Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomura’s rating system. Glencore 0805.HK 805 HK BASIC MATERIALS EQUITY RESEARCH Initiating at NEUTRAL with TP of HKD70.40 Entrepreneurialism fully priced May 31, 2011 Rating Starts at Neutral Target price Starts at70.40 HKD 70.40 Closing price May 30, 2011 HKD 67.40 Potential upside +4.5% Action/Valuation: Expensive relative to mining peers; NEUTRAL Glencore is evolving from a trading house whose mining assets principally served to feed its marketing business into one whose mining assets become the key driver of group earnings. Although we find Glencore's management to be the most entrepreneurial team in the sector, we think valuations are expensive relative to mining peers. Our HKD70.40 TP represents a 10% holding company discount to our SOTP NPV valuation. Mining assets: higher volume growth, but with higher risk and costs Excluding Xstrata, we estimate an attributable copper equivalent CAGR for Glencore of 7.5% over 2011-2015E (vs an average of 5.2% for the diversified miners). Glencore’s high growth is partly offset by higher geographical risk and a higher cost profile, with average costs mostly in the third quartile of industry cost curves. A high-quality and counter-cyclical marketing business Glencore’s marketing business has dominant market shares, high barriers to entry and counter-cyclical cash generation, and we believe it should trade in line with or at a small discount to Noble (because of Noble’s greater exposure to agriculture, which tends to be less cyclical, and its faster earnings growth, offset to some extent by Glencore’s higher RoCE). M&A strategy: Xstrata merger unlikely for now We would be surprised to see Xstrata’s board recommend a nil-premium merger of equals while Glencore trades at a relative valuation premium. Also, we don’t think Glencore would pay a large takeover premium for Xstrata, given Glencore’s opportunistic M&A history. 31 Dec FY10 FY11F FY12F FY13F Currency (USD) Actual Old New Old New Old New Revenue (mn) 144,978 198,108 224,543 215,161 Reported net profit (mn) 3,751 7,340 9,547 9,132 Normalised net profit (mn) 3,751 7,340 9,547 9,132 Normalised EPS 0.5 1.1 1.4 1.3 Norm. EPS growth (%) 129.7 95.7 30.1 -4.3 Norm. P/E (x) 16.9 N/A 8.6 N/A 6.6 N/A 6.9 EV/EBITDA 14.3 N/A 6.8 N/A 5.6 N/A 5.4 Price/book (x) 3.1 N/A 1.7 N/A 1.3 N/A 1.1 Dividend yield (%) na N/A 1.7 N/A 1.7 N/A 1.8 ROE (%) 20.7 26.4 23.7 18.8 Net debt/equity (%) 146.2 55.1 42.3 25.8 Source: Nomura estimates Anchor themes We expect the mining sector to outperform in 2011, with thermal coal being our preferred commodity pick. Nomura vs consensus Coverage on the street is currently sparse. Research analysts Singapore Basic Materials Tanuj Shori - NSL [email protected]+65 6433 6981 European Metals & Mining Paul Cliff - NI plc [email protected]+44 20 7102 4349 Patrick Jones - NI plc [email protected]+44 20 7102 5486 European Steel Jeff Largey - NI plc j[email protected]+44 20 7102 0021 See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
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Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomura’s rating system.
Glencore 0805.HK 805 HK
BASIC MATERIALS
EQUITY RESEARCH
Initiating at NEUTRAL with TP of HKD70.40
Entrepreneurialism fully priced
May 31, 2011
Rating Starts at
Neutral
Target price Starts at70.40
HKD 70.40
Closing price May 30, 2011
HKD 67.40
Potential upside +4.5%
Action/Valuation: Expensive relative to mining peers; NEUTRAL Glencore is evolving from a trading house whose mining assets principally served to feed its marketing business into one whose mining assets become the key driver of group earnings. Although we find Glencore's management to be the most entrepreneurial team in the sector, we think valuations are expensive relative to mining peers. Our HKD70.40 TP represents a 10% holding company discount to our SOTP NPV valuation.
Mining assets: higher volume growth, but with higher risk and costs Excluding Xstrata, we estimate an attributable copper equivalent CAGR for Glencore of 7.5% over 2011-2015E (vs an average of 5.2% for the diversified miners). Glencore’s high growth is partly offset by higher geographical risk and a higher cost profile, with average costs mostly in the third quartile of industry cost curves.
A high-quality and counter-cyclical marketing business Glencore’s marketing business has dominant market shares, high barriers to entry and counter-cyclical cash generation, and we believe it should trade in line with or at a small discount to Noble (because of Noble’s greater exposure to agriculture, which tends to be less cyclical, and its faster earnings growth, offset to some extent by Glencore’s higher RoCE).
M&A strategy: Xstrata merger unlikely for now We would be surprised to see Xstrata’s board recommend a nil-premium merger of equals while Glencore trades at a relative valuation premium. Also, we don’t think Glencore would pay a large takeover premium for Xstrata, given Glencore’s opportunistic M&A history.
31 Dec FY10 FY11F FY12F FY13F
Currency (USD) Actual Old New Old New Old New
Revenue (mn) 144,978 198,108 224,543 215,161
Reported net profit (mn) 3,751 7,340 9,547 9,132
Normalised net profit (mn) 3,751 7,340 9,547 9,132
Normalised EPS 0.5 1.1 1.4 1.3
Norm. EPS growth (%) 129.7 95.7 30.1 -4.3
Norm. P/E (x) 16.9 N/A 8.6 N/A 6.6 N/A 6.9
EV/EBITDA 14.3 N/A 6.8 N/A 5.6 N/A 5.4
Price/book (x) 3.1 N/A 1.7 N/A 1.3 N/A 1.1
Dividend yield (%) na N/A 1.7 N/A 1.7 N/A 1.8
ROE (%) 20.7 26.4 23.7 18.8
Net debt/equity (%) 146.2 55.1 42.3 25.8
Source: Nomura estimates
Anchor themes
We expect the mining sector to outperform in 2011, with thermal coal being our preferred commodity pick.
