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1 GLOBAL LME cash price % change US$/tonne day on day Aluminium 1,729.2 Copper 7, Lead 2, Nickel 14, Tin 23, Zinc 2,5 -.5 Cobalt 31, -.5 Molybdenum 22, Other prices % change day on day Gold (US$/oz) 1, Silver (US$/oz) Platinum (US$/oz) 1, Palladium (US$/oz) Oil WTI USD:EUR exchange rate AUD:USD exchange rate LME/COMEX stocks Tonnes Change Aluminium 5,353,425-4,275 LME copper 289,6-1,25 Comex copper 15,83 52 Lead 21,275-6 Nickel 269, Tin 8, Zinc 788,875-6,175 Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research 21 February 214 Getting bullish on nickel Feature article We review the impact on the nickel market if the current Indonesian ban on nickel ore exports is maintained. It has extremely bullish implications for the market outlook, especially from 215 onwards. Latest news Surprising to the downside, the February flash reading of HSBC China manufacturing PMI for China fell to 48.3 from 49.5 a month ago. This is only.6 points higher than the nadir reached in July 213. According to our China Economist Larry Hu, the economy could see further weakness in months ahead, which clearly would weigh on commodities. One bright spot, new export orders, rose to 49.3 from 48.4, suggesting that strength in developed markets could provide a key support for the Chinese economy this year. For now, the lack of more comprehensive data due to the lunar New Year is likely to prevent the government from taking any easing steps until early March when a fuller picture will have emerged. Latest data from the International Nickel Study Group (INSG) gives its first stab at full-year 213 data. The INSG data shows that world nickel use rose 6.8% YoY in 213 to 1.77mt, led by 16.5% growth in China, taking China to 5.6% of world use. Estimated world production grew by 1.9% YoY to 1.95mt, with Chinese output growing 33.6% YoY to 693.5kt. Based on these numbers, the market was in surplus by 173kt last year. For the first time since 1981, Switzerland has released details on the size, value, source and destination of its gold trade. This is important, as Switzerland is home to the largest gold refineries and a vast proportion of global gold trade passes through it. At the moment the data is just for January 214; a decision whether to provide historical data will be taken later. The data shows that in January, Switzerland imported 232t of gold worth CHF7.1bn ($7.8bn), and exported 187t worth CHF6.8bn. Due to the nature of its trade, Switzerland tends to import a lot of unrefined gold and export refined gold, hence the higher unit valuation of the exports. In terms of pure gold content imports were probably more like 195t. As we have noted previously, the biggest source of Swiss gold imports was the UK, in January supplying 119t. Based on its unit valuation this was purely refined gold, supporting our view it mostly comes from investor (mainly ETF) liquidation. UK export data for January will be released only next month, but this is a higher figure than that has shown in recent months, consistent with the heavier pace of ETF outflows in December. The chief destination of Switzerland's gold exports was Hong Kong, with 84t. This compares to Hong Kong's reported imports from Switzerland of 64t in December and an average of 76t per month in 213, implying Chinese demand in January (Hong Kong data will be available later this month) remained strong. Switzerland also reported sending 12 t to China directly which will support the view that China imports more gold than the Hong Kong trade flows alone suggest. The other major export destination was 27t to India, further evidence that Indian imports in January were at the higher end of their recent range. