdao. Rather, there
will be changes to system-wide utilization rates, and these changes will be reflected
in the corresponding cost structures of the various steps along the steel value chain.
These balances are shown in Exhibit 193 for us and Exhibit 194 for consensus.
Exhibit 195 then compares our estimates to consensus.
We are more bullish than consensus on demand a positive for price.
Consequently, either consensus has not understood what it will take to re-accelerate
the Chinese economy correctly, or the IMF and OECD have underestimated the
Chinese dislike of paying for raw materials. We also remain ahead of consensus on
the supply side a negative for price. At the time of our launch in September
2012, we expected a low-cost supply response of over one billion tons by 2020 and
a "catastrophic" real price collapse down to ~US$75/t. We are now more inclined
to believe that a degree of capital discipline is entering the industry, and that radical
overbuild of mining capacity will be avoided.
However, supply and demand are only one component of any price analysis
the other is cost. If the cost structure of an industry is changing faster than the rate
at which marginal units of supply are either called or displaced, and if the elasticity
of supply at the margin is low, then oversupply can be accompanied by rising
prices and vice versa. Despite the simple continuous output function that we have
used in this analysis, we believe that there is a good reason to believe that the
elasticity of supply in China (once one is at a high-enough cost level) is actually
relatively flat. Once you are prepared to mine below, say, 15% Fe ROM, there is an
abundance of such material that can be exploited even in China. And if the method
of exploitation is similar, then the cost structure of the industry at the margin ought
to be similar as well, leading to a low elasticity of supply. However, this would
represent an upside to our price forecast, as it is already ahead of consensus.
Consequently, we thought it best not to model this effect in our current version of
the analysis. However, the change in elasticity at the margin may be structured
cost escalation in China is real enough (see Exhibit 196).
Putting all of these elements together generates our counter-consensus iron ore
price forecast (see Exhibit 197 and Exhibit 198). Moreover, we are able to
disaggregate the difference between our view and the view implicit in the
consensus price forecast, as shown in Exhibit 199. Approximately half of the
variance to consensus is attributable to our understanding of cash cost escalation in
the Chinese mines, and the other half is due to a difference in supply and demand
balance. Exhibit 200 through Exhibit 203 provide the full details of this analysis.

Three Variables Need to Be
Considered in Any Price
Forecast Supply, Demand
and Cost; However, We Believe
That Cost Is Commonly
Omitted Through a Desire Not
to Confuse Nominal and Real
Drivers of Price Appreciation;
Yet Differential Real Cost
Escalation Is a Key Source of
Value Creation in Mining
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
127





Exhibit 193 We Then Look at Changes to the Supply and Demand Situation to Imply a Change in
the Overall "Balance" of the Iron Ore Industry...
Source: CRU, corporate reports and Bernstein estimates and analysis.

Exhibit 194 ...Which Is, Naturally Enough, Different from Consensus
Source: CRU, corporate reports and Bernstein estimates and analysis.

(150)
(100)
(50)
-
50
100
150
2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
I
r
o
n

O
r
e

(
M
t
)
SCB S-D Iron Ore Balance
SCB Change in Demand SCB Change in Supply SCB Change in Balance
(150)
(100)
(50)
-
50
100
150
2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
I
r
o
n

O
r
e

(
M
t
)
Consensus S-D Iron Ore Balance
Consensus Change in Demand Consensus Change in Supply Consensus Change in Balance
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
128 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 195 We Expect a Stronger Demand Environment and a Stronger Supply Side Response
Than Consensus
Source: CRU, corporate reports and Bernstein estimates and analysis.

Exhibit 196 A Critical Difference Is in the Impact of Expected Continued Cost Escalation on a
Non-Static Chinese Iron Ore Industry
Source: NBS and Bernstein estimates and analysis.

(150)
(100)
(50)
-
50
100
150
2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
I
r
o
n

O
r
e

(
M
t
)
Consensus vs. SCB Comparison S-D Iron Ore Balance
Comparison Change in Demand Comparison Change in Supply Comparison Change in Balance
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Chinese Iron Ore Cost Escalator
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
129





Exhibit 197 It Is a Combination of the Differences in Supply and Demand Forecasts as Well as
Expected Real Cost Escalation in China That Gives Rise to Our Above-Consensus
Price Forecast
Source: NBS, Bloomberg L.P., CRU and Bernstein estimates and analysis.

Exhibit 198 Our Iron Ore Price Forecast Is Consistent With the IMF's Current GDP Forecast of
7.8% in 2013 Rising to 8.5% in 2016 and Average Increase in Supply of 88Mtpa 2013-
16E
Source: Bloomberg L.P. and Bernstein estimates and analysis.

-
20
40
60
80
100
120
140
160
2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
I
r
o
n

O
r
e

(
U
S
$
/
t
)
Resulting Price Path and Comparison to Consensus
Price Dif f erence SCB Price Forecast Consensus Price Forecast
Nominal Dollars Spot* 2013 YTD 2013E 2014E 2015E 2016E
Iron Ore US$/t 109 129 130 137 141 144
Iron Ore Consensus US$/t 123 114 106 100
SCB Upside/Downside 6% 20% 33% 44%
*as of June 30, 2013
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
130 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 199 Roughly 50% of the Upside of Our Forecast vs. Consensus Is Attributable to
Differences in Our Cost Escalation Assumptions and 50% Due to S-D Differences
Source: NBS, Bloomberg L.P., CRU and Bernstein estimates and analysis.

(5)
-
5
10
15
20
25
30
2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
I
r
o
n

O
r
e

(
U
S
$
/
t
)
Explanation of Price Differential vs. Consensus
Cost Supply & Demand
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013




E
U
R
O
P
E
A
N

M
E
T
A
L
S

&

M
I
N
I
N
G
:

A

S
T
R
A
N
G
E

L
O
V
E


H
O
W

I

L
E
A
R
N
E
D

T
O

S
T
O
P

W
O
R
R
Y
I
N
G

A
N
D

L
O
V
E

T
H
E

O
R
E

1
3
1

Exhibit 200 The First Element of an Iron Ore Price Forecast, in Our View, Is the Calibration of a Consistent View on Steel Intensity and Steel Productivity
Source: Bloomberg L.P., AME, CRU, Wood Mackenzie, IMF, World Bank, NBS and Bernstein estimates and analysis.



ChineseSteelIntensityAnalysis 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
China Population m 1,298 1,304 1,311 1,317 1,324 1,329 1,335 1,340 1,346 1,352 1,357 1,361 1,364 1,368 1,372 1,375
China GDP Growth % 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 7.8% 8.0% 8.2% 8.2% 8.2% 8.2% 8.1% 7.8%
China GDP (Real 2005 PPP$) $bn 5,364 6,044 6,900 7,565 8,262 9,125 9,973 10,751 11,585 12,511 13,537 14,647 15,848 17,148 18,537 19,984
China GDP/Capita (Real 2005 PPP$) $/Capita 4,133 4,634 5,265 5,744 6,242 6,866 7,472 8,021 8,607 9,257 9,974 10,763 11,615 12,535 13,515 14,532
Chinese Steel Intensity kg/'000$ 65.5 63.1 61.8 57.8 66.7 63.3 63.2 61.5 59.4 60.5 60.6 59.2 57.0 54.5 51.2 46.9
China Finished Steel Demand Mt 351 381 426 437 551 578 630 662 688 756 820 866 903 935 949 938
China Finished Steel Demand Growth % 25.2% 8.5% 11.8% 2.5% 26.0% 4.9% 9.0% 5.0% 4.0% 10.0% 8.4% 5.6% 4.3% 3.5% 1.6% -1.2%
Chinese Self-Sufficiency in Steel % 98.9% 107.6% 110.7% 108.8% 99.8% 103.9% 103.9% 103.9% 104.2% 104.6% 104.9% 105.2% 105.5% 105.7% 106.0% 106.4%
Chinese Finished Steel Production Mt 348 410 472 475 550 600 655 687 717 792 861 912 953 988 1,007 997
Finished Steel to Crude Steel Ratio % 101.6% 102.2% 103.7% 105.2% 104.3% 104.4% 104.4% 104.4% 104.8% 105.1% 105.4% 105.7% 105.9% 106.2% 106.4% 106.6%
China Crude Steel Production Mt 353 419 489 500 574 627 683 717 751 832 907 964 1,010 1,049 1,071 1,063
China Crude Steel Production Growth % 24.9% 18.7% 16.7% 2.3% 14.6% 9.3% 9.0% 5.0% 4.3% 10.4% 8.7% 6.0% 4.5% 3.7% 1.9% -0.9%
Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,061 1,168 1,277 1,347 1,402 1,448 1,465 1,433
Chinese Steel Capital Stock Mt 2,625 2,954 3,321 3,692 4,169 4,663 5,200 5,757 6,330 6,960 7,641 8,355 9,091 9,844 10,596 11,322
Chinese Steel Capital Stock/Capita kg/Capita 2,023 2,265 2,534 2,803 3,150 3,508 3,896 4,295 4,703 5,149 5,630 6,139 6,663 7,196 7,725 8,233
Steel Growth to GDP Growth Ratio - 2.2 0.7 0.8 0.3 2.8 0.5 1.0 0.6 0.5 1.2 1.0 0.7 0.5 0.4 0.2 -0.2
F
o
r

t
h
e

e
x
c
l
u
s
i
v
e

u
s
e

o
f

J
A
S
O
N

L
A
P
O
R
T
E

a
t

P
E
R
R
Y

C
A
P

T
A
L

o
n

1
6
-
J
u
l
-
2
0
1
3



1
3
2

E
U
R
O
P
E
A
N

M
E
T
A
L
S

&

M
I
N
I
N
G
:

A

S
T
R
A
N
G
E

L
O
V
E


H
O
W

I

L
E
A
R
N
E
D

T
O

S
T
O
P

W
O
R
R
Y
I
N
G

A
N
D

L
O
V
E

T
H
E

O
R
E


Exhibit 201 We Calibrate This Against the Overall Composition of Economic Activity and the Labor Force in China
Source: Bloomberg L.P., AME, CRU, Wood Mackenzie, IMF, World Bank, NBS and Bernstein estimates and analysis.









ChineseMacro&RawMaterialSummary 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
China Population m 1,298 1,304 1,311 1,317 1,324 1,329 1,335 1,340 1,346 1,352 1,357 1,361 1,364 1,368 1,372 1,375
China GDP Growth (Real) % 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 7.8% 8.0% 8.2% 8.2% 8.2% 8.2% 8.1% 7.8%
China GDP (Real 2005 PPP$) $bn 5,364 6,044 6,900 7,565 8,262 9,125 9,973 10,751 11,585 12,511 13,537 14,647 15,848 17,148 18,537 19,984
China GDP/Capita (Real 2005 PPP$) $/Capita 4,133 4,634 5,265 5,744 6,242 6,866 7,472 8,021 8,607 9,257 9,974 10,763 11,615 12,535 13,515 14,532
FAI as % of GDP % 42.1% 43.0% 41.7% 44.0% 48.2% 48.2% 47.6% 47.0% 47.1% 46.8% 46.0% 44.9% 43.3% 41.6% 39.7% 37.8%
Inflation Index % 100.0% 103.2% 106.2% 108.6% 109.5% 111.0% 113.4% 115.4% 117.6% 120.2% 123.0% 125.9% 129.0% 132.0% 135.2% 138.4%
China GDP (Nominal PPP$) $bn 5,364 6,240 7,330 8,214 9,049 10,128 11,306 12,406 13,623 15,039 16,647 18,443 20,441 22,641 25,055 27,651
Nominal GDP Growth % 16.3% 17.5% 12.1% 10.2% 11.9% 11.6% 9.7% 9.8% 10.4% 10.7% 10.8% 10.8% 10.8% 10.7% 10.4%
FAI Contribuition to GDP $bn 2,258 2,681 3,059 3,618 4,366 4,884 5,377 5,830 6,418 7,036 7,664 8,272 8,856 9,415 9,952 10,456
Steel Consumption Mt 351 381 426 437 551 578 630 662 688 756 820 866 903 935 949 938
Steel per $'000 FAI kg/'$000 156 142 139 121 126 118 117 113 107 108 107 105 102 99 95 90
Steel Price RMB CNY/t 4,234 3,935 4,286 5,014 3,728 4,256 4,673 3,999 4,309 4,309 4,309 4,309 4,309 4,309 4,309 4,309
RMB Exchange Rate CNY:USD 8.19 7.97 7.61 6.95 6.83 6.77 6.46 6.31 6.40 6.45 6.51 6.57 6.64 6.69 6.75 6.81
Steel Price USD US$/t 517 494 563 721 546 629 723 634 673 668 662 656 649 644 638 633
Steel Cost of FAI $bn 182 188 240 315 301 363 456 419 463 505 543 568 587 602 606 593
Total Raw Material Consumption in FAI US$bn 267 316 408 496 480 602 745 683 739 795 844 881 908 930 942 936
Non-Raw Material FAI Cost (Labor) US$bn 1,991 2,365 2,652 3,122 3,886 4,282 4,632 5,147 5,678 6,241 6,820 7,392 7,948 8,485 9,010 9,521
Raw Material as % of FAI % 12% 12% 13% 14% 11% 12% 14% 12% 12% 11% 11% 11% 10% 10% 9% 9%
Chinese Economically Active Population m 779 763 765 770 775 784 785 788 790 791 790 789 786 782 778 775
Chinese Employed Population m 758 764 753 756 758 761 764 767 769 770 769 768 765 761 758 754
Unit Value of Labor in FAI US$/person 11,010 12,302 13,136 15,191 18,434 19,605 20,546 22,221 24,048 26,141 28,483 31,057 33,875 36,929 40,227 43,719
Growth in Labor Cost in FAI % 11.7% 6.8% 15.6% 21.3% 6.4% 4.8% 8.1% 8.2% 8.7% 9.0% 9.0% 9.1% 9.0% 8.9% 8.7%
Steel Use Productivity kg/capita 1,943 1,983 2,111 2,126 2,613 2,645 2,795 2,856 2,913 3,168 3,426 3,640 3,850 4,068 4,238 4,305
F
o
r

t
h
e

e
x
c
l
u
s
i
v
e

u
s
e

o
f

J
A
S
O
N

L
A
P
O
R
T
E

a
t

P
E
R
R
Y

C
A
P

T
A
L

o
n

1
6
-
J
u
l
-
2
0
1
3




E
U
R
O
P
E
A
N

M
E
T
A
L
S

&

M
I
N
I
N
G
:

A

S
T
R
A
N
G
E

L
O
V
E


H
O
W

I

L
E
A
R
N
E
D

T
O

S
T
O
P

W
O
R
R
Y
I
N
G

A
N
D

L
O
V
E

T
H
E

O
R
E

1
3
3

Exhibit 202 We Look at How the Cost Curve in China Would Change If There Were to Be No Impact on Price; We Then Calculate the Impact of a Notional
"Over Supply" or "Under Supply" on That Cost Curve, Particularly Relative to Consensus Expectations
Source: Bloomberg L.P., AME, CRU, Wood Mackenzie, IMF, World Bank, NBS and Bernstein estimates and analysis.



IronOreCostCurveAnalysis 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Consensus Iron Ore Forecast US$/t 33 42 46 76 81 147 168 128 127 118 110 107 100 95 90 90
Consensus Crude Steel Production Mt 353 419 489 500 574 627 683 717 751 794 828 858 885 914 943 973
Assumed Consensus Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Assumed Consensus Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Implied Consensus Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,061 1,098 1,133 1,154 1,175 1,200 1,232 1,269
a (C(Q) = a + b*Q^n) - 40 40 40 40 40 40 40 40 40
b (C(Q) = a + b*Q^n) - 2.85E-06 2.67E-06 2.45E-06 2.27E-06 2.16E-06 2.07E-06 1.96E-06 1.84E-06 1.71E-06
n (C(Q) = a + b*Q^n) - 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
Qbase Mt Iron Ore 27 37 34 22 20 26 31 38
Cumulative Qexcess Mt Iron Ore 49 98 143 166 209 248 291 299
Qexcess Mt Iron Ore 49 49 44 23 43 38 43 9
Consensus to Calculated Crude Steel Mt 0.4 37.8 78.8 105.6 124.2 135.4 127.6 89.5
Chinese Iron Ore Cost Escalation % 9.6% 12.9% 6.4% 2.4% 3.5% 4.9% 4.4% 4.1%
a' (C'(Q) = a' + b'*Q^n') - 40 44 49 53 54 56 59 61 64
b' C'(Q) = a' + b'*Q^n') - 2.85E-06 2.67E-06 2.45E-06 2.27E-06 2.16E-06 2.07E-06 1.96E-06 1.84E-06 1.71E-06
n' C'(Q) = a' + b'*Q^n') - 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
IronOreProductionAvailableforExport 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Rio Mt 159 168 179 193 218 239 245 253 267 316 364 378 392 377 377 377
BHP Mt 114 115 120 136 137 149 174 187 209 230 238 239 249 292 324 324
FMG Mt 15 33 42 48 64 101 110 112 113 116 125 130 130
Vale Mt 234 264 303 302 238 308 323 320 308 343 375 384 397 412 441 452
Anglo Mt 31 31 32 37 45 47 46 49 49 48 59 73 73 73 73 73
Big Five Mt 538 579 634 684 670 785 835 873 935 1,048 1,147 1,186 1,227 1,278 1,344 1,355
Change from Big Five Mt 62 113 100 39 41 51 67 11
Change from Other Sources Mt 16 (7) 6 22 45 36 34 52
SCB Total Change in Potential Supply Mt 78 106 106 61 86 86 100 63
Consensus Supply Growth Mt 77 86 78 45 64 64 74 46
SCB vs. Consensus Supply Mt 1 19 27 16 22 22 26 16
F
o
r

t
h
e

e
x
c
l
u
s
i
v
e

u
s
e

o
f

J
A
S
O
N

L
A
P
O
R
T
E

a
t

P
E
R
R
Y

C
A
P

T
A
L

o
n

1
6
-
J
u
l
-
2
0
1
3



1
3
4

E
U
R
O
P
E
A
N

M
E
T
A
L
S

&

M
I
N
I
N
G
:

A

S
T
R
A
N
G
E

L
O
V
E


H
O
W

I

L
E
A
R
N
E
D

T
O

S
T
O
P

W
O
R
R
Y
I
N
G

A
N
D

L
O
V
E

T
H
E

O
R
E


Exhibit 203 This Then Drives Our Price Line
Source: Bloomberg L.P., AME, CRU, Wood Mackenzie, IMF, World Bank, NBS and Bernstein estimates and analysis.
S/DBalance&Price 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
SCB Chinese Demand Mt 538 648 751 739 870 930 999 1,034 1,061 1,168 1,277 1,347 1,402 1,448 1,465 1,433
SCB Change in Chinese Demand Mt 27 107 109 71 54 46 17 (32)
SCB Change in Supply Mt 78 106 106 61 86 86 100 63
SCB Balance Mt (51) 1 3 10 (32) (40) (83) (95)
Consensus Chinese Demand Mt 538 648 751 739 870 930 999 1,034 1,061 1,098 1,133 1,154 1,175 1,200 1,232 1,269
Consensus Change in Chinese Demand Mt 27 37 34 22 20 26 31 38
Consensus Change in Supply Mt 77 86 78 45 64 64 74 46
Consensus Balance Mt (49) (49) (44) (23) (43) (38) (43) (9)
Volume Required for Price Equilibrium ex. Cost Inflation Mt 27 37 34 22 20 26 31 38
SCB Relative Supply Position vs. 2012 Equilibrium Condition Mt 1,010 1,049 1,086 1,118 1,106 1,092 1,040 983
SCB Price inc. Cost Escalation - Nominal US$/t 130 137 141 144 140 136 125 115
SCB Price ex. Cost Escalation - Nominal US$/t 127 127 128 130 124 117 104 92
Consensus Relative Supply Position vs. 2012 Equilibrium Condition Mt 1,012 1,000 990 989 965 953 941 970
Consensus Price inc. Cost Escalation - Nominal US$/t 131 127 123 120 116 114 111 114
Consensus Price ex. Cost Escalation - Nominal US$/t 127 118 110 107 100 95 90 90
SCB vs. Consensus - Nominal US$/t 3 19 31 38 40 41 35 25
SCB vs. Consensus - Nominal % 2.7% 16.3% 28.1% 35.5% 40.2% 43.0% 39.2% 28.1%
SCB vs. Consensus - Due to Chinese Cost Escalation US$/t 4 9 13 14 16 19 21 24
SCB vs. Consensus - Due to S&D Differences US$/t () 10 18 24 24 22 14 2
SCB vs. Consensus - Due to Chinese Cost Escalation % 111.0% 49.3% 40.9% 36.8% 39.3% 45.4% 59.8% 93.3%
SCB vs. Consensus - Due to S&D Differences % -11.0% 50.7% 59.1% 63.2% 60.7% 54.6% 40.2% 6.7%
F
o
r

t
h
e

e
x
c
l
u
s
i
v
e

u
s
e

o
f

J
A
S
O
N

L
A
P
O
R
T
E

a
t

P
E
R
R
Y

C
A
P

T
A
L

o
n

1
6
-
J
u
l
-
2
0
1
3
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
135





Local Currency Costs and USD
Revenues: The Stabilizing Effect of
the "Natural Hedge" in Costs

As JK Galbraith observed, "faced with the choice between changing one's mind and
proving that there is no need to do so, almost everyone gets busy on the proof." As
an exercise in listening to Galbraith, we asked ourselves "what are the valuation
impacts if we are wrong with regards to the iron ore price, and if $80/t iron ore
becomes a near-term reality?" While examining this hypothetical situation, we
came across three "automatic stabilizers" that would mitigate a part of the negative
value impact of a sustained iron ore price fall for the big Western miners and offer
a realistic picture of how a sustained fall in iron ore prices would impact
valuations: (1) the natural FX hedge embedded in the miners' cost structures; (2)
value-in-use (VIU) adjustments commanded by ores of differing qualities; and (3)
elasticity of iron ore demand and spare capacity in China's steel-making industry
whose exploitation would become economical, were the iron price to fall
sufficiently. Across all of these stabilizers, the companies that are the most exposed
to iron ore experience the greatest offsetting effect.
After several years of double-digit cost growth, the miners (particularly Rio
Tinto and BHP Billiton) are winning the battle to contain further operating cost
increases. Furthermore, in a world of falling commodity prices, we expect to see
substantial weakening in producer currencies (AUD and BRL). Given that the
miners' costs are denominated in local currency and their revenues in USD, any
currency weakening will lead to an improvement in operating margin.
Consequently, with nearly 50% of the cost increases in iron ore over the last 10
years coming from the impact of currency movements, any currency weakening is a
significant source of upside. Our analysis shows that there is a natural hedge in the
operating cost structure of the miners that softens the earnings impact of any
sustained fall in commodity prices. In a world where iron ore falls to US$80/t, we
estimate that Vale and Rio would experience the greatest benefits from this natural
hedge, given their greater exposure to iron ore, while more diversified BHP and
Anglo would experience lesser impacts.
FX as an Automatic Stabilizer
The period from 2003 to 2012 saw the IMF 62% FE monthly spot (CFR Tianjin
port) rise at a CAGR of 128%, from an average of US$14/t to an average of
US$129/t. Over the same period, iron ore revenue and EBITDA for our coverage
group rose at a CAGR of 133% and 141%, respectively. The combination of rising
prices and volume increases has led to iron ore EBITDA margin expansion from,
on average, 34% to 56%. While margin growth has been impressive, it could have
been considerably more so, had the miners' costs not tracked prices upward.
Currencies in key iron ore producing countries show a strong correlation to
iron ore prices. The R-squared for the Australian dollar and iron ore prices is 71%
(see Exhibit 204). Similarly, for the Brazilian real, it is 57% (see Exhibit 205). The
relationship in less iron-ore-intensive economies is weaker, e.g., the R-squared to
the South African rand is only 15% (see Exhibit 206). It is therefore evident that
iron ore price and cost rises are strongly linked through the medium of currency
movement. Consequently, the R-squared between iron ore costs and revenue across
our coverage group is 90% (see Exhibit 207). Fortunately, in presence of falling
iron ore prices, the effect of this natural hedge is reversed.
In a World Where Iron Ore Falls
to $80/t Iron Ore, We Estimate
That Cost Savings
Combined With the Natural FX
Hedge Embedded in Miners'
Operating Cost Structure
Could Offset Valuation
Declines by the Equivalent of,
on Average, 6% of June 30,
2013 Share Prices for Rio, BHP,
Vale and Anglo
The Strong Correlation
Between Iron Ore Costs and
Revenues Has Dampened
Miners' Margin Expansion in a
Rising Iron Ore Price
Environment; If Iron Ore Prices
Fall, the Effect of This Natural
Hedge Is Reversed
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
136 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





As a consequence of mining being a commoditized business, there is a very
strong natural hedge between its revenues and costs.
38
Part of the relationship is
driven by currency movements, which are influenced by balance of payment forces
arising from strengthening commodity prices in producer countries. Specifically,
mining companies based in a jurisdiction that uses a non-USD currency receive
large amounts of USD as payments for the commodities they export. In order to
compensate the labor and cover other mining costs in the mining jurisdiction, these
companies have to convert the dollars they received into the local currency. In
doing so, they increase both supply of dollars and demand for the local currency,
thus inducing USD to depreciate vis-a-vis the local currency. Depreciation of the
dollar then makes mining costs expressed in USD terms higher than they would be
otherwise and reduces the miners' margins.
The second component of the natural hedge arises from the fact that significant
elements in mining costs (like diesel or steel in grinding media or rubber for tires)
are tied to the same macroeconomic drivers that influence commodity prices
themselves. Looking at total iron ore costs, we find that local currency appreciation
accounts for 42% of Rio Tintos iron ore costs and 51% of BHP's (see Exhibit 208
and Exhibit 209).
This also explains why hedging in mining is fraught with danger and, in our
view, increases the level of operational risk rather than decreases it. If only the
revenue is hedged, then the natural hedge between costs and revenue is broken. In
addition, trying to hedge the costs of production as well as the revenue is extremely
difficult. Moreover, there is always a price to be paid to set up any hedge,
especially one as complicated as what we believe would be required to hedge all of
the mining costs' components. There are numerous examples in mining where a
nave forward sale of material (often executed under the auspices of a risk
management program) has destroyed significant value through breaking this natural
hedge.

Exhibit 204 There Is a Strong Correlation Between the
Price of Iron Ore and the Strength of the
Australian Dollar, With a High Iron Ore
Price Equating to a Strong Local Currency

Exhibit 205 Likewise, the Relationship Exists (Albeit
Less Pronounced) for the Brazilian Real
Source: Bloomberg L.P. and Bernstein analysis. Source: Bloomberg L.P. and Bernstein analysis.


38
In the "Not All Iron Ores Were Created Equal: The Stabilizing Effect of Value in Use" chapter, we discuss how the degree of commoditization
across different ores can vary, resulting in price differentials for different ores.
R = 0.7147
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
0 25 50 75 100 125 150 175
1

U
S
D

=

X
A
U
D
Iron Ore (US$/t)
Australian Dollar vs. Iron Ore Price
R = 0.5718
1.00
1.50
2.00
2.50
3.00
3.50
0 25 50 75 100 125 150 175
1

U
S
D

=

X
B
R
L
Iron Ore (US$/t)
Brazilian Real vs. Iron Ore Price
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
137





Exhibit 206 Unfortunately for Anglo American, for the
South African Rand, the Relationship Is Not
in Evidence

Exhibit 207 Mining Costs and Revenue Exhibit a High
Degree of Correlation
Source: Bloomberg L.P. and Bernstein analysis. Source: Bloomberg L.P. and Bernstein analysis.

Exhibit 208 Currency Appreciation Drives a Significant
Part of the Cost-to-Price Relationship

Exhibit 209 ...Which Is Particularly True for the
Australian Producers Rio Tinto and BHP
Billiton
Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.

R = 0.1516
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
0 25 50 75 100 125 150 175
1

U
S
D

=

X
Z
A
R
Iron Ore (US$/t)
South African Rand vs. Iron Ore Price
R = 0.9048
0
5,000
10,000
15,000
20,000
25,000
0 20,000 40,000 60,000
T
o
t
a
l

C
o
v
e
r
a
g
e

C
o
s
t
s

(
$
m
)
Total Coverage Revenue
Total Iron Ore Costs and Revenue
41%
17%
42%
Rio Tinto Iron Ore Cost Drivers
Producer Currency Appreciation Local Currency Inflation
Real Cost Increases
51%
22%
27%
BHP Iron Ore Cost Drivers
Producer Currency Appreciation Local Currency Inflation
Real Cost Increases
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
138 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Costs as an Automatic Stabilizer
Macro effects notwithstanding, the miners have made significant progress in
controlling iron ore costs, with Rio Tinto leading the way (see Exhibit 210 through
Exhibit 212). It has shown a deceleration in the relationship between rising iron ore
prices and costs as well as a slowdown in total cost growth. On top of that, Rio is
the lowest-cost iron ore producer in our coverage. A component of this cost control
is Rio Tinto's "Mine of the Future" program, which looks to increase the level of
automation and remote automation in mining, thus reducing the requirement for
ever more expensive labor. Rio Tinto believes that it represents a once-in-a-century
step change in the way mining is conducted. Whether it will truly rate alongside the
introduction of steam shovels or froth floatation remains to be seen, but it clearly
has significant potential. In iron ore, for example, the program has a vision of
utilizing remote-controlled drills to enable drill-and-blast extraction of ore;
satellite-guided haul trucks to transport ore at the mine site; driverless trains to
carry production to port; and teleoperated ship loading. Rio Tinto believes that the
majority of the mining operations could be controlled from a center in Perth
some 1,500km away from the actual mine sites.
We applaud Rio Tinto's vision for the mining industry. Moreover, we look
forward to seeing how this may continue to support Rio's ability to contain
operating costs, and hence generate value creation.
Rio's fellow antipodean BHP Billiton has also achieved a marked deceleration
in both cost growth over time and cost growth relative to iron ore price growth (see
Exhibit 213 and Exhibit 214). This slowdown in cost growth coincided with a
pause in a period of impressive growth for the company (during which cost controls
can often be overlooked in favor of hitting volume targets). We believe that BHP's
total cost profile is positively impacted by the nature of the company's most
important iron ore asset Mt Whaleback. This mine was established in 1968 and
is the biggest single-pit, open-cut iron ore mine in the world. It is more than 5km
long and nearly 1.5km wide. We believe that having large assets with significant
inherent optionality greatly facilitates value accretive growth and enables miners to
capture genuine economies of scale trying to get growth from aggregations of
numerous smaller assets will always be far more challenging.
Nevertheless, the company still has ground to cover. Its December half-year
reporting noted that $1.9 billion in controllable cost savings (i.e., not fuel or
taxation) had been achieved, and incoming CEO Andrew MacKenzie commented
that he would "extend our pressure on costs and drive us to the bottom of cost per
mined ton."
39

Vale has continued to struggle with cost controls. Unlike its companions in the
"Big Three," which have seen cost increases slow down, Vales costs have been
growing at an accelerating rate (see Exhibit 215 and Exhibit 216). Interestingly,
this has left Vale facing opex that is just 7% cheaper than BHP and 21% more
expensive than Rios (all in USD terms). In its 1Q:13 earnings report, Vale noted
that "for the first time in many years," costs and expenses were "an important
source of improvement," with cost cutting extending beyond the operational into
SG&A. The company reported savings of US$880 million year-over-year and
US$2,539 million quarter-over-quarter (with US$1,283 million of this quarterly
decline coming from COGS). While Vales average cost per mined ton of iron ore
could certainly benefit from the new low-cost production from Serra Sul (cash opex
estimated at ~US$30/t), we believe this to be an extraordinarily misguided lens
through which to view cost controls. In our view, miners must consider the price
impact that any new incremental tonnage has upon the market, as it impacts the
price for all tons already in the market. For a functionally "pure" iron ore play like
Vale, this is even more critical than for one of the more diversified miners.

39
http://www.smh.com.au/business/bhp-to-drive-focus-on-costs-in-new-era-20130220-2ermk.html.
The Miners Have Taken Steps
(of Varying Efficacy) to Curb
Iron Ore Cost Increases and
Achieve Leaner Cost
Structures Than in the Past
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
139





Anglo American has seen its iron ore costs rise though 2012 but showed some
signs of containment (see Exhibit 217 and Exhibit 218). The story seems to be
midway between the Australian and Brazilian members of the "Big Three," which
is perhaps unsurprising, given the series of operational disappointments and the
turnaround nature of Anglo's investment case. Perhaps equally unsurprising in this
light is that if one Googles Anglo American cost controls, the first hits are not
stories about CEOs trying to rein in costs in light of new projects (as with the Big
Three); instead, they are for jobs as cost controllers within the company (see
Exhibit 220).

Exhibit 210 Rio Tinto Is the Lowest Cost Iron Ore Producer in Our Coverage; Anglo, as the
Highest, Experiences Cash Opex That Is 50% Higher Than Rio's
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 211 While Mining Cost Escalation Is a Common
Worry, It Appears That the Miners Have
Started to Get It Back Under Control

Exhibit 212 Rio Tinto, in Particular, Is Leading the Way
Source: Bloomberg L.P., corporate reports and Bernstein estimates and
analysis.
Source: Corporate reports and Bernstein estimates and analysis.

550
15
30
45
50
0 100
35
200 300 400 500 600 700 800 150 250 350 450
10
5
50
0
25
40
650 750
20
Rio Vale BHP
33
49
43
40
Anglo
+50%
CumulativeProduction (2012 Mt)
O
p
e
x

U
S
$
/
t
R = 0.9302
0
5
10
15
20
25
30
35
40
0 50 100 150 200
U
n
i
t

C
o
s
t

(
U
S
$
/
t
)
Iron Ore Price US$/t
Rio Tinto Iron Ore Costs vs. Price
0
5
10
15
20
25
30
35
40
U
n
i
t

C
o
s
t
s

(
U
S
$
/
t
)
Rio Tinto Iron Ore Costs Over Time
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
140 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 213 BHP Has Gone Through a Similar
Experience With Both the Cost Relationship
to Iron Ore...

Exhibit 214 ...And Over Time, Showing a Marked
Deceleration
Source: Bloomberg L.P., corporate reports and Bernstein estimates and
analysis.
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 215 For Vale, the Evidence of Cost Control Is
Less Convincing...

Exhibit 216 As Can Be Seen in the Continued Cost
Growth Over Time
Source: Bloomberg L.P., corporate reports and Bernstein estimates and
analysis.
Source: Corporate reports and Bernstein estimates and analysis.

R = 0.8923
0
5
10
15
20
25
30
35
40
45
50
0 50 100 150 200
U
n
i
t

C
o
s
t

(
U
S
$
/
t
)
Iron Ore Price US$/t
BHP Billiton Iron Ore Costs vs. Price
0
5
10
15
20
25
30
35
40
45
50
U
n
i
t

C
o
s
t
s

(
U
S
$
/
t
)
BHP Iron Ore Costs Over Time
R = 0.7575
0
10
20
30
40
50
60
70
0 50 100 150 200
U
n
i
t

C
o
s
t

(
U
S
$
/
t
)
Iron Ore Price US$/t
Vale Iron Ore Costs vs. Price
0
10
20
30
40
50
60
70
U
n
i
t

C
o
s
t
s

(
U
S
$
/
t
)
Vale Iron Ore Costs Over Time
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
141





Exhibit 217 For Anglo, the Situation Seems to Lie
Somewhere Between Vale and the
Australians

Exhibit 218 With Some Evidence of Cost
Containment

Source: Bloomberg L.P., corporate reports and Bernstein estimates and
analysis.
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 219 An Internet Search for the Miners and "Cost Controls" Results in an Ad for a Cost
Control Position as at Least One of the Top 10 Hits (as of April 30, 2013); Only Anglo
Has All of Its First Five Hits as Job Openings
Source: http://www.google.co.uk/search?q=anglo+american+cost+controls&rls=com.microsoft:en-gb&ie=UTF-8&oe=UTF-
8&startIndex=&startPage=1&redir_esc=&ei=_zWAUdWkNMSCONaEgIgK.
R = 0.8307
0
10
20
30
40
50
60
70
0 50 100 150 200
U
n
i
t

C
o
s
t

(
U
S
$
/
t
)
Iron Ore Price US$/t
Anglo Iron Ore Costs vs. Price
0
10
20
30
40
50
60
70
U
n
i
t

C
o
s
t
s

(
U
S
$
/
t
)
Anglo Iron Ore Costs Over Time
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
142 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Impact for Our Coverage
Declining iron ore prices would see producer currencies weaken, which would
lower USD costs and improve margins for the miners. Based on the historical
relationship between the iron ore price and iron ore producer currencies, and
bearing in mind the current cost structures of our coverage companies (see Exhibit
211, Exhibit 213, Exhibit 215 and Exhibit 217), we estimate that the natural hedge
effect linked to an iron ore price decline to US$80/t would offset valuation
declines by 12% for Vale, 8% for Rio, 4% for BHP and have a neutral effect upon
Anglo (all percentages relative to June 30, 2013 prices see Exhibit 220 and
Exhibit 221).
40


Exhibit 220 Given the Historical Relationship Between the Iron Ore Price and Producer
Currencies, a Return to US$80/t Iron Ore Would See Producer Currencies Weaken,
Lowering US$ Costs and Improving Margin for the Miners
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 221 The Sensitivity to Such a Margin Impact Gives, on Average, ~6% Additional Upside
to the Australian and Brazilian Miners But Is Value Neutral for Anglo American
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

40
All valuation offsets are expressed as a percentage of the June 30, 2013 price, in USD terms.
12%
8%
4%
-1%
Vale Rio BHP Anglo
%

o
f

C
u
r
r
e
n
t

S
h
a
r
e

P
r
i
c
e
Share Price Impact of Curreny Effect of US$80/t Iron Ore
FX Impact Rio BHP Vale Anglo
Average $ Cost 32.7 42.5 40.0 49.1
Average LC Cost 32.8 42.6 70.7 374.7
US$ Cost at 80$ Fe 27.9 36.2 34.0 50.3
Margin Uplift per Ton ($) 4.9 6.3 6.0 -1.1
Tons Produced 2012 (kt) 246,831 161,149 303,443 49,137
Current EV/EBITDA 5.0 5.8 4.3 5.1
EV Impact ($m) 6,024 5,880 7,787 -283
Per Share Impact ($) 3.26 1.11 1.52 -0.22
June 30, 2013 Price ($) 40.38 25.46 12.90 18.40
Per Share Impact (%) 8% 4% 12% 1%
In a World of US$80/t Iron Ore,
We Estimate That This Natural
Hedge Could Offset Valuation
Declines by, on Average, 6% of
June 30, 2013 Share Prices
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
143





Not All Iron Ores Were Created
Equal: The Stabilizing Effect of
Value in Use

Not all iron ores were created equal. This chapter examines the second "automatic
stabilizer" we have identified that would mitigate a part of the negative value
impact of a sustained iron ore price fall for the big Western miners: Value-in-Use
(VIU) and heterogeneity in iron ore products. The reference iron ore price is
typically the 62% Fe landed China (CIF) price the 62% grade is, of course,
chosen to be broadly representative of much of the high-quality volume supplied
into China from Australia and Brazil. However, a significant volume of Australian
material (particularly for Fortescue Metals Group, not covered) suffers a substantial
discount to the benchmark on the back of a lower Fe grade. Moreover, both Indian
and Iranian material are important components of the overall supply mix into China
(~10% of the total), and they also suffer a significant discount. This chapter
examines the effective premium and discount on iron ores landed into China by
region and by producer. We conclude that VIU offers a degree of automatic
stabilization to the iron ore price, should a sustained period of "oversupply" begin
to emerge. Furthermore, we expect the higher-quality producers to continue to
produce in a declining price environment for longer. We believe that a not
insubstantial portion of non-Chinese supply could become economically challenged
and be pulled back from the market, should the reference price of iron ore
experience sustained pressure. In a world where iron ore falls to US$80/t, we
estimate that Vale and Rio would experience the greatest benefits from this natural
hedge given their greater exposure to iron ore, while more diversified BHP and
Anglo would experience lesser impacts.
Not All Iron Ores Were Created Equal
In terms of geological abundance, iron ore is not scarce; it is the fourth most
abundant element in the Earth's crust, comprising ~5% of the total. However, to be
economically useful, the iron contained in iron ore must generally be 4-14x more
concentrated (so 20% and 70% Fe by mass) than the average geological abundance
(see Exhibit 222). While by no means rendering iron ore a scarce commodity, this
does make a considerable difference to the types of material that can be exploited in
the production of steel.
From a geological perspective, the story of economically viable iron ore begins
in the Mesoarchean era (3,200 million to 2,800 million years ago), with the
development of Banded Iron Formations (BIFs). The originally reducing
environment of the very early Earth's atmosphere was progressively converted into
an oxidizing (oxygen rich) atmosphere through the photosynthesis of blue-green
algae in the Earth's oceans.
41
The increasing levels of oxygen in the atmosphere
reacted with the iron dissolved in the Earth's oceans to form insoluble iron oxides.
As the levels of oxygen in seawater rose, the solubility of the iron oxides
decreased. Following this decrease in solubility, the oxides were precipitated out of
the seawater to form solid bands of iron-rich material. These bands were laid down
intermingled with layers of mud and clay resulting in the characteristic pattern as
shown in Exhibit 223. The iron-rich material is interwoven with silica-rich layers of

41
An atmospheric condition rich in reducing gases (e.g., hydrogen and carbon monoxide) in which oxygen and other oxidizing gases and vapors
are removed, thereby preventing oxidation.
VIU Offers a Degree of
Automatic Stabilization to the
Iron Ore Price, Should a
Sustained Period of
"Oversupply" Begin to Emerge;
in a World Where Iron Ore Falls
to US$80/t, This Stabilizer
Could Offset Valuation
Declines by, on Average, 7% of
June 30, 2013 Share Price for
Rio, BHP, Vale and Anglo
Iron Ore Is the Fourth Most
Abundant Element, Comprising
5% of the Earth's Crust by
Mass; However, Not All Iron
Ores Are Created Equal
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
144 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





flint and chert
42
to create BIFs. The second step in the generation of exploitable
iron ore was the enrichment of this basic BIF. This occurred through the leaching
out of the silica-rich layers, which led to concentration and further oxidation of the
iron ores that were left behind. The weathering of the BIFs over millions of years
effectively dissolved away the impurities to leave behind an enriched and
economically valuable form of iron ore. It is this iron ore that is mined today.
However, the process of weathering and enrichment of BIFs is complicated; the
multiplicity of geological processes at work means that there are large variations in
the material that can pass under the generic description of "iron ore."
A brief outline of some of the more important types of iron ore is given in
Exhibit 224. The maximum Fe grade occurs at ~70%. This corresponds to
chemically pure hematite or magnetite; at this degree of concentration, the residual
mass is the oxygen associated with the iron rather than any impurity of the ore. The
62% referred to in the Fe benchmark is equivalent to 88.6% pure hematite (i.e.,
62/70). It is the residual 11.4%, rather than 38%, that is non-iron bearing material.
As a further example of the point, we can take a single product such as
Vale's high-quality Standard Sinter Fines (SSF) and look at what other than iron
itself is actually in the iron ore (see Exhibit 225).

Exhibit 222 Rusting Granite in Peterborough, New Hampshire; During Pre-Industrial and Early
Industrial Periods, Local Blacksmiths Relied Upon "Bog Iron" and "Mountain Iron"
(Like the Below); While the Highest-Quality Deposit Reportedly Contained Ore of 56-
63%, the Grade Was Often Much Lower and Was Quickly Depleted in Concentrations
of Useful Economic Value
Note: A Gazetteer of the State of New-Hampshire (1823) by John Farmer and Jacob B. Moore noted that ore considered to be "the richest" in the
nation was "obtained from a mountain in the east part of Concord [changed to Lisbon in 1824]." By 1849, however, The American Railroad
Journal (vol. XXII, no. 609) noted that "The ores of New Hampshire, like those of Maine, are generally situated so that the expenses of
transportation have rendered them of little value. Only one furnace is in operation, at FranconiaThe furnace does but a small business, making
only two and a half tons of iron a day." This stone furnace (no longer in use) is the only surviving iron smelter in New Hampshire today.
Source: Bernstein.


42
A fine-grained silica-rich sedimentary rock that often contains small fossils.
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
145





Exhibit 223 Where All the EBITDA Began A Banded Iron Formation (BIF) Showing
Characteristic Layering Patterns of Iron Ore and Gangue Material
Source: Wikimedia Commons.

Exhibit 224 Not All Iron Ores Are Created Equal...
Source: Wikipedia and Bernstein analysis.


Ore Type Chemical Composition Max Fe
Magnetite Fe
3
O
4
72.4%
Martite Fe
3
O
4
.Fe
2
O
3
72.4% to 70.0%
Hematite Fe
2
O
3
70.0%
Limonite 2Fe
2
O
3
.3H
2
O 59.8%
Goethite FeO.OH 62.9%
Siderite FeCO
3
48.3%
Ilmenite FeO.TiO
2
36.8%
Pyrite FeS
2
46.7%
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
146 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 225 And There Is a Significant "Tail" of Non-Iron Material in Iron Ores, All of Which
Have a Value Implication

Source: IPCC and Bernstein analysis.

The purpose of this (very) brief geological digression was to make the point that
not all iron ores were created equal. The 62% benchmark may generate a false
impression of how homogenous and hence how commoditized iron ore is.
The reality is that a variety of materials can be classified as "iron ore," all of which
behave very differently in the blast furnace (BF). Consequently, each has a
different VIU for a steel maker. The most important feature is that it is as costly to
melt impurities as iron, and impurities yield no output benefit. Coke (the fuel
source in BF steel making) is consumed to melt non-iron material lost to slag.
Clearly, this is to the detriment of the steel maker.
Beyond wasting fuel, impurities also impact the resultant product. Many
residual elements have a further deleterious effect on either the quality of the pig
iron produced or the process of production. For example, phosphorous (P) renders
steel brittle at low temperatures and so must be removed by a process of hot metal
de-phosphorization, which incurs a cost. Alkali metals (K and Na) attack the
refractory lining of the blast furnace, reducing campaign life as well as the strength
of coke and pellets, and so lower overall productivity.
From an economic perspective, inclusion of a VIU adjustment into any cost
curve tends to increase the marginal cost of production, thus putting upward
pressure on the commodity's price. The removal of homogeneity in a commodity
industry has, in some sense, a "de-commoditizing" effect ceteris paribus, it
increases the margin for advantaged players at the expense of those with
disadvantaged ore assets (in the case of iron ore, a low Fe, high-contaminant
profile). To the extent that these disadvantaged players are required to satisfy
market demand, then the cost of the "benchmark" product must be high enough so
that, once adjusted for VIU, it is still economic for their product to remain in the
market.

Chemical Mass (% Wt)
Fe 64.50%
SiO
2 4.50%
Al
2
O
3 3.50%
Mn 0.150%
LOI (Loss on Ignition) 0.800%
P 0.027%
SiO
2 0.007%
Na
2
O 0.015%
K
2
O 0.008%
TiO
2 0.080%
CaO 0.020%
MgO 0.030%
From an Economic
Perspective, Inclusion of a VIU
Adjustment Into a Cost Curve
Tends to Increase the Marginal
Cost of Production, Thus
Putting Upward Pressure on
the Commodity's Price
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
147





VIU as an Automatic Stabilizer
China is the worlds largest consumer of iron ore. In 2012, the Middle Kingdom
accounted for 56% of global demand but produced just 13% of global supply.
Australia and Brazil are the most important importers of iron ore to China (46%
and 22% of 2012 imports, respectively, a proportion which has remained relatively
constant over time) see Exhibit 226 and Exhibit 227. The ore imported to satisfy
this 42% gap between production and demand is of varying quality. Ore imported
in March of this year, for example, ranges from 52% to 67% (see Exhibit 228).
While this may not sound like a wide range, it is worth bearing in mind that the
range is 3x the average concentration of iron ore in the Earths crust (5%). It is
further worth considering that, as 70% is the maximum Fe grade, this range spans
the equivalent of 74-96% pure hematite, with "impurities" ranging from 4% to
26%. These varying ores with their different grades and types of impurities, of
course, command different premiums or discounts to the benchmark 62% Fe price
(see Exhibit 229).
Unsurprisingly, iron ore grade accounts for 93% of the price variation (see
Exhibit 230); the lowest grade imported (52%) commanded the greatest discount at
33%, while the highest grade imported (67%) commanded a 21% premium.
However, even after adjusting for Fe grade, poorer-quality ores still command a
significant discount (see Exhibit 231 through Exhibit 234). As a result, when the
benchmark price of iron ore declines, exporters of poor-quality, low-grade iron ore
into China can be expected to drop out faster than exporters of high-quality, high-
grade iron ore. This functions like an automatic stabilizer, providing support not
only to the iron ore price (thus slowing its rate of decline) but also to valuations of
exporters from higher-quality deposits.

Exhibit 226 While Australia and Brazil Are the Most
Important Suppliers Into China, They
Account for Only ~70% of the Total Non-
Chinese Portion of Supply

Exhibit 227 The Overall Market Shares of Brazil and
Australia Have Remained Roughly Constant
Over Time; Perhaps This Indicates an
Understanding from Incumbents That
Competing on Volume in Commodity
Markets Is Value Destructive
Source: Bloomberg L.P. and Bernstein analysis. Source: Bloomberg L.P. and Bernstein analysis.

46%
22%
5%
4%
2%
2%
2%
2%
15%
China Iron Ore Imports by Origin
Aus Brazil SA India Iran
Canada Ukraine Russia Other
0%
10%
20%
30%
40%
50%
60%
J
a
n
-
0
4
A
u
g
-
0
4
M
a
r
-
0
5
O
c
t
-
0
5
M
a
y
-
0
6
D
e
c
-
0
6
J
u
l
-
0
7
F
e
b
-
0
8
S
e
p
-
0
8
A
p
r
-
0
9
N
o
v
-
0
9
J
u
n
-
1
0
J
a
n
-
1
1
A
u
g
-
1
1
M
a
r
-
1
2
O
c
t
-
1
2
Share of Chinese Iron Ore Imports
Australia Share of Imports Brazil Share of Imports
The Price Paid for Iron Ore
Imported Into China Varies
Considerably; This Acts Like
an Automatic Stabilizer in a
Falling Price Environment,
Providing Support Not Only to
the Iron Ore Price But Also to
Producers of High-Quality
Product
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
148 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 228 There Is a Considerable Variation in the Observed Grade of Iron Ore Landed Into
China It Is Still Far from Being a Homogeneous Product
Source: BAIINFO and Bernstein analysis.

Exhibit 229 An Analysis of 208 Pricing Points Shows a Significant Range of Variation Around the
Benchmark 62% CIF Price Point
Source: BAIINFO and Bernstein analysis.

50%
52%
54%
56%
58%
60%
62%
64%
66%
68%
Australia Brazil Chile India Iran Malaysia Mexico Russia South
Africa
Ukraine
F
e

G
r
a
d
e
Distribution of Observed Iron Ore Grades Landed in China During March
R = 0.7734
-40
-30
-20
-10
0
10
20
30
50% 52% 54% 56% 58% 60% 62% 64% 66% 68%
I
r
o
n

O
r
e

P
r
e
m
i
u
m

v
s
.

B
e
n
c
h
m
a
r
k

U
S
$
/
t
Fe Grade of Iron Ore
Price Impact of Quality in Iron Ore
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
149





Exhibit 230 Unsurprisingly, Fe Grade Explains Most of
the Variation in Price

Exhibit 231 Nevertheless, Even After Adjusting for Fe
Grade, Poor Ores Suffer a Significant
Discount
Source: BAIINFO and Bernstein analysis. Source: BAIINFO and Bernstein analysis.


Exhibit 232 This Is True Across Australian Iron Ores...

Exhibit 233 ...As Well as Those from India
Source: BAIINFO and Bernstein analysis. Source: BAIINFO and Bernstein analysis.

R = 0.9294
-40
-30
-20
-10
0
10
20
30
50% 55% 60% 65% 70%
P
r
e
m
i
u
m

U
S
$
/
t
Fe Grade
Average Premium (US$/t)
R = 0.6298
-25
-20
-15
-10
-5
0
5
10
15
20
50% 55% 60% 65% 70%
P
r
e
m
i
u
m

U
S
$
/
t
Fe Grade
Average Premium (US/Dmtu)
R = 0.9084
-20
-15
-10
-5
0
5
10
15
20
50% 55% 60% 65%
P
r
e
m
i
u
m

U
S
$
/
t
Fe Grade
Premium for Australian Ore
R = 0.9938
-40
-35
-30
-25
-20
-15
-10
-5
0
5
50% 55% 60% 65%
P
r
e
m
i
u
m

U
S
$
/
t
Fe Grade
Premium for Indian Ore
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
150 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 234 There Is a US$46/t Differential Across Ores from Different Supply Locations
Source: BAIINFO and Bernstein estimates and analysis.
Impact for Our Coverage
There is US$25/t of iron ore differential across the majors importing into China,
with Fortescue Metals Group (not covered) at the low end of the range and Anglo
American at the high end (see Exhibit 235). Assuming that 50% of the quality-
disadvantaged material moves out of the market as prices begin to fall, VIU
stabilizer can be expected to provide ~US$5/t of offsetting upward price support
(see Exhibit 236). We estimate that Vale and Rio would experience the greatest
benefits (equivalent to 11% and 9% of June 30, 2013 share prices), while more
diversified BHP and Anglo experience 4% and 6% offsets, respectively.

Exhibit 235 Across the "Major" Space, There Is a US$25/t Differential
Source: BAIINFO and Bernstein estimates and analysis.