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
Nomura | ASIA Glencore May 31, 2011
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Key data on Glencore Income statement (USDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 106,364 144,978 198,108 224,543 215,161Cost of goods sold -103,057 -139,688 -187,430 -211,480 -202,556Gross profit 3,307 5,290 10,677 13,063 12,605SG&A
Executive summary: NEUTRAL, HKD70.40 TP We initiate coverage of Glencore with a NEUTRAL recommendation and HKD70.40 target price. Our target price is set at a 10% discount (at enterprise level) to our NPV, which includes Glencore’s stake in Xstrata at our GBP 22/share NPV. Our in-market SoTP valuation, which includes Glencore’s listed stakes at market value and peer group valuation multiples for Glencore’s other mining and marketing businesses, suggests a value for Glencore of HKD57.50/share. Although we think Glencore boasts one of the most entrepreneurial management teams in the sector, we struggle to find value in Glencore relative to its mining and marketing peers. However, our target price still leaves modest upside potential in absolute terms.
On balance, we believe the most appropriate valuation methodology for Glencore is an enterprise value SoTP with a holding company discount. RMIs should not be deducted from net debt, in our view. Peer group EV/EBITDA multiples avoid any distortions attributable to Glencore’s relatively high net debt/EBITDA ratios in its unlisted mining and marketing businesses (unlisted net debt/EBITDA of 3.8x compared with 3.0x and 0.4x for Noble and Xstrata, respectively). We apply a 10% holding company or SoTP discount as a large proportion of Glencore’s value lies in separate listed entities, particularly its non-controlling stake in Xstrata. In addition, we believe that only 15% of Glencore’s marketing volumes (ex oil) originate from Glencore controlled production assets, which suggests to us that the marketing business could be viewed as separate to the mining business rather than one vertically integrated structure from mine to customer. Lastly, we do not deduct RMIs from net debt to value Glencore’s equity, as RMIs represent working capital for a physical commodity trading business.
Fig. 1: Glencore valuation summary: NPV and in-market
*Management intends to spin out the goldstream of Kazzinc; thus we value it at an average EV/produced gold ounce of Russian miners
Source: Company data, Nomura estimates
Glencore is evolving from a trading house in physical commodities into a company whose mining assets increasingly drive group earnings. This is both a function of a prolonged cycle of high commodity prices and an expansion strategy that increasingly focuses on mining. Glencore plans to use its USD7.9bn primary share issue to fund the
$mn NPV Comments
Industrial
Total Listed 6,876 44,712 29,878
Unlisted
Managed operations 3,169 12,963 4.2x 13,462
Goldstream 5,208* 5,208* Attributable 744 koz x $7,000/oz (Russian EV/produced oz average)
Marketing 3,185 31,751 9.7x 30,989 Noble Group multiple (last reported net debt)
Total 13,231 98,255 83,022
Discount 10% 10% Holding company discount
Discounted EV 88,429 74,720
Proforma Net Debt -24,387 -24,387
Convertible Debt 2,132 Excluded for in-market valuation
Equity Value 66,174 50,333
Equity value (GBP/sh) 558 449
Equity value (HK$/sh) 70.40 57.50
EV/EBITDA Multiple
In-Market Value
2011E Att EBITDA
Xstrata multiple (last reported net debt)
Nomura | ASIA Glencore May 31, 2011
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USD2.2bn cash portion of the USD3.2bn proposed acquisition of additional stakes in Kazzinc from 51% to 93%, and approximately USD5bn towards capex over the next three years to expand its major mining assets – Kazzinc, Mopani, Prodeco and various oil E&P assets in West Africa. We forecast Glencore’s mining activities, including stakes in listed assets, to account for 76% of attributable EBITDA, on average, over the next five years.
We expect Glencore to deliver strong earnings growth over the next two years, buoyed by best-in-class organic growth from its own managed operations as well as from Xstrata. We forecast Glencore’s attributable EBITDA to grow by 63% in 2011 y-o-y and by nearly 92% by 2012, from 2010 levels. We expect Glencore’s marketing division to account for 24% of group attributable EBITDA, on average, over the next five years with mining, including Xstrata, accounting for the remainder.
Fig. 2: Glencore attributable EBITDA 2010-2015E
Note: Glencore does not disclose attributable EBITDA; figures are based on our estimates.
Source: Company data, Nomura estimates
Excluding Xstrata, we estimate an attributable copper equivalent CAGR for Glencore of 7.5% over 2011-2015, compared with an average of 5.2% for the diversified miners. Glencore’s high growth is partly offset by higher geographical risk and a higher cost profile, with average costs mostly in the third quartile of industry cost curves. However, as projects such as Mutanda come online and Prodeco ramps up, Glencore’s copper and coal divisions will have the potential to move down the cost curve.
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Marketing Xstrata Industrial ex Xstrata$mn
Nomura | ASIA Glencore May 31, 2011
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Fig. 3: Copper equivalent organic growth 2010-2015E Investing during the downturn has given Glencore first-mover advantage
Source: Brook Hunt, AME Company data, Nomura estimates.
