Australian Junior Nickels: Sector Overview and Initiation Report

26 March 2009
Asia Pacific/Australia
Equity Research
Non Ferrous Metals / Diversified Metals & Mining (Metals & Mining)
Australian Junior Nickels

Research Analysts
INITIATION
Paul McTaggart
61 2 8205 4698
paul.mctaggart@credit-suisse.com
Sector overview and initiation report
Matthew Cross
61 3 9280 1754 Erratum – this report replaces our previously published Australian Junior
matthew.cross@credit-suisse.com
Nickels report. The previous publication contained an obsolete version of
James Gurry the nickel supply demand report. There are no material changes, or
61 2 8205 4779
james.gurry@credit-suisse.com changes to nickel supply, demand or prices. What has changed is the
layout, appearances of some graphs, updated economic data and minor
corrections to text.
■ Outlook for nickel: We expect the nickel market to remain in surplus for
some years. Around 22% of existing and potential nickel supply from the
market has been cut to date, but we consider an additional 15% cut is
needed to achieve a balance between supply and demand. We forecast a
2009 nickel price of US$5.00/lb, rising to US$5.50/lb in 2010 and a long-term
price of US$6.50/lb. Spot nickel is currently around US$4.40/lb.
■ Initiation of nickel stocks: We have initiated coverage on Western Areas
(WSA), Independence Group (IGO) and Panoramic Resources (PAN), to go
along with our existing coverage of Mirabela Nickel (MBN). A summary of our
views is contained in the table below. We rate MBN and PAN OUTPERFORM.
Please refer to today’s accompanying initiation and company reports.
■ Value apparent despite nickel price: On our analysis, MBN trades at a
price/DCF (using an option-based DCF methodology) of 0.59 and on
price/cash earnings of 3.6x in FY11 as production ramps up to 16.8kt of
payable nickel at a cash cost (net of by-product credits of US$3.26). PAN
trades at a price/DCF of 0.71 and on price/cash earnings of 3.0x in FY10 on
production of 11.1kt of payable nickel at a cash cost (net of by-product
credits of US$3.06). In the case of MBN, its long reserve life (20+ years)
supports the valuation. PAN has a significant cash position which provides it
with strong valuation support.
Figure 1: Australian nickel stocks – target prices, valuations and ratings
Valuation and rating MBN WSA PAN IGO
Share price A$ 1.45 3.50 1.02 2.55
Target price A$ 2.20 4.25 1.50 3.10
Return to TP % 51.7% 21.4% 47.8% 21.6%
Rating OUTPERFORM NEUTRAL OUTPERFORM NEUTRAL
Source: Credit Suisse estimates
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S.
Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision. Customers of Credit Suisse in the
United States can receive independent, third party research on the company or companies covered in this report, at no cost
to them, where such research is available. Customers can access this independent research at www.credit-suisse.com/ir or
call 1 877 291 2683 or email equity.research@credit-suisse.com to request a copy of this research.
26 March 2009
Table of contents
Nickel overview 3
Australian nickel stocks 6
Valuation and sensitivities 10
Nickel price optionality 10
Short-term leverage – using PERs and DCF valuations 12
Long-term leverage – using DCF valuations 12
Global nickel market – demand 14
Economic factors 14
Uses of nickel 15
Stainless steel production 16
China’s stainless steel production 20
Nickel content changes in stainless steel 23
Nickel demand for non-stainless steel uses 29
Credit Suisse forecast nickel demand 31
Nickel supply 32
Notes on nickel projects 34
Balances 34
Upside risk – scenario testing 35
Downside risk 37
Nickel prices 37
Appendix 41
Stainless steel 41
Australian Junior Nickels 2

26 March 2009
Nickel overview
After several years of exceptional returns for producers, we expect the nickel market to be
a tough environment for the next few years. The high prices of the past few years
increased supply (with new producers such as nickel-in-pig appearing) and simultaneously
attacked demand, driving consumers away from nickel-bearing stainless steel. With the
developed world no longer able to use rising asset prices to fuel consumption, nickel
stocks at very high levels and idled nickel projects waiting on the side lines, we cannot
foresee demand again outstripping supply, even when the global economy is restarted;
hence prices well above marginal production costs are unlikely to occur again within the
forecast period.
The recent nickel price drop has to date cut around 22% of existing and potential nickel
supply from the market, but we consider an additional 15% cut is needed to achieve a
balance between supply and demand. Excluding closures, production cuts and expansions
likely to be put on hold, the trajectory of nickel supply growth still reflects the price-driven
expansionary environment of the past few years, with a CAGR of 6.4% from 2009–12, due
to projects that started construction several years ago now entering production.
Figure 2: Primary nickel supply-demand and price

2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F LT(real)
Nickel Supply kt 1,272 1,286 1,357 1,425 1,401 1,288 1,389 1,479 1,553
% Change YoY % 4.5% 1.1% 5.5% 5.1% -1.7% -8.0% 7.8% 6.5% 5.0%
Nickel Demand kt 1,279 1,258 1,396 1,373 1,311 1,124 1,196 1,245 1,310
% Change YoY % 4.1% -1.6% 11.0% -1.7% -4.5% -14.3% 6.4% 4.2% 5.2%
Primary Ni for Stainless % 68.2% 63.9% 65.2% 63.4% 60.0% 58.0% 57.3% 56.2% 55.5%
Balance kt -7 28 -40 52 90 164 193 234 244
Required Shutdowns kt 160 200 230 240
% of supply % 12.4% 14.4% 15.5% 15.5%
Price US$/lb 6.26 6.69 11.00 16.88 9.62 5.00 5.50 6.00 6.00 6.50
Figure 3: Price forecast (2008 real terms) & visible stocks Figure 4: Nickel supply vs demand
kt nickel (LHS); US$/lb (RHS) kt nickel
200.0 25.00 1,600
180.0
1,500
160.0 20.00
140.0 1,400
120.0 15.00
100.0 1,300
80.0 10.00
1,200
60.0
40.0 5.00 1,100
20.0
1,000
0.0 0.00
99
00
01
02
03
04
05
06
07
08
00 01 02 03 04 05 06 07 08 09 10 11 12 13
09
10
11
12
19
20
20
20
20
20
20
20
20
20
20
20
20
20
Visible Stocks (LHS) Nominal Prices (RHS) Global Consumption Primary Nickel Base Production Prim. Ni
Real Prices (2008 terms) Real Prices Forecast Onca Puma Goro
Forward Stock Build (LHS) Jinchuan Expansion
Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates

26 March 2009
We forecast a 2009 nickel price of US$5.00/lb, with a lower price of US$4.70 in the first
half. We expect the nickel cost curve to flatten in 2009, and the mean cash cost to be
US$3.00/lb. Our forecast 2009 price will intersect the curve at the 75th percentile. Given
the rate of closures to date, we believe this price will be sufficient to drive the required
closure of 15% of supply. Our forecast prices gradually increase to US$6.0/lb over the
forecast period, forcing cost discipline on producers and discouraging expansions. Our
long-term price is US$6.50/lb in real terms.
Nickel’s woes are demand-driven. The critical market for nickel is stainless steel, which
accounts for 61% of nickel consumption. A large proportion of stainless steel use is
cosmetic and consumer driven – 59% in automotive sector, construction, and domestic
appliances & utensils. Spending in these sectors depends on income and sentiment, with
domestic construction also influencing the purchase of stainless steel appliances that
occupy the premium end of retail price points. The hardest hit sectors of economies
globally are automotive and residential construction, the latter oversupplied in the US,
Europe and China.
The stainless steel market collapsed in 4Q08, with global production falling 30%. There has
been no significant improvement in 2009 to date, with production by European producers
standing at around 50% capacity in line with orders. Production picked up in China in the first
two months of 2009 in anticipation of stimulus-driven demand, but increased orders have not
eventuated so there was an inventory build and production has dried up.
Between 2000 and 2007, China was the dynamo of stainless steel, with production
growing at a CAGR of 47% between 2002 and 2007. However, apparent consumption was
much lower, 19%, with the higher stainless production growth reflecting a ‘catch up’ rate
from a low start, displacing imports into China. Consequentially, the 2002–07 CAGR of
global production ex-China was a weak 1.9%, while the global CAGR was 7.1%. In 2008,
China switched from a net importer of stainless steel to being self sufficient.
85% of China’s stainless steel consumption is used internally, and the balance is used in
manufactured exports. The 2002–07 CAGR of stainless used domestically in China was
16%. We forecast a growth rate of 10% post-2009, with urbanization continuing, but at a
more modest and sustainable rate as the manufacturing industry matures. China’s CAGR
of stainless used in manufactured exports was 16%. We expect a reduced rate of 7%
post-2011, as consumer spending tightens in developed nations following the end of
borrowing against rising asset prices.
Our stainless steel production forecast is for a global CAGR of 4.7% between 2009 and
2012, with 9.7% in China. We expect a very weak 2009, with production falling 13.5%
globally YoY, recovering in 4Q.
Figure 5: Forecast stainless steel production

Thousands of tonnes
2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
Total World kt 20,493 22,417 24,441 24,410 28,308 28,921 26,533 22,945 24,818 25,942 27,228
World YoY % 7.4% 9.4% 9.0% -0.1% 16.0% 2.2% -8.3% -13.5% 8.2% 4.5% 5.0%
China kt 1,140 1,778 2,365 3,400 5,300 7,850 6,900 6,375 6,995 7,670 8,415
China YoY % 54.5% 56.0% 33.0% 43.8% 55.9% 48.1% -12.1% -7.6% 9.7% 9.6% 9.7%
World ex China kt 19,353 20,639 22,076 21,010 23,008 21,071 19,633 16,570 17,823 18,272 18,813
World ex China YoY % 5.5% 6.6% 7.0% -4.8% 9.5% -8.4% -6.8% -15.6% 7.6% 2.5% 3.0%
China % of total % 5.9% 8.6% 10.7% 16.2% 23.0% 37.3% 35.1% 38.5% 39.2% 42.0% 44.7%
Source: Credit Suisse estimates, Brook Hunt

26 March 2009
The nickel content of stainless steel declined at a CAGR of -4.2% between 2002 and
2008. The reduction was driven by the high price of nickel-bearing stainless steel, with the
nickel price passed to the consumer via an alloy surcharge. The reduction was achieved
by cutting the proportion of high-nickel austenitic stainless produced in favour of nickel-
free ferritic, and low-nickel duplex and 200 series austenitic stainless steel. Both stainless
steel producers and consumers have actively sought to reduce the effects of nickel price
volatility, and now that ferritic grades have a firm foothold, we expect the move away from
high nickel stainless to continue. The substitution is permanent because once consumers
have switched to a suitable alternative stainless grade, there is little reason to change
back. High-nickel stainless provides improved malleability and workability than ferritic
grades, but the corrosion resistance may be little different as that characteristic is provided
by the chromium content, not nickel. High-nickel grades have been over-specified in the
past – used in applications where malleability is not important.
The largest non-stainless steel use for nickel is in alloys – in machine tools for
manufacturing and super-alloys used for turbines. We expect a 10% decline in non-
stainless nickel use in 2009, as aircraft manufacturing eases on airline credit difficulties,
and tool steel use in the auto industry sags, but we expect demand to recover from 2010.
We expect nickel in non-stainless use to return to previous regional growth rates from
2011, as it is driven by industrial and commercial activity, not consumer sentiment.
Nickel production is forecast to ease in 2009 with closures and deferrals cutting actual and
potential production by 22%, but that is insufficient. Projects that commenced construction
following the nickel price rise in 2004 are entering production. Of particular note are two
large nickel laterites owned by Vale that with horrible timing, have just reached
commissioning stage – Onca Puma in Brazil with 52ktpa contained Ni capacity, and the
Goro JV in New Caledonia at 60ktpa. Vale has slowed the commissioning of the projects,
and our forecasts include a very slow ramp-up with neither project reaching capacity within
the forecast period.
Production supply may not be cut sufficiently in China putting pressure on other countries
production: Jinchuan Group intends to continue expansion, with a 120kt 2009 production
target, a 13kt increase on 2008 and an ultimate target of 150ktpa. As top quartile
producers, China’s Ni-in-pig iron producers reduced production in late-2008, but remain a
threat to rational economic behaviour because some new NPI projects that were under
construction in 2008 are affiliated with stainless steel producers and may be kept
operating to reduce exposure to LME Ni price volatility.