35
10
15
30
10
5
0
5
0 5 10 15 20 25 30 35 40 45 50
20
15
25
55
Iran
Malaysia
46
SA
Chile
Ukraine Brazil Mexico Russia Aus India
AverageMonthly ImportstoChina Mt
P
r
e
m
i
u
m

P
a
i
d

i
n

C
h
i
n
a

U
S
$
/
t
8
6
4
650
2
2
4
550
6
600
8
12
14
350 400 450 500 700 750 800 850
12
0
10
0 50 100 150 200 250 300
10
BHPB Rio Vale FMG
25
Anglo
AnnualProduction byMajors Mt
P
r
e
m
i
u
m

P
a
i
d

i
n

C
h
i
n
a

U
S
$
/
t
In a World of US$80/t Iron Ore,
VIU Automatic Stabilizer Could
Offset Valuation Declines by,
on Average, 7% of June 30,
2013 Share Prices
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
151





Exhibit 236 Assuming That 50% of the Quality-Disadvantaged Material Moves Out of the Market
as Price Begins to Fall, It Can Be Expected to Provide ~US$5/t of Offsetting Upward
Price Support, Adding, on Average, $1.75/Share Across Our Coverage (as of June 30,
2013 Prices)
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.
VIU Impact Rio BHP Vale Anglo
Average $ Cost 32.7 42.5 40.0 49.1
Margin Uplift per Ton ($) 5.4 5.4 5.4 5.4
Tons Produced 2012 (kt) 246,831 161,149 303,443 49,137
Current EV/EBITDA 5.0 5.8 4.6 5.0
EV Impact ($m) 6,583 5,010 7,457 1,330
Per Share Impact ($) 3.56 0.94 1.46 1.04
June 30th, 2013 Price ($) 40.38 25.46 12.90 18.40
Per Share Impact (%) 9% 4% 11% 6%
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
152 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE






For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
153





If Prices Fall While Capital Stock Is
Accumulating, Demand Accelerates:
The Demand Elasticity Stabilizer

This chapter examines the third and final "automatic stabilizer" we have identified
that would mitigate a part of the negative value impact of a sustained iron ore price
fall for the big Western miners: the elasticity of demand for iron ore. Chinese steel
making has seen its EBITDA margins cut by ~70% over the last decade on the back
of rising raw material prices (iron ore CAGR 26%, PCI and coking coal CAGR
14%) and essentially stagnant steel prices (1% local currency CAGR, 4% USD
CAGR). Commodity price escalation has driven steel making from being highly
profitable to break even. We believe that this decline coincides with (or rather is
instrumental in causing) the declines in Chinese steel production growth (down
from ~20% p.a. 10 years ago to the ~6% p.a. seen today). However, steel capital
stock in China is still only around one-third the level of that in the West, and the
urbanization and industrialization of China remains far from complete. It is
inconsistent to believe that China is undergoing a period of ongoing capital stock
accumulation, while also believing that iron ore prices would fall as a consequence
of low Chinese steel growth. Consequently, if iron ore prices were low for a
sustained period of time on the back of an "oversupplied" market, demand would
rise, which would itself unwind some of the apparent "oversupply." Compared to
consensus expectations of a long-term iron ore price of 80US$/t, we believe that
this feedback loop could generate long-term iron ore prices some 15US$/t higher
than would otherwise be the case. This would see demand-supply equilibrium
restored at a level closer to US$95/t. We estimate that Vale and Rio would
experience the greatest benefits from this natural hedge, given their greater
exposure to iron ore, while more diversified BHP and Anglo would experience
lesser impacts.
China's Industrialization and Demographics A Recap
According to our supply and demand overview discussed in the "Iron Ore 'Super-
Cycle' Pricing Generated by High-Cost Producers Responding to the Rapidity of
China's Industrialization" chapter, through months of data gathering, we assembled
a database covering the consumption of metals and economic output for 120
countries since 1900. Our iron ore demand framework looks at two distinct
components: the level of installed stock (here, cumulative steel intensity, i.e., total
historical steel installed in an economy less depreciation) and the rate of steel
consumption (here, current steel intensity). We look at both of these on a per-
capita basis against GDP per capita, which enables us to account for not only the
stage of industrialization (and output generation) of a given economy but also its
importance to the overall global steel (and hence iron ore) consumption.
Industrializing and industrialized economies move through three distinct phases of
their rate of steel consumption (see Exhibit 237). The same three phases in the rate
of steel consumption are repeated across industrialized and industrializing countries
in our dataset. We categorize them as "Development," "Peak" and
"Decline/Services." Furthermore, three paradigms emerge for the evolution of the
level of steel consumption across countries that have industrialized (or attempted
to). Two of these paradigms are successful ("Services and Technology,"
exemplified by the U.S. and the U.K., and "Manufacturing," exemplified by
If Iron Ore Prices Were
Continuously Low on the Back
of an "Oversupplied" Market,
Demand Would Rise, Which
Would Itself Unwind Some of
the Apparent "Oversupply";
This Automatic Stabilizer
Could Offset Valuation
Declines by, on Average, 20%
of the June 30, 2013 Share
Prices for Vale, Rio, BHP and
Anglo
Far from Being Overbuilt,
China Resembles the U.S. in
the 1930s, Has Just One-Third
the per Capita Level of
Embedded Steel as the Present
Day U.S. and Is Facing
Tremendous Pressure to
Industrialize Before Its Old-Age
Dependency Ratio Skyrockets
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
154 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Germany and Japan), while one is not sustainable ("Inefficient," exemplified by the
former USSR).
The 120 countries in our dataset display a strongly correlated relationship (R-
squared = 66%) between levels of installed capital and GDP. Furthermore, and
perhaps more importantly, as the outliers can be explained by individual economic
circumstances (e.g., manufacturing hubs or endowment with oil), this framework
generates a powerful predictive tool for looking at the sustainability of the current
and future demand in the context of historical development. Our framework shows
that Chinese steel demand (46% of 2012 finished steel demand globally) is on a
sustainable path. Chinas current steel intensity ("rate") is consistent with its stage
of industrialization. It shows China transitioning from Phase 2 (peak) to Phase 3
(services) at a rate commensurate with that seen elsewhere. This is not a "structural
shift" so much as a natural development to an economic state that is less steel
intensive. To highlight the sustainability of China's demand, we would call
attention to the fact that the economic activity of every person in the U.S. (or any
other developed country) is supported by an installed capital base comprising 80kg
of copper and 12,000kg of steel well more than double the current capital stock
in China (26kg of copper and 4,500kg of steel per capita).
Furthermore, as discussed in the "If China Is to Grow Rich Before It Grows
Old, It Must Finish Industrializing in the Next Decade" chapter, a legacy of the
"one child" policy is that China's aging population resembles an industrialized
nation's demographics. However, it is supported by only a pre-industrial level of
output. By 2020, China's working-age population will have peaked at close to 1
billion people. Over the next generation, 260 million people will leave the Chinese
labor force, leading to a 90% increase in the old-age dependency ratio (see Exhibit
238). While such demographic challenges are not new, they have hitherto been
associated with industrial rather than agrarian economies. By the time Japan's
working population started to decline at the end of the 1990s, the country had an
installed capital stock equivalent to nearly 14,000kg of steel per capita. With
China's current capital stock standing at 4,500kg, our demand projections anticipate
that this will approach 10,000kg by the time China's population starts to age
dramatically (2020). In this regard, it is important to note that there is an important
distinction between high young-age and old-age dependency ratios.
Young-age dependency ratio = investment. I feed my children today on the
expectation that in the future they will feed not only themselves but will generate
a surplus that will enable me to consume. The resources that are allocated toward
a society's children are the quintessential investment in the future productive
capacity of that society.
Old-age dependency ratio = consumption. Other than the social and moral
imperative, it is not clear why I would want to feed granny. There is no hope that
feeding granny will ever pay for itself. Allocating resources to the non-productive
members of society can never generate a return in excess of the resources that are
thereby consumed.
This is not an attempt to make any far-reaching social point. We emphasize
that, from an economic perspective, one form of dependency ratio is "affordable" in
the sense of offering a future return, while the other is not. If a society wishes to
move to a gerontocracy, the imperative is to make sure that there is a level of
productive capacity high enough to withstand the necessary intergenerational
redistribution of the calls on that capacity without triggering social unrest.

For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
155





Exhibit 237 Following the Same Three-Phase Trajectory for the Evolution of the Steel
Consumption Rate Within All Industrialized and Industrializing Countries, China's
Steel Intensity Has Passed from "Development" Through "Peak" and Is Now in
"Decline"; the Steady State Rate of Consumption, Once the Process Is Completed,
Will Be Determined by Whether the Economy, Once Mature, Adopts a More
Manufacturing- or Services-Oriented Focus
Source: WSA, IMF, Mitchell and Bernstein estimates and analysis.



0
10
20
30
40
50
60
70
80
0 5 10 15 20 25 30 35 40 45 50
S
t
e
e
l

I
n
t
e
n
s
i
t
y

(
k
g
/
$
'
0
0
0

G
D
P
)
Output GDP/Capita $'000 (Real 2005 PPP)
Trend Steel Intensity Evolution
France USA China Japan South Korea China Actual
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
156 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 238 In 2000, China Represented a Clear Outlier from the Normal Pattern: the World's
Largest Country Was Set to Age Rapidly and Yet Was Still at a Pre-Industrial Level of
Output; by 2020, China's Working-Age Population Will Have Peaked; Over the Next
Generation, 260 Million People Will Leave the Chinese Labor Force, Leading to a 90%
Increase in the Old-Age Dependency Ratio
Source: UN and Bernstein estimates and analysis.

-10
0
10
20
30
40
50
60
-50 -40 -30 -20 -10 0 10
G
D
P
/
C
a
p
i
t
a

U
S
$
'
0
0
0
Change in Old-Age Dependency Ratio 2000-2040 Negative Indicates Aging Population
Aging of Population vs. Development of Economy Including China
Size of Bubble = Population
USA
Japan
China
South
Korea
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
157





Lower Iron Ore Price as a Stimulus for Chinese Steel Making
Over the last decade, the Chinese domestic price of steel has grown at a CAGR of
1% (4% in USD terms), while its input costs have risen at, on average, 8.5%. In
USD terms, iron ore costs have had a CAGR of 26% over the period, while for both
PCI and coking coal the CAGR has been 14% (see Exhibit 239 through Exhibit
243). As a result, raw material input costs per ton of steel have risen from less than
US$100/t in 2003 to more than US$300/t today (see Exhibit 244) and comprise
nearly three-fourths of the overall costs of steel making (see Exhibit 245 and
Exhibit 246). The rising input costs, combined with more slowly rising steel prices
over the last decade, have, unsurprisingly, seen steel-making EBITDA margins cut
to one-third of their previous levels from an average of 62% in 2003 to 21% by
the end of 1Q:13 (see Exhibit 247) and profit margins all but wiped out.
While at first glance Chinese crude steel production appears to have grown
steadily (see Exhibit 248), this belies the fact that steel production growth has been
declining. Concurrent with the rising input cost pressures, the annualized crude
steel production growth has declined from ~20% to ~6% (see Exhibit 249 and
Exhibit 250). The correlation between steel growth and steel profitability has an R-
squared of 52% (see Exhibit 251).

Exhibit 239 Over the Last 10 Years, the Domestic Steel
Price in China Has Been Remarkably
Constant...

Exhibit 240 ...Whereas the Price of Raw Materials Has
Accelerated Sharply; It Is True for All
Iron Ore...
Source: Bloomberg L.P. and Bernstein analysis. Source: Bloomberg L.P., IMF and Bernstein analysis.

0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
J
a
n
-
0
3
S
e
p
-
0
3
M
a
y
-

J
a
n
-
0
5
S
e
p
-
0
5
M
a
y
-

J
a
n
-
0
7
S
e
p
-
0
7
M
a
y
-

J
a
n
-
0
9
S
e
p
-
0
9
M
a
y
-

J
a
n
-
1
1
S
e
p
-
1
1
M
a
y
-

J
a
n
-
1
3
H
R
C

R
M
B
/
t
Chinese Domestic Steel Price
0
20
40
60
80
100
120
140
160
180
200
J
a
n
-
0
3
S
e
p
-
0
3
M
a
y
-
0
4
J
a
n
-
0
5
S
e
p
-
0
5
M
a
y
-
0
6
J
a
n
-
0
7
S
e
p
-
0
7
M
a
y
-
0
8
J
a
n
-
0
9
S
e
p
-
0
9
M
a
y
-
1
0
J
a
n
-
1
1
S
e
p
-
1
1
M
a
y
-
1
2
J
a
n
-
1
3
U
S
$
/
t
Iron Ore Price
In the West, a Negative Step
Change in Steel Demand
Growth Occurred Only Once
Urbanization Was Complete;
We Believe That If the Price of
Iron Ore Were to Fall, the
Demand for Steel Would Rise
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
158 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 241 ...Key Fuel and Reductants Used in Steel
Making HCC...

Exhibit 242 ...And Its Replacement PCI
Source: CRU and Bernstein analysis. Source: CRU and Bernstein analysis.

Exhibit 243 The Rise in Iron Ore Price Has Done the Most to Increase the Costs of Chinese Steel
Production, Reflecting a Transfer of Value from the Chinese Industrial Sector to the
Western-Owned Miners
Source: AME, CRU, IMF and Bernstein analysis.

0
50
100
150
200
250
300
350
J
a
n
-
0
3
A
u
g
-
0
3
M
a
r
-
0
4
O
c
t
-
0
4
M
a
y
-
0
5
D
e
c
-
0
5
J
u
l
-
0
6
F
e
b
-
0
7
S
e
p
-
0
7
A
p
r
-
0
8
N
o
v
-
0
8
J
u
n
-
0
9
J
a
n
-
1
0
A
u
g
-
1
0
M
a
r
-
1
1
O
c
t
-
1
1
M
a
y
-
1
2
D
e
c
-
1
2
U
S
$
/
t
Hard Coking Coal (HCC) Price
0
50
100
150
200
250
300
J
a
n
-
0
3
S
e
p
-
0
3
M
a
y
-
0
4
J
a
n
-
0
5
S
e
p
-
0
5
M
a
y
-
0
6
J
a
n
-
0
7
S
e
p
-
0
7
M
a
y
-
0
8
J
a
n
-
0
9
S
e
p
-
0
9
M
a
y
-
1
0
J
a
n
-
1
1
S
e
p
-
1
1
M
a
y
-
1
2
J
a
n
-
1
3
U
S
$
/
t
PCI Price
26%
14% 14%
6%
5%
5%
4%
4%
3% 3%
Iron Ore
Cost
PCI Cost Coking Coal
Cost
Steel
Making
Iron Making Sintering Admin &
Support
Rolling Casting &
Ref ining
Coke
Making
C
A
G
R
Chinese Steel-Making Cost Escalation (CAGR 2003-2013)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
159





Exhibit 244 Raw Materials Fed Into Steel Making Used to Cost Less Than 100US$/t; It Is Now Well
Over 300US$/t
Source: AME, CRU, IMF and Bernstein analysis.

Exhibit 245 Currently, the Raw Material Cost of Steel
Making Accounts for Nearly Three Quarters
of the Overall Costs in China

Exhibit 246 There Has Also Been a Slower, But
Nonetheless Pronounced Rise in the Non-
Raw Materials Costs of Steel Making in
China
Source: AME, CRU, IMF and Bernstein analysis. Source: AME and Bernstein analysis.

0
100
200
300
400
500
600
J
a
n
-
0
3
M
a
y
-
0
3
S
e
p
-
0
3
J
a
n
-
0
4
M
a
y
-
0
4
S
e
p
-
0
4
J
a
n
-
0
5
M
a
y
-
0
5
S
e
p
-
0
5
J
a
n
-
0
6
M
a
y
-
0
6
S
e
p
-
0
6
J
a
n
-
0
7
M
a
y
-
0
7
S
e
p
-
0
7
J
a
n
-
0
8
M
a
y
-
0
8
S
e
p
-
0
8
J
a
n
-
0
9
M
a
y
-
0
9
S
e
p
-
0
9
J
a
n
-
1
0
M
a
y
-
1
0
S
e
p
-
1
0
J
a
n
-
1
1
M
a
y
-
1
1
S
e
p
-
1
1
J
a
n
-
1
2
M
a
y
-
1
2
S
e
p
-
1
2
J
a
n
-
1
3
U
S
$
/
t
Chinese Steel-Making Raw Materials Cost
Iron Ore Cost Coking Coal Cost PCI Cost
45%
21%
3%
31%
Steel Making Costs by Element (2013)
Iron Ore Cost Coking Coal Cost PCI Cost Other Costs
55
40
35
24
27
14
15
9
11
7
7
4
2
2
2013 2003
U
S
$
/
t

S
t
e
e
l
Non-Raw Material Cost of Steel
Making
Casting & Ref ining Rolling Steel Making
Iron Making Admin & Support Sintering
Coke Making
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
160 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 247 Unsurprisingly, Margins in the Chinese Steel-Making Industry Have Declined on the
Back of Higher Raw Material Prices
Source: AME, CRU, IMF and Bernstein analysis.

Exhibit 248 While, at First Glance, the Growth in Chinese Steel Production Appears Monotonic...
Source: Bloomberg L.P., AME, CRU, IMF and Bernstein analysis.


0%
10%
20%
30%
40%
50%
60%
70%
80%
J
a
n
-
0
3
M
a
y
-
0
3
S
e
p
-
0
3
J
a
n
-
0
4
M
a
y
-
0
4
S
e
p
-
0
4
J
a
n
-
0
5
M
a
y
-
0
5
S
e
p
-
0
5
J
a
n
-
0
6
M
a
y
-
0
6
S
e
p
-
0
6
J
a
n
-
0
7
M
a
y
-
0
7
S
e
p
-
0
7
J
a
n
-
0
8
M
a
y
-
0
8
S
e
p
-
0
8
J
a
n
-
0
9
M
a
y
-
0
9
S
e
p
-
0
9
J
a
n
-
1
0
M
a
y
-
1
0
S
e
p
-
1
0
J
a
n
-
1
1
M
a
y
-
1
1
S
e
p
-
1
1
J
a
n
-
1
2
M
a
y
-
1
2
S
e
p
-
1
2
J
a
n
-
1
3
H
R
C

E
B
I
T
D
A

M
a
r
g
i
n
Chinese Steel-Making Margin
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
J
a
n
-
0
3
M
a
y
-
0
3
S
e
p
-
0
3
J
a
n
-
0
4
M
a
y
-
0
4
S
e
p
-
0
4
J
a
n
-
0
5
M
a
y
-
0
5
S
e
p
-
0
5
J
a
n
-
0
6
M
a
y
-
0
6
S
e
p
-
0
6
J
a
n
-
0
7
M
a
y
-
0
7
S
e
p
-
0
7
J
a
n
-
0
8
M
a
y
-
0
8
S
e
p
-
0
8
J
a
n
-
0
9
M
a
y
-
0
9
S
e
p
-
0
9
J
a
n
-
1
0
M
a
y
-
1
0
S
e
p
-
1
0
J
a
n
-
1
1
M
a
y
-
1
1
S
e
p
-
1
1
J
a
n
-
1
2
M
a
y
-
1
2
S
e
p
-
1
2
J
a
n
-
1
3
C
r
u
d
e

S
t
e
e
l

k
t
Chinese Monthly Crude Steel Production
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
161





Exhibit 249 ...This Belies a Marked Slowdown in Chinese Steel Production Rates from ~20% at
the Start of the Last Decade to Closer to 6% Today, Concurrent With the Declining
Steel-Making Margins
Source: Bloomberg L.P. and Bernstein analysis.

Exhibit 250 Growth and Profitability Declined Concurrently
Source: Bloomberg L.P., AME, CRU, IMF and Bernstein analysis.

-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
J
a
n
-
0
5
A
p
r
-
0
5
J
u
l
-
0
5
O
c
t
-
0
5
J
a
n
-
0
6
A
p
r
-
0
6
J
u
l
-
0
6
O
c
t
-
0
6
J
a
n
-
0
7
A
p
r
-
0
7
J
u
l
-
0
7
O
c
t
-
0
7
J
a
n
-
0
8
A
p
r
-
0
8
J
u
l
-
0
8
O
c
t
-
0
8
J
a
n
-
0
9
A
p
r
-
0
9
J
u
l
-
0
9
O
c
t
-
0
9
J
a
n
-
1
0
A
p
r
-
1
0
J
u
l
-
1
0
O
c
t
-
1
0
J
a
n
-
1
1
A
p
r
-
1
1
J
u
l
-
1
1
O
c
t
-
1
1
J
a
n
-
1
2
A
p
r
-
1
2
J
u
l
-
1
2
O
c
t
-
1
2
J
a
n
-
1
3
A
n
n
u
a
l
i
z
e
d

T
w
o
-
Y
e
a
r

M
o
M

C
A
G
R
Crude Steel Production Growth Rate
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
J
a
n
-
0
5
A
p
r
-
0
5
J
u
l
-
0
5
O
c
t
-
0
5
J
a
n
-
0
6
A
p
r
-
0
6
J
u
l
-
0
6
O
c
t
-
0
6
J
a
n
-
0
7
A
p
r
-
0
7
J
u
l
-
0
7
O
c
t
-
0
7
J
a
n
-
0
8
A
p
r
-
0
8
J
u
l
-
0
8
O
c
t
-
0
8
J
a
n
-
0
9
A
p
r
-
0
9
J
u
l
-
0
9
O
c
t
-
0
9
J
a
n
-
1
0
A
p
r
-
1
0
J
u
l
-
1
0
O
c
t
-
1
0
J
a
n
-
1
1
A
p
r
-
1
1
J
u
l
-
1
1
O
c
t
-
1
1
J
a
n
-
1
2
A
p
r
-
1
2
J
u
l
-
1
2
O
c
t
-
1
2
J
a
n
-
1
3
S
t
e
e
l

G
r
o
w
t
h
S
t
e
e
l

E
B
I
T
D
A

M
a
r
g
i
n
Chinese Steel Growth and Profitability Since 2005
Margin, % Annualized Growth
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
162 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 251 We Believe That a Significant Part of the Slowdown in Chinese Steel Growth
Resulted from High Commodity Prices; the West Experienced a Step Change in Steel
Demand Growth Only After Urbanization Was Complete; However, This Is Far from
Complete in China, Combined With the Imminent Demographic Shift Enables Us to
Conclude That in the Presence of Falling Iron Price, Steel Demand Would Rise
Source: AME, CRU, IMF and Bernstein analysis.

While it is clear that correlation does not necessarily imply causation, we
believe that a significant part of the slowdown in Chinese steel growth was a result
of the budgetary constraint imposed by high commodity prices. In the West, a
negative step change in steel demand growth occurred only once urbanization was
complete. Urbanization is far from complete in China. Consequently, we believe
that if the price of iron ore were to fall, the demand for steel would rise
(particularly bearing in mind the hard stop the demographic shift in China is
imposing upon the industrialization process). Consequently, we believe that it is
incorrect to interpret the step change seen in OECD steel demand growth post the
1970s' oil shocks as representative of the situation in China today. By the time the
OECD-trend steel demand declined, urbanization was complete, and this is not the
case in China today. Rather, when China "unleashed" the forces of private
enterprise at the turn of the century, it enabled the industry to actively chase the
enormous profitability that was available as a consequence of combining the
productivity of large blast furnaces with the vast pools of surplus Chinese labor and
the availability of incredibly cheap iron ore on the international commodity
markets. As commodity prices re-equilibrated themselves, this excess return was
passed from Chinese steel makers on to Australian (and Brazilian) iron ore
producers. The effect of this is, naturally enough, to reduce the incentive to grow
steel output, while increasing the incentive to grow iron ore output. To the extent
that the incumbent iron ore producers wish to unwind the structural advantage they
currently possess through continuing the poorly thoughtout strategy of value-
destructive capital profligacy, they have at least this one consolation: lowering the
price of iron ore ought to encourage a higher level of Chinese demand.
A complicating factor in the analysis of steel elasticity is the effect of Chinese
monetary stimulus of 2009. A strong relationship exists between lagged steel
growth and the growth in the money supply (R-squared = 55%) see Exhibit 252
through Exhibit 254. If one strips out the effect of Chinese monetary stimulus in
2009, the correlation between steel growth and EBITDA margin increases (R-
R = 0.5187
-5%
0%
5%
10%
15%
20%
25%
30%
35%
0% 10% 20% 30% 40% 50% 60% 70% 80%
A
n
n
u
a
l
i
z
e
d

S
t
e
e
l

G
r
o
w
t
h

R
a
t
e
Chinese Steel EBITDA Margin
Chinese Steel Growth vs. Chinese Steel Profitability
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
163





squared = 67%) see Exhibit 255 and Exhibit 256. Stripping out the effect of M2
growth suppresses the steel growth rate that one would associate with any given
industry profitability. Consequently, as well as increasing the overall correlation,
stripping out government stimulus embeds a level of conservatism in the forward-
looking counterfactual demand growth that we calculate for the falling iron ore
price scenario. A further level of conservatism is factored in by allowing for a
declining steel price in our analysis (down to an HRC price of US$600/t), which
reflects the expectation of continuing steel price declines on the back of sustained
"oversupply" in steel. On the other hand, were the steel price to stay higher than
this, the effect would be to further improve the profitability (and growth) of the
Chinese steel industry.

Exhibit 252 A Complicating Factor in the Analysis Steel
Elasticity Is the Effect of Chinese Monetary
Stimulus in 2009

Exhibit 253 There Is a Strong Relationship Between
Lagged Steel Growth and the Growth in the
Supply of Money...

Source: Bloomberg L.P. and Bernstein analysis. Source: Bloomberg L.P. and Bernstein analysis.

Exhibit 254 ...We Strip This Effect Out of the Analysis of Steel Demand Growth...
Source: Bloomberg L.P. and Bernstein analysis.

0%
5%
10%
15%
20%
25%
30%
35%
J
a
n
-
0
7
J
u
n
-
0
7
N
o
v
-
0
7
A
p
r
-
0
8
S
e
p
-
0
8
F
e
b
-
0
9
J
u
l
-
0
9
D
e
c
-
0
9
M
a
y
-
1
0
O
c
t
-
1
0
M
a
r
-
1
1
A
u
g
-
1
1
J
a
n
-
1
2
J
u
n
-
1
2
N
o
v
-
1
2
M
2

Y
o
Y

S
u
p
p
l
y

G
r
o
w
t
h
Chinese Money Supply
0%
5%
10%
15%
20%
25%
0%
5%
10%
15%
20%
25%
30%
35%
J
a
n
-
0
9
A
p
r
-
0
9
J
u
l
-
0
9
O
c
t
-
0
9
J
a
n
-
1
0
A
p
r
-
1
0
J
u
l
-
1
0
O
c
t
-
1
0
J
a
n
-
1
1
A
p
r
-
1
1
J
u
l
-
1
1
O
c
t
-
1
1
S
t
e
e
l
M
2
M2 and Lagged Steel
M2 Growth Steel Growth
R = 0.5537
0%
5%
10%
15%
20%
25%
0% 10% 20% 30% 40%
L
a
g
g
e
d

S
t
e
e
l

G
r
o
w
t
h
M2 Supply Growth
Chinese Money Supply vs. Steel
Growth
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
164 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 255 ...The Effect of This Would Be to Lower the Level of Steel Production for Any Given
Profitability...
Source: Bloomberg L.P., AME, CRU, IMF and Bernstein estimates and analysis.

Exhibit 256 ...Which Increases the Strength of the Relationship
Source: AME, CRU, IMF and Bernstein analysis.


-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
J
a
n
-
0
5
A
p
r
-
0
5
J
u
l
-
0
5
O
c
t
-
0
5
J
a
n
-
0
6
A
p
r
-
0
6
J
u
l
-
0
6
O
c
t
-
0
6
J
a
n
-
0
7
A
p
r
-
0
7
J
u
l
-
0
7
O
c
t
-
0
7
J
a
n
-
0
8
A
p
r
-
0
8
J
u
l
-
0
8
O
c
t
-
0
8
J
a
n
-
0
9
A
p
r
-
0
9
J
u
l
-
0
9
O
c
t
-
0
9
J
a
n
-
1
0
A
p
r
-
1
0
J
u
l
-
1
0
O
c
t
-
1
0
J
a
n
-
1
1
A
p
r
-
1
1
J
u
l
-
1
1
O
c
t
-
1
1
J
a
n
-
1
2
A
p
r
-
1
2
J
u
l
-
1
2
O
c
t
-
1
2
J
a
n
-
1
3
S
t
e
e
l

G
r
o
w
t
h
S
t
e
e
l

E
B
I
T
D
A

M
a
r
g
i
n
Chinese Steel Growth and Profitability Since 2005
Margin, % Annualized Growth Steel Growth Ex-Monetary Growth
R = 0.6679
-5%
0%
5%
10%
15%
20%
25%
30%
35%
0% 10% 20% 30% 40% 50% 60% 70% 80%
S
t
e
e
l

G
r
o
w
t
h
Steel EBITDA Margin
Chinese Steel Growth Ex-Impact of M2 Growth
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
165





Impact on Our Coverage Valuation
Accepting that the Chinese government is industrializing China as fast as it can,
thanks to demographic pressures (and from the equivalent of a capital stock base
akin to that of the U.S. in the 1930s), and seeing the margin compression that has
occurred in the steel industry, as iron ore prices (and other inputs) have risen over
the last decade, mean accepting that falling iron ore prices would lead to increased
steel growth. In a world where iron ore falls to $80/t, we estimate this reduced cost
pressure would increase steel trend growth rates by 3% an increase in demand,
which, we estimate, would in fact push iron ore price back up to $95/t (see Exhibit
257 and Exhibit 258).
Companies with the highest iron ore exposure would of course benefit the
most; we estimate the offset for Vale would be the equivalent of 31% of its June
30, 2013 share price, Rio 24%, Anglo 16%, and BHP 10% (see Exhibit 259).

Exhibit 257 It Is Inconsistent to Simultaneously Believe That Iron Ore Prices Would Fall as a
Consequence of Low Chinese Steel Growth and That China Is Undergoing a Period
of Ongoing Capital Stock Accumulation; Consequently, We Believe That Falling Iron
Ore Prices Would Lead to Increased Steel Growth of an Additional 3% Impact on
Trend Steel Growth Rates, Even Given a Declining Steel Price
Source: Bloomberg L.P. and Bernstein estimates and analysis.


Average 2011 to Present Forecast at 80US$/t Fe
Steel Price - $/t 673 600
Iron Ore Price - $/t 148 80
Iron Ore Cost - $/t 237 128
Fuel Costs - $/t 172 172
Other Costs - $/t 152 152
Total Costs - $/t 561 452
Margin - $/t 112 148
Margin - % 16.7% 24.7%
Best Fit Steel Growth Rate - % 8.1% 10.9%
Observed Steel Growth Rate - % 8.0% N/A
Impact of Stimulus - % -1.9% -1.9%
Trend Growth Rate - % 6.3% 9.0%
Impact of Lower Iron Ore Prices - % 2.7%
Compared to Consensus
Expectations of a Long-Term
Iron Ore Price of US$80/t
(Which Is Already Being
Discounted by Mining
Equities), We Estimate That
This Automatic Stabilizer
Could Provide an Additional
US$15/t of Support Leading to
an Equilibrium Demand-Supply
Situation Closer to US$95/t
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
166 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 258 The Impact of the Additional Steel Demand Helping Offset the Impact of
"Oversupply" from New Projects Could Support a Higher Price Level Than Would
Otherwise Be Achieved
Source: Bloomberg L.P. and Bernstein estimates and analysis.

Exhibit 259 The Impact of Incorporating This Effect Could See Iron Ore Prices Stabilize Some
15US$/t Higher Than Would Be the Case If the Elasticity of Demand Is Ignored
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.
0
20
40
60
80
100
120
140
160
0
5
0
1
0
0
1
5
0
2
0
0
2
5
0
3
0
0
3
5
0
4
0
0
4
5
0
5
0
0
5
5
0
6
0
0
6
5
0
7
0
0
7
5
0
8
0
0
8
5
0
9
0
0
9
5
0
1
,
0
0
0
1
,
0
5
0
1
,
1
0
0
1
,
1
5
0
1
,
2
0
0
1
,
2
5
0
1
,
3
0
0
1
,
3
5
0
1
,
4
0
0
1
,
4
5
0
1
,
5
0
0
1
,
5
5
0
1
,
6
0
0
I
r
o
n

O
r
e

(
U
S
$
/
t
)
Current and Future Iron Ore Cost Curves
Current Cost Curve Future Cost Curve
Price equillibriumhigherasa
conseuenceofincorporating
demandelasticity
Price equilibriumhigherasa
conseuenceofincorporating
demandelasticity
Loweringprice
increasestrend
demand
Elasticity Impact Rio BHP Vale Anglo
Average $ Cost 32.7 42.5 40.0 49.1
Margin Uplift per Ton ($) 14.9 14.9 14.9 14.9
Tons Produced 2012 (kt) 246,831 161,149 303,443 49,137
Current EV/EBITDA 5.0 5.8 4.6 5.0
EV Impact ($m) 18,255 13,893 20,680 3,689
Per Share Impact ($) 9.89 2.61 4.04 2.89
June 30, 2013 Price ($) 40.38 25.46 12.90 18.40
Per Share Impact (%) 24% 10% 31% 16%
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
167





Valuation and Risks

We provide two valuation metrics:
As mining companies are operationally and financially geared to their underlying
commodity baskets (~80% of weekly equity price moves can be explained by
moves in the underlying commodity prices), we use a regression-based trading
model and our forward-looking commodity price forecasts to help determine our
12-month target prices (and to generate six monthly price forecasts). To the extent
that the regression holds, and the parameters of the regression have not
significantly shifted, we take the target price from the trading model. To the
extent that the regression is shifting or the equity is deviating, we look for
evidence of whether this shift or deviation is temporary (and hence may be
expected to close) or whether it signals a more fundamental re- or de-rating of the
equity. In the event that there is no significant deviation or if we believe a
deviation is temporary, the target price is set by the trading model. In the event
that we believe a deviation is signaling a fundamental change, we will adjust our
target price for this fundamental shift and disclose the manner and magnitude of
the adjustment made. At present, no adjustments have been made to the target
prices generated by our trading model. Note that we round final target prices in
25p/cent increments. Exhibit 260 summarizes our ratings and target prices as of
June 30, 2013.
In addition to the target price (and short-term price forecasts generated by our
trading model), we provide a supplementary valuation based on DCF. Given the
long-lived nature of mining assets, we believe a DCF is critical to understanding
the intrinsic value of a share (what the share price, in our view, "ought" to be
today). Our DCF model constructed in nominal local currency terms out to 2030,
over which explicit commodity price and exchange rate forecasts apply. The
nominal local currency cash flows are de-escalated into real U.S. dollar cash
flows and discounted at the company-specific WACC. A country risk premium
reflecting the geographic origin of the cash flows is added to the underlying
WACC to reflect cash-flow items (i.e., expropriation) that cannot be explicitly
modeled in the cash flow. All reserves are considered exploited by the model. In
addition, 50% of the incremental resources (i.e., 50% of the residual resources
excluding those that have already been converted to reserves) of the company are
modeled. Where residual life of mine (LOM) may be inferred for operations
beyond the 2030 time horizon, a terminal value is calculated for the remaining
years of potentially exploitable material. We use this methodology to derive all
forward-looking multiples and other valuation metrics. Note that we forecast our
models in reporting currency (USD), convert to listing currency (GBP or Real) at
an average exchange rate, and round final DCF values in 25p/cent increments.

Investing in the Miners Is
Always a Call on the Future
Prices of Their Commodity
Exposure
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
168 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





The Trading Model Sets 12-Month Target Prices
The value of the miners is essentially a call on the future commodity price deck;
each of the miners shows a very strong relationship to their underlying commodity
baskets. Our regression-based trading model looks at the relationship between a
company's historical share price performance and its underlying commodity
exposure. It fits the best estimate relationship between the mining company
valuation and its commodity basket historical performance, and then rolls that
relationship forward over time. We do this to capture the fact that the
parameterization of the fit between the miners and the commodity is not fixed.
Regression-based trading models must be taken, of course, with a grain of salt.
A strong regression or R-squared fit between two variables can of course be
preserved, while changing the parameterization of that fit. In other words, that a
relationship exists may always be true, but the nature of that relationship may
change over time. It is the changing nature of the relationship between a mining
equity and its underlying commodity basket that expresses the de-rating or re-rating
of a sector.
Accordingly, we monitor how the results generated by this model change over
time. Does the best-fit change (and if so, for one stock or multiple stocks)? And is
the equity deviating from its historical relationship (or is the R-squared changing
over time)? To the extent that the regression is shifting or the equity is deviating,
we look for evidence of whether this shift or deviation is temporary (and hence
may be expected to close) or whether it signals a more fundamental re- or de-rating
of the equity. In the event that there is no significant deviation or if we believe a
deviation is temporary, the target price is set by the trading model. In the event that
we believe a deviation is signaling a fundamental change, we will adjust our target
price for this fundamental shift and disclose the precise adjustment made. At
present, no adjustments have been made to the target prices generated by our
trading model. Exhibit 261 through Exhibit 280 summarize our ratings and target
prices as of June 30, 2013.
43






43
In order to generate a regression analysis for the new Glencore Xstrata entity, we calculate a synthetic price for the entity based on the trading
history of Xstrata and the relationship that existed between Glencore and Xstrata post the Glencore listing but before the Xstrata offer. Clearly,
this is a less reliable basis than for the other miners but we believe that it continues to have some validity.
Our Trading Model Starts With
Regression Analysis But We
Caution That One Must
Interpret the Regressions
Before Setting Target Prices
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
169





Exhibit 260 Summary of Our Coverage
Source: Bloomberg L.P., FactSet and Bernstein estimates and analysis.

BHPs regression has been tight, not only in our most recent model update
conducted June 5, 2013, but in our previous trading model updates. The R-squared
of the most recent update is 78% (see Exhibit 261 and Exhibit 262). At the time of
our update, BHP was moderately overvalued relative to its best-fit regression (see
Exhibit 263). We find this unsurprising given the faltering market sentiment and
the perception (justified in our view) of BHP as the highest quality stock in our
coverage. Our trading model generates a 12-month target price of 22.50 (see
Exhibit 264). We have not seen signs of the regression shifting nor is there
anything in our fundamental research to date that causes us to anticipate it will;
hence, we set our target price from the unmodified regression model price.

7/12/2013 Anglo BHPB RioTinto Vale
BRL
Price 12.95 18.00 27.99 30.32
PriceTarget 20.25 22.50 41.25 46.50
PotentialUp/Downside 56% 25% 47% 53%
EV/EBITDACurrent 5.09 5.67 4.89 4.30
EV/EBITDA5Yr.Avg. 4.9 5.5 4.8 5.0
EV/EBITDATarget 8.4 8.6 9.8 8.2
PECurrent 8.9 9.3 7.1 5.5
PE5Yr.Avg. 9.2 9.4 8.0 7.6
PETarget 16.1 14.0 16.8 21.7
2013EPSConsensus 2.11 2.47 5.65 2.48
2013EPSSCB 1.90 2.70 5.33 2.28
%SCBvs.Consensus (9.8%) 9.4% (5.6%) (8.2%)
2014EPSConsensus 2.63 2.84 6.44 2.89
2014EPSSCB 2.57 3.73 7.34 2.55
%SCBvs.Consensus (2.2%) 31.3% 14.0% (11.8%)
*NoteallEPSfiguresareinreportingcurrency(USD)
BHP: TP 22.50 (Unmodified
from Trading Model Prediction)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
170 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 261 The Relationship Between the Miners and Their Underlying Commodity Exposure Is
Incredibly Strong...
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 262 ...And Explains the Majority of the Historical Performance
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

50,000
70,000
90,000
110,000
130,000
150,000
170,000
190,000
210,000
230,000
250,000
Jun/06 Dec/06 Jun/07 Dec/07 Jun/08 Dec/08 Jun/09 Dec/09 Jun/10 Dec/10 Jun/11 Dec/11 Jun/12 Dec/12
B
H
P

E
V

(
U
S
$
m
)
BHP EV Fitted vs. Actual
Fitted Actual
R = 0.7848
50,000
70,000
90,000
110,000
130,000
150,000
170,000
190,000
210,000
230,000
250,000
50,000 70,000 90,000 110,000 130,000 150,000 170,000 190,000 210,000 230,000 250,000
B
H
P

A
c
t
u
a
l

E
V

(
U
S
$
m
)
BHP Fitted EV (US$m)
BHP Scatter Plot Fitted vs. Actual
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
171





Exhibit 263 BHP Is Currently Slightly Overvalued Relative to Its Historical Best Fit, an
Unsurprising Development in the Current Tremulous Market Environment
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 264 We See Considerable Upside in the Share Price
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Like BHP, Rio Tintos regression has also been tight in both our historical and
most recent trading model update (June 5, 2013). The R-squared of the most recent
update is 88% (see Exhibit 265 and Exhibit 266). At the time of our update, Rio
was slightly overvalued relative to its best-fit regression (see Exhibit 267), but by
less than 5%. We consider this unsurprising, given the recent slides in both iron ore
prices and Rio Tintos share price (bearing in mind that iron ore generated ~90% of
Rio Tintos 2012 EBIT). Our trading model generates a 12-month target price of
41.25 (see Exhibit 268). We have not seen signs of the regression shifting nor is
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Jun/06 Dec/06 Jun/07 Dec/07 Jun/08 Dec/08 Jun/09 Dec/09 Jun/10 Dec/10 Jun/11 Dec/11 Jun/12 Dec/12
%

U
n
d
e
r
/
O
v
e
r

V
a
l
u
a
t
i
o
n
BHP Share Price vs. Best Fit Regression
UndervaluedRelativeto
CommodityBasket
OvervaluedRelativeto
CommodityBasket
0
5
10
15
20
25
30
35
40
S
h
a
r
e

P
r
i
c
e

(

)
BHPB Share Price Forecast
Actual Forecast ex Volume Growth Forecast Inc Volume Growth DCF SOTP
Rio Tinto: TP 41.25
(Unmodified from Trading
Model Prediction)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
172 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





there anything in our fundamental research to date that causes us to anticipate it
will; hence, we set our target price from the unmodified regression model price.

Exhibit 265 The Relationship Between the Miners and Their Underlying Commodity Exposure Is
Incredibly Strong
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 266 And Explains the Majority of the Historical Performance
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.



50,000
70,000
90,000
110,000
130,000
150,000
170,000
190,000
210,000
230,000
250,000
Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
R
i
o

E
V

(
U
S
$
m
)
Rio EV Fitted vs. Actual
Fitted Actual
R = 0.887
50,000
70,000
90,000
110,000
130,000
150,000
170,000
190,000
210,000
230,000
250,000
50,000 70,000 90,000 110,000 130,000 150,000 170,000 190,000 210,000 230,000 250,000
R
i
o

A
c
t
u
a
l

E
V

(
U
S
$
m
)
BHP Fitted EV (US$m)
Rio Scatter Plot Fitted vs. Actual
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
173





Exhibit 267 Rio Is Currently Slightly Overvalued Relative to Its Historical Best Fit, But Less Than
5%, and Hence Less Than High-Quality BHP
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 268 We See Considerable Upside in the Share Price
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

In our previous trading model update, we noted that Anglo Americans equity price
had declined from fairly valued at the start of the year relative to its commodity
basket to 12% below the baskets spot price (see European Metals & Mining:
Timing Is Everything. Predictions From Our Short-Term Trading Model).
At the time we commented that whether the deviation was temporary or
resulted in a permanent de-rating would depend, in our view, upon the resolution of
the company's operating disappointments and South African risk. With our June 5
update, the regression shifted and the new fit has a tight fit and an R-squared of
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
%

U
n
d
e
r
/
O
v
e
r

V
a
l
u
a
t
i
o
n
Rio Share Price vs. Best-Fit Regression
Undervalued Relative to
CommodityBasket
Overvalued Relative to
CommodityBasket
0
10
20
30
40
50
60
70
S
h
a
r
e

P
r
i
c
e

(

)
Rio Share Price Forecast
Actual Forecast ex Volume Growth Forecast Inc Volume Growth DCF SOTP
Anglo American: TP 20.25
(Unmodified from Trading
Model Prediction)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
174 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





85% (see Exhibit 269 and Exhibit 270); however, the stock is still slightly
undervalued relative to its best-fit regression (see Exhibit 271). Our trading model
generates a 12-month price target of 20.25, which we have taken unmodified (see
Exhibit 272). Given the shift in the regression and the fundamental factors that
have been weighing on the stock, the upcoming 1H reporting (at which time Mr.
Cutifani will present the results of his portfolio review), and that we consider
Anglo a restructuring story, we consider there is a greater likelihood of regression
instability going forward than for Rio or BHP. We are monitoring the situation.

Exhibit 269 The Relationship Between the Miners and Their Underlying Commodity Exposure Is
Incredibly Strong
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 270 And Explains the Majority of the Historical Performance
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

0
20,000
40,000
60,000
80,000
100,000
120,000
Jun/06 Dec/06 Jun/07 Dec/07 Jun/08 Dec/08 Jun/09 Dec/09 Jun/10 Dec/10 Jun/11 Dec/11 Jun/12 Dec/12
A
n
g
l
o

E
V

(
U
S
$
m
)
Anglo EV Fitted vs. Actual
Fitted Actual
R = 0.8536
0
20,000
40,000
60,000
80,000
100,000
120,000
0 20,000 40,000 60,000 80,000 100,000 120,000
A
n
g
l
o

A
c
t
u
a
l

E
V

(
U
S
$
m
)
BHP Fitted EV (US$m)
Anglo Scatter Plot Fitted vs. Actual
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
175





Exhibit 271 Anglo Is Currently Slightly Undervalued Relative to Its Historical Best Fit, But We
Note the Regression Has Shown Instability and a Decision to Invest in the Stock Is
Contingent Upon a Belief in the Fundamental Restructuring Story as Well as
Commodity Prices
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 272 We See Considerable Upside in the Share Price
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
%

U
n
d
e
r
/
O
v
e
r

V
a
l
u
a
t
i
o
n
Anglo Share Price vs. Best-Fit Regression
Undervalued Relative to
CommodityBasket
Overvalued Relative to
CommodityBasket
0
5
10
15
20
25
30
35
40
S
h
a
r
e

P
r
i
c
e

(

)
Anglo Share Price Forecast
Actual Forecast ex Volume Growth Forecast Inc Volume Growth DCF SOTP
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
176 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Vale continues to show instability in its regression relationship. This was
something we had noted in our previous trading model update on May 16, 2013 as
well (see European Metals & Mining: Timing Is Everything. Predictions From Our
Short-Term Trading Model). At that time, we commented that the equity had
previously been more than 20% undervalued at the start of the year; however, our
then-updated regression found the best fit at 3% undervalued in January, and
yielded a 3% discount to the May 16, 2013 price of its spot basket. Our
fundamental concerns about this company cause us to question whether this
regression shift may be indicative of a de-rating.
Our most recent regression analysis finds best fit at 5% overvalued in January
2013. The R-squared of the most recent update is 86% (see Exhibit 273 and Exhibit
274). At the time of our update, Vale was 8% undervalued relative to its best-fit
regression (see Exhibit 275). As with Anglo American, we believe there are
fundamental factors at play here. Though not a restructuring story like Anglo, this
essentially pure-play iron ore company is subject to significant influence by the
Brazilian government (through direct ownership of Golden Shares as well as
ownership by the strategic consortium of Valepar). Furthermore, the company is, in
our view, most at risk should a reduced iron ore price eventuate, given its
geographic longinquity from the worlds largest consumer of iron ore, China. As a
result, we consider that there is a greater likelihood of regression instability going
forward than for Rio or BHP and are monitoring the situation. However, for now,
we have taken the unmodified target price generated by the trading model of BRL
46.50 (see Exhibit 276).

Exhibit 273 The Relationship Between the Miners and Their Underlying Commodity Exposure Is
Incredibly Strong
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
220,000
240,000
Jun/06 Dec/06 Jun/07 Dec/07 Jun/08 Dec/08 Jun/09 Dec/09 Jun/10 Dec/10 Jun/11 Dec/11 Jun/12 Dec/12
R
i
o

E
V

(
U
S
$
m
)
Vale EV Fitted vs. Actual
Fitted Actual
Vale: TP BRL 46.50
(Unmodified from Trading
Model Prediction)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
177





Exhibit 274 And Explains the Majority of the Historical Performance
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 275 Vale Is Currently Slightly Undervalued Relative to Its Historical Best Fit, But as With
Anglo, We Caution That the Regression Has Been Unstable and That There Are Risks
Not Captured by It (Specifically the Significant Influence of the Brazilian
Government)
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.





R = 0.8605
50,000
70,000
90,000
110,000
130,000
150,000
170,000
190,000
210,000
230,000
250,000
50,000 70,000 90,000 110,000 130,000 150,000 170,000 190,000 210,000 230,000 250,000
R
i
o

A
c
t
u
a
l

E
V

(
U
S
$
m
)
BHP Fitted EV (US$m)
Vale Scatter Plot Fitted vs. Actual
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Jun/06 Dec/06 Jun/07 Dec/07 Jun/08 Dec/08 Jun/09 Dec/09 Jun/10 Dec/10 Jun/11 Dec/11 Jun/12 Dec/12
%

U
n
d
e
r
/
O
v
e
r

V
a
l
u
a
t
i
o
n
Vale Share Price vs. Best-Fit Regression
Undervalued Relative to
CommodityBasket
Overvalued Relative to
CommodityBasket
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
178 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 276 We See Considerable Upside in the Share Price
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

For Glencore Xstrata, we have constructed a synthetic stock using Xstratas actual
history and its recent relationship with Glencore. This synthetic stock shows, in our
view, an acceptably high R-squared of 64% (see Exhibit 277 through Exhibit 279).
We note that the difficulties of using this model and the synthetic stock for setting a
target price include not only the short duration of Glencores trading history
(having IPO'd only in May 2011) but also the distortive effects that the merger
between the two companies had on their respective share prices. Furthermore, the
marketing arm of Glencore (93% of 2012 revenues but 42% of operating profit that
year) adds a layer of differentiation relative to the "pure" miners in our coverage.
For now, we have taken the unmodified target price of 5.25 but will continue to
monitor the trading model (see Exhibit 280).



0
10
20
30
40
50
60
70
80
S
h
a
r
e

P
r
i
c
e

(

)
Vale Share Price Forecast
Actual Forecast ex Volume Growth Forecast Inc Volume Growth DCF SOTP
Glencore: TP 5.25
(Unmodified from Trading
Model Prediction)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
179





Exhibit 277 For Glencore Xstrata, the Historical Relationship Is Based on a "Synthetic" Stock
Using the Xstrata Price History and Recent Relationship to Glencore
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 278 And in Glencore Xstrata (Though for Glencore Xstrata the Historical Relationship Is
Based on a "Synthetic" Stock Using the Xstrata Price History and Recent
Relationship to Glencore)
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Jun/06 Dec/06 Jun/07 Dec/07 Jun/08 Dec/08 Jun/09 Dec/09 Jun/10 Dec/10 Jun/11 Dec/11 Jun/12 Dec/12
R
i
o

E
V

(
U
S
$
m
)
Glencore Xstrata EV Fitted vs. Actual
Fitted Actual
R = 0.6421
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000
R
i
o

A
c
t
u
a
l

E
V

(
U
S
$
m
)
BHP Fitted EV (US$m)
Glencore Xstrata Scatter Plot Fitted vs. Actual
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
180 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 279 Glencore Xstrata Seems Fairly Valued Relative to the Historical Best Fit of This
Synthetic Stock
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 280 We See Considerable Upside in the Share Price
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.


-60%
-40%
-20%
0%
20%
40%
60%
80%
Jun/06 Dec/06 Jun/07 Dec/07 Jun/08 Dec/08 Jun/09 Dec/09 Jun/10 Dec/10 Jun/11 Dec/11 Jun/12 Dec/12
%

U
n
d
e
r
/
O
v
e
r

V
a
l
u
a
t
i
o
n
Glencore Xstrata Share Price vs. Best-Fit Regression
Undervalued Relative to
CommodityBasket
Overvalued Relative to
CommodityBasket
2
3
4
5
6
7
8
9
10
May -11 Nov -11 May -12 Nov -12 May -13 Nov -13 May -14 Nov -14 May -15
S
h
a
r
e

P
r
i
c
e

(

)
Glencore Xstrata Share Price Forecast
Actual Forecast ex Volume Growth Forecast Inc Volume Growth DCF SOTP
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
181





DCF Generates an Intrinsic Value
Given the long-lived nature of mining assets, we believe a DCF is critical to
understanding the intrinsic value of a share (what the share price, in our view,
"ought" to be today). This is not only because we believe a DCF captures the future
cash flows (and after all, what is the value of a mining company and what cash
flows can be generated by its assets) but also because it forces us to consider the
fundamental factors impacting the company's assets (on an asset-by-asset basis
where possible, division-by-division where not) and exercise discipline
particularly important in a sector whose equity returns at least in the near term can
be highly trading oriented.
Our DCF model constructed in nominal local currency terms out to 2030 over
which explicit commodity price and exchange rate forecasts apply. The nominal
local currency cash flows are de-escalated into real U.S. dollar cash flows and
discounted at the company-specific WACC. A country risk premium reflecting the
geographic origin of the cash flows is added to the underlying WACC to reflect
cash flow items (i.e., expropriation) that cannot be explicitly modeled in the cash
flow. All reserves are considered exploited by the model. In addition, 50% of the
incremental resources (i.e., 50% of the residual resources, excluding those that have
already been converted to reserves) of the company are modeled. Where residual
LOM may be inferred for operations beyond the 2030 time horizon, a terminal
value is calculated for the remaining years of potentially exploitable material. We
use this methodology to derive all forward-looking multiples and other valuation
metrics. Note that we forecast our models in reporting currency (USD), convert to
listing currency (GBP or real) at an average exchange rate, and round final DCF
values in 25p/cent increments.
In our call European Metals & Mining: Changing Price Targets and Upgrading
Vale to Outperform, we discussed how the DCF overstates the sensitivity of mining
stock prices to changes in commodity price assumptions (by a factor of 3-6x). This
is in part due to the different time frames considered by market participants
(ranging from a matter of days to perhaps a decade at the outside) and the DCF
(which discretely models cash flows out to 2030). However, other confounding
factors may be:
A standard DCF model ignores the covariance between commodity prices
themselves and between commodity prices and the drivers of mining operating
costs (such as FX and diesel). Such covariance between cost and price has the
effect of desensitizing value to price changes.
The sensitivity analysis that is conducted using a DCF model ignores the degree
of mean reversion in commodity prices. Again, this effect desensitizes value to
price changes; in the extreme of instantaneous and mean reversion to a fixed
long-term price, there would be no relationship between prices and mining
valuations. It is worth noting that this effect applies that even if a backwardated
price is used to mimic mean reversion, a backwardated curve that moves varies by
a fixed quantum would show exactly the same behavior (as far as sensitivity is
concerned) as a flat or contangoed price line.
Market misevaluation of risk. The final explanation is that the market places too
high a discount rate on future earnings and too low a discount rate on current
earnings. This has the same effect of increasing the apparent degree of commodity
price backwardation in the miners and would reduce the sensitivity of the equity
to changes in the commodity price basket.




