eureka report, page-11

Deutsche Bank:

Acquisition 2% accretive in FY12
Following the successful completion of the US$932m acquisition of Moly-Cop and
AltaSteel we have updated our OneSteel forecasts. While OneSteel undoubtedly
has domestic experience in mining consumables businesses, given the acquisition
is predominantly located in new or lesser known geographies (namely South
America), we do not believe an acquisition multiple of 9.3x CY10 adequately
compensates OneSteel for the risk. We retain our Hold rating.

Iron ore remains the dominant earnings driver near term
In FY12, we believe iron ore will represent ~73% EBIT. From FY12-15, the average
EBIT contribution is ~50%. However, given OneSteel?s iron ore reserves are
limited to~60mt (or 6mtpa over 10 years) the iron ore represents ~1/4 of our
valuation.
DB ahead of market expectations
We believe OneSteel has announced steel price increases of ~10% for February
2011. On this basis, we believe OneSteel?s Manufacturing business should be
profitable in FY11. As a result, DB is 8% ahead of consensus in FY11, with a
rebound to manufacturing EBIT expected in 2HFY11. We have also reduced our
earnings expectations for Distribution from $20m EBIT to break-even, given we
understand competition in this business remains intense due to limited volume
growth.
Valuation increased in line with earnings changes
Given the cash generative nature of OST?s business, we value OST using a 3-stage
DCF. Details: WACC 10.2%, COD 7.6%, COE 13.45%, RFR 6.25%, Beta 1.2x,
TGR of 2%. Key downside risks include: continued appreciation of the AUD and
softer steel prices. Key upside risks include further successful cost out initiatives,
stabilisation in Australian steel prices and a faster-than-expected increase in
residential and non-residential construction activity.

Incorporating the acquisition

What?s new?

􀂄 Following the completion of the Moly-Cop and AltaSteel transaction, we have updated
our forecasts. In addition, we have reduced our Australian Distribution forecasts given
continued competition (in FY11 only). We note in FY12, the acquisition represents 9% of
sales and 10% of EBIT.

􀂄 We note price increases have been announced for long products of 5-10%, effective
February 2011. On this basis, we believe 2H Manufacturing EBIT should rebound from -
$15m in 1HFY11F to $65m in 2HFY11F.

􀂄 Iron ore continues to be the dominant driver of earnings. From FY12-15F iron ore
represents ~50% EBIT on average. Our valuation for OneSteel?s iron ore business
represents 23% of total NPV ($0.70/share) and 73% of FY12 EBIT.

Old vs New Forecasts

Our forecasts now incorporate:

􀂄 Earnings from Moly-Cop and AltaSteel. Contribution from the acquisition will impact the
P&L from 2HFY11.

􀂄 $35m costs associated with the transaction (a significant item in FY11).

􀂄 Higher interest cost associated with the 100% debt funded acquisition. A$500m of the
new debt (total debt from the acquisition was A$1059) was funded at 5%, with the
interest rate for the remaining debt ~7.25%.

􀂄 We have factored in no synergies given guidance synergies from the transaction are
limited. Further, we believe it is unlikely synergies will be substantial given the diverse
geographical spread.

􀂄 Reduced FY11 Distribution EBIT (now breakeven) given continued competition

Expansion into Mining Consumables
OneSteel announced in November its intention to acquire Moly-Cop and AltaSteel for
US$932m from Anglo American. While we believe the acquisition may make strategic sense,
the acquisition multiple paid appears high for the increased risk of new geographies in Chile,
Peru, Mexico and Canada
We believe this will take OneSteel?s market share to 33% and the #1 player in mining
consumables in the world.

Valuation and risks
Our 12-month share price target is based on a 3-stage DCF: WACC 10.2%, COD 7.6%, COE
13.45%, rfr 6.25%, Beta 1.2x, tgr of 2%, a discount to Australian CPI).

Key downside risks for OST currently include:

􀂄 An increase in the number of long product imports into Australia resulting in increased
competition.

􀂄 Continued increase in the AUD against the USD.

􀂄 A slower increase in international steel demand than expected.

􀂄 A decrease in the demand for iron ore from Onesteel?s Chinese customers.

􀂄 Lower-than-expected iron ore prices from upcoming contract negotiations (given the
high proportion of sales on contract).

􀂄 A decline in iron ore spot prices.

Key upside risks for OST include

􀂄 Australian long product pricing increases

􀂄 Improved cost per tonne performance across the manufacturing segment

􀂄 Further successful cost-out initiatives

􀂄 Faster-than-expected increase in residential and non-residential construction activity