Valuation (NEUTRAL, TP HKD70.40) Our HKD70.40 target price for Glencore is set at a 10% discount to our SoTP NPV, which includes Glencore’s stake in Xstrata at our GBP 22/share NPV. Our in-market SoTP valuation suggests a value for Glencore of HKD57.50/share. We view Xstrata as the closest peer for Glencore’s mining business owing to a similar mix of copper, coal and zinc. We view Noble as the closest peer for Glencore’s marketing business owing to a similar mix of metals & minerals, energy, and agriculture exposure (although Glencore is more exposed to metals & minerals while Noble is more exposed to agriculture).
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2010 2011E 2012E 2013E 2014E 2015E
AAL BHP XTA RIO GLEN Industrial
Nomura | ASIA Glencore May 31, 2011
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Fig. 5: Glencore valuation summary NPV vs EV/EBITDA
Source: Company data, Nomura estimates
$mn NPV Comments
Industrial
Listed
Xstrata 6,007 37,076 23,383
Other 870 7,636 6,495
Total Listed 6,876 44,712 29,878
Unlisted
Managed operations 3,169 12,963 4.2x 13,462
Goldstream 5,208* 5,208* Attributable 744 koz x $7,000/oz (Russian EV/produced oz average)
Marketing 3,185 31,751 9.7x 30,989 Noble Group multiple (last reported net debt)
Total 13,231 98,255 83,022
Discount 10% 10% Holding company discount
Discounted EV 88,429 74,720
Q4 10 Net Debt -29,087 -29,087
Primary issue 7,900 7,900
43% Kazzinc Acq -3,200 -3,200
Proforma Net Debt -24,387 -24,387
Convertible Debt 2,132 Excluded for in-market valuation
Equity Value 66,174 50,333
Basic Shares 6,923 6,923
Dilutive shares 403 Excluded for in-market valuation
Total Shares 7,326 6,923
GBP-USD 1.62 1.62
Equity value (GBP/sh) 558 449
Equity value (HK$/sh) 70.40 57.50
*Management intend to spin out the goldstream of Kazzinc; thus we value it at an average EV / produced gold ounce of Russian gold miners
EV/EBITDA Multiple
In-Market Value
2011E Att EBITDA
Xstrata multiple (last reported net debt)
Nomura | ASIA Glencore May 31, 2011
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Fig. 6: SOTP: NPV valuation
Source: Company data, Nomura estimates
Fig. 7: SOTP: In-market EV/EBITDA valuation
Source: Company data, Nomura estimates
On balance, we believe the most appropriate valuation methodology for Glencore is an enterprise value SoTP with a holding company discount. RMIs should not be deducted from net debt for valuing equity, in our view.
We view Xstrata and Noble as the closest peers for Glencore’s mining and marketing businesses, respectively. Peer group EV/EBITDA multiples avoid distortions attributable to higher net debt/EBITDA ratios in Glencore’s unlisted mining and marketing businesses relative to Noble and Xstrata. For example, we estimate 2010 net debt to 2011E EBITDA of 3.8x for Glencore’s combined unlisted mining and marketing business, compared with net debt/EBITDA multiples for Noble and Xstrata of 3.0x and 0.4x, respectively.
We recognise that our enterprise value methodology is not without its flaws. We think the main issue is the volatility in Glencore’s working capital, which is proportional to changes in commodity prices. This may lead to a volatile net debt which, when deducted from our estimated enterprise value, would also lead to a volatile equity valuation. However, we point out that Noble’s net debt would also be influenced by the same factors, and the market should adjust Noble’s EV/EBITDA multiple accordingly. Any change in Noble’s EV/EBITDA would then be reflected in our in-market SoTP valuation for Glencore. Lastly, we also point out that volatility is hardly new to the mining sector, and Glencore’s in-market valuation will also reflect any volatility in Xstrata’s share price.
We apply a 10% holding company or SoTP discount as a large proportion of Glencore’s value lies in separate listed entities, particularly as the stake in Xstrata is a minority one. In addition, we believe that only 15% of Glencore’s marketing volumes (ex oil) originate from Glencore-controlled production assets (around 40% including volumes (ex oil) from associates and investments), which suggests to us that the marketing business could be viewed as separate to the mining business rather than one vertically integrated structure from mine to customer.
Lastly, we do not deduct RMIs from net debt to value Glencore’s equity, as RMIs represent the working capital of a physical commodity trading business regardless of how liquid they are or whether price risk has been hedged. For the purposes of valuing the equity of the company, we believe working capital (ie, RMIs) should not be treated as (ie, converted to) cash unless the business is no longer a going concern. We think most of the confusion over whether to treat Glencore’s RMIs (USD14.3bn as at end-2010), as cash stems from whether one is trying to measure balance sheet liquidity or to value the equity of the company. Historically, Glencore’s quarterly financials have been used by credit analysts to assess balance sheet liquidity. When assessing Glencore‘s ability to meet future debt obligations, credit analysts typically treat 80% of RMIs as cash, as inventories are liquid assets and prices have been hedged either on exchange or with a highly rated counterparty.
Listed46%
Unlisted22%
Marketing32% Listed
36%
Unlisted27%
Marketing37%
Nomura | ASIA Glencore May 31, 2011
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Fig. 8: Glencore and other supply chain companies We regard Noble as the best comparable with regard to Glencore
Source: Company data, Nomura research
Glencore is positioned somewhere between the diversified miners and the supply-chain managers/commodity traders. Our forecast 2011 attributable EBITDA for Glencore is split roughly three-quarters for its mining assets and one-quarter for marketing. Therefore, we think Glencore’s valuation multiples should sit closer to the miners. We note that Glencore’s marketing business is skewed towards metals & minerals (55% of 2011 EBITDA for marketing, on our estimates), while the Singapore listed commodity traders tend to be skewed more to agriculture (eg, agriculture represents 42% of our 2011 trading+midstream EBITDA estimate for Noble). Agriculture-related earnings tend to be less cyclical and command a valuation premium (eg, Wilmar and Olam).