DCF Generates an Intrinsic
Value for the Stock Today, But
Is Silent on When the Stock
May Achieve That Value
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
182 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 281 BHP DCF Value
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 282 Rio Tinto DCF Value
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.






US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Petroleum 90,058 - 90,058 16.92 11.10 11,592 7.8
Aluminum 5,089 942 6,032 1.13 .74 165 36.5
Base Metals 39,562 8,147 47,709 8.97 5.88 4,689 10.2
Diamonds & Specialty Products (3,822) - (3,822) (.72) (.47) 19 (202.1)
Stainless Steel Materials (656) - (656) (.12) (.08) (37) 17.8
Iron Ore 82,461 14,654 97,115 18.25 11.97 14,271 6.8
Manganese 3,252 56 3,308 .62 .41 514 6.4
Metallurgical Coal 11,163 3,639 14,803 2.78 1.83 1,395 10.6
Energy Coal 5,971 1,174 7,145 1.34 .88 777 9.2
BHPB Enterprise Value 233,079 28,613 261,691 49.18 32.27 33,384 7.8
Less Minorities (1,858) (.35) (.23)
Less Central Costs (9,328) (1.75) (1.15)
Less (Net Debt)/Net Cash (32,169) (6.05) (3.97)
Equity Value 218,337 41.03 26.92
Shares Outstanding 5,321
Share Price (USD) 41.03
Exchange Rate 1.52
Implied Share Price () 26.92
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Iron Ore 97,333 18,889 116,222 62.94 41.29 18,801 6.2
Aluminum 14,801 6,522 21,323 11.55 7.58 1,326 16.1
Copper 37,448 8,266 45,715 24.76 16.24 2,016 22.7
Energy 8,709 2,027 10,736 5.81 3.81 1,111 9.7
Diamonds & Minerals 8,213 - 8,213 4.45 2.92 1,290 6.4
Other (3,070) - (3,070) (1.66) (1.09) (360) 8.5
Rio Enterprise Value 163,434 35,705 199,139 107.85 70.75 24,183 8.2
Less Minorities (21,423) (11.60) (7.61)
Less Central Costs - - -
Less (Net Debt)/Net Cash (21,990) (11.91) (7.81)
Equity Value 155,726 84.34 55.33
Shares Outstanding 1,847
Share Price (USD) 84.34
Exchange Rate 1.52
Implied Share Price (GBP) 55.33
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
183





Exhibit 283 Anglo American DCF Value
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.

Exhibit 284 Vale DCF Value
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.



US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Platinum 4,565 1,149 5,714 4.47 2.93 920 6.2
Diamonds 5,375 - 5,375 4.21 2.76 1,498 3.6
Copper 20,118 3,002 23,120 18.09 11.87 2,234 10.3
Nickel 1,204 227 1,432 1.12 .73 130 11.0
Iron Ore South Africa 16,931 1,760 18,691 14.63 9.59 3,507 5.3
Iron Ore Brazil 4,599 1,610 6,209 4.86 3.19 228 27.2
Manganese 2,550 - 2,550 2.00 1.31 445 5.7
Metallurgical Coal 2,378 373 2,751 2.15 1.41 263 10.4
Thermal Coal 4,950 229 5,179 4.05 2.66 721 7.2
Other Non-Mining Assets 3,030 - 3,030 2.37 1.56 486 6.2
Anglo Enterprise Value 65,700 8,351 74,051 57.94 38.01 8,815 8.4
Less Minorities (20,174) (15.79) (10.36)
Less Central Costs (2,369) (1.85) (1.22)
Less (Net Debt)/Net Cash (5,855) (4.58) (3.01)
Equity Value 45,653 35.72 23.44
Shares Outstanding 1,278
Share Price (USD) 35.72
Exchange Rate 1.52
Implied Share Price (GBP) 23.44
US$m DCF Terminal Value Total Per Share (US$) Per Share (BRL) 2012 EBITDA EV/EBITDA
Iron Ore 88,097 31,317 119,414 23.32 47.00 17,647 6.8
Manganese & Ferroalloys 225 - 225 .04 .09 190 1.2
Coal (1,316) 1,295 (21) (.00) (.01) (449) .0
Base Metals 21,437 2,397 23,833 4.66 9.38 603 39.5
Fertilizers 9,240 - 9,240 1.80 3.64 632 14.6
Other (4,884) - (4,884) (.95) (1.92) (490) 10.0
Vale Enterprise Value 112,800 35,009 147,808 28.87 58.18 18,133 8.2
Less Minorities (3,398) (.66) (1.34)
Less Central Costs - - -
Less (Net Debt)/Net Cash (26,088) (5.10) (10.27)
Equity Value 118,322 23.11 46.57
Shares Outstanding 5,120
Share Price (USD) 23.11
Exchange Rate 2.02
Implied Share Price (BRL) 46.57
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
184 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 285 Glencore Xstrata DCF Value (With and Without Synergies)
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.


US$m DCF Terminal Value Total Per Share (US$) Per Share () 2012 EBITDA EV/EBITDA
Zinc 13,146 1,760 14,907 1.12 .70 2,000 7.5
Copper 51,956 6,558 58,513 4.39 2.74 4,595 12.7
Nickel 7,583 1,395 8,978 .67 .42 663 13.5
Alumina & Aluminum 384 - 384 .03 .02 13 30.5
Coal 17,586 3,098 20,684 1.55 .97 3,106 6.7
Oil & Oil Products 3,353 284 3,636 .27 .17 419 8.7
Agricultural Products 755 - 755 .06 .04 142 5.3
Alloys (75) - (75) (.01) (.00) 144 (.5)
Marketing Metals & Mining 8,382 1,288 9,670 .73 .45 1,289 7.5
Marketing Energy Products 5,479 971 6,450 .48 .30 717 9.0
Marketing Agricultural Products 5,481 892 6,372 .48 .30 220 29.0
Synergies 4,241 760 5,001 .38 .23 750 6.7
With Synergies
Glencore Enterprise Value 118,270 17,006 135,276 10.15 6.33 14,058
Less Minorities (6,998) (.53) (.33)
Less Central Costs - - -
Less (Net Debt)/Net Cash (34,538) (2.59) (1.62)
Plus Corporate & Other
Equity Value 93,739 7.03 58,441.02
Shares Outstanding 13,326
Per Share NPV (USD) 7.03
Exchange Rate 1.60
Per Share NPV (GBP) 4.39
Without Synergies
Glencore Enterprise Value 114,029 16,246 130,275 9.78 6.41 13,308
Less Minorities (6,998) (.53) (.34)
Less Central Costs - - -
Less (Net Debt)/Net Cash (34,538) (2.59) (1.70)
Plus Corporate & Other
Equity Value 88,739 6.66 58,216.90
Shares Outstanding 13,326
Per Share NPV (USD) 6.66
Exchange Rate 1.52
Per Share NPV (GBP) 4.37
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
185





Risks to Our Sector and Stocks
The four most significant risks facing the major mining houses in Europe are lack
of capital discipline, operating cost inflation, a sustained downturn in the Chinese
economy and resource nationalism.
Capital discipline: We believe that mined commodity prices will stay high and
will continue to trend higher until such point that the massive amounts of labor
currently employed in the Chinese mining industry are displaced by capital. This
can happen either through a reform of the domestic mining industry in China or
through the displacement of that industry by supply increases in other
geographies. We do not believe that the natural resource endowment of China
will allow for a rapid (if any) domestic reform, as this requires the existence of
massive high-grade, long-life deposits (such as copper in Chile or iron ore in
Brazil and Australia). Consequently, the duration of the current pricing
environment comes down to the extent to which the Western capital deployed by
the major mining houses to increase low-cost commodity production will displace
the requirement for Chinese domestic production.
Operating cost inflation: U.S. dollar denominated unit costs in all the major
mining houses have seen double-digit growth rates over the last 10 years. Part of
this can be explained by movements in exchange rates and part by the prevailing
inflationary environment in producer geographies. However, there has still been a
very significant increase in underlying real costs. Should this persist or accelerate,
then it has the capacity to erode value.
Chinese economic risks: China is important in commodities as both the major
source of demand growth and as the location of the marginal units of supply. We
believe that the current slowdown in the Chinese economy has been largely self-
induced in an effort to contain food inflation and, as a consequence, a political
stasis ahead of the handover of power at the end of the year. However, a more
long-lived slowdown has the capacity to move the commodity markets into
oversupply on a sustained basis particularly if new supply is not curtailed.
Resource nationalism: Finally, we note with concern the trend toward global
fragmentation and the ever greater desire to extract value from the mining sector.
We believe that this is ultimately a self-defeating strategy by host governments
but it is one with an impressively long pedigree. Persistent macroeconomic
headwinds will make this an ever more attractive option.
Rio Tinto PLC: Company-specific risks include any sustained downturn in
iron ore prices, as the company is the second most exposed of our coverage group
to iron ore (after Vale). Any relaxation of capital discipline particularly around the
Simandou project in Guinea would also be, in our view, a negative catalyst. Further
execution delays in the commissioning of the Oyu Tolgoi copper project in
Mongolia or significant revenue grabs from the Mongolian government could also
be a risk.
BHP Billiton PLC: Company-specific risks include continued weakness in the
price of natural gas in the U.S. and iron ore. Repeats of the weather-induced
volume losses in BHPs metallurgical coal operations as well as continued labor-
related disruptions in these assets could also prove an impediment to our target
price.
Vale SA: Company-specific risks include any sustained downturn in iron ore
price, as the company derives nearly the entirety of its value from exposure to iron
ore. The continuation of disruptions to the output of nickel and attendant cost
pressures are also a risk. The commissioning of Goro (VNC) is an issue that needs
to be addressed, as is the performance at Onca Puma.
Anglo American PLC: For Anglo American in particular, inability to improve
the efficiency of its platinum operations and continued margin pressure arising
from South African labor inflation poses downside risk, as does the potential for
increased union militancy in South Africa (and again in platinum, in particular). A
continued deterioration in labor unrest along with the attendant physical hazards,
delays and expenses could weigh on results. Further delays at the Minas Rio iron
Risks
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
186 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





ore project in Brazil would also be a significant negative catalyst. Failure to
properly integrate De Beers into the Anglo American portfolio could again risk
value loss.
Glencore Xstrata PLC: The greatest unknown, in our minds, for Glencore
relates to its marketing activities. We believe there is insufficient transparency to
assess both embedded risk in the trading book and persistence of edge. We also
note that Glencore requires high levels of working capital and remains vulnerable
to large swings in cash-flow generation as a result. We note as a result of its
operations in frontier jurisdictions, as well as the unknown nature of embedded risk
and persistence of edge in the marketing book, headline risk remains a significant
concern for Glencore. Lastly, we do not consider Glencore yet "institutional
quality" in terms of its transparency or governance.
Post merger, we see challenges facing the combined Glencore-Xstrata entity,
specifically integration of Xstrata's significantly larger operating business into
Glencore's management structures while avoiding disruption to a number of critical
projects, particularly given the anticipated dismissal of many Xstrata personnel.
Furthermore, the choice for a new chairman will be critical to ensuring that the
corporate governance and minority shareholder interests are well protected as
Glencore enters a new stage in its life as one of the largest publicly listed mining
companies in the world.




For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
187





Company Impact

Iron ore is the single most important commodity in the mining space, representing
58% of EBITDA generation (see Exhibit 286). Furthermore, it has been one of the
strongest performing commodities throughout the mining "super-cycle" (see
Exhibit 287), having risen by 1,340% from its 2001 average price to its March
2011 peak.
44
Consequently, having a view on this commodity is essential for
understanding the bulk of the value contained within and generated by our coverage
group (see Exhibit 288).
45

Although it represents the lion's share of our coverage EBITDA generation,
iron ore's importance to each individual miner varies substantially across
companies. Vale and Rio Tinto have the largest exposure, with iron ore
contributing 97% and 75% to their 2012 EBITDA, respectively. As the most
diversified miners, Anglo American and BHP Billiton saw 37% and 55% of
EBITDA, respectively, coming from the cold metal. Finally, mining operations of
Glencore Xstrata have no direct production exposure to iron ore bar the 1Q:13
acquisition of a minority stake in Ferrous Resources.
This chapter is divided into three sections: highly concentrated iron ore plays
(Rio and Vale), diversified miners with moderate exposure (Anglo American and
BHP Billiton) and companies with no direct production exposure (Glencore
Xstrata).

Exhibit 286 Iron Ore Represents, by Far, the Most
Significant Contribution to the Cash
Generation of the Miners

Exhibit 287 And Has Been, Along With Copper, the
Strongest Performer of the Major
Commodities
Source: Corporate reports and Bernstein analysis. Source: Bloomberg L.P. and Bernstein analysis.



44
The IMF 62% Fe monthly spot (CFR Tianjin port), 2001 average = US$13/t, March 2011 = US$187/t.
45
Glencore Xstrata is the only company in our coverage without any direct production exposure to iron ore.
58%
18%
8%
15%
2012 EBITDA Breakdown
Iron Ore Base Metals Coal Other
0
100
200
300
400
500
600
700
800
900
1000
J
u
n
e

2
0
0
0

=

1
0
0
Indexed Commodity Price Performance
Iron Ore Copper HCC
Iron Ore Currently Accounts
for ~60% of the EBITDA of the
Five Major Mining Houses; It
Has Been the Outperforming
Commodity in the Last 10
Years
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
188 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 288 Vale Represents Essentially an Iron Ore Pure Play in Both the Near and Longer Term,
While We See Rio Diversifying in the Medium Term; BHP and Anglo American Have
Exposure to a Well-Diversified Basket of Commodities; Glencore Xstrata Is the Only
Company in Our Coverage Without Any Direct Production Exposure to Iron Ore*
* Excluding the 1Q:13 acquisition of a minority stake in Ferrous Resources.
Source: Corporate reports and Bernstein analysis.
Vale and Rio Tinto Highly Concentrated Iron Ore Plays
In our coverage group, Vale and Rio Tinto are the most heavily exposed to iron ore
(97% and 93% of 2012 EBIT, respectively).
We consider Rio Tinto the most attractive stock in our coverage. Not only does
the company have significant iron ore exposure (93% of 2012 EBIT), it does not
suffer from the same risks quantifiable and unquantifiable that we see
impacting Vale (which generated 97% of its 2012 EBIT from iron ore). Exhibit 289
and Exhibit 290 illustrate the 2012 breakdown of Rio Tinto's and Vale's revenues
and operating profits by commodity. Exhibit 291 through Exhibit 294 show a
historical evolution of revenues and EBITDA by commodity since 2001.



0%
20%
40%
60%
80%
100%
120%
Anglo BHP Rio Vale Glencore Xstrata
Contribution of Iron Ore to EBITDA (2012)
Iron Ore Other
Both Rio and Vale Derive the
Bulk of Their Earnings (93%
and 97% of 2012 EBIT,
Respectively) from Iron Ore;
We Prefer Rio, Which Also
Benefits from World-Class
Copper Exposure
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
189





Exhibit 289 Vale Is the Most Heavily Exposed to Iron
Ore of Our Coverage Group (a Trend We Do
Not See Changing)

Exhibit 290 Followed by Rio Tinto, Which Is
Augmenting Its Portfolio With Some of the
World's Best Copper Projects (the Metal on
Which We Are the Most Bullish)
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

Exhibit 291 Historical Evolution of Rio Tinto's Revenue by Business Unit
Source: Corporate reports and Bernstein analysis.

70%
-4%
1%
3%
8%
4%
15%
97%
2%
1%
100%
EBIT
3%
0%
2%
-2%
Group Revenue
Others
Manganese & Ferroalloys
Coal
Logistics
Fertilizers
Base Metals
Iron Ore
Vale
7%
-7%
10%
9%
4%
12%
7%
100%
EBIT
93%
Group Revenue
3%
0%
18%
44% Other
Diamonds & Minerals
Energy
Copper
Aluminium
Iron Ore
Rio Tinto
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2001 A 2002 A 2003 A 2004 A 2005 A 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A
U
S
$
m
Revenue by Business Unit
Iron Ore Aluminum Copper Energy Diamonds & Minerals Other
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
190 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 292 Historical Evolution of Rio Tinto's EBITDA by Business Unit
Source: Corporate reports and Bernstein analysis.

Exhibit 293 Historical Evolution of Vale's Revenue by Business Unit
Source: Corporate reports and Bernstein analysis.




-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2001 A 2002 A 2003 A 2004 A 2005 A 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A
U
S
$
m
EBITDA by Business Unit
Iron Ore Aluminum Copper Energy Diamonds & Minerals Other
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
U
S
$
m
Revenue by Business Unit
Iron Ore Manganese & Ferroalloys Coal Base Metals Fertilizers Logistics
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
191





Exhibit 294 Historical Evolution of Vale's EBITDA by Business Unit
Source: Corporate reports and Bernstein analysis.

Vale is the world's largest iron ore producer and, in Carajas, has one of the
world's most attractive iron ore assets. However, it is the most operationally geared
miner to the iron ore price (partially as a consequence of geographical distance to
China, partially as a consequence of the operating cost position of some of the
Southern mines and the pellet operations, and partially as a consequence of its
significant capital spend). Consequently, any change in the long-term price of iron
ore has a huge impact on the DCF value of Vale. Moreover, we also believe that
there is more to the story of iron ore prices than simple monotonic declines to some
low flat price. Consequently, there is still an asymmetric risk to the upside for iron
ore prices in the short term. So from a pure value consideration, we are more
favorably inclined to Vale now than previously. Moreover, it has a diversification
strategy, which is beginning to move the company away from being a single-
commodity pure play and most importantly increasing the company's exposure to
copper with Salobo and Lubambe.
That said, we still favor Rio Tinto for those wishing to gain iron ore exposure.
Rio Tinto owns some of the highest-quality iron ore assets and (vitally)
infrastructure globally. Rio has offered a slightly better "bang for your iron ore
buck" on correlation and absolute return bases at less than half the capex per
incremental ton of production and without the risk of significant involvement by
the Brazilian government. Rio also has exposure to some of the world's best
operational copper assets not to mention three of the world's best undeveloped
copper deposits. Tier 1 assets in iron ore include Dampier and Cape Lambert
(Australian Pilbara), while copper includes Escondida, Grasberg and Bingham
Canyon. The company also has some of the most promising and largest copper
prospects in Oyu Tolgoi, Resolution and La Granja.
Rio has commodity diversification into copper and mineral sand, rather than
nickel, and has demonstrated an ability to deliver iron ore growth at considerably
lower capital intensity than Vale. That, coupled with the prospects of genuine
capital discipline and cost cutting under new CEO Sam Walsh (who made his
bones in low-cost brownfield Pilbara production) and a more reasoned approach to
volume growth, means that we continue to see Rio Tinto as our top pick. Exhibit
295 through Exhibit 298 show our revenue and EBITDA forecasts for Rio Tinto
and Vale.


-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
U
S
$
m
EBITDA by Business Unit
Iron Ore Manganese & Ferroalloys Coal Base Metals Fertilizers Logistics
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
192 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 295 Our Forecasts for Rio Tinto's Revenues

Exhibit 296 And EBITDA Through 2018 See
Considerable Growth
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

Exhibit 297 Similarly, Our Forecasts for Vale's
Revenues

Exhibit 298 And EBITDA Also Sees Considerable
Growth
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.


-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
R
e
v
e
n
u
e

(
U
S
$
m
)
Rio Tinto Revenue
Iron Ore Aluminum Copper Energy Diamonds & Minerals Other
(10,000)
-
10,000
20,000
30,000
40,000
50,000
E
B
I
T
D
A

(
U
S
$
m
)
Rio Tinto EBITDA
Iron Ore Aluminum Copper Energy Diamonds & Minerals Other
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
R
e
v
e
n
u
e

(
U
S
$
m
)
Vale Revenue
Iron Ore Manganese & Ferroalloys Coal Base Metals Fertilizers Logistics Others
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
E
B
I
T
D
A

(
U
S
$
m
)
Vale EBITDA
Iron Ore Manganese & Ferroalloys Coal Base Metals Fertilizers Logistics Others
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
193





BHP Billiton and Anglo American The Diversified Miners
BHP Billiton not only has the longest corporate history of our coverage group (its
component parts trace their origins back to 1851 and 1883, respectively), we view
it as the highest quality stock in our coverage. In 2012, the company generated the
highest revenue of the "Big Three" miners in our coverage (US$72 billion versus
US$56 billion for Rio and US$49 billion for Vale) and had the highest EBITDA
margin (42% versus 39% for Vale and 36% for Rio).
BHP Billiton has a well-diversified portfolio from a commodity exposure
perspective. Lagging only Anglo American, it is the second most diversified
company in our coverage (see Exhibit 299 through Exhibit 302). Both Anglo and
BHP have exposure to a commodity that behaves differently from either the ferrous
or the base metals. For Anglo, it is platinum, and for BHP Billion, it is petroleum.
However, where platinum has been a drag on Anglo's portfolio, BHP has received a
boost from "black gold" related in its petroleum division (69% EBITDA margins in
calendar 2012 versus 11% for Anglo's platinum division) Exhibit 303 and
Exhibit 304. We attribute BHP's high margins relative to peers to the Tier 1 nature
of the companys assets and the operational excellence with which they are run.
Consequently, it is BHP Billiton that is the most diversified miner from an earnings
perspective.
The strong commodity risk diversification of BHP Billiton is complemented
with geographic diversification that, while skewed to Australia, is nonetheless low
risk. A significant portion of BHP's assets is located either in Australia (iron ore,
coal and petroleum), North America (petroleum) or Chile (copper). There is limited
emerging market asset exposure and, consequently, limited political risk in the
portfolio (see Exhibit 300). That said, we have noted with concern the deterioration
in the attractiveness of Australia as a location for new mining investment over the
last few years. We believe that this provides a reminder that no country is ever
entirely "safe." Nevertheless, we continue to see significant revenue and EBITDA
growth for "The Big Australian" (see Exhibit 305 and Exhibit 306).

Exhibit 299 The Diversity in Exposure Makes BHP One
of the Lowest-Risk Miners from a
Commodity Perspective

Exhibit 300 Complemented by Low Political Risk and
a Diverse Range of Operating Geographies
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.


7%
9%
19%
26%
19%
20%
29%
52%
0%
3%
0%
4%
0%
8%
3%
100%
EBIT
-2%
1%
Group Revenue
1%
Diamonds
Manganese
Stainless Steel Materials
Aluminum
Energy Coal
Metallurgical Coal
Petroleum
Base Metals
Iron Ore
BHP Billiton
55%
0%
15%
13%
8%
1%
8%
Net Assets by Location
Australia UK North America South America
Southern Africa Rest of World Unallocated
BHP Billiton Is the Highest
Quality Mining Stock in Our
Coverage, With Genuine Tier 1
Assets (e.g., Escondida, Mt
Newman, Olympic Dam and
Peak Downs) Diversified
Across a Range of
Commodities and With Limited
Geographic Risk
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
194 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 301 Historical Evolution of BHP's Revenue by Business Unit
Source: Corporate reports and Bernstein analysis.

Exhibit 302 Historical Evolution of BHP's EBITDA by Business Unit
Source: Corporate reports and Bernstein analysis.



-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2001 A 2002 A 2003 A 2004 A 2005 A 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A
R
e
v
e
n
u
e

(
U
S
$
m
)
Revenue by Business Unit
Petroleum Aluminum Base Metals Diamonds & Specialty Products
Stainless Steel Materials Iron Ore Manganese Metallurgical Coal
Energy Coal Other Group & Inter Segment
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2001 A 2002 A 2003 A 2004 A 2005 A 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A
E
B
I
T
D
A

(
U
S
$
m
)
EBITDA by Business Unit
Petroleum Aluminum Base Metals
Diamonds & Specialty Products Stainless Steel Materials Iron Ore
Manganese Metallurgical Coal Energy Coal
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
195





Exhibit 303 BHP's Petroleum Exposure Is Its Great
Diversifier (Generating 69% EBITDA
Margins in 2012)

Exhibit 304 While Anglo American's Great Diversifier,
Platinum, Came in at Margins of Just 11%
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

Exhibit 305 We Also See Revenue and EBITDA
Growth

Exhibit 306 For BHP Billiton
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

Anglo American has the most diversified portfolio of our coverage group from a
commodity perspective and is significantly smaller than the "Big Three" of BHP,
Rio and Vale. There is a distinct reduction in scale when stepping down from this
triumvirate of the "Big Three" miners to Glencore Xstrata and Anglo (see Exhibit
307).
46
While it is tempting to talk of the five largest global miners as peers, we
believe that the gulf between them is now so large as to make that unconvincing.
The reason for the emergence of the "Big Three" and for the relative ranking in
EBITDA margin performance is attributable to iron ore. Those miners that have

46
We believe that Glencore Xstrata would need to merge with Anglo American to create a competitor to the "Big Three."
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
-
20
40
60
80
100
120
140
D
e
c
-
0
1
D
e
c
-
0
2
D
e
c
-
0
3
D
e
c
-
0
4
D
e
c
-
0
5
D
e
c
-
0
6
D
e
c
-
0
7
D
e
c
-
0
8
D
e
c
-
0
9
D
e
c
-
1
0
D
e
c
-
1
1
D
e
c
-
1
2
U
S
$
m
P
e
t
r
o
l
e
u
m

P
r
o
d
u
c
t
i
o
n

(
m
m
b
o
e
)
Petroleum
Petroleum Production (LHS) Petroleum Revenue (RHS)
Petroleum Capex (RHS)
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
J
u
n
-
0
1
J
u
n
-
0
2
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
J
u
n
-
1
2
U
S
$
m
P
t

P
r
o
d
u
c
t
i
o
n

(
k
o
z
)
Platinum
Platinum Production (LHS) Platinum Revenue (RHS)
Platinum Capex (RHS)
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2011
A
2012
A
2013
E
2014
E
2015
E
2016
E
2017
E
2018
E
R
e
v
e
n
u
e

(
U
S
$
m
)
BHP Billiton Revenue
Petroleum Aluminum
Base Metals Diamonds & Specialty Products
Stainless Steel Materials Iron Ore
Manganese Metallurgical Coal
Energy Coal Other Group & Inter Segment
(10,000)
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2011
A
2012
A
2013
E
2014
E
2015
E
2016
E
2017
E
2018
E
E
B
I
T
D
A

(
U
S
$
m
)
BHP Billiton EBITDA
Petroleum Aluminum
Base Metals Diamonds & Specialty Products
Stainless Steel Materials Iron Ore
Manganese Metallurgical Coal
Energy Coal
Anglo American Has the Most
Diversified Portfolio in Our
Coverage It Remains a
Turnaround Story in Our Minds
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
196 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





exposure to this commodity enjoy the highest margins and have seen the fastest
revenue growth. To the extent that the iron ore margins are diluted by other less
well-performing commodities, the lower the overall EBITDA margin will be (see
Exhibit 308). In general, Anglo benefits from having a well-diversified portfolio of
different commodity exposures (see Exhibit 309, Exhibit 311 and Exhibit 312). In
this regard, it is probably the most diversified of the companies in our coverage and
has the lowest pure commodity risk. This lower commodity risk is, however,
partially offset by greater country risk. Anglo remains heavily exposed to South
Africa through Kumba, Anglo Platinum and its thermal coal operations. We also
see the company becoming increasingly reliant on South America for future
earnings growth. Geographically, Anglo American lacks a really significant
presence in Australia, with antipodean exposure confined to metallurgical coal (a
key differentiator from BHP Billiton, the second most diversified of our coverage
companies from a commodity perspective) Exhibit 310.
The performance at Anglo Platinum is of particular concern to us, as the
overall level of flat production belies a significant shift in the source of the material
that stands behind this. Following the requirements of South African Black
Economic Empowerment (BEE), we see significant material now coming via
concentrate purchases from JV partners and associates (see Exhibit 314). Only
~75% of Anglo Platinum's refined output comes from its own mined material (see
Exhibit 313). This change has a significant impact on margins, as we believe that
Anglo Platinum purchases material for about 90% of the price of the contained
metal. Given that refining costs must still be borne, we see purchases of material as
being dilutive of the margins that can be achieved from mining.
Anglo remains in our minds a turnaround story one that will challenge new
CEO Mark Cutifani, but one which we believe is solvable for a leader with his 36
years of operational expertise. We are looking forward to the results of his strategic
review.
47
As an operationally experienced miner across a host of commodities and
geographies, including deep precious metal mining in Africa, we believe he is well
prepared to address the issues currently facing Anglo Platinum and the group as a
whole. Going forward, we will be particularly interested to hear more from the
company about the progress of its Platinum business restructuring and the
development of Minas Rio, and we expect to hear more details in his portfolio
review, to be presented at the upcoming half-yearly reporting. Exhibit 315 and
Exhibit 316 show our revenue and EBITDA forecasts.


47
Anglo's upcoming reporting schedule is as follows: 2Q production reports for Anglo and listed subsidiaries Kumba and Anglo Platinum are
scheduled for Thursday, July 18, 2013. Anglo Platinum's 1H earnings report is scheduled for Monday, July 22, 2013; Kumba's for Tuesday, July
23, 2013; and Anglo American's for Friday, July 26, 2013. All reporting times 7am BST.
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
197





Exhibit 307 Anglo and Glencore Xstrata Represent the
Tier 2 of Mining Companies Behind the "Big
Three" of Vale, Rio and BHP

Exhibit 308 The Differentiating Feature of the "Big
Three," Both in Terms of Size and Margin,
Is the Presence of Significant Iron Ore
Exposure
Note: Only the revenue and EBITDA for Glencore's Mining and
Energy Industrial activities are included.
Source: Corporate reports and Bernstein analysis.
Note: Only the revenue and EBITDA for Glencore's Mining and
Energy Industrial activities are included.
Source: Corporate reports and Bernstein analysis.

Exhibit 309 Anglo Is the Most Diversified and the
Lowest-Risk Miner from a Commodity
Exposure Perspective

Exhibit 310 The Relative Lack of "Safe" Australian
Exposure Has Always Been a Risk
Compared to the Other Miners
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.





0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
R
e
v
e
n
u
e

(
U
S
$
m
)

D
e
c
e
m
b
e
r

Y
e
a
r

E
n
d
Sector Revenue and EBITDA
Revenue EBITDA
0%
5%
10%
15%
20%
25%
30%
35%
40%
Vale Rio Tinto BHP
Billiton
Anglo Glencore
Xstrata
Sector EBITDA Margin
12%
7%
12%
8%
11%
13%
0%
100%
EBIT
-3%
-2%
27%
49%
Group Revenue
11%
17%
1%
16%
21%
Other
Platinum
Nickel
Metallurgical Coal
Diamonds
Thermal Coal
Copper
Iron Ore and Manganese
Anglo American
36%
1%
46%
2%
10%
5%
Net Assets by Location
South Africa Other Africa South America
North America Australasia Other
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
198 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 311 Historical Evolution of Anglo American's Revenue by Business Unit
Source: Corporate reports and Bernstein analysis.

Exhibit 312 Historical Evolution of Anglo American's EBITDA by Business Unit
Source: Corporate reports and Bernstein analysis.




-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2001 A 2002 A 2003 A 2004 A 2005 A 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A
U
S
$
m
Revenue by Business Unit
Platinum Diamonds Copper Nickel Iron Ore and Manganese Metallurgical Coal Thermal Coal Other Mining & Industrial Other
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2001 A 2002 A 2003 A 2004 A 2005 A 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A
U
S
$
m
EBITDA by Business Unit
Platinum Diamonds Copper Nickel Iron Ore and Manganese Metallurgical Coal Thermal Coal Other Mining & Industrial Other
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
199





Exhibit 313 An Increasing Proportion of Anglo
Platinum's Refined Production Now Comes
from Non-Mined Sources

Exhibit 314 The Majority Is Purchased from Related
Joint Venture Partners and Associates
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

Exhibit 315 Our Forecast for Anglo American Sees
Revenue Growth

Exhibit 316 As Well as EBITDA Growth as Part of the
Turnaround Story
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.


0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
J
u
n
-
2
0
0
1
J
u
n
-
2
0
0
2
J
u
n
-
2
0
0
3
J
u
n
-
2
0
0
4
J
u
n
-
2
0
0
5
J
u
n
-
2
0
0
6
J
u
n
-
2
0
0
7
J
u
n
-
2
0
0
8
J
u
n
-
2
0
0
9
J
u
n
-
2
0
1
0
J
u
n
-
2
0
1
1
J
u
n
-
2
0
1
2
J
u
n
-
2
0
1
3
k
o
z

P
t
Refined Platinum Production by
Source
Series1 Series2
74%
11%
11%
4%
Refined Pt by Source, 2012
Refined Pt from Mined Production Conc from JVs
Conc from Assocs Conc from Third Party
-
10,000
20,000
30,000
40,000
50,000
60,000
2010
A
2011
A
2012
A
2013
E
2014
E
2015
E
2016
E
2017
E
2018
E
R
e
v
e
n
u
e

(
U
S
$
m
)
Anglo American Revenue
Platinum Diamonds Copper
Nickel Iron Ore and Manganese Metallurgical Coal
Thermal Coal Other Mining & Industrial Other
-
5,000
10,000
15,000
20,000
25,000
2010
A
2011
A
2012
A
2013
E
2014
E
2015
E
2016
E
2017
E
2018
E
E
B
I
T
D
A

(
U
S
$
m
)
Anglo American EBITDA
Platinum Diamonds Copper
Nickel Iron Ore and Manganese Metallurgical Coal
Thermal Coal Other Mining & Industrial Other
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
200 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Glencore Xstrata Has No Direct Iron Ore Production Exposure
Glencore Xstrata offers exposure for copper and coal bulls without a taste for iron
(given that the company's only direct iron ore exposure is its 3Q:13 acquisition of a
stake in Ferrous Resources). Glencore Xstrata also offers exposure to the sales and
trading house that CEO Ivan Glasenberg built. As such, it has a profile that is
distinct relative to the pure miners in our coverage (see Exhibit 317 and Exhibit
318). The impact of the high-turnover, low-margin trading business (2% EBITDA
margin in 2012 versus 25% for Glencore Xstrata combined) is even clearer when
contextualized against the average 33% for our coverage group (see Exhibit 319
and Exhibit 320).
On the industrial-assets side, Glencore Xstrata is predominantly a copper and
coal play, with zinc a tertiary significant exposure (see Exhibit 321 through Exhibit
323). The copper and coal assets from the erstwhile Xstrata portfolio contain some
particularly compelling operations. In Latin American copper, Collahuasi,
Antamina and Alumbrera are particularly attractive operating assets in our view,
while in coal, we consider Okay Creek, Rolleston, Bulfa, Mangoola, Ulan (all
Australia) and Cerrejon (Columbia) to be gems.
It is worth noting that, from a strategic perspective, we prefer pure mining
sector plays to diversified natural resources companies (hence our positive view on
the strategic repositioning that Anglo American has undertaken). To the extent that
mining companies have energy specifically, oil and gas production in their
portfolios and can run those at similar or better operating profit margins to the oil
and gas majors, we are not unduly troubled by the inherent diversification from
mining (despite the different skill sets and technical expertise required by the two
disciplines). Agriculturals are, however, not an obvious fit to us, in terms of
operational skill sets, time horizons for management, margins, etc. We understand
Glencores historical reasons for developing this portion of its asset portfolio,
growing as it did from a trading company. However, we remain concerned that the
diversity of the group splits management's focus, diverting energy and attention
away from the most attractive mining elements of the portfolio. We see this as a
negative for the company.

Copper- and Coal-Heavy
Xstrata Is the Miner for Sector
Bulls Without a Taste for Iron
But One Has to Have An
Appetite for Headline Risk
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
201





Exhibit 317 Glencore Xstrata's High-Revenue, Low-
Margin Trading Business Renders Its
Group Profile Very Different from the Pure
Miners in Our Coverage

Exhibit 318 Though Excluding the Marketing Division
Reveals a Profile That Is Similar to the Rest
of the Miners


Source: Corporate reports and Bernstein estimates and analysis.
Note: Only the revenue and EBITDA for Glencore Xstrata's Industrial
Activities are included.
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 319 The Impact of the Marketing Division Can
Be Seen in Total Company Margins

Exhibit 320 While the Margins for Only Industrial
Activities More Closely Resemble the Pure
Miners in Our Coverage
Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.

0
50,000
100,000
150,000
200,000
250,000
R
e
v
e
n
u
e

(
U
S
$
m
)

D
e
c
e
m
b
e
r

Y
e
a
r

E
n
d
Sector Revenue and EBITDA, 2012
Revenue EBITDA
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
R
e
v
e
n
u
e

(
U
S
$
m
)

D
e
c
e
m
b
e
r

Y
e
a
r

E
n
d
Sector Revenue and EBITDA, 2012
Revenue EBITDA
0%
5%
10%
15%
20%
25%
30%
35%
40%
Sector EBITDA Margin, 2012
0%
5%
10%
15%
20%
25%
30%
35%
40%
Vale Rio Tinto BHP
Billiton
Anglo Glencore
Xstrata
Industrial
Activities
Sector EBITDA Margin, 2012
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
202 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 321 Historical Pro Forma Evolution of Glencore Xstrata's Industrial Activities EBITDA
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 322 Glencore Xstrata's Industrial Activities Are
Predominantly a Copper, Coal and Zinc
Play

Exhibit 323 As Can Also Be Seen When Looking at
the Company in Toto (Inclusive of
Marketing)
Note: Only Industrial Activities shown, marketing and associates have
been omitted.
Source: Corporate reports and Bernstein estimates and analysis.

Source: Corporate reports and Bernstein estimates and analysis.

We consider the recently completed merger between Glencore and Xstrata to
be the logical conclusion of a journey nearly two decades in the making, one that
was kicked off by the 1994 management buyout at Glencore and which catapulted
Mr. Ivan Glasenberg into a senior role at the company he now runs. Mr. Glasenberg
has proved to be a quick learner in his transition from a prominent-yet-private
(500)
1,500
3,500
5,500
7,500
9,500
11,500
13,500
15,500
2008 A 2009 A 2010 A 2011 A
Glencore-Xstrata Pro Forma EBITDA Industrial Activities (US$mln)
Zinc Copper Nickel Alumina & Aluminum Coal Oil & Oil Products Agricultural Products Alloys Associates Total
Zinc, 18%
Copper, 41%
Nickel, 6%
Alumina &
Aluminum, 0%
Coal, 28%
Oil & Oil
Products, 4%
Agricultural
Products, 1%
Alloys, 1%
Glencore Xstrata Pro Forma EBITDA Industrial
Activities (2012)
Zinc, 15%
Copper, 36%
Nickel, 8% Alumina &
Aluminum, 0%
Coal, 27%
Oil & Oil
Products, 0%
Agricultural
Products, 0%
Alloys, 2%
Marketing,
17%
Associates,
1%
Other, -7%
Glencore Xstrata Pro Forma EBITDA (2012)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
203





master trader to the CEO of a publicly listed company as evidenced to investors
who watched him navigate 2H:12 demands from shareholders for an improved
share ratio and alterations to management compensation packages. His decision to
prolong this merger process in order to "negotiate" with a regulator that does not
oversee direct operations but represents the interests of his largest consumer
showed an awareness of the importance of customer relationship management. The
concessions that he granted addressed the concerns of the Chinese and left Mr.
Glasenberg several options to unload greenfield projects that he was not
particularly interested in pursuing or the disposal of an admittedly costly crown
jewel at a potentially lucrative price.
We hope that Mr. Glasenberg will show an equally steep learning curve when
it comes to transparency of reporting and governance. We consider that Glencore
has some way to go before it will be "institutional quality" on these metrics.
Furthermore, potential investors should note that Glencore Xstrata's country risk
premium is the second highest in our coverage group (2%, behind only Anglo
American's 2.6% versus an average of 1.2% for the "Big Three"). This is a function
of the company's operations in frontier jurisdictions like the DRC. However
prudently one conducts business in these jurisdictions, they carry not only an
elevated risk that host governments may make increased grabs for a share of the
revenues, but also headline risk as does Glencore's trading division.
48

Nevertheless, as an owner operator (he holds 8% of the combined entity's
paper), Mr. Glasenberg's incentives are squarely aligned with investors indeed,
media coverage of his "rich" 2012 compensation package seemed to fail to grasp
what a good thing it is indeed that the bulk of his compensation comes from
company dividends. We have long been calling for capex restraint to support
commodity prices, and have highlighted how increased dividends can not only
offer a boost to the sector in terms of supporting commodity prices, but also can
lead to equity rerating. It was appropriate for the sector to pursue an aggressive
growth strategy in the last half of the last century; this century brings a new
environment to which mining companies must respond if they are to be responsible
custodians of the value created by previous generations of management.
49
Mr.
Glasenberg seems to be one of the few industry leaders who truly understand this.
It remains to be seen how he will staff the combined entity, following the
departure of much of the senior management talent from Xstrata. But whether
through good luck or perspicacity (or a little of both), he finds himself facing this
dilemma at a time when other major miners are letting project managers go in favor
of cost cutting. So yet again, Mr. Glasenberg finds himself able to pick up attractive
assets at even more attractive prices. We will be watching to see how the
organization unfolds will it be run to maximize LOM asset value, trade flow for
the marketing division, or run in some hybrid fashion? Only time will tell. Time too
will tell whether the senior traders at Glencore, on whom the strength of the
reputation of its marketing division was built, will stick around as their post-IPO
options vest or whether this merger will help them monetize an exit strategy.
Looking farther ahead, the next logical move in Mr. Glasenberg's trajectory is,
in our view, a bid for Anglo American. The synergies from the portfolios
particularly in coal are attractive. Furthermore, "Glencore Xstrata Anglo" would
form, in our view, a credible challenger to the "Big Three" of Vale, Rio and BHP,
allowing the combined entity to more effectively compete for assets and it
would be in Glencores interests to be part of this transformation. But that is, in our
view, a question for 2014-15.

48
To wit the April 21, 2013 story concerning Glencore's reported trading with Iranian supplier to nuclear program
http://www.guardian.co.uk/business/2013/apr/21/glencore-trade-iran-supplier-nuclear.
49
Euro Metals & Mining: Not Enough Aristotle? The Fallacy of Growth & How Mining Companies Can Avoid Destroying Value.

For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
204 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE






For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
205





Appendix 1: From Grizzly to De Niro

This appendix contains the analysis from the "What GDP Growth Is Consistent
With $80/t Iron Ore Baked Into Mining Equities" chapter of this Blackbook and is
divided into three parts.
Section 1 contains a summary of the equity scenario analysis namely, how
each of the equities in our coverage react under the "Grizzly," "Bear," "Bull," and
"De Niro" scenarios relative to our current base scenario at the time the analysis
was conducted (May 2013).
Section 2 offers the complete commodity prices applied across the four
scenarios.
Section 3 shows the five-year historical spot price distribution of the key
commodities used in these scenarios.
Please note that all analysis in this appendix, as in the corresponding chapter,
was conducted in May 2013. All references to current share prices, spot prices and
models are as of May 21, 2013.
Equity Scenario Analysis Summary

Exhibit 324 Vale Shows the Greatest Potential Upside and Widest Price Distribution Under Our
Scenarios (on the Back of Operational Gearing), While Glencore Shows the Greatest
Downside and Least Upside Relative to Our Current Price Target (as a Result of Our
Bullish View on Copper in the Medium Term)
Source: Corporate reports and Bernstein estimates and analysis.


TP / NPV per Share vs. Current Model
Current
Model
Grizzly Bear Bull De Niro Grizzly Bear Bull De Niro
Anglo American 23.00 6.51 17.03 26.84 36.22 -72% -26% 17% 57%
BHP Billiton 25.00 6.54 16.71 27.02 37.49 -74% -33% 8% 50%
Glen Xta Pro Forma 5.16 1.21 3.05 4.90 6.75 -77% -41% -5% 31%
Rio Tinto 45.75 15.23 37.73 59.99 81.69 -67% -18% 31% 79%
Vale BRL 29.25 9.73 34.38 58.97 83.54 -67% 18% 102% 186%
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
206 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 325 Rio Tinto Shows the Least Downside to Our
Scenarios and Glencore the Greatest

Exhibit 326 As Soon as a More Positive Iron Ore Price
Is Introduced, the Impact of Operational
Gearing in Vale Is Immediately Apparent

Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 327 Our Target Prices Are the Equivalent of the
"Bull" Scenario Even Though We Reach
These Targets With Higher Short-Term
Prices and Lower Long-Term Prices

Exhibit 328 It Is Difficult for Us to See Further Upside in
Our Target Price for Glencore as It Already
Factors in a Very Strong Copper Price
Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.


-67% -67%
-72%
-74%
-77%
Rio Tinto Vale Anglo
American
BHP
Billiton
Glen Xta
Pro Forma
TP vs. Current Model Grizzly
18%
-18%
-26%
-33%
-41%
Vale Rio Tinto Anglo
American
BHP
Billiton
Glen Xta
Pro Forma
TP vs. Current Model Bear
102%
31%
17%
8%
-5%
Vale Rio Tinto Anglo
American
BHP
Billiton
Glen Xta
Pro Forma
TP vs. Current Model Bull
186%
79%
57%
50%
31%
Vale Rio Tinto Anglo
American
BHP
Billiton
Glen Xta
Pro Forma
TP vs. Current Model De Niro
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
207





Exhibit 329 Rio Tinto Scenario Summary vs. Consensus
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 330 BHP Billiton Scenario Summary vs. Consensus
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 331 Anglo American Scenario Summary vs. Consensus
Source: Corporate reports and Bernstein estimates and analysis.


vs. Consensus
Rio Tinto
Current
Model
Consensus Grizzly Bear Bull De Niro Grizzly Bear Bull De Niro
Price/Potential Upside 45.75 - 15.23 37.73 59.99 81.69 -49% 27% 103% 176%
Revenue 2012A US$m 50,967 50,967 50,967 50,967 50,967 50,967 - - - -
Revenue 2013E US$m 63,152 55,586 41,893 49,005 56,118 63,230 -25% -12% 1% 14%
Revenue 2014E US$m 79,156 61,445 46,879 55,078 63,278 71,477 -24% -10% 3% 16%
EBITDA 2012A US$m 20,381 20,381 20,381 20,381 20,381 20,381 - - - -
EBITDA 2013E US$m 30,054 21,007 8,102 15,491 22,879 30,267 -61% -26% 9% 44%
EBITDA 2014E US$m 41,048 23,251 7,887 16,344 24,802 33,259 -66% -30% 7% 43%
EPS 2012A US$m -1.62 -1.62 -1.62 -1.62 -1.62 -1.62 - - - -
EPS 2013E US$m 7.42 5.72 -0.32 2.00 4.33 6.67 -106% -65% -24% 17%
EPS 2014E US$m 10.41 6.62 -0.78 1.87 4.54 7.22 -112% -72% -31% 9%
vs. Consensus
BHP Billiton (June Year-End)
Current
Model
Consensus Grizzly Bear Bull De Niro Grizzly Bear Bull De Niro
Price/Potential Upside 25.00 - 6.54 16.71 27.02 37.49 -64% -8% 49% 106%
Revenue 2012A US$m 72,226 72,226 72,226 72,226 72,226 72,226 - - - -
Revenue 2013E US$m 70,497 67,569 59,492 64,371 69,250 74,136 -12% -5% 2% 10%
Revenue 2014E US$m 93,105 73,914 58,919 69,648 80,376 91,119 -20% -6% 9% 23%
EBITDA 2012A US$m 30,324 30,324 30,324 30,324 30,324 30,324 - - - -
EBITDA 2013E US$m 28,861 28,727 17,932 22,776 27,620 32,471 -38% -21% -4% 13%
EBITDA 2014E US$m 50,886 33,552 16,925 27,581 38,238 48,909 -50% -18% 14% 46%
EPS 2012A US$m 2.93 2.93 2.93 2.93 2.93 2.93 - - - -
EPS 2013E US$m 3.20 2.53 1.74 2.35 2.96 3.57 -31% -7% 17% 41%
EPS 2014E US$m 5.64 3.05 1.03 2.38 3.73 5.08 -66% -22% 22% 67%
vs. Consensus
Anglo American
Current
Model
Consensus Grizzly Bear Bull De Niro Grizzly Bear Bull De Niro
Price/Potential Upside 23.00 - 6.51 17.03 26.84 36.22 -59% 6% 67% 126%
Revenue 2012A US$m 28,761 28,761 28,761 28,761 28,761 28,761 - - - -
Revenue 2013E US$m 35,841 34,520 26,766 30,303 33,839 37,376 -22% -12% -2% 8%
Revenue 2014E US$m 41,500 36,177 27,806 31,526 35,247 38,968 -23% -13% -3% 8%
EBITDA 2012A US$m 8,815 8,815 8,815 8,815 8,815 8,815 - - - -
EBITDA 2013E US$m 13,412 9,657 4,288 7,810 11,333 14,855 -56% -19% 17% 54%
EBITDA 2014E US$m 17,136 10,177 3,353 7,058 10,762 14,466 -67% -31% 6% 42%
EPS 2012A US$m 2.22 2.22 2.22 2.22 2.22 2.22 - - - -
EPS 2013E US$m 2.86 2.17 -0.17 1.03 2.23 3.43 -108% -52% 3% 58%
EPS 2014E US$m 4.08 2.61 -0.66 0.63 1.91 3.18 -125% -76% -27% 22%
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
208 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 332 Glencore Xstrata Pro Forma Scenario Summary vs. Consensus
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 333 Vale Scenario Summary vs. Consensus
Source: Corporate reports and Bernstein estimates and analysis.



vs. Consensus
Glencore Xstrata Pro Forma
Current
Model
Consensus Grizzly Bear Bull De Niro Grizzly Bear Bull De Niro
Price 5.16 - 1.21 3.05 4.90 6.75 -77% -41% -5% 31%
Revenue 2012 US$m 229,505 229,505 229,595 229,595 229,595 229,595 - - - -
Revenue 2013E US$m 251,245 244,469 203,872 228,386 252,901 277,415 -17% -7% 3% 13%
Revenue 2014E US$m 283,428 257,098 211,572 237,141 262,709 288,278 -18% -8% 2% 12%
EBITDA 2012 US$m 13,784 13,784 13,858 13,858 13,858 13,858 - - - -
EBITDA 2013E US$m 22,217 13,395 10,271 15,466 20,665 25,866 -23% 15% 54% 93%
EBITDA 2014E US$m 29,264 15,592 10,320 16,041 21,767 27,496 -34% 3% 40% 76%
EPS 2012 US$m 0.43 0.43 0.43 0.43 0.43 0.43 - - - -
EPS 2013E US$m 0.74 1.38 0.08 0.37 0.66 0.96 -94% -73% -52% -31%
EPS 2014E US$m 1.11 1.64 0.05 0.37 0.70 1.03 -97% -77% -57% -37%
vs. Consensus
Vale
Current
Model
Consensus Grizzly Bear Bull De Niro Grizzly Bear Bull De Niro
Price/Potential Upside BRL 29.25 - 9.73 34.38 58.97 83.54 -72% 0% 72% 144%
Revenue 2012A US$m 47,694 47,694 47,694 47,694 47,694 47,694 - - - -
Revenue 2013E US$m 59,716 48,476 42,108 48,165 54,222 60,280 -13% -1% 12% 24%
Revenue 2014E US$m 74,202 50,580 41,150 50,065 58,980 67,895 -19% -1% 17% 34%
EBITDA 2012A US$m 18,133 18,133 18,133 18,133 18,133 18,133 - - - -
EBITDA 2013E US$m 31,950 21,994 14,342 20,399 26,456 32,513 -35% -7% 20% 48%
EBITDA 2014E US$m 43,806 22,151 10,753 19,668 28,583 37,499 -51% -11% 29% 69%
EPS 2012A US$m 1.07 1.07 1.07 1.07 1.07 1.07 - - - -
EPS 2013E US$m 3.73 2.27 1.11 2.02 2.95 3.90 -51% -11% 30% 71%
EPS 2014E US$m 5.48 2.19 0.45 1.80 3.17 4.59 -80% -18% 45% 110%
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
209





Exhibit 334 Both the "Grizzly"...

Exhibit 335 ...And "Bear" Scenarios Show Revenue
Below Consensus Expectations
Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 336 Over the Next Two Years What We Call the
"Bull" Scenario Is Closest to Consensus
Expectation

Exhibit 337 While Under the Strongest Price Scenario,
There Is Upside to Consensus
Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.


-12%
-13%
-17%
-22%
-25%
-20%
-19%
-18%
-23% -24%
BHP
Billiton
Vale Glen Xta
Pro Forma
Anglo
American
Rio Tinto
Revenue vs. Consensus Grizzly
2013E 2014E
-1%
-5%
-7%
-12%
-12%
-1%
-6%
-8%
-10%
-13%
Vale BHP
Billiton
Glen Xta
Pro Forma
Rio Tinto Anglo
American
Revenue vs. Consensus Bear
2013E 2014E
12%
3%
2%
1%
-2%
17%
2%
9%
3%
-3%
Vale Glen Xta
Pro Forma
BHP
Billiton
Rio Tinto Anglo
American
Revenue vs. Consensus Bull
2013E 2014E
24%
14%
13%
10%
8%
34%
16%
12%
23%
8%
Vale Rio Tinto Glen Xta
Pro Forma
BHP
Billiton
Anglo
American
Revenue vs. Consensus De Niro
2013E 2014E
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
210 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 338 The Same Feature Is Seen at the EBITDA
Line...