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 f 215f 216f 't supply/demand balance LME/prducers stocks in week's use Macquarie Private Wealth Nickel facing massive shortage if Indonesian ban is fully enforced On January 12, 214, the Indonesian government started enforcing a total ban on raw material exports in line with the 29 Minerals and Coal Mining Law. An expected compromise, whereby companies building processing plants would obtain temporary export licences, was rejected by the Indonesian Parliament and a 1% ban is now being enforced. In our most recent price forecasts for base metals, we assumed a partial, not a complete ban. Our current forecasts envisage average LME cash prices of $16,/t this year, $17,5/t in 215 and $2,/t in 216. It may well be that after the Indonesian elections this may well turn out to be the case. However, the very consistent rhetoric coming from Indonesian politicians suggests that a continuation of the 1% ban is now more likely than not. If this is the case, our price forecasts are too low. In today s report we look at the nickel supply/demand balance in detail to assess the impact of a full ban. The conclusion is that in the case of a full ban, a massive nickel deficit would start from end-214 onwards and that by 216, LME and producer nickel inventories would be lower than in 26/7 when nickel prices were trading in the $2-5,/t range. We now think that as early as mid-214, a full ban could lead prices rally strong above $15,/t towards $2, by end-214. This conclusion is based on the following assumptions:: High-grade saprolite Indonesian nickel ore (with a nickel grade ranging from 1.6-2%) was used to produced around 45kt of primary nickel in ferronickel and nickel pig iron in 213, accounting for 25% of estimated 213 consumption and 23% of estimated 213 production (this is an assumption due to the uncertainty of the data as we discuss below). There are virtually no other countries that can replace Indonesian ores in the foreseeable future (potentially 3-5ktpa extra could be supplied from Philippines, New Caledonia and Guatemala [to Ukraine] in the near term) Stocks of high grade ore in China and elsewhere are around 25-3kt recoverable nickel and will be mostly eliminated by end-214. The uneven distribution of stocks holdings (of both ore and finished metal) makes the market vulnerable to an early emergence of a spike in ore prices and also the emergence of premiums for in-demand finished nickel products (especially ferronickel and nickel pig iron). Fig 1 Projected nickel market balance if 1% Indonesian nickel ore ban Balance (LHS) Stocks in weeks of use (RHS) Source: Customs Statistics, WBMS, Macquarie Research, February 214 At the outset we have to warn readers that there is no certainty or consensus on the basic data. The published statistics on Indonesian exports, especially with respect to China are unreliable. Figure 2 shows the nickel ore exports from Indonesia to China (estimated for 213 based on actual Jan-Nov data) and Chinese import data from Indonesia and highlights major discrepancies in February 214 2

3 't gross weight million tonnes m tonnes Macquarie Private Wealth The ore data is assumed to be reported on a gross weight wet basis. We assume that the average moisture content of the ore is 35%, that the typical nickel content of Indonesian ore being exported to China is % (an average of 1.75%?). The yield losses in conversion from ore to finished nickel are assumed to be 1% (even though Chinese producers say it is less). On this basis the 213 trade data implies China imported around 42kt ni in ore from Indonesia but that Indonesia exported around 6kt of nickel units to China! Actual production of finished nickel (mainly nickel pig iron) from Indonesian ore was around 4kt last year, out of total nickel pig iron production of around 5kt (unlike 212 estimates most analysts estimates are now in a tight range of 48-52kt for last year). This would imply virtually no stockpiling using official Chinese import data this is wrong since it does not accord with reports of large-scale stockpiling of Indonesian ore at ports and NPI plants. We think some Chinese ports report imports on a dry basis and others report on a wet basis, thus understating the total is measured purely on a wet basis (as the Indonesian exports appear to be). Fig 2 Nickel ore trade data from Indonesia to China (million tonnes) 8 Chinese nickel ore trade with Indonesia - monthly 7 Indonesia-China nickel trade - annual Chinese imports Indonesian exports Indonesian exports to China Chinese imports from Indonesia Source: Customs Statistics, WBMS, Macquarie Research, February 214 Using Indonesian data suggests stockpiling of almost 2kt ni in ore, or 2mt of ore gross weight in China last year. This may have been possible (although most industry estimates are of stockpiling of more like 1-15mt in total last year). We estimate a stock rise of 12mt to 35mt at end-213 (see Figure 3), of which 25mt is probably usable high-grade Indonesian ore. Fig 3 Estimated nickel ore stocks in China Ports Producer Source: Umetal, Macquarie Research, February February 214 3

