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Comfortable balance sheets and supportive dividend potential

Net debt reduced to comfortable levels

Renaissance Capital

14 January 2019

Metals & Mining

Mining companies have significantly deleveraged their balance sheets since 2015, and we believe comfortable balance sheets position them better for a cyclical downturn.

Net debt levels have reduced to comfortable levels over the past three years, and we believe mining companies may start paying attractive dividends.

Figure 26: Mining sector net debt to EBITDA over time (2012-2018E)

1.8x		Average net debt to EBITDA			LT average (2003-2018)
				1.7x
1.6x	1.5x	1.5x			LT average (2003-2018), 1.5x
1.4x			1.2x
1.2x					1.0x
1.0x						0.9x	0.9x
0.8x
0.6x
0.4x
0.2x
0.0x
	2012	2013	2014	2015	2016	2017	2018E

Source: Company data, Renaissance Capital

Net debt/EBITDA now at comfortable levels

CY18E net debt to EBITDA ranked

Figure 27: Companies ranked by CY18E net debt/EBITDA compared with their historical averages

6x

CY18E Net debt/EBITDA

LT average

5.0x

5x

4x

3x

2.1x 2.1x

2.0x

1.9x

1.8x 1.8x

1.6x

1.4x

1.3x 1.3x

1.2x 1.1x

2x

1.0x 1.0x

0.9x

0.7x

0.7x

0.5x 0.5x

0.4x

0.3x 0.3x 0.3x 0.3x

0.2x 0.2x 0.2x

0.1x

Sector average, 0.9x

1x

0x

0.0x

0.1x-

0.3x-

0.4x-

0.7x-

0.8x+-

0.8x+-

-1x

-2x

Northam Sappi Glencore

Sibanye

Sasol

Polymetal Polyus

PhosAgro

RBPlats

Mondi Norilsk

Gold Fields Fortescue

AngloGold Evraz

Russian*

Others*

Harmony

Vale Impala

BHP

Anglo NLMK Alrosa Hulamin

Severstal AMSA Exxaro*

Rio Tinto Amplats

MMK

ARM*

South32

Kumba

Merafe

Assore*

Noted: Net debt to EDITDA ratio has been limited to 5x. We do not subtract Glencore’s readily marketable inventory from net debt.

*Net debt to EBITDA plus equity-accounted income.

Source: Company data, Renaissance Capital estimates

Sector average net debt/EBITDA of 0.9x

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Attractive dividend yields over the next three years…

We forecast average dividend yields of 7.7% over the next three years, with potential upside risk to our forecasts if the current strategy of capital discipline and returning cash to shareholders prevails over the short-to-medium term.

Figure 28: Average dividend yield over next three years (2019-2021E)

	16%	15%	14%				Average dividend yield over next 3 years (2019E-2021E)																Sector Average
			12%		12%	11% 11%		10%	10%
	14%									9%	9% 8% 8%	8% 8%	8% 8%	7%	7%	7%	7%	7% 7%
	12%
	10%
																				Sector Average, 7.7%
	8%
	6%
																		5% 4%	4%	4%	3%	3%
	4%																						2%	2%
	2%
																								1%	1%	0% 0% 0% 0%
	0%
		Alrosa	Hulamin Merafe		Severstal	NLMK Norilsk		Evraz	ARM	Fortescue	Glencore Assore Exxaro	Vale Anglo	Kumba #N/A	South32	MMK	Polyus	Rio Tinto	BHP Polymetal Sasol Sappi	Mondi	Impala	Harmony	Gold Fields	Amplats	Sibanye AngloGold	Tharisa	Lonmin Northam RBPlats AMSA
	Note: Priced as at market close on 7 January 2019.

Source: Company data, Renaissance Capital estimates

Renaissance Capital

14 January 2019

Metals & Mining

We forecast a potential average sector dividend yield of c. 7.7%

…with significant further excess cash available after dividends

We define excess cash as the amount in excess of net debt to EBITDA of 1.5x.