Exhibit 339 ...The Lack of Coverage of Glencore Makes
Comparison More Difficult
Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 340 Again, the "Bull" Scenario Appears Closest
to Consensus

Exhibit 341 Considerable Upside Under Stronger
Commodity Scenarios Emphasizes the
Degree of Operationally Geared Exposure
the Miners Offer to Commodity Prices
Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.


-23%
-35%
-38%
-56%
-61%
-34%
-51%
-50%
-67%
-66%
Glen Xta
Pro Forma
Vale BHP
Billiton
Anglo
American
Rio Tinto
EBITDA vs. Consensus Grizzly
2013E 2014E
15%
-7%
-19%
-21%
-26%
3%
-11%
-31%
-18%
-30%
Glen Xta
Pro Forma
Vale Anglo
American
BHP
Billiton
Rio Tinto
EBITDA vs. Consensus Bear
2013E 2014E
54%
20%
17%
9%
-4%
40%
29%
6%
7%
14%
Glen Xta
Pro Forma
Vale Anglo
American
Rio Tinto BHP
Billiton
EBITDA vs. Consensus Bull
2013E 2014E
93%
54%
48%
44%
13%
76%
42%
69%
43%
46%
Glen Xta
Pro Forma
Anglo
American
Vale Rio Tinto BHP
Billiton
EBITDA vs. Consensus De Niro
2013E 2014E
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
211





Rio Tinto
Rio Tinto is primarily an iron ore business differentiated from its peers BHP
Billiton and Vale by lack of petroleum on one side and by its high-quality (and
growing) copper business on the other. Only under the most bullish price scenarios
does aluminum offer diversification for the group on any measure other than simple
revenue. Rio Tinto is our top pick, and, as this scenario analysis shows, the
company offers the most attractive balance between upside potential and downside
risk.

Exhibit 342 Rio Tinto Scenario Analysis Summary
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 343 Rio Tinto EV by Division
Source: Corporate reports and Bernstein estimates and analysis.


Rio Tinto Implied Share Price (GBP) vs. Current Model
Current Model 45.75 -
Grizzly 15.23 -67%
Bear 37.73 -18%
Bull 59.99 31%
De Niro 81.69 79%
174,957
77,886
150,387
221,759
291,325
(50,000)
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Current Model Grizzly Bear Bull De Niro
U
S
$
m
Rio Tinto EV
Iron Ore Aluminum Copper Energy Diamonds & Minerals Other Total
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
212 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 344 Rio Tinto Current Model Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 345 Rio Tinto Current Model Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Consolidated revenue US$m 22,465 29,700 54,264 41,825 56,576 60,537 50,967 63,152 79,156 72,878
Operating profit US$m 10,352 10,155 11,233 8,292 20,795 14,052 (2,576) 21,070 30,268 20,651
PAT US$m 7,867 7,746 4,609 5,335 15,184 6,765 (3,004) 14,663 20,804 14,267
Minority interests US$m (429) (434) (933) (463) (860) (939) 14 (958) (1,582) (1,343)
Reported earnings US$m 7,438 7,312 3,676 4,872 14,324 5,826 (2,990) 13,706 19,222 12,924
Reported EPS, USD/sh USD/share 5.58 5.69 2.86 2.76 7.30 3.03 -1.62 7.42 10.41 7.00
Balance Sheet
Total assets US$m 34,494 101,391 89,616 97,236 112,773 119,545 117,573 126,444 140,674 149,858
Total liabilities US$m (15,109) (75,067) (67,155) (51,311) (48,261) (60,337) (59,552) (57,470) (55,988) (55,454)
Net assets US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 68,974 84,686 94,403
Total equity US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 68,974 84,686 94,403
Net debt/(Net Cash) US$m 2,775 45,182 38,577 18,861 4,071 8,807 19,412 17,829 6,220 (3,729)
Cash Flow Statement
EBITDA 0 12,566 13,611 23,870 14,471 26,639 29,586 20,381 30,054 41,048 31,540
Operating cash flow US$m 11,196 12,569 20,668 13,834 23,530 27,390 16,548 23,558 35,551 28,645
Net cash flow from operations US$m 8,076 8,491 14,883 9,212 18,277 20,032 9,466 16,584 24,896 21,308
Net cash flow from investing US$m (4,362) (42,742) (6,181) (3,357) (1,711) (16,838) (18,174) (12,249) (9,775) (8,152)
Net cash flow from financing US$m (5,389) 35,097 (9,108) (2,463) (10,610) (3,426) 6,325 (3,148) (6,202) (4,234)
Closing cash & equivalents US$m 736 1,645 1,181 4,233 9,948 9,670 7,082 8,269 17,188 26,110
FCF Per Share US$/share 3.36 3.23 6.38 3.04 7.57 4.61 -3.64 3.22 9.63 8.28
Valuation Summary
Price Target/History 22.45 44.36 11.36 33.70 44.87 31.25 35.12 45.75 45.75 45.75
Price Target/History $ 43.97 88.13 16.72 53.85 69.39 48.58 56.63 72.50 72.50 72.50
MCAP US$m 57,574 113,316 21,456 94,963 136,070 92,178 104,574 133,865 133,865 133,865
EV US$m 63,669 165,224 65,479 122,848 148,311 115,842 124,475 174,957 174,957 174,957
EV/EBITDA - 5.1 12.1 2.7 8.5 5.6 3.9 6.1 5.8 4.3 5.5
PE - 7.9 15.5 5.8 19.5 9.5 16.0 -35.0 9.8 7.0 10.4
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Iron Ore 69,188 15,979 85,167 46.12 29.11 20,945 4.1
Aluminum 15,664 6,259 21,923 11.87 7.49 2,168 10.1
Copper 38,478 7,837 46,315 25.08 15.83 3,318 14.0
Energy 13,894 2,553 16,447 8.91 5.62 2,693 6.1
Diamonds & Minerals 8,149 - 8,149 4.41 2.79 1,290 6.3
Other (3,043) - (3,043) (1.65) (1.04) (360) 8.5
Rio Enterprise Value 142,329 32,628 174,957 94.75 59.80 30,054 5.8
Less Minorities (20,530) (11.12) (7.02)
Less Central Costs - - -
Less (Net Debt)/Net Cash (20,562) (11.14) (7.03)
Equity Value 133,865 72.50 45.75
Shares Outstanding 1,847
Share Price (USD) 72.50
Exchange Rate 1.58
Implied Share Price (GBP) 45.75
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
213





Exhibit 346 Rio Tinto Grizzly Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 347 Rio Tinto Grizzly Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Consolidated revenue US$m 22,465 29,700 54,264 41,825 56,576 60,537 50,967 41,893 46,879 51,701
Operating profit US$m 10,352 10,155 11,233 8,292 20,795 14,052 (2,576) 266 (1,079) 79
PAT US$m 7,867 7,746 4,609 5,335 15,184 6,765 (3,004) (940) (1,948) (1,201)
Minority interests US$m (429) (434) (933) (463) (860) (939) 14 351 504 285
Reported earnings US$m 7,438 7,312 3,676 4,872 14,324 5,826 (2,990) (588) (1,445) (916)
Reported EPS USD/share 5.58 5.69 2.86 2.76 7.30 3.03 -1.62 -0.32 -0.78 -0.50
Balance Sheet
Total assets US$m 34,494 101,391 89,616 97,236 112,773 119,545 117,573 115,634 116,112 116,179
Total liabilities US$m (15,109) (75,067) (67,155) (51,311) (48,261) (60,337) (59,552) (59,430) (61,202) (61,899)
Net assets US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 56,204 54,910 54,281
Total equity US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 56,204 54,910 54,281
Net debt/(Net cash) US$m 2,775 45,182 38,577 18,861 4,071 8,807 19,412 25,896 28,276 29,094
Cash Flow Statement
EBITDA US$m 12,566 13,611 23,870 14,471 26,639 29,586 20,381 8,102 7,887 9,311
Operating cash flow US$m 11,196 12,569 20,668 13,834 23,530 27,390 16,548 6,140 5,178 6,259
Net cash flow from operations US$m 8,076 8,491 14,883 9,212 18,277 20,032 9,466 5,676 5,203 5,654
Net cash flow from investing US$m (4,362) (42,742) (6,181) (3,357) (1,711) (16,838) (18,174) (10,932) (7,733) (6,759)
Net cash flow from financing US$m (5,389) 35,097 (9,108) (2,463) (10,610) (3,426) 6,325 393 745 492
Closing cash & equivalents US$m 736 1,645 1,181 4,233 9,948 9,670 7,082 2,219 434 (179)
FCF per share US$/share 3.36 3.23 6.38 3.04 7.57 4.61 -3.64 -2.66 -0.89 0.04
Valuation Summary
Price Target/History 22.45 44.36 11.36 33.70 44.87 31.25 35.12 15.23 15.23 15.23
Price Target/History $ 43.97 88.13 16.72 53.85 69.39 48.58 56.63 24.14 24.14 24.14
MCAP US$m 57,574 113,316 21,456 94,963 136,070 92,178 104,574 44,566 44,566 44,566
EV US$m 63,669 165,224 65,479 122,848 148,311 115,842 124,475 77,886 77,886 77,886
EV/EBITDA - 5.1 12.1 2.7 8.5 5.6 3.9 6.1 9.6 9.9 8.4
PE - 7.9 15.5 5.8 19.5 9.5 16.0 -35.0 -75.8 -30.8 -48.6
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Iron Ore 40,216 14,407 54,623 29.58 18.67 6,225 8.8
Aluminum (6,068) - (6,068) (3.29) (2.07) (619) 9.8
Copper 16,066 6,231 22,297 12.08 7.62 1,260 17.7
Energy 1,435 1,099 2,535 1.37 .87 452 5.6
Diamonds & Minerals 7,608 - 7,608 4.12 2.60 1,146 6.6
Other (3,110) - (3,110) (1.68) (1.06) (360) 8.6
Rio Enterprise Value 56,148 21,737 77,886 42.18 26.62 8,102 9.6
Less Minorities (9,660) (5.23) (3.30)
Less Central Costs - - -
Less (Net Debt)/Net Cash (23,660) (12.81) (8.09)
Equity Value 44,566 24.14 15.23
Shares Outstanding 1,847
Share Price (USD) 24.14
Exchange Rate 1.58
Implied Share Price (GBP) 15.23
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
214 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 348 Rio Tinto Bear Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 349 Rio Tinto Bear Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Consolidated revenue US$m 22,465 29,700 54,264 41,825 56,576 60,537 50,967 49,005 55,078 61,036
Operating profit US$m 10,352 10,155 11,233 8,292 20,795 14,052 (2,576) 7,227 6,867 9,052
PAT US$m 7,867 7,746 4,609 5,335 15,184 6,765 (3,004) 3,802 3,513 5,024
Minority interests US$m (429) (434) (933) (463) (860) (939) 14 (115) (66) (364)
Reported earnings US$m 7,438 7,312 3,676 4,872 14,324 5,826 (2,990) 3,686 3,448 4,660
Reported EPS USD/share 5.58 5.69 2.86 2.76 7.30 3.03 -1.62 2.00 1.87 2.52
Balance Sheet
Total assets US$m 34,494 101,391 89,616 97,236 112,773 119,545 117,573 118,872 122,477 126,105
Total liabilities US$m (15,109) (75,067) (67,155) (51,311) (48,261) (60,337) (59,552) (58,891) (59,826) (59,559)
Net assets US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 59,981 62,651 66,546
Total equity US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 59,981 62,651 66,546
Net debt/(Net cash) US$m 2,775 45,182 38,577 18,861 4,071 8,807 19,412 23,624 22,631 19,563
Cash Flow Statement
EBITDA US$m 12,566 13,611 23,870 14,471 26,639 29,586 20,381 15,491 16,344 18,876
Operating cash flow US$m 11,196 12,569 20,668 13,834 23,530 27,390 16,548 12,046 13,060 15,189
Net cash flow from operations US$m 8,076 8,491 14,883 9,212 18,277 20,032 9,466 8,896 10,030 11,187
Net cash flow from investing US$m (4,362) (42,742) (6,181) (3,357) (1,711) (16,838) (18,174) (11,382) (8,260) (7,354)
Net cash flow from financing US$m (5,389) 35,097 (9,108) (2,463) (10,610) (3,426) 6,325 (673) (1,026) (1,532)
Closing cash & equivalents US$m 736 1,645 1,181 4,233 9,948 9,670 7,082 3,923 4,668 6,969
FCF per share US$/share 3.36 3.23 6.38 3.04 7.57 4.61 -3.64 -0.91 1.70 2.96
Valuation Summary
Price Target/History 22.45 44.36 11.36 33.70 44.87 31.25 35.12 37.73 37.73 37.73
Price Target/History $ 43.97 88.13 16.72 53.85 69.39 48.58 56.63 59.78 59.78 59.78
MCAP US$m 57,574 113,316 21,456 94,963 136,070 92,178 104,574 110,378 110,378 110,378
EV US$m 63,669 165,224 65,479 122,848 148,311 115,842 124,475 150,387 150,387 150,387
EV/EBITDA - 5.1 12.1 2.7 8.5 5.6 3.9 6.1 9.7 9.2 8.0
PE - 7.9 15.5 5.8 19.5 9.5 16.0 -35.0 29.9 32.0 23.7
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Iron Ore 76,810 23,393 100,203 54.27 34.25 10,716 9.4
Aluminum 723 1,058 1,781 .96 .61 535 3.3
Copper 25,248 8,178 33,426 18.10 11.43 2,114 15.8
Energy 7,318 2,818 10,136 5.49 3.46 1,284 7.9
Diamonds & Minerals 7,938 - 7,938 4.30 2.71 1,201 6.6
Other (3,097) - (3,097) (1.68) (1.06) (360) 8.6
Rio Enterprise Value 114,941 35,447 150,387 81.44 51.40 15,491 9.7
Less Minorities (17,202) (9.32) (5.88)
Less Central Costs - - -
Less (Net Debt)/Net Cash (22,808) (12.35) (7.80)
Equity Value 110,378 59.78 37.73
Shares Outstanding 1,847
Share Price (USD) 59.78
Exchange Rate 1.58
Implied Share Price (GBP) 37.73
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
215





Exhibit 350 Rio Tinto Bull Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 351 Rio Tinto Bull Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Consolidated revenue US$m 22,465 29,700 54,264 41,825 56,576 60,537 50,967 56,118 63,278 70,370
Operating profit US$m 10,352 10,155 11,233 8,292 20,795 14,052 (2,576) 14,187 14,814 18,025
PAT US$m 7,867 7,746 4,609 5,335 15,184 6,765 (3,004) 8,543 8,975 11,250
Minority interests US$m (429) (434) (933) (463) (860) (939) 14 (539) (584) (963)
Reported earnings US$m 7,438 7,312 3,676 4,872 14,324 5,826 (2,990) 8,004 8,391 10,288
Reported EPS USD/share 5.58 5.69 2.86 2.76 7.30 3.03 -1.62 4.33 4.54 5.57
Balance Sheet
Total assets US$m 34,494 101,391 89,616 97,236 112,773 119,545 117,573 122,137 128,903 136,121
Total liabilities US$m (15,109) (75,067) (67,155) (51,311) (48,261) (60,337) (59,552) (58,342) (58,431) (57,188)
Net assets US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 63,795 70,472 78,933
Total equity US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 63,795 70,472 78,933
Net debt/(Net cash) US$m 2,775 45,182 38,577 18,861 4,071 8,807 19,412 21,314 16,907 9,910
Cash Flow Statement
EBITDA US$m 12,566 13,611 23,870 14,471 26,639 29,586 20,381 22,879 24,802 28,441
Operating cash flow US$m 11,196 12,569 20,668 13,834 23,530 27,390 16,548 17,953 20,942 24,119
Net cash flow from operations US$m 8,076 8,491 14,883 9,212 18,277 20,032 9,466 12,160 14,910 16,772
Net cash flow from investing US$m (4,362) (42,742) (6,181) (3,357) (1,711) (16,838) (18,174) (11,832) (8,788) (7,948)
Net cash flow from financing US$m (5,389) 35,097 (9,108) (2,463) (10,610) (3,426) 6,325 (1,755) (2,816) (3,576)
Closing cash & equivalents US$m 736 1,645 1,181 4,233 9,948 9,670 7,082 5,656 8,961 14,208
FCF per share US$/share 3.36 3.23 6.38 3.04 7.57 4.61 -3.64 0.84 4.30 5.89
Valuation Summary
Price Target/History 22.45 44.36 11.36 33.70 44.87 31.25 35.12 59.99 59.99 59.99
Price Target/History $ 43.97 88.13 16.72 53.85 69.39 48.58 56.63 95.04 95.04 95.04
MCAP US$m 57,574 113,316 21,456 94,963 136,070 92,178 104,574 175,496 175,496 175,496
EV US$m 63,669 165,224 65,479 122,848 148,311 115,842 124,475 221,759 221,759 221,759
EV/EBITDA - 5.1 12.1 2.7 8.5 5.6 3.9 6.1 9.7 8.9 7.8
PE - 7.9 15.5 5.8 19.5 9.5 16.0 -35.0 21.9 20.9 17.1
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Iron Ore 112,270 31,795 144,065 78.02 49.24 15,208 9.5
Aluminum 7,437 3,375 10,812 5.86 3.70 1,690 6.4
Copper 34,262 9,984 44,246 23.96 15.12 2,968 14.9
Energy 13,029 4,437 17,465 9.46 5.97 2,117 8.3
Diamonds & Minerals 8,249 - 8,249 4.47 2.82 1,256 6.6
Other (3,079) - (3,079) (1.67) (1.05) (360) 8.6
Rio Enterprise Value 172,168 49,591 221,759 120.10 75.80 22,879 9.7
Less Minorities (24,330) (13.18) (8.32)
Less Central Costs - - -
Less (Net Debt)/Net Cash (21,933) (11.88) (7.50)
Equity Value 175,496 95.04 59.99
Shares Outstanding 1,847
Share Price (USD) 95.04
Exchange Rate 1.58
Implied Share Price (GBP) 59.99
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
216 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 352 Rio Tinto De Niro Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 353 Rio Tinto De Niro Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Consolidated revenue US$m 22,465 29,700 54,264 41,825 56,576 60,537 50,967 63,230 71,477 79,705
Operating profit US$m 10,352 10,155 11,233 8,292 20,795 14,052 (2,576) 21,148 22,761 26,998
PAT US$m 7,867 7,746 4,609 5,335 15,184 6,765 (3,004) 13,284 14,438 17,477
Minority interests US$m (429) (434) (933) (463) (860) (939) 14 (962) (1,098) (1,558)
Reported earnings US$m 7,438 7,312 3,676 4,872 14,324 5,826 (2,990) 12,322 13,340 15,919
Reported EPS USD/share 5.58 5.69 2.86 2.76 7.30 3.03 -1.62 6.67 7.22 8.62
Balance Sheet
Total assets US$m 34,494 101,391 89,616 97,236 112,773 119,545 117,573 125,403 135,331 147,076
Total liabilities US$m (15,109) (75,067) (67,155) (51,311) (48,261) (60,337) (59,552) (57,794) (57,034) (55,750)
Net assets US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 67,609 78,297 91,326
Total equity US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 67,609 78,297 91,326
Net debt/(Net cash) US$m 2,775 45,182 38,577 18,861 4,071 8,807 19,412 19,004 11,178 251
Cash Flow Statement
EBITDA US$m 12,566 13,611 23,870 14,471 26,639 29,586 20,381 30,267 33,259 38,007
Operating cash flow US$m 11,196 12,569 20,668 13,834 23,530 27,390 16,548 23,859 28,825 33,050
Net cash flow from operations US$m 8,076 8,491 14,883 9,212 18,277 20,032 9,466 15,423 19,794 22,361
Net cash flow from investing US$m (4,362) (42,742) (6,181) (3,357) (1,711) (16,838) (18,174) (12,282) (9,316) (8,543)
Net cash flow from financing US$m (5,389) 35,097 (9,108) (2,463) (10,610) (3,426) 6,325 (2,836) (4,608) (4,689)
Closing cash & equivalents US$m 736 1,645 1,181 4,233 9,948 9,670 7,082 7,388 13,258 22,386
FCF per share US$/share 3.36 3.23 6.38 3.04 7.57 4.61 -3.64 2.58 6.89 8.82
Valuation Summary
Price Target/History 22.45 44.36 11.36 33.70 44.87 31.25 35.12 81.69 81.69 81.69
Price Target/History $ 43.97 88.13 16.72 53.85 69.39 48.58 56.63 129.43 129.43 129.43
MCAP US$m 57,574 113,316 21,456 94,963 136,070 92,178 104,574 238,988 238,988 238,988
EV US$m 63,669 165,224 65,479 122,848 148,311 115,842 124,475 291,325 291,325 291,325
EV/EBITDA - 5.1 12.1 2.7 8.5 5.6 3.9 6.1 9.6 8.8 7.7
PE - 7.9 15.5 5.8 19.5 9.5 16.0 -35.0 19.4 17.9 15.0
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Iron Ore 147,127 39,709 186,836 101.18 63.86 19,700 9.5
Aluminum 14,054 5,545 19,599 10.61 6.70 2,844 6.9
Copper 43,122 11,672 54,795 29.67 18.73 3,822 14.3
Energy 18,651 5,952 24,603 13.32 8.41 2,949 8.3
Diamonds & Minerals 8,551 - 8,551 4.63 2.92 1,311 6.5
Other (3,059) - (3,059) (1.66) (1.05) (360) 8.5
Rio Enterprise Value 228,447 62,878 291,325 157.77 99.58 30,267 9.6
Less Minorities (31,279) (16.94) (10.69)
Less Central Costs - - -
Less (Net Debt)/Net Cash (21,058) (11.40) (7.20)
Equity Value 238,988 129.43 81.69
Shares Outstanding 1,847
Share Price (USD) 129.43
Exchange Rate 1.58
Implied Share Price (GBP) 81.69
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
217





BHP Billiton
BHP Billiton is the highest quality stock in our coverage, and has the second most
diversified portfolio after Anglo American. But where Anglo has the drag of
platinum, BHP has a petroleum kicker (run at 77% EBITDA margins in 2011 and
73% in 2012). BHP fares second worst in the Grizzly scenario (after Glencore) but
only third best in the De Niro scenario (the inverse of Anglos third worst in
Grizzly and second best in De Niro). The presence of petroleum means that,
uniquely for BHP, there is a third key explanatory variable (besides copper and iron
ore).

Exhibit 354 BHP Billiton Scenario Analysis Summary
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 355 BHP Billiton EV by Division
Source: Corporate reports and Bernstein estimates and analysis.


BHP Billiton Implied Share Price (GBP) vs. Current Model
Current Model 25.00 -
Grizzly 6.54 -74%
Bear 16.71 -33%
Bull 27.02 8%
De Niro 37.49 50%
251,343
94,981
182,557
270,449
359,245
(50,000)
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Current Model Grizzly Bear Bull De Niro
U
S
$
m
BHP Billiton EV
Petroleum Aluminium Base Metals
Diamonds & Specialty Products Stainless Steel Materials Iron Ore
Metallurgical Coal Energy Coal Manganese
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
218 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 356 BHP Billiton Current Model Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 357 BHP Billiton Current Model Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
June year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Group revenue US$m 39,099 47,473 59,473 50,211 52,798 71,739 72,226 70,497 93,105 101,053
Operating profit US$m 14,671 18,401 24,145 12,160 20,030 31,816 23,916 24,835 43,813 45,665
PAT US$m 10,534 13,496 15,962 6,338 13,008 23,946 15,696 17,218 30,357 32,172
Minority interests US$m (84) (80) (572) (461) (287) (298) (115) (177) (361) (345)
Reported Earnings US$m 10,450 13,416 15,390 5,877 12,721 23,648 15,581 17,041 29,997 31,827
Reported EPS, USD/sh USD/share 1.76 2.39 2.77 1.06 2.29 4.44 2.93 3.20 5.64 5.98

Balance Sheet
Total assets US$m 48,516 58,168 76,008 78,770 88,852 102,891 129,273 138,378 157,766 179,545
Total liabilities US$m (24,061) (28,250) (36,965) (38,059) (39,523) (45,136) (62,188) (63,208) (59,783) (57,595)
Net assets US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 75,170 97,983 121,951
Total equity US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 75,170 97,983 121,951
Net debt/(Net cash) US$m 8,240 8,706 8,458 5,586 3,308 5,823 23,549 30,570 15,735 (4,393)
Cash Flow Statement
EBITDA 0 17,447 21,284 27,757 16,031 24,790 36,855 30,324 28,861 50,886 52,921
Operating cash flow US$m 12,015 15,955 25,148 25,182 22,246 37,081 33,438 25,940 47,290 52,496
Net cash flow from operations US$m 10,497 15,596 17,817 18,863 16,890 30,080 24,548 16,001 33,922 39,080
Net cash flow from investing US$m (5,512) (7,624) (9,064) (11,051) (9,985) (16,464) (32,036) (16,297) (11,542) (10,748)
Net cash flow from financing US$m (5,412) (6,843) (6,999) (1,180) (5,307) (16,018) 2,509 326 (11,344) (10,840)
Closing cash & equivalents US$m 776 1,937 4,237 10,833 12,456 10,084 4,781 4,929 15,965 33,457
FCF Per Share US$/share 0.50 0.95 1.95 1.74 1.43 3.64 1.26 -0.18 4.49 5.52
Valuation Summary
Price Target/History 10.49 13.90 18.75 13.56 18.67 18.78 21.30 25.00 25.00 25.00
Price Target/History $ 19.18 27.82 37.11 22.26 27.83 29.18 34.34 39.51 39.51 39.51
MCAP US$m 113,795 156,214 206,507 123,855 154,816 155,346 182,747 210,242 210,242 210,242
EV US$m 122,950 165,852 222,640 139,155 161,616 163,126 207,645 251,343 251,343 251,343
EV/EBITDA - 7.0 7.8 8.0 8.7 6.5 4.4 6.8 8.7 4.9 4.7
PE - 10.9 11.6 13.4 21.1 12.2 6.6 11.7 12.3 7.0 6.6
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Petroleum 91,182 - 91,182 17.14 10.82 12,170 7.5
Aluminum 5,580 942 6,522 1.23 .77 549 11.9
Base Metals 43,619 8,442 52,061 9.78 6.18 6,658 7.8
Diamonds & Specialty Products (3,822) - (3,822) (.72) (.45) 19 (202.1)
Stainless Steel Materials 47 - 47 .01 .01 391 .1
Iron Ore 54,750 11,663 66,413 12.48 7.88 15,752 4.2
Manganese 3,743 56 3,799 .71 .45 831 4.6
Metallurgical Coal 20,444 5,298 25,742 4.84 3.05 3,762 6.8
Energy Coal 8,090 1,310 9,399 1.77 1.11 1,664 5.6
BHPB Enterprise Value 223,631 27,712 251,343 47.24 29.81 41,796 6.0
Less Minorities (2,500) (.47) (.30)
Less Central Costs (8,032) (1.51) (.95)
Less (Net Debt)/Net Cash (30,570) (5.75) (3.63)
Equity Value 210,242 39.51 25.00
Shares Outstanding 5,321
Share Price (USD) 39.51
Exchange Rate 1.58
Implied Share Price () 25.00
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
219





Exhibit 358 BHP Billiton Grizzly Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 359 BHP Billiton Grizzly Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
June year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Group revenue US$m 39,099 47,473 59,473 50,211 52,798 71,739 72,226 59,492 58,919 63,765
Operating profit US$m 14,671 18,401 24,145 12,160 20,030 31,816 23,916 13,907 9,889 8,739
PAT US$m 10,534 13,496 15,962 6,338 13,008 23,946 15,696 9,312 5,495 4,707
Minority interests US$m (84) (80) (572) (461) (287) (298) (115) (65) (12) 23
Reported earnings US$m 10,450 13,416 15,390 5,877 12,721 23,648 15,581 9,247 5,482 4,730
Reported EPS USD/share 1.76 2.39 2.77 1.06 2.29 4.44 2.93 1.74 1.03 0.89

Balance Sheet
Total assets US$m 48,516 58,168 76,008 78,770 88,852 102,891 129,273 131,685 136,149 140,178
Total liabilities US$m (24,061) (28,250) (36,965) (38,059) (39,523) (45,136) (62,188) (64,309) (64,866) (65,306)
Net assets US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 67,376 71,282 74,872
Total equity US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 67,376 71,282 74,872
Net debt/(Net cash) US$m 8,240 8,706 8,458 5,586 3,308 5,823 23,549 34,997 35,811 35,703
Cash Flow Statement
EBITDA US$m 17,447 21,284 27,757 16,031 24,790 36,855 30,324 17,932 16,925 15,887
Operating cash flow US$m 12,015 15,955 25,148 25,182 22,246 37,081 33,438 18,085 15,692 14,835
Net cash flow from operations US$m 10,497 15,596 17,817 18,863 16,890 30,080 24,548 11,169 11,390 10,896
Net cash flow from investing US$m (5,512) (7,624) (9,064) (11,051) (9,985) (16,464) (32,036) (16,003) (10,616) (9,671)
Net cash flow from financing US$m (5,412) (6,843) (6,999) (1,180) (5,307) (16,018) 2,509 1,573 (1,388) (1,139)
Closing cash & equivalents US$m 776 1,937 4,237 10,833 12,456 10,084 4,781 1,636 1,023 1,109
FCF per share US$/share 0.50 0.95 1.95 1.74 1.43 3.64 1.26 -1.03 0.47 0.55
Valuation Summary
Price Target/History 10.49 13.90 18.75 13.56 18.67 18.78 21.30 6.54 6.54 6.54
Price Target/History $ 19.18 27.82 37.11 22.26 27.83 29.18 34.34 10.36 10.36 10.36
MCAP US$m 113,795 156,214 206,507 123,855 154,816 155,346 182,747 55,132 55,132 55,132
EV US$m 122,950 165,852 222,640 139,155 161,616 163,126 207,645 94,981 94,981 94,981
EV/EBITDA - 7.0 7.8 8.0 8.7 6.5 4.4 6.8 5.3 5.6 6.0
PE - 10.9 11.6 13.4 21.1 12.2 6.6 11.7 6.0 10.1 11.7
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Petroleum 33,627 - 33,627 6.32 3.99 8,301 4.1
Aluminum (3,929) - (3,929) (.74) (.47) (551) 7.1
Base Metals 14,280 4,787 19,067 3.58 2.26 2,731 7.0
Diamonds & Specialty Products (3,846) - (3,846) (.72) (.46) 7 (538.8)
Stainless Steel Materials (1,556) - (1,556) (.29) (.18) (71) 22.0
Iron Ore 31,758 9,792 41,550 7.81 4.93 4,391 9.5
Manganese 1,157 37 1,194 .22 .14 218 5.5
Metallurgical Coal 3,538 2,135 5,673 1.07 .67 650 8.7
Energy Coal 2,365 835 3,200 .60 .38 565 5.7
BHPB Enterprise Value 77,394 17,586 94,981 17.85 11.27 16,242 5.8
Less Minorities (605) (.11) (.07)
Less Central Costs (4,246) (.80) (.50)
Less (Net Debt)/Net Cash (34,997) (6.58) (4.15)
Equity Value 55,132 10.36 6.54
Shares Outstanding 5,321
Share Price (USD) 10.36
Exchange Rate 1.58
Implied Share Price () 6.54
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
220 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 360 BHP Billiton Bear Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Pro Forma Financials
June year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Group revenue US$m 39,099 47,473 59,473 50,211 52,798 71,739 72,226 64,371 69,648 75,639
Operating profit US$m 14,671 18,401 24,145 12,160 20,030 31,816 23,916 18,751 20,529 20,502
PAT US$m 10,534 13,496 15,962 6,338 13,008 23,946 15,696 12,606 12,783 12,853
Minority interests US$m (84) (80) (572) (461) (287) (298) (115) (118) (122) (88)
Reported earnings US$m 10,450 13,416 15,390 5,877 12,721 23,648 15,581 12,488 12,661 12,765
Reported EPS USD/share 1.76 2.39 2.77 1.06 2.29 4.44 2.93 2.35 2.38 2.40

Balance Sheet
Total assets US$m 48,516 58,168 76,008 78,770 88,852 102,891 129,273 134,493 142,870 151,650
Total liabilities US$m (24,061) (28,250) (36,965) (38,059) (39,523) (45,136) (62,188) (63,876) (63,243) (62,199)
Net assets US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 70,617 79,628 89,452
Total equity US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 70,617 79,628 89,452
Net debt/(Net cash) US$m 8,240 8,706 8,458 5,586 3,308 5,823 23,549 33,256 29,422 23,510
Cash Flow Statement
EBITDA US$m 17,447 21,284 27,757 16,031 24,790 36,855 30,324 22,776 27,581 27,688
Operating cash flow US$m 12,015 15,955 25,148 25,182 22,246 37,081 33,438 21,566 26,172 26,491
Net cash flow from operations US$m 10,497 15,596 17,817 18,863 16,890 30,080 24,548 13,100 18,516 18,928
Net cash flow from investing US$m (5,512) (7,624) (9,064) (11,051) (9,985) (16,464) (32,036) (16,141) (10,909) (9,988)
Net cash flow from financing US$m (5,412) (6,843) (6,999) (1,180) (5,307) (16,018) 2,509 1,072 (4,761) (4,529)
Closing cash & equivalents US$m 776 1,937 4,237 10,833 12,456 10,084 4,781 2,929 5,774 10,186
FCF per share US$/share 0.50 0.95 1.95 1.74 1.43 3.64 1.26 -0.70 1.74 1.96
Valuation Summary
Price Target/History 10.49 13.90 18.75 13.56 18.67 18.78 21.30 16.71 16.71 16.71
Price Target/History $ 19.18 27.82 37.11 22.26 27.83 29.18 34.34 26.48 26.48 26.48
MCAP US$m 113,795 156,214 206,507 123,855 154,816 155,346 182,747 140,900 140,900 140,900
EV US$m 122,950 165,852 222,640 139,155 161,616 163,126 207,645 182,557 182,557 182,557
EV/EBITDA - 7.0 7.8 8.0 8.7 6.5 4.4 6.8 8.0 6.6 6.6
PE - 10.9 11.6 13.4 21.1 12.2 6.6 11.7 11.3 11.1 11.0
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
221





Exhibit 361 BHP Billiton Bear Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
June year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Group revenue US$m 39,099 47,473 59,473 50,211 52,798 71,739 72,226 64,371 69,648 75,639
Operating profit US$m 14,671 18,401 24,145 12,160 20,030 31,816 23,916 18,751 20,529 20,502
PAT US$m 10,534 13,496 15,962 6,338 13,008 23,946 15,696 12,606 12,783 12,853
Minority interests US$m (84) (80) (572) (461) (287) (298) (115) (118) (122) (88)
Reported earnings US$m 10,450 13,416 15,390 5,877 12,721 23,648 15,581 12,488 12,661 12,765
Reported EPS USD/share 1.76 2.39 2.77 1.06 2.29 4.44 2.93 2.35 2.38 2.40

Balance Sheet
Total assets US$m 48,516 58,168 76,008 78,770 88,852 102,891 129,273 134,493 142,870 151,650
Total liabilities US$m (24,061) (28,250) (36,965) (38,059) (39,523) (45,136) (62,188) (63,876) (63,243) (62,199)
Net assets US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 70,617 79,628 89,452
Total equity US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 70,617 79,628 89,452
Net debt/(Net cash) US$m 8,240 8,706 8,458 5,586 3,308 5,823 23,549 33,256 29,422 23,510
Cash Flow Statement
EBITDA US$m 17,447 21,284 27,757 16,031 24,790 36,855 30,324 22,776 27,581 27,688
Operating cash flow US$m 12,015 15,955 25,148 25,182 22,246 37,081 33,438 21,566 26,172 26,491
Net cash flow from operations US$m 10,497 15,596 17,817 18,863 16,890 30,080 24,548 13,100 18,516 18,928
Net cash flow from investing US$m (5,512) (7,624) (9,064) (11,051) (9,985) (16,464) (32,036) (16,141) (10,909) (9,988)
Net cash flow from financing US$m (5,412) (6,843) (6,999) (1,180) (5,307) (16,018) 2,509 1,072 (4,761) (4,529)
Closing cash & equivalents US$m 776 1,937 4,237 10,833 12,456 10,084 4,781 2,929 5,774 10,186
FCF per share US$/share 0.50 0.95 1.95 1.74 1.43 3.64 1.26 -0.70 1.74 1.96
Valuation Summary
Price Target/History 10.49 13.90 18.75 13.56 18.67 18.78 21.30 16.71 16.71 16.71
Price Target/History $ 19.18 27.82 37.11 22.26 27.83 29.18 34.34 26.48 26.48 26.48
MCAP US$m 113,795 156,214 206,507 123,855 154,816 155,346 182,747 140,900 140,900 140,900
EV US$m 122,950 165,852 222,640 139,155 161,616 163,126 207,645 182,557 182,557 182,557
EV/EBITDA - 7.0 7.8 8.0 8.7 6.5 4.4 6.8 8.0 6.6 6.6
PE - 10.9 11.6 13.4 21.1 12.2 6.6 11.7 11.3 11.1 11.0
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
222 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 362 BHP Billiton Bull Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 363 BHP Billiton Bull Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
June year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Group revenue US$m 39,099 47,473 59,473 50,211 52,798 71,739 72,226 69,250 80,376 87,513
Operating profit US$m 14,671 18,401 24,145 12,160 20,030 31,816 23,916 23,595 31,170 32,266
PAT US$m 10,534 13,496 15,962 6,338 13,008 23,946 15,696 15,900 20,072 20,999
Minority interests US$m (84) (80) (572) (461) (287) (298) (115) (171) (231) (199)
Reported earnings US$m 10,450 13,416 15,390 5,877 12,721 23,648 15,581 15,729 19,841 20,800
Reported EPS USD/share 1.76 2.39 2.77 1.06 2.29 4.44 2.93 2.96 3.73 3.91

Balance Sheet
Total assets US$m 48,516 58,168 76,008 78,770 88,852 102,891 129,273 137,301 149,592 163,123
Total liabilities US$m (24,061) (28,250) (36,965) (38,059) (39,523) (45,136) (62,188) (63,443) (61,619) (59,091)
Net assets US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 73,858 87,973 104,032
Total equity US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 73,858 87,973 104,032
Net debt/(Net cash) US$m 8,240 8,706 8,458 5,586 3,308 5,823 23,549 31,516 23,033 11,317
Cash Flow Statement
EBITDA US$m 17,447 21,284 27,757 16,031 24,790 36,855 30,324 27,620 38,238 39,489
Operating cash flow US$m 12,015 15,955 25,148 25,182 22,246 37,081 33,438 25,048 36,651 38,146
Net cash flow from operations US$m 10,497 15,596 17,817 18,863 16,890 30,080 24,548 15,031 25,641 26,961
Net cash flow from investing US$m (5,512) (7,624) (9,064) (11,051) (9,985) (16,464) (32,036) (16,279) (11,202) (10,304)
Net cash flow from financing US$m (5,412) (6,843) (6,999) (1,180) (5,307) (16,018) 2,509 570 (8,135) (7,919)
Closing cash & equivalents US$m 776 1,937 4,237 10,833 12,456 10,084 4,781 4,221 10,525 19,262
FCF per share US$/share 0.50 0.95 1.95 1.74 1.43 3.64 1.26 -0.36 3.01 3.38
Valuation Summary
Price Target/History 10.49 13.90 18.75 13.56 18.67 18.78 21.30 27.02 27.02 27.02
Price Target/History $ 19.18 27.82 37.11 22.26 27.83 29.18 34.34 42.81 42.81 42.81
MCAP US$m 113,795 156,214 206,507 123,855 154,816 155,346 182,747 227,777 227,777 227,777
EV US$m 122,950 165,852 222,640 139,155 161,616 163,126 207,645 270,449 270,449 270,449
EV/EBITDA - 7.0 7.8 8.0 8.7 6.5 4.4 6.8 9.8 7.1 6.8
PE - 10.9 11.6 13.4 21.1 12.2 6.6 11.7 14.5 11.5 11.0
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Petroleum 73,891 - 73,891 13.89 8.76 13,170 5.6
Aluminum 1,889 73 1,962 .37 .23 354 5.5
Base Metals 35,621 10,746 46,367 8.71 5.50 6,008 7.7
Diamonds & Specialty Products (3,816) - (3,816) (.72) (.45) 20 (194.9)
Stainless Steel Materials 1,654 487 2,141 .40 .25 489 4.4
Iron Ore 89,025 22,698 111,723 21.00 13.25 11,348 9.8
Manganese 4,059 88 4,147 .78 .49 759 5.5
Metallurgical Coal 17,164 6,493 23,656 4.45 2.81 2,719 8.7
Energy Coal 7,880 2,498 10,378 1.95 1.23 1,422 7.3
BHPB Enterprise Value 227,366 43,083 270,449 50.83 32.08 36,290 7.5
Less Minorities (2,657) (.50) (.32)
Less Central Costs (8,499) (1.60) (1.01)
Less (Net Debt)/Net Cash (31,516) (5.92) (3.74)
Equity Value 227,777 42.81 27.02
Shares Outstanding 5,321
Share Price (USD) 42.81
Exchange Rate 1.58
Implied Share Price () 27.02
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
223





Exhibit 364 BHP Billiton De Niro Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 365 BHP Billiton De Niro Valuation
Source: Corporate reports and Bernstein estimates and analysis.

Pro Forma Financials
June year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Group revenue US$m 39,099 47,473 59,473 50,211 52,798 71,739 72,226 74,136 91,119 99,387
Operating profit US$m 14,671 18,401 24,145 12,160 20,030 31,816 23,916 28,446 41,824 44,030
PAT US$m 10,534 13,496 15,962 6,338 13,008 23,946 15,696 19,199 27,370 29,141
Minority interests US$m (84) (80) (572) (461) (287) (298) (115) (224) (341) (310)
Reported earnings US$m 10,450 13,416 15,390 5,877 12,721 23,648 15,581 18,975 27,030 28,831
Reported EPS USD/share 1.76 2.39 2.77 1.06 2.29 4.44 2.93 3.57 5.08 5.42

Balance Sheet
Total assets US$m 48,516 58,168 76,008 78,770 88,852 102,891 129,273 140,113 156,322 176,258
Total liabilities US$m (24,061) (28,250) (36,965) (38,059) (39,523) (45,136) (62,188) (63,009) (59,993) (57,640)
Net assets US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 77,104 96,329 118,618
Total equity US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 77,104 96,329 118,618
Net debt/(Net cash) US$m 8,240 8,706 8,458 5,586 3,308 5,823 23,549 29,772 16,634 (882)
Cash Flow Statement
EBITDA US$m 17,447 21,284 27,757 16,031 24,790 36,855 30,324 32,471 48,909 51,290
Operating cash flow US$m 12,015 15,955 25,148 25,182 22,246 37,081 33,438 28,534 47,146 49,801
Net cash flow from operations US$m 10,497 15,596 17,817 18,863 16,890 30,080 24,548 16,966 32,779 34,990
Net cash flow from investing US$m (5,512) (7,624) (9,064) (11,051) (9,985) (16,464) (32,036) (16,417) (11,496) (10,621)
Net cash flow from financing US$m (5,412) (6,843) (6,999) (1,180) (5,307) (16,018) 2,509 68 (11,515) (9,652)
Closing cash & equivalents US$m 776 1,937 4,237 10,833 12,456 10,084 4,781 5,515 15,283 30,000
FCF per share US$/share 0.50 0.95 1.95 1.74 1.43 3.64 1.26 -0.02 4.28 4.79
Valuation Summary
Price Target/History 10.49 13.90 18.75 13.56 18.67 18.78 21.30 37.49 37.49 37.49
Price Target/History $ 19.18 27.82 37.11 22.26 27.83 29.18 34.34 59.39 59.39 59.39
MCAP US$m 113,795 156,214 206,507 123,855 154,816 155,346 182,747 316,027 316,027 316,027
EV US$m 122,950 165,852 222,640 139,155 161,616 163,126 207,645 359,245 359,245 359,245
EV/EBITDA - 7.0 7.8 8.0 8.7 6.5 4.4 6.8 11.1 7.3 7.0
PE - 10.9 11.6 13.4 21.1 12.2 6.6 11.7 16.7 11.7 11.0
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Petroleum 94,043 - 94,043 17.67 11.16 15,605 6.0
Aluminum 4,781 688 5,469 1.03 .65 806 6.8
Base Metals 46,296 13,731 60,028 11.28 7.12 7,647 7.9
Diamonds & Specialty Products (3,809) - (3,809) (.72) (.45) 26 (147.7)
Stainless Steel Materials 3,252 843 4,095 .77 .49 769 5.3
Iron Ore 117,657 29,160 146,817 27.59 17.41 14,826 9.9
Manganese 5,509 113 5,623 1.06 .67 1,029 5.5
Metallurgical Coal 23,969 8,664 32,634 6.13 3.87 3,754 8.7
Energy Coal 10,899 3,446 14,346 2.70 1.70 1,873 7.7
BHPB Enterprise Value 302,599 56,646 359,245 67.51 42.61 46,335 7.8
Less Minorities (3,691) (.69) (.44)
Less Central Costs (9,755) (1.83) (1.16)
Less (Net Debt)/Net Cash (29,772) (5.60) (3.53)
Equity Value 316,027 59.39 37.49
Shares Outstanding 5,321
Share Price (USD) 59.39
Exchange Rate 1.58
Implied Share Price () 37.49
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
224 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Anglo American
Anglo American has the most commodity-diversified portfolio in our coverage and
the second-highest country risk (after Glencore), thanks to its South African
exposure. Where BHPs analysis confirms a third explanatory variable (oil),
Anglos is impacted by the interlinked risks of platinum and South African country
risk. The company fares third worst in the Grizzly scenario and second best in De
Niro. We will look with interest to see how the Anglo turnaround story under new
CEO Mark Cutifani plays out and how resultant changes in exposure may alter the
potential upside/downside of this analysis.

Exhibit 366 Anglo American Scenario Analysis Summary
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 367 Anglo American EV by Division
Source: Corporate reports and Bernstein estimates and analysis.


