Metals & Mining Sector
From Bears to Bulls on Iron Ore
 Iron Ore Price Upgrades — Citi’s commodity team have replaced the claws with
horns in iron ore, upgrading to a 15% increase in 2010E, previously a 16.5% fall
for fines. Whilst the cyclical outlook is more bullish, we remain relatively cautious
on the structural outlook given potential new supply, move to spot pricing and
elasticity of Chinese production. Long-term fines price of US$57/dmt maintained.
 Earnings Upgrades — Earnings impact moderated by adoption of Citi’s latest A$
upgrades. BHPB FY10E +1% to US$9.1b and FY11E +13% to US$13.9b. RIO
downgraded 2% to US$4.6b in 2009E, but 2010E upgraded 8% to US$6.8b. FMG
upgraded 18% to US$342m in FY10E and 163% to US$663m in FY11E.
 Buy BHPB & RIO — Iron ore remains the single largest earnings driver for the
diversifieds and we maintain our Buy ratings with a target price of A$43 for BHP,
previously A$40, and A$68 for RIO, previously A$66. Production/shipments
appear unaffected by the detention of the RIO employees and lack of Chinese
settlement poses no real risk to estimates given spot price strength.
 Fortescue Still a Sell — Despite iron ore upgrades and allowing for the expansion
to 95mtpa at a cost of US$3.2b, FMG remains Sell-rated with a target price of
A$3.30, previously A$2.10. US$1+b is needed to fund expansion, with a
redeemable preference share issue the most likely funding mechanism.
 Who is getting Spot? — Chinese spot prices have rocketed to US$110+/t on
threats to import licenses, Indian monsoons and return of other markets. Minimal
Australian production appears to actually being sold at this price (US$90+/t FOB).