26 March 2009
Australian nickel stocks

We have initiated coverage on Western Areas, Independence Group and Panoramic
Resources, to go along with our existing coverage of Mirabela Nickel. Separate initiation
reports have been issued for each stock, please refer to our accompanying initiation
reports on Independence Group, Panoramic and Western Areas, as well as the update on
our views of Mirabela.
Our preferred nickel exposures are Mirabela and Panoramic, primarily because we see the
most valuation upside in these stocks. Both stocks will make money at current spot nickel
prices, and have sufficient balance sheet strength to ride out through a prolonged
downturn in nickel prices. Figure 6 outlines our ratings and target prices for and a
valuation comparison. Figure 7 contains a summary of valuation metrics, while Figure 8
contains production, cost and grade assumptions used in our financial modelling.
Figure 6: Australian nickel stocks – target prices, valuations and ratings

Valuation and rating MBN WSA PAN IGO
Share price A$ 1.45 3.50 1.02 2.55
Target price A$ 2.20 4.25 1.50 3.10
Return to TP % 51.7% 21.4% 47.8% 21.6%
Rating OUTPERFORM NEUTRAL OUTPERFORM NEUTRAL
DCF A$/share 2.59 4.26 1.48 3.08
Price/DCF x 0.56 0.82 0.69 0.83
Source: Company data, Credit Suisse estimates
Why we like Mirabela

Reserve position is key. We like Mirabela primarily because of its long mine life.
Mirabela is unique in that it has a 20+ year mine life on current reserves (121mt at 0.6%
Ni); we think this provides significant option value on the nickel price. While the reserve
grade is low, the operations should be relatively low cost and simple. The company’s
balance sheet issues have been resolved post the debt and equity raisings (please refer to
today’s separate MBN note).
On our analysis, MBN trades at a price/DCF (using an option-based DCF methodology) of
0.59 and at EV/Reserve of A$924/t and on price/cash earnings of 3.6x in FY11 as
production ramps up to 16.8kt of payable nickel at a cash cost (net of by-product credits of
US$3.26). Construction of the Santa Rita mine is now 85% complete and will commence
commissioning in mid 2009.
Why we like Panoramic

Cash position supports valuation: Cash and cash receivables are A$80mn with no bank
debt (and market cap is just $195mn). PAN’s principal mining asset (Lanfranchi) has a six-
year mine life based on current reserves and the company is aiming to extend this to 10
years given an active exploration programme. While the current mine life is not extensive,
Panoramic is well supported from an option based DCF valuation – given the cash position
– as well as near-term earnings and EV/reserve multiples.
On our analysis, PAN trades at a price/DCF of 0.71 and at EV/Reserve of A$1,509/t and
on price/cash earnings of 3.0x in FY10 on production of 11.1kt of payable nickel at a cash
cost (net of by-product credits of US$3.06) and a nickel price of US$5.50/lb.

26 March 2009
Western Areas; high quality, just a matter of price

Good mine life, high grade and low cost: Western Areas has the highest nickel grade
and is the lowest-cost producer of the group; this has obvious appeal in the current nickel
price environment. WSA is mining and developing two of the world’s highest grade and
lowest cost nickel mines (Flying Fox and Spotted Quoll) and has completed initial surface
development for two additional planned underground mines (Cosmic Boy and Diggers
South). At February 2009, WSA reported ore reserves at Flying Fox T1 of 8.6kt of nickel in
ore (3.6% nickel), a resource of 12.8kt of nickel in ore at T4 (4.1% nickel) and a reserve of
49.7kt of nickel in ore at T5 (5.9% nickel). On 12 January 2009, WSA announced a
Spotted Quoll resource of 2mt at 6.2% nickel (126kt of contained nickel). While the mine
life for Flying Fox/Spotted Quoll based on reserves is around five years, we see potential
for further exploration success and we believe WSA will be able to convert a significant
portion of its resource into reserve and we expect mining operations to continue to at least
2020 (dependent upon nickel price).
We think WSA is a high quality business; we think that MBN and PAN offer better
valuation metrics. On our analysis, WSA trades at a price/DCF (using an option-based
DCF methodology) of 0.80 and at EV/Reserve of A$7,194/t and on price/cash earnings of
5.8x in FY11 as production ramps up to 11.1kt of payable nickel at a cash cost (net of by-
product credits of a low US$1.78).
Independence mixes nickel and gold

Nickel, gold and cash: IGO has cash of A$126mn, the ageing Long nickel mine and an
interest in the Tropicana gold project. IGO’s stated aims for Long are for it to sustain
production of nickel in ore at 9ktpa and be within the bottom third of global nickel cost
curve. IGO aims to find new reserves at Long to extend the mine life (five years on current
reserves) and, possibly, lift production. The 2008/09 budget aims for production of nickel
(in ore) to be in the range 8.4–8.8kt (at an average mined grade of 3.6% nickel) for cash
costs (payable nickel) in the range A$4.50–$4.65/lb.
Pre-feasibility work continues on the Tropicana gold project (IGO 30% free carry to
completion of the pre-feasibility study) with a gold resource of 5.01moz (75.3mt at 2.07g/t
Au) in January 2009. Pre-feasibility work is expected to be complete in June 2009. In March
2009 CEO Chris Borwick stated that the most likely scenario was for a 6–6.5mtpa plant to
produce 350–400k oz of gold per annum with a 10+ year mine life. We have valued IGO’s
interest in Tropicana at A$107mn based on a US$50/oz value on the resource.
On our analysis, IGO trades at a price/DCF (using an option-based DCF methodology) of
0.83 and at EV/Reserve of A$4,933/t and on price/cash earnings of 10.4x in FY11 on
production of 4.5kt of payable nickel at a cash cost (net of by-product credits of US$3.98).
The earnings and production based measures are higher than its peers given the value
inherit in Tropicana and this leads us to be give greater importance to our DCF valuation.
While there is a value case for IGO (and based our valuation of Tropicana), we see better
valuation support in MBN and PAN.

26 March 2009
Figure 7: Australian nickel sector – valuation compcos

Valuation and rating MBN WSA PAN I GO
Share price A$/sh 1.54 3.40 1.05 2.73
Target price A$/sh 2.20 4.25 1.50 3.10
Return to TP % 43.3% 25.0% 42.9% 13.6%
Rating Outperform Neutral Outperform Neutral
DCF A$/sh 2.59 4.26 1.48 3.08
Share price/DCF x 0.59 0.80 0.71 0.89
Earnings multiples (diluted)
PE 12month FY09 x -5.3 -22.9 14.9 18.6
PE 24month FY10 x 17.4 18.5 4.8 15.7
PE 36month FY11 x 4.5 9.5 5.5 13.4
PE 60month FY13 (long term commodity prices) x 3.3 6.0 5.0 10.2
Price/cash earnings FY09 x -5.3 -81.0 3.7 11.8
Price/cash earnings FY10 x 11.3 9.0 2.7 11.3
Price/cash earnings FY11 x 3.6 5.8 3.0 10.4
Price/cash earnings FY13 (long term commodity prices) x 2.8 4.3 3.0 8.8
EV/EBITDA (fixed) FY09 x -37.1 9.6 1.5 7.3
EV/EBITDA (fixed) FY10 x 10.8 8.1 1.4 6.0
EV/EBITDA (fixed) FY11 x 3.9 7.3 1.5 5.4
EV/EBITDA (fixed) FY13 (long term commodity prices) x 3.1 7.1 1.5 4.6
Cashflow multiples
FCF per share FY09 A$/sh - 0.30 - 0.09 0.14 0.13
FCF per share FY10 A$/sh 0.17 0.31 0.30 0.25
FCF per share FY11 A$/sh 0.48 0.56 0.25 0.28
FCF per share FY13 (long term commodity prices) A$/sh 0.52 0.79 0.28 0.33
FCF yield FY09 % -20% -3% 13% 5%
FCF yield FY10 % 11% 9% 28% 9%
FCF yield FY11 % 31% 16% 24% 10%
FCF yield FY13 (long term commodity prices) % 34% 23% 26% 12%
Dividend yield FY09 % 0.0% 0.0% 1.0% 0.7%
Dividend yields FY13 (long term commodity prices) % 14.9% 8.3% 10.1% 5.0%
Balance sheet
Gearing (ND/ND+E) (FY09) % 55.6% 67.9% net cash net cash
Price / book value (FY09) x 0.5x 5.7x 0.8x 2.4x
Market cap A$m 199 572 202 309
Net debt (FY09) (negative = net cash) A$m 237.3 211.9 -79.7 -125.9
Equity A$m 426.4 100.4 266.3 129.0
EV A$m 671.0 782.1 134.4 183.5
Reserves and production
EV/Reserve (contained nickel) A$/t 924 7,194 1,509 4,933
EV/Resource (contained nickel) A$/t 860 2,526 667 2,421
Reserves - contained nickel kt 726.0 108.7 89.1 37.2
Resources - contained nickel (measured and indicated only) kt 780.0 309.7 201.5 75.8
Reserves to production FY09 x - 13.2 5.1 5.2
Reserves to production FY10 x 74.8 6.1 4.3 4.4
EV/Production FY09 - payable nickel A$/t - 19,617 7,761 39,628
EV/Production FY10 - payable nickel A$/t 98,789 9,643 12,075 41,021

26 March 2009
Figure 8: Australian nickel sector – summary of production assumptions

FY09 Production Data MBN WSA PAN IGO
Nickel in concentrate - FY09 production kt - 8.2 17.0 7.1
Nickel payable - FY09 production kt - 5.5 11.3 4.6
Nickel payable - FY09 production mlb - 12.2 24.8 2.1
Average head grade mined - FY09 % 0.0% 3.6% 1.6% 3.5%
C1 cash costs, pre by-product credits - FY09 US$/lb - 2.64 4.43 4.03
C1 cash costs, including by-product credits - FY09 US$/lb - 2.59 3.08 3.90
FY10 Production Data
Nickel in concentrate - FY10 production kt 9.7 16.5 16.8 6.9
Nickel payable - FY10 production kt 6.8 11.3 11.1 4.5
Nickel payable - FY10 production mlb 15.0 24.9 24.5 2.0
Average head grade mined - FY10 US$/lb 0.7% 3.8% 1.6% 3.4%
C1 cash costs, pre by-product credits - FY10 US$/lb 4.29 2.10 4.44 4.17
C1 cash costs, including by-product credits - FY10 US$/lb 3.74 2.04 3.06 3.99
FY11 Production Data
FY13 LT Production Data

26 March 2009
Valuation and sensitivities

Nickel price optionality
We have used option weighted DCF valuations to as the basis for our valuation of the
sector. This approach recognises that the long-run nickel price is uncertain and that mining
companies have the option to cease production at low/unprofitable nickel prices. An
options-based approach explicitly recognises the value of the option.
We have calculated DCF valuations for the nickel stocks across a range of long-term
nickel prices from US$2.00/lb to US$15.00/lb, distributed around our long-term nickel price
assumption of US$6.50/lb. We have assigned each long-term nickel price a probability
weighting, Figure 9 outlines our prices and the probability weighting we have assigned.
Our option-weighted DCF value is the sum of the DCF valuations at each long-term nickel
price, multiplied by the assigned weighting and is outlined in Figure 11. In line with the in-
built call option, the minimum DCF value for the stock is zero as we have assumed nickel
production will be stopped in the event it is unprofitable.
Mirabela provides the most optionality, in our view. Mirabela is unique among the group in
that it has a 20+ year mine life. In our view, this gives Mirabela the most leverage and
optionality to long-term nickel prices of the group, as demonstrated in Figure 10.
Figure 9: Long-term nickel price assumptions and weightings Figure 10: Mirabela – a call option on the LT nickel price?
30.0% 10.00 9.48
9.00
25.0%
25.0% 6.94
8.00
7.00
20.0%
17.5% 17.5% 6.00 4.39
DCF valuation
Weighting
15.0% 5.00
4.00
10.0% 10.0% 2.70
10.0% 3.00 2.27
7.0% 7.0% 1.85
2.00
5.0% 0.15
3.0% 3.0% 1.00 - -
-
0.0%
2.00 3.00 4.00 6.00 6.50 7.00 9.00 12.00 15.00
2.00 3.00 4.00 6.00 6.50 7.00 9.00 12.00 15.00
LT nickel price - US$/lb
LT Nickel Price - US$/LB DCF Valuation
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

26 March 2009
Figure 11: Option-weighted DCF valuations

Independence (IGO) DCF valuation Weighting Option-weighted DCF value
@ US$2.00/lb nickel 2.49 3.0% 0.07
@ US$3.00/lb nickel 2.61 7.0% 0.18
@ US$4.00/lb nickel 2.73 10.0% 0.27
@ US$6.00/lb nickel 2.98 17.5% 0.52
@ US$6.50/lb nickel 3.04 25.0% 0.76
@ US$7.00/lb nickel 3.11 17.5% 0.54
@ US$9.00/lb nickel 3.35 10.0% 0.34
@ US$12.00/lb nickel 3.72 7.0% 0.26
@ US$15.00/lb nickel 4.09 3.0% 0.12
Option-weighted DCF valuation 3.08
Mirabela Nickel (MBN) DCF valuation Weighting Option-weighted DCF value
@ US$2.00/lb nickel - 3.0% -
@ US$3.00/lb nickel - 7.0% -
@ US$4.00/lb nickel 0.15 10.0% 0.02
@ US$6.00/lb nickel 1.85 17.5% 0.32
@ US$6.50/lb nickel 2.27 25.0% 0.57
@ US$7.00/lb nickel 2.70 17.5% 0.47
@ US$9.00/lb nickel 4.39 10.0% 0.44
@ US$12.00/lb nickel 6.94 7.0% 0.49
@ US$15.00/lb nickel 9.48 3.0% 0.28
Panoramic (PAN) DCF valuation Weighting Option-weighted DCF value
@ US$2.00/lb nickel 0.33 3.0% 0.01
@ US$3.00/lb nickel 0.57 7.0% 0.04
@ US$4.00/lb nickel 0.81 10.0% 0.08
@ US$6.00/lb nickel 1.29 17.5% 0.23
@ US$6.50/lb nickel 1.41 25.0% 0.35
@ US$7.00/lb nickel 1.53 17.5% 0.27
@ US$9.00/lb nickel 2.02 10.0% 0.20
@ US$12.00/lb nickel 2.74 7.0% 0.19
@ US$15.00/lb nickel 3.47 3.0% 0.10
Western Areas (WSA) DCF valuation Weighting Option-weighted DCF value
@ US$2.00/lb nickel 0.97 3% 0.03
@ US$3.00/lb nickel 1.67 7% 0.12
@ US$4.00/lb nickel 2.36 10% 0.24
@ US$6.00/lb nickel 3.74 18% 0.65
@ US$6.50/lb nickel 4.08 25% 1.02
@ US$7.00/lb nickel 4.43 18% 0.78
@ US$9.00/lb nickel 5.81 10% 0.58
@ US$12.00/lb nickel 7.88 7% 0.55
@ US$15.00/lb nickel 9.96 3% 0.30