Anglo American Implied Share Price (GBP) vs. Current Model
Current Model 23.00 -
Grizzly 6.51 -72%
Bear 17.03 -26%
Bull 26.84 17%
De Niro 36.22 57%
71,480
30,791
57,712
82,848
106,894
(20,000)
-
20,000
40,000
60,000
80,000
100,000
120,000
Current Model Grizzly Bear Bull De Niro
U
S
$
m
Anglo American EV
Platinum Diamonds Copper Nickel
Iron Ore - South Africa Iron Ore - Brazil Manganese Metallurgical Coal
Thermal Coal Other - Non Mining Assets
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
225





Exhibit 368 Anglo American Current Model Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 369 Anglo American Current Model Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Consolidated revenue US$m 33,072 25,470 26,311 20,858 27,960 30,580 28,761 35,841 41,500 41,761
Operating profit (underlying) US$m 9,324 9,158 9,284 4,695 9,353 10,646 5,898 8,835 11,979 9,948
PAT (underlying) US$m 6,396 6,345 6,287 3,117 6,410 7,885 4,122 5,653 7,866 6,542
Minority interests US$m (925) (902) (1,050) (548) (1,434) (1,765) (1,283) (2,004) (2,650) (1,767)
Underlying Earnings US$m 5,471 5,443 5,237 2,569 4,976 6,120 2,839 3,649 5,216 4,775
Underlying EPS, USD/sh USD/share 3.74 4.47 4.36 2.14 4.13 5.05 2.22 2.86 4.08 3.74
Balance Sheet
Total assets US$m 46,483 44,762 49,738 56,308 66,656 72,442 79,369 82,062 86,671 90,367
Total liabilities US$m (19,356) (20,432) (27,982) (28,239) (28,685) (29,253) (35,582) (34,927) (34,365) (33,636)
Net assets US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 47,135 52,306 56,730
Total equity US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 47,135 52,306 56,730
Net debt/(Net Cash) US$m 3,051 4,782 11,348 11,328 7,443 1,374 8,828 5,255 2,511 (3,234)
Cash Flow Statement
EBITDA 0 12,197 11,171 11,790 6,930 11,983 13,463 8,815 13,412 17,136 16,058
Operating cash flow US$m 10,057 9,839 9,522 4,904 9,924 11,498 7,021 12,656 14,949 14,191
Net cash flow from operations US$m 8,310 7,264 8,008 4,087 7,727 9,362 4,822 10,423 11,856 11,612
Net cash flow from investing US$m (1,805) (2,261) (11,750) (2,223) (2,470) (4,853) (9,821) (3,701) (5,662) (3,080)
Net cash flow from financing US$m (6,675) (4,969) 3,542 (1,619) (2,400) 1,474 1,950 (5,357) (5,200) (4,298)
Closing cash & equivalents US$m 3,004 3,129 2,771 3,269 6,401 11,732 9,094 10,459 11,453 15,687
FCF Per Share US$/share 3.16 2.74 2.38 -0.43 2.03 2.61 -0.61 3.34 4.67 6.50
Valuation Summary
Price Target/History 25.65 30.97 14.20 27.11 33.36 23.79 18.94 23.00 23.00 23.00
Price Target/History $ 50.23 61.53 20.90 43.32 51.59 36.98 30.55 36.50 36.50 36.50
MCAP US$m 73,390 74,937 25,099 52,066 62,214 44,788 39,038 46,650 46,650 46,650
EV US$m 88,850 92,138 41,479 74,501 87,586 59,078 65,509 71,480 71,480 71,480
EV/EBITDA - 7.3 8.2 3.5 10.8 7.3 4.4 7.4 5.3 4.2 4.5
PE - 6.8 6.9 3.3 12.7 8.1 4.7 8.5 8.1 5.6 6.2
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Platinum 5,699 1,190 6,889 5.39 3.40 1,447 4.8
Diamonds 5,368 - 5,368 4.20 2.65 1,437 3.7
Copper 21,244 3,084 24,328 19.04 12.01 2,927 8.3
Nickel 1,370 239 1,609 1.26 .79 200 8.0
Iron Ore South Africa 10,752 1,241 11,993 9.38 5.92 3,733 3.2
Iron Ore Brazil 1,455 1,301 2,756 2.16 1.36 227 12.2
Manganese 2,826 - 2,826 2.21 1.40 615 4.6
Metallurgical Coal 6,563 683 7,247 5.67 3.58 1,399 5.2
Thermal Coal 6,010 234 6,244 4.89 3.08 1,320 4.7
Other Non-Mining Assets 2,221 - 2,221 1.74 1.10 106 21.0
Anglo Enterprise Value 63,508 7,972 71,480 55.93 35.30 13,412 5.3
Less Minorities (17,365) (13.59) (8.58)
Less Central Costs (1,736) (1.36) (.86)
Less (Net Debt)/Net Cash (5,729) (4.48) (2.83)
Equity Value 46,650 36.50 23.00
Shares Outstanding 1,278
Share Price (USD) 36.50
Exchange Rate 1.58
Implied Share Price (GBP) 23.00
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
226 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 370 Anglo American Grizzly Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 371 Anglo American Grizzly Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Consolidated revenue US$m 33,072 25,470 26,311 20,858 27,960 30,580 28,761 26,766 27,806 30,133
Operating profit (underlying) US$m 9,324 9,158 9,284 4,695 9,353 10,646 5,898 656 (240) (252)
PAT (underlying) US$m 6,396 6,345 6,287 3,117 6,410 7,885 4,122 125 (509) (567)
Minority interests US$m (925) (902) (1,050) (548) (1,434) (1,765) (1,283) (345) (330) (371)
Underlying earnings US$m 5,471 5,443 5,237 2,569 4,976 6,120 2,839 (221) (839) (938)
Underlying EPS USD/share 3.74 4.47 4.36 2.14 4.13 5.05 2.22 -0.17 -0.66 -0.73
Balance Sheet
Total assets US$m 46,483 44,762 49,738 56,308 66,656 72,442 79,369 78,833 79,678 78,664
Total liabilities US$m (19,356) (20,432) (27,982) (28,239) (28,685) (29,253) (35,582) (35,824) (37,318) (36,921)
Net assets US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 43,009 42,360 41,743
Total equity US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 43,009 42,360 41,743
Net debt/(Net cash) US$m 3,051 4,782 11,348 11,328 7,443 1,374 8,828 8,076 10,511 9,772
Cash Flow Statement
EBITDA US$m 12,197 11,171 11,790 6,930 11,983 13,463 8,815 4,288 3,353 4,317
Operating cash flow US$m 10,057 9,839 9,522 4,904 9,924 11,498 7,021 5,838 3,052 3,695
Net cash flow from operations US$m 8,310 7,264 8,008 4,087 7,727 9,362 4,822 5,854 3,337 4,009
Net cash flow from investing US$m (1,805) (2,261) (11,750) (2,223) (2,470) (4,853) (9,821) (3,345) (4,777) (2,343)
Net cash flow from financing US$m (6,675) (4,969) 3,542 (1,619) (2,400) 1,474 1,950 (2,560) (205) (1,735)
Closing cash & equivalents US$m 3,004 3,129 2,771 3,269 6,401 11,732 9,094 9,043 7,398 7,328
FCF per share US$/share 3.16 2.74 2.38 -0.43 2.03 2.61 -0.61 0.04 -1.30 1.13
Valuation Summary
Price Target/History 25.65 30.97 14.20 27.11 33.36 23.79 18.94 6.51 6.51 6.51
Price Target/History $ 50.23 61.53 20.90 43.32 51.59 36.98 30.55 10.32 10.32 10.32
MCAP US$m 73,390 74,937 25,099 52,066 62,214 44,788 39,038 13,184 13,184 13,184
EV US$m 88,850 92,138 41,479 74,501 87,586 59,078 65,509 30,791 30,791 30,791
EV/EBITDA - 7.3 8.2 3.5 10.8 7.3 4.4 7.4 7.2 9.2 7.1
PE - 6.8 6.9 3.3 12.7 8.1 4.7 8.5 -37.7 -9.9 -8.9
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Platinum 1,578 986 2,563 2.01 1.27 415 6.2
Diamonds 3,368 - 3,368 2.64 1.66 660 5.1
Copper 9,608 2,174 11,782 9.22 5.82 1,492 7.9
Nickel 1,023 243 1,266 .99 .63 128 9.9
Iron Ore South Africa 5,006 972 5,978 4.68 2.95 639 9.4
Iron Ore Brazil 718 1,136 1,854 1.45 .92 83 22.4
Manganese 1,516 - 1,516 1.19 .75 299 5.1
Metallurgical Coal (2,844) - (2,844) (2.23) (1.40) (136) 20.9
Thermal Coal 2,558 197 2,754 2.16 1.36 603 4.6
Other Non-Mining Assets 2,554 - 2,554 2.00 1.26 486 5.3
Anglo Enterprise Value 25,083 5,708 30,791 24.09 15.21 8,815 3.5
Less Minorities (9,008) (7.05) (4.45)
Less Central Costs (1,997) (1.56) (.99)
Less (Net Debt)/Net Cash (6,603) (5.17) (3.26)
Equity Value 13,184 10.32 6.51
Shares Outstanding 1,278
Share Price (USD) 10.32
Exchange Rate 1.58
Implied Share Price (GBP) 6.51
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
227





Exhibit 372 Anglo American Bear Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 373 Anglo American Bear Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Consolidated revenue US$m 33,072 25,470 26,311 20,858 27,960 30,580 28,761 30,303 31,526 34,331
Operating profit (underlying) US$m 9,324 9,158 9,284 4,695 9,353 10,646 5,898 3,788 3,032 3,460
PAT (underlying) US$m 6,396 6,345 6,287 3,117 6,410 7,885 4,122 2,261 1,763 2,051
Minority interests US$m (925) (902) (1,050) (548) (1,434) (1,765) (1,283) (941) (962) (1,021)
Underlying earnings US$m 5,471 5,443 5,237 2,569 4,976 6,120 2,839 1,320 800 1,030
Underlying EPS USD/share 3.74 4.47 4.36 2.14 4.13 5.05 2.22 1.03 0.63 0.81
Balance Sheet
Total assets US$m 46,483 44,762 49,738 56,308 66,656 72,442 79,369 80,040 81,801 81,928
Total liabilities US$m (19,356) (20,432) (27,982) (28,239) (28,685) (29,253) (35,582) (35,432) (36,298) (35,201)
Net assets US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 44,608 45,502 46,727
Total equity US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 44,608 45,502 46,727
Net debt/(Net cash) US$m 3,051 4,782 11,348 11,328 7,443 1,374 8,828 6,911 7,837 5,366
Cash Flow Statement
EBITDA US$m 12,197 11,171 11,790 6,930 11,983 13,463 8,815 7,810 7,058 8,508
Operating cash flow US$m 10,057 9,839 9,522 4,904 9,924 11,498 7,021 8,525 6,380 7,424
Net cash flow from operations US$m 8,310 7,264 8,008 4,087 7,727 9,362 4,822 7,699 5,768 6,701
Net cash flow from investing US$m (1,805) (2,261) (11,750) (2,223) (2,470) (4,853) (9,821) (3,493) (5,008) (2,602)
Net cash flow from financing US$m (6,675) (4,969) 3,542 (1,619) (2,400) 1,474 1,950 (3,672) (1,632) (3,264)
Closing cash & equivalents US$m 3,004 3,129 2,771 3,269 6,401 11,732 9,094 9,628 8,756 9,591
FCF per share US$/share 3.16 2.74 2.38 -0.43 2.03 2.61 -0.61 1.37 0.42 3.03
Valuation Summary
Price Target/History 25.65 30.97 14.20 27.11 33.36 23.79 18.94 17.03 17.03 17.03
Price Target/History $ 50.23 61.53 20.90 43.32 51.59 36.98 30.55 26.98 26.98 26.98
MCAP US$m 73,390 74,937 25,099 52,066 62,214 44,788 39,038 34,477 34,477 34,477
EV US$m 88,850 92,138 41,479 74,501 87,586 59,078 65,509 57,712 57,712 57,712
EV/EBITDA - 7.3 8.2 3.5 10.8 7.3 4.4 7.4 7.4 8.2 6.8
PE - 6.8 6.9 3.3 12.7 8.1 4.7 8.5 16.5 27.2 21.1
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Platinum 4,982 1,702 6,685 5.23 3.30 1,005 6.7
Diamonds 4,770 - 4,770 3.73 2.36 969 4.9
Copper 13,451 2,848 16,298 12.75 8.05 2,127 7.7
Nickel 1,337 294 1,632 1.28 .81 171 9.5
Iron Ore South Africa 10,582 1,810 12,393 9.70 6.12 1,586 7.8
Iron Ore Brazil 2,909 1,688 4,597 3.60 2.27 131 35.1
Manganese 2,257 - 2,257 1.77 1.11 438 5.1
Metallurgical Coal 1,455 513 1,967 1.54 .97 390 5.0
Thermal Coal 4,011 255 4,266 3.34 2.11 888 4.8
Other Non-Mining Assets 2,847 - 2,847 2.23 1.41 486 5.9
Anglo Enterprise Value 48,601 9,110 57,712 45.16 28.50 8,815 6.5
Less Minorities (14,813) (11.59) (7.32)
Less Central Costs (2,226) (1.74) (1.10)
Less (Net Debt)/Net Cash (6,196) (4.85) (3.06)
Equity Value 34,477 26.98 17.03
Shares Outstanding 1,278
Share Price (USD) 26.98
Exchange Rate 1.58
Implied Share Price (GBP) 17.03
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
228 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 374 Anglo American Bull Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 375 Anglo American Bull Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Consolidated revenue US$m 33,072 25,470 26,311 20,858 27,960 30,580 28,761 33,839 35,247 38,528
Operating profit (underlying) US$m 9,324 9,158 9,284 4,695 9,353 10,646 5,898 6,905 6,296 7,162
PAT (underlying) US$m 6,396 6,345 6,287 3,117 6,410 7,885 4,122 4,387 4,030 4,663
Minority interests US$m (925) (902) (1,050) (548) (1,434) (1,765) (1,283) (1,536) (1,595) (1,672)
Underlying earnings US$m 5,471 5,443 5,237 2,569 4,976 6,120 2,839 2,850 2,435 2,991
Underlying EPS USD/share 3.74 4.47 4.36 2.14 4.13 5.05 2.22 2.23 1.91 2.34
Balance Sheet
Total assets US$m 46,483 44,762 49,738 56,308 66,656 72,442 79,369 81,232 83,904 85,630
Total liabilities US$m (19,356) (20,432) (27,982) (28,239) (28,685) (29,253) (35,582) (35,033) (35,272) (33,938)
Net assets US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 46,199 48,632 51,692
Total equity US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 46,199 48,632 51,692
Net debt/(Net cash) US$m 3,051 4,782 11,348 11,328 7,443 1,374 8,828 5,735 5,149 946
Cash Flow Statement
EBITDA US$m 12,197 11,171 11,790 6,930 11,983 13,463 8,815 11,333 10,762 12,699
Operating cash flow US$m 10,057 9,839 9,522 4,904 9,924 11,498 7,021 11,211 9,708 11,153
Net cash flow from operations US$m 8,310 7,264 8,008 4,087 7,727 9,362 4,822 9,540 8,198 9,390
Net cash flow from investing US$m (1,805) (2,261) (11,750) (2,223) (2,470) (4,853) (9,821) (3,628) (5,236) (2,858)
Net cash flow from financing US$m (6,675) (4,969) 3,542 (1,619) (2,400) 1,474 1,950 (4,788) (3,058) (4,327)
Closing cash & equivalents US$m 3,004 3,129 2,771 3,269 6,401 11,732 9,094 10,218 10,122 12,326
FCF per share US$/share 3.16 2.74 2.38 -0.43 2.03 2.61 -0.61 2.70 2.14 4.93
Valuation Summary
Price Target/History 25.65 30.97 14.20 27.11 33.36 23.79 18.94 26.84 26.84 26.84
Price Target/History $ 50.23 61.53 20.90 43.32 51.59 36.98 30.55 42.52 42.52 42.52
MCAP US$m 73,390 74,937 25,099 52,066 62,214 44,788 39,038 54,344 54,344 54,344
EV US$m 88,850 92,138 41,479 74,501 87,586 59,078 65,509 82,848 82,848 82,848
EV/EBITDA - 7.3 8.2 3.5 10.8 7.3 4.4 7.4 7.3 7.7 6.5
PE - 6.8 6.9 3.3 12.7 8.1 4.7 8.5 12.0 14.1 11.5
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Platinum 8,298 2,340 10,638 8.32 5.25 1,595 6.7
Diamonds 6,142 - 6,142 4.81 3.03 1,277 4.8
Copper 17,213 3,453 20,666 16.17 10.21 2,762 7.5
Nickel 1,630 340 1,970 1.54 .97 215 9.2
Iron Ore South Africa 16,038 2,575 18,613 14.56 9.19 2,533 7.3
Iron Ore Brazil 5,000 2,183 7,183 5.62 3.55 179 40.1
Manganese 2,981 - 2,981 2.33 1.47 578 5.2
Metallurgical Coal 5,011 994 6,005 4.70 2.97 916 6.6
Thermal Coal 5,435 309 5,744 4.49 2.84 1,173 4.9
Other Non-Mining Assets 2,905 - 2,905 2.27 1.43 486 6.0
Anglo Enterprise Value 70,652 12,196 82,848 64.83 40.92 8,815 9.4
Less Minorities (20,449) (16.00) (10.10)
Less Central Costs (2,272) (1.78) (1.12)
Less (Net Debt)/Net Cash (5,783) (4.52) (2.86)
Equity Value 54,344 42.52 26.84
Shares Outstanding 1,278
Share Price (USD) 42.52
Exchange Rate 1.58
Implied Share Price (GBP) 26.84
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
229





Exhibit 376 Anglo American De Niro Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 377 Anglo American De Niro Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Consolidated revenue US$m 33,072 25,470 26,311 20,858 27,960 30,580 28,761 37,376 38,968 42,726
Operating profit (underlying) US$m 9,324 9,158 9,284 4,695 9,353 10,646 5,898 10,019 9,552 10,856
PAT (underlying) US$m 6,396 6,345 6,287 3,117 6,410 7,885 4,122 6,510 6,291 7,267
Minority interests US$m (925) (902) (1,050) (548) (1,434) (1,765) (1,283) (2,132) (2,229) (2,323)
Underlying earnings US$m 5,471 5,443 5,237 2,569 4,976 6,120 2,839 4,378 4,063 4,945
Underlying EPS USD/share 3.74 4.47 4.36 2.14 4.13 5.05 2.22 3.43 3.18 3.87
Balance Sheet
Total assets US$m 46,483 44,762 49,738 56,308 66,656 72,442 79,369 82,417 85,995 90,141
Total liabilities US$m (19,356) (20,432) (27,982) (28,239) (28,685) (29,253) (35,582) (34,630) (34,240) (33,497)
Net assets US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 47,787 51,755 56,644
Total equity US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 47,787 51,755 56,644
Net debt/(Net cash) US$m 3,051 4,782 11,348 11,328 7,443 1,374 8,828 4,550 2,452 (3,469)
Cash Flow Statement
EBITDA US$m 12,197 11,171 11,790 6,930 11,983 13,463 8,815 14,855 14,466 16,889
Operating cash flow US$m 10,057 9,839 9,522 4,904 9,924 11,498 7,021 13,897 13,035 14,882
Net cash flow from operations US$m 8,310 7,264 8,008 4,087 7,727 9,362 4,822 11,381 10,624 12,077
Net cash flow from investing US$m (1,805) (2,261) (11,750) (2,223) (2,470) (4,853) (9,821) (3,753) (5,462) (3,111)
Net cash flow from financing US$m (6,675) (4,969) 3,542 (1,619) (2,400) 1,474 1,950 (5,908) (4,483) (4,580)
Closing cash & equivalents US$m 3,004 3,129 2,771 3,269 6,401 11,732 9,094 10,813 11,492 15,878
FCF per share US$/share 3.16 2.74 2.38 -0.43 2.03 2.61 -0.61 4.05 3.86 6.84
Valuation Summary
Price Target/History 25.65 30.97 14.20 27.11 33.36 23.79 18.94 36.22 36.22 36.22
Price Target/History $ 50.23 61.53 20.90 43.32 51.59 36.98 30.55 57.39 57.39 57.39
MCAP US$m 73,390 74,937 25,099 52,066 62,214 44,788 39,038 73,350 73,350 73,350
EV US$m 88,850 92,138 41,479 74,501 87,586 59,078 65,509 106,894 106,894 106,894
EV/EBITDA - 7.3 8.2 3.5 10.8 7.3 4.4 7.4 7.2 7.4 6.3
PE - 6.8 6.9 3.3 12.7 8.1 4.7 8.5 10.6 11.4 9.4
US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Platinum 11,526 2,905 14,432 11.29 7.13 2,184 6.6
Diamonds 7,480 - 7,480 5.85 3.69 1,585 4.7
Copper 20,886 3,989 24,875 19.46 12.28 3,396 7.3
Nickel 1,914 381 2,295 1.80 1.13 258 8.9
Iron Ore South Africa 21,367 3,270 24,637 19.28 12.17 3,481 7.1
Iron Ore Brazil 7,025 2,622 9,646 7.55 4.76 227 42.5
Manganese 3,687 - 3,687 2.88 1.82 718 5.1
Metallurgical Coal 8,312 1,431 9,743 7.62 4.81 1,442 6.8
Thermal Coal 6,828 359 7,187 5.62 3.55 1,458 4.9
Other Non-Mining Assets 2,912 - 2,912 2.28 1.44 486 6.0
Anglo Enterprise Value 91,938 14,957 106,894 83.64 52.79 8,815 12.1
Less Minorities (25,902) (20.27) (12.79)
Less Central Costs (2,277) (1.78) (1.12)
Less (Net Debt)/Net Cash (5,365) (4.20) (2.65)
Equity Value 73,350 57.39 36.22
Shares Outstanding 1,278
Share Price (USD) 57.39
Exchange Rate 1.58
Implied Share Price (GBP) 36.22
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
230 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Glencore Xstrata Plc Pro Forma
The combined Glencore Xstrata entity (pro forma analysis) shows the greatest
downside and least upside in the Grizzly and De Niro scenarios. This is because
Glencore Xstrata is the play for investors who want sector exposure with minimal
iron ore (Xstrata has none, Glencore has in 1Q:13 acquired a stake in Carl Ichan-
backed Ferrous Resources, which produced just 3.2Mt in 2012 and plans to boost
production to 5Mt in 2013, and reach 17Mt by 2016). Note that while we have
outperform ratings on both Glencore and Xstrata, we have no rating on the
combined entity as it remains pro forma until its listing.

Exhibit 378 Glencore Xstrata Pro Forma Scenario Analysis Summary
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 379 Glencore Xstrata Pro Forma EV by Division
Source: Corporate reports and Bernstein estimates and analysis.


Glencore Xstrata Pro Forma NPV per share vs. Current Model
Current Model 5.16 -
Grizzly 1.21 -77%
Bear 3.05 -41%
Bull 4.90 -5%
De Niro 6.75 31%
150,387
62,457
103,780
145,426
187,125
(20,000)
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
Current Model Grizzly Bear Bull De Niro
U
S
$
m
Glencore Xstrata Pro-forma EV
Zinc Copper Nickel
Alumina & Aluminium Coal Oil & Oil Products
Agricultural Products Alloys Marketing - Metals & Mining
Marketing - Energy Products Marketing - Agricultural Products Synergies
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
231





Exhibit 380 Glencore Xstrata Pro Forma Current Model Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Pro Forma Financials
December year-end 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Income Statement
Group revenue US$m 173,369 123,847 169,189 211,548 229,505 251,245 283,428 299,966
Operating profit US$m 11,302 6,546 10,696 11,325 8,394 14,944 21,432 23,908
PAT US$m 7,841 4,310 7,202 8,222 6,164 11,023 16,314 18,689
Minority interests US$m (339) (296) (475) (456) (497) (1,107) (1,497) (1,572)
Reported Earnings US$m 7,502 4,014 6,727 7,766 5,666 9,915 14,816 17,117
Reported EPS, USD/sh US$/share 0.56 0.30 0.50 0.58 0.43 0.74 1.11 1.28
Balance Sheet
Total assets US$m 110,935 122,488 139,637 149,128 157,463 167,726 176,720 186,355
Total liabilities US$m (75,915) (77,237) (84,948) (82,961) (83,581) (84,645) (81,292) (76,704)
Net assets US$m 35,020 45,251 54,689 66,167 73,882 83,081 95,428 109,651
Total equity US$m 35,020 45,251 54,689 66,167 73,882 83,081 95,428 109,651
Net debt/(Net cash) US$m 33,979 34,813 36,895 35,384 34,881 28,181 15,927 (18)
Cash Flow Statement
EBITDA 0 14,638 9,949 14,708 15,878 13,784 22,217 29,264 31,608
Operating cash flow US$m 17,322 3,870 11,935 13,012 15,464 18,028 27,492 30,724
Net cash flow from operations US$m 14,640 2,312 9,262 10,724 12,678 14,650 22,355 24,631
Net cash flow from investing US$m (13,128) (6,842) (7,913) (12,244) (8,872) (6,182) (4,835) (3,262)
Net cash flow from financing US$m (929) 4,631 (282) 2,321 (5,157) (6,184) (12,485) (13,664)
Closing cash & equivalents 31 Dec US$m 1,982 2,037 3,185 3,253 2,130 4,414 9,448 17,154
FCF Per Share US$/share 0.64 -0.14 0.19 0.05 0.18 0.62 1.26 1.51
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
232 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 381 Glencore Xstrata Pro Forma Current Model Valuation
Source: Corporate reports and Bernstein estimates and analysis.


US$m DCF Terminal Value Total Per Share (US$) Per Share () 2013 EBITDA EV/EBITDA
Zinc 16,070 1,807 17,877 1.34 .84 3,097 5.8
Copper 54,408 6,491 60,899 4.57 2.85 7,989 7.6
Nickel 8,233 1,375 9,608 .72 .45 1,196 8.0
Alumina & Aluminium 377 - 377 .03 .02 51 7.4
Coal 25,583 3,535 29,118 2.19 1.36 5,489 5.3
Oil & Oil Products 3,249 262 3,511 .26 .16 572 6.1
Agricultural Products 772 - 772 .06 .04 283 2.7
Alloys 390 - 390 .03 .02 275 1.4
Marketing - Metals & Mining 8,340 1,157 9,497 .71 .44 1,309 7.3
Marketing - Energy Products 5,364 873 6,237 .47 .29 791 7.9
Marketing - Agricultural Products 5,345 801 6,146 .46 .29 919 6.7
Synergies 5,097 860 5,956 .45 .28 750 7.9
With Synergies
Glencore Enterprise Value 133,228 17,160 150,387 11.29 7.04 22,722
Less Minorities (7,649) (.57) (.36)
Less Central Costs - - -
Less (Net Debt)/Net Cash (32,395) (2.43) (1.52)
Plus Corporate & Other
Equity Value 110,343 8.28 5.16
Shares Outstanding 13,326
Per Share NPV (USD) 8.28
Exchange Rate 1.60
Per Share NPV (GBP) 5.16
Without Synergies
Glencore Enterprise Value 128,131 16,300 144,431 10.84 6.76 21,972
Less Minorities (7,649) (.57) (.36)
Less Central Costs - - -
Less (Net Debt)/Net Cash (32,395) (2.43) (1.52)
Plus Corporate & Other
Equity Value 104,387 7.83 4.88
Shares Outstanding 13,326
Per Share NPV (USD) 7.83
Exchange Rate 1.60
Per Share NPV (GBP) 4.88
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
233





Exhibit 382 Glencore Xstrata Pro Forma Grizzly Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.


Income Statement
December year-end 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Income Statement
Group revenue US$m 173,369 123,847 169,189 211,548 229,595 203,872 211,572 217,569
Operating profit US$m 11,330 6,575 10,725 11,354 8,461 3,038 2,543 3,502
PAT US$m 7,864 4,333 7,225 8,245 6,219 1,491 1,053 1,723
Minority interests US$m (339) (296) (475) (456) (497) (367) (377) (386)
Reported earnings US$m 7,525 4,037 6,750 7,789 5,722 1,124 676 1,337
Reported EPS US$/share 0.56 0.30 0.51 0.58 0.43 0.08 0.05 0.10
Balance Sheet
Total assets US$m 110,507 122,060 139,209 148,700 156,874 154,053 154,035 154,057
Total liabilities US$m (75,915) (77,237) (84,948) (82,961) (83,402) (80,286) (79,978) (78,803)
Net assets US$m 34,592 44,823 54,261 65,739 73,473 73,767 74,057 75,254
Total equity US$m 34,592 44,823 54,261 65,739 73,473 73,767 74,057 75,254
Net debt/(Net cash) US$m 33,979 34,813 36,895 35,384 35,482 33,314 31,446 27,947
Cash Flow Statement
EBITDA 0 14,638 9,949 14,708 15,878 13,858 10,271 10,320 11,138
Operating cash flow US$m 17,322 3,870 11,935 13,012 15,589 11,654 9,416 10,194
Net cash flow from operations US$m 14,635 2,306 9,256 10,719 12,791 10,958 8,875 9,281
Net cash flow from investing US$m (13,128) (6,842) (7,913) (12,244) (8,786) (6,800) (6,083) (4,705)
Net cash flow from financing US$m (924) 4,637 (276) 2,326 (5,255) (4,500) (3,101) (3,437)
Closing cash & equivalents 31 Dec US$m 1,982 2,037 3,185 3,253 2,229 1,887 1,578 2,716
FCF per Share US$/share 0.64 -0.14 0.19 0.05 0.19 0.36 0.25 0.38
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
234 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 383 Glencore Xstrata Grizzly Valuation
Source: Corporate reports and Bernstein estimates and analysis.


US$m DCF Terminal Value Total Per Share (US$) Per Share () 2012 EBITDA EV/EBITDA
Zinc 6,533 1,433 7,966 .60 .37 2,000 4.0
Copper 21,775 4,526 26,301 1.97 1.23 4,595 5.7
Nickel 5,000 1,318 6,318 .47 .30 663 9.5
Alumina & Aluminum (413) - (413) (.03) (.02) 13 (32.8)
Coal 84 1,363 1,448 .11 .07 3,173 .5
Oil & Oil Products 694 113 808 .06 .04 419 1.9
Agricultural Products (3,579) - (3,579) (.27) (.17) 142 (25.2)
Alloys (1,115) - (1,115) (.08) (.05) 155 (7.2)
Marketing Metals & Mining 6,731 1,065 7,795 .58 .36 1,289 6.0
Marketing Energy Products 4,375 739 5,114 .38 .24 717 7.1
Marketing Agricultural Products 4,973 759 5,732 .43 .27 220 26.0
Synergies 5,174 908 6,082 .46 .28 750 8.1
With Synergies
Glencore Enterprise Value 50,231 12,226 62,457 4.69 2.92 14,135
Less Minorities (3,021) (.23) (.14)
Less Central Costs - - -
Less (Net Debt)/Net Cash (33,675) (2.53) (1.58)
Plus Corporate & Other
Equity Value 25,761 1.93 1.21
Shares Outstanding 13,326
Per Share NPV (USD) 1.93
Exchange Rate 1.60
Per Share NPV (GBP) 1.21
Without Synergies
Glencore Enterprise Value 45,058 11,317 56,375 4.23 2.67 13,385
Less Minorities (3,021) (.23) (.14)
Less Central Costs - - -
Less (Net Debt)/Net Cash (33,675) (2.53) (1.59)
Plus Corporate & Other
Equity Value 19,679 1.48 .93
Shares Outstanding 13,326
Per Share NPV (USD) 1.48
Exchange Rate 1.58
Per Share NPV (GBP) .93
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
235





Exhibit 384 Glencore Xstrata Pro Forma Bear Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.


Income Statement
December year-end 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Income Statement
Group revenue US$m 173,369 123,847 169,189 211,548 229,595 228,386 237,141 243,970
Operating profit US$m 11,330 6,575 10,725 11,354 8,461 8,234 8,264 9,699
PAT US$m 7,864 4,333 7,225 8,245 6,219 5,690 5,731 6,908
Minority interests US$m (339) (296) (475) (456) (497) (711) (744) (769)
Reported earnings US$m 7,525 4,037 6,750 7,789 5,722 4,979 4,987 6,138
Reported EPS US$/share 0.56 0.30 0.51 0.58 0.43 0.37 0.37 0.46
Balance Sheet
Total assets US$m 110,507 122,060 139,209 148,700 156,874 159,665 161,230 163,188
Total liabilities US$m (75,915) (77,237) (84,948) (82,961) (83,402) (82,237) (80,190) (77,146)
Net assets US$m 34,592 44,823 54,261 65,739 73,473 77,428 81,040 86,042
Total equity US$m 34,592 44,823 54,261 65,739 73,473 77,428 81,040 86,042
Net debt/(Net cash) US$m 33,979 34,813 36,895 35,384 35,123 31,615 26,429 19,232
Cash Flow Statement
EBITDA 0 14,638 9,949 14,708 15,878 13,858 15,466 16,041 17,336
Operating cash flow US$m 17,322 3,870 11,935 13,012 15,589 14,387 15,342 16,602
Net cash flow from operations US$m 14,635 2,306 9,256 10,719 12,791 12,463 13,294 14,056
Net cash flow from investing US$m (13,128) (6,842) (7,913) (12,244) (8,786) (6,518) (5,761) (4,320)
Net cash flow from financing US$m (924) 4,637 (276) 2,326 (5,255) (5,290) (6,521) (7,087)
Closing cash & equivalents 31 Dec US$m 1,982 2,037 3,185 3,253 2,229 2,884 3,896 6,545
FCF per Share US$/share 0.64 -0.14 0.19 0.05 0.19 0.47 0.58 0.73
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
236 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 385 Glencore Xstrata Pro Forma Bear Valuation
Source: Corporate reports and Bernstein estimates and analysis.


US$m DCF Terminal Value Total Per Share (US$) Per Share () 2012 EBITDA EV/EBITDA
Zinc 11,248 1,983 13,231 .99 .62 2,000 6.6
Copper 33,347 6,138 39,485 2.96 1.85 4,595 8.6
Nickel 7,384 1,748 9,133 .69 .43 663 13.8
Alumina & Aluminum (147) - (147) (.01) (.01) 13 (11.7)
Coal 10,037 3,222 13,259 .99 .62 3,173 4.2
Oil & Oil Products 1,819 184 2,003 .15 .09 419 4.8
Agricultural Products 103 - 103 .01 .00 142 .7
Alloys 178 301 479 .04 .02 155 3.1
Marketing - Metals & Mining 7,366 1,182 8,548 .64 .40 1,289 6.6
Marketing - Energy Products 4,811 819 5,630 .42 .26 717 7.9
Marketing - Agricultural Products 5,295 820 6,115 .46 .29 220 27.8
Synergies 5,077 865 5,942 .45 .28 750 7.9
With Synergies
Glencore Enterprise Value 86,518 17,262 103,780 7.79 4.86 14,135
Less Minorities (5,122) (.38) (.24)
Less Central Costs - - -
Less (Net Debt)/Net Cash (33,516) (2.52) (1.57)
Plus Corporate & Other
Equity Value 65,142 4.89 3.05
Shares Outstanding 13,326
Per Share NPV (USD) 4.89
Exchange Rate 1.60
Per Share NPV (GBP) 3.05
Without Synergies
Glencore Enterprise Value 81,442 16,397 97,839 7.34 4.63 13,385
Less Minorities (5,122) (.38) (.24)
Less Central Costs - - -
Less (Net Debt)/Net Cash (33,516) (2.52) (1.59)
Plus Corporate & Other
Equity Value 59,200 4.44 2.80
Shares Outstanding 13,326
Per Share NPV (USD) 4.44
Exchange Rate 1.58
Per Share NPV (GBP) 2.80
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
237





Exhibit 386 Glencore Xstrata Bull Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.


Income Statement
December year-end 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Income Statement
Group revenue US$m 173,369 123,847 169,189 211,548 229,595 252,901 262,709 270,371
Operating profit US$m 11,330 6,575 10,725 11,354 8,461 13,432 13,989 15,903
PAT US$m 7,864 4,333 7,225 8,245 6,219 9,914 10,453 12,140
Minority interests US$m (339) (296) (475) (456) (497) (1,057) (1,113) (1,155)
Reported earnings US$m 7,525 4,037 6,750 7,789 5,722 8,857 9,340 10,986
Reported EPS US$/share 0.56 0.30 0.51 0.58 0.43 0.66 0.70 0.82
Balance Sheet
Total assets US$m 110,507 122,060 139,209 148,700 156,874 165,392 168,691 172,699
Total liabilities US$m (75,915) (77,237) (84,948) (82,961) (83,402) (84,089) (80,174) (75,162)
Net assets US$m 34,592 44,823 54,261 65,739 73,473 81,302 88,517 97,537
Total equity US$m 34,592 44,823 54,261 65,739 73,473 81,302 88,517 97,537
Net debt/(Net cash) US$m 33,979 34,813 36,895 35,384 34,694 29,671 20,954 9,962
Cash Flow Statement
EBITDA 0 14,638 9,949 14,708 15,878 13,858 20,665 21,767 23,540
Operating cash flow US$m 17,322 3,870 11,935 13,012 15,589 17,122 21,273 23,017
Net cash flow from operations US$m 14,635 2,306 9,256 10,719 12,791 14,163 17,979 19,032
Net cash flow from investing US$m (13,128) (6,842) (7,913) (12,244) (8,786) (6,208) (5,397) (3,899)
Net cash flow from financing US$m (924) 4,637 (276) 2,326 (5,255) (6,191) (10,110) (10,885)
Closing cash & equivalents 31 Dec US$m 1,982 2,037 3,185 3,253 2,229 3,993 6,465 10,712
FCF per Share US$/share 0.64 -0.14 0.19 0.05 0.19 0.60 0.93 1.10
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
238 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 387 Glencore Xstrata Pro Forma Bull Valuation
Source: Corporate reports and Bernstein estimates and analysis.


US$m DCF Terminal Value Total Per Share (US$) Per Share () 2012 EBITDA EV/EBITDA
Zinc 15,958 2,568 18,526 1.39 .87 2,000 9.3
Copper 44,942 7,852 52,794 3.96 2.47 4,595 11.5
Nickel 9,780 2,210 11,990 .90 .56 663 18.1
Alumina & Aluminum 115 - 115 .01 .01 13 9.1
Coal 19,905 5,088 24,993 1.88 1.17 3,173 7.9
Oil & Oil Products 2,942 256 3,198 .24 .15 419 7.6
Agricultural Products 3,730 - 3,730 .28 .17 142 26.2
Alloys 1,499 626 2,125 .16 .10 155 13.7
Marketing - Metals & Mining 8,032 1,318 9,349 .70 .44 1,289 7.3
Marketing - Energy Products 5,266 912 6,178 .46 .29 717 8.6
Marketing - Agricultural Products 5,642 894 6,536 .49 .31 220 29.7
Synergies 5,045 846 5,891 .44 .28 750 7.9
With Synergies
Glencore Enterprise Value 122,857 22,569 145,426 10.91 6.80 14,135
Less Minorities (7,585) (.57) (.35)
Less Central Costs - - -
Less (Net Debt)/Net Cash (33,207) (2.49) (1.55)
Plus Corporate & Other
Equity Value 104,634 7.85 4.90
Shares Outstanding 13,326
Per Share NPV (USD) 7.85
Exchange Rate 1.60
Per Share NPV (GBP) 4.90
Without Synergies
Glencore Enterprise Value 117,812 21,723 139,535 10.47 6.61 13,385
Less Minorities (7,585) (.57) (.36)
Less Central Costs - - -
Less (Net Debt)/Net Cash (33,207) (2.49) (1.57)
Plus Corporate & Other
Equity Value 98,743 7.41 4.68
Shares Outstanding 13,326
Per Share NPV (USD) 7.41
Exchange Rate 1.58
Per Share NPV (GBP) 4.68
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
239





Exhibit 388 Glencore Xstrata De Niro Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.


Income Statement
December year-end 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Income Statement
Group revenue US$m 173,369 123,847 169,189 211,548 229,595 277,415 288,278 296,773
Operating profit US$m 11,330 6,575 10,725 11,354 8,461 18,634 19,718 22,111
PAT US$m 7,864 4,333 7,225 8,245 6,219 14,143 15,181 17,379
Minority interests US$m (339) (296) (475) (456) (497) (1,402) (1,482) (1,540)
Reported earnings US$m 7,525 4,037 6,750 7,789 5,722 12,741 13,699 15,839
Reported EPS US$/share 0.56 0.30 0.51 0.58 0.43 0.96 1.03 1.19
Balance Sheet
Total assets US$m 110,507 122,060 139,209 148,700 156,874 171,122 176,157 182,467
Total liabilities US$m (75,915) (77,237) (84,948) (82,961) (83,402) (85,938) (80,153) (73,420)
Net assets US$m 34,592 44,823 54,261 65,739 73,473 85,184 96,005 109,047
Total equity US$m 34,592 44,823 54,261 65,739 73,473 85,184 96,005 109,047
Net debt/(Net cash) US$m 33,979 34,813 36,895 35,384 34,261 27,719 15,467 (82)
Cash Flow Statement
EBITDA 0 14,638 9,949 14,708 15,878 13,858 25,866 27,496 29,748
Operating cash flow US$m 17,322 3,870 11,935 13,012 15,589 19,861 27,209 29,437
Net cash flow from operations US$m 14,635 2,306 9,256 10,719 12,791 15,874 22,669 24,013
Net cash flow from investing US$m (13,128) (6,842) (7,913) (12,244) (8,786) (5,896) (5,033) (3,478)
Net cash flow from financing US$m (924) 4,637 (276) 2,326 (5,255) (7,100) (13,704) (14,439)
Closing cash & equivalents 31 Dec US$m 1,982 2,037 3,185 3,253 2,229 5,108 9,040 15,137
FCF per Share US$/share 0.64 -0.14 0.19 0.05 0.19 0.73 1.29 1.46
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
240 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 389 Glencore Xstrata De Niro Valuation
Source: Corporate reports and Bernstein estimates and analysis.


US$m DCF Terminal Value Total Per Share (US$) Per Share () 2012 EBITDA EV/EBITDA
Zinc 20,660 3,164 23,824 1.79 1.11 2,000 11.9
Copper 56,528 9,601 66,129 4.96 3.09 4,595 14.4
Nickel 12,175 2,683 14,857 1.11 .70 663 22.4
Alumina & Aluminum 374 - 374 .03 .02 13 29.7
Coal 29,730 6,944 36,674 2.75 1.72 3,173 11.6
Oil & Oil Products 4,063 330 4,394 .33 .21 419 10.5
Agricultural Products 7,335 - 7,335 .55 .34 142 51.6
Alloys 2,848 953 3,801 .29 .18 155 24.5
Marketing - Metals & Mining 8,705 1,462 10,168 .76 .48 1,289 7.9
Marketing - Energy Products 5,727 1,011 6,738 .51 .32 717 9.4
Marketing - Agricultural Products 5,996 973 6,969 .52 .33 220 31.7
Synergies 5,027 834 5,861 .44 .27 750 7.8
With Synergies
Glencore Enterprise Value 159,169 27,955 187,125 14.04 8.75 14,135
Less Minorities (10,038) (.75) (.47)
Less Central Costs - - -
Less (Net Debt)/Net Cash (32,890) (2.47) (1.54)
Plus Corporate & Other
Equity Value 144,197 10.82 6.75
Shares Outstanding 13,326
Per Share NPV (USD) 10.82
Exchange Rate 1.60
Per Share NPV (GBP) 6.75
Without Synergies
Glencore Enterprise Value 154,142 27,122 181,264 13.60 8.59 13,385
Less Minorities (10,038) (.75) (.48)
Less Central Costs - - -
Less (Net Debt)/Net Cash (32,890) (2.47) (1.56)
Plus Corporate & Other
Equity Value 138,337 10.38 6.55
Shares Outstanding 13,326
Per Share NPV (USD) 10.38
Exchange Rate 1.58
Per Share NPV (GBP) 6.55
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
241





Vale
Vale is the "pure" iron ore play in our coverage, with 70% of FY 2012 revenues
coming from iron ore. As such, and given iron ores historical volatility, Vale has a
downside tied with Rio Tinto in the Grizzly and Bear Scenarios, but the greatest
upside in the Bull and De Niro scenarios. Vale remains our least preferred stock
the company incurs more capex/ton for its new iron ore exposure than Rio Tinto,
and we question how the significant involvement of the Brazilian government
(directly, through Golden Shares, and indirectly, through Valepar) influences the
companys strategic direction vis-a-vis shareholder interests.

Exhibit 390 Vale Scenario Analysis Summary
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 391 Vale Pro Forma EV by Division
Source: Corporate reports and Bernstein estimates and analysis.


Vale Implied Share Price (BRL) vs. Current Model
Current Model 29.25 -
Grizzly 9.73 -67%
Bear 34.38 18%
Bull 58.97 102%
De Niro 83.54 186%
102,468
51,601
115,951
180,127
244,263
(50,000)
-
50,000
100,000
150,000
200,000
250,000
300,000
Current Model Grizzly Bear Bull De Niro
U
S
$
m
Vale EV
Iron Ore Manganese&Ferroalloys Coal Base Metals Fertilizers Other
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
242 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 392 Vale Current Model Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 393 Vale Current Model Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro-Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Net Operating Revenue US$m 19,647 32,242 37,426 23,311 45,293 60,947 47,694 59,716 74,202 63,530
Operating profit US$m 7,632 13,190 15,698 6,057 21,695 28,600 13,737 27,218 38,448 24,736
PAT US$m 6,782 12,166 15,123 4,546 17,493 21,140 11,281 17,802 26,784 17,080
Minority interests US$m (579) (802) (258) (107) (189) 233 257 630 1,006 726
Reported Earnings US$m 6,203 11,364 14,865 4,439 17,304 21,373 11,538 18,432 27,789 17,807
Reported EPS - preferred, US$/sh US$/share 2.14 2.42 2.53 .97 3.23 4.37 1.07 3.73 5.48 3.51
Reported EPS - common, US$/sh US$/share 2.18 2.42 2.53 .97 3.22 4.34 1.07 3.73 5.48 3.51
Balance Sheet
Total assets US$m 60,926 76,717 79,992 102,279 129,139 128,728 131,478 145,353 166,232 178,561
Total liabilities US$m (38,442) (40,886) (34,945) (41,782) (56,698) (48,614) (55,115) (54,482) (54,135) (52,945)
Net assets US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 90,871 112,097 125,616
Total equity US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 90,871 112,097 125,616
Net debt/(Net Cash) US$m 18,108 17,978 8,216 16,320 18,253 20,860 26,088 26,361 19,152 10,244
Cash Flow Statement
EBITDA US$m 8,620 15,380 18,505 8,779 24,955 32,722 18,133 31,950 43,806 30,513
Operating cash flow US$m 8,272 15,836 20,297 9,581 22,743 33,236 16,673 31,184 42,164 31,958
Net cash flow from operations US$m 7,233 11,214 16,164 7,136 19,669 24,797 16,595 21,977 29,701 24,049
Net cash flow from investing US$m (16,954) (9,208) (11,401) (13,159) (17,184) (14,369) (15,347) (18,466) (16,934) (11,579)
Net cash flow from financing US$m 13,345 (5,209) 9,004 625 (2,569) (14,371) 1,165 (3,716) (7,360) (5,788)
Closing cash & equivalents US$m 4,448 1,046 10,331 7,293 7,584 3,531 5,832 5,627 11,034 17,715
FCF Per Share US$/share 1.09 1.16 1.64 0.03 1.53 1.89 0.42 0.90 2.70 2.55
Valuation Summary
Price Target/History BRL 54.10 50.75 23.89 42.20 48.50 42.69 38.49 29.25 29.25 29.25
Price Target/History $ 25.34 28.51 10.24 21.14 27.57 25.50 19.70 14.74 14.74 14.74
MCAP US$m 76,537 139,635 52,916 113,098 146,075 133,023 100,447 74,796 74,796 74,796
EV US$m 101,433 167,084 62,164 131,681 165,914 152,529 121,850 102,468 102,468 102,468
EV/EBITDA - 11.8 10.9 3.4 15.0 6.6 4.7 6.7 3.2 2.3 3.4
PE - 25.3 21.0 9.4 43.4 15.0 9.8 36.0 7.8 5.3 8.3
US$m DCF Terminal Value Total Per Share (US$) Per Share (BRL) 2013 EBITDA EV/EBITDA
Iron Ore 69,020 15,363 84,383 16.55 32.99 27,326 3.1
Manganese & Ferroalloys 1,135 68 1,203 .24 .47 345 3.5
Coal 7,317 2,823 10,140 1.99 3.96 467 21.7
Base Metals 9,766 - 9,766 1.92 3.82 2,322 4.2
Fertilizers 5,078 - 5,078 1.00 1.99 1,917 2.6
Other (8,103) - (8,103) (1.59) (3.17) (428) 18.9
Vale Enterprise Value 84,214 18,254 102,468 20.09 40.06 31,950 3.2
Less Minorities (1,201) (.24) (.47)
Less Central Costs - - -
Less (Net Debt)/Net Cash (26,088) (5.12) (10.20)
Equity Value 75,178 14.74 29.25
Shares Outstanding 5,100
Share Price (USD) 14.74
Exchange Rate 1.99
Implied Share Price (BRL) 29.25
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
243





Exhibit 394 Vale Grizzly Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 395 Vale Grizzly Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro-Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Net Operating Revenue US$m 19,647 32,242 37,426 23,311 45,293 60,947 47,694 42,108 41,150 45,397
Operating profit US$m 7,632 13,190 15,698 6,057 21,695 28,600 13,737 9,634 5,574 6,938
PAT US$m 6,782 12,166 15,123 4,546 17,493 21,140 11,281 5,027 2,381 3,207
Minority interests US$m (579) (802) (258) (107) (189) 233 257 109 (104) (125)
Reported Earnings US$m 6,203 11,364 14,865 4,439 17,304 21,373 11,538 5,136 2,277 3,081
Reported EPS - preferred, US$/sh US$/share 2.14 2.42 2.53 .97 3.23 4.37 1.07 1.11 .45 .61
Reported EPS - common, US$/sh US$/share 2.18 2.42 2.53 .97 3.22 4.34 1.07 1.11 .45 .61
Balance Sheet
Total assets US$m 60,926 76,717 79,992 102,279 129,139 128,728 131,478 136,284 141,169 145,257
Total liabilities US$m (38,442) (40,886) (34,945) (41,782) (56,698) (48,614) (55,115) (55,528) (58,488) (59,985)
Net assets US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 80,756 82,681 85,272
Total equity US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 80,756 82,681 85,272
Net debt/(Net Cash) US$m 18,108 17,978 8,216 16,320 18,253 20,860 26,088 30,501 36,176 37,329
Cash Flow Statement
EBITDA US$m 8,620 15,380 18,505 8,779 24,955 32,722 18,133 14,342 10,753 12,379
Operating cash flow US$m 8,272 15,836 20,297 9,581 22,743 33,236 16,673 16,648 10,167 11,909
Net cash flow from operations US$m 7,233 11,214 16,164 7,136 19,669 24,797 16,595 13,036 7,703 8,873
Net cash flow from investing US$m (16,954) (9,208) (11,401) (13,159) (17,184) (14,369) (15,347) (16,324) (12,923) (9,410)
Net cash flow from financing US$m 13,345 (5,209) 9,004 625 (2,569) (14,371) 1,165 (22) 963 (328)
Closing cash & equivalents US$m 4,448 1,046 10,331 7,293 7,584 3,531 5,832 2,522 (1,734) (2,599)
FCF Per Share US$/share 1.09 1.16 1.64 0.03 1.53 1.89 0.42 -0.44 -0.76 0.20
Valuation Summary
Price Target/History BRL 54.10 50.75 23.89 42.20 48.50 42.69 38.49 9.73 9.73 9.73
Price Target/History $ 25.34 28.51 10.24 21.14 27.57 25.50 19.70 4.88 4.88 4.88
MCAP US$m 76,537 139,635 52,916 113,098 146,075 133,023 100,447 24,759 24,759 24,759
EV US$m 101,433 167,084 62,164 131,681 165,914 152,529 121,850 51,601 51,601 51,601
EV/EBITDA - 11.8 10.9 3.4 15.0 6.6 4.7 6.7 3.6 4.8 4.2
PE - 25.3 21.0 9.4 43.4 15.0 9.8 36.0 8.8 21.7 16.0
US$m DCF Terminal Value Total Per Share (US$) Per Share (BRL) 2012 EBITDA EV/EBITDA
Iron Ore 40,155 13,197 53,352 10.46 20.86 17,647 3.0
Manganese & Ferroalloys 506 41 547 .11 .21 190 2.9
Coal (293) 1,503 1,210 .24 .47 (449) (2.7)
Base Metals 763 151 914 .18 .36 603 1.5
Fertilizers 2,608 - 2,608 .51 1.02 632 4.1
Other (7,030) - (7,030) (1.38) (2.75) (490) 14.3
Vale Enterprise Value 36,709 14,892 51,601 10.12 20.17 18,133 2.8
Less Minorities (627) (.12) (.25)
Less Central Costs - - -
Less (Net Debt)/Net Cash (26,088) (5.12) (10.20)
Equity Value 24,886 4.88 9.73
Shares Outstanding 5,100
Share Price (USD) 4.88
Exchange Rate 1.99
Implied Share Price (BRL) 9.73
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
244 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 396 Vale Bear Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 397 Vale Bear Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro-Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Net Operating Revenue US$m 19,647 32,242 37,426 23,311 45,293 60,947 47,694 48,165 50,065 55,319
Operating profit US$m 7,632 13,190 15,698 6,057 21,695 28,600 13,737 15,683 14,434 16,752
PAT US$m 6,782 12,166 15,123 4,546 17,493 21,140 11,281 9,327 8,774 10,416
Minority interests US$m (579) (802) (258) (107) (189) 233 257 430 337 323
Reported Earnings US$m 6,203 11,364 14,865 4,439 17,304 21,373 11,538 9,757 9,111 10,739
Reported EPS - preferred, US$/sh US$/share 2.14 2.42 2.53 .97 3.23 4.37 1.07 2.02 1.80 2.12
Reported EPS - common, US$/sh US$/share 2.18 2.42 2.53 .97 3.22 4.34 1.07 2.02 1.80 2.12
Balance Sheet
Total assets US$m 60,926 76,717 79,992 102,279 129,139 128,728 131,478 139,311 148,331 157,044
Total liabilities US$m (38,442) (40,886) (34,945) (41,782) (56,698) (48,614) (55,115) (55,180) (57,248) (57,693)
Net assets US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 84,131 91,083 99,351
Total equity US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 84,131 91,083 99,351
Net debt/(Net Cash) US$m 18,108 17,978 8,216 16,320 18,253 20,860 26,088 29,124 31,333 28,488
Cash Flow Statement
EBITDA US$m 8,620 15,380 18,505 8,779 24,955 32,722 18,133 20,399 19,668 22,302
Operating cash flow US$m 8,272 15,836 20,297 9,581 22,743 33,236 16,673 21,701 18,958 21,727
Net cash flow from operations US$m 7,233 11,214 16,164 7,136 19,669 24,797 16,595 16,070 13,613 15,602
Net cash flow from investing US$m (16,954) (9,208) (11,401) (13,159) (17,184) (14,369) (15,347) (17,056) (14,000) (10,610)
Net cash flow from financing US$m 13,345 (5,209) 9,004 625 (2,569) (14,371) 1,165 (1,291) (1,270) (2,859)
Closing cash & equivalents US$m 4,448 1,046 10,331 7,293 7,584 3,531 5,832 3,555 1,898 4,032
FCF Per Share US$/share 1.09 1.16 1.64 0.03 1.53 1.89 0.42 0.01 0.16 1.22
Valuation Summary
Price Target/History BRL 54.10 50.75 23.89 42.20 48.50 42.69 38.49 34.38 34.38 34.38
Price Target/History $ 25.34 28.51 10.24 21.14 27.57 25.50 19.70 17.24 17.24 17.24
MCAP US$m 76,537 139,635 52,916 113,098 146,075 133,023 100,447 87,494 87,494 87,494
EV US$m 101,433 167,084 62,164 131,681 165,914 152,529 121,850 115,951 115,951 115,951
EV/EBITDA - 11.8 10.9 3.4 15.0 6.6 4.7 6.7 5.7 5.9 5.2
PE - 25.3 21.0 9.4 43.4 15.0 9.8 36.0 17.0 19.1 16.2
US$m DCF Terminal Value Total Per Share (US$) Per Share (BRL) 2012 EBITDA EV/EBITDA
Iron Ore 81,692 23,544 105,236 20.64 41.14 17,647 6.0
Manganese & Ferroalloys 886 89 974 .19 .38 190 5.1
Coal 3,112 2,575 5,687 1.12 2.22 (449) (12.7)
Base Metals 6,349 1,115 7,464 1.46 2.92 603 12.4
Fertilizers 5,057 - 5,057 .99 1.98 632 8.0
Other (8,468) - (8,468) (1.66) (3.31) (490) 17.3
Vale Enterprise Value 88,628 27,323 115,951 22.74 45.33 18,133 6.4
Less Minorities (1,922) (.38) (.75)
Less Central Costs - - -
Less (Net Debt)/Net Cash (26,088) (5.12) (10.20)
Equity Value 87,942 17.24 34.38
Shares Outstanding 5,100
Share Price (USD) 17.24
Exchange Rate 1.99
Implied Share Price (BRL) 34.38
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
245





Exhibit 398 Vale Bull Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 399 Vale Bull Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro-Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Net Operating Revenue US$m 19,647 32,242 37,426 23,311 45,293 60,947 47,694 54,222 58,980 65,241
Operating profit US$m 7,632 13,190 15,698 6,057 21,695 28,600 13,737 21,731 23,293 26,566
PAT US$m 6,782 12,166 15,123 4,546 17,493 21,140 11,281 13,712 15,323 17,965
Minority interests US$m (579) (802) (258) (107) (189) 233 257 752 777 771
Reported Earnings US$m 6,203 11,364 14,865 4,439 17,304 21,373 11,538 14,464 16,100 18,736
Reported EPS - preferred, US$/sh US$/share 2.14 2.42 2.53 .97 3.23 4.37 1.07 2.95 3.17 3.69
Reported EPS - common, US$/sh US$/share 2.18 2.42 2.53 .97 3.22 4.34 1.07 2.95 3.17 3.69
Balance Sheet
Total assets US$m 60,926 76,717 79,992 102,279 129,139 128,728 131,478 142,390 155,636 169,177
Total liabilities US$m (38,442) (40,886) (34,945) (41,782) (56,698) (48,614) (55,115) (54,815) (55,959) (55,282)
Net assets US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 87,575 99,678 113,895
Total equity US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 87,575 99,678 113,895
Net debt/(Net Cash) US$m 18,108 17,978 8,216 16,320 18,253 20,860 26,088 27,679 26,299 19,186
Cash Flow Statement
EBITDA US$m 8,620 15,380 18,505 8,779 24,955 32,722 18,133 26,456 28,583 32,224
Operating cash flow US$m 8,272 15,836 20,297 9,581 22,743 33,236 16,673 26,753 27,748 31,544
Net cash flow from operations US$m 7,233 11,214 16,164 7,136 19,669 24,797 16,595 19,188 19,677 22,670
Net cash flow from investing US$m (16,954) (9,208) (11,401) (13,159) (17,184) (14,369) (15,347) (17,788) (15,077) (11,809)
Net cash flow from financing US$m 13,345 (5,209) 9,004 625 (2,569) (14,371) 1,165 (2,593) (3,565) (5,526)
Closing cash & equivalents US$m 4,448 1,046 10,331 7,293 7,584 3,531 5,832 4,639 5,674 11,009
FCF Per Share US$/share 1.09 1.16 1.64 0.03 1.53 1.89 0.42 0.48 1.12 2.32
Valuation Summary
Price Target/History BRL 54.10 50.75 23.89 42.20 48.50 42.69 38.49 58.97 58.97 58.97
Price Target/History $ 25.34 28.51 10.24 21.14 27.57 25.50 19.70 29.57 29.57 29.57
MCAP US$m 76,537 139,635 52,916 113,098 146,075 133,023 100,447 150,060 150,060 150,060
EV US$m 101,433 167,084 62,164 131,681 165,914 152,529 121,850 180,127 180,127 180,127
EV/EBITDA - 11.8 10.9 3.4 15.0 6.6 4.7 6.7 6.8 6.3 5.6
PE - 25.3 21.0 9.4 43.4 15.0 9.8 36.0 20.0 18.6 16.0
US$m DCF Terminal Value Total Per Share (US$) Per Share (BRL) 2012 EBITDA EV/EBITDA
Iron Ore 123,153 33,829 156,982 30.78 61.37 17,647 8.9
Manganese & Ferroalloys 1,265 137 1,401 .27 .55 190 7.4
Coal 6,510 3,640 10,151 1.99 3.97 (449) (22.6)
Base Metals 11,926 2,071 13,997 2.74 5.47 603 23.2
Fertilizers 7,501 - 7,501 1.47 2.93 632 11.9
Other (9,905) - (9,905) (1.94) (3.87) (490) 20.2
Vale Enterprise Value 140,450 39,677 180,127 35.32 70.42 18,133 9.9
Less Minorities (3,212) (.63) (1.26)
Less Central Costs - - -
Less (Net Debt)/Net Cash (26,088) (5.12) (10.20)
Equity Value 150,827 29.57 58.97
Shares Outstanding 5,100
Share Price (USD) 29.57
Exchange Rate 1.99
Implied Share Price (BRL) 58.97
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
246 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 400 Vale De Niro Pro Forma Financials
Source: Corporate reports and Bernstein estimates and analysis.

Exhibit 401 Vale De Niro Valuation
Source: Corporate reports and Bernstein estimates and analysis.


