London, 16 December 2011

In a challenging macro environment Liberum Capital see five key themes driving H1’12 mining sector performance.

(1) Commodity price risk overplayed: copper, coal and iron ore continue to drive Big 5 earnings.

(2) The ‘new normal’, where weaker demand coupled with perseverant supply will lead commodity prices through a protracted progression to marginal cost.

(3) A strong sector, with robust margins and powerful balance sheets yet surprisingly low FCF yields which dash hopes of capital returns.

(4) Delivery of volume growth.

(5) M&A highlighting the Big 5 SOTP discount. With the exception of Glencore, the Big 5 have ‘silently’ re-rated in recent months, while earnings downgrades loom. Nevertheless, value remains apparent: we favour Glencore (BUY), BHP (BUY) and Anglo (BUY)

- H1’12E ADRs to drive sector higher? Listing ADRs in Australia would close the PLC/LTD spread on Rio and BHP, in turn sending the London miners higher

- Glencore (BUY): The standout Big 5 miner with 21% 2011-12E YoY net profit growth, Glencore will be the only Major to de-rate. Best-in-class volume growth, and trading at a 10% discount to Xstrata. Whilst we see Glencore bidding for Xstrata in due course, this is more likely from Q2’12

- BHP Billiton (BUY): Not expensive to play defensive given spot 2012E PER of 9.6x is in line with the peer average and only a 5% premium to Rio Tinto. Less specific iron ore price risk than Rio, while shale entry looks better than we had originally thought

- Anglo American (BUY): Discount looks overdone on spot 2012E PER of 8.2x (boosted by a weak spot ZAR). Still scope for game changing platinum spin-out, although deal complexities may yet prevent execution

- Rio Tinto (BUY): Not so cheap on spot 2012E PER of 9.2x, the discount for over-exposure to iron ore has dried up. Rio looks more expensive on a relative basis than it has done all year

- Xstrata (HOLD) on expected weak H1’12E copper before earnings growth from late 2012. Most expensive on 11.6x spot 2012E PER. Any Glencore bid requires Glencore outperformance as a pre-requisite

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Liberum Capital

www.liberumcapital.com