Our NPV (firm value) for Glencore’s marketing business is USD32bn and is included in our NPV-based target price for Glencore. Our in-market SoTP valuation for the marketing business suggests an enterprise value of USD31bn. We believe Glencore’s marketing business should trade in line with or at a small discount to Noble group (our in-market valuation assumes a 2011E EV/EBITDA multiple of 9.7x, in line with Noble). This is because of Noble’s greater exposure to agriculture, which tends to be less cyclical, and to Noble’s faster earnings growth, offset to some extent by Glencore’s higher returns on capital employed (Please see a detailed comparison between the two businesses later in this report).
Fig. 12: Marketing business valuation: NPV vs EV/EBITDA
Source: Bloomberg, company data, Nomura estimates
The industrial business – listed assets
Our NPV (equity value) for Glencore’s listed industrial assets is USD44bn while the current market value for these assets is USD30bn. Glencore’s single largest listed asset is its 35% stake in Xstrata. Xstrata remains our top pick in the mining sector with an NPV target price of GBP 22/share. We believe Xstrata’s organic project pipeline remains undervalued, with the market still sceptical on Xstrata’s execution capability. The successful delivery of a suite of major projects in 2012 offers a re-rating catalyst for Xstrata shares, in our view (see our report - Xstrata: Monetizing an undervalued project portfolio, dated 14 April 2011).
Fig. 13: Listed industrial assets Glencore's share of current market cap is used for our valuation for the minor listed stakes
Century Aluminium 44% 641 641 Included at market cap in both valuations
Recylex 32% 71 71 Included at market cap in both valuations
UC Rusal 9% 2,148 1,944 Included at Nomura price target (15.1 HKD/sh)
Xstrata 35% 37,076 23,383 Included at Nomura price target (£22/sh)
Katanga Mining 74% 2,583 2,467 Included at NPV
Minara Resources 82% 1,574 753 Included at NPV
Nystar 8% 178 178 Included at market cap in both valuationsVolcan 4% 176 176 Included at market cap in both valuationsBiopetrol Industries 60% 28 28 Included at market cap in both valuations
Chemoil 52% 220 220 Included at market cap in both valuations
Polymet Mining (US) 6% 17 17 Included at market cap in both valuations
Total 44,712 29,878
Nomura | AEJ Glencore May 31, 2011
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The industrial business – unlisted assets
Our NPV (firm value) for Glencore’s unlisted industrial assets is USD22bn while the current in-market value for these assets is also USD22bn, assuming EV/EBITDA valuation multiples in line with Xstrata. Once Glencore increases its stake in Kazzinc from 51% to 93% (expected to complete later this year), Kazzinc will become Glencore’s most valuable unlisted mining asset, on our estimates. We have included Kazzinc’s gold assets at a valuation of USD5.2bn (based on peer group multiples for Russian gold assets) in both our NPV and in-market valuation methodologies. This is because gold assets tend to trade well above their NPVs and so we expect management to create value by spinning out the gold assets into a separate listed vehicle.
Fig. 14: Unlisted mining assets
Source: Company data, Nomura estimates
NPV Comments
Copper (ex KAT) 1,001 4,632 4.2x 4,252 Xstrata multiple (last reported net debt)Zinc 1,258 3,401 4.2x 5,345 Xstrata multiple (last reported net debt)
Spun out gold 5,208* 5,208* Attributable 744 koz x $7,000/oz (Russian EV/produced oz average)Alumina 76 565 4.2x 322 Xstrata multiple (last reported net debt)Coal 738 3,842 4.2x 3,135 Xstrata multiple (last reported net debt)Oil & loans 0 3,620 3,485 oil-related loans: $2.9 bn, Guinean oil resources: $560 mnAgriculture 96 523 4.2x 408 Xstrata multiple (last reported net debt)
Total 3,169 21,792 22,155*Management intend to spin out the goldstream of Kazzinc; thus we value it at an average EV / produced gold ounce of Russian gold miners
$mnEV/EBITDA
MultipleIn-Market
Value2011E Att EBITDA
Nomura | AEJ Glencore May 31, 2011
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Earnings summary & sensitivity We expect Glencore to deliver excellent earnings growth over the next two years, buoyed by best-in-class organic growth from its managed operations as well as from Xstrata. We forecast Glencore’s attributable EBITDA to grow by 63% in 2011 y-o-y and by nearly 92% by 2012, from 2010 levels. We also expect capex levels to stay elevated over the next several years as the group finances its best-in-class organic growth platform.
Fig. 15: Glencore earnings summary
Note: Attributable EBITDA is Nomura estimate as it is not reported by the company.
Source: Company data, Nomura estimates
We expect earnings from Xstrata to continue to be the largest portion of the group’s attributable EBITDA over the next several years. We expect marketing earnings will be less volatile than industrial earnings.
Fig. 16: Attributable EBITDA by business division
Note: 2010 attributable EBITDA is Nomura estimate and not reported by the company. Source: Company data, Nomura estimates
Fig. 17: 2011E attributable EBITDA by commodity segment Industrial ex XTA includes copper, coal, zinc, nickel, and other
Note: 2011 attributable EBITDA is Nomura estimate and not reported by the company.
Although we expect earnings from Glencore’s marketing business to be less cyclical than mining, its real attribute is counter-cyclical cash flow. As commodity prices fall, Glencore’s working capital shrinks and this more than offsets any decrease in EBITDA. We calculate that a 20% fall in commodity prices from our estimates would increase operating cash flow by 40% or USD1.3bn in 2012. Alternatively, in a period of rising commodity prices, more capital is tied up in working capital, so the inverse impact is felt. We have assumed that working capital is roughly three-quarters of marketing capital employed (readily marketable inventories averaged 72% of marketing capital employed between 2008 and 2010).