Pro-Forma Financials
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Income Statement
Net Operating Revenue US$m 19,647 32,242 37,426 23,311 45,293 60,947 47,694 60,280 67,895 75,163
Operating profit US$m 7,632 13,190 15,698 6,057 21,695 28,600 13,737 27,779 32,153 36,379
PAT US$m 6,782 12,166 15,123 4,546 17,493 21,140 11,281 18,223 22,081 25,655
Minority interests US$m (579) (802) (258) (107) (189) 233 257 1,073 1,218 1,219
Reported Earnings US$m 6,203 11,364 14,865 4,439 17,304 21,373 11,538 19,297 23,299 26,875
Reported EPS - preferred, US$/sh US$/share 2.14 2.42 2.53 .97 3.23 4.37 1.07 3.90 4.59 5.30
Reported EPS - common, US$/sh US$/share 2.18 2.42 2.53 .97 3.22 4.34 1.07 3.90 4.59 5.30
Balance Sheet
Total assets US$m 60,926 76,717 79,992 102,279 129,139 128,728 131,478 145,544 163,142 181,594
Total liabilities US$m (38,442) (40,886) (34,945) (41,782) (56,698) (48,614) (55,115) (54,424) (54,601) (52,772)
Net assets US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 91,120 108,541 128,821
Total equity US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 91,120 108,541 128,821
Net debt/(Net Cash) US$m 18,108 17,978 8,216 16,320 18,253 20,860 26,088 26,134 20,998 9,504
Cash Flow Statement
EBITDA US$m 8,620 15,380 18,505 8,779 24,955 32,722 18,133 32,513 37,499 42,146
Operating cash flow US$m 8,272 15,836 20,297 9,581 22,743 33,236 16,673 31,805 36,539 41,361
Net cash flow from operations US$m 7,233 11,214 16,164 7,136 19,669 24,797 16,595 22,433 25,950 29,876
Net cash flow from investing US$m (16,954) (9,208) (11,401) (13,159) (17,184) (14,369) (15,347) (18,521) (16,155) (13,008)
Net cash flow from financing US$m 13,345 (5,209) 9,004 625 (2,569) (14,371) 1,165 (3,946) (5,944) (8,248)
Closing cash & equivalents US$m 4,448 1,046 10,331 7,293 7,584 3,531 5,832 5,798 9,650 18,270
FCF Per Share US$/share 1.09 1.16 1.64 0.03 1.53 1.89 0.42 0.98 2.12 3.44
Valuation Summary
Price Target/History BRL 54.10 50.75 23.89 42.20 48.50 42.69 38.49 83.54 83.54 83.54
Price Target/History $ 25.34 28.51 10.24 21.14 27.57 25.50 19.70 41.90 41.90 41.90
MCAP US$m 76,537 139,635 52,916 113,098 146,075 133,023 100,447 212,585 212,585 212,585
EV US$m 101,433 167,084 62,164 131,681 165,914 152,529 121,850 244,263 244,263 244,263
EV/EBITDA - 11.8 10.9 3.4 15.0 6.6 4.7 6.7 7.5 6.5 5.8
PE - 25.3 21.0 9.4 43.4 15.0 9.8 36.0 21.4 18.2 15.8
US$m DCF Terminal Value Total Per Share (US$) Per Share (BRL) 2012 EBITDA EV/EBITDA
Iron Ore 164,597 44,101 208,698 40.92 81.59 17,647 11.8
Manganese & Ferroalloys 1,643 184 1,828 .36 .71 190 9.6
Coal 9,908 4,704 14,611 2.87 5.71 (449) (32.5)
Base Metals 17,498 3,025 20,523 4.02 8.02 603 34.0
Fertilizers 9,944 - 9,944 1.95 3.89 632 15.7
Other (11,343) - (11,343) (2.22) (4.43) (490) 23.1
Vale Enterprise Value 192,248 52,015 244,263 47.90 95.50 18,133 13.5
Less Minorities (4,503) (.88) (1.76)
Less Central Costs - - -
Less (Net Debt)/Net Cash (26,088) (5.12) (10.20)
Equity Value 213,672 41.90 83.54
Shares Outstanding 5,100
Share Price (USD) 41.90
Exchange Rate 1.99
Implied Share Price (BRL) 83.54
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
247





Complete Commodity Price Scenarios
Exhibit 402 Long-Term Real Commodity Price Scenarios
Source: Bloomberg L.P. and Bernstein estimates and analysis.


Real LT Commodity prices Scenario as % of Current LT Price
Current
Model
Grizzly Bear Bull De Niro Grizzly Bear Bull De Niro
Platinum US$/oz 1,486 1,500 1,700 1,900 2,100 101% 114% 128% 141%
Palladium US$/oz 606 500 600 700 800 83% 99% 116% 132%
Rhodium US$/oz 1,110 1,000 1,200 1,400 1,600 90% 108% 126% 144%
Gold US$/oz 1,619 1,200 1,500 1,800 2,100 74% 93% 111% 130%
Copper US$/t 7,652 6,500 7,500 8,500 9,500 85% 98% 111% 124%
Nickel US$/t 15,991 16,000 18,000 20,000 22,000 100% 113% 125% 138%
Zinc US$/t 1,841 1,800 2,000 2,200 2,400 98% 109% 119% 130%
Lead US$/t 2,003 1,800 2,000 2,200 2,400 90% 100% 110% 120%
Hard Coking Coal US$/t 194 150 180 210 240 77% 93% 108% 124%
PCI US$/t 158 115 138 160 183 73% 87% 102% 116%
Semi-Soft Coking Coal US$/t 149 107 128 149 171 72% 86% 100% 115%
Thermal Coal ex Newcastle US$/t 88 80 90 100 110 91% 103% 114% 126%
Thermal Coal ex RBCT US$/t 89 81 92 102 112 91% 103% 114% 126%
Thermal Coal ex Colombia US$/t 82 75 85 94 103 91% 103% 114% 126%
Iron Ore Fines FOB Aus US$/t 74 70 90 110 130 94% 121% 148% 175%
Iron Ore Lump FOB Aus. US$/t 79 74 96 117 138 94% 121% 148% 175%
Iron Ore Fines FOB Brazil US$/t 69 65 84 103 121 94% 121% 148% 175%
Iron Ore Concentrate FOB Can US$/t 64 60 77 94 111 94% 121% 148% 175%
Iron Ore Pellets FOB Canada US$/t 81 76 98 120 142 94% 121% 148% 175%
Diamonds US$/carat 77 80 85 90 95 104% 111% 117% 124%
Phosphates US$/t 620 600 675 750 825 97% 109% 121% 133%
Niobium US$/t 36,485 35,000 40,000 45,000 50,000 96% 110% 123% 137%
Manganese Ore US$/t 222 200 230 260 290 90% 104% 117% 131%
Ferro Manganese US$/t 1,148 1,034 1,189 1,344 1,499 90% 104% 117% 131%
Ferro Chrome USc/lb 101 100 110 120 130 99% 109% 119% 129%
Ferro Vanadium US$/kg 29 25 30 35 40 87% 105% 122% 140%
V2O5 US$/lb 5 5 6 7 8 86% 105% 124% 143%
Silver US$/oz 30 20 25 30 35 67% 83% 100% 117%
Cobalt US$/lb 13 10 15 20 25 80% 120% 160% 200%
Uranium US$/lb 44 45 50 55 60 101% 113% 124% 135%
Molybdenum US$/lb 11 10 12 14 16 91% 109% 127% 145%
Bauxite US$/t 64 40 50 60 70 62% 78% 94% 109%
Alumina US$/t 373 273 305 337 369 73% 82% 90% 99%
Aluminum US$/t 2,405 1,700 1,900 2,100 2,300 71% 79% 87% 96%
Oil WTI US$/bbl 122 85 95 105 115 70% 78% 86% 94%
Natural Gas - Henry Hub US$/mmbtu 5 3 4 5 6 48% 67% 87% 106%
Tin US$/t 19,601 17,381 20,055 22,729 25,403 89% 102% 116% 130%
Brent US$/bbl 122 98 110 122 133 81% 90% 99% 109%
Nat Gas - Japan US$/mmbtu 13 11 16 21 25 90% 127% 163% 199%
Blended Soy Meal & Oil US$/t 776 600 750 900 1,050 77% 97% 116% 135%
German rapeseed US/t 748 578 723 867 1,012 77% 97% 116% 135%
Ukrainian oilseed US/t 554 428 535 642 750 77% 97% 116% 135%
Sugar Spot US/t 563 435 544 653 762 77% 97% 116% 135%
Flour (Baltic) US/t 40 31 39 47 55 77% 97% 116% 135%
Cotton (Brazilian) US/t 2,068 1,599 1,998 2,398 2,798 77% 97% 116% 135%
Corn (US Export) US/t 242 187 234 281 327 77% 97% 116% 135%
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
248 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





History of Commodity Prices
Exhibit 403 Nickel Spot Price Distribution
Source: Bloomberg L.P. and Bernstein analysis.

Exhibit 404 Zinc Spot Price Distribution
Source: Bloomberg L.P. and Bernstein analysis.


0%
2%
4%
6%
8%
10%
12%
14%
P
e
r
c
e
n
t
i
l
e
Ni Spot Price (US$/t)
Five-Year Nominal Nickel Price Distribution
Spotasof
04/22/2013
$15,099/t
0%
5%
10%
15%
20%
25%
1,0001,1001,2001,3001,4001,5001,6001,7001,8001,9002,0002,1002,2002,3002,4002,5002,6002,7002,800
P
e
r
c
e
n
t
i
l
e
Zn Spot Price (US$/t)
Five-Year Nominal Zinc Price Distribution
Spotasof
04/22/2013
$1,851/t
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
249





Exhibit 405 Aluminum Spot Price Distribution
Source: Bloomberg L.P. and Bernstein analysis.

Exhibit 406 Platinum Spot Price Distribution
Source: Bloomberg L.P. and Bernstein analysis.


0%
2%
4%
6%
8%
10%
12%
14%
16%
P
e
r
c
e
n
t
i
l
e
Al Spot Price (US$/t)
Five-Year Nominal Aluminum Price Distribution
Spotasof
04/22/2013
$1,872/t
0%
2%
4%
6%
8%
10%
12%
14%
7
5
0
8
0
0
8
5
0
9
0
0
9
5
0
1
,
0
0
0
1
,
0
5
0
1
,
1
0
0
1
,
1
5
0
1
,
2
0
0
1
,
2
5
0
1
,
3
0
0
1
,
3
5
0
1
,
4
0
0
1
,
4
5
0
1
,
5
0
0
1
,
5
5
0
1
,
6
0
0
1
,
6
5
0
1
,
7
0
0
1
,
7
5
0
1
,
8
0
0
1
,
8
5
0
1
,
9
0
0
1
,
9
5
0
2
,
0
0
0
2
,
0
5
0
2
,
1
0
0
2
,
1
5
0
2
,
2
0
0
2
,
2
5
0
2
,
3
0
0
2
,
3
5
0
P
e
r
c
e
n
t
i
l
e
Pt Spot Price (US$/oz)
Five-Year Nominal Platinum Price Distribution
Spotasof
04/22/2013
$1,439/oz
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
250 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 407 Palladium Spot Price Distribution
Source: Bloomberg L.P. and Bernstein analysis.

Exhibit 408 Gold Spot Price Distribution
Source: Bloomberg L.P. and Bernstein analysis.


0%
2%
4%
6%
8%
10%
12%
14%
150 200 250 300 350 400 450 500 550 600 650 700 750 800 850
P
e
r
c
e
n
t
i
l
e
Pl Spot Price (US$/oz)
Five-Year Nominal Palladium Price Distribution
Spotasof
04/22/2013
$679/oz
0%
1%
2%
3%
4%
5%
6%
7%
8%
P
e
r
c
e
n
t
i
l
e
Au Spot Price (US$/oz)
Five-Year Nominal Gold Price Distribution
Spotasof
04/22/2013
$1,414/oz
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
251





Exhibit 409 Silver Spot Price Distribution
Source: Bloomberg L.P. and Bernstein analysis.

Exhibit 410 Thermal Coal Spot Price Distribution
Source: Bloomberg L.P. and Bernstein analysis.


0%
5%
10%
15%
20%
25%
30%
35%
5 10 15 20 25 30 35 40 45 50
P
e
r
c
e
n
t
i
l
e
Ag Spot Price (US$/oz)
Five-Year Nominal Silver Price Distribution
Spotasof
04/22/2013
$23.66/oz
0%
2%
4%
6%
8%
10%
12%
14%
60 65 70 75 80 85 90 95 100105110115120125130135140145150155160165170175180185190195200
P
e
r
c
e
n
t
i
l
e
Spot Price (US$/t)
Five-Year Nominal Thermal Coal FOB Aus Price Distribution
Spotasof
04/22/2013
$86/t
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
252 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 411 Molybdenum Spot Price Distribution
Source: Bloomberg L.P. and Bernstein analysis.

Exhibit 412 Uranium Spot Price Distribution
Source: Bloomberg L.P. and Bernstein analysis.


0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
P
e
r
c
e
n
t
i
l
e
Spot Price (US$/lb)
Five-Year Nominal Molybdenum Price Distribution
Spotasof
04/22/2013
$11.3/lb
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92
P
e
r
c
e
n
t
i
l
e
Spot Price (US$/lb)
Five-Year Nominal Uranium Price Distribution
Spotasof
04/22/2013
$40.9/lb
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
253





Appendix 2: Growth Scenarios

This appendix provides full details on the internally consistent scenarios in the
"What GDP Growth Is Consistent With $80/t Iron Ore Baked Into Mining
Equities?" and "China Growth Scenarios" chapters. It shows the relationship
between Chinese GDP, supply, demand and resultant iron ore price in five
scenarios. These scenarios are:
1) Consensus implied scenario ($80/t iron ore)
2) April 2013 IMF GDP forecast
3) "Back to the Future" based upon IMF 2012 forecast
4) "Out With a Whimper" taking the Chinese official GDP target
5) "It's All Over Now Baby Blue," with 6% GDP growth and no supply
curtailment
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013



2
5
4

E
U
R
O
P
E
A
N

M
E
T
A
L
S

&

M
I
N
I
N
G
:

A

S
T
R
A
N
G
E

L
O
V
E


H
O
W

I

L
E
A
R
N
E
D

T
O

S
T
O
P

W
O
R
R
Y
I
N
G

A
N
D

L
O
V
E

T
H
E

O
R
E



Exhibit 413 Consensus Scenario
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and Bernstein estimates and analysis.



ChineseCrudeSteelProductionSummary 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
China Population m 1,298 1,304 1,311 1,317 1,324 1,329 1,335 1,340 1,346 1,352 1,357 1,361 1,364 1,368 1,372 1,375
China GDP Growth % 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 7.8% 7.6% 7.5% 7.2% 7.1% 7.0% 7.0% 7.0%
China GDP (Real 2005 PPP$) $bn 5,364 6,044 6,900 7,565 8,262 9,125 9,973 10,751 11,585 12,468 13,396 14,367 15,389 16,472 17,628 18,870
China GDP/Capita (Real 2005 PPP$) $/Capita 4,133 4,634 5,265 5,744 6,242 6,866 7,472 8,021 8,607 9,224 9,870 10,557 11,279 12,041 12,852 13,722
Chinese Steel Intensity kg/'000$ 65.5 63.1 61.8 57.8 66.7 63.3 63.2 61.5 59.4 57.9 55.9 53.7 51.5 49.4 47.4 45.5
China Finished Steel Demand Mt 351 381 426 437 551 578 630 662 688 722 749 771 792 814 836 859
China Finished Steel Demand Growth % 25.2% 8.5% 11.8% 2.5% 26.0% 4.9% 9.0% 5.0% 4.0% 4.9% 3.7% 3.0% 2.7% 2.7% 2.7% 2.7%
Chinese Self Sufficiency in Steel % 98.9% 107.6% 110.7% 108.8% 99.8% 103.9% 103.9% 103.9% 104.2% 104.6% 104.9% 105.2% 105.5% 105.7% 106.0% 106.4%
Chinese Finished Steel Production Mt 348 410 472 475 550 600 655 687 717 755 786 812 836 860 886 913
Finished Steel to Crude Steel Ratio % 101.6% 102.2% 103.7% 105.2% 104.3% 104.4% 104.4% 104.4% 104.8% 105.1% 105.4% 105.7% 105.9% 106.2% 106.4% 106.6%
China Crude Steel Production Mt 353 419 489 500 574 627 683 717 751 794 828 858 885 914 943 973
China Crude Steel Production Growth % 24.9% 18.7% 16.7% 2.3% 14.6% 9.3% 9.0% 5.0% 4.3% 5.4% 4.0% 3.3% 2.9% 3.0% 3.0% 3.0%
Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,061 1,098 1,132 1,154 1,174 1,200 1,231 1,269
Chinese Steel Capital Stock Mt 2,625 2,954 3,321 3,692 4,169 4,663 5,200 5,757 6,330 6,926 7,536 8,157 8,786 9,424 10,071 10,728
Chinese Steel Cpaital Stock/Capita kg/Capita 2,023 2,265 2,534 2,803 3,150 3,508 3,896 4,295 4,703 5,124 5,552 5,994 6,439 6,889 7,343 7,801
Steel Growth to GDP Growth Ratio - 2.2 0.7 0.8 0.3 2.8 0.5 1.0 0.6 0.5 0.6 0.5 0.4 0.4 0.4 0.4 0.4
Consensus Iron Ore Forecast US$/t 33 42 46 76 81 147 168 128 127 118 110 107 100 95 90 90
Assumed Consensus Steel Production Mt 353 419 489 500 574 627 683 717 751 794 828 858 885 914 943 973
Assumed Consensus Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Assumed Consensus Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Assumed Consensus Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,061 1,098 1,133 1,154 1,175 1,200 1,232 1,269
Implied Iron Ore Price - Nominal US$/t 33 42 46 76 81 147 168 128 127 117 110 106 100 95 90 90
Implied Iron Ore Price - Real US$/t 38 48 52 84 88 156 175 131 127 115 106 100 92 86 80 78
F
o
r

t
h
e

e
x
c
l
u
s
i
v
e

u
s
e

o
f

J
A
S
O
N

L
A
P
O
R
T
E

a
t

P
E
R
R
Y

C
A
P

T
A
L

o
n

1
6
-
J
u
l
-
2
0
1
3





E
U
R
O
P
E
A
N

M
E
T
A
L
S

&

M
I
N
I
N
G
:

A

S
T
R
A
N
G
E

L
O
V
E


H
O
W

I

L
E
A
R
N
E
D

T
O

S
T
O
P

W
O
R
R
Y
I
N
G

A
N
D

L
O
V
E

T
H
E

O
R
E

2
5
5

Exhibit 414 IMF Scenario
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and Bernstein estimates and analysis.



ChineseCrudeSteelProductionSummary 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
China Population m 1,298 1,304 1,311 1,317 1,324 1,329 1,335 1,340 1,346 1,352 1,357 1,361 1,364 1,368 1,372 1,375
China GDP Growth % 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 8.0% 8.2% 8.5% 8.5% 8.5% 8.5% 8.1% 7.8%
China GDP (Real 2005 PPP$) $bn 5,364 6,044 6,900 7,565 8,262 9,125 9,973 10,751 11,616 12,573 13,643 14,806 16,065 17,424 18,839 20,309
China GDP/Capita (Real 2005 PPP$) $/Capita 4,133 4,634 5,265 5,744 6,242 6,866 7,472 8,021 8,630 9,302 10,051 10,880 11,774 12,737 13,735 14,768
Chinese Steel Intensity kg/'000$ 65.5 63.1 61.8 57.8 66.7 63.3 63.2 61.5 61.4 62.0 62.4 60.8 58.3 55.3 50.6 46.2
China Finished Steel Demand Mt 351 381 426 437 551 578 630 662 713 780 851 900 936 964 954 939
China Finished Steel Demand Growth % 25.2% 8.5% 11.8% 2.5% 26.0% 4.9% 9.0% 5.0% 7.8% 9.3% 9.2% 5.8% 4.0% 2.9% -1.0% -1.6%
Chinese Self Sufficiency in Steel % 98.9% 107.6% 110.7% 108.8% 99.8% 103.9% 103.9% 103.9% 104.2% 104.6% 104.9% 105.2% 105.5% 105.7% 106.0% 106.4%
Chinese Finished Steel Production Mt 348 410 472 475 550 600 655 687 743 816 893 947 988 1,019 1,011 998
Finished Steel to Crude Steel Ratio % 101.6% 102.2% 103.7% 105.2% 104.3% 104.4% 104.4% 104.4% 104.8% 105.1% 105.4% 105.7% 105.9% 106.2% 106.4% 106.6%
China Crude Steel Production Mt 353 419 489 500 574 627 683 717 779 857 941 1,001 1,046 1,082 1,076 1,064
China Crude Steel Production Growth % 24.9% 18.7% 16.7% 2.3% 14.6% 9.3% 9.0% 5.0% 8.1% 9.8% 9.5% 6.1% 4.2% 3.2% -0.8% -1.3%
Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,111 1,214 1,339 1,416 1,468 1,507 1,474 1,435
Chinese Steel Capital Stock Mt 2,625 2,954 3,321 3,692 4,169 4,663 5,200 5,757 6,355 7,008 7,719 8,465 9,232 10,011 10,764 11,487
Chinese Steel Cpaital Stock/Capita kg/Capita 2,023 2,265 2,534 2,803 3,150 3,508 3,896 4,295 4,722 5,185 5,687 6,220 6,766 7,318 7,848 8,353
Steel Growth to GDP Growth Ratio - 2.2 0.7 0.8 0.3 2.8 0.5 1.0 0.6 1.0 1.1 1.1 0.7 0.5 0.3 -0.1 -0.2
Consensus Iron Ore Forecast US$/t 33 42 46 76 81 147 168 128 127 118 110 107 100 95 90 90
Assumed Consensus Steel Production Mt 353 419 489 500 574 627 683 717 751 794 828 858 885 914 943 973
Assumed Consensus Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Assumed Consensus Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Assumed Consensus Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,061 1,098 1,133 1,154 1,175 1,200 1,232 1,269
Implied Iron Ore Price - Nominal US$/t 33 42 46 76 81 147 168 128 138 142 152 160 157 150 129 114
Implied Iron Ore Price - Real US$/t 38 48 52 84 88 156 175 131 138 139 147 150 145 136 114 99
F
o
r

t
h
e

e
x
c
l
u
s
i
v
e

u
s
e

o
f

J
A
S
O
N

L
A
P
O
R
T
E

a
t

P
E
R
R
Y

C
A
P

T
A
L

o
n

1
6
-
J
u
l
-
2
0
1
3



2
5
6

E
U
R
O
P
E
A
N

M
E
T
A
L
S

&

M
I
N
I
N
G
:

A

S
T
R
A
N
G
E

L
O
V
E


H
O
W

I

L
E
A
R
N
E
D

T
O

S
T
O
P

W
O
R
R
Y
I
N
G

A
N
D

L
O
V
E

T
H
E

O
R
E


Exhibit 415 Back to the Future
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and Bernstein estimates and analysis.



ChineseCrudeSteelProductionSummary 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
China Population m 1,298 1,304 1,311 1,317 1,324 1,329 1,335 1,340 1,346 1,352 1,357 1,361 1,364 1,368 1,372 1,375
China GDP Growth % 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 8.2% 8.4% 8.7% 8.7% 8.7% 8.7% 8.3% 8.0%
China GDP (Real 2005 PPP$) $bn 5,364 6,044 6,900 7,565 8,262 9,125 9,973 10,751 11,637 12,619 13,718 14,915 16,213 17,618 19,084 20,611
China GDP/Capita (Real 2005 PPP$) $/Capita 4,133 4,634 5,265 5,744 6,242 6,866 7,472 8,021 8,646 9,336 10,107 10,960 11,883 12,879 13,913 14,988
Chinese Steel Intensity kg/'000$ 65.5 63.1 61.8 57.8 66.7 63.3 63.2 61.5 62.8 63.3 63.5 61.8 59.1 55.9 51.1 46.5
China Finished Steel Demand Mt 351 381 426 437 551 578 630 662 731 799 872 921 958 985 974 958
China Finished Steel Demand Growth % 25.2% 8.5% 11.8% 2.5% 26.0% 4.9% 9.0% 5.0% 10.5% 9.3% 9.1% 5.7% 3.9% 2.9% -1.1% -1.7%
Chinese Self Sufficiency in Steel % 98.9% 107.6% 110.7% 108.8% 99.8% 103.9% 103.9% 103.9% 104.2% 104.6% 104.9% 105.2% 105.5% 105.7% 106.0% 106.4%
Chinese Finished Steel Production Mt 348 410 472 475 550 600 655 687 762 836 914 970 1,010 1,042 1,033 1,019
Finished Steel to Crude Steel Ratio % 101.6% 102.2% 103.7% 105.2% 104.3% 104.4% 104.4% 104.4% 104.8% 105.1% 105.4% 105.7% 105.9% 106.2% 106.4% 106.6%
China Crude Steel Production Mt 353 419 489 500 574 627 683 717 798 878 964 1,025 1,070 1,106 1,099 1,086
China Crude Steel Production Growth % 24.9% 18.7% 16.7% 2.3% 14.6% 9.3% 9.0% 5.0% 10.8% 9.7% 9.4% 6.1% 4.2% 3.1% -0.8% -1.4%
Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,146 1,252 1,380 1,459 1,512 1,551 1,516 1,475
Chinese Steel Capital Stock Mt 2,625 2,954 3,321 3,692 4,169 4,663 5,200 5,757 6,373 7,044 7,775 8,541 9,328 10,126 10,898 11,638
Chinese Steel Cpaital Stock/Capita kg/Capita 2,023 2,265 2,534 2,803 3,150 3,508 3,896 4,295 4,735 5,212 5,728 6,276 6,836 7,402 7,945 8,463
Steel Growth to GDP Growth Ratio - 2.2 0.7 0.8 0.3 2.8 0.5 1.0 0.6 1.3 1.1 1.0 0.7 0.5 0.3 -0.1 -0.2
Consensus Iron Ore Forecast US$/t 33 42 46 76 81 147 168 128 127 118 110 107 100 95 90 90
Assumed Consensus Steel Production Mt 353 419 489 500 574 627 683 717 751 794 828 858 885 914 943 973
Assumed Consensus Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Assumed Consensus Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Assumed Consensus Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,061 1,098 1,133 1,154 1,175 1,200 1,232 1,269
Implied Iron Ore Price - Nominal US$/t 33 42 46 76 81 147 168 128 146 151 162 170 167 160 137 121
Implied Iron Ore Price - Real US$/t 38 48 52 84 88 156 175 131 146 148 156 160 154 145 122 105
F
o
r

t
h
e

e
x
c
l
u
s
i
v
e

u
s
e

o
f

J
A
S
O
N

L
A
P
O
R
T
E

a
t

P
E
R
R
Y

C
A
P

T
A
L

o
n

1
6
-
J
u
l
-
2
0
1
3





E
U
R
O
P
E
A
N

M
E
T
A
L
S

&

M
I
N
I
N
G
:

A

S
T
R
A
N
G
E

L
O
V
E


H
O
W

I

L
E
A
R
N
E
D

T
O

S
T
O
P

W
O
R
R
Y
I
N
G

A
N
D

L
O
V
E

T
H
E

O
R
E

2
5
7

Exhibit 416 Ending With a Whimper
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and Bernstein estimates and analysis.



ChineseCrudeSteelProductionSummary 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
China Population m 1,298 1,304 1,311 1,317 1,324 1,329 1,335 1,340 1,346 1,352 1,357 1,361 1,364 1,368 1,372 1,375
China GDP Growth % 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 8.0% 8.0% 7.9% 7.7% 7.7% 7.7% 7.5% 7.5%
China GDP (Real 2005 PPP$) $bn 5,364 6,044 6,900 7,565 8,262 9,125 9,973 10,751 11,611 12,545 13,536 14,582 15,705 16,909 18,177 19,540
China GDP/Capita (Real 2005 PPP$) $/Capita 4,133 4,634 5,265 5,744 6,242 6,866 7,472 8,021 8,627 9,282 9,973 10,715 11,510 12,360 13,252 14,209
Chinese Steel Intensity kg/'000$ 65.5 63.1 61.8 57.8 66.7 63.3 63.2 61.5 61.1 60.7 58.6 56.3 54.4 52.1 48.9 46.4
China Finished Steel Demand Mt 351 381 426 437 551 578 630 662 710 761 794 821 854 880 889 906
China Finished Steel Demand Growth % 25.2% 8.5% 11.8% 2.5% 26.0% 4.9% 9.0% 5.0% 7.3% 7.3% 4.2% 3.5% 4.0% 3.1% 0.9% 2.0%
Chinese Self Sufficiency in Steel % 98.9% 107.6% 110.7% 108.8% 99.8% 103.9% 103.9% 103.9% 104.2% 104.6% 104.9% 105.2% 105.5% 105.7% 106.0% 106.4%
Chinese Finished Steel Production Mt 348 410 472 475 550 600 655 687 740 797 832 864 901 931 942 964
Finished Steel to Crude Steel Ratio % 101.6% 102.2% 103.7% 105.2% 104.3% 104.4% 104.4% 104.4% 104.8% 105.1% 105.4% 105.7% 105.9% 106.2% 106.4% 106.6%
China Crude Steel Production Mt 353 419 489 500 574 627 683 717 775 837 877 913 954 988 1,002 1,027
China Crude Steel Production Growth % 24.9% 18.7% 16.7% 2.3% 14.6% 9.3% 9.0% 5.0% 7.6% 7.7% 4.5% 3.8% 4.3% 3.3% 1.2% 2.3%
Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,105 1,177 1,223 1,256 1,301 1,336 1,340 1,368
Chinese Steel Capital Stock Mt 2,625 2,954 3,321 3,692 4,169 4,663 5,200 5,757 6,352 6,986 7,640 8,309 8,996 9,697 10,392 11,090
Chinese Steel Cpaital Stock/Capita kg/Capita 2,023 2,265 2,534 2,803 3,150 3,508 3,896 4,295 4,719 5,169 5,629 6,105 6,594 7,088 7,576 8,064
Steel Growth to GDP Growth Ratio - 2.2 0.7 0.8 0.3 2.8 0.5 1.0 0.6 0.9 0.9 0.5 0.5 0.5 0.4 0.1 0.3
Consensus Iron Ore Forecast US$/t 33 42 46 76 81 147 168 128 127 118 110 107 100 95 90 90
Assumed Consensus Steel Production Mt 353 419 489 500 574 627 683 717 751 794 828 858 885 914 943 973
Assumed Consensus Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Assumed Consensus Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Assumed Consensus Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,061 1,098 1,133 1,154 1,175 1,200 1,232 1,269
Implied Iron Ore Price - Nominal US$/t 33 42 46 76 81 147 168 128 137 134 127 125 122 117 106 104
Implied Iron Ore Price - Real US$/t 38 48 52 84 88 156 175 131 137 131 122 118 112 106 94 90
F
o
r

t
h
e

e
x
c
l
u
s
i
v
e

u
s
e

o
f

J
A
S
O
N

L
A
P
O
R
T
E

a
t

P
E
R
R
Y

C
A
P

T
A
L

o
n

1
6
-
J
u
l
-
2
0
1
3



2
5
8

E
U
R
O
P
E
A
N

M
E
T
A
L
S

&

M
I
N
I
N
G
:

A

S
T
R
A
N
G
E

L
O
V
E


H
O
W

I

L
E
A
R
N
E
D

T
O

S
T
O
P

W
O
R
R
Y
I
N
G

A
N
D

L
O
V
E

T
H
E

O
R
E


Exhibit 417 It's All Over Now Baby Blue
Source: WSA, IMF, CRU, Bloomberg L.P., Mitchell, Maddison and Bernstein estimates and analysis.

ChineseCrudeSteelProductionSummary 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
China Population m 1,298 1,304 1,311 1,317 1,324 1,329 1,335 1,340 1,346 1,352 1,357 1,361 1,364 1,368 1,372 1,375
China GDP Growth % 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 7.6% 7.3% 7.0% 6.7% 6.3% 6.0% 6.0% 6.0%
China GDP (Real 2005 PPP$) $bn 5,364 6,044 6,900 7,565 8,262 9,125 9,973 10,751 11,573 12,417 13,287 14,177 15,070 15,974 16,933 17,949
China GDP/Capita (Real 2005 PPP$) $/Capita 4,133 4,634 5,265 5,744 6,242 6,866 7,472 8,021 8,598 9,187 9,789 10,418 11,045 11,677 12,345 13,052
Chinese Steel Intensity kg/'000$ 65.5 63.1 61.8 57.8 66.7 63.3 63.2 61.5 58.6 55.8 53.1 50.5 47.0 44.2 43.0 41.7
China Finished Steel Demand Mt 351 381 426 437 551 578 630 662 678 692 705 716 709 706 728 748
China Finished Steel Demand Growth % 25.2% 8.5% 11.8% 2.5% 26.0% 4.9% 9.0% 5.0% 2.5% 2.1% 1.8% 1.6% -1.1% -0.4% 3.2% 2.7%
Chinese Self Sufficiency in Steel % 98.9% 107.6% 110.7% 108.8% 99.8% 103.9% 103.9% 103.9% 104.2% 104.6% 104.9% 105.2% 105.5% 105.7% 106.0% 106.4%
Chinese Finished Steel Production Mt 348 410 472 475 550 600 655 687 707 724 740 754 748 746 772 796
Finished Steel to Crude Steel Ratio % 101.6% 102.2% 103.7% 105.2% 104.3% 104.4% 104.4% 104.4% 104.8% 105.1% 105.4% 105.7% 105.9% 106.2% 106.4% 106.6%
China Crude Steel Production Mt 353 419 489 500 574 627 683 717 740 761 780 797 792 792 822 848
China Crude Steel Production Growth % 24.9% 18.7% 16.7% 2.3% 14.6% 9.3% 9.0% 5.0% 2.8% 2.5% 2.1% 1.9% -0.8% -0.2% 3.5% 3.0%
Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,041 1,039 1,044 1,042 1,004 978 1,010 1,040
Chinese Steel Capital Stock Mt 2,625 2,954 3,321 3,692 4,169 4,663 5,200 5,757 6,320 6,886 7,453 8,021 8,569 9,103 9,649 10,205
Chinese Steel Cpaital Stock/Capita kg/Capita 2,023 2,265 2,534 2,803 3,150 3,508 3,896 4,295 4,696 5,095 5,491 5,894 6,280 6,654 7,035 7,421
Steel Growth to GDP Growth Ratio - 2.2 0.7 0.8 0.3 2.8 0.5 1.0 0.6 0.3 0.3 0.3 0.2 -0.2 -0.1 0.5 0.5
Consensus Iron Ore Forecast US$/t 33 42 46 76 81 147 168 128 127 118 110 107 100 95 90 90
Assumed Consensus Steel Production Mt 353 419 489 500 574 627 683 717 751 794 828 858 885 914 943 973
Assumed Consensus Scrap Consumed in EAF Mt 43 46 46 48 58 64 70 74 79 86 90 95 99 102 105 107
Assumed Consensus Scrap Consumed in BOF Mt 18 22 36 53 44 59 74 86 100 117 129 143 156 168 178 187
Assumed Consensus Iron Ore Demand Mt 538 648 751 739 870 930 999 1,034 1,061 1,098 1,133 1,154 1,175 1,200 1,232 1,269
Implied Iron Ore Price - Nominal US$/t 33 42 46 76 81 147 168 128 123 106 95 89 77 68 66 66
Implied Iron Ore Price - Real US$/t 38 48 52 84 88 156 175 131 123 104 92 84 71 62 58 57
F
o
r

t
h
e

e
x
c
l
u
s
i
v
e

u
s
e

o
f

J
A
S
O
N

L
A
P
O
R
T
E

a
t

P
E
R
R
Y

C
A
P

T
A
L

o
n

1
6
-
J
u
l
-
2
0
1
3
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
259





Appendix 3: Financial Statements

Exhibit 418 Rio Tinto Income Statement
Source: Corporate reports and Bernstein estimates and analysis.

Income Statement
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Production
Iron Ore Mt 132.8 144.7 153.4 171.5 184.6 191.8 198.8 209.9 253.9 296.2
Copper kt 804 738 699 805 678 520 549 527 799 907
Gold koz 1,007 1,231 459 1,111 772 670 294 176 401 467
Coking Coal Mt 5.9 6.2 7.4 7.5 9.0 8.8 7.9 8.4 8.8 9.2
Thermal Coal Mt 29.1 22.2 19.3 20.2 18.4 17.4 19.7 24.2 24.2 22.9
Uranium klbs 12.6 12.6 14.2 14.1 11.4 7.1 9.8 9.5 9.5 10.6
Diamonds k carats 35,163 26,023 20,816 14,026 13,843 11,733 13,122 15,758 24,458 29,802
Aluminum kt 845 1,473 3,981 3,804 3,790 3,824 3,456 3,552 3,608 3,622
Prices
Iron Ore Fines US$/t 42 46 76 65 108 152 120 131 138 142
Copper US$/t 6,725 7,124 6,969 5,142 7,531 8,822 7,952 7,830 9,049 10,352
Gold US$/oz 604 695 872 972 1,225 1,571 1,669 1,541 1,572 1,604
Hard Coking Coal US$/t 117 103 328 145 220 296 210 179 203 222
Thermal Coal US$/t 49 66 129 72 99 121 94 92 104 116
Uranium US$/lb 47 99 64 47 46 56 49 43 49 54
Diamonds US$/carat 62 60 64 70 80 80 80 94 108 103
Aluminum US$/t 2,567 2,640 2,575 1,663 2,172 2,398 2,019 2,012 2,260 2,483
Revenue
Iron Ore US$m 6,938 9,193 16,150 12,598 24,024 29,909 24,695 27,958 34,937 41,194
Aluminum US$m 3,493 7,359 18,297 12,038 15,206 12,159 10,105 12,104 13,681 14,899
Copper US$m 7,079 8,501 5,829 6,206 7,782 7,555 6,520 5,788 9,786 12,481
Energy US$m 4,240 4,765 8,018 4,869 5,652 7,327 5,783 6,039 7,077 7,890
Diamonds & Minerals US$m 3,461 3,658 4,116 2,618 3,035 3,220 3,640 4,083 4,770 4,995
Other US$m 229 42 5,655 5,707 4,624 5,508 4,823 4,524 4,524 4,524
Group Revenue US$m 25,440 33,518 58,065 44,036 60,323 65,678 55,566 60,496 74,775 85,984
Associate Revenue US$m (2,975) (3,818) (3,801) (2,211) (3,747) (5,141) (4,599) (4,801) (5,534) (6,317)
Consolidated Revenue US$m 22,465 29,700 54,264 41,825 56,576 60,537 50,967 55,695 69,242 79,667
Operating Costs US$m (13,892) (20,752) (37,641) (33,818) (36,667) (36,260) (37,536) (38,769) (46,388) (50,135)
Exploration & Evaluation Costs US$m - (321) (1,134) (514) (594) (1,437) (1,970) (2,050) (2,533) (2,913)
Special Items and Other US$m 401 (56) (5,295) 13 379 (9,492) (15,071) - - -
Associate Income US$m 1,378 1,584 1,039 786 1,101 704 1,034 937 1,104 1,346
Operating Profit US$m 10,352 10,155 11,233 8,292 20,795 14,052 (2,576) 15,813 21,424 27,965
Net Interest US$m (54) (404) (1,414) (809) (615) (382) (160) (1,235) (1,181) (961)
Other Financing Charges US$m (58) 85 (641) 377 397 (456) 168 (390) (390) (390)
PBT US$m 10,240 9,836 9,178 7,860 20,577 13,214 (2,568) 14,188 19,853 26,614
Income Tax Expense US$m (2,373) (2,090) (3,742) (2,076) (5,296) (6,439) (429) (3,730) (5,413) (7,523)
Loss from Discontinued Operations US$m - - (827) (449) (97) (10) (7) - - -
Tax Rate % 23.2% 21.2% 40.8% 26.4% 25.7% 48.7% -16.7% 26.3% 27.3% 28.3%
PAT US$m 7,867 7,746 4,609 5,335 15,184 6,765 (3,004) 10,458 14,440 19,091
Minority Interests US$m (429) (434) (933) (463) (860) (939) 14 (614) (884) (1,506)
Reported Earnings US$m 7,438 7,312 3,676 4,872 14,324 5,826 (2,990) 9,844 13,555 17,586
Reported EPS, USD/sh USD/share 5.58 5.69 2.86 2.76 7.30 3.03 (1.62) 5.33 7.34 9.52
Underlying Earnings US$m 7,338 7,443 10,303 6,298 13,987 15,549 9,303 9,844 13,555 17,586
Underlying EPS, USD/sh USD/share 5.50 5.79 8.03 3.57 7.13 8.09 5.03 5.33 7.34 9.52
DPS USD/share 1.92 1.16 1.52 .68 .90 1.17 1.64 1.66 1.73 2.19
W. Average Shares Outstanding m 1,333 1,286 1,284 1,764 1,961 1,923 1,849 1,847 1,847 1,847
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
260 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 419 Rio Tinto Balance Sheet
Source: Corporate reports and Bernstein estimates and analysis.

Balance Sheet
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Non-current assets
Intangible assets US$m 1,225 23,407 20,581 19,998 21,016 16,142 9,402 9,402 9,402 9,402
PP&E US$m 22,207 45,647 41,753 45,803 56,024 64,967 75,131 82,099 84,752 87,306
Investments in associates US$m 2,235 7,038 5,053 6,735 6,855 9,833 5,312 5,312 5,312 5,312
Other US$m 1,952 3,456 3,794 4,986 5,713 6,617 7,535 7,731 8,259 8,707
Total non-current assets US$m 27,619 79,548 71,181 77,522 89,608 97,559 97,380 104,544 107,725 110,727
Current assets
Inventories US$m 2,540 5,382 5,607 4,889 4,756 5,307 6,136 5,903 7,005 7,418
Receivables US$m 2,938 6,479 5,401 4,447 5,582 6,058 5,319 5,720 6,798 7,714
Cash and equivalents US$m 736 1,645 1,181 4,233 9,948 9,670 7,082 6,427 11,807 20,473
Other US$m 661 8,337 6,246 6,145 2,879 951 1,656 686 686 686
Total current assets US$m 6,875 21,843 18,435 19,714 23,165 21,986 20,193 18,736 26,296 36,291
Total assets US$m 34,494 101,391 89,616 97,236 112,773 119,545 117,573 123,280 134,022 147,018
Current liabilities
Payables US$m (2,693) (6,667) (7,197) (5,759) (6,570) (9,381) (9,244) (7,639) (9,065) (9,600)
Short-term debt US$m (1,504) (8,213) (10,034) (847) (2,151) (1,447) (2,228) (2,337) (1,440) (424)
Other US$m (1,583) (2,155) (2,748) (2,923) (4,155) (4,138) (2,349) (2,349) (2,349) (2,349)
Total current liabilities US$m (5,780) (17,035) (19,979) (9,529) (12,876) (14,966) (13,821) (12,325) (12,854) (12,373)
Non-current liabilities
Long-term debt US$m (2,007) (38,614) (29,724) (22,155) (13,277) (20,357) (24,591) (24,700) (23,803) (22,787)
Deferred tax liabilities US$m (2,425) (6,486) (4,054) (4,304) (5,222) (6,592) (5,119) (5,119) (5,119) (5,119)
Other US$m (4,897) (12,932) (13,398) (15,323) (16,886) (18,422) (16,021) (15,608) (15,608) (15,608)
Total non-current liabilities US$m (9,329) (58,032) (47,176) (41,782) (35,385) (45,371) (45,731) (45,427) (44,530) (43,514)
Total liabilities US$m (15,109) (75,067) (67,155) (51,311) (48,261) (60,337) (59,552) (57,752) (57,385) (55,886)
Net assets US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 65,528 76,637 91,131
Equity
Shareholders equity US$m 18,232 24,772 20,638 43,831 58,247 52,539 46,865 54,372 65,481 79,975
Minority interests US$m 1,153 1,552 1,823 2,094 6,265 6,669 11,156 11,156 11,156 11,156
Total equity US$m 19,385 26,324 22,461 45,925 64,512 59,208 58,021 65,528 76,637 91,131
Net debt/(Net cash) US$m 2,775 45,182 38,577 18,861 4,071 8,807 19,412 20,285 13,112 2,412
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
261





Exhibit 420 Rio Tinto Cash Flow Statement
Source: Corporate reports and Bernstein estimates and analysis.

Cash Flow
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
EBITDA 12,566 13,611 23,870 14,471 26,639 29,586 20,381 24,183 31,348 38,698
Change in working capital US$m (696) 129 431 991 (825) 347 401 (1,969) (1,282) (1,242)
Other US$m (674) (1,171) (3,633) (1,628) (2,284) (2,543) (4,234) (3,022) (3,608) (4,141)
Operating cash flow US$m 11,196 12,569 20,668 13,834 23,530 27,390 16,548 19,193 26,458 33,315
Income tax paid US$m (2,799) (3,421) (3,899) (3,076) (4,100) (6,197) (5,823) (3,730) (5,413) (7,523)
Dividends paid to minorities US$m (193) (168) (348) (410) (457) (548) (422) (614) (884) (1,506)
Net interest paid US$m (128) (489) (1,538) (1,136) (696) (613) (837) (1,235) (1,181) (961)
Net cash flow from operations US$m 8,076 8,491 14,883 9,212 18,277 20,032 9,466 13,614 18,980 23,326
Capital expenditure US$m (3,920) (5,000) (8,574) (5,388) (4,591) (12,335) (17,458) (12,707) (9,360) (9,535)
Acquisitions & investments US$m - (37,509) - (661) (1,061) (4,901) (1,647) - - -
Disposals US$m 14 32 2,734 2,677 4,027 491 944 557 - -
Other US$m (456) (265) (341) 15 (86) (93) (13) - - -
Net cash flow from investing US$m (4,362) (42,742) (6,181) (3,357) (1,711) (16,838) (18,174) (12,150) (9,360) (9,535)
(Repayment)/receipt of debt US$m (619) 38,161 (7,970) (16,445) (9,360) 5,891 7,888 218 (1,793) (2,034)
Dividends paid to shareholders US$m (2,573) (1,507) (1,933) (876) (1,754) (2,236) (3,038) (2,337) (2,447) (3,091)
Shares issued US$m 31 37 23 14,877 342 424 2,945 - - -
Shares bought back US$m (2,370) (1,648) - - - (5,504) (1,471) - - -
Other financing activities US$m 142 54 772 (19) 162 (2,001) 1 - - -
Net cash flow from financing US$m (5,389) 35,097 (9,108) (2,463) (10,610) (3,426) 6,325 (2,119) (4,240) (5,125)
Effects of exchange rate on cash US$m 30 (27) (101) (284) (139) (71) (49) - - -
Change in cash and equivalents US$m (1,645) 819 (507) 3,108 5,817 (303) (2,432) (655) 5,380 8,666
Closing cash and equivalents US$m 736 1,645 1,181 4,233 9,948 9,670 7,082 6,427 11,807 20,473
FCF to firm US$m 4,477 4,148 8,195 5,370 14,839 8,858 (6,733) 2,756 11,685 16,257
FCF per share US$/share 3.36 3.23 6.38 3.04 7.57 4.61 (3.64) 1.49 6.33 8.80
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
262 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 421 BHP Income Statement
Source: Corporate reports and Bernstein estimates and analysis.

Income Statement
June year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Production
Crude oil, Condensate & NGL mmbbl 55 57 68 76 97 92 85 93 98 106
Natural Gas bcf 360 357 368 365 369 405 822 952 1,186 1,524
Alumina kt 4,187 4,460 4,554 4,396 3,841 4,010 4,152 5,114 5,735 5,838
Aluminum kt 1,362 1,340 1,298 1,233 1,241 1,246 1,153 1,209 1,284 1,284
Copper kt 1,268 1,250 1,376 1,207 1,075 1,139 1,095 1,175 1,258 1,315
Uranium t 3,936 3,486 4,144 4,007 2,279 4,045 3,885 4,112 4,112 4,112
Nickel kt 175 186 168 173 176 153 158 143 143 143
Iron Ore Mt 97 99 112 114 125 134 159 170 188 203
Manganese Ore kt 5,280 6,009 6,575 4,162 6,765 7,011 7,879 8,337 9,001 9,001
Manganese Alloy kt 652 662 775 467 602 774 688 490 413 413
Metallurgical Coal Mt 35 38 35 36 37 33 33 37 38 39
Energy Coal Mt 86 87 80 68 66 70 71 79 85 87
Prices
Oil - WTI US$/bbl 66 72 100 62 79 95 94 98 112 125
Natural Gas - Henry Hub US$/mmbtu 6.73 6.96 8.89 3.94 4.37 4.00 2.75 4.07 4.83 5.44
Aluminum US$/t 2,567 2,640 2,575 1,663 2,172 2,398 2,019 2,012 2,260 2,483
Copper US$/t 6,725 7,124 6,969 5,142 7,531 8,822 7,952 7,830 9,049 10,352
Uranium US$/lb 47 99 64 47 46 56 49 43 49 54
Nickel US$/t 24,102 37,147 21,155 14,655 21,799 22,896 17,544 16,507 17,890 19,412
Iron Ore Fines US$/t 42 46 76 65 108 152 120 131 138 142
Ferromanganese US$/t 853 1,379 2,957 1,316 1,395 1,323 1,223 1,128 1,264 1,398
Hard Coking Coal US$/t 117 103 328 145 220 296 210 179 203 222
Thermal Coal US$/t 49 66 129 72 99 121 94 92 104 116
Revenue
Petroleum US$m 5,230 5,885 8,382 7,211 8,782 10,737 12,937 14,198 18,935 24,417
Aluminum US$m 5,084 5,879 5,746 4,151 4,353 5,221 4,766 4,753 5,707 6,259
Base Metals US$m 10,294 12,635 14,774 7,105 10,409 14,152 11,596 12,317 13,958 16,351
Diamonds & Specialty Products US$m 1,263 893 969 896 1,272 1,517 1,326 681 499 499
Stainless Steel Materials US$m 2,955 6,901 5,088 2,355 3,617 3,861 2,993 2,454 2,504 2,714
Iron Ore US$m 4,782 5,524 9,455 10,048 11,139 20,412 22,601 20,125 24,177 27,314
Manganese US$m 1,037 1,244 2,912 2,536 2,150 2,423 2,152 2,050 2,311 2,498
Metallurgical Coal US$m 3,941 3,769 3,941 8,087 6,059 7,573 7,576 5,736 6,681 7,660
Energy Coal US$m 3,965 4,576 6,560 6,524 4,265 5,507 6,022 5,182 5,911 6,781
Other Group & Inter Segment US$m 548 167 1,646 1,298 752 336 257 100 100 100
Group revenue US$m 39,099 47,473 59,473 50,211 52,798 71,739 72,226 67,596 80,782 94,592
Other income US$m 1,227 588 648 589 528 531 906 4,429 5,293 6,198
Operating costs US$m (25,655) (29,660) (35,976) (38,640) (33,296) (40,454) (49,216) (50,507) (55,003) (62,079)
Operating profit US$m 14,671 18,401 24,145 12,160 20,030 31,816 23,916 21,518 31,073 38,710
Financial income US$m 226 260 293 309 215 245 225 128 100 253
Financial expense US$m (731) (650) (955) (852) (674) (806) (955) (1,508) (1,775) (1,644)
PBT US$m 14,166 18,011 23,483 11,617 19,571 31,255 23,186 20,138 29,397 37,318
Income tax expense US$m (3,207) (4,174) (6,798) (4,784) (6,112) (6,481) (7,238) (4,257) (7,088) (8,998)
Royalty-related taxation US$m (425) (341) (723) (495) (451) (828) (252) (1,393) (2,319) (2,944)
Tax rate % 25.6% 25.1% 32.0% 45.4% 33.5% 23.4% 32.3% 28.1% 32.0% 32.0%
PAT US$m 10,534 13,496 15,962 6,338 13,008 23,946 15,696 14,488 19,990 25,377
Minority interests US$m (84) (80) (572) (461) (287) (298) (115) (103) (158) (183)
Reported earnings US$m 10,450 13,416 15,390 5,877 12,721 23,648 15,581 14,384 19,832 25,193
Reported EPS USD/share 1.76 2.39 2.77 1.06 2.29 4.44 2.93 2.70 3.73 4.73
DPS USD/share .32 .39 .56 .82 .83 .91 1.10 1.14 .96 .99
Shares outstanding m 5,934 5,615 5,565 5,564 5,563 5,323 5,321 5,321 5,321 5,321
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
263





Exhibit 422 BHP Balance Sheet
Source: Corporate reports and Bernstein estimates and analysis.