26 March 2009
Short-term leverage – using PERs and DCF valuations

We have run a sensitivity analysis looking at the impact of changes to the near-term nickel
price assumptions. We have changed the nickel price for FY10 until FY13, and left our
long-term assumption of US$6.50/lb. Figure 13 has the results of our scenarios.
We think Panoramic and Mirabela provide the best operating leverage to short-term nickel
prices, as supported by PERs and DCF-based valuations. But it is a case of a rising tide
floats all boats in the near term. A significant move above current spot prices would make
a huge difference to the profitability of the sector as a whole.
Long-term leverage – using DCF valuations

Figure 12 shows the DCF valuation impact of changing our long-term nickel price
assumption of US$6.50/lb from 2014. We have weightings to the different nickel prices
and calculated a weighted DCF. The weightings provide lower probabilities to extreme up
and downsides.
Mirabela and Western areas provide the best leverage to increasing long-term nickel
prices; this is a primarily a function of having the longest mine lives, but it is also a function
of being ‘pure-play’ nickel companies.
Independence and Panoramic both have significant net cash balances that reduce the
sensitivity of their DCF valuations to changes in the nickel prices. Both companies also
have significant exposures to other metals – Independence to gold through its Tropicana
project and Panoramic to copper, via its significant copper credit.
Figure 12: DCF valuations at different long-term nickel prices

11.00
10.00
9.00
8.00
7.00
DCF Valuation - A$/sh
6.00
5.00
4.00
3.00
2.00
1.00
-
2.00 3.00 4.00 6.00 6.50 7.00 9.00 12.00 15.00
LT Nickel Price - US$/lb
IGO MBN PAN WSA

26 March 2009
Figure 13: Sensitivity to changes in short-term nickel prices, assuming a US$6.50/lb long-term nickel price
Independence (IGO) 2010 PER 2011 PER 2012 PER 2013 PER DCF (A$)
@ US$2.00/lb nickel <0 <0 <0 <0 1.77
@ US$3.00/lb nickel 177.6 <0 <0 <0 2.09
@ US$4.00/lb nickel 31.5 52.1 51.9 55.9 2.41
@ US$6.00/lb nickel 11.9 11.1 11.0 11.1 3.06
@ US$6.50/lb nickel 10.3 9.2 9.2 9.3 3.22
@ US$7.00/lb nickel 9.1 9.2 7.9 7.9 3.38
@ US$9.00/lb nickel 6.2 7.9 5.0 5.1 4.03
@ US$12.00/lb nickel 4.2 5.1 3.3 3.3 5.00
@ US$15.00/lb nickel 3.1 3.3 2.4 2.4 5.97
Mirabela Nickel (MBN) 2010 PER 2011 PER 2012 PER 2013 PER DCF
@ US$2.00/lb nickel <0 <0 <0 <0 1.16
@ US$3.00/lb nickel 88.4 26.9 205.7 128.2 1.42
@ US$4.00/lb nickel 32.4 9.6 12.6 11.2 1.69
@ US$6.00/lb nickel 14.3 4.2 4.4 3.9 2.22
@ US$6.50/lb nickel 12.5 3.7 3.8 3.4 2.35
@ US$7.00/lb nickel 11.2 3.7 3.3 3.0 2.48
@ US$9.00/lb nickel 7.8 3.3 2.2 2.0 3.01
@ US$12.00/lb nickel 5.3 2.3 1.5 1.3 3.81
@ US$15.00/lb nickel 4.1 1.6 1.1 1.0 4.61
Panoramic (PAN) 2010 PER 2011 PER 2012 PER 2013 PER DCF
@ US$2.00/lb nickel <0 <0 <0 <0 <0
@ US$3.00/lb nickel <0 <0 <0 <0 <0
@ US$4.00/lb nickel <0 <0 <0 <0 <0
@ US$6.00/lb nickel 3.6 4.6 <0 <0 1.43
@ US$6.50/lb nickel 3.1 3.6 4.0 4.8 1.64
@ US$7.00/lb nickel 2.7 3.6 3.3 3.8 1.85
@ US$9.00/lb nickel 1.7 3.0 1.9 2.1 2.67
@ US$12.00/lb nickel 1.1 1.8 1.2 1.2 3.90
@ US$15.00/lb nickel 0.8 1.1 0.8 0.9 5.14
Western Areas (WSA) 2010 PER 2011 PER 2012 PER 2013 PER DCF
@ US$2.00/lb nickel <0 <0 <0 <0 1.84
@ US$3.00/lb nickel <0 <0 <0 <0 2.40
@ US$4.00/lb nickel <0 109.1 156.8 47.3 2.96
@ US$6.00/lb nickel 13.1 8.9 9.7 7.7 4.07
@ US$6.50/lb nickel 10.2 7.2 7.9 6.4 4.35
@ US$7.00/lb nickel 8.4 7.2 6.6 5.4 4.63
@ US$9.00/lb nickel 4.9 6.1 4.0 3.4 5.75
@ US$12.00/lb nickel 3.0 3.7 2.5 2.2 7.43
@ US$15.00/lb nickel 2.1 2.4 1.9 1.6 9.10

26 March 2009
Global nickel market – demand

Economic factors
The depth and duration of the current ‘Great Recession’ remain difficult to estimate.
November forecasts with recovery predicted for 2009 rapidly became obsolete as global
attempts to stem the credit crisis have achieved little success and economic forecasters
have pushed back the timing of a recovery and worsened the outlook:
■ On 28 January 2009, the IMF released an Updated World Economic Outlook

predicting Global GDP growth for 2009 will be 0.5%, a downward revision of 1.75%
since the previous release of November 2008. Its forecast included a GDP contraction
of 2% for advanced economies, the first annual contraction during the post-war period,
and a slowing of developing economies from 6.25% in 2008 to 3.25% in 2009. The
IMF noted that financial markets have remained difficult for a longer period than
envisaged in November 2008, with policy efforts having done little to resolve the
uncertainty about the long-term solvency of financial institutions. A gradual
improvement was forecast for 2010, with growth picking up to 3% aided by efforts to
ease the credit strains.
■ A Global IP Scorecard released on 2 February by Credit Suisse Fixed Income

Research noted that November 2008 recorded the biggest decline in global industrial
output in at least 50 years, but that a growing number of economic and market
indicators suggest a likely stabilization of the level of global output in early-2009. It
suggested global IP momentum will recover from an expected level of -22% to around
0% by mid-year, but YoY growth is likely to remain negative for most of 2009. The
trough of YoY IP was forecast to be -9.6% in April. However, the Scorecard cautioned
that a further downturn in activity cannot be ruled out in the second half of the year,
and even if the worst depression scenario can be avoided, a long period of weak
growth seems almost unavoidable.
■ Credit Suisse Asian Research supported the stabilisation thesis, noting on 4 February
a 7.7% jump in China’s January’s PMI suggests that the slowdown is bottoming out;
although the PMI remained in contraction territory, there is no pick-up in orders for
finished goods, and exports remain weak. The improvements are in infrastructure-
related areas suggesting that the government-funded investment impacted order
flows. However, our China Basic Materials analysts reported back from a road trip on
11 March (‘Demand from Stimulus – Are we there yet?’) that three months after the
stimulus plan was announced, the majority of the projects are yet to materialise with
the only visible outcomes being railway projects and the Sichuan earthquake recovery.
Steel prices and production picked up in January and February, perhaps anticipating
stimulus demand, but we calculate that China overproduced by 6mt in these months
and steel prices have subsequently sagged (‘Rebound in China’s steel production may
not be sustainable in the long term’ – 16 March).
We have used the Global IP scorecard data and forecasts to construct our IP forecast for
2009. From 2010, we revert to our Metals and Mining global IP forecast of 1.3% for 2010
and 2.8% for 2011 and 2012 (Figure 14).

26 March 2009
Figure 14: Global IP estimates

% change YoY
14
12
10
8
6
4
2
% Yr
0
-2
-4
-6
-8
-10
Global (LHS) Developed (LHS)
-12
Global F/C Developing (RHS)
-14
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Credit Suisse estimates, Datastream
Uses of nickel
The major first use of nickel is in stainless steel, consuming around 61% of production.
61% of nickel in stainless
Other uses include alloys, consuming 19% – including non-ferrous or superalloys – 8%
steel
used for nickel plating and 12% in chemicals and other uses including nickel metal hydride
batteries.
As the dominant use of nickel, the stainless steel market is critical for understanding Jet engines also important
primary nickel demand. The other major use, non-ferrous alloys with 14% of primary nickel for nickel alloys
consumption is dominantly used in turbines, particularly aircraft engines, so the state of
the international airline industry is important.
Figure 15: First use primary nickel 2008

Others
Foundry 8%
4%
Plating
8%
Non-ferrous Alloy s
14% Stainless Steel
61%
Other Steel Alloy s

5%
Source: Brook Hunt

26 March 2009
Stainless steel production

A large proportion of the end uses for stainless steel are cosmetic and consumer-driven. 59% Stainless steel use largely
of demand depends on the automotive sector (mainly vehicle trim and exhausts), construction, cosmetic and consumer
and domestic appliances and utensils. Spending on these sectors depends on income and driven – residential
sentiment, with stainless steel consumer goods occupying the premium end of retail price construction strong demand
points. Residential construction has a stronger influence on demand than indicated by Figure influence
16 as the purchase of a house spurs demand for new domestic appliances.
There are many substitutes for stainless steel depending on the application. In domestic
Range of substitutes
appliances where the use of stainless is largely cosmetic, competition includes paint
(whitegoods), vitreous enamel and plastic.
Conversely, little stainless steel is used for infrastructure unless the item undergoes
substantial wear, as galvanised steel is a cheaper substitute used in applications such as
Little stainless used for
road signs and guard rails. We believe planned spending on infrastructure by governments,
infrastructure
such as the US$600bn Chinese fiscal package, is unlikely to directly drive any surge in
stainless steel consumption.
Figure 16: Stainless steel end uses 2007

Catering Utensils %
Architecture, Building & Domestic Appliances
Construction 39%
13%
Automotiv e & Transport

14%
Others & Unallocated

Process & Other
8%
Industries
26%
Source: Brook Hunt
Given these factors, the near-term outlook for stainless steel demand is poor. The majority of
the developed world is in recession, and the residential construction is at the root of the global
malaise. Consensus estimates for 2009 housing starts in the US are one-third of the 2005 total
(Figure 17). Monthly starts in January at an annualised rate of 477k were the lowest since Near-term stainless demand
records began to be kept in 1959 and permits for future building starts were also a record low. outlook poor – residential
While annualised building starts in February rebounded to 583k and permits rose 3%, both construction depressed in
were still down 47% and 44%, respectively, YoY. In 2009, consensus forecasts are for private US, Europe & China
consumption in the US and the Eurozone to fall by over 1% from the already low figures of
2008, and be flat in Japan (Figure 18). These are striking changes from the boom years of
2005–2007 when demand for stainless steel was strong.

