Ann: Half Year Results - 22 February 2011 , page-8

from Goldman Sachs:

OneSteel {$2.84 -14.0 -4.70%} 1H11 Result - Initial Thoughts

 Result Better Than We Expected: 1H11 Underlying NPAT was $125m (vs GS&PA est $114m). The result
was ~6% ahead of our estimates at the EBIT line, driven by a stronger contribution from the Australian
Distribution segment and lower D&A. However, this was partially offset by a weaker contribution from
Manufacturing and Recycling segments. The result at the NPAT line was also assisted by a lower effective tax
rate (~24% vs GS&PA est ~29%).

 No Explicit Guidance: However, the company expects an improvement in utilisation rates during the 2H,
stronger domestic end market demand, improved manufacturing margins in the 4Q and a stronger earningscontribution from the recycling business in the 2H (albeit domestic operations to remain challenging until
supply of arisings improves).

 Iron Ore Volume Guidance ~6.25mt (inc 2mt of MGO): Iron ore sales volumes are on track to reach its
FY11 target of 6.0-6.5mt, including ~2mt of medium grade ore. However, the company noted that as a result
of extreme weather in December and January (including flooding at the mine), OST now expects sales for the
year to be around the middle of this range.

Result Metrics

 Underlying NPAT: $125m (GS&PA est $114m).

 Interim DPS: 6.0? (unfranked) (GS&PA est 6.0?).

 Underlying EBIT: $215m (GS&PA est $203m).

 Operating Cash Flow: $157m (down from $324m in the pcp). Operating Cash Flow was adversely impacted
by inventory build ahead of the scheduled blast furnace outage during 4QFY11. It also includes a $91m
working capital uplift related to the acquisition of Moly-Cop and Alta Steel.

Business Segments

 Iron Ore ? Broadly In Line: EBITDA $290m (GS&PA est $284m).

 Recycling ? Weaker: EBITDA $3m (GS&PA est $16m).

 Manufacturing - Weaker: EBITDA -$12m (GS&PA est $18m).

 Australian Distribution - Stronger: EBITDA $25m (GS&PA est $12m). This division is likely to have
benefited from the reinforcing business that sits within it.

 NZ Distribution ? Broadly In Line: EBITDA $12m (GS&PA est $9m).

Outlook/Guidance

 No quantitative earnings guidance provided.

 Iron ore sales volumes are on track to reach its FY11 target of 6.0-6.5mt, including ~2mt of medium grade ore.
However, the company noted that as a result of extreme weather in December and January including flooding
at the mine, OST now expects sales for the year to be around the middle of this range.

 In Recycling, OST expects its earnings performance to lift vs 1H due to the impact of increasing prices,
improving activity levels and cost savings.

 In Mining Consumables, the outlook is positive for its recently acquired businesses in the Americas and its
existing businesses in the United States and Australasia due to continued strength in mining activity.

 In its domestic steel businesses, margins early in 2H11 will continue to be adversely impacted by delays
between rising raw material costs and the increased domestic prices taking effect, and continuing generally
weak volumes. However, it is seeing encouraging signs that volumes have bottomed and that margins will
improve in the 4Q11 as announced price increases take effect for a wide range of products and as volumes lift.

 OST expects domestic steel volumes to lift through the 2H from continued strength in the resources sector,
and increased government-funded civil works projects which have recently commenced, or are due to
commence in the period. Further improvements in demand will be subject to the extent and speed in economic
recovery, particularly in the non-residential privately funded and residential construction sectors, which
continue to be affected by factors such as credit availability and higher interest rates.

 OST expects production and operating levels to lift slightly in the 2H, albeit still well short of full capacity.

Steelmake at its Sydney and Laverton electric arc furnaces is expected to be ~560-580kt (85% utilisation),
while steelmake at Whyalla and Waratah is expected to be ~380kt and ~130kt respectively for the half.
Production for the 2H is expected to include ~80kt related to preparation for the scheduled blast furnace
repair/re-design work in the 4Q11.
Key points from the OneSteel (OST) 1H11 Conference Call:

 The result was broadly in line to a touch better than market expectations.

 FY11 consensus earnings estimates may come back to account for guidance towards iron ore sales of 6.25mt
(vs previous comments the run rate was towards upper end of 6-6.5mt). This is largely due to the impact of
extreme weather on mining/shipping schedules. In isolation, we estimate this could have a ~7% negative
impact.

 Management noted 3Q11 will be tough for the steel business, but they are seeing encouraging signs that both
volumes and prices have bottomed and they expect a significant margin expansion in 4Q11.

 Our earnings estimates are under review. We are unlikely to change our positive view.

Outlook Comments

 The international outlook remains positive for steel making raw material and mining consumables.

 Mining consumables - continued strength in mining activity expected to underpin strong demand in
Americas/Australasia.

 Recycling - International business to build on improved 1H11. Australian trading conditions to remain
challenging until supply of arisings improves. Earnings to benefit from increased prices/activity/cost savings.

Australian steel - Encouraging signs that volumes and prices have bottomed. 3Q11 to be impacted by lag and
4Q11 to benefit from price increases. Some volume recovery expected through 2H from resource sector and
increased government-funded civil works projects. Production and operating levels expected to lift slightly in
2H11.

Distribution

 Sales volumes were flat in 1H11 and remain ~15-20% below normal levels (albeit OST distribution business
has maintained market share).

 Government-funded infrastructure projects commencing - most volume impact in 2011. Price rises for a wide
range of products announced - benefit in 4Q11.

Manufacturing

 Margins impacted by lower prices, higher opening inventory and higher raw material costs.

 OST noted it still has ~35,000-40,000 tonnes of carry over coking coal (~US$300/t) to work through in 2H11.

 The EBIT loss of -$71m would have been -$91m after removing the +$20m contribution from the groups
existing mining consumables operations.

 The majority of the 1H11 loss in manufacturing was incurred in 2Q11. OST also suggested these difficult
conditions are likely to continue into the 3Q11 given the lag in passing through higher prices in the domestic
market. However, it expects significant margin expansion in 4Q11 (it has pushed through a number of price
increases across a range of products in recent months. Australian price movements typically lag international
price movements by 2-4+ months).

Blast Furnace Shutdown

 The Whyalla Blast Furnace remains on track for May
shutdown. There was no change to the capital cost
guidance of $60-65m, or operating EBIT impact guidance of $0 to -$10m.

Iron Ore

 Shipments near end of 1H11 adversely impacted by poor weather. Mining cost (loaded on ship) within
guidance range of A$25-A$40 per tonne.

 OST noted the mine operating contract with HWE is up for renegotiation this year. Due to poor weather,
OST expects iron ore sales to be ~middle of 6-6.5mt range (we had 6.5mt factored in).

 OST noted it is making encouraging progress on further exploration in FY11. It expects to add to reserves and
resources in 2011 - a further update will be provided at FY11 results.

Balance Sheet

 Gearing (ND/ND+E) at 31 December was ~30% (at the bottom end of its stated target range of 30-40%).
However, the company noted that while operating conditions remain challenged and the funding environment
remains tight, it will attempt to keep gearing below its target range.

Tax Rate /Costs

 The effective underlying tax rate in 1H11 was ~24%. OST expects the FY11 effective tax rate to be towards
the bottom of the 27-30% range.

 OST has largely maintained labour reduction savings of $160m implemented during GFC, plus further savings
from freight, consumables, overheads and continuing labour reductions.

12 Month Target Price: $3.49