Metals & Mining
2009 outlook - Commodity,
NPAT, Rating, TP, EPS chgs
Peter O'Connor
Research Analyst
(+61) 02 8258-1548
peter.oconnor@db.com
Brendan Fitzpatrick
Research Analyst
(+61) 2 8258-1519
brendan.fitzpatrick@db.com
Paul Young
Research Analyst
(+61) 2 8258-2587
paul-d.young@db.com
Long gold; short the bulks & base metals heading into 2009
The landscape in 2009 looks difficult with NO signs of leading economic indicators
turning (yet). The main benefit we have in '09 vs '08 is that at least the market is
prepared for a "rough" patch. In short we suggest; 1) avoid the bulks, which have
pricing risk ahead of annual negotiations, 2) avoid industrial/base metals as the
stocking cycle (-ve for price) is likely to run well into mid '09, 3) Go long gold,
which should be one of the only positive price havens in 2009.
Deutsche Bank AG/Sydney
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
Lihir Gold Ltd (LGL.AX),AUD2.46 Buy
Iluka Resources (ILU.AX),AUD4.91 Buy
BHP Billiton Ltd (BHP.AX),AUD30.75 Buy
Newcrest Mining Ltd (NCM.AX),AUD28.35 Hold
Companies featured
Alumina (AWC.AX),AUD1.58 Hold
BHP Billiton Ltd (BHP.AX),AUD30.75 Buy
Centennial Coal Co Ltd (CEY.AX),AUD2.94 Hold
ERA (ERA.AX),AUD18.50 Hold
Independence Group (IGO.AX),AUD2.31 Hold
Iluka Resources (ILU.AX),AUD4.91 Buy
Lihir Gold Ltd (LGL.AX),AUD2.46 Buy
Mirabela (MBN.AX),AUD1.60 Buy
Macarthur Coal Ltd (MCC.AX),AUD3.12 Sell
Mincor (MCR.AX),AUD0.92 Sell
Minara (MRE.AX),AUD0.38 Sell
Newcrest Mining Ltd (NCM.AX),AUD28.35 Hold
OZ Minerals (OZL.AX),AUD0.55 Hold
Paladin Energy Limited (PDN.AX),AUD2.98 Buy
Rio Tinto Ltd (RIO.AX),AUD44.00 Hold
St Barbara (SBM.AX),AUD0.28 Hold
Western Areas (WSA.AX),AUD3.95 Hold
Target price changes
Code Prev TP New TP change
BHP 31.50 37.50 19%
RIO 52.5 51.00 -3%
ILU 5.80 6.00 3%
MCC 1.99 1.95 -2%
CEY 3.10 3.20 3%
NCM 28.00 30.00 7%
LGL 3.50 3.60 3%
SBM 0.25 0.35 40%
OGC 0.25 0.25 0%
Target Price changes
Code Prev TP New TP change
AWC 1.60 1.60 0%
OZL 0.60 0.60 0%
MBN 6.50 3.00 -54%
WSA 4.50 4.00 -11%
MRE 0.50 0.25 -50%
IGO 2.00 1.90 -5%
MCR 1.15 0.55 -52%
ERA 20.00 20.00 0%
PDN 4.00 3.60 -10%
Ratings Changes
RIO Buy to Hold
ERA Buy to Hold
MRE Hold to Sell
MCR Hold to Sell
OGC Sell to Hold
Related recent research Date
Commodities Outlook
Michael Lewis 09 Jan 2009
Global Markets Research Company
2009 Outlook - trimming the sails and looking for fair weather
This report changes ratings, price targets, and/or estimates for several companies
under coverage. For a detailed listing of these changes, see pp. 5, 9.. Lessons
learnt in 2008 - and there were many - include most importantly that one shouldn’t
assume that any trend can continue indefinitely. The notion that China had
decoupled and that the world had entered a new industrial age - that of the
population heavy BRIC economies - combined with abundant liquidity seemed,
with the benefit of hindsight, to intoxicate the investment community. But equally
as the precipitous decline registered in 2008 were sharp and alarming, we could
reasonably expect that a recovery could afford an equally definitive inflexion point.
However, ahead of such an inflexion point, which could emerge in late 2009 (see
below), the metals and mining space appears to be burdened with a negative
earnings trend; a result of softer commodity prices. The later issue is the theme of
this outlook document of 2009 - we have trimmed commodity and currency
expectations reflecting the DB view of the world in 2009 and consequently
earnings (ex gold), have headed lower in most cases. Suitable positioning in such
an environment would be to; 1) Long gold and gold equities, 2) short the bulks and
industrial metals. We also expect that “expensive defensives” such as BHP will
continue to garner inflows and safe haven status. Bottom up stories are “few and
far between” but Iluka has a 1H2009 price increase and is worth some thought!
