UK Mining
There were giants in the earth

We launch our sector coverage with an Overweight stance 􀁘
We initiate on Anglo American, BHP Billiton, Rio Tinto and
Xstrata with BUY recommendations, with a preference for
BHP Billiton and Rio Tinto 􀁘
We expect commodity demand from developing economies to
remain the dominant driver

Contents
Executive summary 1
Recommendations 2
Investment case 3
Sector dynamics 7
Comparing the leading diversified miners .................................................................7
Valuations................................................................................................................10
Mining industry M&A 13
BHP Billiton’s offer for Rio Tinto 22
What is Rio Tinto worth? .........................................................................................22
Recommendation ....................................................................................................23
What is the offer, and what is it worth? ...................................................................25
The rationale for the bid ..........................................................................................26
Creating a super-major............................................................................................27
The failed takeover by Vale for Xstrata 30
What is Vale? ..........................................................................................................30
What is Xstrata worth? ............................................................................................35
M&A alternatives for Xstrata....................................................................................35
Commodity outlook – executive summary 38
Commodity outlook – demand issues 43
China: the engine of global growth..........................................................................46
India: joining the party .............................................................................................52
Commodity outlook – supply issues 56
The supply-side response .......................................................................................56
Shortages, cost escalation and supply disruptions .................................................58
Commodity overview 66
Base metals.............................................................................................................68
Precious metals.......................................................................................................74
Bulk commodities ....................................................................................................77
Exchange rates 80
Disclosures Appendix 81