In Ore of Earnings GrowthInitiate at OW ? preferred Australia...

In Ore of Earnings Growth

Initiate at OW ? preferred Australia steel exposure:
OneSteel (OST) is primarily a long steel producer with a
domestic focus, but it also owns an iron ore mine that
provides raw materials at cost to its own operations. In
addition, OST has iron ore export sales of ~6Mtpa until
at least 2020. The export iron ore sales are the main
driver of our OST earnings growth forecast of 81% in
FY11e followed by a further 22% in FY12e. Our 12
month price target is A$4.11/share.

Where we differ: The iron ore business contributed
69% to the OST EBIT result in FY10. We expect
continued strong performance from the business given
our bullish iron ore price forecasts which are a key
difference in view from the market. When compared to
spot, consensus iron ore price forecasts have most
potential for upgrade. Should consensus iron ore pricing
increase to equal ours, then we forecast consensus
earnings upgrades for OST of ~13% in FY11 and FY12.

Valuation below long term average: OST?s one year
forward EV/EBITDA multiple of 4.8x, is below the
company?s long term average of 5.8x and the average
for long steel producers of 6.2x. On a price to book value
metric OST is trading on 0.8x, also below its long term
average of 1.2x. The current share price of A$2.68/sh is
at a 23% discount to our DCF valuation of A$3.50/sh.
Strong balance sheet, but limited growth
opportunities: OST?s recent FY10 result showed
improved operating cash flow and a gearing level of 18%.
The company appears well positioned to explore limited
growth opportunities domestically or return
accumulating cash to investors.

Constructive on global steel pricing but domestic
demand subdued: Due to emerging market demand,
we believe global steel and steel making raw material
prices will regularly come under pressure as supply
struggles to keep pace. Domestic steel producers are
price takers, however, we maintain a more subdued
view of Australian steel demand with mining and
infrastructure activity a potential upside risk. We
therefore have an In-Line view of the Australian steel
industry.

Why Overweight?

? A vertically integrated long steel
producer, including the supply of iron
ore to its own and customer (~6Mtpa)
steel mills operated in Australia and
overseas.
? Leading supplier of long steel
products to the domestic market.
Despite our subdued view for
domestic steel demand, one positive
area of potential surprise is increased
mining and infrastructure activity in
Australia.
? Our top of the market iron ore pricing
expectations is driving OneSteel?s
earnings growth.
? Strong balance sheet position.
? Limited capital growth options for
steel domestically.
? Valuation: The one-year forward
EV/EBITDA multiple of 4.8x is below
OST?s long term average of 5.8x, and
the average for long steel producers
of 6.2x.

Key Value Drivers
? East Asia long steel prices.
? Iron ore prices.
? Global scrap prices.
? Australian construction activity.
? A$/US$.

Upside Risks
? Stronger than expected recovery in
steel demand.
? Increase to export iron ore volumes.
? Limited import competition.
? A$/US$ weakness.

Downside Risks
? Unscheduled production outages.
? Introduction of Emissions Trading
Scheme.
? A$/US$ Strength.