4 The other problem with the Indonesian ore export data is that it has consistently been much higher than Chinese apparent use of the ore since 21. If the data is to be believed, the accumulated surplus of supply over use since 21 is around 5kt ni in ore. This suggests strongly that Indonesian ore exports may have been overstated in recent years (perhaps to get ongoing large export licences). Based on our estimates of 25mt of high grade ores stocks (containing around 25kt of recoverable nickel, equal to 7.5 months of use at average 213 rates), then assuming a ramp-up of use of ore from the Philippines (from around 1-12kt in 213 to 14-16kt in 214) plus 2-3mt of Indonesian ore shipped in December but only arriving in January 214, we estimate that 214 production of around 395kt of nickel pig iron in 214 might be achievable. However, this would then fall to 15kt in 215 and 216 assuming 1% sourcing from the Philippines. While total ore stocks are around 7.5 months of use, some suppliers have close to 12 months and other have only a few months (especially smaller producers). A tightening of ore supplies and a reduction in NPI production could take place soon that the end of the 7.5 months period. Indeed, there are already signs that ore prices are edging higher and as some smaller producers deplete stocks, prices could move sharply higher. Last year, Indonesian ore was selling at less than $3/t fob. Recent offers of high-grade Filipino ore have moved above $45/t fob. We foresee further sharp rises in ore prices in the coming months, pushing NPI costs sharply higher. We think that there is potential to raise blast furnace NPI production in China (based on ore from the Philippines). This product contained 1.5-2% nickel and is mainly used to produce low-grade 2-series stainless steel (containing 1.5-2% nickel). The 8-12% nickel pig iron product which is produced mainly from Indonesian ore, is used mainly to make 3-series stainless steel (which contains 8% Ni)). However, the low grade NPI could potentially be blended with pure nickel to make 3 series stainless steel. We are forecasting a relatively rapid ramp-up of Indonesian nickel pig iron production, from 2kt last year to 5kt this year, then to 5kt in 215 and 1kt in 216. Delays in getting approvals and lack of infrastructure (mainly power) are likely to delay start-ups. Potential investors in Indonesia are still not 1% convinced that the ban will be long-lasting and may want to wait until after the Indonesian elections before committing. While the project list was long before the ban was implemented, many of these projects were phantom projects based on the assumption that ore export licenses would be issued against them in 214. As Figure 4 shows, Indonesia was also a significant ore exporter to Australia, Europe and Japan in recent years. We understand that the largest Japanese user, Pacific Metals, has also replaced its 1-15ktpa (ni contained) use of Indonesian ore with supplies from New Caledonia and the Philippines. Australian use is of low-grade limonite ores, which can be replaced with ore from the Philippines and New Caledonia, while European users (Ukraine and Greece) are likely to find additional ores from Europe (Turkey and Greece) and Guatemala. Fig 4 Estimated Indonesian nickel in ore (recoverable) production Ni matte FeNi Ore exports: PT Vale Aneka Ore to Tambang Japan Ore to Australia Ore to Europe Ore to China Total Total World refined Indonesia Ore Production production Share % Exports % % % % % % % % % % % % % % Source: Company reports, Indonesian Customs, Macquarie Research, February February 214 4

