Global Metals, Mining & Steel: EVA Increasing Returns

- A global view — "We have completed a global EVA study on the metals, mining & steel companies under Citi’s global coverage. We aim to show which companies, regions and commodities generated the most shareholder value over the past five years and are likely to generate the most attractive return over the next three years."
- Profitability of the industry is improving — "The global mining companies have added c. 5% return above the cost of capital for each year between 2005-09. We expect this to improve to 9% for 2010-12. In contrast, the steel sector has added c. 2.4% above the cost of capital and this is anticipated to decline to 0.3% over the next three years. BHP Billiton has been the standout performer in absolute EVA terms and is expected to generate $47bn over the next three years, dwarfing any of its nearest rivals. On the steel side, POSCO has been the leader over the last four years, but is expected to be edged out by CSN over the forecast period."
- EM over DM — "We expect emerging markets to outperform developed markets over the next three years. The key regions of outperformance expected to come through are Latam and Australia. North America has delivered the lowest EVA returns for mining, while European steel has been the worst performer in the steel sector."
- Commodity exposure — "On a returns basis, coking coal has been the highest returning commodity over the past five years, followed by copper then iron ore. We expect iron ore, coking coal and copper to be the key outperformers with a large improvement coming through in gold. In contrast, we expect PGMs, steel and zinc to meet their cost of capital."
- Don’t do M&A — "Over the past five years, the mining sector has absorbed $258 billion in invested capital and the steel sector has absorbed $115 billion in invested capital. Most of this has occurred via M&A and our analysis shows that M&A done around 2007 transferred a large amount of value from the acquirers to those being acquired. Capital discipline by the mining sector will be a key driver in determining alpha within the sector."
- Rankings — "We have combined our rankings based on commodity exposure and EVA return to construct a key pick list globally of most favoured and least favoured companies. The key leading companies are Grupo Mexico, Antofagasta, PanAust Limited, OZ Minerals, Freeport-McMoRan, Cliffs Natural Resources, Fortescue Metals Group, Bumi Resources, China Coal Energy, Raspadskaya, Xstrata, BHP Billiton, Rio Tinto, JFE Holdings, Gerdau SA, Salzgitter, POSCO, Mechel and Voestalpine. Potential laggards are National Aluminium, Aluminium Corporation of China, Allegheny Technologies and Evraz."

Citigroup Global Metals Mining Steel 20100730

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