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
3 December 2010
Issue No. 456

The Round Up is a comprehensive daily note produced by the RBS Warrants team providing an overview of market movements along with quality ideas for warrant traders and investors.

Global Market Action Aussie Market Action Equinox Minerals (EQNKZB) BHP Billiton (BHPKZJ) Origin Energy (ORGKZC) Australian Strategy

Scoreboard, commentary SPI Comment, Events & Dividends MINI Trading Buy – Copper set to soar MINI Trading Buy – Deploying the cash MINI Trading Buy – Cashflow set to surge Monthly Market Review - November 2010

Daily Monitor

Equity Structured Products and Warrants

Overnight Commentary United States Commentary
US markets were higher thanks to positive Home Sales figures and the best ICSC Chain store sales growth since March. Banks also performed well after a broker upgraded the sector and said they will outperform thanks to a stronger market and an improved equity investing environment. Eco – Pending Home Sales for October showed a huge increase month on month up 10.4% vs -1% expected. Initial Jobless Claims were slightly higher for the week at 436k vs 424k but the four-week moving average for initial weekly claims for jobless benefits fell to a fresh two-year low and ICSC Chain Store Sales showed growth of 5.8% year-over-year comparable-store gain for November 2010. Movers – Homebuilders had a good night with Lennar up 7%, DR Horton 3.7% higher and Beazer added 5.2%. Banks had a good night with BoA up 3.2% and JP up 3.1% on the Dow whilst on the S&P 100 Regions Financial was the best performer up 6.2%. Abercrombie & Fitch was the 2nd best on the S&P500 after saying that stores open at least 1 year had shown sales growth of 22%.

United Kingdom and Europe Commentary
European markets enjoyed another solid night as investors gained confidence that the latest debt crisis will be contained. Markets were initially cautious with ECB chief Trichet saying that they would resist a major bond buying program but investors bought stocks when he later said they would do all they could to prevent contagion. Euro markets were also boosted by some good economic and retail numbers out of the US in the afternoon. Miners continued to track higher base metal prices with Vedanta the best up 6.2% whilst BHP and RIO added 3.7% and 4.9% respectively. GKN, the auto parts maker, was the best on the night, up 7.7%, after US vehicle sales were stronger.

Equity Structured Products and Warrants

Commodities Commentary
Last GOLD OIL NI AL ZN CU CRB 1383 87.97 23637 2327 2260 8720 % Move -0.3% 1.2% 0.5% 0.4% 4.6% 1.6% 1.0%

SPI Commentary
The SPI traded up 98 pts to 4691. Open at 4593 with a high of 4696 and a low of 4585. Volume 42,148. Overnight the SPI traded up 42 pts to 4736. 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 US Wednesday AUS US Thursday AUS US Friday AUS US
*Dates are indicative only and may change

GDP (QoQ) , Existing Home Sales MBA Mortgage Applications , Core Durable Goods Orders (MoM) , Initial Jobless Claims (MoM) , Personal Spending (MoM) , New Home Sales

RBA Governor Stevens Speaks

Equity Structured Products and Warrants

MINI Trading Buy:
Equinox Minerals (EQNKZB) - Copper set to soar
Despite the recent rally in the red metal EQN has still yet to appreciate, trading around the support level of $5.60. The Citadel transaction could provide EQN with a high-quality asset without overpaying, in our view. We maintain our Buy recommendation on the stock, with EQN continuing to look attractive to us relative to the sector. Best way to play EQN is with 1-for-1 MINI EQNKZB. Strike $3.472, Stop Loss $4.17.

Source: IRESS

Copper - Ticks all the right boxes “Copper comes a cropper” is not a headline we expect to see any time soon. Long our most favoured base metal, copper does exactly what it says on the tin, and is one of the few commodity portfolio exposures where you can sleep soundly at night. The biggest derailer to the copper story is the economic macro, where periods of risk-off markets tend to hurt attitudes towards copper. But copper is very much a paucity of supply story. Probably the only thing you have to worry about is when, not if, copper exceeds its July ‘08 nominal high of US$8,940/t US$4.05/lb) before proceeding to vault the US$10,000/t marker. • • • • • Copper demand underpinned by China, is surging and we forecast a 10% yoy rise in 2010 to a record 18.50mt with a 2010-14F demand CAGR of 5% pa. We view 2010 as a balanced market and a prelude to inventory draining supply shortfalls ahead with a cumulative supply shortfall of 1.20mt through to 2014F. Copper is also a supply story. World copper mine utilisation rates are woefully low at 78%. Head grades are falling; smelters are starved of vital concentrate feedstock and where are the much needed new copper whoppers? Exchange stocks of copper have been handsomely eroded. LME stocks are at 11-month lows and down 33% since their February ’10 high, whilst Shanghai stocks have fallen 54% since their April ’10 record high to a oneyear low. Our 2010 price forecast is raised by 2% to US$7,300/t ($3.31/lb) and 2011 by 7% to US$8,265/t ($3.75/lb). By 2014, an end-cycle price peak is forecast, with the average price forecast to be a mouth-watering US$10,475/t (4.75/lb). Our long-term copper price has been raised 11% to US$5,500/t ($2.50/lb).
ExPrc 2.2578 3.472 Stop Loss 2.71 4.17 CP Long Long ConvFac 1 1 Delta 1 1 Description Long MINI Long MINI

Security EQNKZA EQNKZB

Equity Structured Products and Warrants

MINI Trading Buy:
BHP Billiton (BHP.AX): Deploying the cash
We have come off research restriction following BHP's withdrawal of the PotashCorp bid. In our view the stock offers a compelling investment case and we have reinstated our Buy recommendation.