5 The supply response outside China is likely to come mainly from the large projects that have been slowly ramping up in recent years. These projects have perennially disappointed expectations. At the start of both 212 and 213 we had confidently predicted that they would collectively add over 1kt of nickel in the coming year. As Figure 5 shows, they added 51kt in 212 and 47kt in 213. Perhaps optimistically, we are stocking with a forecast of 119kt additions from these projects in 214. These projects are a mixture intermediate and finished nickel producers. Figure 6 lists some of the more important intermediate flows and highlights some significant losses in recent years. Potentially a higher nickel price may reverse some. Two big uncertain supply sources for 213 are Talvivaara and Mirabela, both currently undergoing restructuring after encountering financial problems. Fig 5 Main increases in non-chinese nickel production ( t Ni) t Ni Year Year Year Year Year Year Year F 215F 216F VNC (Goro) Onça Puma Ravensthorpe Kevista Enterprise 1 Eagle Koniambo Talvivarra Barro Alto Ambatovy Taganito Ramu Skye Resources Taguang Total YoY change Source: Company reports, Macquarie Research, February 214 Fig 6 Main intermediate feed source changes ( t Ni) Change Change Change Change Change F 215F 216F 212/11 213/12 214/13F 215/14F 216/15F Ramu Pal inter PT Vale matte First Quantum Ravensthorpe PAL inter. First Quantum Kevista conc Angloplats matte Bindura Nickel Trojan conc Norilsk/ARM Nkomati conc Vale VNC PAL inter BHP Billiton conc Panoramic Resources conc Mincor Resources conc SMM Taganito PAL inter First Quantum Enterprise conc Lundin Eagle conc Western Areas conc Belvedere Resources conc Talvivaara conc Mirabela Nickel conc BHP Billiton matte Norilsk Tati conc Norilsk Lake Johnson conc Glencore Xstrata Australia conc Total Source: Company reports, Macquarie Research, February February 214 5

6 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Price: $US/tonne Ni ex-vat Macquarie Private Wealth Another source of potential source of growth in supply is recycled nickel in stainless steel scrap. We estimate that global nickel use of purchased recycled scrap units was around 665kt last year. As Chinese nickel pig iron production surged in recent years, stainless steel producers in China gained a crucial competitive advantage over non-chinese producers leading to a big surge in Chinese stainless steel exports (see Figure 7, which shows pricing of nickel pig iron in China compared with nickel in scrap in Europe). Non-Chinese stainless steel production fell YoY in 212 and 212 and was unchanged in 213. The price of nickel in stainless steel scrap has fallen from close to 9% of the LME nickel price in recent year to a low of 73% in 213 as supply exceeded demand. We suspect that scrap collectors have hoarded some material and as nickel prices rise, this material could find its way back into the market. Chinese stainless steel producers are starting to lose export competitiveness as nickel pig iron prices rise relative to the LME price (Figure 7). This could lead to a recovery in non-chinese stainless steel production relative to China and lead to dishoarding of scrap will be used at the expense of primary nickel. We are already hearing of an increase in scrap prices in Europe and also of a sharp reduction in spot discounts of ferronickel (from $7/t plus last year to virtually zero now). This indicates a tightening physical market will get even tighter as Chinese nickel pig iron production starts to fall in 2H 214. Fig 7 Pricing of Chinese nickel pig iron and European stainless steel scrap relative to LME price % Ni - LME price Ni in SS Scrap minus LME Source: SMM, LME, CRU, Macquarie Research, February 214 Turning to nickel demand, the outlook remains relatively optimistic driven by a buoyant stainless steel market globally (until now driven mainly by China). There are signs of a recovery in non- Chinese demand (especially in Europe and the US), while China has started 214 on a slightly weaker note with some leading producers cutting production. We are predicting that global nickel demand will rise by 5.5% in 214 and 7.2% in 215. Our revised supply/demand balance (based on a 1% ban) is shown in Figure 8. We foresee a relatively balance market this year but then a plunge into large, unsustainable deficit from 215 onwards. 21 February 214 6

