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The Round Up
10 September 2010
Issue No. 406
Overnight Commentary
ECO - Initial Jobless Claims were lower than expected at 451k vs 470k, Continuing Claims were 4478k vs 4450k and the
Trade Balance was better than expected at -42.8B vs -47B as airplane exports help narrow the margin.
Movers - Banks were in favour with JP Morgan and BOA adding 2.5% and 1%. Alcoa and GE added 1.5% and 1.4%
while on the downside McDonalds shed 2.3% after European August sales were lower than expected.
Equity Structured Products and Warrants
Commodities Commentary
Last % Move
GOLD 1244 -0.9%
OIL 74.10 -0.8%
NI 22754 -0.7%
AL 2106 -2.6%
ZN 2153 -3.0%
CU 7555 -1.6%
CRB -0.4%
SPI Commentary
The SPI traded up 39 pts to 4582. Open at 4543 with a high of 4593 and a low of 4518. Volume 30,501. Overnight the SPI traded up
24pts to 4601.
*SPI report taken from the 9:50am open to the 4:30pm close on the previous trading day. Charts taken from IRESS
Summary
RIO reported underlying earnings of US$5.8bn, ahead of consensus at US$5.5bn and well above our forecast US$5.2bn.
The difference related to iron ore where RIO achieved better prices than we had expected (we took a conservative view
on price realisations in light of the move from benchmark to quarterly contracts). A dividend of US$0.45ps was declared,
inline with our forecast. Net debt at the end of the period stands at US$12bn (US$19bn YE2010), with gearing at 19%.
Overall a strong result in our view.
Divisional NPAT (US$m) 1H10E Consensus Actual Diff vs RBS Diff vs RBS
Iron Ore 3,420 3676 4108 688 20%
Aluminium 387 348 358 -29 -7%
Copper 1,185 1153 1062 -123 -10%
Energy 620 793 642 22 4%
Diamond and Minerals 83 81 121 38 45%
Other Operations 4 -61 -2 -6 -148%
Underlying NPAT (US$m) 5,188 5,515 5,767 579 11%
Iron ore remains the key swing factor for RIO, with 2/3rds of earnings coming from the division. 3Q10 iron ore prices will
be the average of the March to May spot price, implying US$147/t FOB (above the spot price of US$134/t). This
represents another gain qoq, which will see positive earnings momentum continue.
Corporate items
RIO is about to enter a growth phase which is positive for production growth, however a significant amount of capex
needs to be spent.
Source: IRESS
Total emerges with a 20% equity stake in GLNG and 1.5mtpa of off-take
STO has sold-down 15% for A$650m, which was well below the A$850m implied by the Petronas deal. Unfortunately,
STO has also been forced to forgo its US$500m second train FID payment, in return for Petronas agreeing to up its off-
take to 3.5mtpa (from 2mtpa with a 1mtpa option). On top of this, STO has vended in some more of its CSG acreage at nil
cost, although management wasn't able to put a contingent resource number on the size.
No change to RBS Research’s Santos valuation and target price just yet
RBS Research will be refining the valuation assumptions over the coming weeks as the project moves closer to FID. In
isolation, the second train FID payment would remove about A$0.66/share from current valuation, but RBS Research had
been factoring in extremely conservative LNG pricing for any future volumes signed up. If anything, RBS Research’s
A$2.65/share valuation for GLNG may need to increase slightly (pre 15% sell-down).
Source: IRESS
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