26 March 2009
Figure 17: Consensus forecasts for housing starts Figure 18: Consensus forecasts for private consumption
millions % change on previous year
4 3.5%
3.5 3.0%
2.5%
3
2.0%
2.5 1.5%
2 1.0%
1.5 0.5%
0.0%
1
-0.5% 2005 2006 2007 2008E 2009F 2010F
0.5
-1.0%
0 -1.5%
2005 2006 2007 2008E 2009F 2010F -2.0%
US Housing Starts Japan Housing starts Canada Housing Starts US Japan Eurozone
Source: Consensus Economics 12 Jan 2009 Source: Consensus Economics 12 Jan 2009
Stainless steel producers cut back

Activity by producers confirms the brutal downturn in the fortunes of stainless steel from
mid-2008. After a solid first half, all the major stainless producers suffered from a collapse
European stainless
in demand in the second half of 2008. ThyssenKrupp, the European market leader, cut
producers running at 50%
capacity by 25% for 4Q08 and 1Q09 and reported to us that stainless demand was weaker
capacity…
than the carbon steel market. Acerinox described 2008 as the worst year in its history and
at the start of March, the Spanish plant was producing at 50% capacity, in line with orders.
Outokumpu announced job cuts and shift reductions on 3 February, saying orders
continued to be very low at only half its capacity. ArcelorMittal’s 4Q08 stainless production
was down by 20% in Brazil in 4Q08, but 47% in Belgium. In South Korea, POSCO cut
production 38% QoQ in 4Q. Brook Hunt reported cuts of 50% instituted from December in
Asia also hit hard
Taiwan, production cuts of around 40% from November in Japan, small stainless
producers going out of business in China, and estimated that stainless production for the
US in 4Q08 was 30% less than the previous year following the closure of a melt plant by
AK Steel and probable cutbacks at NAS.
Ferrochrome demand
Another view of the current state of stainless production can be gained from ferrochrome, the
key ingredient of all stainless steels, dominated by South African producers. Global Ferrochrome key ingredient
production fell 35% in 4Q08 and we expect it to be down further in the first half of 2009. The in stainless
largest ferrochrome producer, Xstrata-Merafe Chrome Venture, progressively announced the steel…production fell 35% in
suspension of 17 furnaces beginning December 2008, with suspended capacity amounting 4Q08
to 1.37mtpa, 80% of its total. Actual production in recent years was below capacity, with
1.22mt produced in 2007, thus we estimate actual ferrochrome production cut as 0.88mtpa.
With the ferrochrome containing 55% chrome, this suspended capacity is equivalent to
2.7mtpa of stainless steel with a grade of 18% chrome, the most common form. The second
largest producer, Samancor, with a production capacity of around 1mtpa of ferrochrome –
equivalent to 3mtpa of stainless – temporarily shut all its furnaces in December. The Lack of demand shuts South
company plans to operate at 50% capacity in 2009 but currently only two of its 16 furnaces African ferrochrome
have restarted. Hernic with a capacity of 420ktpa closed all its furnaces in January and is furnaces
likely to keep them on care and maintenance through 2Q. ASA Metals, reported in mid-
January that clients are deferring shipments to the second quarter of 2009, forcing it to halve
production at its two furnaces. On 3 February, Outokumpu announced it would suspend
ferrochrome production at its mine and plant in Finland.

26 March 2009
Despite the aggressive curtailments by ferro-chrome producers, the market continues to

deteriorate. Metal Bulletin reported in mid-March that chrome ore stockpiles at Chinese
Huge chrome ore stockpile
ports are estimated to have reached 1.5mt, sufficient for 400kt of ferrochrome or four
in China – four months
months supply in China. Traders who bought ore at high prices are unwilling to sell into the
ferrochrome demand.
current falling spot prices (Figure 19), and stainless mills are uninterested in stocking up
as the steel recovery seen in January and February has fizzled out.
Figure 19: High carbon & low carbon ferrochrome prices

US$/lb Chrome
6.00
5.00
4.00
US$/lb Cr
3.00
2.00
1.00
-
98
99
00
01
02
03
04
05
06
07
08
09
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
HCFeCr 60% Cr US LCFeCr 65% Cr EU LCFeCr 65% Cr
Source: Metal Bulletin
Credit Suisse stainless steel forecasts

Our base case forecast for stainless steel production in 2009 and 2010 is provided by
Credit Suisse’s European Steel team (See: Acerinox report, 4 March 2009), which predicts
output will fall by 13.5% to 22,950mt in 2009, followed by an 8% rise to 24,820mt in 2010 Forecast 13% stainless
(Figure 20). In detail, we forecast production of stainless steel in 1Q09 to be even weaker steel production cut for
than in 4Q08, a QoQ change of -1.4% and 35% below the same period in 2008. We 2009, weak 8% recovery in
expect 1Q will be the trough, but expect continued weakness throughout the year. We 2010.
forecast a steady QoQ recovery to begin in 2Q in absolute terms, but we expect that it will
be 4Q before stainless production records an increase over the corresponding period of
2008. Our forecast global total for 2009 is 6.0mt less than the global peak production of
28.9mt in 2007.
Figure 20: Stainless steel production

Thousands of tonnes
2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
Total World kt 20,493 22,417 24,441 24,410 28,308 28,921 26,533 22,945 24,818 25,942 27,228
World YoY % 7.4% 9.4% 9.0% -0.1% 16.0% 2.2% -8.3% -13.5% 8.2% 4.5% 5.0%
China kt 1,140 1,778 2,365 3,400 5,300 7,850 6,900 6,375 6,995 7,670 8,415
China YoY % 54.5% 56.0% 33.0% 43.8% 55.9% 48.1% -12.1% -7.6% 9.7% 9.6% 9.7%
World ex China kt 19,353 20,639 22,076 21,010 23,008 21,071 19,633 16,570 17,823 18,272 18,813
World ex China YoY % 5.5% 6.6% 7.0% -4.8% 9.5% -8.4% -6.8% -15.6% 7.6% 2.5% 3.0%
China % of total % 5.9% 8.6% 10.7% 16.2% 23.0% 37.3% 35.1% 38.5% 39.2% 42.0% 44.7%

26 March 2009
Figure 21: Global IP vs. stainless steel production

% change YoY
40% 10%
30% 8% Sharp % YoY recovery in

6% 2010 due to depressed
20% levels in 2008–09
4%
10%
2%
0% 0%
Q1-93
Q1-94
Q1-95
Q1-96
Q1-97
Q1-98
Q1-99
Q1-00
Q1-01
Q1-02
Q1-03
Q1-04
Q1-05
Q1-06
Q1-07
Q1-08
Q1-09
Q1-10
Q1-11
Q1-12
-2%
-10%
-4%
-20%
-6%
-30%
-8%
-40% -10%
SSteel ( LHS) IP (RHS) F/C IP (RHS)
Figure 22: China IP vs. stainless steel production

% change YoY
100% 24%
75% 18%
50% 12%
25% 6%
0% 0%
Q1-93
Q1-94
Q1-95
Q1-96
Q1-97
Q1-98
Q1-99
Q1-00
Q1-01
Q1-02
Q1-03
Q1-04
Q1-05
Q1-06
Q1-07
Q1-08
Q1-09
Q1-10
Q1-11
Q1-12
-25% -6%
-50% -12%
SSteel (LHS) China IP (RHS) F/C IP (RHS)
In 4Q 2009 and first quarter of 2010, we forecast a large YoY increase in stainless steel
production in all regions reaching a maximum of 29% globally. This is a result of a
moderate recovery in production being measured against the highly depressed production
levels of the previous year. Thus, while we forecast resurgence in production, it is not as
abrupt as YoY graphs indicate. In 2011 and 2012 we forecast further steady recovery to
production rates lower than previous levels in developed nations, but approaching
previous highs in the BRICs (Figure 23). Previous stainless steel production in developed
nations included material for export to countries including China. China became self-
sufficient in stainless steel production in 2008, so the market for this production is gone.

26 March 2009
Figure 23: Actual & forecast global stainless steel production Developed nations’ stainless
millions of tonnes production lower than
35,000 previous due to loss of
China export market
30,000
25,000
20,000
15,000
10,000
5,000
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
USA Europe Japan Rest of World China
China’s Stainless Steel Production

During 2008, China switched from being a net importer of stainless steel to being self- China became self-sufficient
sufficient, thereby displacing imports from other countries (Figure 24). in stainless production in
2008
Figure 24: China’s Stainless Steel Import & Exports Figure 25: Stainless Steel Production Changes YoY
thousands of tonnes Thousands of Tonnes of Stainless Steel
3,500 3,000
2,500
3,000
2,000
2,500 1,500
2,000 1,000
500
1,500
0
-500 2000 2001 2002 2003 2004 2005 2006 2007 2008
1,000
-1,000
500
-1,500
0 -2,000
2002 2003 2004 2005 2006 2007 2008E -2,500
Ex ports Imports Net Imports China SS y-o-y change (kt) World ex China SS y-o-y change (kt)
Source: ISSF Source: Brook Hunt

26 March 2009
The effect of diminishing net imports is evident in the global stainless steel production data
(Figure 25): in the three years from 2005 to 2007, China’s stainless production grew at a China’s huge stainless
rate of 44%–56% YoY, but for the World ex-China, production fell in two of those years by production growth 2005-07
almost the same amount as China increased. World ex China 2007 production was 1mt was “catch up” rate,
less than 2004 due to displacement of imports by Chinese production. China’s explosive displacing imports &
production growth rate for stainless steel in these years did not reflect the rate of demand production in Rest of World
growth, but was a ‘catch-up’ rate, racing from low production of a few hundred thousand
tonnes in the late-1990s to catch up with demand.
Future growth rate should
With China’s stainless steel production capacity now sufficient to meet its demand we be slower to match internal
predict that future production growth will slow from the ‘catch-up’ rate, to a rate matching demand growth
its demand growth. Any excess production will have to compete with other countries for a
share of the export market. Our model has China’s net exports being zero, so that
production matches demand. If China’s production continues at a high rate and impacts Stainless consumption
the export markets, global production is unlikely to change – output elsewhere would be growth for manufactured
scaled back on lost market share. exports to slow to 7% from
We calculate that 85% of China’s apparent consumption of stainless steel is used for 15% on subdued consumer
domestic consumption – including urbanisation, and 15% in manufactured exports. From spending in US & Europe
2002–07, the CAGR of stainless steel used in manufactured exports was 16%. Once we
have passed through the current period of economic turmoil, we expect stainless steel
consumption for manufactured exports to resume growth, but at a reduced rate of 7% p.a.
(Figure 26). The forecast rate is slower than previously due to our expectation of weaker
consumption of goods worldwide: the residential construction sector has been devastated
in the US and Europe and is likely to remain subdued in the forecast period. With regard to
household spending, we expect tighter wallets in the future, particularly in the US, where
the days of borrowing cash against rising asset values to spend on luxury consumer goods
has ended.
Figure 26: China’s stainless use in manufactured exports Figure 27: China’s domestic consumption of stainless
kt stainless steel kt stainless steel
1,400 8,000
1,200 7,000
6,000
1,000
5,000
800
4,000
600
3,000
400
2,000
200 1,000
0 0
2002 2004 2006 2008E 2010F 2012F 2002 2004 2006 2008E 2010F 2012F
SS in Manufactured Exports SS for Domestic Consumption
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
From 2002 to 2007, the CAGR of stainless steel consumed domestically in China was
19%, compared to 16% growth in carbon steel production. Following the economic turmoil,
we expect China’s domestic stainless steel consumption will resume as the country
continues to urbanise, but at a slower growth rate of 10% for 2010 to 2012 (Figure 27,
Figure 28). Our forecast lower rate is based on per capita consumption of carbon steel and
nickel (Figure 29; Figure 30), but also reflects our view that urbanisation will continue at a
more sustainable rate as the manufacturing industry matures.

26 March 2009
Figure 28: China’s apparent consumption of stainless steel – source and use China’s domestic
Thousands of tonnes consumption growth of
10,000 stainless expected to slow
to 10%... still a rapid clip
9,000
due to urbanisation
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2002 2003 2004 2005 2006 2007 2008E 2009F 2010F 2011F 2012F
Domestic Consumption Manufactured Exports Production Net imports
Source: Credit Suisse estimates, ISSF, Brook Hunt
China’s estimated per capita carbon steel consumption for the urban population has Per capita steel
exceeded that of the US. It is unlikely to follow the steep trajectory of smaller nations that consumption growth to ease
are steel exporters, due to a lack of countries with sufficient import potential, hence, we
expect its trajectory to flatten, to a lower growth rate closer to global GDP.
Figure 29: Carbon steel consumption per capita vs. GDP Figure 30: Nickel consumption per capita vs. GDP
kg per capita vs. GDP USD kg per capita vs. GDP USD
1200 4.0
1000
3.5
Steel consumption, kg
3.0
Ni consumption, kg
800
2.5
600 2.0
400 1.5
1.0
200
0.5
0 0.0
0 5 10 15 20 25 30 35
0 5 10 15 20 25 30 35
GDP, USDk, 1990 base
GDP, USDk 1990 base
US China S. Korea Japan Germany China urban
US China S. Korea Japan Germany China urban Taiw an
Source: Credit Suisse estimates Source: Credit Suisse estimates
Nickel consumption in China has not reached the per capita consumption levels seen in Per capita nickel
the US. If we use nickel as a proxy for stainless steel, it would seem there is considerable consumption has
consumption growth available in China. However, given a large portion of stainless steel considerable growth
use is for cosmetic purposes, Chinese consumption may never reach Western levels if remaining
stainless steel goods are not considered fashionable and apartments are not furnished
according to the western model. Considering the expected flattening of the steel
consumption and the apparent growth available to stainless steel, we consider that
stainless steel consumption per capita rise will rise but at a moderated rate compared to
previous growth.