Fig. 19: Marketing segment 2012 sensitivity analysis Impact from across-the-board changes to our commodity price assumptions
M&A: Xstrata merger unlikely for now We would be surprised to see Xstrata’s board recommend a nil-premium merger of equals for as long as Glencore trades on a relative valuation premium. On our estimates, Xstrata and Glencore trade on 2011 P/E multiples of 6.5x and 8.5x, respectively.
Equally, we are sceptical of the view that Glencore would be prepared to pay a significant takeover premium for Xstrata, as Glencore’s M&A history is much more opportunistic (eg, increasing its stake in Katanga during the global financial crisis). In practice, we think that any potential merger between Xstrata and Glencore may be difficult to consummate, for the same reason that Xstrata’s merger proposal to Anglo American was never consummated – one party is perceived as the target and wants a full takeover premium, while the other party is not prepared to pay one.
Any potential merger between Xstrata and Glencore may run the risk of diluting the marketing business (12% of combined 2011E EBITDA), to such an extent that the market would simply de-rate the marketing earnings to a mining multiple. If no merger agreement can be reached between the two parties, then we would expect Glencore to eventually sell its stake in Xstrata as we see the current ownership structure as unsustainable. With Glencore now armed with an acquisition currency, we see the potential for increasing tension between the two companies who may end up bidding for the same assets (eg, Drummond Coal’s Colombian operations).
Any synergies from a potential merger between Xstrata and Glencore would likely originate from feeding Xstrata’s production volumes through Glencore’s marketing business (as opposed to synergies at the asset level). Glencore is the exclusive marketing agent for Xstrata alloys and takes an advisory fee on Xstrata’s coal exports from Australia and South Africa. Glencore also distributes Xstrata’s nickel, cobalt and ferronickel. The Relationship Agreement regulates the relationship between the two parties, but we think the associated bureaucracy may actually hinder Glencore’s ability to add value. If any potential marketing synergies are very large then we think they could be realised by broadening the scope of current marketing agreements and terminating the Relationship Agreement by selling the stake in Xstrata.
Fig. 21: XTA-GLEN NewCo 2011E attributable EBITDA Glencore's marketing business could potentially be de-rated as part of NewCo
Source: Company data, Nomura estimates
Copper40%
Zinc11%
Nickel6%
Coal25%
Marketing12%
Other6%
Nomura | AEJ Glencore May 31, 2011
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Marketing division Glencore’s marketing business is a supply-chain management business rather than a proprietary commodities trading business. This flow business produces high-quality earnings that are not purely dependent on the direction of commodity prices. Profitability is enhanced through three key arbitrage strategies: geographical (regional price differentials), product (price differentials between grades, and blends, among others) and timing (price differentials across different delivery dates). Glencore’s business model benefits from high barriers to entry, such as its global logistics network, financing and risk management skills, and long-term supplier/customer relationships.
Although Glencore will sometimes take proprietary positions on the direction of commodity prices, we believe that this normally accounts for less than 10% of earnings from the marketing division. However, this percentage is not disclosed by Glencore.
Recent press comments suggest a growing interest by politicians and regulators in the influence of commodity price speculators on commodity prices. However, we think this is unlikely to have a large impact on Glencore’s core logistics business. With the possible exception of cobalt, Figure 27 shows that Glencore’s total market shares, which we think are more relevant to global commodity markets than ‘addressable market’ shares, are not particularly dominant. In addition, as we believe Glencore only controls around 16% of its marketing volumes via its own production, we think it would be difficult to prove that Glencore was the price setter in these markets (price is set by supply and demand). However, any proprietary-based earnings may be more at risk from greater regulation, while the potential for greater regulation and disclosure on inventories held in warehouses owned by Glencore and other commodity traders could also reduce the profitability of arbitrage strategies related to time differences (ie, carry trades).
Fig. 22: Commodity value chain Glencore plays a part at every step of the value chain
Source: Company data, Nomura estimates
Extraction Consumers
Inputs processed Inlandfrom own production & storage & Shipped Warehouse Delivered to final consumers3rd party sources logistics
Purchase: $12/MT + Freight: $22/MT + Rent: $4/MT + Freight: $20/MTInsurance/financing over 30 day period:$15/MT
Marketing/Distribution
Profit: $27/MTSale:$100/MT
Nomura | AEJ Glencore May 31, 2011
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Noble-Glencore: a closer comparison
We believe that Glencore’s marketing division should trade in line with or at a modest discount to Noble group. This is because of Noble’s greater exposure to agriculture, which tends to be less cyclical, and to Noble’s faster earnings growth, offset to some extent by Glencore’s higher returns on capital employed.
Earnings mix: How much is supply-chain (marketing) versus upstream? The key difference between Noble and Glencore is the break-up of their earnings mix. Glencore’s earnings are mostly driven by its upstream assets (which comprise its stakes in various mines and listed entities such as Xstrata), whereas Noble is still primarily a trader, evolving gradually into an asset manager. We estimate that for FY11, Noble’s mix would be ~17% upstream (ie, asset-based) as compared with Glencore’s 73%. Please note that we are including Noble’s midstream businesses with supply chain as they have an element of processing value addition in them, and as a result earnings from that segment are not significantly correlated to commodity prices.
Fig. 23: Noble: earnings mix
Note: Noble does not disclose earnings mix by function; these are based on our estimates.