Balance Sheet
June year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Non-current assets
Intangible assets US$m 683 615 625 661 687 904 5,112 5,207 5,207 5,207
PP&E US$m 30,985 36,705 47,332 49,032 55,576 68,468 95,247 100,513 104,539 107,721
Other US$m 8,072 9,761 6,371 6,591 7,455 8,239 8,463 9,693 10,001 10,297
Total non-current assets US$m 39,740 47,081 54,328 56,284 63,718 77,611 108,822 115,412 119,746 123,224
Current assets
Inventories US$m 2,732 3,296 4,971 4,821 5,334 6,154 6,233 6,850 7,544 8,360
Receivables US$m 3,831 4,689 9,801 5,153 6,543 8,197 7,704 8,299 9,888 11,412
Cash and equivalents US$m 776 1,937 4,237 10,833 12,456 10,084 4,781 3,748 10,028 20,943
Other US$m 1,437 1,165 2,671 1,679 801 845 1,733 1,982 1,982 1,982
Total current assets US$m 8,776 11,087 21,680 22,486 25,134 25,280 20,451 20,880 29,441 42,697
Total assets US$m 48,516 58,168 76,008 78,770 88,852 102,891 129,273 136,292 149,188 165,922
Current liabilities
Payables US$m (4,053) (4,724) (6,774) (5,619) (6,467) (9,718) (12,024) (8,865) (9,763) (10,819)
Short-term debt US$m (1,368) (1,352) (3,461) (1,094) (2,191) (3,519) (3,531) (3,866) (2,793) (953)
Other US$m (3,248) (4,173) (6,243) (4,774) (4,384) (6,496) (6,046) (4,480) (4,480) (4,480)
Total current liabilities US$m (8,669) (10,249) (16,478) (11,487) (13,042) (19,733) (21,601) (17,211) (17,036) (16,253)
Non-current liabilities
Long-term debt US$m (7,648) (9,291) (9,234) (15,325) (13,573) (12,388) (24,799) (32,051) (30,978) (29,138)
Deferred tax liabilities US$m (1,592) (1,822) (3,116) (3,038) (4,320) (2,683) (5,287) (5,177) (5,177) (5,177)
Other US$m (6,152) (6,888) (8,137) (8,209) (8,588) (10,332) (10,501) (9,339) (8,766) (8,186)
Total non-current liabilities US$m (15,392) (18,001) (20,487) (26,572) (26,481) (25,403) (40,587) (46,567) (44,921) (42,502)
Total liabilities US$m (24,061) (28,250) (36,965) (38,059) (39,523) (45,136) (62,188) (63,778) (61,957) (58,754)
Net assets US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 72,513 87,231 107,167
Equity
Shareholders equity US$m 24,218 29,667 38,335 39,954 48,525 56,762 65,870 71,270 85,988 105,924
Minority interests US$m 237 251 708 757 804 993 1,215 1,243 1,243 1,243
Total equity US$m 24,455 29,918 39,043 40,711 49,329 57,755 67,085 72,513 87,231 107,167
Net debt/(Net cash) US$m 8,240 8,706 8,458 5,586 3,308 5,823 23,549 32,169 23,743 9,149
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
264 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 423 BHP Cash Flow Statement
Source: Corporate reports and Bernstein estimates and analysis.

Cash Flow
June year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
EBITDA 17,447 21,284 27,757 16,031 24,790 36,855 30,324 25,614 38,119 45,903
Change in working capital US$m - - (3,744) 3,931 (1,719) 28 968 (4,058) (1,693) (1,580)
Other US$m (5,432) (5,329) 1,135 5,220 (825) 198 2,146 1,984 (662) (662)
Operating cash flow US$m 12,015 15,955 25,148 25,182 22,246 37,081 33,438 23,540 35,764 43,661
Income tax paid US$m (3,152) (3,682) (5,867) (5,129) (4,379) (5,951) (7,312) (6,946) (7,088) (8,998)
Royalty-related tax paid US$m (659) (554) (885) (906) (576) (607) (1,015) (1,224) (2,319) (2,944)
Net Interest paid US$m (378) (380) (630) (314) (421) (455) (588) (1,192) (1,586) (1,309)
Other US$m 2,671 4,257 51 30 20 12 25 10 - -
Net cash flow from operations US$m 10,497 15,596 17,817 18,863 16,890 30,080 24,548 14,188 24,770 30,410
Capital expenditure US$m (5,239) (6,365) (7,558) (9,492) (9,323) (11,147) (18,385) (18,003) (11,072) (10,376)
Acquisitions & investments US$m (1,362) (1,667) (1,686) (1,710) (1,048) (5,515) (13,967) (567) - -
Disposals US$m 1,089 408 180 277 386 198 310 2,413 - -
Other US$m - - - (126) - - 6 - - -
Net cash flow from investing US$m (5,512) (7,624) (9,064) (11,051) (9,985) (16,464) (32,036) (16,157) (11,072) (10,376)
(Repayment)/receipt of debt US$m (1,101) 1,382 (750) 3,575 (485) (577) 8,827 7,257 (2,146) (3,679)
Dividends paid to company shareholders US$m (1,936) (2,271) (3,135) (4,563) (4,618) (5,054) (5,877) (6,098) (5,114) (5,257)
Dividends paid to minority shareholders US$m (190) (68) (115) (406) (277) (90) (56) (53) (158) (183)
Shares issued US$m 34 22 - - - - - - - -
Shares bought back US$m (2,215) (5,906) (3,365) (169) (274) (10,329) (507) (348) - -
Other financing activities US$m (4) (2) 366 383 347 32 122 61 - -
Net cash flow from financing US$m (5,412) (6,843) (6,999) (1,180) (5,307) (16,018) 2,509 819 (7,418) (9,120)
Effects of exchange rate on cash US$m 1 11 21 26 26 27 (56) (1) - -
Change in cash and equivalents US$m (426) 1,140 1,775 6,658 1,624 (2,375) (5,035) (1,151) 6,279 10,915
Closing cash and equivalents US$m 776 1,937 4,237 10,833 12,456 10,084 4,781 3,748 10,028 20,943
FCF to firm US$m 2,965 5,354 10,838 9,655 7,968 19,376 6,726 (2,633) 15,284 21,344
FCF per share US$/share .50 .95 1.95 1.74 1.43 3.64 1.26 (.49) 2.87 4.01
(FCF = Operating cash flow less tax paid, less capex)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
265





Exhibit 424 Vale Income Statement
Source: Corporate reports and Bernstein estimates and analysis.


Income Statement
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Production
Iron Ore kt 264,153 303,161 301,698 237,953 307,793 322,597 319,961 272,398 297,995 329,993
Manganese Ore kt 2,243 1,333 2,384 1,656 1,842 2,557 2,363 2,008 2,008 2,008
Ferroalloys kt 534 543 473 224 451 436 392 128 128 128
Metallurgical Coal kt - 1,764 2,810 2,528 3,059 2,767 5,083 7,992 11,695 12,465
Thermal Coal kt - 440 1,286 2,894 3,832 4,505 3,419 2,616 4,213 4,543
Nickel kt 232 249 275 187 178 238 235 285 310 314
Copper kt 265 284 312 197 208 300 290 405 469 558
Potash kt 733 671 607 716 662 625 549 480 480 480
Prices
Iron Ore US$/t 37 42 64 55 100 139 108 122 129 132
Manganese Ore US$/t 117 155 639 246 347 271 222 241 267 287
Ferro Manganese US$/t 828 1,357 2,892 1,291 1,374 1,302 1,205 1,130 1,264 1,398
Hard Coking Coal US$/t 117 103 328 145 220 296 210 179 203 222
Thermal Coal US$/t 51 61 123 60 77 111 84 77 90 104
Nickel US$/t 24,141 37,183 21,145 14,665 21,813 22,866 17,533 16,517 17,890 19,412
Copper US$/t 6,738 7,133 6,961 5,148 7,533 8,813 7,948 7,825 9,049 10,352
Phosphates US$/t 258 423 967 318 499 628 635 667 742 799
Revenue
Bulk Materials US$m 12,569 15,434 23,553 15,071 34,478 46,904 35,662 33,222 39,305 44,892
Base Metals US$m 5,962 15,313 11,764 6,679 8,200 9,627 7,133 8,720 11,087 13,267
Fertilizers US$m 143 178 295 413 1,846 3,547 3,777 4,790 5,629 6,060
Logistics US$m 1,376 1,525 1,607 1,104 1,465 1,727 1,644 889 906 924
Other US$m 313 665 1,290 672 492 541 537 738 753 767
Group revenue US$m 20,363 33,115 38,509 23,939 46,481 62,346 48,753 48,359 57,679 65,909
VAT US$m (716) (873) (1,083) (628) (1,188) (1,399) (1,059) (3,940) (4,514) (5,095)
Net operating revenue US$m 19,647 32,242 37,426 23,311 45,293 60,947 47,694 44,419 53,165 60,815
Operating costs US$m (11,017) (16,862) (18,921) (14,532) (20,338) (28,225) (29,561) (22,297) (26,935) (28,400)
Depreciation, depletion and amortization US$m (998) (2,190) (2,807) (2,722) (3,260) (4,122) (4,396) (4,753) (5,427) (5,797)
Operating profit US$m 7,632 13,190 15,698 6,057 21,695 28,600 13,737 17,369 20,803 26,618
Financial income US$m 327 295 602 381 290 718 401 2,281 1,653 2,642
Interest expense US$m (1,338) (2,482) (1,765) (1,558) (2,646) (2,465) (2,414) (3,919) (3,981) (3,884)
Other financing charges US$m 883 3,449 (448) 2,203 975 (1,566) (1,788) - - -
Gain on sale of investments US$m - 320 777 (870) 40 - 1,513 (491) - -
PBT US$m 7,504 14,772 14,864 6,213 20,354 25,287 11,449 15,240 18,476 25,376
Income tax expense US$m (1,432) (3,201) (535) (2,100) (3,705) (5,282) 833 (4,940) (6,188) (7,985)
Equity results in affiliates US$m 710 595 794 433 987 1,135 (1,001) 726 861 1,102
Loss from discontinued operations US$m - - - - (143) - - - - -
Tax rate % 19.1% 21.7% 3.6% 33.8% 18.2% 20.9% -7.3% 32.4% 33.5% 31.5%
PAT US$m 6,782 12,166 15,123 4,546 17,493 21,140 11,281 11,026 13,149 18,492
Minority interests US$m (579) (802) (258) (107) (189) 233 257 39 (30) (39)
Reported earnings US$m 6,203 11,364 14,865 4,439 17,304 21,373 11,538 11,065 13,119 18,453
Reported EPS - Preferred US$/share 2.14 2.42 2.53 0.97 3.23 4.37 1.06 2.28 2.55 3.58
Reported EPS - Common US$/share 2.18 2.42 2.53 0.97 3.22 4.34 1.07 2.28 2.55 3.58
Reported EPS - Pref linked to convertibles US$/share 0.00 2.20 4.13 1.73 4.95 6.37 0.00 0.00 0.00 0.00
Reported EPS - Common linked to convertibles US$/share 0.00 2.36 4.31 2.26 7.44 8.15 0.00 0.00 0.00 0.00
DPS US$/share .80 .56 .56 .53 .57 1.73 1.17 .33 .51 .72
Preferred shares outstanding m 1,181 1,889 1,985 2,031 2,025 1,964 1,944 1,968 1,968 1,968
Common shares outstanding m 1,840 2,943 3,094 3,182 3,209 3,187 3,176 3,186 3,186 3,186
Treasury Prefs Shares Linked to Mandatory Convertible Notes m - 23 30 66 47 47 - - - -
Treasury Common Shares Linked to Mandatory Convertible Notes m - 42 57 70 18 18 - - - -
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
266 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 425 Vale Balance Sheet
Source: Corporate reports and Bernstein estimates and analysis.

Balance Sheet
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Non-current assets
Intangible assets US$m 4,484 3,791 2,773 3,486 4,591 4,161 3,969 9,308 9,308 9,308
PP&E US$m 38,007 54,625 48,454 67,637 83,096 88,895 90,744 95,975 105,882 112,684
Investments in associates US$m 2,353 2,922 2,408 4,585 4,497 8,093 6,492 6,956 7,817 8,919
Other US$m 3,142 3,999 3,119 5,277 5,164 5,843 7,376 7,948 7,948 7,948
Total non-current assets US$m 47,986 65,337 56,754 80,985 97,348 106,992 108,581 120,188 130,955 138,859
Current assets
Inventories US$m 3,493 3,859 3,896 3,196 4,298 5,251 5,052 6,117 7,488 7,568
Receivables US$m 3,604 3,952 3,204 3,120 8,211 8,505 6,795 7,121 8,522 9,465
Cash and equivalents US$m 4,448 1,046 10,331 7,293 7,584 3,531 5,832 4,162 4,338 10,404
Other US$m 1,395 2,523 5,807 7,685 11,698 4,449 5,218 5,299 5,299 5,299
Total current assets US$m 12,940 11,380 23,238 21,294 31,791 21,736 22,897 22,699 25,646 32,736
Total assets US$m 60,926 76,717 79,992 102,279 129,139 128,728 131,478 142,887 156,601 171,595
Current liabilities
Payables US$m (2,382) (2,430) (2,261) (2,309) (3,558) (4,814) (4,529) (4,646) (5,687) (5,748)
Short-term debt US$m (1,434) (1,416) (633) (2,963) (2,962) (1,517) (3,468) (3,563) (3,534) (2,523)
Other US$m (3,496) (6,237) (4,343) (3,909) (8,240) (4,712) (4,407) (3,871) (3,871) (3,871)
Total current liabilities US$m (7,312) (10,083) (7,237) (9,181) (14,760) (11,043) (12,404) (12,080) (13,092) (12,142)
Non-current liabilities
Long-term debt US$m (21,122) (17,608) (17,914) (20,650) (22,875) (22,874) (28,452) (28,842) (28,813) (27,802)
Deferred tax liabilities US$m (4,527) (5,725) (4,005) (5,755) (8,085) (5,654) (3,538) (3,504) (3,504) (3,504)
Other US$m (5,481) (7,470) (5,789) (6,196) (10,978) (9,043) (10,721) (14,002) (16,209) (18,362)
Total non-current liabilities US$m (31,130) (30,803) (27,708) (32,601) (41,938) (37,571) (42,711) (46,348) (48,526) (49,668)
Total liabilities US$m (38,442) (40,886) (34,945) (41,782) (56,698) (48,614) (55,115) (58,428) (61,617) (61,809)
Net assets US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 84,459 94,984 109,786
Equity
Shareholders equity US$m 19,673 33,276 42,556 56,935 68,899 77,715 74,241 82,907 93,402 108,164
Minority interests US$m 2,811 2,555 2,491 3,562 3,542 2,399 2,122 1,552 1,582 1,621
Total equity US$m 22,484 35,831 45,047 60,497 72,441 80,114 76,363 84,459 94,984 109,786
Net debt/(Net cash) US$m 18,108 17,978 8,216 16,320 18,253 20,860 26,088 28,244 28,009 19,921
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
267





Exhibit 426 Vale Cash Flow Statement
Source: Corporate reports and Bernstein estimates and analysis.

Cash Flow
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
EBITDA 8,620 15,380 18,505 8,779 24,955 32,722 18,133 22,523 26,230 32,415
Change in working capital US$m 288 1,060 (229) 1,426 (3,083) (803) 1,621 (2,137) (1,730) (963)
Other US$m (636) (604) 2,021 (624) 871 1,317 (3,081) 691 - -
Operating cash flow US$m 8,272 15,836 20,297 9,581 22,743 33,236 16,673 21,077 24,499 31,452
Income tax paid US$m (541) (3,284) (2,867) (1,331) (1,972) (7,293) 1,238 (4,833) (6,188) (7,985)
Net interest paid US$m (498) (1,338) (1,266) (1,114) (1,102) (1,146) (1,316) (94) (121) 911
Net cash flow from operations US$m 7,233 11,214 16,164 7,136 19,669 24,797 16,595 16,150 18,191 24,378
Capital expenditure US$m (4,431) (6,853) (8,972) (8,096) (12,647) (16,075) (15,777) (16,609) (15,333) (12,599)
Acquisitions & investments US$m (13,201) (2,926) - (1,952) (6,252) - - (182) - -
Disposals US$m 886 1,042 134 448 - 1,081 974 700 - -
Other US$m (208) (471) (2,563) (3,559) 1,715 625 (544) (345) - -
Net cash flow from investing US$m (16,954) (9,208) (11,401) (13,159) (17,184) (14,369) (15,347) (16,436) (15,333) (12,599)
(Repayment)/receipt of debt US$m 15,011 (2,620) 559 2,471 1,907 (1,135) 7,621 332 (59) (2,022)
Dividends paid to shareholders US$m (1,319) (1,875) (2,850) (2,724) (3,000) (9,000) (6,000) (1,726) (2,624) (3,691)
Dividends paid to minority interests US$m (46) (714) (143) (47) (140) (100) (45) - - -
Shares issued US$m - - - - - (1,134) (411) - - -
Shares bought back US$m (301) - (752) 925 (1,996) (3,002) - - - -
Other financing activities US$m - - 12,190 - 660 - - - - -
Net cash flow from financing US$m 13,345 (5,209) 9,004 625 (2,569) (14,371) 1,165 (1,395) (2,682) (5,713)
Effects of exchange rate on cash US$m (217) (199) (5,432) 2,360 375 (109) (112) 11 - -
Change in cash and equivalents US$m 3,407 (3,402) 8,335 (3,038) 291 (4,052) 2,301 (1,670) 176 6,066
Closing cash and equivalents US$m 4,448 1,046 10,331 7,293 7,584 3,531 5,832 4,162 4,338 10,404
FCF to firm US$m 3,300 5,699 8,458 154 8,124 9,868 2,134 (365) 2,979 10,868
FCF per share US$/share 1.09 1.16 1.64 .03 1.53 1.89 .42 (.07) .58 2.11
(FCF = Operating cash flow less tax paid, less capex)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
268 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 427 Anglo American Income Statement
Source: Corporate reports and Bernstein estimates and analysis.

Income Statement
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Production
Platinum koz 2,817 2,474 2,387 2,452 2,570 2,530 2,379 2,262 2,386 2,378
Palladium koz 1,539 1,390 1,319 1,361 1,449 1,431 1,396 1,356 1,442 1,448
Diamonds k carats 23,011 23,001 21,659 11,070 14,849 14,098 18,314 24,524 24,524 24,524
Copper kt 680 663 679 677 633 610 670 696 703 735
Nickel kt 26 26 20 20 20 29 39 28 38 41
Iron Ore kt 31,109 32,400 37,411 44,596 47,482 46,089 49,137 49,040 46,008 59,234
Thermal Coal - Domestic kt 43,390 42,521 44,412 51,080 49,923 47,592 46,939 48,798 48,798 48,798
Thermal Coal - Export kt 33,762 35,212 33,771 25,960 26,808 27,217 28,076 28,486 29,484 30,816
Metallurgical Coal kt 10,964 11,289 14,889 12,934 17,034 15,243 18,864 19,201 19,201 21,071
Prices
Platinum US$/oz 1,142 1,301 1,576 1,200 1,611 1,722 1,552 1,598 1,733 1,859
Palladium US$/oz 320 355 358 267 526 716 605 741 766 785
Copper US$/t 6,725 7,124 6,969 5,142 7,531 8,822 7,952 7,830 9,049 10,352
Nickel US$/t 24,102 37,147 21,155 14,655 21,799 22,896 17,544 16,507 17,890 19,412
Iron Ore Lump US$/t 54 60 105 80 125 173 127 139 147 151
Iron Ore Fines US$/t 42 46 76 65 108 152 120 131 138 142
Thermal Coal US$/t 49 66 129 72 99 121 94 92 104 116
Hard Coking Coal US$/t 117 103 328 145 220 296 210 179 203 222
Revenue
Platinum US$m 5,861 6,789 6,327 4,535 6,602 7,359 5,489 5,610 6,336 6,727
Diamonds US$m 3,148 3,076 3,096 1,728 2,644 3,320 4,028 5,709 6,314 6,426
Copper US$m 4,537 4,507 3,907 3,967 4,877 5,144 5,122 5,346 6,238 7,467
Nickel US$m 553 878 408 348 426 488 336 444 664 776
Iron Ore and Manganese US$m 2,684 2,300 4,099 3,419 6,612 8,124 6,730 7,497 8,136 10,472
Metallurgical Coal US$m 1,398 1,389 3,119 2,239 3,377 4,347 3,889 3,521 3,993 4,699
Thermal Coal US$m 1,935 2,165 3,157 2,490 2,866 3,722 3,447 3,122 3,721 4,401
Other Mining & Industrial US$m 18,521 9,455 8,851 5,908 5,520 4,039 3,739 3,604 3,604 3,604
Other US$m - - - 3 5 5 5 4 4 4
Group revenue US$m 38,637 30,559 32,964 24,637 32,929 36,548 32,785 34,857 39,009 44,576
Less associates' revenue US$m (5,565) (5,089) (6,653) (3,779) (4,969) (5,968) (4,024) (2,403) (2,817) (3,291)
Consolidated revenue US$m 33,072 25,470 26,311 20,858 27,960 30,580 28,761 32,453 36,193 41,285
Operating costs US$m (24,330) (16,952) (18,330) (16,481) (19,452) (20,912) (23,356) (26,526) (28,859) (31,668)
Associate income US$m 582 640 1,303 318 845 978 493 155 273 395
Operating profit (underlying) US$m 9,324 9,158 9,284 4,695 9,353 10,646 5,898 6,082 7,606 10,011
Net interest US$m (165) (137) (452) (273) (244) (20) (288) (456) (378) (284)
PBT (underlying) US$m 9,159 9,021 8,832 4,422 9,109 10,626 5,610 5,626 7,228 9,727
Income tax expense US$m (2,763) (2,676) (2,545) (1,305) (2,699) (2,741) (1,488) (1,519) (1,952) (2,626)
Tax rate % 30.2% 29.7% 28.8% 29.5% 29.6% 25.8% 26.5% 27.0% 27.0% 27.0%
PAT (underlying) US$m 6,396 6,345 6,287 3,117 6,410 7,885 4,122 4,107 5,276 7,101
Minority interests US$m (925) (902) (1,050) (548) (1,434) (1,765) (1,283) (1,680) (1,989) (2,309)
Underlying earnings US$m 5,471 5,443 5,237 2,569 4,976 6,120 2,839 2,427 3,288 4,792
Underlying EPS USD/share 3.74 4.47 4.36 2.14 4.13 5.05 2.22 1.90 2.57 3.75
EPS incl special items USD/share 4.23 6.00 4.34 2.02 5.43 5.09 (1.17) 1.90 2.57 3.75
Diluted EPS incl special items USD/share - - - 1.98 5.18 4.89 (1.14) 1.90 2.57 3.74
DPS USD/share .67 .80 .92 - .25 .68 .78 .70 .45 .59
Shares outstanding m 1,461 1,218 1,201 1,202 1,206 1,211 1,278 1,278 1,278 1,278
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
269





Exhibit 428 Anglo American Balance Sheet
Source: Corporate reports and Bernstein estimates and analysis.

Balance Sheet
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
Non-current assets
Intangible assets US$m 2,134 1,556 3,006 2,776 2,316 2,322 4,571 4,571 4,571 4,571
PP&E US$m 23,498 23,534 29,545 35,198 39,810 40,549 45,089 47,662 49,713 48,395
Investments in associates US$m 4,780 3,341 3,612 3,312 4,900 5,240 3,063 3,140 3,277 3,474
Other US$m 3,039 5,611 3,995 3,991 4,952 5,029 5,449 5,710 5,937 6,228
Total non-current assets US$m 33,451 34,042 40,158 45,277 51,978 53,140 58,172 61,083 63,498 62,668
Current assets
Inventories US$m 2,974 2,344 2,702 3,212 3,604 3,517 5,005 4,979 5,464 5,729
Receivables US$m 5,312 3,731 2,929 3,351 3,731 3,674 3,275 4,019 4,475 5,157
Cash and equivalents US$m 3,004 3,129 2,771 3,269 6,401 11,732 9,094 10,103 10,220 13,519
Other US$m 1,742 1,516 1,178 1,199 942 379 3,823 673 673 673
Total current assets US$m 13,032 10,720 9,580 11,031 14,678 19,302 21,197 19,773 20,832 25,079
Total assets US$m 46,483 44,762 49,738 56,308 66,656 72,442 79,369 80,857 84,330 87,746
Current liabilities
Payables US$m (5,040) (3,950) (4,770) (4,395) (4,950) (5,098) (4,536) (6,368) (6,989) (7,328)
Short-term debt US$m (2,028) (5,895) (6,784) (1,499) (1,535) (1,018) (2,604) (1,492) (951) -
Other US$m (1,731) (1,635) (1,570) (851) (1,397) (2,062) (1,663) (1,681) (1,704) (1,735)
Total current liabilities US$m (8,799) (11,480) (13,124) (6,745) (7,882) (8,178) (8,803) (9,541) (9,644) (9,064)
Non-current liabilities
Long-term debt US$m (4,220) (2,404) (7,211) (12,816) (11,904) (11,855) (15,150) (14,409) (14,048) (12,807)
Deferred tax liabilities US$m (3,687) (4,650) (4,555) (5,192) (5,641) (5,730) (6,069) (6,203) (6,375) (6,606)
Other US$m (2,650) (1,898) (3,092) (3,486) (3,258) (3,490) (5,560) (4,817) (4,993) (5,169)
Total non-current liabilities US$m (10,557) (8,952) (14,858) (21,494) (20,803) (21,075) (26,779) (25,428) (25,416) (24,582)
Total liabilities US$m (19,356) (20,432) (27,982) (28,239) (28,685) (29,253) (35,582) (34,969) (35,060) (33,646)
Net assets US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 45,888 49,270 54,100
Equity
Shareholders' equity US$m 24,271 22,461 20,221 26,121 34,239 39,092 37,657 39,170 41,856 45,878
Minority interests US$m 2,856 1,869 1,535 1,948 3,732 4,097 6,130 6,718 7,414 8,222
Total equity US$m 27,127 24,330 21,756 28,069 37,971 43,189 43,787 45,888 49,270 54,100
Net debt/(Net cash) US$m 3,051 4,782 11,348 11,328 7,443 1,374 8,828 5,966 4,947 (544)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
270 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 429 Anglo American Cash Flow Statement
Source: Corporate reports and Bernstein estimates and analysis.


Cash Flow
Dec year-end 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E
EBITDA 12,197 11,171 11,790 6,930 11,983 13,463 8,815 10,052 11,833 15,590
Share of associates operating profit US$m (1,090) (1,072) (2,104) (580) (1,255) (1,427) (759) (496) (823) (1,188)
Share of associates D&A US$m (329) (183) (253) (248) (301) (286) (233) (161) (173) (177)
Change in working capital US$m (532) (688) (23) (910) (380) (159) (527) 984 (400) (727)
Other US$m (189) 611 112 (288) (123) (93) (275) 176 176 176
Operating cash flow US$m 10,057 9,839 9,522 4,904 9,924 11,498 7,021 10,556 10,613 13,674
Dividends received US$m 288 311 659 639 285 403 340 110 169 230
Income tax paid US$m (2,035) (2,886) (2,173) (1,456) (2,482) (2,539) (2,539) (1,367) (1,756) (2,364)
Other US$m - - - - - - - - - -
Net cash flow from operations US$m 8,310 7,264 8,008 4,087 7,727 9,362 4,822 9,299 9,025 11,540
Capital expenditure US$m (3,686) (3,931) (5,146) (4,607) (5,280) (6,203) (5,607) (6,042) (5,555) (3,290)
Acquisitions & investments US$m (344) (1,933) (7,246) (384) (653) (63) (4,946) - - -
Disposals US$m 1,766 822 1,554 2,818 2,863 610 166 - - -
Other US$m 459 2,781 (912) (50) 600 803 566 2,457 226 226
Net cash flow from investing US$m (1,805) (2,261) (11,750) (2,223) (2,470) (4,853) (9,821) (3,585) (5,329) (3,064)
(Repayment)/receipt of debt US$m 583 3,121 6,613 (371) (1,144) (297) 4,886 (1,854) (901) (2,192)
Dividends paid to minorities US$m (383) (728) (796) (472) (617) (1,404) (1,267) (1,092) (1,293) (1,501)
Dividends paid to shareholders US$m (2,888) (1,538) (1,550) - (302) (818) (970) (895) (579) (749)
Interest paid US$m (426) (483) (741) (741) (837) (807) (775) (845) (783) (714)
Shares issued US$m - - - - - - - - - -
Shares bought back US$m - - - - - - - - - -
Other financing activities US$m (3,561) (5,341) 16 (35) 500 4,800 76 (19) (22) (21)
Net cash flow from financing US$m (6,675) (4,969) 3,542 (1,619) (2,400) 1,474 1,950 (4,705) (3,579) (5,177)
Change in cash and equivalents US$m (170) 34 (200) 245 2,857 5,983 (3,049) 1,009 117 3,299
Closing cash and equivalents US$m 3,004 3,129 2,771 3,269 6,401 11,732 9,094 10,103 10,220 13,519
FCF to firm US$m 4,624 3,333 2,862 (520) 2,447 3,159 (785) 3,257 3,470 8,250
FCF per share US$/share 3.16 2.74 2.38 (.43) 2.03 2.61 (.61) 2.55 2.72 6.46
(FCF = Operating cash flow less tax paid, less capex)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
271





Exhibit 430 Glencore Xstrata Pro Forma Income Statement (Including Synergies)
Source: Corporate reports and Bernstein estimates and analysis.


Income Statement
December year-end 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Sales Volume
Zinc Own Feed kt 1,795 1,814 1,761 1,668 1,569 1,601 1,955 2,028
Copper Own Feed kt 1,198 1,206 1,199 1,241 1,161 1,446 1,578 1,801
Nickel & Ferronickel Own Feed kt 91 80 85 100 104 123 145 167
Coal Mt 107 104 100 105 137 153 162 176
Ferrochrome kt 1,126 786 1,165 1,021 918 990 1,204 1,204
Platinum koz 138 133 118 92 76 76 148 244
Oil Own Feed Mstb 17 9 - 1 5 5 6 6
Oil - Share of RussNeft Investment Mstb - - 3 5 6 6 6 6
Prices
Zinc US$/t 1,886 1,656 2,158 2,195 1,949 2,036 2,237 2,387
Copper US$/t 6,969 5,142 7,531 8,822 7,952 7,830 9,049 10,352
Nickel US$/t 21,155 14,655 21,799 22,896 17,544 16,507 17,890 19,412
Thermal Coal US$/t 129 72 99 121 94 92 104 116
Platinum US$/oz 1,576 1,200 1,611 1,722 1,552 1,598 1,733 1,859
Brent US$/bbl 99 62 80 111 110 121 135 145
Revenue
Zinc US$m 5,671 5,445 6,678 7,047 7,117 6,913 8,221 8,878
Copper US$m 14,203 11,554 17,435 19,213 16,191 18,209 21,742 26,687
Nickel US$m 3,754 2,500 3,451 3,872 3,306 3,346 4,134 5,010
Alumina & Aluminum US$m 263 235 422 520 410 454 475 532
Coal US$m 9,175 7,816 9,035 11,648 12,205 12,576 15,216 18,183
Oil & Oil Products US$m 1,672 534 253 642 1,640 1,828 2,206 2,457
Agricultural Products US$m 1,337 1,789 2,180 3,359 2,935 3,100 3,153 3,211
Alloys US$m 2,002 1,305 1,894 1,689 1,413 1,434 1,997 2,380
Marketing - Metals & Mining US$m 34,940 30,971 38,639 44,067 50,834 48,703 52,789 57,291
Marketing - Energy Products US$m 87,310 54,041 80,061 104,775 118,192 129,598 145,034 155,637
Marketing - Agricultural Products US$m 12,057 6,793 8,238 13,744 14,155 12,284 12,356 12,434
Other US$m 235 114 153 222 358 358 358 358
Group revenue US$m 173,369 123,847 169,189 211,548 229,505 239,552 268,430 293,806
Operating costs US$m (161,545) (116,778) (157,970) (199,700) (220,589) (230,466) (255,535) (274,731)
Operating profit US$m 11,824 7,069 11,219 11,848 8,916 9,086 12,895 19,075
Financial income US$m 490 674 433 476 579 437 532 809
Financial expense US$m (1,987) (1,608) (1,837) (1,638) (1,808) (1,688) (1,628) (1,452)
PBT US$m 10,327 6,135 9,815 10,686 7,688 7,835 11,799 18,432
Income tax expense US$m (2,051) (1,402) (2,194) (2,033) (1,065) (1,485) (2,499) (4,209)
Tax rate % 19.9% 22.8% 22.4% 19.0% 13.8% 19.0% 21.2% 22.8%
PAT US$m 8,276 4,733 7,621 8,653 6,623 6,350 9,299 14,223
Minority interests US$m (339) (296) (475) (456) (497) (672) (951) (1,286)
Reported earnings US$m 7,937 4,437 7,146 8,197 6,126 5,678 8,348 12,937
Reported EPS US$/share .59 .33 .54 .61 .46 .43 .63 .97
DPS US$/share .06 .06 .06 .09 .14 .14 .19 .23
Post-acquisition shares out m 13,326 13,326 13,326 13,326 13,326 13,326 13,326 13,326
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
272 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 431 Glencore Xstrata Pro Forma Balance Sheet (Including Synergies)
Source: Corporate reports and Bernstein estimates and analysis.


Balance Sheet
December year-end 2008 A 2009 A 2010 A 2011 A 2012 E 2013 E 2014 E 2015 E
Non-current assets
Intangible assets US$m 6,714 6,238 6,216 6,254 6,850 6,850 6,850 6,850
PP&E US$m 43,000 46,242 57,972 66,093 78,146 78,191 76,858 74,355
Other US$m 9,887 11,027 11,677 11,836 10,930 10,941 11,101 11,562
Total non-current assets US$m 59,601 63,507 75,865 84,183 95,926 95,983 94,810 92,767
Current assets
Inventories US$m 11,378 19,643 22,156 22,371 20,435 22,515 24,824 26,744
Receivables US$m 15,897 18,495 23,457 25,637 25,110 28,230 31,015 34,143
Cash and equivalents US$m 1,982 2,037 3,185 3,253 2,130 2,702 4,736 9,903
Other US$m 14,238 10,967 7,135 5,845 6,024 6,024 6,024 6,024
Total current assets US$m 43,495 51,142 55,933 57,106 53,699 59,471 66,600 76,814
Total assets US$m 103,096 114,649 131,798 141,289 149,625 155,454 161,409 169,581
Current liabilities
Payables US$m (14,847) (15,179) (20,775) (23,262) (21,878) (24,217) (26,574) (28,601)
Short-term debt US$m (6,039) (10,172) (14,683) (9,790) (8,808) (8,215) (6,505) (3,800)
Other US$m (14,880) (10,137) (10,233) (6,886) (6,935) (6,941) (6,952) (6,972)
Total current liabilities US$m (35,766) (35,488) (45,691) (39,938) (37,621) (39,373) (40,031) (39,374)
Non-current liabilities
Long-term debt US$m (29,408) (29,655) (25,405) (28,648) (28,766) (28,173) (26,463) (23,758)
Other US$m (10,741) (11,798) (13,651) (14,375) (17,194) (17,594) (18,062) (18,665)
Total non-current liabilities US$m (40,149) (41,453) (39,056) (43,023) (45,960) (45,767) (44,525) (42,423)
Total liabilities US$m (75,915) (77,237) (84,948) (82,961) (83,581) (85,140) (84,556) (81,797)
Net assets US$m 27,181 37,412 46,850 58,328 66,044 70,314 76,853 87,785
Equity
Shareholders equity US$m 24,639 34,517 42,194 53,221 59,753 63,585 69,397 79,288
Minority interests US$m 2,542 2,895 4,656 5,107 6,290 6,729 7,457 8,496
Total equity US$m 27,181 37,412 46,850 58,328 66,044 70,314 76,853 87,785
Net debt/(Net cash) US$m 33,979 34,813 36,895 35,384 35,492 32,889 26,019 14,077
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
273





Exhibit 432 Glencore Xstrata Pro Forma Cash Flow Statement (Including Synergies)
Source: Corporate reports and Bernstein estimates and analysis.


Cash Flow
December year-end 2008 A 2009 A 2010 A 2011 A 2012 E 2013 E 2014 E 2015 E
EBITDA 14,638 9,949 14,708 15,878 13,784 15,902 20,203 26,252
Change in working capital US$m 2,682 (6,970) (3,523) (2,691) 1,754 (2,891) (2,812) (3,114)
Other US$m 2 891 750 (175) (75) 187 384 776
Operating cash flow US$m 17,322 3,870 11,935 13,012 15,464 13,198 17,775 23,914
Income tax paid US$m (2,170) (1,158) (1,854) (1,557) (1,965) (1,483) (2,585) (4,515)
Net interest paid US$m (1,449) (1,085) (1,268) (1,226) (1,315) (1,048) (1,002) (844)
Other US$m 850 585 345 403 431 427 413 382
Net cash flow from operations US$m 14,553 2,212 9,158 10,632 12,615 11,093 14,601 18,936
Capital expenditure US$m (6,645) (4,665) (7,709) (10,844) (11,224) (7,006) (6,119) (4,817)
Acquisitions & investments US$m (6,909) (390) (1,238) (1,478) 2,143 - - -
Disposals US$m 352 1,161 652 379 378 1,206 144 10
Other US$m 74 (2,948) 382 (301) (168) (895) 415 1,052
Net cash flow from investing US$m (13,128) (6,842) (7,913) (12,244) (8,872) (6,695) (5,560) (3,755)
(Repayment)/receipt of debt US$m 2,380 (769) 2,101 (1,466) (2,383) (1,186) (3,420) (5,409)
Dividends paid to company shareholders US$m (826) (782) (817) (1,149) (1,887) (1,872) (2,584) (3,061)
Dividends paid to minority shareholders US$m (522) - (407) (1,002) (1,209) (365) (613) (1,188)
Shares issued US$m - 5,667 - 7,616 - - - -
Shares bought back US$m - - - - - - - -
Other financing activities US$m (1,874) 615 (1,055) (1,586) 385 (403) (389) (358)
Net cash flow from financing US$m (842) 4,731 (178) 2,413 (5,093) (3,826) (7,006) (10,015)
Effects of exchange rate on cash US$m - - - - - - - -
Change in cash and equivalents US$m 583 101 1,067 801 (1,350) 572 2,034 5,167
Closing cash and equivalents, Dec 31 US$m 1,982 2,037 3,185 3,253 2,130 2,702 4,736 9,903
FCF to firm US$m 8,507 (1,953) 2,372 611 2,275 4,709 9,071 14,582
FCF per share US$/share .64 (.15) .18 .05 .17 .35 .68 1.09
(FCF = Operating cash flow less tax paid, less capex)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
274 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 433 Glencore Xstrata Pro Forma Income Statement (Excluding Synergies)
Source: Corporate reports and Bernstein estimates and analysis.


Income Statement
December year-end 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Sales Volume
Zinc Own Feed kt 1,795 1,814 1,761 1,668 1,569 1,601 1,955 2,028
Copper Own Feed kt 1,198 1,206 1,199 1,241 1,161 1,446 1,578 1,801
Nickel & Ferronickel Own Feed kt 91 80 85 100 104 123 145 167
Coal Mt 107 104 100 105 137 153 162 176
Ferrochrome kt 1,126 786 1,165 1,021 918 990 1,204 1,204
Platinum koz 138 133 118 92 76 76 148 244
Oil Own Feed Mstb 17 9 - 1 5 5 6 6
Oil - Share of RussNeft Investment Mstb - - 3 5 6 6 6 6
Prices
Zinc US$/t 1,886 1,656 2,158 2,195 1,949 2,036 2,237 2,387
Copper US$/t 6,969 5,142 7,531 8,822 7,952 7,830 9,049 10,352
Nickel US$/t 21,155 14,655 21,799 22,896 17,544 16,507 17,890 19,412
Thermal Coal US$/t 129 72 99 121 94 92 104 116
Platinum US$/oz 1,576 1,200 1,611 1,722 1,552 1,598 1,733 1,859
Brent US$/bbl 99 62 80 111 110 121 135 145
Revenue
Zinc US$m 5,671 5,445 6,678 7,047 7,117 6,913 8,221 8,878
Copper US$m 14,203 11,554 17,435 19,213 16,191 18,209 21,742 26,687
Nickel US$m 3,754 2,500 3,451 3,872 3,306 3,346 4,134 5,010
Alumina & Aluminum US$m 263 235 422 520 410 454 475 532
Coal US$m 9,175 7,816 9,035 11,648 12,205 12,576 15,216 18,183
Oil & Oil Products US$m 1,672 534 253 642 1,640 1,828 2,206 2,457
Agricultural Products US$m 1,337 1,789 2,180 3,359 2,935 3,100 3,153 3,211
Alloys US$m 2,002 1,305 1,894 1,689 1,413 1,434 1,997 2,380
Marketing - Metals & Mining US$m 34,565 30,221 37,889 43,317 50,084 47,953 52,039 56,541
Marketing - Energy Products US$m 87,310 54,041 80,061 104,775 118,192 129,598 145,034 155,637
Marketing - Agricultural Products US$m 12,057 6,793 8,238 13,744 14,155 12,284 12,356 12,434
Other US$m 235 114 153 222 358 358 358 358
Group revenue US$m 172,244 122,347 167,689 210,048 228,005 238,052 266,930 292,306
Operating costs US$m (161,315) (116,174) (157,366) (199,096) (219,984) (229,862) (254,931) (274,127)
Operating profit US$m 10,929 6,173 10,323 10,952 8,021 8,190 11,999 18,180
Financial income US$m 490 674 433 476 579 437 532 809
Financial expense US$m (1,987) (1,608) (1,837) (1,638) (1,808) (1,688) (1,628) (1,452)
PBT US$m 9,432 5,239 8,919 9,790 6,792 6,939 10,903 17,536
Income tax expense US$m (1,902) (1,231) (2,016) (1,876) (956) (1,340) (2,326) (4,012)
Tax rate % 20.2% 23.5% 22.6% 19.2% 14.1% 19.3% 21.3% 22.9%
PAT US$m 7,530 4,008 6,903 7,914 5,836 5,599 8,577 13,524
Minority interests US$m (339) (296) (475) (456) (497) (672) (951) (1,286)
Reported earnings US$m 7,191 3,712 6,428 7,458 5,338 4,927 7,625 12,238
Reported EPS US$/share .54 .28 .48 .56 .40 .37 .57 .92
DPS US$/share .02 .02 .02 .04 .09 .10 .15 .19
Post-acquisition shares out m 13,326 13,326 13,326 13,326 13,326 13,326 13,326 13,326
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
275





Exhibit 434 Glencore Xstrata Pro Forma Balance Sheet (Excluding Synergies)
Source: Corporate reports and Bernstein estimates and analysis.


Balance Sheet
December year-end 2008 A 2009 A 2010 A 2011 A 2012 E 2013 E 2014 E 2015 E
Non-current assets
Intangible assets US$m 8,898 8,422 8,400 8,438 9,034 9,034 9,034 9,034
PP&E US$m 43,000 46,242 57,972 66,093 78,146 78,191 76,858 74,355
Other US$m 9,887 11,027 11,677 11,836 10,930 10,941 11,101 11,562
Total non-current assets US$m 61,785 65,691 78,049 86,367 98,110 98,167 96,994 94,951
Current assets
Inventories US$m 11,378 19,643 22,156 22,371 20,435 22,515 24,824 26,744
Receivables US$m 15,897 18,495 23,457 25,637 25,110 28,230 31,015 34,143
Cash and equivalents US$m 1,982 2,037 3,185 3,253 2,130 2,702 4,736 9,903
Other US$m 14,238 10,967 7,135 5,845 6,024 6,024 6,024 6,024
Total current assets US$m 43,495 51,142 55,933 57,106 53,699 59,471 66,600 76,814
Total assets US$m 105,280 116,833 133,982 143,473 151,808 157,638 163,593 171,765
Current liabilities
Payables US$m (14,847) (15,179) (20,775) (23,262) (21,878) (24,217) (26,574) (28,601)
Short-term debt US$m (6,039) (10,172) (14,683) (9,790) (8,808) (8,215) (6,505) (3,800)
Other US$m (14,880) (10,137) (10,233) (6,886) (6,935) (6,941) (6,952) (6,972)
Total current liabilities US$m (35,766) (35,488) (45,691) (39,938) (37,621) (39,373) (40,031) (39,374)
Non-current liabilities
Long-term debt US$m (29,408) (29,655) (25,405) (28,648) (28,766) (28,173) (26,463) (23,758)
Other US$m (10,741) (11,798) (13,651) (14,375) (17,194) (17,594) (18,062) (18,665)
Total non-current liabilities US$m (40,149) (41,453) (39,056) (43,023) (45,960) (45,767) (44,525) (42,423)
Total liabilities US$m (75,915) (77,237) (84,948) (82,961) (83,581) (85,140) (84,556) (81,797)
Net assets US$m 29,365 39,596 49,034 60,512 68,227 72,498 79,037 89,968
Equity
Shareholders equity US$m 26,823 36,701 44,378 55,405 61,937 65,769 71,580 81,472
Minority interests US$m 2,542 2,895 4,656 5,107 6,290 6,729 7,457 8,496
Total equity US$m 29,365 39,596 49,034 60,512 68,227 72,498 79,037 89,968
Net debt/(Net cash) US$m 33,979 34,813 36,895 35,384 35,492 32,889 26,019 14,077
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
276 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





Exhibit 435 Glencore Xstrata Pro Forma Cash Flow (Excluding Synergies)
Source: Corporate reports and Bernstein estimates and analysis.


Cash Flow
December year-end 2008 A 2009 A 2010 A 2011 A 2012 E 2013 E 2014 E 2015 E
EBITDA 13,888 9,199 13,958 15,128 13,034 15,152 19,453 25,502
Change in working capital US$m 2,682 (6,970) (3,523) (2,691) 1,754 (2,891) (2,812) (3,114)
Other US$m 2 891 750 (175) (75) 187 384 776
Operating cash flow US$m 16,572 3,120 11,185 12,262 14,714 12,448 17,025 23,164
Income tax paid US$m (2,021) (987) (1,676) (1,400) (1,857) (1,339) (2,412) (4,318)
Net interest paid US$m (1,449) (1,085) (1,268) (1,226) (1,315) (1,048) (1,002) (844)
Other US$m 850 585 345 403 431 427 413 382
Net cash flow from operations US$m 13,952 1,633 8,586 10,039 11,973 10,488 14,024 18,383
Capital expenditure US$m (6,645) (4,665) (7,709) (10,844) (11,224) (7,006) (6,119) (4,817)
Acquisitions & investments US$m (6,909) (390) (1,238) (1,478) 2,143 - - -
Disposals US$m 352 1,161 652 379 378 1,206 144 10
Other US$m 74 (2,948) 382 (301) (168) (895) 415 1,052
Net cash flow from investing US$m (13,128) (6,842) (7,913) (12,244) (8,872) (6,695) (5,560) (3,755)
(Repayment)/receipt of debt US$m 2,380 (769) 2,101 (1,466) (2,383) (1,186) (3,420) (5,409)
Dividends paid to company shareholders US$m (225) (203) (245) (556) (1,245) (1,267) (2,007) (2,508)
Dividends paid to minority shareholders US$m (522) - (407) (1,002) (1,209) (365) (613) (1,188)
Shares issued US$m - 5,667 - 7,616 - - - -
Shares bought back US$m - - - - - - - -
Other financing activities US$m (1,874) 615 (1,055) (1,586) 385 (403) (389) (358)
Net cash flow from financing US$m (241) 5,310 394 3,006 (4,452) (3,221) (6,429) (9,462)
Effects of exchange rate on cash US$m - - - - - - - -
Change in cash and equivalents US$m 583 101 1,067 801 (1,350) 572 2,034 5,167
Closing cash and equivalents, Dec 31 US$m 1,982 2,037 3,185 3,253 2,130 2,702 4,736 9,903
FCF to firm US$m 7,906 (2,532) 1,800 18 1,633 4,103 8,494 14,029
FCF per share US$/share .59 (.19) .14 .00 .12 .31 .64 1.05
(FCF = Operating cash flow less tax paid, less capex)
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
277





Index of Exhibits

1 Financial Overview 4
2 In 2000, China Was a Clear Outlier the World's Largest Country
Set to Age Rapidly and Yet Still at a Pre-Industrial Output Level 5
3 The Demographic Challenges Facing China Stand Behind the
Requirement to Accelerate the Capital Stock Formation 5
4 China Accounted for ~16% of 2012 Global Iron Ore Production
(ROE Equivalent); Our Analysis Shows That ~60% of the
Chinese Production Consisted Primarily of "Missing" Chinese
High-Cost Mines 7
5 Productivity Uplift of the Iron Ore Imports Into China Has Enabled
It to Overtake the U.S. in Terms of Effective Productivity in 2003 7
6 The Value Destructive Effect of Excessive Volume Growth Can Be
Seen Once the Impact of Supply Elasticity Is Considered 8
7 It Is the Elasticity of Supply That Inflects Any Commodity Cost
Curve; the Higher the Elasticity, the Higher the Margin and the
Lower the Degree of Consolidation Required to Generate
Superior Returns 8
8 Our Three Scenarios Set the Widest Plausible Band, in Our View,
Around Implied Consensus Expectations; They Range from More
Bullish Than the IMF's Current Forecast, Through Official
Chinese GDP Targets, to a Bear Scenario in Which No Supply Is
Removed from the Market Despite Prices Collapsing 9
9 Our Iron Ore Price Forecast Is Consistent With the IMF's Current
GDP Forecast of 7.8% in 2013 Rising to 8.5% in 2016 and
Average Increase in Supply of 88Mtpa 2013-2016 9
10 Mining Costs and Revenue Exhibit a High Degree of Correlation 10
11 Currency Appreciation Drives a Significant Part of the Cost to Price
Relationship, Particularly for the Australian Producers 10
12 There Is a Significant Range of Variation Around the Benchmark
62% CIF Price Point, and Even After Adjusting for Fe Grade,
Poor-Quality Ore Suffers a Significant Discount 11
13 We Believe That a Significant Part of the Slowdown in Chinese
Steel Growth Resulted from the Budgetary Constraint Imposed by
High Commodity Prices 11
14 There Is a Clear Relationship Between the Aging of a Population
and Its WealthUsually, Birth Rates Fall as Societies Get Rich,
With Aging Population Supported by the Increased Productivity
Associated With Industrialization 16
15 In 1910, the U.S. Began Transitioning from an Agricultural
Economy 17
16 Toward One Driven by Services 17
17 We Believe That the Increases in Labor Productivity, Occasioned
by the Increased Intensity of Capital Stock (Machinery, Railroads,
etc.), Enabled This Transition 17
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
278 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





18 In 2000, China Was a Clear Outlier from the Normal Pattern the
World's Largest Country Was Set to Age Rapidly and Yet Was
Still at a Pre-industrial Level of Output 18
19 It Was Only in the Year 2000 That China Started Reducing Its
Framing Dependence 19
20 1970s Saw the Rise in Construction and Manufacturing
Employment Start 19
21 Followed in Short Order by the Service Sector 19
22 Today, More People Are Employed in Services Than
Manufacturing 19
23 The Pattern in China Is Nearly Identical to That Seen in the U.S.;
Capitalization Drives Productivity Increases, Which Then Lead to
the Emergence of Services 20
24 Comparing China to the U.S. Suggests That the Structure of the
Chinese Economy Today Is Similar to the U.S. in the 1930s, Both
in Labor and Capital Stock; However, the Transition Has Been
Far More Rapid in China 20
25 The Demographic Challenges Facing China and the Emergence of
Lewis Point Stand Behind the Requirement to Accelerate the
Capital Stock Formation 21
26 The Urgency to Industrialize the Chinese Economy Is Evident in the
Acceleration in Steel Demand in Comparison to the Historical
Precedent in the West 22
27 A Very Similar Demographic to China Was Seen in Japan Toward
the End of the Last Century; However, by the Time the Japanese
Transition Occurred, Industrialization Was Complete and Output
Stayed High 22
28 A Rapid Fall in the Child Dependency Ratio Following the "One
Child" Policy 24
29 Will Eventually Be Offset by the Extraordinary Increase in the
Old-Age Dependency Ratio 24
30 The End of the Last Century Marked an Opportunity to Deploy
Abundant Labor in China to Develop Its Capital Stock 24
31 Mirroring Japan But Scaling Up More Than 10 Fold (127 Million
vs. 1,345 Million People) 24
32 1930-1973 Saw Real Commodity Prices Grow as Capital Was
Accumulated in Western Economies; Once Demand Went Flat,
Productivity Improvements in Mining Drove Real Commodity
Prices Down 26
33 The Emergence of a New Phase of Capital Accumulation Driven by
China Has Seen Significant Real Commodity Price Appreciation;
Our Counter-Consensus View on Commodities Is Driven, in Part,
by a Belief That This Will Continue Until the Chinese Capital
Stock Accumulation Comes to an End 26
34 Chinese Labor Costs Have Been Instrumental in Changing Global
Commodity Cost Curve Structures and, With Them, the Price of
Mined Raw Materials; What Happens Once China Moves Past the
Lewis Point? 27
35 Across Our Coverage Group, Iron Ore Generated, on Average, 41%
of Revenue 30
36 ...And 65% of EBITDA in 2012 30
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
279





37 Iron Ore Currently Accounts for 44% of Rio Tinto's Revenue and
Has Been Driven by a 7.6% Production CAGR 30
38 Iron Ore Currently Accounts for 31% of BHP Billiton's Revenue
and Has Been Driven by an 8.1% Production CAGR 31
39 Iron Ore Currently Accounts for 70% of Vale's Revenue and Has
Been Driven by a 6.9% Production CAGR 31
40 Iron Ore Currently Accounts for 18% of Anglo American's Revenue
and Has Been Driven by a 23.7% Production CAGR 32
41 Like Other Countries That Have Industrialized, China's Steel
Intensity Has Passed from "Development" Through "Peak" and Is
Now in "Decline"; the Steady-State Rate of Consumption Will Be
Determined by Whether the Economy, Once Mature, Adopts a
More Manufacturing or Services-Oriented Focus 34
42 The "Services and Technology" Pattern (Embodied by the U.S.)
Shows the Highest Output/Capital Stock (on a Per-Capita Basis),
the "Manufacturing" Pattern (Embodied by Germany) Also Shows
an Upward-Sloping Relationship Between Output and Capital
Stock; Only the Failed "Inefficient" Pattern (Embodied by the
former USSR) Shows a Flat and Negative Relationship Between
Output and Embedded Capital Stock 34
43 Our Analysis Derives a Consistent Relationship Between Steel
Demand Growth and Overall Level of Economic Activity for
China; It Does Not See Signs That the Output Generated by the
Embedded Capital Stock Is "Inefficient"; Rather, It Is Increasing
in a Manner Consistent With Development Into an Economy
Midway Between the "Services and Technology" (Embodied by
the U.S.) and the "Manufacturing" (Embodied by Germany)
Patterns 35
44 A Central Plank of Our Thesis Rests on the Fact That Chinese
Urbanization and Industrialization Are Still Far from Complete; in
Terms of Capital Stock Accumulation, Labor Composition and
Levels of Output, China Today Resembles the U.S. in the 1930s 36
45 At First Glance, the Old Heuristic of Marginal Cash Costs Appears
to Have Broken Down 38
46 But the Fact That Our Visibility Into Costs in China Is
Incomplete Provides a Better Answer 38
47 China Accounted for ~16% of 2012 Global Iron Ore Production
(ROE Equivalent); Our Analysis, Which Completes the Global
Cost Curve, Shows That ~60% of the Chinese Production
Consisted Primarily of "Missing" Chinese High-Cost Mines 38
48 Our Analysis of the Cash Costs of 149 Green and Brownfield
Projects Shows That the Majority Will Not Be Value Accretive at
Iron Ore Prices Below $150/t Against a Fully Loaded Discount
Rate 38
49 We Embed a Contango Rather Than Backwardation Into Our Short-
to Medium-Term Price Forecasts 39
50 Our Iron Ore Forecast Sees Considerable Upside in 2014-16E
Relative to Consensus; We Would Be Even More Bullish If We
Were Convinced the Western Majors Were Committed to a
Higher Degree of Capital Discipline 39
51 Mining in Western Australia in 1961... 43
52 ...And Today 43
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
280 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





