European Metals &Mining:Results season outlook,cash returns,costs and capital allocation in focus

Earnings season outlook.

    In this report we publish our results previews for our European mining coverage;a summary of key items and upcoming catalysts is provided in Fig 1. We seefour dominant themes in the upcoming results season: 1) A significant lift incash returns in 2018 following two years of rapid deleveraging; 2) buildingcyclical cost pressures through raw materials and FX; 3) increasing investorfocus on use of surplus cash flows and capital allocation; M&A activity is likelyto pick up but there are still some material divestments possible in 2018; 4)further consensus earnings upgrades (DB spot >20% above consensus EBITDA).

    Top picks: RIO (leading cash returns, ongoing divestment of marginal assets),GLEN (undervalued growth, base metal exposure) and FM (superior medium-termcopper growth). Sells: ANTO (greater opex risk, valuation), BOL (smelting marginpressure, FX, peaking zinc prices), S32 (exposure to raw material price inflation).

    Key catalysts and events in 1H18.

    GLEN: further bolt-on M&A activity seems likely (see our recent report for furtherdetails); BHP: Onshore divestment, negotiations with unions at Escondida (theexisting agreement expires on 1 August 2018), Samarco legal updates. FM:progress on Cobre Panama and securing related project financing. Anglo: updateon the company's strategic and portfolio outlook post the recent ANC elections.

    Cash returns.

    For our European coverage we forecast YE17e net debt of ~$47bn (ND / EBITDA~0.8x), down from ~$71bn YE16 and ~$99bn YE13. This should lead to asignificant lift in cash returns in 2018. Our dividend and buyback assumptions areoutlined in Fig 2. RIO is the highest yielding large cap in our coverage (>8% in2018) and we expect the existing 2018 buyback of US$1.9bn to be scaled up toUS$3bn. We do not expect BHP, AAL and GLEN to top up dividends with specials/buybacks until the mid-year. We expect Boliden to announce a higher dividendabove the usual 33% payout (DB model a 50% payout).

    Raw material and FX pressures.

    In our 2018 Mining Outlook we provided a detailed analysis on current andhistorical cost trends. DB's cost proxy is pointing to YoY US$ based cost inflationof ~8% in 2018. Major 'resource currencies' such as the AUD and ZAR arecurrently trading 4% and 9% stronger compared to 2017 averages; spot brent is~23% above 2017. We see the biggest upward cost pressures at FXPO, KAZ, S32,ANTO, and NHY.