Source: Nomura estimates
Fig. 24: Glencore: earnings mix
Source: Company data, Nomura estimates
Fig. 25: Noble marketing: earnings mix
Source: Company data, Nomura estimates
Fig. 26: Glencore marketing: earnings mix
Source: Company data, Nomura estimates
12% 13% 17% 17%
88% 87% 83% 83%
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59% 62%73% 76%
41% 38%27% 24%
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Agriculture Energy Metals & Minerals$mn
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Nomura | AEJ Glencore May 31, 2011
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Glencore’s scale and market shares are much larger than Noble’s in metals, energy; Noble dominates agriculture trading Glencore and Noble have three operating segments in common: metals and minerals, energy, and agriculture. (Noble historically reported a fourth logistics segment, which it merged with the other three from 1QFY11.) Glencore offers much greater scale and scope than Noble, with Glencore’s marketing volumes (and market share) for most commodities (except agriculture) materially higher than Noble's.
Fig. 27: Glencore and Noble: relative presence
Note: Noble’s volumes are not consolidated. Noble does not disclose volumes by commodity.
Source: Company data, Nomura estimates
FY10 volumes (mn mT) Unit Glencore
Glencore approximate addressable market share
Glencore total
market share
Noble Comment
Metals and minerals mt 20.5 22.1Noble is much larger in iron ore, iron related alloys and aluminium. However its presence in other commodities is very small
Noble has a larger presence in oilseeds and sugarcane, but a smaller presence in grains. Noble is- One of the top 5 oilseed crushers in Argentina- One of the top 5 sugarcane crushers in Brazil- A large trader of coffee and cocoa- One of the top 5 oilseed crushers in China
Grains mt 19 9% 1%Oils and oilseeds mt 8 4% 1%
Nomura | AEJ Glencore May 31, 2011
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Glencore’s supply chain business is much more focused on metals and minerals, in contrast to Noble's growth in agriculture and energy For Glencore, roughly 55% of the total supply chain earnings correspond to the metals and minerals segment, compared with 23% (Nomura estimate) in metals for Noble’s midstream and supply chain earnings combined. Agriculture and energy occupy a much smaller share of earnings for Glencore at 19% and 26%, respectively. Noble’s dominant exposure is agriculture, which accounts for over half of earnings (midstream+supply chain), which is generally less cyclical owing to its relative price inelasticity. This suggests that Glencore’s earnings growth may face greater headwinds as metals prices eventually return to mid-cycle levels.
Industrial division Excluding Xstrata, we estimate an attributable copper equivalent CAGR for Glencore of 7.5% over 2011-2015E compared with an average of 5.2% for the diversified miners. Glencore’s high growth is partly offset by higher geographical risk and a higher cost profile, with average costs mostly in the third quartile of industry cost curves.
Fig. 31: Big 5 copper equivalent organic growth Investing during the downturn gives Glencore organic growth ahead of its peers
Glencore boasts the most impressive growth profile of the diversified miners.
Katanga is expected to expand to 308ktpa copper in 2015 from 58ktpa in 2010. The greenfield Mutanda project is set to come online in 2011 and ramp up to 103ktpa copper and 23ktpa cobalt by 2012. Prodeco is set to ramp up from around 10mtpa thermal coal production in 2010 to 21mtpa by 2015. The Alen and Aseng Guinean oil projects are due to come online in 2014 and 2012, respectively, and achieve peak production of 75kbpd in 2014.
Source: Company data, Nomura estimates
Although Glencore’s managed industrial assets offer the best growth profile among the major diversified miners, their relative cost position is less attractive. Glencore’s assets sit mostly in the third quartile of industry cash costs, but the relative positions of copper and coal should improve with the commissioning of Mutanda and the ramp up of Prodeco. The other diversified miners have a much greater concentration of assets in the first and second quartiles. Also, Glencore’s strategy of targeting return on equity means that owning low-cost assets is not as crucial as attaining assets at a cheap valuation to achieve high returns on equity.
100
110
120
130
140
150
160
170
2010 2011E 2012E 2013E 2014E 2015E
AAL BHP XTA RIO GLEN Industrial
Nomura | AEJ Glencore May 31, 2011
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Fig. 32: Glencore generic 2011 cost curve position for managed operations Cost curve positions are approximate
We estimate the group’s average coal cost to be mid-third quartile, but the division should move down the cost curve as Prodeco ramps up. Alumina and nickel both reside in the mid third-quartile of industry cash costs Glencore’s copper assets occupy the fourth quartile of the cost curve, on average, although they have scope to reduce unit costs as production ramps up. Kamoto, Nkana and Mufulira are high-cost mines. Mutanda enjoys significant cobalt by-products that help it achieve a first-quartile position.
Source: Brook Hunt, AME, company data, Nomura estimates
Fig. 33: Glencore industrial EBITDA (attributable) Associates are included on an attributable basis (35% of Xstrata's EBITDA)
Source: Company data, Nomura estimates
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2011E 2012E 2013E 2014E 2015E
Metals & Minerals Energy
Agriculture Corporate (inc associates)$ mn
No
mura | A
SIA
Glencore
May 31, 201124
Fig. 34: Glencore managed industrial operations
Source: Brook Hunt, AME, company data, Nomura estimates
The group’s largest zinc asset is Kazzinc, which operates a fully integrated zinc business in Kazakhstan.
Glencore owns 51% of Kazzinc and expects to increase its ownership to 93% with USD2.2bn in cash from the IPO proceeds and USD1bn in issued share capital, for a total consideration of USD3.2bn. Glencore also possesses options to increase its stake to 99.4%.