We calculate average cumulative excess cash available for dividends at 30% of market cap over the next three years, despite attractive dividends paid over the period. While we do not have any conviction about the sector’s capital discipline over the medium term, we believe the sector could re-rate over the short term as the market gains visibility on the sector’s yield potential.

Figure 29: Potential average excess cash* as a percentage of market cap over the next three years

	140%	115%					Average excess cash over next 3 years (2019E-2021E), %											Sector average
	120%
			81%		62%	56% 56%		50%	48%	40%	38% 36% 36% 34% 34% 33%	31% 30% 29%	27% 27%	21% 21%	19%	16% 15%	15% 14%	11%	9% 9%	4%
	20%
	100%
	80%
	60%																	Sector average, 30%
	40%
	0%
	-20%
																				4%-	15%-	30%-
	-40%
	-60%
		Hulamin	Harmony		Impala	ARM* AngloGold		Merafe	Assore*	Sibanye	South32 Anglo Kumba MMK Exxaro* ArcelorMittal SA	Amplats Rio Tinto Alrosa	Norilsk Fortescue	NLMK Vale	BHP	Polyus PhosAgro	Mondi Severstal	Polymetal	RBPlats Sasol	Evraz Sappi	Glencore	Northam

Note: Priced as at market close on 6 January 2019.

*Average excess cash over a three-year period (CY19-21E) at target debt gearing levels (net debt to EBITDA of 1.5x).

Source: Company data, Thomson Reuters, Renaissance Capital estimates

We forecast potential cumulative excess cash after dividends of 30% of the sector’s market cap over the next three years

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Value relative to other stocks

Renaissance Capital

14 January 2019

Metals & Mining

IRR captures near-term cash generation and the benefit of long-term growth. What we view as diversified miners’ attractive near-term cash-flow yields support more attractive IRR than other sectors, despite limited earnings growth (Figure 30).

To see how the resource companies under our coverage stack up in terms of long-term value relative to other companies in other sectors, we have constructed a simple model to forecast dividends 10 years out:

1.We use Thomson Reuters consensus EPS and DPS forecasts for the next two years up to 2019. We assume the consensus 2019 forecast represents normalised mid-cycle earnings.

2.We forecast EPS beyond 2019 by assuming 14-16% returns on incremental investment. We use the following formula: Thomson Reuters 2018E EPS forecast + (change in book value per share x RoI%).

3.We calculate DPS as EPS x payout ratio (1 - retention rate).

4.We assume a low retention rate (around 20%) for low-growth companies and we assume retention rates drop to around 50% for high-growth companies.

We assume all companies achieve returns on incremental investment of around 15%

Figure 30: IRR over a 10-year investment period

25%

20%

15%

10%

5%

21.3%

17.9%
17.5%
	17.3%
		16.6%
			16.4%
				16.3% 16.3%
					16.1%
						15.6%						13.8% 13.7%
							14.6%								13.0% 13.0%
							14.6%	14.5%									12.9% 12.8% 12.8%
									14.5%										12.6%				12.3% 12.3%
										14.1%		13.6%
											14.0%		13.4%
														13.2% 13.1% 13.1%								12.4% 12.4%			12.1% 12.1% 12.0% 12.0% 12.0%
																										11.8% 11.7%																Average, 11.9%
																											11.6% 11.4% 11.3%
																												11.2% 11.1%
																													10.7% 10.6% 10.6% 10.6%
																															10.4%
																																10.4% 10.3% 10.3% 10.2%
																																10.1% 10.1% 10.1%
																																	9.9% 9.9% 9.9% 9.8%
																																			9.7% 9.7% 9.6%
																																				9.4% 9.3%
																																					9.2% 9.2%
																																						9.2%				8.8%
																																							9.1%				8.5%
																																								9.0%				8.3% 8.2%
																																									8.8%				7.6%
																																													6.6%
																																														6.4%
																																															6.2%

4.2%

0%

Bank

Severstal

Tobacco

Fortescue

Construction

Glencore

Industrial

Bank

Beverages

Bank

Industrial

Industrial

Luxury

Insurance

Pharmaceutical

Healthcare

Inv.

