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