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Equity Structured Products and Warrants

This material has been produced by RBS sales and trading staff and should not be considered independent.

The Round Up
10 September 2010
Issue No. 406

The Round Up is a comprehensive


daily note produced by the RBS Global Market Action Scoreboard, commentary
Warrants team providing an overview Aussie Market Action SPI Comment, Events & Dividends
of market movements along with RIO Tinto (RIOKZG) MINI Trading Buy – Iron Clad Results
quality ideas for warrant traders and
Santos (STOKZD) MINI Trading Buy – You don't get something for
investors.
nothing
Origin Energy (ORGKZC) MINI Trading Buy – Cashflow set to surge
Australian Strategy Monthly Market Review - August 2010
Daily Monitor
Equity Structured Products and Warrants

Overnight Commentary

United States Commentary


The US was stronger overnight as a raft of eco data painted a brighter picture about the health of the economy. Volumes
remain low as Jewish New Year continues into tonight however the market keeps grinding north posting its 6th gain in
seven session.

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

United Kingdom and Europe Commentary


London - The FTSE added 1.2% as US employment data and expectations the Basel III capital rules will not be as tight
as first thought bouyed sentiment. Banks were the biggest winners with Lloyds, Barclays and RBS adding 3.3% to 5.1%.
The BOE kept rates at 0.5% for the 18th straight month and commentary from a European Central Bank member stating
"the Eurozone is on the brink of recovery" fuelled the fire. ARM Holdings added another 4% as it revealed a new
processor for next generation phones.

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 Intraday SPI Daily

*SPI report taken from the 9:50am open to the 4:30pm close on the previous trading day. Charts taken from IRESS

Upcoming Economic Events for the Week


Monday AUS
US
Tuesday AUS RBS Interest Rate Decision, Home Loans (MoM)
US
Wednesday AUS Unemployment Rate
US US Beige Book
Thursday AUS
US Trade Balance , Initial Jobless Claims
Friday AUS
US
*Dates are indicative only and may change
Equity Structured Products and Warrants

MINI Trading Buy:


RIO Tinto (RIOKZG) – Iron Clad Result
RBS MINIs over RIO

Stock: Rio Tinto


Ticker: RIO
Share price: A$73.01
Target price: A$83.20
NPV: A$83.20
Rec. Buy

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.

Underlying NPAT by division

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.

+ Net debt reduced to US$12bn from US$39bn at 30 June 2009


+ Full year 2010 capex to approach US$6bn (RBS US$5.7bn)
+ Full year 2011 capex to be approx US$9bn (RBS US$5.9bn)
+ Impairment charge of US$403m, related to Alcan Engineered Products

Security ExPrc Stop Loss CP ConvFac Delta Description


RIOKZG 51.2382 56.31 Long 1 1 MINI Long
Equity Structured Products and Warrants

MINI Trading Buy:


Santos (STO.AX): You don't get something for nothing
Santos has finally announced a long-awaited sell-down and off-take deal inrespect of GLNG. However,
some concessions had to be given and this has disappointed the market. We still believe there is value
in Santos to be unlocked over time and maintain our Buy rating.

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.

Key hurdles now funding, proving up T2 reserves and environmental approvals


STO is still targeting FID by the end of CY10 and plans to update the market on funding plans and capex numbers around
that time. Management today suggested that a further sell-down of equity and some off-take appears likely before FID,
but wasn't a necessity. We still think Santos will need at least A$1.5bn of fresh equity for GLNG in order to keep the rating
agencies happy.

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).

Buy maintained post pull-back, but an investor in STO needs patience


In our view, the biggest disappointment was having to give up the US$500m second train FID payment in exchange for
'project certainty'. While we believe this was a necessary step in getting the project closer to the finish line and unlocking
value for shareholders, the market had not been expecting it after recent press speculation that Shell might get involved
with GLNG in some form of project consolidation. Overall, we still think there will be some upside as GLNG comes to
fruition. RBS MINIs over STO

Security ExPrc Stop Loss CP ConvFac Delta Description


STOKZD 928.95 10.22 Long 1 1 MINI Long
Equity Structured Products and Warrants

MINI Trading Buy:


Origin Energy (ORGKZC) – Cashflow set to surge
ORG's FY10 earnings fell a little short of our forecasts, but, importantly, FY11 is on track to be a big
year on the earnings front. With cashflows set to surge over the coming years, on our estimates, we
think the market is underestimating ORG's financial flexibility and optionality. Buy maintained.
Buy maintained with RBS Target Price of $18.25

Source: IRESS

Underlying NPAT of A$585m was behind our A$611m forecast


EBITDA of A$1,304m (incl associates) was the main variance to RBS Research numbers (A$1,321m forecast) but D&A
(variance of A$9m) and minorities (variance of A$9m) also impacted. Operationally, the generation and E&P contributions
were lower than we expected with retail offsetting. Management has suggested it would have hit its 15% growth target if
not for the overseas exploration write-downs, although RBS Research had these in the numbers already. OPCF of
A$789m was a little below RBS Research’s expectations (A$840m), but the 25c dividend was in line.

ORG has guided for 15% NPAT growth in FY11


FY11 guidance has been set at +35% EBITDAF growth and +15% NPAT growth in FY11. Importantly, the guidance now
includes a reasonably aggressive A$170m exploration programme and RBS Research have pushed up forecasts for
exploration write-offs to about A$65m (from A$40m). This has been the sole driver of RBS Research’s earnings
downgrade. Importantly, the valuation impact is negligible.

APLNG - is consolidation lurking?


