Metals & Mining Review
SECTOR REVIEW
Adjusting to a new world
Tumbling steel demand and production have significantly altered the landscape
for steelmakers and producers of metals and minerals. After 5 years in which
the industry was forced to run at full speed to keep pace with demand, the race
was abruptly brought to a stop. Miners have the opportunity to catch their
breaths back and prepare for another leg, but will there be a second leg? We
believe so. Below we provide a summary of our ideas for 2009.
CSN (TOP-pick): (OUTPERFORM) TP: US$20/shr (P$44/shr), upside potential
of 67%. Investment case: (1) underleveraged balance sheet following the
Namisa deal; (2) high free cash flow generation; (3) volume growth in its iron
ore business, 35% in 2009; and (5) cheap relative valuation, trading at an 09
EV/Ebitda of 3.4x, which represents a discount of 32% to Gerdau.
Vale: (OUTPERFORM) TP: US$18/shr (R$40/shr), upside potential of 52%.
Investment case: (1) strong balance sheet; (2) lowest cost iron ore producer in
the industry.
Bradepsar: (OUTPERFORM) TP: US$14/shr (R$31/shr), upside potential of
70%. We maintain our view that being part of Vale’s control block deserves a
premium; however, do not see short-term triggers to take shares to such levels.
MMX: (OUTPERFORM) TP: US$5/shr (R$11/shr), upside potential of 280%.
We see deep value and optionality for MMX’s shares on a DCF-basis and
believe the possibility of M&A could positively impact shares.
Magnesita: (OUTPERFORM) TP: US$6/shr (P$13/shr), upside potential of 85%.
We believe Magnesita remains a deep value play, with strong optional value, for
those investors with a mid-long term investment horizon.
Ternium: (NEUTRAL) TP: US$13/shr, upside potential of 55%. Even though we
see substantial intrinsic value in TX, we still believe that Brazilian players, such
as CSN, are more defensive plays in the short-term.
Gerdau: (UNDERPERFORM) TP: US$8/shr (R$18/shr), upside potential of
20%. Downgrading on (1) valuation grounds; (2) exposure to weaker steel
markets in Brazil and in the US (~30% of Ebitda) and; (3) excessive optimism
regarding Brazilian operations, which we believe could disappoint.
PCU: (UNDERPERFORM) TP: US$15/shr, upside potential of 5%. Weak
copper pricing places valuations at unattractive levels.
Grupo Mexico: (UNDERPERFORM) TP: US$0.80/shr (P$11/shr), upside
potential of 15%. We believe that the risk/return profile for GMexico has
deteriorated significantly and do not see short-term catalysts to reduce the
discount to NAV, currently at 53%.
Usiminas: RESTRICTED.

Mining – Adjusting to a new world
Tumbling steel demand and production have significantly altered the landscape for
steelmakers and producers of metals and minerals. After 5 years in which the industry was
forced to run at full speed to keep pace with demand, the race was abruptly brought to a
stop.
Miners have the opportunity to catch their breaths back and prepare for another leg, but
will there be a second leg?
We believe so. China has led the rush for iron ore, with the responsibility for 95% of all the
growth in seaborne iron ore demand. For this reason, iron ore producers may be lucky.
China is still embarked on a multi-decade effort to develop its economy and because a
large component of this endeavour entails the building of its infrastructure, it does not
depend on a major improvement of the global economy. Chinese steel intensity is still
rising and the development of inland regions is removing the polarization of fixed asset
investment away from the coastal cities such as Shanghai, Beijing and Guangzhou. Steel
consumption per capita may reach 330kg/cap in 2008 and we forecast it reaching
500kg/cap by 2015 (many economists forecast steel consumption per capita reaching 600-
650kg).