7 Fig 8 Global nickel supply/demand balance on basis of a 1% Indonesian ore ban `t f 215f 216f Total SS production % Change 23.4% 5.7% 5.5% 9.4% 7.% 7.5% 5.5% Ni-containing SS prod % Change 22.3% 9.3% 7.4% 8.9% 7.4% 8.% 5.4% Nickel Consumption % Change 16.9% 7.3% 4.1% 8.1% 5.5% 7.2% 3.9% Nickel Supply % Change 6.7% 12.3% 9.2% 1.8% -3.1% -5.1% 6.7% (of which NPI) (159) (282) (362) (52) (4) (2) (25) World Market Balance LME/Producer stocks Weeks' world demand Source: INSG, Macquarie Research, February 214 We call this unsustainable due to the implied low level of stocks the market essentially runs out. What would happen is what happened in 26/7. Price would run up and kill demand, leading to further substitution away from nickel use in stainless steel. More stainless steel scrap would be used (but nickel in scrap prices would soar). Another possibility is a much faster increase in Indonesian nickel pig iron production though the introduction of tunnel kiln/rotary kiln or blast furnace technology which uses coal and coke as an energy source rather than electricity. However, we still struggle to see how such plants can be built in time to avoid the second nickel crisis in a decade. Unless, of course, Indonesian policy changes again 21 February 214 7

8 Thursday 2 February 214 Commodities Prices Closing price * Closing price * 2-Feb-14 2-Feb Feb Feb-14 % ch. day 214 YTD Ave 213 US$/tonne US /lb US$/tonne US /lb on day US$/tonne US$/tonne LME Cash Aluminium 1, , ,714 1,845 Aluminium Alloy 1, , ,787 1,8 NAASAC 1, , ,792 1,831 Copper 7, , ,263 7,322 Lead 2, , ,139 2,141 Nickel 14, , ,44 15,3 Tin 23,125 1,49 23,245 1, ,96 22,35 Zinc 2,5 93 2, ,29 1,99 Cobalt 31, 1,46 31,146 1, ,34 27,326 Molybdenum 22,375 1,15 22, ,36 22,925 LME 3 Month Aluminium 1, , ,758 1,887 Aluminium Alloy 1, , ,824 1,828 NAASAC 1, , ,823 1,861 Copper 7, , ,232 7,346 Lead 2, , ,16 2,157 Nickel 14, , ,17 15,78 Tin 23,95 1,48 23,195 1, ,72 22,318 Zinc 2, , ,3 1,94 Cobalt 31,1 1,411 31,25 1, ,333 27,515 Molybdenum 22,375 1,15 22, ,36 22,927 * LME closing price - 17 hrs London time. Year-to-date averages calculated from official fixes. Gold - London PM Fix (US$/oz) Silver - London AM Fix (US$/oz) Platinum - London PM Fix (US$/oz) Palladium - London PM Fix (US$/oz) Oil WTI - NYMEX latest (US$/bbl) EUR : USD exchange rate - latest AUD : USD exchange rate - latest 1,316 1, ,246 1, ,413 1, ,415 1, Exchange Stocks Change since last report Cancelled End-13 Ch. since (tonnes) 2-Feb Feb-14 Volume Percent warrants stocks end-13 LME Aluminium 5,353,425 5,357,7-4, % 2,471,9 5,458,75-14,65 Shanghai Aluminium 24,889 24,889.% - 181,644 59,245 Total Aluminium 5,594,314 5,598,589-4, % - 5,639,719-45,45 LME Copper 289,6 29,625-1,25 -.4% 169, ,425-76,825 Comex Copper 15,83 15, % - 15, Shanghai Copper 18,341 18,341.% - 125,849 54,492 Total Copper 485, , % - 57,347-21,576 LME Zinc 788, ,5-6, % 211,5 933, ,6 Shanghai Zinc 259, ,271.% - 238,723 2,548 Total Zinc 1,48,146 1,54,321-6, % - 1,172, ,52 LME Lead 21,275 21, % 33, ,45-13,175 Shanghai Lead 87,366 87,366.% - 9,29-2,843 Total Lead 288, , % - 34,659-16,18 Aluminium Alloy 54,8 54, % 2,96 56,44-1,64 NASAAC 78,34 78, % 44,2 84,86-6,52 Nickel 269, , % 118, ,636 7,578 Tin 8,43 8, % 3,75 9,685-1,255 Source: Comex, LBMA, LME, Nymex, Reuters, SHFE, Macquarie Research 21 February 214 8

9 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie First South - South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 213 AU/NZ Asia RSA USA CA EUR Outperform 47.89% 6.13% 37.97% 39.49% 59.64% 48.65% (for US coverage by MCUSA, 6.52% of stocks followed are investment banking clients) Neutral 35.56% 22.65% 46.84% 54.5% 35.54% 32.43% (for US coverage by MCUSA, 4.35% of stocks followed are investment banking clients) Underperform 16.55% 17.22% 15.19% 6.1% 4.82% 18.92% (for US coverage by MCUSA,.% of stocks followed are investment banking clients) Company Specific Disclosures: Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. 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