26 March 2009
For 2009, and 2010, we expect to see the effects of the current economic turmoil. China stainless
Anecdotal evidence suggests that urbanisation has slowed drastically due to the global consumption for
demand slump. Thousands of factories have closed and floods of unemployed workers are manufactured exports and
heading back to rural provinces. Construction of apartment blocks and offices with no domestic uses falling in
prospective tenants has halted, but there remains over-capacity in the property market. 2008 and 2009
Property sales fell 19.7% YoY in 2008 and inventories may take one to two years to clear
in some regions. We estimate domestic consumption of stainless steel fell 15% in 2008
and we forecast a further reduction of approximately 11% in 2009. For 2010, we expect
domestic demand to stabilise and begin its growth at 10% p.a. With the downturn in
western economies, we estimate that stainless steel use in manufactured exports
collapsed by 30% in 2008. We forecast a further fall of 14% in 2009 before growth
resumes with a 5% rise in 2010.
Combining our forecasts for domestic consumption and manufactured exports with our
prediction of zero net exports we obtain stainless steel production growth rates of negative
8% in 2009 and positive 10% p.a. from 2010–2012. Thus our forecast represents a large
decrease from the rapid growth of 2000–2007 when the country’s production grew by 30–
60% p.a.
Stainless steel intensity of use to IP has been flat since 2004 (Figure 31). We expect a
rather flat IOU to continue from 2009 after a step-down during the global financial crisis. IOU for stainless expected
The step-down combines the effects of the global slump, and the end of China’s ‘catch-up’ to stay flat after step-down
phase of stainless steel production growth. during global crisis and end
of China’s ‘catch-up’
Figure 31: China’s stainless steel consumption intensity based on IP stainless phase
30 80.0%
25 60.0%
20 40.0%
15 20.0%
10 0.0%
5 -20.0%
2002 2003 2004 2005 2006 2007 2008E 2009F 2010F 2011F 2012F
IOU (Ap. Consum/Unit IP) IP % Chg y -o-y SS Ap. Consumption Chg y -o-y
Nickel Content Changes in Stainless Steel

See the Appendix for a review of stainless steel series referred to in this section.
There is a trend of decreasing intensity of Ni use in stainless steel over time. Global
primary nickel consumption per tonne of stainless steel had a CAGR of -4.2% from 2002–
2008 (Figure 32). The reduction has been achieved by reducing the proportion of high
nickel austenitic stainless being produced in favour of nickel-free ferritic, and by producing
a higher proportion of low-nickel duplex grades and 200-series austenitic. The primary
driver of the change is the high nickel price over this period (Figure 33).

26 March 2009
Decreasing intensity of
Figure 32: Intensity of primary nickel use in stainless steel by region
% of primary Ni per tonne in stainless steel
nickel use in stainless due
to higher ‘no-nickel’ and
7% ‘low-nickel’ stainless use
Actual Forecast
6%
5%
4%
3%
2%
1%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009F 2010F 2011F 2012F
Total World Europe North America China
Japan South Korea Taiw an India
Figure 33: LME stocks and prices

LHS: tonnes refined nickel; RHS: US$/lb
100,000 25.00
90,000
80,000 20.00
70,000
60,000 15.00
50,000
40,000 10.00
30,000
20,000 5.00
10,000
0 0.00
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
LME Stocks (LHS - tonnes) LME Prices (RHS - US$/lb)
Source: LME data
In 2007, nickel comprised approximately 80% of the raw material costs of stainless steel
(Figure 34). The cost was fully passed on to customers via a nickel price alloy surcharge
(Figure 35), but continued to adversely affect steel producers through higher working
capital and the warehouse costs required to manage production given extreme volatility in
demand – demand rises with nickel price, as consumers attempt to beat the price peak,
but halts and destocking begins as the nickel price falls, as customers await floor prices.
■ After high demand in early 2007 while nickel prices were peaking, Acerinox reported
that demand for its nickel-bearing stainless steel plummeted in the second half of
2007, while nickel prices fell, but there was no reduction in demand for nickel-free
ferritic stainless steel.

26 March 2009
Figure 34: Proportion of nickel cost to total material inputs in grade 304 stainless steel
US$/t; %
Nickel ~80% of raw material
costs in 2007
6000 90%
5000 80%
4000 70%
US$/t
3000 60%
2000 50%
1000 40%
0 30%
May-97
May-98
May-99
May-00
May-01
May-02
May-03
May-04
May-05
May-06
May-07
May-08
Steel Billet Cost (LHS) FeCr Cost (LHS)
Ni Cost (LHS) % Ni/Total cost (RHS)
Source: Credit Suisse estimates; Metal Bulletin
Stainless steel producers have been attempting to reduce the effects of nickel price Stainless producers keen to
volatility, mainly by increasing production and development of ‘low-nickel’ and ‘no-nickel’ end nickel price induced
stainless steel: volatility on their business
by increasing production
■ ArcelorMittal has developed new ferritic grades, increased R&D into new ferritic ‘no-nickel’ and ‘low-nickel’
applications and developed new 200-series austenitic with only 4.5% Ni, but similar grades
corrosion resistance to grade 304.
■ Outokumpu has developed a duplex grade with 21.5% Cr, and 1.5% Ni, which is
intended as a replacement for grade 304 austenitic stainless and has licensed Italian
steel maker, Valbruner, as a producer to increase market penetration. Over two years,
the market has grown to 3mtpa, mainly in Europe. Outokumpu has also begun scaling
up production capacity in ferritic grades to reduce earnings cyclicity.
■ Ferritic specialist, JFE has released a new high-Cr grade 443 to compete with 304 on
the corrosion resistance stakes.
■ POSCO has taken a different route to reduce exposure to volatile nickel prices, by
building a 30ktpa ferronickel plant at Gwangyang, sufficient for just under half its
requirements, fed by lateritic ore from New Caledonia.
End-use manufacturers also increased demands for low-nickel grades due to the price
End users also migrating
(Figure 35). The nickel price surcharge squeezes margins at the end of the manufacturing
away from nickel bearing
chain as it cannot be fully passed on to consumers in the intensely competitive retail space.
stainless due to surcharge
We are aware of barbeque manufacturers that switched from traditional 304 grade
stainless steel, containing around 8% nickel, to the nickel-free 400-series to relieve margin
squeeze. Brook Hunt has reported North American food equipment manufacturers moving
to low-nickel or no-nickel grades.

26 March 2009
Figure 35: European price of cold-rolled grade 304 stainless steel 2mm
US$/tonne
7,000
6,000
5,000
US$/tonne
4,000
3,000
2,000
1,000
0
Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08
Europe Base price Europe Alloy Surcharge
Source: Metal Bulletin
Globally the migration to ferritic grades began around 2003. At this time, the ratio of
austenitic production to ferritic was about 79%, falling to 76% in 2005–06 as elevated Ni
prices began to impact, and to 72% in 2007 when nickel prices peaked at over
US$50,000/t (Figure 36, Figure 37). Stainless steel producers have reported to us a 10%
switch to ferritic within the two-year period from 2006–2008. The migration to ferritic
grades seems to have little elasticity with nickel price. Once consumers make the change
to ferritic grades with suitable corrosion resistance, there is little incentive to change back
to austenite. With the consumers actively seeking lower prices and producers keen
promote no-nickel or low-nickel grades, the days of an order for stainless steel implying
grade 304 are over.
Migration to ferritic grades
Figure 36: Production austenitic vs. ferritic production began around 2003,
LHS:’000t, RHS: % increasing with nickel price
35,000 85% rise in 2004
30,000
80%
25,000
20,000 75%
15,000 70%
10,000
65%
5,000
0 60%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
Austenitic production (LHS) Ferritic production (LHS) Austenitic ratio (RHS)
Within the overall austenitic population, the proportion of low nickel 200-series has also
been increasing at the expense of 300-series (Figure 38). 200-series compositions are
most commonly used in India, particularly for cookware, and small, private producers of
the series have arisen in China. According to Brook Hunt, the global proportion of 200-
series increased from 15% to 23% from 2006–2007.

26 March 2009
Figure 37: Austenitic ratio by region

% stainless steel austenitic
100%
90%
80%
70%
60%
50%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
Global Europe North America China
India Japan South Korea Taiwan
Use of low-nickel 200-series

Figure 38: Proportion of austenitic that is 300-series vs. 200-series
% 300-series also increased from 2005 at
the expense of 300-series
100%
80%
60%
40%
20%
0%
2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
North America China Japan Taiwan India
Credit Suisse forecasts for Ni use trend in stainless

We forecast the trend of reduced nickel intensity to continue over the forecast period of
2009–2012, but at a lower CAGR of -2.1% p.a. We expect the imperative to reduce nickel
consumption to diminish because we forecast a nickel surplus during the period, which
implies a relatively low nickel price. However, over the longer term, the increased use of
ferritic stainless is likely to continue as new grades with high-Cr that match or exceed
304’s corrosion resistance are gaining acceptance and becoming entrenched in the
market. Reports of China’s Baosteel and Zhangjiagang POSCO ceasing ferritic production
in favour of 200- and 300-series stainless is likely related to the sharp downturn in the auto
market – 409 grade is typically used for auto exhausts. We also expect increased use of
low-nickel duplex grades, driven by Outokumpu. These have grown rapidly from a very low
base of about 1% to a 3mt market share in Europe over about two years, although 2009
has been a setback. However, we do not expect a large increase in the use of 200-series
use, due to lower corrosion resistance than the 300- and 400-series given its reduced
chromium content, and reduced availability due to the closure of small, private 200-series
producers in China in the current market downturn.

26 March 2009
We forecast that nickel use in stainless steel will continue to grow at a slower rate than
stainless steel production (Figure 39). Nickel use in stainless to
Figure 39: Nickel use in stainless steel vs. global stainless production grow at a slower rate than
thousands of tonnes stainless production due to
increasing use of low-nickel
2000 35,000 and no-nickel grades
1800
30,000
1600
1400 25,000
1200 20,000
1000
800 15,000
600 10,000
400
5,000
200
0 0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
Primary Nickel (LHS) Nickel in Scrap (LHS) World Stainless Steel Production (RHS)
Credit Suisse estimates, Brook Hunt
Scrap use in stainless steel

We expect the proportion of primary nickel used in austenitic stainless steel to remain
stable during the forecast period. Although the global proportion of scrap used in
production varies a few percentage points each year, there is no particular trend in the
global variation (Figure 40). 18/8 (grade 304) nickel-bearing stainless steel scrap typically
trades at around 70% of the cost of the primary ingredients, so there is financial incentive
to maximise scrap use (Figure 41). In developed nations, stainless steel producers tend to
use the maximum amount of scrap possible. India and Taiwan exhibited a trend of
increasing scrap use coinciding with the nickel price rise in 2003, but this trend is lost in
the global average (Figure 40).
From 2003–2H07, the scrap price rose with the nickel price and surpassed 80% of the
cost of stainless steel raw materials. Global scrap use fell in 2007, coinciding with high
prices. In late-2008, scrap prices collapsed with stainless steel demand, briefly falling
below 40% of the cost of the materials as mills ceased buying, but the price has
subsequently recovered and appears to be trending back towards the 60% level. We
expect to see greater availability of scrap in high-nickel periods due to increased recovery
of end-of-life products in view of the metal value.

26 March 2009
Figure 40: Nickel in scrap use in stainless steel by region

% of nickel from scrap; thousands tonnes
No particular trend in global
70% variations in scrap use
Actual Forecast
60%
50%
40%
30%
20%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
World Total % North America % Europe %

China % South Korea % Japan %
Taiw an % India %
Figure 41: 18/8 solids scrap price vs. cost of materials in stainless steel
US$/t & % 18/8 solids scrap price is
7000 100%
around 70% of cost of
primary ingredients
6000 80% providing a financial
incentive to maximise use
5000 60%
4000 40%
US$/t
3000 20%
2000 0%
1000 -20%
0 -40%
May-97
May-98
May-99
May-00
May-01
May-02
May-03
May-04
May-05
May-06
May-07
May-08
Steel Billet Cost (LHS) FeCr Cost (LHS) Ni Cost (LHS)

18/8 UK Scrap Price (LHS) Scrap/prim. materials (RHS)
Source: Credit Suisse estimates, Metal Bulletin
Nickel demand for non-stainless steel uses

We expect the airline industry to be strongly impacted by the global recession, with direct
implications for primary nickel demand in the second largest application – non-ferrous or
superalloys. Reduced earnings by airlines will inevitably flow on to aircraft orders as capex
plans are reviewed to conserve cash where possible. We believe the difficulty in obtaining
credit will further contribute to a downturn in aircraft orders through both lease plans and
outright purchases. At the end of January Standard & Poor’s took the first step towards
potentially cutting Boeing’s credit rating, saying the aviation market was deteriorating and
financing terms for customers could get tougher.