… but we are nearer to, although dragging along, the bottom …
Despite the aforementioned gloomy backdrop we have noticed the early signs of
“bottom fishing” with price sensitive consumers coming back into several key
markets i.e. iron ore spot market (China), steel (price up-tick) and consequently
freight rates (BDI) have moved off lows. That said we still have global growth
stalling and forecast to head negative in 2009 (G3/G7 basis), negative LEI’s, a
slowing Chinese economy, contracting global steel make - which has accelerated
through 4Q 2008 - and credit markets which are still in a heightened state of
illiquidity. The above malaise is expected to be worked through in 2009, emerge
into a more stable economic outlook in the later part of 2009. Lastly, it is worth
noting that there is plenty of cash sitting on the sidelines; there is now $8.85
trillion held in cash, bank deposits and money market funds (Fed Reserve data).
Equal to 74% of the market cap of the US market, the highest ratio since 1990.
The eight prior times cash peaked, the S&P 500 rose an average 24% in 6mths.
Commodity prices reviewed, Ratings 4 down, 1 up; TPs 8 down, 4 unch., 6 up
Valuations are based on DCF derived NPVs based life-of-mine projections, they fell
for base metal miners, but rose for miners of gold and mineral sands. Risks: All
earnings remain dependent on operational performance meeting expectations and
in some case debt refinancing. Company-specific comments on pp. 19-36.

Table of Contents
Summary comments......................................................................... 3
Trimming forecasts heading into 2009......................................................................................3
Valuation update .......................................................................................................................3
Sector focus - LGL, NCM, BHP & ILU.......................................................................................5
Why Gold? ...............................................................................................................................6
Medium term outlook more stable and favourable ...................................................................7
Running the numbers … mostly lower Earnings............................ 9
Earnings rise for the gold stocks and ILU, others flat or lower .................................................9
Detailed review of commodity price changes.........................................................................10
“Spot” the difference - DB vs spot earnings scenario............................................................11
Long gold, short bulks/metals ....................................................... 12
Gilt edge tiles – Gold and mineral sands stand out in 1H 2009...............................................12
Macro outlook - Commodity triggers: S&P 500 recovery, return of US growth, a new Fed
tightening cycle.......................................................................................................................12
Gold up, but trimming nearly all other commodity prices and FX ...........................................13
Gold – a gold lining to the clouds of 2009...............................................................................14
Industrial Metals......................................................................................................................14
Copper – first among the base metals ....................................................................................15
Zinc – was hit hard and has the potential to bounce...............................................................15
Nickel – stainless steel component follows first world demand.............................................16
Aluminium – oversupply makes it least favoured....................................................................17
No currency respite this time around ……..............................................................................18
Key company data and notes ......................................................... 19
BHP Billiton – Quality assets and a strong fiscal position .......................................................19
Rio Tinto – Aluminium a burden, Downgrade to Hold.............................................................20
Alumina – Further Atlantic production cuts required...............................................................21
Iluka – Mineral sand prices showing resilience so far .............................................................22
OZ Minerals – Awaiting the outcome of the investment and sale proposals..........................23
ERA – First Ranger 3 Deeps appears priced in (for now), downgrade to HOLD.....................24
Paladin Energy – Operational improvement ongoing, expect production of ~700klb in Dec Q
...............................................................................................................................................25
Newcrest Mining – Large, low cost miner..............................................................................26
Lihir Gold – Leveraged gold miner with near term growth .....................................................27
St Barbara – Moving on from extra capital raising...................................................................28
OceanaGold – Funding issue and growth both removed........................................................29
Western Areas – Focusing on low cost production from Flying Fox and Spotted Quoll.........30
Minara – Downgrade to SELL on forecast losses in 2008 and 2009.......................................31
Mincor– Losses forecast until 2H 2010, Downgrade to SELL ................................................32
Mirabela – Still waiting for debt syndication ...........................................................................33
Independence Group – Cash flow positive down to US$2.8/lb nickel.....................................34
Macarthur Coal – volume risk to the down side remains........................................................35
Centennial Coal – Assets are sound, some coal market risk...................................................36
Appendices....................................................................................... 37
Financial models and Operational data/models.......................................................................37
DB - Metals & Mining valuation table as at 8 Jan 2009...........................................................37
DB Commodity Price Deck .....................................................................................................37
CY Commodity price charts – DB new and previous vs Consensus .......................................37