Kazzinc produces around 300ktpa of zinc metal (which includes between 200ktpa and 250ktpa mined zinc production, topped off with purchased concentrate). It also produces around 40ktpa mined lead and around 30ktpa mined copper. Mined gold production is set to increase from around 326koz in 2010 to 636koz in 2014 with the ramp-up of the greenfield Vasilkovskoye gold mine. Management has indicated that it intends to list the goldstream via an IPO (totalling around 800koz refined gold output). Based on a Russian gold producers’ average of EV/produced ounce of USD7,000, the spun-off Altyntau Gold would be valued at around USD5.2bn. This appears to be a positive strategy for the assets, in our view, as gold operations normally fetch a multiple to NPV in the market and tend to be de-rated within a diversified mining structure.
Glencore owns and manages four major operations in zinc across South America and Kazakhstan. In South America, Glencore owns 97% of Los Quenuales, which owns and operates the Yauliyacu and Isyacruz zinc mines in Peru. Together, they produce around 120ktpa of zinc, 24ktpa of lead, and around 3.5moz of silver. Glencore also owns Sinchi Wayra, which operates five Bolivian zinc mines that produce around 100ktpa of zinc, 7ktpa of lead and around 2.5moz of silver. Lastly, the group also operates AR Zinc (Aguilar) in Argentina, which produces around 40ktpa of zinc, 14ktpa of lead and around 1moz of silver.
Copper
Glencore’s copper operations lie predominantly in the Copperbelt along the border of Zambia and the Democratic Republic of Congo (DRC).
The largest and most notable of these is Glencore’s 74.4% owned, publicly-listed subsidiary, Katanga Mining, which is 75% owner of the Kamoto-KOV copper complex (DRC state mining company, Gecamines owns the other 25%). Located in the Katanga province of the DRC, KCC’s copper production is expected to ramp up from 58ktpa in 2010 to more than 300ktpa by 2015. The operation is also expected to delivery cobalt production of 15ktpa by 2015 (from 3ktpa in 2010). The current Katanga Mining was created out of the merger of Nikanor and Katanga Mining, in both of which Glencore held a stake.
Also in the DRC, Glencore owns a 40% stake in and is operator of the Mutanda copper-cobalt project. The project will eventually ramp up through several stages to 104ktpa by 2013. Cobalt production will reach 23ktpa by 2013. The adjacent Kansuki deposit is expected to deliver a 100ktpa copper project. Glencore management expects synergies between Kansuki and Mutanda and is expediting the project.
Across the Zambian-Congolese border lies Glencore’s third Central African copper investment, Mopani Copper Mines. The group owns 73.1% of the complex, which includes the Nkana and Mufulira mines. Together, the two produce around 100ktpa mined copper and around 2ktpa mined cobalt. Mopani is to deliver total metal production of around 240ktpa through both own mined production and tolled concentrate from Mutanda and Katanga.
Lastly, Glencore is 100% owner and operator of the Cobar copper mine in New South Wales, Australia. Cobar produces around 90ktpa copper-in-concentrate. The construction of a hoisting shaft extension (USD139m capex) to increase production by around 30ktpa copper-in-concentrate by 2013 is in the final stages of the feasibility study.
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Nickel and alumina
Glencore possesses an effective 82% holding in the Murrin Murrin integrated nickel-cobalt operation in Western Australia through a 71% stake in Minara Resources and a 40% ownership in Murrin Murrin (Minara owns the other 60%). The laterite nickel operation utilises high-pressure acid leaching technology for extraction. Murrin Murrin produces around 36ktpa nickel and around 3ktpa cobalt. Murrin Murrin occupies the third quartile of the 2011 Brook Hunt nickel cost curve.
Glencore is 100% owner and operator of the Sherwin Alumina refinery located in Corpus Christi, Texas, US. It has refining capacity of 1.6mtpa, but has averaged around 1.3mtpa production since 2008 (average capacity utilisation of around 81%). Sherwin utilises natural gas for power, which has helped contain costs. The refinery occupies the third quartile of the 2011 Brook Hunt alumina cost curve.
Fig. 35: Industrial metals & minerals segment summary Mined production includes by-products
Source: Brook Hunt, company data, Nomura estimates
Capex by type 1,422 1,074 958 648 734Sustaining 527 554 470 433 505Expansionary 895 520 488 215 229
Total NPV 16,998Total attributable NPV 17,963
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Energy
Glencore is developing two key organic growth projects in the energy division.
The first of these is the brownfield expansion of Prodeco in Colombia. This thermal coal operation is scheduled to expand from 10mtpa in 2010 to 21mtpa by 2015. Glencore exercised its call option on Prodeco from Xstrata in early 2010 after selling it to Xstrata as part of Xstrata’s rights issue in early 2009. Glencore’s second coal asset is Shanduka, located in South Africa, which has production capacity of 13mtpa of thermal coal. Around two-thirds of Shanduka’s production is sold to Eskom and one-third is sold on the seaborne market through Richards Bay Coal Terminal.
Glencore’s second major project in the energy division are the Guinean oil blocks Alen (25% ownership) and Aseng (24% ownership). These two operations are due to achieve first oil in 2014 and 2012 respectively, reaching peak production of around 75kbpd in 2014 on a consolidated basis. Glencore also holds interests in a number of exploration blocks in the vicinity of Alen and Aseng.
Fig. 36: Industrial Energy segment summary
Source: Noble Energy, AME, company data, Nomura estimates
Capex by type 598 395 219 208 158Sustaining 34 39 38 55 58Expansionary 564 356 181 153 100
Total NPV 7,667Total attributable NPV 7,463
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Agriculture
Glencore’s main agricultural industrial asset is the Moreno sunflower oil plant. It has annual production capacity of around 1.9mtpa and has average capacity utilisation over the past three years of 66%. Glencore also holds various stakes in wheat and rice mills, farms, and sugar-processing facilities.