26 March 2009
With regards to Boeing’s new 787 Dreamliner, the company recently stated that it intended
to stick to its recent production schedule. 31 aircraft orders have been cancelled so far, but
it has a backlog of over 850 aircraft. Airbus also has a hefty backlog of orders for its
widebody A380, with 175 aircraft to be built. The backlogs suggest there will be little
reduction in the construction of these models, which are well behind original delivery
schedules, but we expect the cancellations will affect demand for smaller, single-aisle
aircraft which do not offer efficiency savings.
Production of specialty steels alloys containing nickel have been cut back. Demand for tool
steels in particular has been affected, with the global auto industry malaise contributing to
the fall in demand.
Despite these immediate cuts, non-stainless steel nickel use is an industrial input with
demand driven by industrial and commercial activity rather than consumer sentiment. We
expect demand to rebound as global industrial activity picks up. Our model of primary
nickel demand for non-stainless steel applications has a cutback of 10% YoY for all
regions in 2009, with an 8% rebound in 2010. For 2011 and 2012, we return to average
trend growth observed for each region in the period 2004–2007, but excluding outliers if
there have been major changes. This model has global growth of 6.9% per year from 2011
Non-stainless steel demand
(Figure 42).
driven by industrial &
Figure 42: Non-stainless steel demand for primary nickel commercial activity – 10%
kt cutback in 2009 then return
700 to long-term growth.
600
500
400
300
200
100
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
USA Europe Japan Rest of World China

26 March 2009
Credit Suisse forecast nickel demand

Our nickel consumption forecasts are derived from stainless steel production, austenitic
ratios, nickel in austenitic grade, scrap ratio and non-stainless demand for primary nickel
(Figure 43).
Figure 43: Primary nickel consumption forecast

thousands of tonnes of nickel
2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009F 2010F 2011F 2012F
Nth America 165 140 129 122 134 140 157 153 151 133 144 150 158
Europe 419 445 459 455 466 435 474 435 431 363 377 388 405
China 65 87 104 136 161 195 247 309 279 250 269 286 307
Japan 192 184 188 197 194 185 201 189 183 144 155 161 170
India 29 30 32 33 32 32 34 29 28 28 31 32 34
Other Asia 169 156 173 191 195 189 189 161 149 133 138 142 146
Other World 78 76 84 94 96 82 95 96 89 74 81 86 90
Total consumption 1,116 1,118 1,170 1,229 1,279 1,258 1,396 1,373 1,311 1,124 1,196 1,245 1,310
% change 4.8% 0.1% 4.6% 5.1% 4.1% -1.6% 11.0% -1.7% -4.5% -14.3% 6.4% 4.2% 5.2%
For Stainless 682 704 784 847 872 805 910 871 786 652 685 700 727
% change 0.9% 3.2% 11.3% 8.0% 3.0% -7.7% 13.1% -4.3% -9.7% -17.1% 5.2% 2.1% 3.8%
For Non-Stainless 435 414 386 383 407 454 486 502 525 472 510 545 583
% change 11.7% -4.7% -6.8% -0.9% 6.4% 11.5% 7.2% 3.2% 4.5% -10.0% 8.0% 6.9% 6.9%
For 2009 we forecast nickel consumption will fall 14% YoY, including a 17% fall for primary
nickel in stainless steel. We forecast a 6% recovery in 2010 and 4%–5% in following years,
but 2012 consumption will remain well below 2006 peak nickel usage. The greater growth
rate of nickel use in non-stainless applications implies that stainless steel will gradually
become a less dominant market for nickel, in our forecast reducing from a 60% market
share of nickel use in 2008 to 55% in 2012.

26 March 2009
Nickel supply
Shutdowns
In recent periods there have been frequent announcements of nickel mine closures and
cutbacks as the low nickel price takes its toll.
We have updated refined nickel and ferronickel production for 2008 and 2009F compared
to Brook Hunt’s estimate of December 2007. The major changes are listed in Figure 44.
The nickel metal losses have been matched by a wave of mine closures and cutbacks
world wide. The nickel output cutback of 374kt for 2009 is 22% of the nickel supply, but
remains insufficient to return the market to balance.
Figure 44: Changes to forecast nickel metal output since December 2007
in thousands of tonnes
Recent cutbacks have
Refinery Company 2008F 2009F slashed Ni supply relative to
Copper Cliff Vale 10 -23 December 2007 forecasts
Goro Vale 0 -17
Onca Puma Vale 0 -7
Falcondo Xstrata -11 -30
Jinchuan JNMC -8 -5
Ni-pig Iron (BF) -17 -39
Ni-pig Iron (EAF) -11 -48
Norilsk NGMK -18 -16
SLN SLN -9 -18
Others -34 -125
R’thorpe/Yabulu BHPB -7 -29
Loma de Niquel Anglo American 0 -17
-105 -374
Source: Brook Hunt, Credit Suisse estimates
Given the state of the industry, we have removed from our supply model all projects which
have been approved, but are some years away from completion. All of these are laterite
projects intended to produce ferronickel and include a standalone refinery for Anglo
American’s Barro Alto in Brazil, for which a 12-month delay to 2011 was announced on
17 December to ease capex pressure, and SMSP-Xstrata’s US$3.8bn Koniambo project in
New Caledonia, which was approved in October 2007. The supply balance in the nickel
market has drastically changed since these projects were approved and we consider it highly
likely that strategic delays will push any significant production outside the forecast period.
Our forecasts include expected production losses of 2.2% of global output per year,
equating to 29kt of nickel in 2009, to take account breakdowns, strikes and other
stoppages. Our balances will not be affected by daily metal newsflow as unforeseen
output shortages are built in.
After adjustments for shutdowns and projects we consider unlikely to start during the
forecast period, supply shows an acceleration of growth relative to previous years – 6.4%
CAGR for 2009–2012 compared to 5.3% for 2005–2007 (Figure 45, Figure 46). The
production growth reflects the high nickel price environment that was in place since 2004.
Projects that were started several years ago have now reached commissioning stage, and
the price spike encouraged existing producers to announce expansions.

26 March 2009
Figure 45: Production forecast for refined nickel & ferro-nickel

Thousands of tonnes nickel
Refined Nickel and FeNi 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
production
Canada 134 137 141 124 155 137 154 162 187 176 170 175 174
Western Europe 183 196 200 198 197 202 209 226 232 209 215 226 230
CIS 247 251 240 263 278 282 293 284 276 234 233 244 246
Japan 161 154 158 165 170 165 153 162 157 154 172 178 184
China 52 49 57 70 81 103 145 199 207 186 206 224 229
Australia 112 128 133 128 123 121 117 113 108 115 115 116 116
Other World 225 241 257 270 268 276 287 279 233 214 278 317 374
Disruption allowance -5 -29 -31 -33 -35
Total Production 1,113 1,156 1,184 1,218 1,272 1,286 1,357 1,425 1,401 1,288 1,389 1,479 1,553
% change 7.8% 3.9% 2.4% 2.8% 4.5% 1.1% 5.5% 5.1% -1.7% -8.0% 7.8% 6.5% 5.0%
Capacity Utilisation % 79% 80% 80% 81% 79% 70% 66% 71% 75% 76%
Figure 46: Forecast Ni consumption vs. production

thousands of tones of nickel
Accelerating production
growth, 6.4% CAGR 2009–
1,600 12 as projects initiated in the
high price environment
1,500
reach fruition
1,400
1,300
1,200
1,100
1,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
Global Consumption Primary Nickel Base Production Prim. Ni

Onca Puma Goro
Jinchuan Ex pansion

26 March 2009
Notes on nickel projects

Production growth within our forecasts includes two nickel laterite projects owned by Vale Vale’ two new laterite
that with diabolical timing have just reached commissioning stage: Onca Puma in Brazil projects
and the Goro JV in New Caledonia, which aim to produce 52ktpa and 60ktpa of contained
nickel, respectively. Vale has slowed the commissioning of these projects (included in our
forecasts) due to the state of the nickel market, but we would not be surprised to see them
placed in care and maintenance. The two projects differ; Onca Puma is saprolite (clay)-
hosted, with treatment by smelting, while Goro is limonite (iron oxide)-hosted and will use
high pressure acid leach, reminiscent of Murrin Murrin. While the Vale projects may be
technically more robust than the troubled West Australian projects, including Murrin Murrin
and Ravensthorpe, construction and treatment for nickel laterite projects is more complex
than sulphide nickel deposits and commissioning could be slow and expensive. Onca
Puma would be easier to close than Goro as the latter is a JV with New Caledonian
Government and Japanese interests and has had a turbulent development history, but on
Brook Hunt calculations, Onca Puma will have lower operating costs (Figure 55).
While we expect the price collapse to nix a majority of the opportunistic expansions
announced by companies, China’s Jinchuan Group appears set to continue increasing
Jinchuan intends to keep
production at China’s Jinchuan complex. The 2008 production was 107kt and the
expanding
company intends to reach 120kt of nickel and 400kt of copper in 2009, on its way to an
ultimate target of 150ktpa contained nickel. Reuters reported the Jinchuan Chairman
saying on 9 March that the downturn is the best time to expand ready for the next cycle.
Another new development that will likely continue is POSCO’s Gwangyang smelter. This
has been developed to reduce the volatility of nickel prices for the stainless steel maker by
controlling its own supply.
On a rational economic basis, China’s Ni-in-pig iron producers should have ended their run.
These were of great interest to the nickel market when they suddenly appeared in 2005 and
Nickel-in-pig production
rapidly increased production to 73kt of nickel by 2007. The plant owners seized an
easing but may not close
opportunity to use existing furnaces to produce alloy, driven by high nickel prices and
entirely
Government directives aimed at closing small pig iron plants. Brook Hunt suggested that
85% of NPI plants have closed or changed to making other alloys in December, although
some may have restarted recently. On November 2008 prices, Brook Hunt assessed that
NPI using electric arc furnaces to produce higher grade product had C1 Costs of US$6.50/lb,
but blast furnace technology which produces low nickel grade pig iron had costs of
US$7.90/lb. We have reduced NPI production in our forecasts from 72kt in 2008 to 27ktpa
from 2010. However, there remains a threat to nickel markets that some new NPI projects
that were under construction in late-2008 are affiliated with stainless steel producers and
may be kept operating to reduce steel makers exposure to LME price volatility.
Our demand scenario indicates that supply has to be cut back further. We believe this will
be done by a combination of further mine closures and suspension of expansions.
However, the suspended projects will form a cap against future nickel price rallies. Given Suspended projects will
sufficient price incentive, perhaps 300ktpa of production from stalled projects including form a cap against price
Ravensthorpe and Chinese NPI could rapidly return to market. rallies
Balances
Nickel stock balances are opaque. Visible stocks – such as refined nickel registered for
warranting on the LME and producer stocks – are only a portion of actual nickel available. Stocks greater than LME –
Smelter and furnace output of nickel matte and ferronickel constitute a large portion of ferronickel and nickel matte
supply used by stainless steel producers, but have no terminal market. Accordingly, our not included on LME
annual balances are higher than LME stocks as we include all the nickel supply including
ferronickel.

26 March 2009
Our base case supply-demand balance returns an aggregate surplus of 835kt for the
period 2009 to 2012, driving the stock ratio to 48 weeks of consumption. Clearly this
enormous surplus will not actually occur. At the end of 2008, stocks were already at a 13-
year high with almost 80kt on the LME, after the abrupt slowdowns in 2H07 and 2H08
created a wall of nickel (Figure 33), and stocks should not rise much above this level if a
reasonable market is to be maintained.
Our balances suggest that under our base case consumption scenario, supply must fall by
about 200ktpa over the period to 2012 to maintain a balanced market. The price drop has
so far cut 25% of potential supply from the market, but we need to see another 15% cut.
This will be price driven, but we believe the price movement does not need to be
catastrophic from spot levels as the steady parade of announced cuts and closures
indicates that the current price is achieving the necessary results. Rather, we see no major
upside in prices over the forecast period. We expect to see tough prices that will force cost Massive surplus on base
discipline amongst producers and discourage new production. case will not eventuate –
nickel price will force
Figure 47: Base case nickel supply balance before anticipated closures another 15% of supply to be
thousands of tonnes
cut
250
200
150
100
50
-50
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009F 2010F 2011F 2012F
-100
Upside risk – scenario testing

Given our base case consumption scenario is bearish on stainless steel production, with Testing our base case
China’s production growth rate forecast to be 9.7% p.a. from 2010–2012 versus 30%–60% against a resumption of 35%
p.a. from 2000-2007, we have tested our balances against a case in which China’s 2009 stainless growth in China
stainless steel production is held flat on 2008 levels, and production growth expanded at does not eliminate huge
+35% p.a. from 2010–2012. We run this expanded consumption against the base case surplus
supply model.