Diversified…

Retailer

Assore Food

Property

Oil

Life

Healthcare

Rio

AssurerLife

Beverages

Property

Healthcare

Amplats

Beverages

Motor

Merafe

Alrosa

Sasol

Tech

NLMK

RBPlat

Asset…

Bank

Polyus

Exxaro

AMSA

Anglo

Norilsk

gas & Oil

Tech

Property

Telecom

Property

Polymetal

5 Retailer

Vale

1 Tech

Tech

Retailer

AngloGold

Gold

South32

Sibanye

Telecom

Retailer

Retailer Retailer

Mondi

BHP

Retailer

6

Impala Evraz

ARM

3

2

2

5

2

1

goods

MMK

Bank

Holding

Retailer

1

4

&

Property

Tinto

Bank

2

3

Northam

1

4

Sappi

2

3

1

5

Food

2

Kumba

Assurer

2

4

8 9

2

4

2

1

1 2

2

2

3

1

1

3

6

1

1

Fields

3

1

3

gas

Food

*Priced at market close on 7 January 2019.

Source: Company data, Thomson Reuters Datastream, Renaissance Capital

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Renaissance Capital

14 January 2019

Metals & Mining

Less than a 10-year dividend repayment period for some miners

We calculate that some mining companies could repay their market caps out of dividends over the next 10 years, based on target gearing levels and assuming no further growth projects at value-destructive returns.

While we do not have any conviction about the sector’s capital discipline over the medium term, we believe the sector could re-rate over the short term as the market gains visibility on the sector’s yield potential.

Figure 31: Cumulative 10-year dividends as % of share price

180%

160%

140%

120%

100%

80%

60%

40%

20%

163%

147%
144%
	143%			121%				109%
	131%	130%
					120%				108%
	130%		128%
					114%
												103%
						111%							101% 101%
							109%			107% 107%				100%
											104% 104%				97% 96%
																95% 95%
																	91%
																		91% 90%
																			89% 89%
																				88%
																					86% 86%
																						83%																										Average, 81.4%
																								82% 81% 81% 81%
																									80%
																											77%
																												72% 71%
																														70% 69%
																															68% 67%
																																	66% 66% 66%
																																		65%
																																				59%								52% 52%
																																					57%
																																													51% 50%
																																						56%		54%						49% 49%		46%
																																							54%		54%								45%			42%
																																										52%					48% 48% 47%
																																																			44% 44% 43% 43%		36% 35%
																																																					34%
																																																						29%
																																																							28%
																																																								24%

0%

Merafe

Evraz

NLMK

Anglo

Polyus

Norilsk

MMK

Asset…

Sappi

Assore

Property

AngloGold

Rio

Kumba

Bank

Telecom

RBPlat

Bank Bank

Retailer Retailer5

Amplats

Food

Diversified…

Sibanye

Beverages

Industrial

HoldingInv.

Harmony

Beverages

Retailer

Beverages

Retailer

Tech4

Fortescue

Impala

Severstal

Glencore

Polymetal

Exxaro

Property

Tobacco

Property

South32

Property

Gold

Oil

Property

4 Bank

Telecom

Oil

Construction

Industrial

Industrial

Retailer

Life

Pharmaceutical

Insurance

Retailer

Healthcare

Luxury

Healthcare

Healthcare

Retailer

Life

Retailer

ARM

3

5

Vale

Fields

&

1

gas &

Motor

Mondi

1

8

Assurer

9 Retailer goods

3

1

Food

Assurer

Tech

Alrosa

Bank

2

2

BHP

6 1

Food

3 Tech

3

Bank

1

AMSA

2

4

2

10

2

Sasol

4

1

gas

2

1

1

2

2

2

3

6

1

1

1

5

Tinto

1

2

3

3

2

*Priced at market close on 7 January 2019.

Source: Company data, Thomson Reuters, Renaissance Capital

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