Today ORG appeared the most open to collaborating with another project proponent since the Conoco deal was struck
almost two years ago and we continue to believe that any news on that front would be well received by the market. Like
all investors, we would like to see an off-take arrangement done before we get too excited about the project, but, in our
view, an investor is not paying a dime for any LNG upside.

Buy maintained, ORG's balance sheet about to go to work


ORG's major capex programme is taking a breather and the company will have very substantial cashflow over the coming
years. Throw in an under-geared balance sheet and we believe the market is under-estimating the opportunities ahead.
The NSW energy sell-down and APLNG are the obvious candidates, but we wouldn't be surprised to see some accretive
acquisition from left field that could create shareholder value.
BUY ORGKZC for 1-for-1 upside towards RBS Target Price of $18.25

RBS MINIs over ORG


Security ExPrc Stop Loss CP ConvFac Delta Description
ORGKZC 1100.32 1198 Call 1 1 MINI Long
Equity Structured Products and Warrants

RBS Round Up Corner:

Monthly Market Review - August 2010


The S&P/ASX 200 Accumulation Index lost momentum finishing down 1.2% in August. Reporting season finished
on a stronger note with net positive NPAT surprise and positive outlook comments. However, market concerns
were focused on slowing global growth and the impact of a downgrade cycle.

The top- and bottom-performing sectors in August


The best performers for the month (in terms of total return) were Consumer Staples (+6.3%), Property (+3.7%) and
Industrials (+2.3%). The worst performers were Telecommunication Services (-9.1%), Financials ex Property (-3.5%) and
Information Technology (-3.5%).

S&P/ASX 200 top- and bottom-performing stocks in August


The top five performers in August were AWB Ltd (+46.0%), Elders (+42.2%), Perseus Mining (+31.6%), Lynas
Corporation (+28.9%) and Prime Infrastructure Group (+28.8%). The bottom five performers were Cudeco (-54.3%),
Murchison Metals (-24.0%), Mirabela Nickel (-20.4%), James Hardie (-18.1%) and Ten Network Holdings (-18.0%).

S&P/ASX 200 top- and bottom-performing sectors for the 12 months


The Consumer Staples sector topped the pack, with a strong 15% rise over the past 12 months. Other strong performers
were Utilities (+10.9%) and Industrials (+8.1%). Telecommunication Services (-8.2%) was the worst performer during the
period.

S&P/ASX 100 performance


The S&P/ASX 100 Index was down 1.4% in August. The top-performing stocks were Newcrest Mining (+13.9%), Alumina
(+12.1%), JB Hi-Fi (+10.5%), Aristocrat Leisure (+9.7%) and Caltex Australia (+9.4%). The bottom-performing stocks
were James Hardie (-18.1%), Billabong (-17.1%), Downer EDI (-16.7%), Primary Health Care (-10.5%) and Telstra
Corporation (-10.2%).
Equity Structured Products and Warrants

For further information please do not hesitate to contact us on the details below

Equities Structured Products & Warrants


Toll free 1800 450 005 www.rbs.com.au/warrants
Trading Products Team
Ben Smoker 02 8259 2085 ben.smoker@rbs.com
Ryan Corrigan 02 8259 2425 ryan.corrigan@rbs.com
Investment Products Team
Elizabeth Tian 02 8259 2017 elizabeth.tian@rbs.com
Tania Smyth 02 8259 2023 tania.smyth@rbs.com
Robert Deutsch 02 8259 2065 robert.deutsch@rbs.com
Mark Tisdell 02 8259 6951 mark.tisdell@rbs.com

Disclaimer
The information contained in this report has been prepared by RBS Equities (Australia) Limited (“RBS Equities”) (ABN 84 002 768 701) (AFS Licence No 240530) and has
been taken from sources believed to be reliable. RBS Equities does not make representations that the information is accurate or complete and it should not be relied on as
such. Any opinions, forecasts and estimates contained in this report are the views of RBS Equities at the date of issue and are subject to change without notice. RBS
Equities and its affiliated companies may make markets in the securities discussed. RBS Equities, its affiliated companies and their employees from time to time may hold
shares, options, rights and warrants on any issue contained in this report and may, as principal or agent, sell such securities. RBS Equities may have acted as manager or
co-manager of a public offering of any such securities in the past three years. RBS Equities’ affiliates may provide, or have provided banking services or corporate finance to
the companies referred to in this report. The knowledge of affiliates concerning such services may not be reflected in this report. This report does not constitute an offer or
invitation to purchase any securities and should not be relied upon in connection with any contract or commitment. RBS Equities, in preparing this report, has not taken into
account an individual client’s investment objectives, financial situation or particular needs. Before a client makes an investment decision, a client should consider whether any
advice contained in this report is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on any
recommendation without first having consulted with your advisor for a personal securities recommendation. The information contained in this report is general advice only.
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The warrants contained in this report are issued by RBS Group (Australia) Pty Limited (“RBS”) (ABN 78 000 862 797, AFS Licence No. 247013). The Product Disclosure
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© Copyright 2009. RBS Equities. A Participant of the ASX Group.

Explanation of Warrant Tables


Security – refers to the code ascribed to the warrant, ExDate – refers to the date on which the warrant expires or is reset, ExPrc – refers to the exercise price, or second
instalment payment, CP – tells you whether the warrant is a call or a put, ConvFac – the conversion factor of the warrant which tells you how many warrants you need to
exercise in order to take possession of 1 share, Delta – tells you how much the warrant will move for a 1c move in the underlying security, Description – Tells you the type
of warrant.
All charts taken from IRESS unless indicated otherwise

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