26 March 2009
Figure 48: China stainless production in expanded case Figure 49: Nickel surplus at expanded case
thousands of tonnes steel thousands of tonnes of nickel
200
18,000
16,000
150
14,000
12,000
10,000 100
8,000
6,000 50
4,000
2,000 0
0
2000 2002 2004 2006 2008 2010F 2012F -50
2000 2002 2004 2006 2008 2010F 2012F
Base case Additional for Scenario
Source: Credit Suisse estimates, Brook Hunt Source: Credit Suisse estimates
Figure 50: China stainless steel production under base case and expanded case
in millions, unless otherwise stated
2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009F 2010F 2011F 2012F
Expanded Case kt 532 738 1,140 1,778 2,365 3,400 5,300 7,850 6,900 6,900 9,315 12,575 16,976
YoY 57.4% 38.7% 54.5% 56.0% 33.0% 43.8% 55.9% 48.1% -12.1% 0.0% 35.0% 35.0% 35.0%
Base Case kt 532 738 1,140 1,778 2,365 3,400 5,300 7,850 6,900 6,375 6,995 7,670 8,415
YoY 57.4% 38.7% 54.5% 56.0% 33.0% 43.8% 55.9% 48.1% -12.1% -7.6% 9.7% 9.6% 9.7%
Figure 51: Global stainless production expanded case Figure 52: Nickel supply-demand expanded case
Kt nickel Kt nickel
1,700
40,000
1,600
35,000
1,500
30,000
25,000 1,400
20,000 1,300
15,000 1,200
10,000 1,100
5,000
1,000
0
1999 2001 2003 2005 2007 2009F 2011F Global Consumption Primary Nickel
Jinchuan Expansion
Goro
USA Europe Japan Rest of World China Onca Puma
Base Production Prim. Ni
Source: Credit Suisse estimates, Brook Hunt Source: Credit Suisse estimates, Brook Hunt
The expanded case is extremely aggressive with China’s stainless production increasing 140%
from expected 2008 level in four years and global production increasing 41%. In the expanded
case we have maintained World ex-China’s production the same as the base case, with the
assumption that all the stainless is consumed. Global stainless steel CAGR from 2009–2012 is
18% in the expanded case, in comparison to 8.9% in the period 2005–2007.

26 March 2009
Despite the huge stainless steel increase in our expanded case, nickel surpluses total
430kt in the period 2009–2012 and weeks’ consumption peaks at 29 weeks in 2011.
However, by 2012, nickel consumption approaches supply, although the surplus built up in
prior years remains. The key period is 2009 where surpluses rise 150kt–200kt in almost
any scenario that factors in weak 2009 consumption without massive supply cuts. Our
modelling suggests there will need to be supply cutbacks to bring the market into balance
irrespective of whether China’s massive stainless consumption resumes or not, hence we
maintain our view of a weak outlook for nickel prices over the forecast period.
Downside risk
We see greater risk on the downside than the upside. As noted at the start of our report, High risk to the downside
as at March, most of the European stainless steel producers are operating at about 50% of
capacity, matching orders. Chinese steel production including stainless jumped in January
and February in anticipation of stimulus demand, but has now died, as the anticipated
orders for the stainless did not materialize and it ended up as inventory.
If the low capacity utilisation rates continue well into the second quarter, as now looks
50% stainless capacity rates
likely, the northern hemisphere summer hiatus will be approaching and steel producers
continuing into 2Q, with
are unlikely to make any moves to increase production at that stage. This will push any
summer slowdown
possible upsurge in stainless production and nickel demand late into 3Q09, with no time
approaching could see
left for significant production. Under this scenario, stainless steel production for 2009 could
stainless production fall to
drop to 21.5mt, a 19% decline on 2008 production which would increase the 2009 forecast
21.5mt, 19% down on 2008
nickel surplus by an additional 40kt. This scenario would increase the surplus by 24% and
increase the pressure for production cuts.
Nickel prices
After several years of phenomenal returns for producers, we expect the nickel market to
be a very harsh environment for the next few years.
Figure 53: Nickel price forecast

in US$/lb
Period 1Q09 2Q09 3Q09 4Q09 2009 2010 2011 2012 LT
US$/lb 4.75 4.65 5.20 5.40 5.00 5.50 6.00 6.00 6.50
Source: Credit Suisse estimates Low prices expected across
The explosive volatility in nickel prices that briefly drove the nickel price to a peak of over the forecast period, enough
$24/lb in mid-2007 was demand-driven by Chinese stainless steel growth rates of 30%– for low cost producers to
60% p.a., and supercharged with commodity speculation by funds. The high prices profit, but keeping new
increased supply, with producers such as nickel-in-pig appearing, and simultaneously starts out
attacked demand, driving consumers away from nickel-bearing stainless. With the global
economy shrinking, nickel stocks at very high levels, and idled nickel projects on the
sidelines, we cannot see demand again outstripping supply even when the global
economy is restarted. Without consumption surpassing supply, prices well in excess of
marginal costs will not occur.
Many operations will be able to cut costs in a protracted downturn with sulphide producers
having the greatest flexibility on the ability to high-grade mines. In the previous recession
of 2001, the average C1 cost for sulphide operations fell 23% from highs set in 1996,
whereas, laterite producers managed to lower costs by only 11%. We expect to see similar
reductions in cash costs in the current down-turn, with sulphide miners better placed than
laterites.

26 March 2009
Figure 54: Quarterly price forecast (2008 real terms) vs. total visible stocks
LHS: ‘000 t refined Nickel; RHS: US$/lb
200.0 25.00
180.0
160.0 20.00
140.0
120.0 15.00
100.0
80.0 10.00
60.0
40.0 5.00
20.0
0.0 0.00
Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13
Stocks (LHS) Nominal Prices (RHS) Real Prices (2008 terms)

Real Prices Forecast Forw ard Stock Build (LHS)
Figure 55: 2009 flexed nickel C1 cost curve overlain by 2008 cost curve (outline)
US$/lb Ni (vertical). v. Mlb Ni
2008 cost curve
2009 F’cast
US$5.00/lb
Source: Brook Hunt, Credit Suisse estimates

26 March 2009
The 2008 mean C1 cost was US$3.30. In 2009, flexing the cost curve for Credit Suisse
estimated prices, the cost curve flattens and lowers with the mean cost falling to US$3.00/lb
(Figure 55). The flattening is caused by a reduction in the value of by-product credits at the
low end of the curve, and a lowering of input costs such as fuel and sulphide flocculants at
the high end. The stronger US$ reduces costs for operations lowering the curve.
Norilsk sits at the bottom of the cost curve with negative costs due to copper and PGM by-
products, followed by other large sulphide producers – Sudbury, Voiseys Bay and
Jinchuan. The efficient and well-established laterite projects dominate the middle of the
curve, while the high cost end of the curve is occupied by a mixture of laterite projects and
smaller sulphide mines, or those without significant by-products. Lower energy prices have
lowered the costs of China’s NPI projects, but they remain near the top of the cost curve.
BHP’s Ravensthorpe was the highest cost producer prior to its closure.
Our forecast price for 2009 of US$5.00/lb cuts the cost curve at the 75th percentile, with
25% of mines being higher cost. In the short term, further production needs to be driven
out of the market so we forecast a lower price in 1H 2009 of US$4.70/lb. We expect this
price to be sufficiently low to ultimately force the closure of the 15% of supply that we
consider needs to be cut to balance the nickel market.
Nickel exhibits a classic exponential curve ratio diagram, with the pinch point causing
prices to rocket lying just below two weeks’ consumption of visible stocks. At greater stock
levels, the price trend is rather flat sitting below US$5.00/lb (Figure 56).
There is downside risk to our prices. If 1Q09 turns out not to be the trough of the downturn
or global recovery is anaemic, the production surplus will likely be worse than our forecast
and greater price pain may be needed to force more shutdowns. Brook Hunt examined its
cost curves versus prices and found that during extreme recessions, such as 1982, the
nickel price can hit the 50th percentile of the cost curve, which would be US$3.00/lb.
Figure 56: Nickel price vs. weeks consumption visible stocks (2008 real terms)
25.00
20.00
15.00
US$/lb
10.00
5.00
0.00
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0
Weeks Consumption

Australian Junior Nickels
Figure 57: Nickel Supply and demand

in kt unless otherwise stated
World Nickel Supply and Demand Balance Stainless production by Country
kt 2006 2007 2008 2009F 2010F 2011F 2012F kt 2006 2007 2008 2009F 2010F 2011F 2012F
Mine Production 1,496 1,593 1,592 1,501 1,607 1,727 1,746 Europe 9,609 8,379 8,152 6,850 7,155 7,345 7,545
Disruption allowance -5 -32 -34 -36 -38 % change 13% -13% -3% -16% 4% 3% 3%
Mine output 1,496 1,593 1,587 1,469 1,573 1,691 1,708 China 5,300 7,850 6,900 6,375 6,995 7,670 8,415
surplus/(deficit) (90% conv.) -10 9 27 34 27 43 -16 % change 56% 48% -12% -8% 10% 10% 10%
REFINED Ni AND FeNi PRODUCTION Japan 3,856 3,882 3,609 2,580 2,850 2,910 2,990
Canada 154 162 187 176 170 175 174 % change 3% 1% -7% -29% 10% 2% 3%
Western Europe 209 226 232 209 215 226 230 South Korea 2,300 2,206 1,889 1,770 1,845 1,885 1,935
CIS 293 284 276 234 233 244 246 % change 0% -4% -14% -6% 4% 2% 3%
Japan 153 162 157 154 172 178 184 Taiwan 1,796 1,500 1,312 1,180 1,245 1,280 1,330
China 145 199 207 186 206 224 229 % change 7% -16% -13% -10% 6% 3% 4%
Australia 117 113 108 115 115 116 116 India 1,750 1,780 1,750 1,660 1,880 1,950 2,030
Other 287 279 233 214 278 317 374 % change 17% 2% -2% -5% 13% 4% 4%
Disruption allowance 0 0 -5 -29 -31 -33 -35 USA 2,459 2,171 1,925 1,680 1,890 1,920 1,970
Total Production 1,357 1,425 1,401 1,288 1,389 1,479 1,553 % change 10% -12% -11% -13% 13% 2% 3%
% change 5% 5% -2% -8% 8% 6% 5% Brazil 532 488 450 384 417 426 443
Capacity Utilisation % 81% 79% 70% 66% 71% 75% 76% % change 3% -8% -8% -15% 9% 2% 4%
CONSUMPTION Other 706 664 546 467 541 556 570
Nth America 157 153 151 133 144 150 158 Total World 28,308 28,921 26,533 22,945 24,818 25,942 27,228
Europe 474 435 431 363 377 388 405 % change 16% 2% -8% -14% 8% 5% 5%
China 247 309 279 250 269 286 307
Japan 201 189 183 144 155 161 170 Nickel Production (bars) versus Consumption (kt Ni)
India 34 29 28 28 31 32 34 1,600
Other Asia 189 161 149 133 138 142 146 1,400
Other World 95 96 89 74 81 86 90
1,200
Total consumption 1,396 1,373 1,311 1,124 1,196 1,245 1,310
% change 11% -2% -5% -14% 6% 4% 5% 1,000
For Stainless 910 871 786 652 685 700 727 800
% change 13% -4% -10% -17% 5% 2% 4%
600
For Non-Stainless 486 502 525 472 510 545 583
% change 7% 3% 5% -10% 8% 7% 7% 400
SURPLUS/(DEFICIT) -40 52 90 164 193 234 244 200

LME stocks 7 48 79
0
Producer Stocks 64 62 58
2006 2007 2008 2009F 2010F 2011F 2012F
Estimated Total Stocks 236 288 375 539 732 966 1210
Nth America Europe China Japan India
weeks Consumption 8.8 10.9 14.9 24.9 31.9 40.3 48.0
Other Asia Other World Canada Western Europe CIS
Price (US$/lb) 11.00 16.88 9.57 5.00 5.50 6.00 6.00
Japan China Australia Other
26 March 2009
40
26 March 2009
Appendix
Stainless steel
Stainless steel is defined as steel containing greater than 10.5% chromium (Cr) although
most varieties have contents between 13%–26%. The Cr is critical, providing the corrosion
resistance of stainless steel. Cr fits readily into the steel molecular structure, substituting
for iron atoms. The Cr rapidly oxidises, forming a passive surface film of molecular
thickness which then protects the steel from further corrosion. 10.5% is the minimum Cr
content that will allow the chromium oxide layer to form reliably. A higher Cr content will
provide a stronger passive layer and therefore greater corrosion resistance.
Cr-bearing stainless steel which retains the original steel molecular structure is known as
‘Ferrite’ and is magnetic. Ferritic ‘no-nickel’ stainless steels make up the 400-series and
comprise about 25% of the stainless steel market. Major uses of ferritic stainless steel are
automotive exhaust pipe silencers, typically made of grade 409 with 11% Cr, and washing
machine drums made of grade 430 with 17% Cr. Ferritic stainless steel generally has
similar formability characteristics to carbon steel. Japan has been a major developer of the
400-series, with some dedicated producers such as JFE. Ferrites now hold a market share
of about 45% in Japan.
Stainless steel can be made more malleable and easier to weld by adding elements that
do not fit readily into the native steel molecular structure, but instead change the molecular
structure from a cube with an atom in the centre (body centred cubic), to a cube with one
atom in the centre of each face (face centred cubic). Stainless steel with this molecular
structure is known as ‘austenite’. It has different properties from ferrite, including being
non-magnetic. Over 70% of stainless steel production is austentic due to the combination
of good formability and weldability.
When nickel is used to create the austenitic structure, the stainless steel is known as the
300-series, which has a stainless steel market share of around 55%. Grade 304, also
known as 18/8 for the percentages of Cr/Ni, is the most widely developed and readily
available stainless steel due to the broad spectrum of applications for which it is suitable. It
comprises 50% of all stainless steel. 8% is the minimum amount of nickel that will convert
all the steel to austenite when the Cr composition is 18%.
Figure 58: Stainless steel series, compositions, common forms & applications
in millions, unless otherwise stated
Families Series Cr % Ni % Mo % Mn % N % Corrosion Resistance Applications
Ferritic 400 series 17-25
409 11 Low Auto exhaust
430 17 Mod-high Washing Machine Cylinders
Austenitic 300 series 17-24
304 18 8 High Most Common Grade
316 17 10 2 Very High Marine Grade
200 series
201 17 4 6 0.25 Mod-High Cookware
Duplex 21-25 1-7 0.3-4 0.1-0.25 High-Very High
Source: Company data, ISSF
Nickel is not the only element that can change the steel structure to austenite, with
nitrogen and manganese also being effective. Nitrogen is a particularly powerful austenite
former, but can only be added in limited amounts as problems arise. Adding Mn allows
nitrogen to be used, but normally a small amount of nickel needs to also be added to
change all the ferrite to austenite. The resulting ‘CrMn’ austenites are known as the 200-
series of stainless steels and comprise the ‘low-nickel’ group. The market share of the
200-series is now around 15%, having doubled in recent years. The corrosion resistance
of the 200-series is typically less than the 300 series as the content of chromium – a ferrite
former – often has to be lowered to allow austenite to fully develop when the nickel content
is low, because Mn is less effective at austenising than Ni.