53 At Either End of the Industrialization Process, Metal Intensity (Rate
of Consumption/Embedding) Is Low; Rather, Metal Is Required
to Embed the Capital Stock That Enables the Transition from
Primary to Tertiary Forms of Value-Add (or Farmers to
Hairdressers) 44
54 The Chinese Economy Has Seen Steel Intensity Peak at
~65kg/$'000 of Output (vs. 40kg/$000 U.S. Peak); Because
China's Peak Was More Than 60% Higher Than the U.S., and
Because Many Datasets Look at Only the Last ~20 Years of Data,
This Has Spawned Fears That the High Rate of Steel
Consumption in Recent Years Is Indicative of Overinvestment
and That the Chinese Economy Is Unduly (and Inefficiently) Steel
Intensive 45
55 Global Freight Rates Have Declined in Real Terms by an Average
of 0.9% p.a. Over the Last 260 Years... 46
56 Leading to the Emergence of a Truly Global Market for Bulk
Commodities, Including Iron Ore and Coal; Consequently,
Relative Global Competitiveness in the Production of These
Commodities Began to Matter 47
57 Before the Advent of Scrap-Based EAF Production, U.S. Iron Ore
Production Peaked in the 30 Years Between 1950 and 1980 47
58 The Transition to EAF-Based Production Saw Declines in Both Iron
Ore Production and Employment 48
59 Consequently, the U.S. Iron Ore Productivity Peaked at Nearly
9,000 Tons/Man-Year (Although for Much of the U.S.
Industrialization, Its Intensity Was Far Lower) 48
60 In Contrast to the U.S., Western Australian Iron Ore Industry Was
Always Driven by Exports First to Japan and Today to China;
the Declines in Shipping Costs Facilitated This Greatly 50
61 Superior Geology and Continuing Improvement in Mining and
Logistics Technology Have Led to Substantial Increases in
Mining Productivity 50
62 In Addition, Low Population Density Renders Iron Ore Mining in
Pilbara Hugely Productive... 51
63 And Provides a Significant Advantage Over the U.S. or China as
Mining Jurisdictions 51
64 The Consolidation of the Industry Can Be Seen in Both the
Concentration of Employment... 52
65 ...And Production in Western Australia 52
66 Among the Majors, Rio and BHP Have Almost Identical
Productivities and Are Almost Twice as Productive as Either
FMG or Cliffs 53
67 It Is Also Interesting to Note the Significant Declines in
Productivity Seen at the Company Level as Well as in the
Industry Overall in Recent Years 53
68 However, the Decline in Productivity in Western Australia Is Due to
the Inclusion of Labor That Is Allocated to Building Projects
(With a Significant Production Lead Time) vs. Labor Allocated to
Operations That Generate Current Volume 54
69 China Has Seen Both Its Steel 55
70 And Iron Ore Production Increase 55
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
281





71 The Iron Ore Majors (Vale, Rio and BHP) Have Aggressively
Grown Their Volume Share of the Chinese Iron Ore Market Over
the Last Decade, While Chinese Self-Sufficiency Has Declined
Significantly 56
72 Extrapolating the Trend Decline in Self-Sufficiency Forward
Suggests the End of the Chinese Iron Ore Industry (and With It
the High-Cost Price Support for Iron Ore) in the Region from
2020 to 2025; Clearly, Acceleration in Supply from the Seaborne
Market and Declining Steel Growth Rates Would Advance This 56
73 Chinese Growth in Iron Ore (on a Rich-Ore-Equivalent Basis)
Peaked in 2007; Since Then, Declining Grades and Rising Costs
Have Seen Useable Ore Production Decline 57
74 An Ever-Increasing Amount of Labor Has to Be Allocated to
China's Iron Ore Production 57
75 Leading to a Prolonged Decline in the Productivity of the Chinese
Domestic Industry Since 2007 58
76 An Australian Miner Is 35x as Productive as His Chinese
Counterpart; However, Given That Globalization of the Iron Ore
Industry Has Enabled China to Outsource Its Iron Ore Mining to
Australia, Does That Differential Matter? 58
77 Productivity Uplift of the Iron Ore Imports Into China Has Enabled
It to Overtake the U.S. in Terms of Effective Productivity in 2003 59
78 We Compare the Rate at Which Steel Is Being Embedded in China
Relative to Peak U.S. Steel Intensity (Y Axis) and the Peak Iron
Ore Production (in Man-Hour Terms) to Which China Has Access
Relative to That Accessible to the U.S. During Its
Industrialization (X Axis); However, Due to Productivity
Improvements, the Real Resources Consumed to Embed Steel in
the Chinese Economy Are Markedly Lower Than Was the Case
During the Industrialization of the U.S. 59
79 U.S. Iron Ore Production Peaked in 1951, With an American Miner
Producing 3,150 Tons/Year and Steel Intensity of 33kg/$1,000;
Today, China's Steel Intensity Is 63kg/$'000, While the Effective
Productivity of Iron Ore Production Is 13,600 Tons/Man-Year 60
80 Bergkamen Coal Washing Plant 61
81 Hckelhoven Coal Washing Plant 61
82 Kaiserstuhl Coking Plant 61
83 Werdohl Leaf Spring Factory 61
84 Assuming Disciplined Capex, We Expect Rio Tinto to Have Room
to De-Gear Its Balance Sheet Significantly Over the Next Few
Years 66
85 Curtailment of Capex and De-Gearing of the Balance Sheet Would
Enable Rio to Raise Its Dividend from US$3.0 Billion in 2012;
We See No Reason Why It Should Not Double Over Time 66
86 Rio Tinto's Cost Curve... 67
87 ...Not Dissimilar to Our Own 67
88 Schematically, We Can Represent the Rio Tinto Cost Curve... 68
89 ...And So We Can Calculate the Elasticity of Supply That Rio Tinto
Must Believe In 68
90 The Value Destructive Effect of Excessive Volume Growth Can Be
Seen Once the Impact of Supply Elasticity Is Considered 69
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
282 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





91 Rio Tinto's Claim That It Does Not See a Price Fall of US$20/t on
the Back of Its 70Mtpa Increase in Production Becomes the Key
Variable in Deciding Whether or Not the Project Makes Sense; If
the Project Induces a Greater Decline, It Will Be Net Value
Destructive for the Company 70
92 Rio Tinto Also Believes in a 3% Demand Growth World; This
Would Be Sufficient to Limit the Price Impact of the Expansion to
~US$14/t and So Make It Appear Value Accretive (Though
Clearly Not by the Degree That It Would Be If the Price Impact of
the New Supply Were Neglected in Entirety) 71
93 In Understanding the Value Impact of Consolidation, We Construct
Two Simple Industries One Fragmented... 72
94 ...The Other Consolidated, But in All Other Respects Identical 72
95 For Each Industry, We Simply Look at the Consequences of Each
Player Looking to Maximize Apparent Local Value; in This Case,
"Apparent" Means Simply Looking at the Economics of Their
Own Decision Making; It Is Easy to Show That in a Situation of
Potential Oversupply, Local Value Maximization Leads to Global
Value Destruction for a Fragmented Industry With No Market
Impact Awareness... 73
96 ...And This Global Value Destruction Will Occur Whether or Not
Each Individual Player Is Aware of the Impact That Its Decisions
Have on the Market Price; the Apparent Gain from Organic
Growth in Each Scenario Is an Overwhelmingly Compelling Prize 74
97 In a Consolidated Industry, Where Each Player Acts as If It Was
Unaware of the Impact That Its Decisions Have on the Market,
There Is Absolutely No Difference in Outcome Versus a
Fragmented Industry; Exactly the Same Volume Is Brought to the
Market and Exactly the Same Value Destruction Results;
Consolidation in Commodity Markets Is Necessary But Not
Sufficient to Generate Superior Returns 75
98 The Sufficient Condition for Superior Returns in Consolidated
Markets Is an Awareness of the Impact That Volume Decisions
Have on Price and the Fact That This Changes the Value of the
Entire Portfolio, Not Just the Marginal Ton; Under Such
Conditions, the Pursuit of Local Optimality Returns a Global
Value Solution in Excess of What Is Optimal 76
99 A Necessary Condition for Superior Price Performance Is That an
Industry Be Consolidated, But It Is Not Sufficient; a Necessary
and Sufficient Condition Is That There Is a Consolidated Industry
Comprising Agents Who Understand the Price Impact of Their
Own Decisions 77
100 There Are Really Only Three Players That Matter in Iron Ore (Four
at a Push)...This Is a Sufficient Enough Degree of Consolidation
That the Pursuit of Local Value Maximization Ought to Embed
Capital Discipline in the Industry and Generate Superior Returns 78
101 While the Degree of Possible Oversupply Is Clearly an Important
Variable... 78
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
283





102 ...Even More Important Is the Elasticity of Supply, and Here Rio
Tinto Itself Estimates This to Be About Three; Moreover, It Is the
Elasticity of Supply That Inflects Any Commodity Cost Curve
and So Generates the Margins That an Industry Enjoys; the
Higher the Elasticity, the Higher the Margin and Also the Lower
the Degree of Consolidation Required to Generate Superior
Returns 79
103 However, This Is Clearly Not What Is Being Discounted in the
Stocks 79
104 We Are Beginning to See Greater Clarity from the Miners in Their
Thinking on Capital Discipline and Price Preservation...All of
Which Ought to Create a Greater Chance of Seeing Growth
Restrained and the Industry Re-Rate, Generating Significant
Upside for the Miners, Especially Rio Tinto and Vale 80
105 Summary of Historical Commodity Prices 82
106 Except for Some Precious Metals, Current Spot Prices of the Key
Commodities for the Miners in Our Coverage Were Substantially
Below Their Most Recent Five-Year Mean 82
107 Higher Average Year-to-Date Prices Reflect Higher Commodity
Prices in the Beginning of the First Quarter of the Year 83
108 Summary of Commodity Price Scenarios vs. Historical Distribution
Real Terms 84
109 Summary of Commodity Price Scenarios vs. Current Model Real
Terms 84
110 The "Fat Tail" in the Copper Price Distribution Relates to the Period
Immediately After the Financial Crisis; We Would Interpret the
Shape of the Price Distribution as Telling Us Something About
the True Costs of Marginal Production 85
111 The Shift in Pricing Regime from the Benchmark to the Spot
Market as Well as the Deterioration in Chinese Domestic Mined
Iron Ore Grades Result in a Markedly Different Price Distribution
for Iron Ore Than for Copper 85
112 Vale Shows the Greatest Potential Upside and Widest Price
Distribution Under Our Scenarios (on the Back of Operational
Gearing), While Glencore Shows the Greatest Downside and
Least Upside Relative to Our DCF Value (as a Result of Our
Bullish View on Copper in the Medium Term) 86
113 Rio Tinto Shows the Least Downside to Our Scenarios and
Glencore the Greatest 86
114 As Soon as a More Positive Iron Ore Price Is Introduced, the Impact
of Operational Gearing in Vale Is Immediately Apparent 86
115 Our Target Prices Are the Equivalent of the "Bull" Scenario Even
Though We Reach These Targets With Higher Short-Term Prices
and Lower Long-Term Prices 87
116 It Is Difficult for Us to See Further Upside in Our Target Price for
Glencore as It Already Factors in a Very Strong Copper Price 87
117 As This Scenario Analysis Run in Late May Shows, Rio Tinto
Offers the Most Attractive Balance Between Risk and Potential
Upside 87
118 The Presence of Oil in the BHP Portfolio Adds a Third Critical
Variable That Renders It Harder to Unpack the Implied Iron Ore
and Copper Price from the Market Price; Oil Remains a Key
Diversifier for the Highest Quality Stock in Our Coverage 88
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
284 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





119 While the Market Price of Vale Might Seem to Imply a Higher Iron
Ore Price, We Believe That This Is a Function of Us Modeling a
Higher Tax Rate for Vale Than the Market 88
120 For Anglo, the Issues of Both Platinum and South African Political
Risks Add a Layer of Complexity to the Investment Proposition 88
121 Note That for Glencore Xstrata, We Run the Analysis on Our
Combined Pro Forma Glencore Xstrata; Copper Is the Single
Greatest Sensitivity for Glencore Xstrata; to See Outperformance
in This "Not Yet Institutional Quality" (from a Governance and
Reporting Perspective) Stock, It Is Necessary to Believe in a
Strong Copper Price 89
122 A Central Question for an Iron Ore Price Forecast Is How to Project
China's Steel Intensity Into the Future? Looking at Historical
Steel Intensity Alone Is Insufficient 90
123 The Relationship Between Economies' Capital Stock and Level of
Output (R-squared = 65%) Provides the Missing Data Point for
Forecasting How the Capital Stock to Output Ratio Will Evolve in
China 91
124 We Use the U.S. Development Path as a Basis for China's
Industrialization Forecast 92
125 The Benefit of Increasing Productivity Over Time Is Easier to See If
the Axes in the Earlier Graph Are Inverted; in the U.S., the Real
Advances Took Place Only Once the Capital Stock Had Been
Built and Urbanization With the Accompanying Labor Force
Transformation Had Been Completed 92
126 China Is More Steel Intensive Than the U.S., But Shows
Convergence 93
127 For Illustration Only, We Show a Development Path That Would
Enable China to Converge to the Current U.S. GDP Levels by
2020; It Would Require a 20% Growth Rate Each Year 94
128 Using Convergence as the "Missing" Data Enables Us to Calculate
the Transition Path Between Steel Intensities at Two Different
Points in Time and Derive the Relationship Between Overall
Economic and Metal Growth Rates 94
129 Since the Time of Our Original Analysis, China's Economy Has
Slowed Down Markedly 96
130 In the Space of a Year, the IMF Revised Its Growth Projections
Down by 0.5% on Average Over 2014-16) 96
131 Taking the IMF's April 2013 Growth Forecast, We Estimate the
Following Convergence to the U.S. Steel Stock Levels for
China 96
132 Which Would Imply the Following Trajectory for Steel Intensity;
the Previous Steel Intensity Trend Line Was Extrapolated in
Order to Keep the Long-Term Evolution of China Consistent
With the U.S.; Now, We Calculate It Year-by-Year 97
133 We Refine Our Previous Steel Intensity Trend Line 97
134 And Generate the Following Steel Production Forecast; It Shows
Declines in Crude Steel Growth Seen Post 2020; in Our View, It
Is Unavoidable Under All Chinese Growth Scenarios 98
135 Instead of Having to Guess the Relationship Between Metal Growth
and Overall Economic Growth, We Can Derive It from the First
Principles 98
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
285





136 Consensus Expectations for Chinese Steel Production Are
Significantly Different from Those Implied by the IMF's GDP
Deck 100
137 We Back Out the Scenario for China's GDP Evolution That Is
Implied in the Steel Growth Consensus; It Sees the Annual GDP
Trend Growth of 7.1 vs. 8.5% Implied in the IMF Deck 100
138 The Steel Intensity That Such a Trajectory Would Imply Is
Markedly Lower Than the Scenario Consistent With the IMF
GDP Deck 101
139 Instead of a Recovery in the Metal to GDP Multiplier, We Would
Continue to See Declines 101
140 Unsurprisingly, Given the Relative Immaturity of the Chinese
Economy, Its Steel Growth Is Highly Leveraged (~4 to 1) to the
Overall Economic Growth Rate 102
141 Using Our Knowledge of the Structure of the Chinese Domestic
Mining Industry, We Can Generate an Exemplar Cost Curve for
the Industry as a Whole 103
142 This Enables Us to Understand the Elasticity of Supply 103
143 Combining It With Consensus Steel Demand Expectations Yields
Consensus Price Expectations 104
144 And Enables Us to Derive Consensus Supply Expectations 104
145 Assuming the Consensus GDP Deck, Two-Thirds of the Supply
Expected to Come Onstream Is Not Needed 104
146 With Price Destructive Oversupply of ~300Mt by 2020 104
147 We Can Use the Implied Consensus Supply Expectations to Derive
Consensus Steel Demand Scenario and Iron Ore Price Line for
Any Chinese GDP Deck Assumptions; Steel Intensity Is Geared
to China's GDP and the Iron Ore Price Is Geared to Steel
Intensity; Risk and Uncertainty Pervades This Sector 106
148 In Order to "Stress Test" the Demand and Price Environment, We
Construct Three Scenarios: (1) Slightly More Bullish Than the
IMF (i.e., Back to the IMF April 2012 Figures); (2) One That
Respects China's Official 7.5% GDP Growth Target; and (3)
Significantly Below the Target and the Implied Consensus
Growth Rates 108
149 The Resulting Price Paths Illustrate That the Risks for Long-Term
Iron Ore Prices Are to the Upside, Barring a Significant "Miss" on
the Chinese Growth 108
150 Scenario 1 Uses a Slightly Stronger GDP Deck Than the Current
IMF Figures 109
151 And Nearly 2% Higher Than Consensus 109
152 To Support This Level of Growth, Steel Intensity Would Need to
Rise 109
153 It Would Enable an Accelerated Capital Stock Growth Rate in
China 109
154 This Would See Steel Growth Approach 10%... 110
155 ...And a Steel-to-GDP Ratio Well Above 1 110
156 Under This Scenario, Only 18% of New Volume Is Price
Destructive 110
157 Leading to a Continuation of High Prices Into the Medium Term 110
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
286 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





158 Scenario 2 Assumes the Official Annual GDP Growth Figure of
7.5%... 111
159 Which Is Still Significantly Ahead of Consensus Expectations 111
160 Although It Can Be Achieved Without an Upward Correction to
Steel Intensity 111
161 It Still Anticipates an Above-Consensus Demand Growth 111
162 With Well-Supported Steel Growth... 112
163 ...And a Declining Steel-to-GDP Ratio 112
164 Nevertheless, 200Mtpa of Supply Is Still Unwarranted from a Value
Perspective... 112
165 Leading to Suppressed Yet Above-Consensus Iron Ore Prices 112
166 Our Bear Case Assumes 6% GDP Growth for China in the Long
Term 113
167 Which Is ~1% Below the Current Implied Consensus Expectation 113
168 This Would Lead to a Significant Reduction in Steel Intensity... 113
169 ...And Would See Stagnant Production Into the Medium Term 113
170 Consequently, the Industry Would Effectively Go Ex Growth... 114
171 ...And Steel-to-GDP Ratio Would Fall Well Below 1 114
172 In This Scenario, Virtually All Volume Growth Is Price and Value
Destructive 114
173 Iron Ore Tests a US$65/t Floor 114
174 There Has Been a Significant Change in the Structure of the
Chinese Economy Over the Last 10 Years... 116
175 ...With Consumption Losing Out to Investment; Now Investment
Accounts for Around Half of All Activity 116
176 Secondary Forms of Economic Activity Have Grown on Average
1.4% Faster Than the Tertiary Forms Over the Course of China's
Industrialization (10.7% vs. 9.3%) 117
177 However, the Net Result of All of This Activity Is That China Is on
Trend to Catch Up With the U.S. in Terms of the Overall Steel
Productivity 117
178 China Currently Has ~35% of the Steel Stock of the U.S.; We
Expect It to Rise to ~69% by 2020 118
179 We Use This Relationship Between Steel Stock and Output to Link
the Steel Intensity (i.e., Rate of Steel Consumption) Between
Different Periods in a Country's Economic Development 118
180 Such a Trajectory of Steel Use Implies FAI Falling from 48% to
38% of GDP, in Effect Achieving the Policy Aim of Rebalancing
the Chinese Economy 119
181 However, the Vast Majority of the Investment in China Relates Not
to Raw Material Consumption Per Se, But Rather the
Capitalization of Labor Associated With That Investment 119
182 Under Our Scenario for Raw Material Consumption (With Constant
Prices), the Raw Material Component of FAI Falls from 12.4%
(Historical Average) to 8.9% Over the Forecast Period 120
183 Steel Is by Far the Most Important Raw Material Component of
FAI; Copper and Aluminum Are Also Significant 120
184 The Proportion of Raw Materials in FAI Has Stayed Very Stable
Over Time 121
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
287





185 Against This Picture of Raw Material Use, the Increase in the
Importance of Investment in China Is Due to the Movement of
Labor Into Tertiary Forms of Activity 122
186 Against a Backdrop of Continued De-Agrarianization, a Declining
Labor Pool and a Continued Move Into Tertiary Forms of
Employment, the Component of the Labor Force in Secondary
Forms Must Decline Over Time 122
187 The Trajectory of De-Agrarianization Has China Requiring 15%
More Steel Capital Stock Than the U.S. to Effect the Transition to
an Economy Dominated by the Service Sector 123
188 This Deceleration in Steel Demand and Change in Composition of
the Workforce Imply a Significant Increase in Steel Use
Productivity; If Steel Productivity Were Held Flat, There Would
Be Significant Upside to Steel Demand 123
189 Against This Demand Environment, We Look at Cost Curves of
Iron Ore Landed China; the New Low-Cost Supply Additions
Rotate the Cost Curve Downwards; Cost Inflation Translates the
Cost Curve Upwards; It Is the Interplay Between Cost Curve
Translation and Rotation That Generates Margin and Ultimately
Price 124
190 Our Analysis of the Major Miners Informs Our Supply Side
Projections 125
191 We Allow for Significant Growth from the Juniors 125
192 FMG Appears to Have the Most Aggressive Growth Plans 125
193 We Then Look at Changes to the Supply and Demand Situation to
Imply a Change in the Overall "Balance" of the Iron Ore
Industry... 127
194 ...Which Is, Naturally Enough, Different from Consensus 127
195 We Expect a Stronger Demand Environment and a Stronger Supply
Side Response Than Consensus 128
196 A Critical Difference Is in the Impact of Expected Continued Cost
Escalation on a Non-Static Chinese Iron Ore Industry 128
197 It Is a Combination of the Differences in Supply and Demand
Forecasts as Well as Expected Real Cost Escalation in China That
Gives Rise to Our Above-Consensus Price Forecast 129
198 Our Iron Ore Price Forecast Is Consistent With the IMF's Current
GDP Forecast of 7.8% in 2013 Rising to 8.5% in 2016 and
Average Increase in Supply of 88Mtpa 2013-16E 129
199 Roughly 50% of the Upside of Our Forecast vs. Consensus Is
Attributable to Differences in Our Cost Escalation Assumptions
and 50% Due to S-D Differences 130
200 The First Element of an Iron Ore Price Forecast, in Our View, Is the
Calibration of a Consistent View on Steel Intensity and Steel
Productivity 131
201 We Calibrate This Against the Overall Composition of Economic
Activity and the Labor Force in China 132
202 We Look at How the Cost Curve in China Would Change If There
Were to Be No Impact on Price; We Then Calculate the Impact of
a Notional "Over Supply" or "Under Supply" on That Cost Curve,
Particularly Relative to Consensus Expectations 133
203 This Then Drives Our Price Line 134
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
288 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





204 There Is a Strong Correlation Between the Price of Iron Ore and the
Strength of the Australian Dollar, With a High Iron Ore Price
Equating to a Strong Local Currency 136
205 Likewise, the Relationship Exists (Albeit Less Pronounced) for the
Brazilian Real 136
206 Unfortunately for Anglo American, for the South African Rand, the
Relationship Is Not in Evidence 137
207 Mining Costs and Revenue Exhibit a High Degree of Correlation 137
208 Currency Appreciation Drives a Significant Part of the Cost-to-Price
Relationship 137
209 ...Which Is Particularly True for the Australian Producers Rio Tinto
and BHP Billiton 137
210 Rio Tinto Is the Lowest Cost Iron Ore Producer in Our Coverage;
Anglo, as the Highest, Experiences Cash Opex That Is 50%
Higher Than Rio's 139
211 While Mining Cost Escalation Is a Common Worry, It Appears That
the Miners Have Started to Get It Back Under Control 139
212 Rio Tinto, in Particular, Is Leading the Way 139
213 BHP Has Gone Through a Similar Experience With Both the Cost
Relationship to Iron Ore... 140
214 ...And Over Time, Showing a Marked Deceleration 140
215 For Vale, the Evidence of Cost Control Is Less Convincing... 140
216 As Can Be Seen in the Continued Cost Growth Over Time 140
217 For Anglo, the Situation Seems to Lie Somewhere Between Vale
and the Australians 141
218 With Some Evidence of Cost Containment 141
219 An Internet Search for the Miners and "Cost Controls" Results in an
Ad for a Cost Control Position as at Least One of the Top 10 Hits
(as of April 30, 2013); Only Anglo Has All of Its First Five Hits
as Job Openings 141
220 Given the Historical Relationship Between the Iron Ore Price and
Producer Currencies, a Return to US$80/t Iron Ore Would See
Producer Currencies Weaken, Lowering US$ Costs and
Improving Margin for the Miners 142
221 The Sensitivity to Such a Margin Impact Gives, on Average, ~6%
Additional Upside to the Australian and Brazilian Miners But Is
Value Neutral for Anglo American 142
222 Rusting Granite in Peterborough, New Hampshire; During Pre-
Industrial and Early Industrial Periods, Local Blacksmiths Relied
Upon "Bog Iron" and "Mountain Iron" (Like the Below); While
the Highest-Quality Deposit Reportedly Contained Ore of 56-
63%, the Grade Was Often Much Lower and Was Quickly
Depleted in Concentrations of Useful Economic Value 144
223 Where All the EBITDA Began A Banded Iron Formation (BIF)
Showing Characteristic Layering Patterns of Iron Ore and Gangue
Material 145
224 Not All Iron Ores Are Created Equal... 145
225 And There Is a Significant "Tail" of Non-Iron Material in Iron
Ores, All of Which Have a Value Implication 146
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
289





226 While Australia and Brazil Are the Most Important Suppliers Into
China, They Account for Only ~70% of the Total Non-Chinese
Portion of Supply 147
227 The Overall Market Shares of Brazil and Australia Have Remained
Roughly Constant Over Time; Perhaps This Indicates an
Understanding from Incumbents That Competing on Volume in
Commodity Markets Is Value Destructive 147
228 There Is a Considerable Variation in the Observed Grade of Iron
Ore Landed Into China It Is Still Far from Being a
Homogeneous Product 148
229 An Analysis of 208 Pricing Points Shows a Significant Range of
Variation Around the Benchmark 62% CIF Price Point 148
230 Unsurprisingly, Fe Grade Explains Most of the Variation in Price 149
231 Nevertheless, Even After Adjusting for Fe Grade, Poor Ores Suffer
a Significant Discount 149
232 This Is True Across Australian Iron Ores... 149
233 ...As Well as Those from India 149
234 There Is a US$46/t Differential Across Ores from Different Supply
Locations 150
235 Across the "Major" Space, There Is a US$25/t Differential 150
236 Assuming That 50% of the Quality-Disadvantaged Material Moves
Out of the Market as Price Begins to Fall, It Can Be Expected to
Provide ~US$5/t of Offsetting Upward Price Support, Adding, on
Average, $1.75/Share Across Our Coverage (as of June 30, 2013
Prices) 151
237 Following the Same Three-Phase Trajectory for the Evolution of the
Steel Consumption Rate Within All Industrialized and
Industrializing Countries, China's Steel Intensity Has Passed from
"Development" Through "Peak" and Is Now in "Decline"; the
Steady State Rate of Consumption, Once the Process Is
Completed, Will Be Determined by Whether the Economy, Once
Mature, Adopts a More Manufacturing- or Services-Oriented
Focus 155
238 In 2000, China Represented a Clear Outlier from the Normal
Pattern: the World's Largest Country Was Set to Age Rapidly and
Yet Was Still at a Pre-Industrial Level of Output; by 2020,
China's Working-Age Population Will Have Peaked; Over the
Next Generation, 260 Million People Will Leave the Chinese
Labor Force, Leading to a 90% Increase in the Old-Age
Dependency Ratio 156
239 Over the Last 10 Years, the Domestic Steel Price in China Has Been
Remarkably Constant... 157
240 ...Whereas the Price of Raw Materials Has Accelerated Sharply; It
Is True for All Iron Ore... 157
241 ...Key Fuel and Reductants Used in Steel Making HCC... 158
242 ...And Its Replacement PCI 158
243 The Rise in Iron Ore Price Has Done the Most to Increase the Costs
of Chinese Steel Production, Reflecting a Transfer of Value from
the Chinese Industrial Sector to the Western-Owned Miners 158
244 Raw Materials Fed Into Steel Making Used to Cost Less Than
100US$/t; It Is Now Well Over 300US$/t 159
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
290 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





245 Currently, the Raw Material Cost of Steel Making Accounts for
Nearly Three Quarters of the Overall Costs in China 159
246 There Has Also Been a Slower, But Nonetheless Pronounced Rise
in the Non-Raw Materials Costs of Steel Making in China 159
247 Unsurprisingly, Margins in the Chinese Steel-Making Industry Have
Declined on the Back of Higher Raw Material Prices 160
248 While, at First Glance, the Growth in Chinese Steel Production
Appears Monotonic... 160
249 ...This Belies a Marked Slowdown in Chinese Steel Production
Rates from ~20% at the Start of the Last Decade to Closer to 6%
Today, Concurrent With the Declining Steel-Making Margins 161
250 Growth and Profitability Declined Concurrently 161
251 We Believe That a Significant Part of the Slowdown in Chinese
Steel Growth Resulted from High Commodity Prices; the West
Experienced a Step Change in Steel Demand Growth Only After
Urbanization Was Complete; However, This Is Far from
Complete in China, Combined With the Imminent Demographic
Shift Enables Us to Conclude That in the Presence of Falling Iron
Price, Steel Demand Would Rise 162
252 A Complicating Factor in the Analysis Steel Elasticity Is the Effect
of Chinese Monetary Stimulus in 2009 163
253 There Is a Strong Relationship Between Lagged Steel Growth and
the Growth in the Supply of Money... 163
254 ...We Strip This Effect Out of the Analysis of Steel Demand
Growth... 163
255 ...The Effect of This Would Be to Lower the Level of Steel
Production for Any Given Profitability... 164
256 ...Which Increases the Strength of the Relationship 164
257 It Is Inconsistent to Simultaneously Believe That Iron Ore Prices
Would Fall as a Consequence of Low Chinese Steel Growth and
That China Is Undergoing a Period of Ongoing Capital Stock
Accumulation; Consequently, We Believe That Falling Iron Ore
Prices Would Lead to Increased Steel Growth of an Additional
3% Impact on Trend Steel Growth Rates, Even Given a Declining
Steel Price 165
258 The Impact of the Additional Steel Demand Helping Offset the
Impact of "Oversupply" from New Projects Could Support a
Higher Price Level Than Would Otherwise Be Achieved 166
259 The Impact of Incorporating This Effect Could See Iron Ore Prices
Stabilize Some 15US$/t Higher Than Would Be the Case If the
Elasticity of Demand Is Ignored 166
260 Summary of Our Coverage 169
261 The Relationship Between the Miners and Their Underlying
Commodity Exposure Is Incredibly Strong... 170
262 ...And Explains the Majority of the Historical Performance 170
263 BHP Is Currently Slightly Overvalued Relative to Its Historical Best
Fit, an Unsurprising Development in the Current Tremulous
Market Environment 171
264 We See Considerable Upside in the Share Price 171
265 The Relationship Between the Miners and Their Underlying
Commodity Exposure Is Incredibly Strong 172
266 And Explains the Majority of the Historical Performance 172
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
291





267 Rio Is Currently Slightly Overvalued Relative to Its Historical Best
Fit, But Less Than 5%, and Hence Less Than High-Quality BHP 173
268 We See Considerable Upside in the Share Price 173
269 The Relationship Between the Miners and Their Underlying
Commodity Exposure Is Incredibly Strong 174
270 And Explains the Majority of the Historical Performance 174
271 Anglo Is Currently Slightly Undervalued Relative to Its Historical
Best Fit, But We Note the Regression Has Shown Instability and a
Decision to Invest in the Stock Is Contingent Upon a Belief in the
Fundamental Restructuring Story as Well as Commodity Prices 175
272 We See Considerable Upside in the Share Price 175
273 The Relationship Between the Miners and Their Underlying
Commodity Exposure Is Incredibly Strong 176
274 And Explains the Majority of the Historical Performance 177
275 Vale Is Currently Slightly Undervalued Relative to Its Historical
Best Fit, But as With Anglo, We Caution That the Regression Has
Been Unstable and That There Are Risks Not Captured by It
(Specifically the Significant Influence of the Brazilian
Government) 177
276 We See Considerable Upside in the Share Price 178
277 For Glencore Xstrata, the Historical Relationship Is Based on a
"Synthetic" Stock Using the Xstrata Price History and Recent
Relationship to Glencore 179
278 And in Glencore Xstrata (Though for Glencore Xstrata the
Historical Relationship Is Based on a "Synthetic" Stock Using the
Xstrata Price History and Recent Relationship to Glencore) 179
279 Glencore Xstrata Seems Fairly Valued Relative to the Historical
Best Fit of This Synthetic Stock 180
280 We See Considerable Upside in the Share Price 180
281 BHP DCF Value 182
282 Rio Tinto DCF Value 182
283 Anglo American DCF Value 183
284 Vale DCF Value 183
285 Glencore Xstrata DCF Value (With and Without Synergies) 184
286 Iron Ore Represents, by Far, the Most Significant Contribution to
the Cash Generation of the Miners 187
287 And Has Been, Along With Copper, the Strongest Performer of
the Major Commodities 187
288 Vale Represents Essentially an Iron Ore Pure Play in Both the Near
and Longer Term, While We See Rio Diversifying in the Medium
Term; BHP and Anglo American Have Exposure to a Well-
Diversified Basket of Commodities; Glencore Xstrata Is the Only
Company in Our Coverage Without Any Direct Production
Exposure to Iron Ore* 188
289 Vale Is the Most Heavily Exposed to Iron Ore of Our Coverage
Group (a Trend We Do Not See Changing) 189
290 Followed by Rio Tinto, Which Is Augmenting Its Portfolio With
Some of the World's Best Copper Projects (the Metal on Which
We Are the Most Bullish) 189
291 Historical Evolution of Rio Tinto's Revenue by Business Unit 189
292 Historical Evolution of Rio Tinto's EBITDA by Business Unit 190
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
292 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





293 Historical Evolution of Vale's Revenue by Business Unit 190
294 Historical Evolution of Vale's EBITDA by Business Unit 191
295 Our Forecasts for Rio Tinto's Revenues 192
296 And EBITDA Through 2018 See Considerable Growth 192
297 Similarly, Our Forecasts for Vale's Revenues 192
298 And EBITDA Also Sees Considerable Growth 192
299 The Diversity in Exposure Makes BHP One of the Lowest-Risk
Miners from a Commodity Perspective 193
300 Complemented by Low Political Risk and a Diverse Range of
Operating Geographies 193
301 Historical Evolution of BHP's Revenue by Business Unit 194
302 Historical Evolution of BHP's EBITDA by Business Unit 194
303 BHP's Petroleum Exposure Is Its Great Diversifier (Generating 69%
EBITDA Margins in 2012) 195
304 While Anglo American's Great Diversifier, Platinum, Came in at
Margins of Just 11% 195
305 We Also See Revenue and EBITDA Growth 195
306 For BHP Billiton 195
307 Anglo and Glencore Xstrata Represent the Tier 2 of Mining
Companies Behind the "Big Three" of Vale, Rio and BHP 197
308 The Differentiating Feature of the "Big Three," Both in Terms of
Size and Margin, Is the Presence of Significant Iron Ore Exposure 197
309 Anglo Is the Most Diversified and the Lowest-Risk Miner from a
Commodity Exposure Perspective 197
310 The Relative Lack of "Safe" Australian Exposure Has Always Been
a Risk Compared to the Other Miners 197
311 Historical Evolution of Anglo American's Revenue by Business
Unit 198
312 Historical Evolution of Anglo American's EBITDA by Business
Unit 198
313 An Increasing Proportion of Anglo Platinum's Refined Production
Now Comes from Non-Mined Sources 199
314 The Majority Is Purchased from Related Joint Venture Partners
and Associates 199
315 Our Forecast for Anglo American Sees Revenue Growth 199
316 As Well as EBITDA Growth as Part of the Turnaround Story 199
317 Glencore Xstrata's High-Revenue, Low-Margin Trading Business
Renders Its Group Profile Very Different from the Pure Miners in
Our Coverage 201
318 Though Excluding the Marketing Division Reveals a Profile That
Is Similar to the Rest of the Miners 201
319 The Impact of the Marketing Division Can Be Seen in Total
Company Margins 201
320 While the Margins for Only Industrial Activities More Closely
Resemble the Pure Miners in Our Coverage 201
321 Historical Pro Forma Evolution of Glencore Xstrata's Industrial
Activities EBITDA 202
322 Glencore Xstrata's Industrial Activities Are Predominantly a
Copper, Coal and Zinc Play 202
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
293





323 As Can Also Be Seen When Looking at the Company in Toto
(Inclusive of Marketing) 202
324 Vale Shows the Greatest Potential Upside and Widest Price
Distribution Under Our Scenarios (on the Back of Operational
Gearing), While Glencore Shows the Greatest Downside and
Least Upside Relative to Our Current Price Target (as a Result of
Our Bullish View on Copper in the Medium Term) 205
325 Rio Tinto Shows the Least Downside to Our Scenarios and
Glencore the Greatest 206
326 As Soon as a More Positive Iron Ore Price Is Introduced, the Impact
of Operational Gearing in Vale Is Immediately Apparent 206
327 Our Target Prices Are the Equivalent of the "Bull" Scenario Even
Though We Reach These Targets With Higher Short-Term Prices
and Lower Long-Term Prices 206
328 It Is Difficult for Us to See Further Upside in Our Target Price for
Glencore as It Already Factors in a Very Strong Copper Price 206
329 Rio Tinto Scenario Summary vs. Consensus 207
330 BHP Billiton Scenario Summary vs. Consensus 207
331 Anglo American Scenario Summary vs. Consensus 207
332 Glencore Xstrata Pro Forma Scenario Summary vs. Consensus 208
333 Vale Scenario Summary vs. Consensus 208
334 Both the "Grizzly"... 209
335 ...And "Bear" Scenarios Show Revenue Below Consensus
Expectations 209
336 Over the Next Two Years What We Call the "Bull" Scenario Is
Closest to Consensus Expectation 209
337 While Under the Strongest Price Scenario, There Is Upside to
Consensus 209
338 The Same Feature Is Seen at the EBITDA Line... 210
339 ...The Lack of Coverage of Glencore Makes Comparison More
Difficult 210
340 Again, the "Bull" Scenario Appears Closest to Consensus 210
341 Considerable Upside Under Stronger Commodity Scenarios
Emphasizes the Degree of Operationally Geared Exposure the
Miners Offer to Commodity Prices 210
342 Rio Tinto Scenario Analysis Summary 211
343 Rio Tinto EV by Division 211
344 Rio Tinto Current Model Pro Forma Financials 212
345 Rio Tinto Current Model Valuation 212
346 Rio Tinto Grizzly Pro Forma Financials 213
347 Rio Tinto Grizzly Valuation 213
348 Rio Tinto Bear Pro Forma Financials 214
349 Rio Tinto Bear Valuation 214
350 Rio Tinto Bull Pro Forma Financials 215
351 Rio Tinto Bull Valuation 215
352 Rio Tinto De Niro Pro Forma Financials 216
353 Rio Tinto De Niro Valuation 216
354 BHP Billiton Scenario Analysis Summary 217
355 BHP Billiton EV by Division 217
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
294 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





356 BHP Billiton Current Model Pro Forma Financials 218
357 BHP Billiton Current Model Valuation 218
358 BHP Billiton Grizzly Pro Forma Financials 219
359 BHP Billiton Grizzly Valuation 219
360 BHP Billiton Bear Pro Forma Financials 220
361 BHP Billiton Bear Valuation 221
362 BHP Billiton Bull Pro Forma Financials 222
363 BHP Billiton Bull Valuation 222
364 BHP Billiton De Niro Pro Forma Financials 223
365 BHP Billiton De Niro Valuation 223
366 Anglo American Scenario Analysis Summary 224
367 Anglo American EV by Division 224
368 Anglo American Current Model Pro Forma Financials 225
369 Anglo American Current Model Valuation 225
370 Anglo American Grizzly Pro Forma Financials 226
371 Anglo American Grizzly Valuation 226
372 Anglo American Bear Pro Forma Financials 227
373 Anglo American Bear Valuation 227
374 Anglo American Bull Pro Forma Financials 228
375 Anglo American Bull Valuation 228
376 Anglo American De Niro Pro Forma Financials 229
377 Anglo American De Niro Valuation 229
378 Glencore Xstrata Pro Forma Scenario Analysis Summary 230
379 Glencore Xstrata Pro Forma EV by Division 230
380 Glencore Xstrata Pro Forma Current Model Pro Forma
Financials 231
381 Glencore Xstrata Pro Forma Current Model Valuation 232
382 Glencore Xstrata Pro Forma Grizzly Pro Forma Financials 233
383 Glencore Xstrata Grizzly Valuation 234
384 Glencore Xstrata Pro Forma Bear Pro Forma Financials 235
385 Glencore Xstrata Pro Forma Bear Valuation 236
386 Glencore Xstrata Bull Pro Forma Financials 237
387 Glencore Xstrata Pro Forma Bull Valuation 238
388 Glencore Xstrata De Niro Pro Forma Financials 239
389 Glencore Xstrata De Niro Valuation 240
390 Vale Scenario Analysis Summary 241
391 Vale Pro Forma EV by Division 241
392 Vale Current Model Pro Forma Financials 242
393 Vale Current Model Valuation 242
394 Vale Grizzly Pro Forma Financials 243
395 Vale Grizzly Valuation 243
396 Vale Bear Pro Forma Financials 244
397 Vale Bear Valuation 244
398 Vale Bull Pro Forma Financials 245
399 Vale Bull Valuation 245
400 Vale De Niro Pro Forma Financials 246
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
295





401 Vale De Niro Valuation 246
402 Long-Term Real Commodity Price Scenarios 247
403 Nickel Spot Price Distribution 248
404 Zinc Spot Price Distribution 248
405 Aluminum Spot Price Distribution 249
406 Platinum Spot Price Distribution 249
407 Palladium Spot Price Distribution 250
408 Gold Spot Price Distribution 250
409 Silver Spot Price Distribution 251
410 Thermal Coal Spot Price Distribution 251
411 Molybdenum Spot Price Distribution 252
412 Uranium Spot Price Distribution 252
413 Consensus Scenario 254
414 IMF Scenario 255
415 Back to the Future 256
416 Ending With a Whimper 257
417 It's All Over Now Baby Blue 258
418 Rio Tinto Income Statement 259
419 Rio Tinto Balance Sheet 260
420 Rio Tinto Cash Flow Statement 261
421 BHP Income Statement 262
422 BHP Balance Sheet 263
423 BHP Cash Flow Statement 264
424 Vale Income Statement 265
425 Vale Balance Sheet 266
426 Vale Cash Flow Statement 267
427 Anglo American Income Statement 268
428 Anglo American Balance Sheet 269
429 Anglo American Cash Flow Statement 270
430 Glencore Xstrata Pro Forma Income Statement (Including
Synergies) 271
431 Glencore Xstrata Pro Forma Balance Sheet (Including Synergies) 272
432 Glencore Xstrata Pro Forma Cash Flow Statement (Including
Synergies) 273
433 Glencore Xstrata Pro Forma Income Statement (Excluding
Synergies) 274
434 Glencore Xstrata Pro Forma Balance Sheet (Excluding Synergies) 275
435 Glencore Xstrata Pro Forma Cash Flow (Excluding Synergies) 276

For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
296 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE






Disclosure Appendix
VALUATION METHODOLOGY
Mining companies are operationally and financially geared to their underlying commodity exposure, so we provide two valuation
metrics (see the "Valuation and Risks" chapter of this Blackbook for more details):
~80% of weekly mining equity price moves can be explained by underlying commodity price moves, so we use a
regression-based trading model and our commodity price forecasts to help determine our 12-month price targets. If the regression
remains stable or deviations appear temporary, the model determines the target price. If we believe a deviation is signaling a
fundamental change, we will adjust our target price for this fundamental shift and disclose the manner and magnitude of the
adjustment made. At present, no adjustments have been made.
We additionally provide a supplementary DCF-based valuation constructed in nominal local currency terms out to 2030
over which explicit commodity price and exchange rate forecasts apply. The nominal local currency cash flows are de-escalated into
real U.S. dollar cash flows and discounted at the company-specific WACC. A country risk premium reflecting the geographic origin
of the cash flows is added to the underlying WACC to reflect cash flow items (i.e., expropriation) that cannot be explicitly modeled in
the cash flow. All reserves are considered exploited by the model. In addition, 50% of the incremental resources (i.e., 50% of the
residual resources, excluding those that have already been converted to reserves) of the company are modeled. Where residual life
of mine (LOM) may be inferred for operations beyond the 2030 time horizon, a terminal value is applied for the remaining years of
potentially exploitable material. We forecast our models in reporting currency (USD), convert to listing currency (GBP or Real), and
round final DCF values in 25p/cent increments.
RISKS
The four most significant risks facing the major mining houses are: 1) lack of capital discipline (specifically displacement of high-cost
Chinese marginal producers by low-cost Western production), 2) operating cost inflation (U.S. dollar denominated unit costs in all
the major mining houses have seen double-digit growth rates over the last 10 years, roughly half of which are macro related and the
other half are real local currency), 3) a sustained downturn in the Chinese economy (the largest consumer of global resources), and
4) resource nationalism (ranging from increased share of rent extraction to outright asset confiscation). For more details on both
sector risks and company-specific risks, see the risk section in the "Valuation and Risks" chapter.
SRO REQUIRED DISCLOSURES
References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong
Kong) Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd.
which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C,
collectively.
Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account
penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or
contributions to, generating investment banking revenues.
Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on
the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for
Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets
exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-
Japan) exchanges - unless otherwise specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.
As of 07/11/2013, Bernstein's ratings were distributed as follows: Outperform - 39.6% (0.9% banking clients) ; Market-Perform -
47.2% (0.0% banking clients); Underperform - 13.2% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers
in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services
within the last twelve (12) months.
Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common
stock of the following companies RIO.LN / Rio Tinto PLC, BLT.LN / BHP Billiton PLC.
This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you
can also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y.
10105 or Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, United Kingdom; or Sanford
C. Bernstein (Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour
View Street, Central, Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein
(Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No.
199703364C, Director of Compliance, 30 Cecil Street, #28-08 Prudential Tower, Singapore 049712.


For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE
297





12-Month Rating History as of 07/14/2013
Ticker Rating Changes
AAL.LN O (IC) 09/05/12 O (DC) 07/29/11
BBL O (IC) 09/26/12 O (DC) 07/29/11
BHP O (IC) 09/05/12
BHP.AU O (IC) 09/26/12
BLT.LN O (IC) 09/05/12 O (DC) 07/29/11
GLEN.LN O (RC) 02/13/13 M (IC) 09/05/12
RIO O (IC) 09/05/12 O (DC) 07/29/11
RIO.LN O (IC) 09/05/12 O (DC) 07/29/11
VALE O (RC) 06/07/13 U (IC) 09/05/12
VALE3.BZ O (RC) 06/07/13 U (IC) 09/05/12

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated
Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

OTHER DISCLOSURES
A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise
as and when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any
updates or changes to its coverage policies. Although the definition and application of these methods are based on generally
accepted industry practices and models, please note that there is a range of reasonable variations within these models. The
application of models typically depends on forecasts of a range of economic variables, which may include, but not limited to, interest
rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any
valuation is dependent upon the subjective opinion of the analysts carrying out this valuation.
This document may not be passed on to any person in the United Kingdom (i) who is a retail client (ii) unless that person or entity
qualifies as an authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act
2000 (the "Act"), or qualifies as a person to whom the financial promotion restriction imposed by the Act does not apply by virtue of
the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client"
for the purposes of the Conduct of Business Rules of the Financial Conduct Authority.
To our readers in the United States: Sanford C. Bernstein & Co., LLC is distributing this publication in the United States and
accepts responsibility for its contents. Any U.S. person receiving this publication and wishing to effect securities transactions in any
security discussed herein should do so only through Sanford C. Bernstein & Co., LLC.
To our readers in the United Kingdom: This publication has been issued or approved for issue in the United Kingdom by Sanford
C. Bernstein Limited, authorised and regulated by the Financial Conduct Authority and located at 50 Berkeley Street, London W1J
8SB, +44 (0)20-7170-5000.
To our readers in member states of the EEA: This publication is being distributed in the EEA by Sanford C. Bernstein Limited,
which is authorised and regulated in the United Kingdom by the Financial Conduct Authority and holds a passport under the Markets
in Financial Instruments Directive.
To our readers in Hong Kong: This publication is being distributed in Hong Kong by Sanford C. Bernstein (Hong Kong) Limited
which is licensed and regulated by the Hong Kong Securities and Futures Commission (Central Entity No. AXC846). This
publication is solely for professional investors only, as defined in the Securities and Futures Ordinance (Cap. 571).
To our readers in Singapore: This publication is being distributed in Singapore by Sanford C. Bernstein, a unit of AllianceBernstein
(Singapore) Ltd., only to accredited investors or institutional investors, as defined in the Securities and Futures Act (Chapter 289).
Recipients in Singapore should contact AllianceBernstein (Singapore) Ltd. in respect of matters arising from, or in connection with,
this publication. AllianceBernstein (Singapore) Ltd. is a licensed entity under the Securities and Futures Act and registered with
Company Registration No. 199703364C. It is regulated by the Monetary Authority of Singapore and located at 30 Cecil Street, #28-
08 Prudential Tower, Singapore 049712, +65-62304600. The business name "Sanford C. Bernstein" is registered under business
registration number 53193989L.
To our readers in Australia: Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited and Sanford C. Bernstein (Hong
Kong) Limited are exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in
respect of the provision of the following financial services to wholesale clients:
providing financial product advice;
dealing in a financial product;
making a market for a financial product; and
providing a custodial or depository service.
Sanford C. Bernstein & Co., LLC., Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited and AllianceBernstein
(Singapore) Ltd. are regulated by, respectively, the Securities and Exchange Commission under U.S. laws, by the Financial Conduct
Authority under U.K. laws, by the Hong Kong Securities and Futures Commission under Hong Kong laws, and by the Monetary
Authority of Singapore under Singapore laws, all of which differ from Australian laws.
For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013
298 EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING
AND LOVE THE ORE





One or more of the officers, directors, or employees of Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C.
Bernstein (Hong Kong) Limited, Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein
(Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No.
199703364C, and/or their affiliates may at any time hold, increase or decrease positions in securities of any company mentioned
herein.
Bernstein or its affiliates may provide investment management or other services to the pension or profit sharing plans, or employees
of any company mentioned herein, and may give advice to others as to investments in such companies. These entities may effect
transactions that are similar to or different from those recommended herein.
Bernstein Research Publications are disseminated to our customers through posting on the firm's password protected website,
www.bernsteinresearch.com. Additionally, Bernstein Research Publications are available through email, postal mail and commercial
research portals. If you wish to alter your current distribution method, please contact your salesperson for details.
Bernstein and/or its affiliates do and seek to do business with companies covered in its research publications. As a result, investors
should be aware that Bernstein and/or its affiliates may have a conflict of interest that could affect the objectivity of this publication.
Investors should consider this publication as only a single factor in making their investment decisions.
This publication has been published and distributed in accordance with Bernstein's policy for management of conflicts of interest in
investment research, a copy of which is available from Sanford C. Bernstein & Co., LLC, Director of Compliance, 1345 Avenue of
the Americas, New York, N.Y. 10105, Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB,
United Kingdom, or Sanford C. Bernstein (Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International
Finance Centre, 1 Harbour View Street, Central, Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) , a
unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with
Company Registration No. 199703364C, Director of Compliance, 30 Cecil Street, #28-08 Prudential Tower, Singapore 049712.
Additional disclosures and information regarding Bernstein's business are available on our website www.bernsteinresearch.com.
CERTIFICATIONS
I/(we), Paul Gait, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our)
personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be,
directly or indirectly, related to the specific recommendations or views in this publication.

Approved By: NK
Copyright 2013, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and AllianceBernstein (Singapore) Ltd., subsidiaries of
AllianceBernstein L.P. ~1345 Avenue of the Americas ~ NY, NY 10105 ~212/756-4400. All rights reserved.
This publication 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 Bernstein or any of their subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. This publication is based upon
public sources we believe to be reliable, but no representation is made by us that the publication is accurate or complete. We do not undertake to advise you of any change in the reported information or in the opinions herein.
This publication was prepared and issued by Bernstein for distribution to eligible counterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax
advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of
investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past performance of an investment is not
necessarily a guide to, indicator of, or assurance of, future performance.


For the exclusive use of JASON LAPORTE at PERRY CAPTAL on 16-Jul-2013



EUROPEAN METALS & MINING: A STRANGE LOVE HOW I LEARNED TO STOP WORRYING AND LOVE THE ORE
F
o
r

t
h
e

e
x
c
l
u
s
i
v
e

u
s
e

o
f

J
A
S
O
N

L
A
P
O
R
T
E

a
t

P
E
R
R
Y

C
A
P

T
A
L

o
n

1
6
-
J
u
l
-
2
0
1
3

You might also like