Total attributable firm NPV 93,493 Less net debt 7,750 NPV of equity ($ mn) 85,743 NPV of firm: breakup 93,493 NPV per share (GBp) 1,806 Coal 30,091 Value of growth options (GBp) 440 Copper 41,042 Total NPV per share (Gbp) 2,247 Nickel 7,393 Share Price (GBp) 1,391 Zinc 7,308 Target Price (GBp) 2,200 Other 7,658
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Appendix
Share lockups, indexation, and key management
Fig. 40: Share lockups
Source: Company data, Nomura research
Fig. 41: Indexation
Source: Company data, Nomura research
Share lockup arrangementsLockup duration
on all sharesBoard and Staggered lockupsexecutive directors Both sales and hedging transactions prohibitedFour year Includes all commodity department headslocked-up Staggered lockupsmanagers Both sales and hedging transactions prohibitedTwo years locked-up Staggered lockupsmanagers Both sales and hedging transactions prohibitedOther existingshareholders
Glencore 180 days
Further primary issuance by Glencore prohibited (excluding employee share option programme awards in the ordinary course, issuances of shares with an aggregate value of up to $1bn to fund an acquisition, merger or takeover, and other customary carve-outs)
Cornerstoneinvestors
Kazzinc minorityNon-cash consideration to be issued in accordance with planned acquisition of Kazzinc stake (42.3%)
investors Lockup duration starting from completion of transactionConvertible bondholders
5 years
Lock up overview
4 years
2 years
360 days Both sales and hedging transactions prohibited
180 days Lockup from admission, subject to certain customary exceptions
180 days
90 daysBonds converted into shares after the IPO are restricted from sale until 90 days post listing
IndexationFTSE
Fast entry to FTSE 100 and FTSE All-world indices on close of business of first day of unconditional tradingImmediately post IPO, Glencore's index investability weighting will be 12%FTSE will consult with market practitioners on the appropriate approach for future weighting changes as the free float increases to more closely reflect the availability of sharesClassification under Basic Material industry, Basic Resource super sector, Mining sector and General Mining subsector
MSCIEarly inclusion into the Large Cap segment of the MSCI Global Standard Indices on an accelerated basis (expected to become effective on 1 June 2011)Foreign Inclusion Factor (index free float weight) will be 12%Global Industry Classification Standard (GICS) is Diversified Metals & Mining
STOXXReview for fast-track addition to STOXX 'blue chip' indices at next quarterly review (Sept. 2011)Eligibility for inclusion anticipated after increase in free-float
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Fig. 42: Key management
Source: Company data, Nomura research
Glencore Board of Directors and management teamSimon Murray Aged 71Independent Non Executive Chairman of GEMSExecutive Chairman Board member of Richemont and Essar EnergyExecutive DirectorsIvan Glasenberg Aged 53CEO BoD Member since 2002
CEO of Glencore since 200227 years with Glencore
Steven Kalmin Aged 40CFO CFO of Glencore since 2005
12 years with GlencoreIndependent Non Executive Directors
Aged 53Former CEO of BPBoard member of TNK-BP and partner of AEA InvestorsAged 6540 years of experience in the resource industryMember of the Boards of Santos and Amalgamated HoldingsAged 48CEO of RHJ International and former CEO of WintherthurMember of the Boards of Julius Baer Gruppe, AXA Konzern and AreconAged 65Chairman and CEO of First ReserveChairman of Dresser-RandAged 54Executive Director of Henderson Land Development CompanyDirector of Hong Kong (Ferry) Holdings
Peter Coates
Leonhard Fischer
William Macaulay
Li Ning
Anthony Hayward
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Appendix A-1
Analyst Certification
We, Tanuj Shori, Paul Cliff and Patrick Jones, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures Mentioned companies Issuer name Ticker Price Price date Stock rating Sector rating Disclosures Glencore 805 HK 67.40 HKD 30-May-2011 Neutral Not rated 49 Xstrata plc XTA LN 1424 27-May-2011 Buy Bullish
Disclosures required in the U.S.
49 Possible IB related compensation in the next 3 months Nomura Securities International, Inc. and/or its affiliates expects to receive or intends to seek compensation for investment banking services from the company in the next three months.
Previous Rating Issuer name Previous Rating Date of change Glencore Not rated 30-May-2011 Xstrata plc Rating Suspended 20-Oct-2009
Glencore (805 HK) 67.40 (30-May-2011)Chart Not Available
Valuation Methodology Our HKD70.40 price target is based on SoTP of net present values, discounted back to the last reporting period (FY10). We utilise different WACCs for different segments of the business to account for different geopolitical risks in the various locales (eg different WACCs for Katanga and agricultural marketing). We take a 10% discount from enterprise value to account for the difficulties encountered by companies that derive significant proportions of their value from either non-controlling stakes in other companies (eg Glencore’s interest in Xstrata) and from disparate businesses (production and marketing). Risks that may impede the achievement of the target price Glencore is exposed to commodity price risk, particularly copper, coal, and zinc. It is also exposed to operational and geopolitical risk in both its mining and marketing business. The marketing business is exposed to counterparty risk.
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Xstrata plc (XTA LN) 1424 (27-May-2011)Rating and target price chart (three year history)
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our 2200p target price is based on DCF valuation (WACC=8.5%, terminal growth 0%). We discount back to the latest reporting period (FY 10). The benchmark index for this stock is the FTSE 350 Mining Index. Risks that may impede the achievement of the target price Xstrata is exposed to commodity price risk (especially coal, copper, chrome, nickel and zinc), various operational risks common to all mining companies, and political risks in different parts of the world.
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Important Disclosures Online availability of research and additional conflict-of-interest disclosures Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. 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Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%.
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A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
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