Source: IRESS

Capital management a positive and probably only the start, in our view BHP has reinstated its US$13bn buyback program, which has US$4.2bn to be completed. The buyback will be on market and for Plc shares (at this stage there is no off-market purchase of Ltd shares). When completed the buyback will increase RBS Research’s FY11F and FY12F EPS by 2%. We view the reinstatement as an interim measure in terms of capital management. We believe the BHP board will review further capital management initiatives ahead of the interim results in February 2011. RBS Research forecast BHP will be in a net-cash position by the end of FY11, leaving directors with the options of reinvesting in the business, increasing dividends, buying back shares or all of the above. We see plenty of room to increase dividends We believe BHP has the capacity to increase dividends substantially. Currently, RBS Research estimate BHP is on an FY11 dividend yield of only c2%. The US$0.93 dividend equates to about US$5.1bn, which compares to operating cash flow of about US$29bn. In our view, BHP could materially increase this amount on a sustainable basis. We believe this would be another positive and that it would demonstrate management's confidence in future cash flow. Options for M&A appear limited now that PotashCorp is off the agenda Opportunities for BHP to acquire a company that would make a meaningful impact now look limited. It seems that an oil & gas acquisition might be the easiest option for assets material to BHP. We see no reason for such a deal to be pursued straight away and we believe any such transaction would likely be six months away to allow for adequate due diligence. Investment view - Buy - we think BHP offers a compelling investment case BHP is trading at a 15% discount to RBS Research’s NPV and on a PE of 10x FY12F. We advise investors to be overweight BHP going into the next reporting season, as further capital management initiatives may provide another positive catalyst for a re-rating. RBS Research reinstate full research coverage with a Buy recommendation and A$51.15 target price (was A$51.48). RBS MINIs over BHP
Security BHPKZJ ExPrc 32.1971 Stop Loss 35.28 CP Long ConvFac 1 Delta 1 Description 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 ORGKZC ExPrc 1116.75 Stop Loss 12.20 CP Call ConvFac 1 Delta 1 Description MINI Long

Equity Structured Products and Warrants

RBS Round Up Corner:

Monthly Market Review - November 2010
Australian equities fell 1.7% in November, as risk aversion dominated capital markets as European sovereign risk re-emerged along with concerns that China may over-tighten as it works to quell inflation. The defensive sectors outperformed, Health Care by 7.4% and Telecoms by 6.6%.

Australia's performance vs the world In local currency, the All Ordinaries (-1.2%) underperformed the US S&P 500 (-0.2%) but outperformed the World MSCI ex Australia Index (-1.7%) and the regional MSCI ex Japan Index (-1.6%). The best- and worst-performing sectors The best performers for the month were Health Care (+5.7%), Telecommunication Services (+5.0%) and Energy (+1.3%). The worst performers were Consumer Staples (-5.3%), Financials ex Property (-4.2%) and Consumer Discretionary (-4.2%). The top-five and bottom-five performing S&P/ASX 200 stocks The top-five performers from the S&P/ASX 200 (price) Index for the month were Cudeco (+55.6%), Intrepid Mines (+37.8%), Linc Energy (+34.0%), Riversdale Mining (+27.3%) and Sundance Resources (+24.1%). The bottom-five performers were Hastie Group (-29.0%), Aristocrat Leisure (-25.9%), Infigen Energy (-21.8%), Karoon Gas Australia (-21.3%) and Murchison Metals (-20.3%). Consensus earnings revisions The top-five upgrades were Intoll Group (+18.1%), Iluka Resources (+15.1%), Alumina (+13.9%), Incitec Pivot (+8.1%) and Caltex Australia (+6.5%). The top-five downgrades were BlueScope Steel (-31.8%), Aristocrat Leisure (-31.2%), CSR (-12.1%), AWE (-11.8%) and OneSteel (-8.9%).

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

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. RBS Equities, its officers, directors, employees and agents accept no liability for any loss or damage arising out of the use of all or any part of the information contained in this report. This Information is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. If you are located outside Australia and use this Information, you are responsible for compliance with applicable local laws and regulation. This report may not be taken or distributed, directly or indirectly into the United States, or to any U.S. person (as defined in Regulation S under the U.S. Securities Act of 1993, as amended). 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 Statements relating to these warrants are available upon request from RBS Equities or on our website www.rbs.com.au/warrants RBS Group (Australia) Pty Limited is not an Authorised Deposit-Taking Institution and these products do not form deposits or other liabilities of The Royal Bank of Scotland N.V. or The Royal Bank of Scotland plc. The Royal Bank of Scotland plc does not guarantee the obligations of RBS Group (Australia) Pty Limited. © 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