26 March 2009
A major user of 200-series is India where the stainless steel is used for cookware.
Consumers believe that magnetic stainless is low quality so 400-series ferrites have been
commercially unsuccessful. CrMn austenites, being non-magnetic, satisfied consumers,
but avoided the cost of nickel for the manufacturers. Proprietary stainless (such as J1 and
J2) with 200-series style compositions comprise about 75% of India’s market for austenitic
stainless steel, hence, the country has a lower nickel content in its austenitic stainless
steel than any other country – typically around 3% versus 9% in Europe.
Apart from Austenitc and Ferritic, there are other types of stainless known as Martensitic
(hard grades used for knives in high quality cutlery and turbine blades), and Duplex, but
these remain volumetrically minor, about 4% in total in 2006 The duplex type has a mixed
microstructure of austenite and ferrite and is a relatively recent development, being
researched in the 1970s, Production is now growing rapidly, hitting 3mtpa globally or 10%
of the market share, due to a push by Outokumpu. It is a ‘low-nickel’ stainless, but
Outokumpu grades have been developed to compete with grade 304 on corrosion
resistance.

26 March 2009
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26 March 2009
Companies Mentioned (Price as of 24 Mar 09)

Acerinox (ACX.MC, Eu9.36, UNDERPERFORM, TP Eu6.00, OVERWEIGHT)
Anglo American plc (AAL.L, 1275.00 p, OUTPERFORM [V], TP 1550.00 p, OVERWEIGHT)
ArcelorMittal (MT.N, $21.51, OUTPERFORM [V], TP $30.00, OVERWEIGHT)
BHP Billiton Limited (BHP.AX, A$33.26, UNDERPERFORM, TP A$28.00)
Boeing (BA, $36.11, NEUTRAL, TP $47.00)
Independence Group NL (IGO.AX, A$2.73, NEUTRAL, TP A$3.10)
JFE Holdings Inc (5411, ¥2,270, NEUTRAL [V], TP ¥2,000, MARKET WEIGHT)
Mirabela Nickel (MBN.AX, A$1.54, OUTPERFORM [V], TP A$2.20, OVERWEIGHT)
Outokumpu (OUT1V.HE, Eu9.47, UNDERPERFORM [V], TP Eu8.00, OVERWEIGHT)
Panoramic Resources (PAN.AX, A$1.05, OUTPERFORM, TP A$1.50)
POSCO (005490.KS, W381,000, OUTPERFORM [V], TP W520,000)
PT International Nickel Indonesia Tbk (INCO.JK, Rp2375.00, NEUTRAL [V], TP Rp1850.00)
Thyssen Krupp AG (TKAG.F, Eu14.22, OUTPERFORM [V], TP Eu23.00, OVERWEIGHT)
Vale (VALE5, $12.12, NEUTRAL [V], TP $15.00)
Western Areas NL (WSA.AX, A$3.40, NEUTRAL, TP A$4.25)
Xstrata Plc (XTA.L, 448.00 p, OUTPERFORM [V], TP 600.00 p, OVERWEIGHT)
Disclosure Appendix
Important Global Disclosures
I, Paul McTaggart, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and
securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in
this report.
See the Companies Mentioned section for full company names.
3-Year Price, Target Price and Rating Change History Chart for IGO.AX
IGO.AX Closing Target
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Closing Price Target Price Initiation/Assumption Rating
O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
3-Year Price, Target Price and Rating Change History Chart for MBN.AX
MBN.AX Closing Target
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26 March 2009
3-Year Price, Target Price and Rating Change History Chart for PAN.AX
PAN.AX Closing Target
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3-Year Price, Target Price and Rating Change History Chart for WSA.AX
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The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total
revenues, a portion of which are generated by Credit Suisse's investment banking activities.
Analysts’ stock ratings are defined as follows***:
Outperform (O): The stock’s total return is expected to exceed the industry average* by at least 10-15% (or more, depending on perceived risk)
over the next 12 months.
Neutral (N): The stock’s total return is expected to be in line with the industry average* (range of ±10%) over the next 12 months.
Underperform (U)**: The stock’s total return is expected to underperform the industry average* by 10-15% or more over the next 12 months.
*The industry average refers to the average total return of the relevant country or regional index (except with respect to Europe, where stock
ratings are relative to the analyst’s industry coverage universe).
**In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested that analysts maintain at least 15% of their rated
coverage universe as Underperform. This guideline is subject to change depending on several factors, including general market conditions.
***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three rating definitions, with a required equity return
overlay applied.
Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.
Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.
Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected
performance of an analyst’s coverage universe* versus the relevant broad market benchmark**:
Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.
Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.
Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.
*An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector.
**The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months.

26 March 2009
Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution
Outperform/Buy* 37% (58% banking clients)
Neutral/Hold* 44% (55% banking clients)
Underperform/Sell* 17% (48% banking clients)
Restricted 2%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy,
Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's
decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the
market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit
Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research:
http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot
be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for (IGO.AX)
Method: We have used an option-based discounted cashflow scenario arriving at a valuation of $3.10 per share for IGO. Given the volatility in the
nickel price and the embedded option value in all mining stocks, we base our $3.10 twelve month target price on this option-based DCF. It
essentially is the weighted sum of DCF values at various long term nickel price assumptions (based around the Credit Suisse US$6.50/lb long term
nickel price forecast). Weighted average cost of capital used is 12% (9.5% inflation adjusted) with beta 1.25, risk-free rate 5.6%, market risk premium
8%, target level of debt 25% and pre-tax cost of debt 7%.
Risks: The risks that IGO may not achieve our $3.10 target price include commodity price risk and production risk. A nickel price lower than US$3/lb
would start to make IGO's operations uneconomic and management may choose the shut down the operations at this level. Other major
assumptions include 55,000 tonnes of ore is mined per quarter, nickel grades of 3.4% per tonne, and 100% resource conversion (IGO has extensive
exploration activities). Our valuation and target price would need to be reviewed if any of these metrics were not achieved.
Price Target: (12 months) for (MBN.AX)
Method: Our target price of $2.20/sh for Mirabella Nickel is based on a 15% discount to our option weighted DCF valuation of $2.59 per share. Our
weighted average cost of capital is 12.0% (9.5% inflation adjusted) inputs are: risk-free rate 5.6%, market risk premium 8%, beta 1.25, cost of debt
7% and target level of gearing 25%.
Risks: The risks to our target price of $2.20 for Mirabella Nickel are significant and include: receipt of arranged additional debt and equity funding,
completion of construction of plant and equipment and successful ramp up of the Santa Rita Project. Mirabela is a company with one asset, which is
in development at present, thus an investment in Mirabela is exposed to risks that could impede it reaching production and expanding production as
assumed in our valuation. In addition, our valuation is also based on commercial risks such as nickel price assumptions, foreign currency
movements and market conditions.
Price Target: (12 months) for (PAN.AX)
Method: Our discounted cash flow valuation of PAN using the Credit Suisse nickel price forecasts is $1.41 per share. We have also run an
optionality based DCF scenario arriving at a valuation of $1.50 per share. Due to the volatility in the nickel price we base our target price on the
option based DCF. Our valuation weighted average cost of capital is 12% (9.5% inflation adjusted) inputs are risk free rate 5.6%, market risk
premium 8%, beta 1.25, cost of debt 7% and target level of gearing 25%.
Risks: Risks to our $1.50 target price include commodity price risk and production risk. Our forecast is for a long term nickel price of US$6.50/lb,
our forecast and target price would be lower if the actual nickel price is materially lower than this. We are forecasting nickel grades of 1.6%. If the
company yields a materially lower grade then our forecasts for the business would be revised down.
Price Target: (12 months) for (WSA.AX)
Method: Our $4.25 target price is set in line with our option weighted discounted cash flow valuation. This method is a weighted average of the
various DCFs at different long term nickel prices (around our forecast US$6.5/lb). Weighted average cost of capital is 12% (beta 1.25, market
premium 8%, risk free rate 5.6%, 25% target level of debt, 7% pre tax interest cost).
Risks: Risks to our $4.25 target price include ramp up risk for Flying Fox and Spotted Quoll which could impede reaching the production assumed in
our valuation. Adverse movements in the nickel price and AUD foreign exchange rate materially away from our forecast range are also a risk of WSA
not achieving our target price.
The subject company (MBN.AX, WSA.AX) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of
Credit Suisse.
Credit Suisse provided investment banking services to the subject company (MBN.AX, WSA.AX) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (MBN.AX) within the past 12 months.
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (MBN.AX, PAN.AX,
WSA.AX) within the next 3 months.

26 March 2009
Important Regional Disclosures

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (IGO.AX, MBN.AX, PAN.AX,
WSA.AX) within the past 12 months.
Credit Suisse certifies that (1) the ratings on Australian stocks and weightings on Australian GICS sectors expressed in this report accurately reflect
the Credit Suisse Equities (Australia) Limited (“CSEA”) rating methodology and (2) no part of the Firm’s compensation was, is, or will be directly
related to the specific ratings or weightings disclosed in this report.
The CSEA rating methodology determines individual stock ratings using the projected excess rate of return on a stock relative to the broad market,
overlaid by an absolute required equity return measure. Analysts project a 12-month target share price for each stock. The capital gain or loss
implied by the 12-month target share price, along with the analyst’s projected prospective gross dividend yield, is compared with the projected total
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Australian Junior Nickels: Sector Overview and Initiation Report

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26 March 2009

Australian Junior Nickels

Australian Junior Nickels 2

Figure 2: Primary nickel supply-demand and price

Australian Junior Nickels 3

Figure 5: Forecast stainless steel production

Australian Junior Nickels 4

Australian Junior Nickels 5

Australian nickel stocks

Figure 6: Australian nickel stocks – target prices, valuations and ratings

Why we like Mirabela

Why we like Panoramic

Australian Junior Nickels 6

Western Areas; high quality, just a matter of price

Independence mixes nickel and gold

Australian Junior Nickels 7

Figure 7: Australian nickel sector – valuation compcos

Australian Junior Nickels 8

Figure 8: Australian nickel sector – summary of production assumptions

Australian Junior Nickels 9

Valuation and sensitivities

Australian Junior Nickels 10

Figure 11: Option-weighted DCF valuations

Australian Junior Nickels 11

Short-term leverage – using PERs and DCF valuations

Long-term leverage – using DCF valuations

Figure 12: DCF valuations at different long-term nickel prices

IGO MBN PAN WSA

Source: Credit Suisse estimates

Australian Junior Nickels 12

Australian Junior Nickels 13

Global nickel market – demand

■ On 28 January 2009, the IMF released an Updated World Economic Outlook

■ A Global IP Scorecard released on 2 February by Credit Suisse Fixed Income

Australian Junior Nickels 14

Figure 14: Global IP estimates

Source: Credit Suisse estimates, Datastream

Figure 15: First use primary nickel 2008

Other Steel Alloy s

Source: Brook Hunt

Australian Junior Nickels 15

Stainless steel production

Figure 16: Stainless steel end uses 2007

Automotiv e & Transport

Others & Unallocated

Source: Brook Hunt

Australian Junior Nickels 16

Stainless steel producers cut back

Australian Junior Nickels 17

Despite the aggressive curtailments by ferro-chrome producers, the market continues to

Figure 19: High carbon & low carbon ferrochrome prices

Source: Metal Bulletin

Credit Suisse stainless steel forecasts

Figure 20: Stainless steel production

Australian Junior Nickels 18

Figure 21: Global IP vs. stainless steel production

30% 8% Sharp % YoY recovery in

SSteel ( LHS) IP (RHS) F/C IP (RHS)

Source: Credit Suisse estimates, Datastream

Figure 22: China IP vs. stainless steel production

SSteel (LHS) China IP (RHS) F/C IP (RHS)

Source: Credit Suisse estimates, Datastream